UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-54928

 

 

NOTIS GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada   30-0893689

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

65 Mechanic Street, Red Bank, New Jersey   07701
(Address of Principal Executive Offices)   (Zip Code)

 

[**]

(Issuer’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
None   None   None

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, Par Value $0.001 Per Share

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [  ] No [X]

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]
     
Non-accelerated Filer [X]   Smaller Reporting Company [X]
     
    Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as reported by the OTC Markets Group Inc. on June 30, 2017 was $1,993,849.

 

As of November 26, 2019, the Company had 10,000,000,000 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

     
 

 

TABLE OF CONTENTS

 

PART I    
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 13
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. MINE SAFETY DISCLOSURE 27
PART II    
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 28
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 76
ITEM 9A. CONTROLS AND PROCEDURES 76
ITEM 9B. OTHER INFORMATION 76
PART III    
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 77
ITEM 11. EXECUTIVE COMPENSATION 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 84
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 85
PART IV    
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 86
ITEM 16. FORM 10-K SUMMARY 93
  SIGNATURES 94

 

2  
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Report”), including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, any statements relating to our ability to consummate any acquisition or other business combination and any other statements that are not statements of current or historical facts. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:

 

  a continued decline in general economic conditions nationally and internationally;
  decreased demand for our products and services;
  market acceptance of our products;
  impact of any litigation or infringement actions brought against us;
  the outcome of litigation or regulatory proceedings;
  the regulation and legalization of hemp;
  risks in product development;
  inability to raise capital to fund continuing operations;
  inability to honor our debt obligations; and
  other factors, including the risk factors described in greater detail in Item 1A of this Report under the heading “Risk Factors.”

 

The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “Risk Factors” may not be exhaustive.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.

 

3  
 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

We are a Nevada corporation in the industrial hemp market operating through our wholly-owned subsidiaries (listed more fully below). Based upon our knowledge and expertise in the regulation of the industrial hemp industry, our business plan involves creating a sustainable business model to grow crops and manufacture products from hemp farmland and to market, sell, and distribute hemp derivative products such as cannabidiol (“CBD”) distillate and isolate, while exploring other business opportunities that complement our core business. At this time, we cultivate industrial hemp, process it into a derivative product via a toll processing relationship, and then we sell the hemp derivative product, such as CBD, on a wholesale basis. We plan to cultivate industrial hemp on our 320-acre farm in Pueblo, Colorado (the “Farm”) through our wholly owned subsidiary, EWSD I, LLC d/b/a Shi Farms, a Delaware limited liability company (“Shi Farms”). In 2017, we completed a pilot study on the Farm, where we planted 15 acres of land, which was processed by a third-party contractor and distributed the derivative product through our network. Based on the pilot study, we engaged in a “scale-up pilot study” where we planted and harvested an aggregate of 100 acres of land in the planting season (early June to the end of September) of 2018. In 2019, we have planted 830 acres, which included corporate-owned land as well as land farmed via our co-operative farming program.

 

Through our subsidiary, NY – SHI, LLC, a New York limited liability company (“NY – SHI”), we conducted a similar pilot study on 1.5 acres in the Hudson Valley region of New York State in 2018 through a contractor to determine if it is viable to cultivate industrial hemp in New York on a larger scale. We have received good education on our pilot study and are considering scaling in 2019.

 

On May 10, 2019, we, through our subsidiary Shi Farms, entered into a Partner Farm Agreement (the “Partner Farm Agreement”) with Mile High Labs, Inc, a Colorado company (“Mile High”). Pursuant to the Partner Farm Agreement, we have agreed to produce, sell, and/or deliver certain dried hemp products (the “Product”) to Mile High, and Mile High agreed to purchase such Product from us and/or provide certain processing services (the “Processing Services”). Among other obligations, we agreed to provide a physical location to perform such Processing Services on our property (the “Property”), the infrastructure necessary to access the Property, and the construction of certain structures for the purpose of conducting the Processing Services on the Property. Among other obligations, Mile High is required to provide, transport, and install all necessary equipment to operate the processing facilities located on the Property, subject to the terms and provisions therein. Mile High also agreed to provide us 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 Property. The Partner Farm Agreement has an initial term of five years and renews automatically thereafter for one-year increments. We 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. We will have no processing costs for the production of this oil/isolate.

 

In connection with, and pursuant to, the Partner Farm Agreement, we also entered into a Supply Agreement, dated May 10, 2019 (the “Supply Agreement”; and, together with the Partner Farm Agreement, the “MH Agreements”), with Mile High, whereby we produce and sell to Mile High, and Mile High purchases and accepts from us the Products enumerated in the MH Agreements in quantities specified in the MH Agreements and by Mile High from time-to-time. Pursuant to the Supply Agreement, following the processing of the Product, Mile High and we agreed, among other things, to sell the finished Product as partners and to co-brand the finished Product with both Mile High’s and our name and logo. Should Mile High establish a cooperative advertising and promotional program, we will be required to pay a co-op fee equal to 3% of the amount of the purchase order from Mile High. The initial term of the Supply Agreement is five years and renews automatically for one-year increments.

 

4  
 

 

On May 31, 2017, we, and two of our subsidiaries, Shi Farms and Pueblo Agriculture Supply and Equipment LLC (“PASE”), and Trava LLC, a Florida limited liability company that has lent various sums to us (“Trava”), entered into a Management Services Agreement (the “MS Agreement”) with respect to our hemp grow located at the Farm. The MS Agreement had 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 collected all revenue generated by the Farm operations. Further, Trava had to satisfy all of our Farm-related past due expenses and, subject to certain limitations, to pay all current and future operational expenses of the Farm operations. Finally, commencing October 2017, Trava commenced making the monthly mortgage payments on the Farm, although we remain 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 us or, at our option, to either or both of our subsidiaries, an amount equivalent to 51% of the net cash for each such calendar month. Such monthly payments were 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 had the unilateral right to purchase the Farm operation at a four times multiple of its EBITDA (calculated at the mean average thereof for each of the two option years).

 

In September 2017, in connection with Trava’s monthly lending to us of funds sufficient for the Farm’s monthly operational expenses of the Farm operations, we amended the MS Agreement to provide that, from time to time, Trava may exercise its rights to convert some or all of the notes that evidence its lending of funds into shares of our common stock at a fixed conversion price of $.0001. If Trava converted, in whole or in part, any one or more of such notes, then (unless (i) thereafter, we are 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 our common stock becomes “no bid”), Trava would continue to exercise its conversion rights in respect of all of such notes (to the 4.9% limitations set forth therein) and would 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 would, on a dollar-for-dollar basis, reduce our financial obligations under the notes. Once Trava had received sufficient proceeds from such sales to reduce our 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 MS Agreement), then the MS Agreement would be deemed to have been cancelled without any further economic obligations between Trava and us and Trava’s purchase right shall, accordingly, be extinguished.

 

After having earlier modified the MS Agreement through the provisions of the on-going monthly funding provided by Trava, effective as of January 29, 2018, we and Trava entered into an agreement to terminate the MS Agreement.

 

On July 11, 2019, NY – SHI and Shi Farms 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” (the “Joint Venture”) 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.

 

Pursuant to the Joint Venture Agreement, NY – SHI and Canbiola Sub 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 $500,000 in value of Canbiola’s common stock (12,074,089 shares) to NY – SHI.Additionally, pursuant to the Joint Venture Agreement, SHI Farms has agreed, going forward, 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.

 

5  
 

 

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.

 

The Joint Venture Agreement contains customary representations, warranties, covenants, and indemnities by each of its applicable parties.

 

Through our cooperative farming program located in the Durant, Oklahoma area (through our subsidiary, Shi Cooperative, LLC, a Colorado limited liability company (“Shi Cooperative”)), we planted 145 acres in 2019. We utilized two separate farm plots, one representing 105 acres, the other representing 40 acres.

 

In June 2019, through Shi Cooperative, we planted five acres of outdoor feminized seed production in Reno, Nevada.

 

State and local laws regarding farming and growing hemp and processing centers for hemp vary. In December 2018, Congress passed the Agriculture Improvement Act of 2018, also known as the “Farm Bill,” which was then signed into law by the President. This new law contains provisions to legalize the cultivation, processing, and sale of industrial hemp. We are honing our focus to control our supply chain – from “seed to sale,” we will control our own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products.

 

Historically, we established joint ventures and entered into operating and management agreements with our partners and acted as a distributor of hemp products processed by our contractors. We previously generated revenue from various sources on a “one-time basis” for services that we provided to clients in helping them obtain licenses, build out and open dispensaries and cultivation centers. Prior to 2017, we sold a line of portable vaporizers and accessories under the brand name Vaporfection. We discontinued these business operations in 2016 to focus on our current business model.

 

We operate through the following subsidiaries:

 

  Shi Farms, which cultivates and processes industrial hemp in Colorado;
     
  NY – SHI, which conducted our pilot study in New York and will be our joint venture partner with Canbiola and Canbiola Sub;
     
  SHI Cooperative, which contracts with third-party farmers to cultivate hemp in, among other areas, Colorado, Nevada, and Oklahoma;
     
  PASE, which owns dehydration equipment;
     
  SOCO Processing, LLC (“SOCO Processing”), a Colorado limited liability company established in May 2018 to construct a pre-processing plant as part of the Partner Farm Agreement and Supply Agreement with Mile High; and
     
  Rock Acquisition Corporation (“Rock Acquisition”), a New Jersey corporation established in December 2017, which will manage land containing potential sand and gravel assets in Pueblo, Colorado under a mining permit with the State of Colorado.

 

6  
 

 

Corporate History

 

We were originally incorporated on June 16, 1977 in the State of Nevada under the name “Rabatco, Inc.” In May 2000, we changed our name to MindfulEye, Inc. On November 25, 2011, P. Vincent Mehdizadeh purchased 50% of the outstanding shares of our common stock. On August 30, 2011, in anticipation of the transaction discussed below, we changed our name to “Medbox, Inc.” Pursuant to a Stock Purchase Agreement with PVM International, Inc. (“PVM”), dated December 31, 2011, we acquired all of the outstanding shares of common stock in various entities controlled by Mr. Mehdizadeh, in exchange for 2,000,000 shares of our common stock and a $1 million promissory note. The promissory note was repaid in full on April 16, 2013. During December 2016, our Board of Directors (the “Board”) and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. Please see Note 11, Discontinued Operations, to our Consolidated Financial Statements for more information.

 

Effective January 28, 2016, we changed our name from Medbox, Inc., to Notis Global, Inc.

 

On April 15, 2016, at a special meeting of our stockholders, stockholders holding a majority of the total shares of outstanding our common stock voted to amend our Articles of Incorporation to increase the number of authorized shares of our 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 on April 18, 2016.

 

PCH Investment Group, Inc. – San Diego Project Investment

 

Effective as of March 21, 2017, through a series of related transactions, Notis intended to acquire, indirectly, an aggregate of 459,999 of the then-issued and outstanding shares of capital stock (the “PCH To-Be-Purchased Shares”) of PCH Investment Group, Inc., a California corporation (“PCH”) for a proposed purchase price of $300,000 in cash and the proposed issuance of shares of the Company’s 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. Clinton 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 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”).

 

7  
 

 

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 Company’s Board of Directors ratified the forms of employment agreements for Mr. Goh, as the Company’s then-Chief Executive Officer, and for Mr. Pyatt, as the Company’s then-prospective President. If the agreements became effective, and following the second anniversary thereof, the terms were to have become “at- will.” In addition to payment of a base salary, the agreements provided for certain cash, option, and equity bonuses, in each case to become subject both to each individual and to the Company meeting certain performance goals to be acknowledged by them and to be approved by a disinterested majority of the Company’s Board of Directors.

 

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 of Directors 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 of Directors that all of such transactions should be approved and that the Company could consummate the acquisition of the PCH To-Be-Purchased Shares, accept the option to acquire the PCH Optioned Shares, enter into the PCH-Related Note, the documents ancillary thereto, and the Employment Agreements.

 

In connection with the Company’s intended acquisition of the PCH To-Be-Purchased Shares and the Company’s intended option to acquire the PCH Optioned Shares, PASE, EWSD, PCH, and the Company entered into a Convertible Note Purchase Agreement (the “Note Purchase Agreement”) with a third-party lender (the “PCH Lender”). Concurrently, PASE and the Company (with EWSD and PCH as co-obligors) entered into a related 10% Senior Secured Convertible Promissory Note (the “PCH-Related Note”) in favor of the PCH Lender. The initial principal sum under the PCH-Related Note was $1,000,000 and it bears interest at the rate of 10% per annum. Principal and interest are subject to certain conversion rights in favor of the PCH Lender. So long as any principal is outstanding or any interest remains accrued, but unpaid, at any time and from time to time, at the option of the PCH Lender, any or all of such amounts may be converted into shares of the Company’s 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.

 

8  
 

 

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 the Company’s 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 the Company’s common stock at the time that the Company exercised its option to acquire the PCH Optioned Shares under the PCH Option Agreement. Further, in the event that the Company were to have issued additional equity securities prior to the date on which it in fact had issued the Purchase Price Shares at a price per share that was less than the value referenced above, the PCH Shareholders would have been entitled to “full ratchet” anti-dilution protection in the calculation of the number of Purchase Price Shares to be issued (with the exception of a recapitalization by the Lender to reduce the Company’s overall dilution).

 

If the Company did not exercise the intended option to acquire the PCH Optioned Shares prior to PCH Optioned Shares Expiry Date, the PCH Shareholders would have had the right to reacquire the PCH To-Be-Purchased Shares from the Company for the same cash consideration ($300,000) that was to have been paid to them for those shares. Further, if the Company were to be in default of its material obligations under the SPA, or if PASE were the subject of any bankruptcy proceedings, then the PCH Shareholders have the same reacquisition rights noted in the preceding sentence.

 

Pursuant the PCH Option Agreement, PASE was granted the option to purchase all 49%, but not less than all 49%, of the PCH Optioned Shares. The exercise price for the PCH Optioned Shares is an amount equivalent to five times PCH’s “EBITDA” for the 12-calendar month period, on a look-back basis, that concludes on the date of exercise of the Option, less $10 (which was the purchase price of the option). The calculation of the 12-month EBITDA was to be determined by PASE’s (or its) then-currently engaged independent auditors. If the Company were to exercise the option prior to the first anniversary of the closing of the acquisition of the PCH To-Be-Purchased Shares, then the exercise price for the PCH Optioned Shares was to be based on the EBITDA for the entire 12-calendar month period that commenced with the effective date of the PCH Option Agreement.

 

PCH Investment Group, Inc. – San Diego Project Termination

 

On March 27, 2017, the Company filed a Current Report on Form 8-K to announce the above-described series of events. Subsequently, it became clear to the Company that the PCH Parties failed to make key closing deliveries, including, without limitation, actual transfer of the PCH To-Be-Purchased Shares, the PCH Lease (as defined below) and related marijuana licenses. Thereafter, the parties entered into litigation and eventual settlement as described below.

 

The Settlement Agreement and Mutual General Release

 

The Company, PACE, and EWSD (collectively, the “Notis Parties”) and PCH, Messrs. Pyatt, Kaller, and Goh (solely in connection with his status as an equity holder of PCH, collectively, the “PCH Individuals”; and, with PCH, collectively, the “PCH Parties”) entered into a Settlement Agreement and Mutual General Release, with an effective date of August 16, 2017 (the “Settlement Agreement”), inter alia, to “unwind” the SPA’s intended transactions, to confirm that the transactions never officially closed, and to enter into a series of mutual releases with such parties. Some of the salient recitals from the Settlement Agreement are:

 

  1. One or both of the PCH Lender and the Ongoing Lender (collectively, the “Notis Lenders”) and PCH have certain disagreements in respect of their respective rights and obligations in and related to certain of the SPA and related documents;

 

9  
 

 

  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).

 

Government Regulations

 

The Farm Bill, which was signed into law in December 2018, legalizes industrial hemp cultivation and the transfer of hemp-derived products across state lines. Pursuant to the Farm Bill, industrial hemp may not contain more than 0.3% tetrahydrocannabinol (“THC”). Any cannabis plant that contains more than 0.3% THC would be considered non-hemp cannabis under federal law with no legal protection. In addition, state departments of agriculture must consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary of U.S. Department of Agriculture (the “USDA”). A state’s plan to license and regulate hemp can only commence once the Secretary of the USDA approves that state’s plan. In states opting not to devise a hemp regulatory program, the USDA will construct a regulatory program under which hemp cultivators in those states must apply for licenses and comply with a federally run program. The Farm Bill also outlines actions that are considered violations of federal hemp law (including such activities as cultivating without a license or producing cannabis with more than 0.3% THC). The law details possible punishments for such violations, pathways for violators to become compliant, and even which activities qualify as felonies under the law, such as repeated offenses.

 

10  
 

 

On August 11, 2016, a Statement of Principles on Industrial Hemp (the “Statement”) was issued by the Office of Secretary of the USDA, the Drug Enforcement Administration (“DEA”) of the U.S. Department of Justice (“DOJ”), and the Food and Drug Administration (“FDA”) of the Department of Health and Human Service (“HHS”). On this date, Jonathan Miller, Esq., of the law firm Frost Brown Todd, in Lexington, Kentucky, and co-signed by Joseph Sandler, Esq., of the law firm Sandler Reiff Lamb Rosenstein & Birkenstock, in Washington, D.C., provided to the members of the Kentucky Hemp Industry Counsel a legal Opinion on the U.S. Federal Agency Statement of Principles. This legal opinion provided the following:

 

As we outlined comprehensively in our Opinion on the Legal Status of Industrial Hemp, dated December 21, 2015 and attached as Appendix B (“our December Opinion”), the Agricultural Act of 2014, P.L. No. 113-79 (the “2014 Farm Bill”) and the Consolidated Appropriations Act for FY 2016 (the “Omnibus Law”) constitute a sweeping legal revolution for the industrial hemp crop. Taken together, the two laws ensure that individuals and firms that are engaged in authorized agricultural pilot programs should be permitted to grow, cultivate, transport, process, sell and/or use industrial hemp under the guidelines and regulations of state law, without interference from agencies using federally-authorized funds.

 

The issuance of the Statement of Principles by the three federal agencies most involved in these issues – the USDA, the DEA and FDA – brings that valued sense of certainty to individuals and firms involved in the industrial hemp business. Further, clarity provided by the Statement brings several items of good news to hemp farmers and firms:

 

  [  ] While initially, the DEA rejected a clear understanding of the 2014 Farm Bill that institutions of higher education and state departments of agriculture could contract out hemp pilot projects to private farmers and business – requiring us to go to federal court to clarify – the Statement clearly acknowledges that private “persons licensed, registered, or otherwise authorized” by state agriculture departments and “persons employed by or under a production contract or lease” with colleges and universities may participate in pilot programs.
     
  [  ] Moreover, in the most welcome portion of the Statement, authorized pilot program participants “may be able to participate in USDA research or other programs to the extent otherwise eligible for participation in those programs.” We believe that this broad language for the first time opens up duly registered pilot projects to be eligible for loans, grants, certification programs, and the wide variety of other opportunities made available to farmers and agri-businesses at USDA and its sub-agencies.
     
  [  ] These federal agencies also for the first time acknowledge that, as part of marketing research programs, “industrial hemp products can be sold” in or among states with pilot programs. This recognition, which reflects clear authorization by the 2014 Farm Bill and the Omnibus Law, will not only give hemp farmers and businesses confidence that they can sell their products; but perhaps more importantly, provides much needed assurance to financial institutions that such commerce is legal, and that they can facilitate financial transactions in the industry.
     
  [  ] The Statement makes clear that the FDA will continue to oversee “marketing claims” and the “process for drug applications,” while the Controlled Substances Act will still apply to “the manufacture, distribution, and dispensing of drug products.” Accordingly, the advice we shared in our December Opinion is confirmed: Firms engaged in producing hemp products for human consumption should not market their products as a “drug” nor make any medicinal claims without prior FDA approval. However, there are no blanket prohibitions on any other kind of sale of hemp-based consumable products such as cannabidiol (“CBD”), nor even any mention of CBD in the Statement.

 

In addition, our subsidiaries, including, but not limited to, Shi Farms, NY – SHI, and SHI Cooperative are also subject to other federal and local regulations.

 

Competition

 

Our competitors in the hemp space include sellers of products and services dedicated to the industrial hemp industry, including the cultivation, processing, and distribution of industrial hemp products. We expect that the quantity and composition of our competitive environment will continue to evolve as the industry matures. Additionally, increased competition is possible to the extent that new states and geographies enter the marketplace as a result of continued enactment of regulatory and legislative changes. We believe that by diligently establishing and expanding our brands, product offerings, and services in new and existing locations, our goal is to become well established in this growing industry. Additionally, our goal is that establishing our product offerings in new and existing locations are factors that mitigate the risk associated with operating in a developing competitive environment. Our competitors may have substantially greater resources, operating experience, marketing capabilities, name recognition, and production capabilities.

 

11  
 

 

Employees

 

As of December 31, 2017, we had two full-time employees, none of whom is employed by us as of the date of this Annual Report. As of that date, we also had approximately nine independent contractors, three of whom are now employed by us or by one of our subsidiaries and one individual who served as our executive chair and remains in that role for us.As of November 26, 2019, we have two full-time employees and one of our subsidiaries, Shi Farms, has seven full-time employees. The number of our (and our subsidiaries’) part-time employees fluctuates over the course of a year due to the nature of our business. We also use the services of up to 20 (depending on seasonal fluctuations) independent contractors through Shi Farms. Neither we nor our subsidiaries have experienced any work stoppages and we consider the relations with their respective employees and independent contractors to be good.

 

Implications of Emerging Growth Company Status

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

  reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data in this Report;
     
  an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;
     
  reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements, and registration statements; and
     
  exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our capital stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. For example, we intend to take advantage of the reduced reporting requirements with respect to disclosure regarding our executive compensation arrangements, have presented only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this Report, and have taken advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. To the extent that we take advantage of these reduced reporting burdens, the information that we provide stockholders may be different than you might obtain from other public companies in which you hold equity interests.

 

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

12  
 

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the risks and uncertainties described below together with all other information contained in this Report before making investment decisions with respect to our common stock. Our business, financial condition, and operating results can be affected by a number of factors, whether currently known or unknown, including, but not limited to, those described below, any one or more of which could, directly or indirectly, cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. If any of the following risks actually occur, our business, financial condition, results of operations, and our future growth prospects would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline, resulting in a loss of all or part of your investment. The risks and uncertainties described in this Report are not the only ones facing us. Additional risks and uncertainties of which we are not presently aware, or that we currently consider immaterial, may also affect our business operations.

 

Past financial performance should not be considered to be a reliable indicator of future performance, and current and potential investors should not use historical trends to anticipate results or trends in future periods.

 

Risks Related to our Securities

 

There is no assurance that we will ever have enough authorized shares of common stock to honor the conversion or exercise of its convertible notes, warrants, and other derivative securities.

 

Our Articles of Incorporation authorize 10,000,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of November 26, 2019, our Board has authorized the issuance of all of the shares of Common Stock, of which shares 9,982,923,868 are held of record or in street name by our stockholders. As of such date, all of the shares of Preferred Stock remain unissued and undesignated. We may also be obligated to issue an additional 8,700,000,000 shares of common stock including shares of common stock issuable upon exercise of options and warrants and excluding shares of common stock issuable upon conversion of convertible notes. There is no assurance that we will ever have enough authorized shares of common stock to honor the exercise and conversion requests of our options and warrants.

 

We can sell additional shares of common stock or securities convertible into shares of common stock, without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in our Company and could depress our stock price.

 

Our Board is authorized to issue our common stock and preferred stock, up to the amounts authorized. As of the date of this Report, we do not have a material number of authorized but unissued shares of common stock available for issuance. Although our Board intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares.

 

In order to raise capital to fund our business plan, including developing and operating the Farm, and pay for our operating expenses, we have issued convertible debentures to our lenders that are convertible into shares of our common stock at a discount to the current market prices, upon conversion by the lenders. Conversion of these debentures, if, when, and as shares of common stock become available for such conversions of these debentures by the lenders, would result in an immediate and substantial dilution to holders of our common stock and could depress the price of our common stock, having a material effect on the market value of the shares.

 

Our stock price has been extremely volatile.

 

The market price of our common stock has periodically been extremely volatile and could be subject to further significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects, among other factors.

 

Among the factors that could affect our stock price are:

 

   industry trends;
     
   actual or anticipated fluctuations in our quarterly financial and operating results and operating results that vary from the expectations of our management or of securities analysts and investors;

 

13  
 

 

   our failure to meet the expectations of the investment community and changes in investment community;
     
   recommendations or estimates of our future operating results;
     
   announcements of strategic developments, acquisitions, dispositions, financings, product developments, and other materials events by us or our competitors;
     
   regulatory and legislative developments;
     
   litigation;
     
   general market conditions;
     
   other domestic and international macroeconomic factors unrelated to our performance; and
     
   additions or departures of key personnel.

 

Because our common stock is not listed on any national securities exchange, investors may find it difficult to buy and sell our shares.

 

Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our common stock is quoted on the OTC Pink® Open Market, it is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than The Nasdaq Stock Market, The New York Stock Exchange, NYSE American, or other national securities exchanges. These factors may have an adverse impact on the trading and price of our common stock.

 

Sales by our stockholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.

 

A substantial portion of our total outstanding shares of common stock may be sold into the market under Rule 144 promulgated under the Securities Act. Such sales could cause the market price of our common stock to drop, even if our business is doing well. Such sales may include sales by our officers and directors, who may have entered into pre-arranged stock trading plans to sell shares of our common stock beneficially owned by them, established under Rule 10b5-1 of the Exchange Act.

 

Furthermore, the market price of our common stock could decline as a result of the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate.

 

Our preferred stock may have rights senior to those of our common stock, which could adversely affect holders of our common stock.

 

Our Articles of Incorporation give our Board the authority to issue one or more series of preferred stock without a vote or action by our stockholders. The Board also has the authority to determine the terms of each series of preferred stock, including price, preferences, and voting rights. The rights granted to holders of preferred stock in the future may adversely affect the rights of holders of our common stock. Any such authorized class of preferred stock may have a liquidation preference – a pre-set distribution in the event of a liquidation – that would reduce the amount available for distribution to holders of common stock or superior dividend rights that would reduce the amount of dividends that could be distributed to common stockholders. In addition, an authorized class of preferred stock may have voting rights that are superior to the voting right of the holders of our common stock.

 

14  
 

 

We do not expect to pay any cash dividends in the foreseeable future.

 

We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, results of operations, capital requirements, and such other factors as our Board deems relevant. Accordingly, investors may need to sell their shares of our common stock to realize a return on their investment, and they may not be able to sell such shares at or above the price paid for them.

 

Our common stock historically has been categorized as “penny stock,” which may make it more difficult for investors to sell their shares of common stock due to suitability requirements.

 

Our common stock is categorized as “penny stock.” The Securities and Exchange Commission (the “SEC”) adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Historically, the price of our common stock has been significantly less than $5.00 per share and we did not qualify for any of the other exceptions; therefore, our common stock is considered “penny stock.” This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with his or her spouse. The penny stock rules require a broker-dealer buying our securities, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability and/or willingness of broker-dealers to trade our securities, either directly or on behalf of their clients, may discourage potential investor’s from purchasing our securities, or may adversely affect the ability of our stockholders to sell their shares.

 

The Financial Industry Regulatory Authority, Inc. (“FINRA”), has adopted sales practice requirements that historically may have limited a stockholder’s ability to buy and sell our common stock, which could depress the price of our common stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements historically has made it more difficult for broker-dealers to recommend that their customers buy our common stock, which could limit your ability to buy and sell our common stock, have an adverse effect on the market for our shares, and thereby depress our price per share of common stock.

 

15  
 

 

Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of us.

 

Nevada has a business combination law that prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after an “interested stockholder” first becomes an “interested stockholder,” unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then-outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.

 

The potential effect of Nevada’s business combination law is to discourage parties interested in taking control of us from doing so if these parties cannot obtain the approval of our Board. Both of these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.

 

Risks Related to Our Business

 

Our success is dependent on legalizing industrial hemp.

 

Continued development of the industrial hemp market is dependent upon continued legislative authorization of industrial hemp at the both the federal and the state level. The Farm Bill was signed into law in December 2018, which contained provisions to legalize the cultivation, processing, and sale of “industrial hemp” (hemp with no more than 0.3% THC) as well as narrowly provide for specific exceptions for CBD from its Schedule I status. For non-industrial hemp and CBD generally, even in those jurisdictions in which industrial hemp has been legalized at the state level, its prescription is a violation of federal law if it does not meet this specification. Pursuant to the Farm Bill, there will be significant shared state-federal regulatory power over industrial hemp cultivation and production. For additional information, see the heading “Government Regulations.” In certain states, such as Colorado, this may be based on the specifics of the legislation passed in that state, and on local governments authorizing a sufficient number of dispensaries. The federal government may at any time choose to change federal law, and, in the past, it has investigated hemp businesses in the various states in which we do business. Moreover, a change in the federal attitude towards enforcement could cripple the industry. While there may be ample public support for certain legislative proposals, key support must be created at the legislative committee level or a bill may never advance to a vote. Any one of these factors could slow or halt the progress of further industrial hemp adoption at the governmental level, which would limit the market for our products and negatively impact our business and revenues. Further, adverse actions taken by the federal government may lead to delays on our business operations, disruptions to our revenue streams, losses of substantial assets, and substantial litigation expenses.

 

We have a limited operating history and operate in a new industry, and we may not succeed.

 

We have a limited operating history and may not succeed. We are subject to all risks inherent in a developing business enterprise. Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with manufacturing specialty products and the competitive and regulatory environment in which we operate. For example, the industrial hemp industry is a new industry that, as a whole, may not succeed, particularly if the Federal government changes course and decides to prosecute those dealing in industrial hemp under Federal law. If that happens, there may not be an adequate market for our products. As a new industry, there are not established players on whose business models we can follow or build upon. Similarly, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in our Company. Furthermore, as the industrial hemp industry is a new market, it is ripe for technological advancements that could limit or eliminate the need for our products.

 

16  
 

 

Furthermore, unanticipated expenses, problems, and technical difficulties may occur, and they may result in material delays in the operation of our business, in particular with respect to our new products. We may not be able to successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, such failure could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.

 

There is no track record for companies pursuing our strategy and, if our strategy is unsuccessful, we will not be profitable, and our stockholders could lose their investments.

 

There is no track record for companies pursuing our business strategy, and there is no guarantee that our business strategy will be successful or profitable. If our strategy is unsuccessful, we may fail to meet our objectives and not realize the revenues or profits from the business we pursue, which may cause our value to decrease, thereby potentially causing our stockholders to lose their investments. The success of our strategy will depend on numerous factors including:

 

  the success of our cultivation operations;
     
  our ability to build a brand;
     
  our ability to establish and develop a distribution network; and
     
  our ability to obtain adequate financing to continue carry out our business plan.

 

Our growth will depend upon a series of factors including the successful cultivation and harvest of the industrial hemp we grow on our property or through the third-party contractor farmers who grow on our behalf, the ability to process the harvested hemp raw material either through our own processing plant or through a toll processor, the ability to continue to build a sales pipeline, and the ability to acquire additional acreage to expand our cultivation operation and we may be unable to consummate acquisitions on advantageous terms, or at all.

 

Our growth strategy is focused on the acquisition of specialized real estate assets on favorable terms as opportunities arise. Our ability to acquire these real estate assets on favorable terms is subject to the following risks:

 

  competition from other potential acquirers may significantly increase the purchase price of a desired property;
     
  we may not successfully purchase and lease our properties to meet our expectations;
     
  we may be unable to obtain the necessary equity or debt financing to consummate an acquisition on satisfactory terms or at all;
     
  agreements for the acquisition of properties are typically subject to closing conditions, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate; and
     
  we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, against the former owners of the properties.

 

We are subject to risks inherent in an agricultural business, including the risk of crop failure.

 

We grow industrial hemp, which is an agricultural process. As such, our business is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather (including climate change), insects, plant diseases, and similar agricultural risks. There can be no assurance that natural elements, such as insects and plant diseases, will not entirely interrupt our production activities or have an adverse effect on our business.

 

17  
 

 

Significant interruptions in our access to certain key inputs such as raw materials, electricity, water and other utilities may impair our growing operations.

 

Our business is dependent on a number of key inputs and their related costs, including raw materials, supplies, and equipment related to our operations, as well as electricity, water, and other utilities. Any significant interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage. Our ability to compete and grow industrial hemp is dependent on us having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that we will be successful in maintaining our required supply of labor, equipment, parts, and components.

 

We may acquire a property or properties “as-is,” which increases the risk of an investment that requires us to remedy defects or costs without recourse against the prior owner.

 

We may acquire properties “as is” with only limited representations and warranties from the seller regarding matters affecting the condition, use, and ownership of the property. There may also be environmental conditions associated with properties we acquire of which we are unaware despite our diligence efforts, and for which we could be liable. In particular, current and potential future facilities may present environmental concerns of which we are not currently aware. If environmental contamination exists on properties we acquire or develops after acquisition, we could become subject to liability for the contamination. As a result, if defects on any of our properties (including any building on such properties) or other matters adversely affecting the properties are discovered, including, but not limited to, environmental matters, we may not be able to pursue a claim for any or all damages against the seller, which could harm our business, financial condition, liquidity, and results of operations.

 

The Company and our clients may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.

 

Despite industrial hemp’s legality under federal law given above, banks may choose not to accept deposits of funds derived from industrial hemp-based businesses. On February 14, 2014, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks “clarifying Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to hemp-related businesses.” In addition, U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized hemp businesses. While these are positive developments, there can be no assurance this legislation will be successful, or that, even with the FinCEN guidance, banks will decide to do business with hemp retailers. The inability of potential clients in our target markets to open accounts and otherwise use the services of banks may make it difficult for such potential clients to purchase our products and services and could materially harm our business.

 

States and municipalities in which we do, or seek to do, business may have, or may adopt, laws that adversely affect our ability to do business.

 

While the federal government has the right to regulate hemp, which it has in fact done for industrial hemp processing resulting in industrial hemp with a THC value greater than 0.3%, state and municipal governments may adopt additional laws and regulations that may negatively affect industrial hemp businesses. States that currently have laws that permit industrial hemp activity could, in the future, reverse course and adopt new laws that further negatively affect hemp businesses. Additionally, municipal governments in these states may have laws that adversely affect hemp businesses, even though there are no such laws at the state level. For example, municipal governments may have zoning laws that restrict where hemp operations can be located and the manner and size of which they can expand and operate. These municipal laws, like the federal laws, may adversely affect our ability to do business, and adverse enforcement actions under these laws may lead to costly litigation and a closure of our businesses with which we have contracts or royalty-fee structures in place, in turn, affecting our own business. Moreover, if additional states do not adopt laws that legalize certain aspects of the hemp industry, we may not be able to expand our business in the manner in which we prefer.

 

18  
 

 

Also, given the complexity and rapid change of the federal, state, and local laws pertaining to industrial hemp, we may incur substantial legal costs associated with complying with these laws and in acquiring the necessary state and local licenses required by our business endeavors. For example, some states permit entities to enter into joint venture relationships with individual license holders that provide for revenue sharing arrangements. In other states, revenue sharing is not permitted, and we accept fixed fees for our services. State and municipal governments may also limit the number of specialized licenses available or apply stringent compliance requirements necessary to maintain the license. These developments may limit our ability to expand our negatively affect our business model.

 

Our independent registered public accounting firm has raised concerns about our ability to continue operations as a “going concern.” Investors may lose all of their investment if we are unable to continue operations and generate revenues.

 

Our independent registered public accounting firm has included a “going concern” explanatory paragraph in its report on our financial statements for the years ended December 31, 2016 and 2017, indicating that we have sustained substantial losses from continuing operations and have used, rather than provided, cash in our continuing operations, and that these factors raise substantial doubt about our ability to continue as a going concern. Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the near future and thereafter, and there are no assurances that such funding will be available at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. Without additional funds from generation of revenues through execution of our business plan, debt or equity financings, sales of assets, or other transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our stockholders would likely lose most or all of their investment in us. See “Liquidity and Capital Resources” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for further information regarding our efforts to secure liquidity and future cash flows.

 

We received an event of default regarding a promissory note and are unable to predict the outcome of this matter.

 

On September 22, 2016, we received notice of an Event of Default and Acceleration from one of our lenders regarding a promissory note issued on March 14, 2016. On October 31, 2018, affiliates of YA PN, LTD. (“YA PN”), and we, entered into a forbearance agreement regarding the promissory notes (the “Forbearance Agreement”), a security agreement, related documents and the financing arrangements described within the Forbearance Agreement pursuant to which the affiliates of YA PN agreed not to enforce certain of its claims. Of an agreed upon amount of $2,350,000, we have paid $520,000 and YA PN assigned (with our permission) $1,408,000 to various otherwise unaffiliated entities. We still owe YA PN $422,000. As of the date of this filing, we remain in default of the Forbearance Agreement. We are unable to predict the ultimate outcome of these matters; however, legal action taken by YA PN, or the assignees, could have a material adverse effect on our financial condition, results of operations, and/or cash flows and our ability to raise funds in the future. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The ability to continue as a going concern is dependent on our ability to raise additional capital and implement its business plan.

 

We will require additional capital to finance our operations in the future, but that capital may not be available when it is needed and could be dilutive to existing stockholders.

 

We will require additional capital for future operations. We plan to finance anticipated ongoing expenses and capital requirements with funds generated from the following sources:

 

  cash provided by operating activities;
     
  cash provided by joint venture or related transactions;
     
  available cash and cash investments; and
     
  capital raised through debt and equity offerings.

 

19  
 

 

Current conditions in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. As of the date of this Report, we do not have any significant number of shares of authorized, but unissued, common stock available for sale to any prospective investors on any terms. Our ability to raise additional capital will depend on conditions, available common stock, and in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you that we will be able to raise additional capital at all or on terms that are acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our liquidity, financial condition, results of operations, and prospects. Furthermore, if we raise capital by issuing stock, the holdings of our existing stockholders will be diluted, and the market price of our common stock could decline.

 

If we raise capital by issuing debt securities, such debt securities would rank senior to our common stock upon our bankruptcy or liquidation. If we raise capital by issuing equity securities, they may be senior to our common stock for the purposes of dividend and liquidating distributions, which may adversely affect the market price of our common stock. Finally, upon dissolution or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.

 

We and some of our subsidiaries are currently delinquent with their respective federal and applicable state tax returns filings for the years ending December 31, 2015, 2016, 2017, and 2018 and, therefore, we may incur additional taxes, interests, penalties, and costs, which could have a material adverse effect on us and our net operating losses.

 

Although we have been experiencing recurring losses, we are obligated to file tax returns for compliance with Internal Revenue Service regulations and that of applicable state jurisdictions. Our subsidiary, Shi Farms, has approximately $3.8 million of accumulated net operating losses through the year ended December 31, 2017. This net operating loss will be eligible to be carried forward for tax purposes at federal and applicable states level, but the use of such net operating losses may be subject to restrictions under applicable tax law. A full valuation allowance has been recorded related to the deferred tax assets generated from the net operating losses. We are currently delinquent in filing our tax returns for years ended December 31, 2015, 2016, 2017, and 2018.

 

We have material weaknesses in our internal control over financial reporting. In addition, because of our status as an emerging growth company, our independent registered public accounting firm is not required to provide an attestation report as to our internal control over financial reporting for the foreseeable future.

 

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements for the years ended December 31, 2016 and 2017, we determined that our disclosure controls and procedures were not effective, and that there was a material weakness in our internal controls over financial reporting, due to insufficient segregation of duties in our finance and accounting function because of our limited personnel. We currently have no employees and rely (and anticipate continuing to rely) heavily on third-party contractors for the provision of professional and other services. This resulted in not ensuring appropriate segregation of duties between incompatible functions and made it more difficult to ensure that financial information is adequately analyzed and reviewed on a timely basis to detect misstatements. These above deficiencies represent a material weakness in our internal control over financial reporting given that they result in a reasonable possibility that a material misstatement to the annual or interim financial statements would not have been prevented or detected.

 

We have begun evaluating and implementing additional procedures to improve the segregation of duties; however, because of our limited resources, we cannot assure that these or other measures will fully remediate the deficiencies or material weakness described above in a timely manner. We intend to address the weaknesses identified above by increasing the oversight and review procedures of the board of directors with regard to financial reporting, financial processes and procedures, and internal control procedures and, if and when funding is available, hiring additional finance and accounting personnel.

 

20  
 

 

Nevertheless, there can be no assurances that we will have enough financial resources to remedy our current material weaknesses and significant deficiencies. If we are unable to remediate the material weakness, or otherwise maintain effective internal control over financial reporting, we may not be able to report our financial results accurately, prevent fraud, or file our periodic reports in a timely manner. We cannot assure you that we have identified all of our existing significant deficiencies and material weaknesses, or that we will not in the future have additional significant deficiencies or material weaknesses.

 

Our independent registered public accounting firm will not be required to attest formally to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date on which we are no longer an “emerging growth company” as defined in the JOBS Act, if we take advantage (as we expect to do) of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” until the fifth anniversary of the date of the first sale of common equity securities pursuant to the registration statement that went effective on December 11, 2015. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, or operating. Our remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future.

 

Any of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our Company, which could have a negative impact on our stock price.

 

The success of our new and existing products and services is uncertain.

 

We have committed, and hope to continue to commit, significant resources and capital to develop and market existing product and service enhancements and new products and services. To date, we have developed into a vertically integrated industrial hemp/CBD company. We have completed two successful indoor seed production pilots. These pilots have led to us planting approximately 8 acres of outdoor feminized seed production. We have scaled from 15 to 100 to 838 acres of outdoor hemp planting over the past 3 years. During this 3-year period, we have continued to expand our wholesale sale pipeline. We continue to work towards full vertical integration through our MH Agreements with Mile High. At this time, industrial hemp and industrial hemp derived products remain products that are relatively untested, and we cannot assure you that we will achieve market acceptance for these products and services, or other new products and services that we may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business of dispensing regulated pharmaceutical products. In addition, new products, services, and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services, or enhancements or to hire qualified employees could seriously harm our business, financial condition, and results of operations. Further, there is a risk that the market price of our products could decline which in turn would decrease profit margins.

 

If we are able to expand our operations, we may be unable to manage successfully our future growth.

 

If we are able to expand our operations in the United States, as planned, we may experience periods of rapid growth, which will require additional resources. Any such growth could place increased strain on our management, operational, financial, and other resources, and we will need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.

 

21  
 

 

We may not be able to obtain adequate insurance coverage in respect of the risks our business faces, the premiums for such insurance may not continue to be commercially justifiable, or there may be coverage limitations and other exclusions which may result in such insurance not being sufficient to cover potential liabilities that we face.

 

We currently have insurance coverage, protecting many, but not all, of our assets and operations. Our insurance coverage is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities, including potential product liability claims, or will be generally available in the future or, if available, that premiums will be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, we may be exposed to material uninsured liabilities that could impede our liquidity, profitability or solvency.

 

Our business may expose us to product liability claims for damages resulting from the manufacture of our products. Product liability claims, whether or not we are ultimately held liable for them, could have a material adverse effect on our business and results of operations.

 

We may be subject to product liability claims if any of our products are alleged to be defective or cause harmful effects. Product liability claims, or other claims related to our products, regardless of their outcome, could require us to spend significant time and money in litigation, divert management time and attention, require us to pay significant damages, harm our reputation, or hinder acceptance of our products. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products.

 

Our prior operating results are not indicative of our future results if we are able to effectuate our business plan successfully.

 

You should not consider prior operating results with respect to revenues, net income, or any other measure to be indicative of our future operating results. In 2016, we transitioned to a new business model of growing and cultivating hemp, which commenced in 2017 with our initial hemp pilot study, now totaling 830 acres as of July 2019. The timing and amount of future revenues will depend almost entirely the success of our new model and our ability to service new customers. Our future operating results will depend upon many other factors, including:

 

  state and local regulation;
     
  our ability to implement our new business model;
     
  our success in expanding our business network and managing our prospective growth;
     
  our ability to develop and market products;
     
  the ability to hire additional qualified employees and consultants; and
     
  the timing of such hiring and our ability to control costs.

 

Our lack of adequate directors’ and officers’ insurance may also make it difficult for us to retain and attract talented and skilled directors and officers.

 

We are and may in the future be subject to additional litigation, including potential class action and stockholder derivative actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. Although we have obtained directors’ and officers’ liability (“D&O”) insurance to cover such risk exposure for our directors and officers, the amount of directors’ and potential officers’ insurance we have obtained is lower than customary for public companies. Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines, and expenses including attorneys’ fees of directors and covered officers) of officers and directors who are the subject of a lawsuit as a result of their service to the Company. The amount of D&O insurance we have obtained may not be adequate to cover such expenses should such a lawsuit occur, and our deductibles are higher than we may be able to pay. While neither Nevada law nor our Articles of Incorporation or bylaws require us to indemnify or advance expenses to our officers and directors involved in such a legal action, we have agreed to indemnify our officers and directors and may agree to indemnify other officers and directors in the future. Without adequate D&O insurance, the amounts we would pay to indemnify our directors and potential officers should they be subject to legal action based on their service to the Company could have a material adverse effect on our financial condition, results of operations, and liquidity. Furthermore, our lack of adequate D&O insurance may make it difficult for us to attract and retain talented and skilled directors and officers, which could adversely affect our business.

 

22  
 

 

If we are unable to maintain effective internal control over our financial reporting, the reputational effects could materially adversely affect our business.

 

Under the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002, as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted rules requiring public companies to perform an evaluation of Internal Control over Financial Reporting (“Internal Controls”) and to report on our evaluation in our Annual Report on Form 10-K. Our Internal Controls constitute a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. However, as discussed in greater detail in Item 9A of this Report, we identified a material weakness in our Internal Controls. If our remediation of such reported material weaknesses is ineffective, or if in the future we are unable to maintain effective Internal Controls, resulting material restatements could occur, regulatory actions could be taken, and a resulting loss of investor confidence in the reliability of our financial statements could materially adversely affect the value of our common stock. We may be required to expend substantial funds and resources in order to rectify any deficiencies in our Internal Controls. Further, if lenders lose confidence in the reliability of our financial statements it could have a material adverse effect on our ability to fund our operations.

 

We depend upon key personnel, the loss of whom could seriously harm our business and our prospects.

 

Our operating performance is substantially dependent on the continued services of our key personnel. The unexpected loss of the services of any of such persons could have a material adverse effect on our business, operations, financial condition, and operating results, as well as the value of our common stock.

 

We incur increased costs as a result of operating as a public company and our management is required to devote substantial time to new compliance initiatives.

 

As a public company, we will incur significant legal, accounting, and other expenses. We may also lose status as an emerging growth company, which may further increase legal, accounting, and other expenses resulting from increased disclosure and compliance obligations. Our management and other personnel have limited experience operating a public company, which may result in operational inefficiencies or errors, or a failure to improve or maintain effective internal controls over financial reporting to ensure timely and accurate reporting of operational and financial results. Our existing management team will need to devote a substantial amount of time to these compliance initiatives, and we may need to hire additional personnel to assist us with complying with these requirements. Moreover, rules and regulations will continue to increase and will continue to increase our legal and financial compliance costs and will make some activities more time consuming and costly.

 

Laws and regulations affecting the industrial hemp industry are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us.

 

Local, state, and federal industrial hemp laws and regulations are broad in scope and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition.

 

In addition, it is possible that regulations may be enacted in the future that will be directly applicable to us and our products. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. These potential effects could include, however, requirements for the revisions to our products to meet new standards, the recall, or discontinuance of certain products, or additional record keeping and reporting requirements. Any or all of these requirements could have a material adverse effect on our business, financial condition, and results of operations.

 

23  
 

 

We, or the industrial hemp industry more generally, may receive unfavorable publicity or become subject to negative consumer or investor perception.

 

We believe that the industrial hemp and CBD industry is highly dependent upon positive consumer and investor perception regarding the benefits, safety, efficacy, and quality of the products distributed to consumers. The perception of the industry and products, currently and in the future, may be significantly influenced by scientific research or findings, regulatory investigations, litigation, political statements, media attention, and other publicity (whether or not accurate or with merit) both in the United States and in other countries relating to the consumption of hemp-based products, including unexpected safety or efficacy concerns arising with respect to hemp based products or the activities of industry participants. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention, or other research findings or publicity will be favorable to the industrial hemp and/or CBD markets. Adverse future scientific research reports, findings, and regulatory proceedings that are, or litigation, media attention, or other publicity that is, perceived as less favorable than, or that questions, earlier research reports, findings, or publicity (whether or not accurate or with merit) could result in a significant reduction in the demand for our products. Further, adverse publicity reports or other media attention regarding the safety, efficacy, and quality of industrial hemp, or our products specifically, or associating the consumption of CBD with illness or other negative effects or events, could adversely affect us. This adverse publicity could arise even if the adverse effects associated with hemp-based products resulted from consumers’ failure to use such products legally, appropriately, or as directed.

 

We face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.

 

The industry in which we operate in general is subject to intense and increasing competition. Some of our competitors may have greater capital resources, facilities, and diversity of product lines, which may enable them to compete more effectively in this market. Our competitors may devote their resources to developing and marketing products that will directly compete with ours. Due to this potential competition, there is no assurance that we will not encounter difficulties in obtaining revenues and market share or in the positioning of our products. There are no assurances that competition will not lead to reduced prices for our product. If we are unable to successfully compete with existing companies and new entrants to the market this will have a negative impact on our business and financial condition.

 

Litigation may adversely affect our business, financial condition, and results of operations.

 

From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results of our operations.

 

We may experience breaches of security at our facilities or loss as a result of the theft of our products.

 

Because of the nature of our products and the limited channels for distribution, as well as the concentration of inventory in our facilities, we are subject to the risk of theft of our products and other security breaches. A security breach could result in a significant loss of available products, expose us to additional liability under applicable regulations and to potentially costly litigation or increase expenses relating to the resolution and future prevention of similar thefts, any of which could have an adverse effect on our business, financial condition, and results of operations.

 

24  
 

 

We may be subject to risks related to our information technology systems, including the risk that we may be the subject of a cyber-attack and the risk that we may be in non-compliance with applicable privacy laws.

 

Our operations depend, in part, on how well we and our vendors protect networks, equipment, information technology (IT) systems, and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism, theft, malware, ransomware and phishing attacks. Any of these and other events could result in IT system failures, delays, or increases in capital expenses. Our operations also depend on the timely maintenance, upgrade, and replacement of networks, equipment, and IT systems and software, as well as preemptive expenses to mitigate the risks of failures. The failure of IT systems or a component of IT systems could, depending on the nature of any such failure, adversely impact our reputation and results of operations.

 

ITEM 2. PROPERTIES

 

On August 7, 2015, we purchased the Farm, which is comprised of 320 acres of agricultural land in Pueblo, Colorado (the “Acquired Property”), pursuant to an Agreement of Purchase and Sale of Membership Interest (the “Acquisition Agreement”) entered into on July 23, 2015, between East West Secured Development, LLC (the “Seller”) and us, pursuant to which we purchased 100% of the membership interest of Shi Farms upon Shi Farms’ simultaneous purchase of the Farm from Southwest Farms, Inc. (“Southwest”). The closing occurred on August 7, 2015, as a result of which we, through our then-new, wholly-owned subsidiary, Shi Farms, became the owner of the Acquired Property. As consideration, we, among other things, issued a secured promissory in the principal amount of $3,670,000. The note is secured by a deed of trust and assignment of rents encumbering the acquired property.

 

In connection with Shi Farms’ purchase of the Acquired Property, Shi Farms entered into a secured promissory note with Southwest in the principal amount of $3,670,000 (the “Farm Note”). Interest on the outstanding principal balance of the Farm Note accrues at the rate of five percent per annum. The Farm Note was payable by Shi Farms in 35 payments of principal and interest, which payments are calculated based upon an amortization period of 30 years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. In June 2018, we extended the maturity date of the Farm Note to August 20, 2019 and then subsequently extended the maturity date to August 1, 2020. In connection with the extension, we agreed to make a payment of $250,000 by May 31, 2019 (which payment was made) in addition to the regularly scheduled payments under the Farm Note. We also agreed to a loan extension fee of $40,000 payable by July 16, 2018 (that was paid) and $2,500 as reimbursement for seller’s costs and expenses. The Farm Note is secured by a deed of trust and assignment of rents encumbering the Acquired Property.

 

In connection with the closing, Shi Farms also entered into an unsecured promissory note with the Seller, in respect of payments previously made by the Seller to Southwest, in the principal amount of $830,000 (the “Unsecured Farm Note”). Interest on the outstanding principal balance of the Unsecured Farm Note accrues at the rate of six percent per annum. The Unsecured Farm Note is payable by Shi Farms in 35 payments of principal and interest, which is calculated based upon an amortization period of 30 years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. In August 2019, we received a default notice from the noteholder. We are currently engaged in discussions to reach an amicable solution regarding the Unsecured Farm Note.

 

Shi Farms’ purchase price (subject to the Farm Note and the Unsecured Farm Note) consisted of (i) $500,000 paid by us in cash as a deposit into the escrow for the Acquired Property and (ii) our agreement to pay the Seller a royalty of three percent of the adjusted gross revenue, if any, from operation of the Acquired Property (including sale of any portion of or interest in the Acquired Property, less any applicable expenses) for the three-year period beginning on January 1, 2016, payable 50% in cash and 50% in our common stock, which period has expired as of the date of this Report. The number of shares due in connection with any such payment was to have been determined by dividing the dollar amount of such payment by the volume-weighted average price of shares of our common stock for the 30 trading days prior to the due date of the payment.

 

On September 30, 2016, Shi Farms granted East West Secured Development, LLC (the “Junior Lender”) a Second Deed of Trust, Security Agreement and Financing Statement (the “Second Trust Deed”) and an Assignment of Rents and Leases (the “Assignment of Rents”). The Second Trust Deed and the Assignment of Rents encumber the Farm, and the rents payable by tenants under any current and future leases of and from the Farm. The Second Trust Deed and the Assignment of Rents secure the payment of all obligations of Shi Farms pursuant to any debentures issued to the Junior Lender in accordance with the Securities Purchase Agreement dated June 30, 2016 by and among Shi Farms, Junior Lender, and Company (the “2016 Securities Purchase Agreement”).

 

25  
 

 

The security granted pursuant to the Second Trust Deed and the Assignment of Rents to the Junior Lender is subordinate to the rights of Southwest (such rights as set forth in the Deed of Trust, Security Agreement and Financing Statement dated as of August 7, 2015 granted by Shi Farms in favor of Southwest, as well as the Assignment of Rents and Leases by and between Shi Farms and Southwest, dated as of August 7, 2015). The Junior Lender’s subordination is documented in a Subordination Agreement dated as of August 23, 2016 (and amended by a First Amendment to Subordination Agreement dated as of September 19, 2016) by and among Southwest, Junior Lender, Company, Shi Farms, and PASE (collectively, the “Subordination Agreement”). Pursuant to the Subordination Agreement: (1) Southwest consented to the Second Trust Deed and the Assignment of Rents and (2) the Junior Lender may not increase the principal amount of indebtedness pursuant to the 2016 Securities Purchase Agreement beyond $1,500,000.

 

ITEM 3. LEGAL PROCEEDINGS

 

SEC Investigation and Wells Notice

 

In 2014, a federal grand jury subpoena pertaining to our financial reporting, which was served upon our predecessor independent registered public accounting firm, as well as certain alleged wrongdoing raised by a former employee of ours. We were subsequently served with two SEC subpoenas in early November 2014. We established a Special Committee of the Board and fully cooperated with the grand jury and SEC investigations. As a result of certain errors discovered in connection with the review by management and its professional advisor, the audit committee, upon management’s recommendation, concluded on December 24, 2014 that the consolidated financial statements for the year ended December 31, 2013 and for the third and fourth quarters therein, as well as for the quarters ended March 31, 2014, June 30, 2014, and September 30, 2014, should no longer be relied upon and would be restated to correct the errors. On March 6, 2015, the audit committee determined that the consolidated financial statements for the year ended December 31, 2012, together with all three, six, and nine months financial information contained therein, and the quarterly information for the first two quarters of fiscal 2013 should also be restated.

 

In March 2016, SEC staff advised our counsel in a telephone conversation, followed by a written “Wells” notice, that it is has made a preliminary determination to recommend that the SEC file an enforcement action against us in connection with misstatements by prior management in our financial statements for fiscal 2012, 2013, and the first three quarters of 2014. Without admitting or denying the SEC’s allegations, we reached a settlement with the SEC. According to the final judgment entered into in March 2017, we agreed to be permanently enjoined from violating Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 15(a)(1) of the Exchange Act and Sections 5 and 17(a) of the Securities Act.

 

In connection with the SEC enforcement action, the SEC also alleged that one of our former officers, Bruce Bedrick, violated certain sections of the Securities Act and the Exchange Act and that he failed to comply with Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”). On December 22, 2017, the United States District Court for the Southern District of California entered an Amended Final Judgment as to Dr. Bedrick, pursuant to which he was permanently restrained and enjoined from violating Section 17(a)(2) of the Securities Act, Sections 10(b) and 13(a), 13(a)(14), and 13(b) of the Exchange Act, and Section 304(a) of SOX and was ordered to pay to the SEC a $200,000 civil penalty and to pay to us $1,000,000 as reimbursement pursuant to Section 304 of SOX. The reimbursement was to be made in two payments: the first was to have been tendered on or about January 22, 2018 and the second was to have been tendered on or before December 22, 2018. We received the first tender a few months after it was due and only following significant court proceedings in which we ultimately prevailed. We have not received the second installment and the SEC is attempting to collect such installment on our behalf.

 

Another of our former officers and directors, P. Vincent Mehdizadeh, consented to the entry of a final judgment permanently enjoining him from future violations of Sections 10(b) and 15(a) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder, aiding and abetting the Company’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder, and Sections 5(a), 5(c), and 17(a) of the Securities Act; requiring him to pay disgorgement of $6,014,048 plus prejudgment interest of $270,299 and a civil penalty of $6,014,048; and prohibiting him from serving as an officer and director of a public company or participating in any penny stock offerings.

 

26  
 

 

Other Litigation

 

Creaxion

 

On August 23, 2017, Creaxion Corporation (“Creaxion”) filed a complaint in the Superior Court of Fulton County, Georgia, styled Creaxion Corporation, Plaintiff, v. Notis Global, Inc., Defendant, Civil Action No. 2017CV294453. Creaxion plead counts for (1) Breach of Contract in the amount of $89,000, (2) prejudgment interest, and (3) attorney’s fees. We were served on September 26, 2017 and did not respond to the complaint. On November 30, 2017, the court granted Creaxion’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 a default judgment in favor of Creaxion in the amount of $89,000 and pre- judgment interest at a rate of 6.25%.

 

Sheppard Mullin

 

On October 27, 2017, Sheppard, Mullin, Richter, & Hampton LLP (“Sheppard Mullin”) filed a complaint in the Superior Court of the State of California for the County of Los Angeles, styled Sheppard, Mullin, Richter, & Hampton LLP, a California limited liability partnership, plaintiff v. Notis Global, Inc., a Nevada corporation, formerly known as Medbox, Inc.; and Does 1-10, inclusive, Defendants, Case No. BC681382. Sheppard Mullin plead causes of action for (1) Breach of Contract, (2) Account Stated, and (3) and Unjust Enrichment, seeking approximately $240,000. We accepted service and did not file a responsive pleading to the complaint. On May 17, 2018, the court entered judgment in favor of Sheppard Mullin in the amount of $277,998.77. On June 25, 2018, we entered into a settlement agreement with Sheppard Mullin, pursuant to which we agreed to pay $50,000 by June 29, 2018 and $25,000 by June 30, 2019, both of which payments were made, and the judgment was deemed satisfied in full.

 

MedVend

 

On May 22, 2013, we initiated litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings LLC (“MedVend”) in connection with a contemplated transaction that we entered into for the purchase of an approximate 50% ownership stake in MedVend for $4.1 million. The lawsuit alleged fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. In January 2017, we settled the litigation and agreed to pay the original shareholders of MedVend an aggregate of $375,000 in 6 installments over three years. We defaulted on the original settlement agreement. MedVend unsuccessfully attempted to obtain a partial payment from us through certain court proceedings that it initiated regarding Dr. Bedrick’s component of the above-disclosed SEC Investigation and Wells Notice.

 

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.

 

Whole Hemp Agreement and Litigation

 

In December 2015, we entered into a farming agreement (the “Farming Agreement”) with Whole Hemp Company (“Whole Hemp”), now known as Folium Biosciences, pursuant to which Whole Hemp was to manufacture products from hemp and cannabis crops that it as to grow on our farm, and we were to build greenhouses for such activities up to an aggregate size of 200,000 square feet. In March 2016, we amended and restated the Farming Agreement (the “First Amended and Restated Farming Agreement”).

 

In addition, in December 2015, we entered into a grower’s distributor agreement (the “Grower’s Distributor Agreement”) with Whole Hemp, pursuant to which we were to provide marketing, sales, and related services on behalf of Whole Hemp in connection with the sale of its CBD oil product, and pursuant to which we were to receive a percentage of gross revenues. In March 2016, we amended and restated the Grower’s Distributor Agreement (the “First Amended and Restated Grower’s Distribution Agreement”).

 

We believe that Whole Hemp defaulted under the First Amended and Restated Farming Agreement beginning in May 2016. Because we believe Whole Hemp had defaulted under the First Amended and Restated Farming Agreement, we terminated the agreement.

 

Whole Hemp subsequently filed a complaint in the Pueblo County, Colorado district court related to the First Amended and Restated Farming Agreement and the First Amended and Restated Grower’s Distributor Agreement. In August 2016, the court ordered that all of Whole Hemp’s plants in our possession be destroyed. We complied with that order. In June 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with prejudice. In light of the court order to destroy all of the Whole Hemp plants, we immediately expensed all capitalized agricultural costs in the amount of $73,345 related to these plants.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

27  
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for Securities

 

On September 9, 2016, we were notified by the OTC Markets Group Inc. that it would remove quotations of our common stock from the OTCQB® Venture Market to the OTC Pink® Open Market, if we did not file our Quarterly Report on Form 10-Q for the period ended June 30, 2016 by September 30, 2016. We did not file such Quarterly Report; accordingly, on or about October 1, 2016, our common stock became quoted on the OTC Pink® Open Market. As of the date of this Report, our common stock remains quoted on the OTC Pink® Open Market under the symbol “NGBL.”

 

As of December 31, 2017, there were approximately 1,444 holders of record of our common stock.As of November 26, 2019, there were approximately 1,445 holders of record of our common stock.

 

Dividends

 

We have never declared or paid any cash dividends on its common stock. We intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities not otherwise reported in the period for which this Report is filed.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

28  
 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our Consolidated Financial Statements and the accompanying notes.

 

The following discussion includes many forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Report immediately prior to Item 1.

 

Overview

 

Historically, we established joint ventures and entered into operating and management agreements with our partners and acted as a distributor of hemp products processed by our contractors. We previously generated revenue from various sources on a “one-time basis” for services that we provided to clients in helping them obtain licenses, build out and open dispensaries and cultivation centers. Prior to 2017, we sold a line of portable vaporizers and accessories under the brand name Vaporfection. We discontinued these business operations in 2016 to focus on our current business in the industrial hemp industry.

 

Based upon our knowledge and expertise in the regulation of the industrial hemp industry, our business plan involves creating a sustainable business model to grow crops and manufacture products from hemp farmland and to market, sell, and distribute hemp derivative products such as CBD distillate and isolate, while exploring other business opportunities that complement our core business.

 

We operate through the following subsidiaries:

 

  EWSD I, LLC d/b/a Shi Farms, which cultivates and processes industrial hemp at a 320-acre farm in Pueblo, Colorado;
     
  NY – SHI LLC, which conducted our pilot study in New York and will be our joint venture partner with Canbiola and Canbiola Sub;
     
  SHI Cooperative LLC, which will contract with third-party farmers to cultivate hemp in, among other areas, Colorado, Nevada, and Oklahoma;
     
  Pueblo Agriculture Supply and Equipment, LLC, “PASE” which owns dehydration equipment;
     
  SOCO Processing LLC, which will construct a pre-processing plant as part of the Partner Farm Agreement and Supply Agreement with Mile High; and
     
  Rock Acquisition Corporation, which will manage land containing potential sand and gravel assets in Pueblo, Colorado, under a mining permit with the State of Colorado.

 

29  
 

 

Comparison of the years ended December 31, 2017 and 2016

 

Net Loss

 

The Company reported a consolidated net loss of approximately $117.3 million for the year ended December 31, 2017 compared to a consolidated net loss of approximately $17.7 million for the year ended December 31, 2016. The fluctuation of approximately $99.6 million was primarily due to an increase in the change in fair value of derivative liabilities of approximately $56.9 million, and an increase in interest expense of approximately $18.0 million.

 

Revenue

 

Revenue was $489,097 for the year ended December 31, 2017, compared to $253,835 for the year ended December 31, 2016. The increase of approximately $235,262 in total revenue was due to the Company executing its business plan and increasing the size of its agricultural capacity by farming on 15 acres. The net result was an increase in biomass that we processed into CBD, which allowed us to commence sales of CBD. During the fourth quarter of 2017, the Company launched its wholesale CBD business. During the first quarter of 2016, the Company launched its CBD oil sales program pursuant to the First Amended and Restated Grower’s Distribution Agreement. The First Amended and Restated Grower’s Distribution Agreement was subsequently terminated in May 2016.

 

Costs of Revenue

 

Costs of revenues increased by $53,231 for the year ended December 31, 2017, as compared to the same period of 2016. Our CBD oil sale program launched in the first quarter of 2016 and we incurred cost of revenue related to the procurement of CBD oils in the amount of approximately $92,889 during the year ended December 31, 2017, as compared to $220,000 for the same period of 2016.

 

We incurred costs related to the cultivation of crops during December 31, 2017 in the amount of approximately $384,000, as compared to $230,000 for December 31, 2016, which also impacted the increase in cost of revenue.

 

In light of the court order to destroy all of the Whole Hemp plants, the Company has immediately expensed all capitalized agricultural costs of $73,345 as of December 31, 2016, which represented all costs as of that date related to the Whole Hemp plants.

 

Operating Expenses

 

Operating expenses consist of all other costs incurred during the period, other than cost of revenue. We incurred approximately $5.5 million in operating expenses for the year ended December 31, 2017, compared to approximately $10 million for the year ended December 31, 2016. The decrease of approximately $4.9 million was primarily due to the decrease in general and administrative expenses of that amount due to the closing of the Company’s headquarter office in Los Angeles, California, as well as the Company’s revised business plan resulting in certain discontinued operations. General and administrative expenses consist primarily of salary costs, including stock-based compensation, professional costs, including the costs associated with being a public company and consultants, rent, and other costs.

 

30  
 

 

Other Expense

 

Other expense increased by approximately $104.6 million during the year ended December 31, 2017, compared to the prior year period, primarily from the increase in the change in fair value of derivative liabilities and interest expense. A decrease in gain on change in fair value of warrant liability, gain on sale of interest in subsidiary, gain on debt forgiveness and gain on extinguishment of debt. This was offset by an increase in other income.

 

Liquidity and Capital Resources

 

As of December 31, 2017, the Company had cash on hand of approximately $90,000 compared to approximately $24,000 at December 31, 2016.

 

Cash Flow

 

During the year ended December 31, 2017, cash was primarily used to fund our operations, as well as the development of the Farm.

 

    For the year ended December 31,  
Cash flow   2017     2016  
Net cash used in operating activities   $ (1,584,213 )   $ (3,552,099 )
Net cash used in investing activities    

(588,063

)      (638,048 )
Net cash provided by financing activities     2,236,319       4,179,138  
Cash Flows from discontinued operations     2,456       (17,858 )
                 
Net decrease in cash   $ 66,499     $ (28,867 )

 

Cash Flows – Operating Activities

 

During the year ended December 31, 2017, cash flows used in operating activities were $1.6 million, consisting primarily of an increase in change in fair value of derivative liability, gain on extinguishment of debt, and a decrease in financing costs.

 

Cash Flows – Investing Activities

 

During the year ended December 31, 2017, cash flows used in investing activities was $588,063 in connection with the PCH deal.

 

Cash Flows – Financing Activities

 

During the year ended December 31, 2017, cash flows provided by financing activities were $2.2 million, consisting primarily of approximately $2.3 million of gross proceeds from the issuance of convertible notes payable.

 

31  
 

 

Liquidity and Cash Flows

 

Management believes that our cash balances on hand, cash flows expected to be generated from operations, proceeds from current and future expected debt issuances and proceeds from future share capital issuances, if any, may not be sufficient to fund the Company’s net cash requirements through January 2020. As noted in the footnotes to the accompanying Consolidated Financial Statements, the Company recently received a Notice of Default from a creditor following non-payment of the balance due under a certain promissory note at maturity thereof, pursuant to which the Company will incur penalties and an increased interest rate, as well as potential legal expenses associated with the creditor’s legal actions. For additional information, see the section entitled “Item 1A. Risk Factors” elsewhere in this Report. As of the date of this Report, we are in default on all notes outstanding. We are unable to predict the outcome of these matters; however, legal action taken by our lenders could have a material adverse effect on our financial condition, results of operations, and/or cash flows and our ability to raise funds in the future. In order to execute our long-term growth strategy, which may include selected acquisitions of businesses or facilities that may bolster our CBD oil extraction business or real estate for the cultivation of hemp, we will need to raise additional funds through public or private equity offerings, debt financings, or other means.

 

Our financial statements were prepared on a going concern basis. The going concern basis assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities in the normal course of business. During the year ended December 31, 2017, we had a net loss of approximately $117.3 million, negative cash flow from operations of $1.6 million, and negative working capital of $158.7 million. We will need to raise capital in order to fund our operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The ability to continue as a going concern is dependent on our ability to raise additional capital and implement a business model that generates meaningful revenues. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

We will continue to execute on our 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 or timing acceptable to us, or at all. If we are successful, we expect that these efforts could provide us with the necessary liquidity to continue operations at least through the first quarter of the fiscal year during which this Report has been filed. If we are unable to obtain adequate debt or equity financing, we may be forced to slow or reduce the scope of operations and proposed expansion, and our business would be materially affected. It is uncertain whether we can obtain financing to fund operating deficits until profitability is achieved or until revenues increase. 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, our ability 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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

32  
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements Page
Consolidated Financial Statements:  
   
Report of Independent Registered Public Accounting Firm 34 
   
Consolidated Balance Sheets as of December 31, 2017 and 2016 35
   
Consolidated Statements of Operations and Comprehensive Loss – Years ended December 31, 2017 and 2016  36
   
Consolidated Statements of Stockholders’ Deficit – Years ended December 31, 2017 and 2016  37
   
Consolidated Statements of Cash Flows – Years ended December 31, 2017 and 2016  38
   
Notes to Consolidated Financial Statements – Years ended December 31, 2017 and 2016  39

 

33  
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Notis Global, Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Notis Global, Inc. (“the Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2017 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph Regarding Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2017

 

Salt Lake City, UT

November 4, 2019

 

 

34  
 

 

NOTIS GLOBAL, INC.

CONSOLIDATED BALANCE SHEETS

 

    December 31, 2017     December 31, 2016  
Assets                
Current assets                
Cash   $ 90,466     $ 23,967  
Accounts receivable, net     80,000       -  
Inventory, net     84,210       -  
Capitalized agricultural costs     394,903       160,131  
Prepaid expenses and other current assets     35,840       92,976  
Assets of discontinued operations     2,492       2,522  
Total current assets     687,911       279,596  
                 
Property and equipment, net     6,344,983       6,712,369  
Total assets   $ 7,032,894     $ 6,991,965  
                 
Liabilities and Stockholders’ Deficit                
Current liabilities                
Accounts payable   $ 7,837,124     $ 6,009,827  
Accrued expenses     8,087,362       2,187,393  
Accounts payable and accrued expenses – related parties     594,701       727,893  
Liabilities of discontinued operations     1,022,553       1,020,127  
Current portion of notes payable, net     4,191,657       3,367,478  
Notes payable - related parties     289,866       289,866  
Convertible notes payable, net     19,471,454       8,645,442  
Convertible notes payable, - related parties     105,000       105,000  
Due on demand note     312,431       -  
Share Restriction Liability     60,374       -  
Option liability     299,965       -  
Derivative Liability     113,636,474       15,635,947  
Warrant Liability     3,528,602       14,430  
Total current liabilities     159,437,563       38,003,403  
                 
Notes Payable, less current portion     -       4,093,272  
Total liabilities     159,437,563       42,096,675  
Commitments and contingencies (Note 13)                
Stockholders’ Deficit                
Preferred stock, $0.001 par value: 10,000,000 authorized; 0 issued and outstanding as of December 31, 2017 and 2016, respectively     -       -  
Common stock, $0.001 par value: 10,000,000,000 authorized, 10,000,000,000 and 9,942,223,868 issued and outstanding as of December 31, 2017 and 2016, respectively     10,000,000       9,942,224  
Additional paid-in capital     45,344,302       46,606,283  
Treasury stock     -       (1,209,600 )
Accumulated deficit     (207,748,971 )     (90,443,617 )
Total stockholders’ deficit     (152,404,669 )     (35,104,710 )
Total liabilities and stockholders’ deficit   $ 7,032,894     $ 6,991,965  

 

See notes to Consolidated Financial Statements.

 

35  
 

 

NOTIS GLOBAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    For the year ended  
    December 31,  
    2017     2016  
             
Revenue   $ 489,097     $ 253,835  
Service revenue     -       8,000  
Total revenue     489,097       261,835  
                 
Operating expenses                
Cost of revenues     516,546       463,315  
General and administrative     5,033,339       9,944,022  
Total operating expenses     5,549,885       10,407,337  
Loss from operations     (5,060,788 )     (10,145,502 )
                 
Other income (expense)                
Interest expense, net     (21,044,042 )     (6,066,598 )
Change in fair value of derivative liabilities     (90,219,268 )     (33,271,611 )
Change in fair value of warrant liability     (237,120 )     998,764  
Gain on sale of interest in subsidiary     -       630,571  
Loss on sale of rights and assets     -       (32,300 )
Gain on debt forgiveness     -       486,857  
Loss on failed business combination     (1,001,520 )     -  
Gain on extinguishment of debt     -       29,646,079  
Other income (expense)     265,776     (65,468 )
Total other expense     (112,236,174 )     (7,673,706 )
                 
Lossfrom continuing operations     (117,296,962 )     (17,819,208 )
                 
Discontinued operations                
Income (loss) from discontinued operations     (8,392 )     87,638  
                 
Lossbefore provision for income taxes     (117,305,354 )     (17,731,570 )
                 
Provision for income taxes     -       -  
                 
Net loss   $ (117,305,354 )   $ (17,731,570 )
                 
Loss per share attributable to common stockholders                
Basic and diluted loss per share – continuing operations     (0.01 )     (0.01 )
Basic and diluted loss per share from discontinued operations     (0.00 )     0.00  
Basic and diluted loss per share   $ (0.01 )   $ (0.01 )
Weighted average shares outstanding                
Basic and diluted     9,969,661,904       4,364,487,739  
                 
Other comprehensive loss     -       -  
Net loss     (117,305,354 )     (17,731,570 )
Realized loss on discontinued operations     -       (187,154 )
Comprehensive loss   $ (117,305,354 )   $ (17,918,724 )

 

See notes to Consolidated Financial Statements.

 

36  
 

 

NOTIS GLOBAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

 

    Preferred Stock     Common Stock     Treasury Stock     Additional Paid-In     Accumulated     Accumulated Other
Comprehensive
   

Total

Stockholders’

 
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Loss     Deficit  
Balances at December 31, 2015     -     $ -       240,971,727     $ 240,972       (60,000 )   $ (1,209,600 )   $ 42,600,089     $ (72,524,893 )   $ (193,755 )   $ (31,087,187 )
Sale of common stock     -       -       851,063       851       -       -       15,149       -       -       16,000  
Stock-based compensation     -       -       28,778,831       28,779       -       -       780,645       -       -       809,424  
Investor contribution     -       -       -       -       -       -       324,754       -       -       324,754  
Issuance of shares to consultants     -       -       144,042,308       144,042       -       -       (47,252 )     -       -       96,790  
Shares cancelation     -       -       (1,633,652 )     (1,634 )     -       -       (485,223 )     -       -       (486,857 )
Conversions of convertible notes payable     -       -       9,529,213,591       9,529,214       -       -       -       -       -       9,529,214  
Gain on extinguishment of debt     -       -       -       -       -       -       3,418,121       -       -       3,418,121  
Unrealized gain from marketable securities     -       -       -       -       -       -       -       -       193,755       193,755  
Realized gain from marketable securities     -       -       -       -       -       -       -       (187,154 )     -       (187,154 )
Net income     -       -       -       -       -       -       -       (17,731,570 )     -       (17,731,570 )
Balances at December 31, 2016     -       -       9,942,223,868       9,942,224       (60,000 )     (1,209,600 )     46,606,283       (90,443,617 )     -       (35,104,710 )
Common stock issued for settlement of liabilities     -       -      

2,000,000

     

2,000

      -       -      

(2,000

)    

-

     

-

     

-

 
Stock-based compensation     -       -       17,076,132       17,076      

60,000

     

1,209,600

     

(1,223,216

)     -       -      

3,460

 
Conversions of convertible notes payable     -       -       38,700,000       38,700       -       -       (36,765 )     -       -       1,935  
Net income     -       -       -       -       -       -              

(117,305,354

)     -      

(117,305,354

)
Balances at December 31, 2017     -     $ -       10,000,000,000     $ 10,000,000       -   $ -   $

45,344,302

    $ (207,748,971 )   $ -     $ (152,404,669 )

 

See notes to Consolidated Financial Statements.

 

37  
 

 

NOTIS GLOBAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year ended December 31,  
    2017     2016  
Cash flows from operating activities                
Net loss     (117,305,354 )     (17,819,208 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     367,386       17,362  
Provisions and allowances     -       120,841  
Gain on debt forgiveness     -       (486,857 )
Inventory valuation reserve     -       (5,000 )
Change in fair value of derivative liability     90,219,268       33,271,611  
Change in fair value of warrant liability     237,120       (918,969 )
Change in fair value of option liability     40       -  
Amortization of debt discount     4,080,199       4,162,769  
Financing costs     6,574,761       581,817  
Note principal increase upon default     4,601,289       -  
Loss on failed business combination     1,001,520       -  
Gain on extinguishment of debt     -       (29,646,079 )
Stock based compensation     631,777       906,214  
Changes in operating assets and liabilities:                
Accounts receivable     (80,000 )     -  
Inventory     (84,210 )     68,889  
Capitalized agricultural costs     (234,772 )     (160,131 )
Prepaid expenses and other current assets     57,136       62,452  
Advances for machinery     -       (310,725 )
Deferred costs     -       76,000  
Accounts payable     2,582,850       4,024,890  
Other accrued expenses     5,899,969       707,611  
Accrued expenses - related parties     (133,192 )     1,786,928  
Customer deposits     -       7,486  
Net cash used in operating activities     (1,584,213 )     (3,552,099 )
                 
Changes related to discontinued operations     2,456       (17,858 )
                 
Cash flows from investing activities                
Payments made for investment in PCH    

(588,063

)     -  
Issuance of note receivable     -       (10,000 )
Repayment of note receivable     -       19,159  
Proceeds received for sale of rights and assets     -       (30,000 )
Construction in progress     -       (617,207 )
Net cash used in investing activities    

(588,063)

      (638,048 )
                 
Cash flows from financing activities                
Proceeds from issuance of notes payable     95,527       1,453,599  
Payments on notes payable     (74,492 )     (509,461 )
Proceeds from issuance of demand loan     312,431       -  
Exercise of employee stock options     -       16,000  
Proceeds from issuance of convertible notes payable, net of fees     2,266,400       3,166,500  
Payments on convertible notes payable     (363,547 )     -  
Proceeds from issuance of convertible notes payable - related party, net     -       52,500  
Net cash provided by financing activities     2,236,319       4,179,138  
                 
Net change in cash and cash equivalents     66,499       (28,867 )
Cash, beginning of year     23,967       52,834  
Cash, end of year   $ 90,466     $ 23,967  
                 
Supplemental disclosures of cash flow information:                
                 
Cash paid for interest   $

237,902

    $ 38,595  
Cash paid for income tax   $ -     $ -  
                 
Non- cash investing and financing activities:                
Common stock issued upon debt conversion   $ 38,700     $ 12,947,334  
Account payable assigned to note payable – related party   $ -     $ 292,366  
Account payable assigned to convertible note payable – related party   $ -     $ 50,000  
Account payable assigned to convertible notes payable   $ 679,022     $ 72,500  
Account payable assigned to note payable   $ 72,500     $ -  
Issuance of warrants in connection with convertible debentures   $ 3,009,034     $ -  
Exchange of notes payable and accrued interest to convertible notes   $ 3,966,199     $ 753,122  
Exchange of convertible notes payable and accrued interest to convertible notes   $ -     $ 5,970,910  
Advances on machinery paid directly by lender   $ -     $ 161,401  
OID – notes payable   $ 12,759     $ 239,496  
OID – convertible notes payable   $ -     $ 157,487  
Convertible notes payable assigned to notes payable   $ -     $ 1,431,401  
Cancellation of notes payable for land   $ -     $ 208,605  
Debt discount additions for convertible notes   $ 1,206,498     $ 3,615,351  
Debt discount additions for notes payable   $ -   $ -  
Exchange of notes payable to related party to convertible notes payable to related party   $ -     $ 2,500  
Investor contribution   $ -     $ 324,754  
Unrealized gain on marketable securities   $ -     $ 6,601  
Common stock issued for settlements   $ 2,000     $ -  
Treasury stock   $

1,209,600

    $ -  
Share Restriction Liability   $ 12     $ -  

 

See notes to Consolidated Financial Statements.

 

38  
 

 

NOTIS GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 December 31, 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 (Note 5). 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 dba Shi Farms (“EWSD”). The Farm was operated by an independent farming partner until the relationship was terminated in May 2016 (Note 3). 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 Annual Report, the Company was headquartered in Red Bank, 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 (the “Board”) approved the name-change merger.

 

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; see Note 5.)
   
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). (See Note 6)
   
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.
   
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).

 

During December of 2016, the Board and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 11)

 

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.

 

39  
 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

 

The 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 year ended December 31, 2017, the Company had a net loss from operations of approximately $117.3 million, negative cash flow from operations of $1.58 million and negative working capital of $158.7 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 $3.6 million and negative working capital of $37.7 million. The Company will need to raise capital in order to fund its operations. 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 Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Management’s plans include:

 

The Company expects that EWSD, which owns the 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® Open Market. Additionally, on September 9, 2016, the Company received notice from OTC Markets that it would move the Company’s listing from the OTCQB® Venture Market to OTC Pink® Open Market, 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® Open Market. These actions might also impact the Company’s ability to obtain funding.

 

Principles of Consolidation

 

The 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.

 

40  
 

 

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 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 (see Note 7).

 

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.

 

41  
 

 

For the years ended December 31, 2017 and 2016, 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 December 31, 2016, valuation as compared to December 31, 2017.

 

Warrants

 

The Company reexamined the determination made as of December 31, 2016, that it did not have sufficient authorized shares available for all of their outstanding warrants to be classified in equity at December 31, 2017, and concluded there still were insufficient authorized shares (Note 7). Therefore, the Company recognized a warrant liability as of December 31, 2017. 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:

 

December 31, 2017   Total     Quoted Prices
in Active
Markets for Identical
Assets or Liabilities
(Level 1)
   

Quoted Prices

for Similar Assets or Liabilities in Active
Markets
(Level 2)

    Significant Unobservable Inputs
(Level 3)
 
Warrant liability     3,528,602       -       -       3,528,602  
Option liability     299,965       -       -       299,965  
Derivative liability     113,636,474       -       -       113,636,474  
                                 
Total liabilities   $ 117,465,041     $    -     $   -     $ 117,465,041  

 

December 31, 2016

  Total     Quoted Prices
in Active
Markets for Identical
Assets or Liabilities
(Level 1)
    Quoted Prices
for Similar Assets or Liabilities in Active
Markets
(Level 2)
    Significant Unobservable Inputs
(Level 3)
 
Warrant liability     14,430       -       -       14,430  
Derivative liability     15,635,947       -       -       15,635,947  
                                 
Total liabilities   $ 15,650,377     $    -     $ -     $ 15,650,377  

 

42  
 

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

    For the year ended December 31, 2017  
    Total  
January 1, 2017     15,650,377  
Initial recognition of conversion feature     7,781,259  
Initial recognition of warrant liability     3,277,052  
Initial recognition of option liability     299,925  
Change in fair value of conversion feature     90,219,268  
Change in fair value of warrant liability     237,120  
Change in fair value of option liability     40  
         
Ending Balance, December 31, 2017   $ 117,465,041  

 

    For the year ended December 31, 2016  
    Total  
January 1, 2016   $ 20,186,594  
Initial recognition of conversion feature     581,817  
Change in fair value of conversion feature     33,271,611  
Gain on extinguishment of debt     (37,464,075 )
Change in fair value of liability     (918,969 )
Unrealized loss on marketable securities     (6,601 )
December 31, 2016     15,650,377  

 

Revenue Recognition

 

Revenues from Cannabidiol oil product

 

The Company recognizes revenue from the sale of Cannabidiol oil products (“CBD oil”) upon shipment, when title passes, and when collectability is reasonably assured.

 

Cost of Revenue

 

Cost of revenue consists primarily of expenses associated with the delivery and distribution of the Company’s products and services. Under the Company’s prior business model, the Company only began capitalizing costs when it obtained a license and a site for operation of a customer dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in excess of the projected net realizable value of the sale of the licenses, then the excess cost above net realizable value is written off to cost of revenues. Cost of revenues also includes the rent expense on master leases held in the Company’s name, which are subleased to the Company’s operators. In addition, cost of revenue related to the Company’s vaporizer line of products consists of direct procurement cost of the products along with costs associated with order fulfillment, shipping, inventory storage and inventory management costs.

 

43  
 

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 2017 and 2016, the Company held no cash equivalents.

 

The Company’s policy is to place its cash with high credit quality financial instruments and institutions and limit the amounts invested with any one financial institution or in any type of instrument. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash.

 

Accounts Receivable and Allowances

 

Accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. In determining the amount of the allowance, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations and assesses current economic trends affecting its customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. The Company also considers its historical level of credit losses. As of December 31, 2017 and 2016, there was an allowance for doubtful accounts of $0.

 

Inventory

 

The Company utilizes lower of standard cost or net realizable valuemethod. During the years ended December 31, 2017 and 2016, the Company recorded an impairment of $0 and $32,300 respectively, that was recorded to cost of revenues.

 

Capitalized agricultural costs

 

Capitalized agricultural costs consists of pre-harvest agricultural costs, including irrigation, fertilization, seeding, laboring, other ongoing crop and land maintenance activities and work-in-progress activities. All capitalized agricultural costs are accumulated and capitalized as incurred. The Company has reflected the capitalized agriculture costs as a current asset as the growing cycle of the crops are estimated to be six months to a year.

 

Basic and Diluted Net Income/Loss Per Share

 

Basic net loss per share of Common Stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per share of Common Stock is determined using the weighted-average number of shares of Common Stock outstanding during the period, adjusted for the dilutive effect of Common Stock equivalents. In periods when losses are reported, which is the case for the years ended December 31, 2017 and 2016 presented in these Consolidated Financial Statements, the weighted-average number of shares of Common Stock outstanding excludes Common Stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following Common Stock equivalents at December 31, 2017 and 2016:

 

    December 31, 2017     December 31, 2016  
Warrants     11,765,757,748       69,757,748  
Options     1,000,000,000       -  
Convertible notes – related party     10,500,000       10,500,000  
Convertible notes     465,782,195,939       114,808,810,010  
Totals     478,558,453,687       114,889,067,758  

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses accelerated depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:

 

Vehicles     5 years  
Furniture and Fixtures     3 - 5 years  
Office equipment     3 years  
Machinery     2 years  
Buildings     10 - 39 years  

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

44  
 

 

In addition, the Company’s management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing the Company’s income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorities. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes.

 

Commitments and Contingencies

 

Certain conditions may exist as of the date the Consolidated Financial Statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Consolidated Financial Statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

 

The Company accrues all legal costs expected to be incurred per event. For legal matters covered by insurance, the Company accrues all legal costs expected to be incurred per event up to the amount of the deductible.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting.

 

On July 22, 2015, the FASB issued a new standard that requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. The new standard will be effective for fiscal years beginning after December 15, 2016, and interim periods in fiscal years beginning after December 15, 2016. The adoption did not have a material effect on its financial position or results of operations or cash flows.

 

In April 2015, the FASB issued a new standard that requires an entity to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the entity would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The new standard will be effective for fiscal years beginning after December 15, 2015, and interim periods in fiscal years beginning after December 15, 2016. The adoption did not have a material effect on its financial position or results of operations or cash flows.

 

45  
 

 

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.

 

46  
 

 

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.

 

47  
 

 

NOTE 3 – ASSET ACQUISITION

 

Farming Agreement

 

On December 18, 2015, the Company and EWSD entered into a Farming Agreement (the “Farming Agreement”) with Whole Hemp Company LLC (“Whole Hemp” now known as “Folium Biosciences, LLC”), pursuant to which Folium Biosciences would manufacture products from hemp and cannabis crops it would grow on EWSD farmland, and the Company would build greenhouses for such activities up to an aggregate size of 200,000 square feet. Folium Biosciences would pay all preapproved costs of such construction on or before September 30, 2017 as partial consideration for a revocable license to use the greenhouses and a separate 10 acre plot of EWSD farmland (the “10 Acres”). EWSD would retain ownership of the greenhouses. For the first growing season commencing October 1, 2016, the Company would receive a percentage of gross sales of all Folium Bioscience’s products on a monthly basis, and the Company’s share would increase incrementally based on the extent of crops planted on EWSD farmland according to a mutually agreed schedule. In addition, the Company would receive 50% of Folium Biosciences’ gross profits from the farming activities on the 10 Acres. The Company planned to recognize all revenue from the Farming Agreement at the net amount received when it has been earned and determined collectable.

 

Pursuant to the Farming Agreement, the Company also granted Folium Biosciences a warrant to purchase 4,000,000 shares of Common Stock at an exercise price of $0.50 per share, exercisable at any time within five years. The warrants were valued at $76,000, using the Black-Scholes-Merton model, with key valuation assumptions used that consist of the price of shares of Common Stock at settlement date, a risk-free interest rate based on the average yield of a five-year Treasury note and expected volatility of shares of Common Stock, all as of the measurement date. The fair value of the warrants is included in deferred costs and will be recognized over the life of the Farming Agreement. Due to the termination of the Farming and Growers Distribution Agreements, as discussed below, as of September 30, 2016, this amount has been fully amortized.

 

On March 11, 2016, the Company and EWSD entered into a First Amended and Restated Farming Agreement with Whole Hemp, amending, and restating in certain respects the Farming Agreement. The First Amended and Restated Farming Agreement clarifies that EWSD, rather than the Company, would be responsible for the building of greenhouses to be utilized by Whole Hemp for growing hemp and cannabis crops pursuant to the agreement, and that EWSD would be the recipient of all payments by Whole Hemp (including all revenue sharing arrangements) under the agreement.

 

On or about May 7, 2016, the Company determined that Folium Biosciences was in default of the Farming Agreement, principally because it had abandoned its obligation to provide farming activities under the First Amended and Restated Farming Agreement. On May 13, 2016, EWSD notified Folium Biosciences of its defaults under the First Amended and Restated Farming Agreement and EWSD’s election to terminate the First Amended and Restated Farming Agreement.

 

By its terms, the First Amended and Restated Farming Agreement may be terminated at any time by either party, if the other party was in material breach of any obligation under the First Amended and Restated Farming Agreement, which breach continued uncured for 30 days following written notice thereof.

 

On June 1, 2016, a complaint was filed by Whole Hemp on this matter, naming the Company and EWSD, as defendants. See Whole Hemp Complaint, below.

 

48  
 

 

Growers’ Distributor Agreement

 

On December 18, 2015, the Company also entered into a Growers’ Agent Agreement with Folium Biosciences, which was amended on March 11, 2016, to change the name of the agreement to Growers’ Distributor Agreement, (“Distributor Agreement”) and to clarify some terms. Pursuant to the Distributor Agreement, the Company would provide marketing, sales, and related services on behalf of Folium Biosciences in connection with the sale of its Cannabidiol oil product (“CBD oil”), from which the Company would receive a percentage of gross revenues (other than the sale of such product generated from the EWSD 10 Acres and the Folium Biosciences 40 acre plot subject to the Farming Agreement). The Growers’ Agent Agreement was effective until September 30, 2025. The Company would sell the product on behalf of Folium Biosciences on a commission basis. The Company may not act as agent of any other grower, distributor, or manufacturer of the same product unless such other party agrees.

 

On March 11, 2016, the Company and EWSD entered into a First Amended and Restated Grower’s Distributor Agreement with Whole Hemp, amending and restating in certain respects the Grower’s Agent Agreement, including by substituting EWSD as a party in place of the Company.

 

Because the Company believes Folium Biosciences is in default, principally because it had abandoned its obligation to provide farming activities under the First Amended and Restated Farming Agreement since May 7, 2016, EWSD notified Whole Hemp on May 13, 2016 of its election to terminate the Restated Grower’s Distributor Agreement.

 

By its terms, the Restated Grower’s Distributor Agreement could be terminated at any time by either party, if the other party was in material breach of any obligation under the Restated Grower’s Distributor Agreement, which breach continued uncured for 30 days following written notice thereof.

 

Whole Hemp Complaint

 

A complaint was filed by Whole Hemp Company, LLC (“Whole Hemp”) on June 1, 2016, naming the Company and EWSD (collectively, the “Company Defendants”), as defendants in Pueblo County, CO district court. The complaint alleges five causes of action against the Company Defendants: misappropriation of trade secrets, civil theft, intentional interference with prospective business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and the Company Defendants for the Farming Agreement and the Distributor Agreement.

 

The court entered an ex parte temporary restraining order on June 2, 2016, and a modified temporary restraining order on July 14, 2016, enjoining the Company Defendants from disclosing, using, copying, conveying, transferring, or transmitting Whole Hemp’s trade secrets, including Whole Hemp’s plants. On June 13, 2016, the court ordered that all claims be submitted to arbitration, except for the disposition of the temporary restraining order.

 

On August 12, 2016, the court ordered that all of Whole Hemp’s plants in the Company Defendants’ possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties were expected to file a motion to dismiss the district court action.

 

In light of the Whole Hemp plants all being destroyed pursuant to the court order, the Company has immediately expensed all Capitalized agricultural costs as of June 30, 2016, as all costs as of that date related to Whole Hemp plants.

 

The Company Defendants commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between the parties. Whole Hemp filed an Answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted to the court.

 

On September 30, 2016, the arbitrator held an initial status conference and agreed to allow the Company Defendants to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016.

 

49  
 

 

On or about July 19, 2016, EWSD initiated arbitration before JAMS (Case ID: 18657). Effective June 20, 2017, as a result of a mediation held in Colorado, the parties entered into a Confidential Settlement and Mutual Release Agreement (the “Release Agreement”), pursuant to which the parties dismissed with prejudice all of their respective claims or counterclaims against each other, as asserted in the Arbitration, and mutually released each other from all claims. The Release Agreement specifically provides that neither its execution nor implementation is, or will be deemed to be or construed as, an admission by any party of any liability, act, or matter.

 

NOTE 4 – INVENTORY AND CAPITALIZED AGRICULTURAL COSTS

 

Inventories and capitalized agricultural costs are generally kept for a short period of time.

 

Finished goods are comprised of CBD Isolate and CBD Distillate.

 

Growing costs, also referred to as agricultural costs, consist of cultivation, fertilization, labor costs and soil improvement, pest control and irrigation.

 

Biomass is comprised of labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.

 

Raw materials include all purchasing costs.

 

Inventory at December 31, 2017 and 2016 consisted of the following:

 

    December 31, 2017     December 31, 2016  
Finished goods   $ 84,210     $  
Growing crops and biomass     394,903       160,131  
                 
Total inventory, net   $ 479,113     $ 160,131  

 

The Company recorded a markdown of $0 and $32,300 during the years ended December 31, 2017 and 2016, respectively.

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment at December 31, 2017 and 2016 consists of:

 

Property and Equipment   December 31, 2017     December 31, 2016  
Advances     -       472,126  
Land     4,945,000       4,945,000  
Construction in progress     -       1,241,380  
Buildings and structures     1,300,630       59,250  
Machinery     497,011       21,600  
                 
      6,742,641       6,739,356  
                 
Less accumulated depreciation     (397,658 )     (26,988 )
                 
Property and equipment, net   $ 6,344,983     $ 6,712,368  

 

Depreciation expense for the years ended December 31, 2017 and 2016, was $367,385 and $17,363, respectively.

 

50  
 

 

NOTE 6 – PCH INVESTMENT

 

Effective as of March 21, 2017, through a series of related transactions, Notis intended to acquire, indirectly, an aggregate of 459,999 of the then-issued and outstanding shares of capital stock (the “PCH To-Be-Purchased Shares”) of PCH Investment Group, Inc., a California corporation (“PCH”) for a proposed purchase price of $300,000 in cash and the proposed issuance of shares of Common Stock. The PCH To-Be-Purchased Shares represented 51% of the outstanding capital stock of PCH. In connection with the Company’s then-intended acquisition of the PCH To-Be-Purchased Shares, the Company (or its affiliates) was also to be granted an indirect option to acquire the remaining 49% (the “PCH Optioned Shares”) of the capital stock of PCH. The option was to expire on February 10, 2019 (the “PCH Optioned Shares Expiry Date”).

 

Located in San Diego, California, PCH was a management services business that focused on the management of cannabis production and manufacturing businesses. On November 1, 2016, PCH entered into a Management Services Agreement (the “PCH Management Agreement”) with California Cannabis Group (“CalCan”) and Devilish Delights, Inc. (“DDI”), both of which then were California nonprofit corporations in the cannabis production and manufacturing business (“their business”). CalCan and Mr. Pyatt represented that CalCan was then licensed by the City of San Diego, California, to cultivate cannabis and manufacture cannabis products, as well as to sell, at wholesale, the cultivated and manufactured products at wholesale to legally operated medical marijuana dispensaries. The PCH Management Agreement provided that PCH was responsible for the day-to-day operations and business activities of their business. In that context, PCH was to be responsible for the payment of all operating expenses of their business (including the rent and related expenditures for CalCan and DDI) from the revenue generated by their business, or on an out-of- pocket basis if the revenue should be insufficient. In exchange for PCH’s services and payment obligations, PCH was to be entitled to 75% of the gross profits of their business. The PCH Management Agreement did not provide for any gross profit milestone during its first 12 months; thereafter, it provided for an annual $8 million gross profit milestone, with any amount in excess thereof to be carried forward to the next annual period. In the event that, during any annual period, the gross profit thereunder was less than $8 million (including any carry-forward amounts), then, on a one- time basis, PCH would have been permitted to carry-forward such deficit to the following annual period. If, in that following annual period, the gross profit was to have exceeded $6 million, then PCH would have been entitled to an additional “one-time basis” carry-forward of a subsequent deficit. The term of the PCH Management Agreement was for five years, subject to two extensions, each for an additional five-year period, in all cases subject to earlier termination for an uncured material breach by PCH of its obligations thereunder. Mr. Pyatt, the Company’s then- current Chief Operating Officer and Senior Vice President, Government Affairs, was also then a member of the Board of Directors of CalCan and DDI.

 

51  
 

 

Pursuant to a Securities Purchase Agreement, that was made and entered into as of March 16, 2017 (five days before the presumed closing of the transaction; the “SPA”), “PASE” was to have acquired the PCH To-Be-Purchased Shares from the three PCH shareholders: (i) Mystic, LLC, a California limited liability company that Mr. Goh, the Company’s then-Chief Executive Officer, formed and controlled for his investments in cannabis projects, (ii) Mr. Pyatt, and (iii) Mr. Kaller, then the general manager of PCH (collectively, the “PCH Shareholders”).

 

As a condition to the Lender entering into the Note Purchase Agreement and the PCH-Related Note (both as noted below) and providing any additional funding to the Company in connection with its intended acquisition of the PCH To-Be-Purchased Shares, the Board ratified the forms of employment agreements for Mr. Goh, as the Company’s then-Chief Executive Officer, and for Mr. Pyatt, as the Company’s then-prospective President. If the agreements became effective, and following the second anniversary thereof, the terms were to have become “at- will.” In addition to payment of a base salary, the agreements provided for certain cash, option, and equity bonuses, in each case to become subject both to each individual and to the Company meeting certain performance goals to be acknowledged by them and to be approved by a disinterested majority of the Board.

 

Due to the nature of the above-described intended transaction, and the related parties involved with PCH, the Company formed a special committee of its Board to consider all of the aspects thereof, as well as the related financing proposed to be provided by the Lender. The special committee consisted of three of the four directors: Ambassador Ned L. Siegel, Mitch Lowe, and Manual Flores. In the context of the special committee’s charge, it engaged an otherwise independent investment banking firm (the “Banker”) to analyze the potential acquisition of the PCH To-Be-Purchased Shares through the SPA (noted above) and the Stock Purchase Option Agreement (the “PCH Option Agreement”; the parties to which are PASE, PCH, the PCH Shareholders, as noted below), the related financing agreements (all as noted below), other related business and financial arrangements, and the above-referenced employment agreements. After the Banker completed its full review of those agreements and its own competitive analysis, it provided its opinion that the consideration to be paid in connection with the acquisition of the PCH To- Be-Purchased Shares and the terms of the PCH-Related Note were fair to the Company from a financial point of view. Following the Banker’s presentation of its analysis and opinion, and the special committee’s own analysis, the special committee unanimously recommended to the full Board that all of such transactions should be approved and that the Company could consummate the acquisition of the PCH To-Be-Purchased Shares, accept the option to acquire the PCH Optioned Shares, enter into the PCH-Related Note, the documents ancillary thereto, and the Employment Agreements.

 

In connection with the Company’s intended acquisition of the PCH To-Be-Purchased Shares and the Company’s intended option to acquire the PCH Optioned Shares, PASE, EWSD, PCH, and the Company entered into a Convertible Note Purchase Agreement (the “Note Purchase Agreement”) with a third-party lender (the “PCH Lender”). Concurrently, PASE and the Company (with EWSD and PCH as co-obligors) entered into a related 10% Senior Secured Convertible Promissory Note (the “PCH-Related Note”) in favor of the PCH Lender. The initial principal sum under the PCH-Related Note was $1,000,000 and it bears interest at the rate of 10% per annum. Principal and interest are subject to certain conversion rights in favor of the PCH Lender. So long as any principal is outstanding or any interest remains accrued, but unpaid, at any time and from time to time, at the option of the PCH Lender, any or all of such amounts may be converted into shares of Common Stock. Notwithstanding such conversion right, and except in the circumstance described in the next sentence, the PCH Lender may not exercise its conversion rights if, in so doing, it would then own more than 4.99% of the Company’s issued and outstanding shares of Common Stock. However, upon not less than 61 days’ notice, the PCH Lender may increase its limitation percentage to a maximum of 9.99%. The PCH Lender’s conversion price is fixed at $0.0001 per share. Principal and accrued interest may be pre-paid from time to time or at any time, subject to 10 days’ written notice to the PCH Lender. Any prepayment of principal or interest shall be increased to be at the rate of 130% of the amount so to be prepaid and, during the 10-day notice period, the PCH Lender may exercise its conversion rights in respect of any or all of the amounts otherwise to be prepaid.

 

In a series of other loan transactions prior to the intended closing of the acquisition of the PCH To-Be-Purchased Shares, a different third party lender (the “Ongoing Lender”) had lent to the Company, in five separate tranches, an aggregate amount of approximately $414,000 (the “Pre-acquisition Loans”), that, in turn, the Company lent to PCH to use for its working capital obligations. Upon the purported closing of the acquisition of the PCH To-Be-Purchased Shares and, pursuant to the terms of the PCH-Related Note, the PCH Lender lent to the Company (i) approximately $86,000, that, in turn, the Company lent to PCH to use for its additional working capital obligations, (ii) $300,000 for the purported acquisition of the PCH To-Be-Purchased Shares, and (iii) $90,000 for various transaction-related fees and expenses. Immediately subsequent to the closing of the purported acquisition of the PCH To-Be-Purchased Shares, the PCH Lender lent to the Company (x) approximately $170,000 for the Company’s operational obligations and (y) approximately $114,000 for the Company partially to repay an equivalent amount of the Pre-acquisition Loans.

 

52  
 

 

In connection with the Pre-acquisition Loans and the PCH-Related Note, the makers and co-obligors thereof entered into an Amended and Restated Security and Pledge Agreement in favor of the Lender, pursuant to which such parties, jointly and severally, granted to the Lender a security interest in all, or substantially all, of their respective property. Further, PCH entered into a Guarantee in favor of the PCH Lender in respect of the other parties’ obligations under the PCH-Related Note. PCH’s obligation to the PCH Lender under these agreements is limited to a maximum of $500,000.

 

As of the intended closing of the acquisition of the PCH To-Be-Purchased Shares, the Company paid $300,000 to the PCH Shareholders. If that transaction had closed, the Company would also have become obligated to issue to the PCH Shareholders 1,500,000,000 shares (the “Purchase Price Shares”) of Common Stock. That number of issuable shares was to be subject to certain provisions detailed in the PCH-Related Note, which are summarized herein.

 

Notwithstanding the number of issuable shares referenced above, the number of issued Purchase Price Shares was to have been equal to 15% of the then-issued and outstanding shares of Common Stock at the time that the Company exercised its option to acquire the PCH Optioned Shares under the PCH Option Agreement. Further, in the event that the Company were to have issued additional equity securities prior to the date on which it in fact had issued the Purchase Price Shares at a price per share that was less than the value referenced above, the PCH Shareholders would have been entitled to “full ratchet” anti-dilution protection in the calculation of the number of Purchase Price Shares to be issued (with the exception of a recapitalization by the Lender to reduce the Company’s overall dilution).

 

If the Company did not exercise the intended option to acquire the PCH Optioned Shares prior to PCH Optioned Shares Expiry Date, the PCH Shareholders would have had the right to reacquire the PCH To-Be-Purchased Shares from the Company for the same cash consideration ($300,000) that was to have been paid to them for those shares. Further, if the Company were to be in default of its material obligations under the SPA, or if PASE were the subject of any bankruptcy proceedings, then the PCH Shareholders have the same reacquisition rights noted in the preceding sentence.

 

Pursuant the PCH Option Agreement, PASE was granted the option to purchase all 49%, but not less than all 49%, of the PCH Optioned Shares. The exercise price for the PCH Optioned Shares is an amount equivalent to five times PCH’s “EBITDA” for the 12-calendar month period, on a look-back basis, that concludes on the date of exercise of the Option, less $10 (which was the purchase price of the option). The calculation of the 12-month EBITDA was to be determined by PASE’s (or its) then-currently engaged independent auditors. If the Company were to exercise the option prior to the first anniversary of the closing of the acquisition of the PCH To-Be-Purchased Shares, then the exercise price for the PCH Optioned Shares was to be based on the EBITDA for the entire 12-calendar month period that commenced with the effective date of the PCH Option Agreement.

 

PCH Investment Group, Inc. – San Diego Project Termination

 

On March 27, 2017, the Company filed a Current Report on Form 8-K to announce the above-described series of events. Subsequently, it became clear to the Company that the PCH Parties failed to make key closing deliveries, including, without limitation, actual transfer of the PCH To-Be-Purchased Shares, the PCH Lease (as defined below) and related marijuana licenses. Thereafter, the parties entered into litigation and eventual settlement as described below.

 

53  
 

 

The Settlement Agreement and Mutual General Release

 

The Company, PACE, and EWSD (collectively, the “Notis Parties”) and PCH, Messrs. Pyatt, Kaller, and Goh (solely in connection with his status as an equity holder of PCH, collectively, the “PCH Individuals”; and, with PCH, collectively, the “PCH Parties”) entered into a Settlement Agreement and Mutual General Release, with an effective date of August 16, 2017 (the “Settlement Agreement”), inter alia, to “unwind” the SPA’s intended transactions, to confirm that the transactions never officially closed, and to enter into a series of mutual releases with such parties. Some of the salient recitals from the Settlement Agreement are:

 

  1. One or both of the PCH Lender and the Ongoing Lender (collectively, the “Notis Lenders”) and PCH have certain disagreements in respect of their respective rights and obligations in and related to certain of the SPA and related documents;
     
  2. Some or all of the Notis Parties and the Notis Lenders, on the one hand, and PCH and the PCH Individuals, on the other hand, have certain disagreements in respect of the conduct of PCH’s business;
     
  3. Some or all of the Notis Parties and PCH have certain disagreements in respect of the ownership and possessory right of certain of the furniture and equipment utilized by PCH on its own behalf or on behalf of others in respect of the conduct of PCH’s business located at 9212 Mira Este Court, San Diego, California (the location for the “PCH Lease”);
     
  4. The Notis Parties and the PCH Parties have certain disagreements in respect of their respective rights and obligations in and related to the SPA;
     
  5. PCH and Trava LLC, a Florida limited liability company and a material lender to PCH, have certain disagreements in respect of their respective rights and obligations in and related to the PCH / Trava Master Service Agreement (as defined in the Settlement Agreement);
     
  6. Notis and Mr. Pyatt have certain disagreements in respect of their respective rights and obligations in and related to the Pyatt Employment Agreement (as defined in the Settlement Agreement), as manifested in part by Mr. Pyatt’s filing of the Pyatt Labor Complaint (as defined in the Settlement Agreement);
     
  7. The Notis Parties and the PCH Parties have certain disagreements in respect of the Notis Parties and the PCH Parties’ respective conduct in connection with PCH’s rights and obligations in and related to the PCH / SDO Master Service Agreement (as defined in the Settlement Agreement);
     
  8. The Notis Lenders and PCH have certain disagreements in respect of the PCH’s conduct in connection with PCH’s rights and obligation in and related to certain of the Notis Financing Documents (as defined in the Settlement Agreement);
     
  9. The Notis Lenders and PCH have certain disagreements in respect of the ownership and possessory rights of certain of the Equipment (as defined in the Settlement Agreement); and
     
  10. Some or all of the Notis Parties and the PCH Individuals, among others, have certain disagreements in respect of the operation of the PCH Shareholder/Buy-Sell Agreement (as defined in the Settlement Agreement).

 

See, also, Change of Officers and Directors in connection with the severance by each of Messrs. Pyatt and Goh of their respective employment and directorship relationships with us.

 

In connection with the PCH investment, the Company recorded $1,001,520 as a loss in connection with the failed and unconsummated business combination. The $1,001,520 is the amount the Company invested in the PCH transaction.

 

NOTE 7 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY

 

Convertible notes payable consists of:

 

    December 31, 2017     December 31, 2016  
Investor #1   $ 15,198,404     $ 6,642,745  
Investor #2     2,087,198       1,857,146  
Investor #3     293,009       231,142  
Investor #4     2,462,284       -  
Investor #5     300,000       -  
      20,340,895       8,731,033  
Less discounts     (869,441     (85,591 )
Plus premium     -       -  
                 
Less current maturities     19,471,454       8,645,442  
                 
Convertible notes payable, net of current maturities   $ -     $ -  

 

Investor #1

 

During the year ended December 31, 2016 the Company issued 30 convertible notes to third-party lenders totaling $9,700,170. The Company received cash of $2,695,000 and original issue discounts of $119,737. The lender also paid $161,401 on advancements on fixed assets and consolidated principal and interest of $6,818,744. These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between July 13, 2016 through September 9, 2017. This note is secured by the Company’s assets. The convertible notes convert at a fixed rate of $0.75 or a 49% to 40% discount with a lookback of 30 trading days.

 

54  
 

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of Investor #1’s notes during the year ended December 31, 2016, gave rise to a derivative liability of $12,259,532, of which $1,952,380 were recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible notes. $10,307,152 was recorded due to the consolidation of the principal and interest and was expense to loss on extinguishment.

 

During the year ended December 31, 2016 Investor #1 converted $802,926 of principal into 4,374,651,437 shares of Common Stock.

 

During the year ended December 31, 2016 Investor #1 converted $5,188,643 of principal and $686,827 of interest into the consolidation loan disclosed in respect of Investor #1 and Investor #3 elsewhere in these notes. The Company has recorded $36,071,697 gain on extinguishment.

 

During the year ended December 31, 2017 the Company issued 29 convertible notes to third-party lenders totaling $1,529,297. The Company received cash of $1,066,400 and paid $413,457 from the PCH-Related Note. (See Note 6). These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between February 3, 2017 through December 4, 2018. The notes convert at a fixed rate of $0.0001 or a 50% discount with a lookback of 30 trading days.

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of Investor #1’s convertible notes during the year ended December 31, 2017, gave rise to a derivative liability of $2,950,900. $1,036,301 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note.

 

During the year ended December 31, 2017 the Company went into default on all of Investor #1’s convertible notes. These notes now accrue interest at a rate of 24% per annum, a late fee of 18% on interest outstanding compounding quarterly and the principal increases by 50%-30%. The increase of principal of $3,698,710 was recorded to interest expense.

 

Upon default, 18 promissory notes held by Investor #1 became convertible. The Company reclassed $3,691,199 from notes payable to convertible notes payable.

 

During the year ended December 31, 2017, the Company repaid $250,000 in principal and $37,148 in interest.

 

Investor #2

 

During the year ended December 31, 2016, the Company issued two convertible notes to third-party lenders totaling $278,000. The Company received cash of $235,000 and the lender paid $43,000 on behalf of the Company for vendor liabilities. These convertible notes accrue interest at a rate of 5% per annum and mature with interest and principal both due between July 13, 2016 through April 30, 2017. This note is secured by the Company’s assets. The convertible notes convert at a fixed rate of $0.75 or a 49% discount with a lookback of 20 trading days.

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of Investor #2’s convertible notes during the year ended December 31, 2016, gave rise to a derivative liability of $282,312, of which $265,917 was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible notes. $16,395 was above the face value of the convertibles notes and was recorded as interest expense.

 

During the year ended December 31, 2017, the Company went into default on all of Investor #2’s convertible notes. These notes now accrue interest at a rate of 24% per annum and a late fee of 18% on interest outstanding compounding quarterly. The default caused a derivative expense of $549,535.

 

Upon default, the promissory note held by Investor #2 became convertible. The Company reclassed $275,000 from notes payable to convertible notes payable.

 

During the year ended December 31, 2016, Investor #2 converted $1,450,661 of principal and $38,002 of interest into 4,949,130,904 shares of Common Stock.

 

During the year ended December 31, 2017, Investor #2 converted $1,935 of principal into 38,700,000 shares of Common Stock.

 

At December 31, 2017, the Company was in default on all the convertible debentures with Investor #2.

 

55  
 

 

Investor #3

 

During the year ended December 31, 2016, the Company issued two convertible notes to third-party lenders totaling $282,500. The Company received cash of $236,500, original issue discounts of $34,750 and the lender paid $11,250 on behalf of the Company for vendor liabilities. These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between September 14, 2016 through August 20, 2017. This note is secured by the Company’s assets. These notes are convertible upon default at a rate of $0.75 or a 49% discount with a lookback of 30 trading days.

 

Due to the fact that these notes have an option to convert at a variable amount upon default, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of Investor #3’s convertible notes during the year ended December 31, 2016, gave rise to a derivative liability of $672,335, of which $332,592 was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible notes. $339,743 was above the face value of the convertible notes and was recorded as interest expense.

 

During the year ended December 31, 2016 Investor #3 converted $51,358 of principal into 205,431,250 shares of Common Stock.

 

Investor #4

 

During the year ended December 31, 2017, the Company issued seven convertible notes to third-party lenders totaling $1,641,522. The Company received cash of $1,000,000 and paid $641,522 towards farm expenses. These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between March 15, 2018 through November 09, 2018. This note is secured by the Company’s assets. The notes convert at a fixed rate of $0.0001 or a 50% discount with a lookback of 30 trading days.

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of Investor #4’s notes during the year ended December 31, 2017, gave rise to a derivative liability of $3,842,628. In addition, the Company issued warrants to purchase 10,000,000,000 shares of common stock. The warrant entitles the holder to purchase shares of Common Stock at a purchase price of $0.0001 per share for a period of four years from the issue date. The Company recorded a $2,979,231 debt discount relating to the warrants issued to the investor. The debt discounts are charged to accretion of debt discount and issuance cost ratably over the term of the convertible note.

 

During the year ended December 31, 2017, the Company went into default on all of Investor #4 convertible notes. These notes now accrue interest at a rate of 24% per annum, a late fee of 18% on interest outstanding compounding quarterly and the principal increases by 50%. The increase of principal of $820,761 was recorded to interest expense.

 

Investor #5

 

During the year ended December 31, 2017, the Company issued two convertible notes to third-party lenders totaling $200,000. The Company received cash of $200,000. These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between April 27, 2018 through May 8, 2018. This note is secured by the Company’s assets. These notes are convertible upon default at a rate of $0.0001 or a 49% discount with a lookback of 30 trading days.

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of Investor #5’s convertible notes during the year ended December 31, 2017, gave rise to a derivative liability of $438,196, of which $170,198 was recorded as a debt discount. In addition, the Company issued warrants to purchase 200,000 shares of Common Stock. The warrant entitles the holder to purchase shares of Common Stock at a purchase price of $0.0001 per share for a period of four years from the issue date. The Company recorded a $29,802 debt discount relating to the warrants issued to the investor. The debt discounts are charged to accretion of debt discount and issuance cost ratably over the term of the convertible notes.

 

56  
 

 

During the year ended December 31, 2017, the Company went into default on all of Investor #4’s convertible notes. These notes now accrue interest at a rate of 24% per annum, a late fee of 18% on interest outstanding compounding quarterly and the principal increases by 50%. The increase of principal of $100,000 was recorded to interest expense.

 

Related Party Financing

 

One of the members of the Board entered into three separate subordinated convertible promissory notes convertible at $0.01 with the Company on March 4, 2016, March 10, 2016, and March 15, 2016, respectively, each in the principal amount of $25,000, for a total of $75,000. Also on March 15, 2016, another of the Company’s directors entered into a subordinated convertible promissory note convertible at $0.01 with the Company in the principal amount of $25,000, and two other of the Company’s directors each entered into a subordinated convertible promissory note convertible at $0.01 with the Company in the principal amount of $2,500. All of the foregoing convertible promissory notes have three year terms and an interest rate of 8% per annum. The debentures were evaluated to determine if the conversion feature fell within the guidance for derivative accounting, and as the debentures are convertible at a fixed conversion price, and do not include a reset provision to occur upon subsequent sales of securities at a price lower than the fixed conversion price, the Company concluded the conversion feature did not qualify as a derivative.

 

In connection with their funding of the Notes (collectively, the “Board Notes”), the directors each received a warrant, exercisable for a period of three (3) years from the date of Board Notes, to purchase an amount of Common Stock equal to 50% of the principal sum under each of the Board Notes, at an exercise price equal to 200% of the applicable Conversion Price. The exercise price of the warrants is $0.02. The warrants were determined to have a fair value of $42,000, calculated with the Black-Scholes-Merton model, with the following key valuation assumptions: estimated term of three years, annual risk-free rate of 0.93%, and annualized expected volatility of 172%.

 

NOTE 8 – NOTES PAYABLE

 

Notes payable consists of:

 

    December 31, 2017     December 31, 2016  
Southwest Farms   $ 3,536,279     $ 3,590,241  
East West Secured Development     486,531       503,031  
Investor #1     103,847       3,691,200  
Investor #2     -       275,000  
Investor #6     65,000       -  
      4,191,657       8,059,472  
Less discounts     -       (598,721 )
Plus premium     -       -  
                 
Subtotal notes payable     4,191,657       7,460,751  
Less current maturities     4,191,657       3,367,479  
                 
Notes payable, net of current maturities   $ -     $ 4,093,272  

 

57  
 

 

Investor #1

 

During the year ended December 31, 2016, the Company issued 18 convertible notes to third-party lenders totaling $3,691,199. The Company received cash of $1,095,741, original issue discounts of $996,199 and the lender paid $145,000 on behalf of the Company for vendor liabilities. These convertible notes accrue interest at a rate between 5% to 10% per annum and mature with interest and principal both due between December 12, 2016 through November 18, 2017. This note is secured by the Company’s assets. These notes are convertible upon default at a rate of $0.75 or a 40% discount with a lookback of 20 trading days.

 

Due to the fact that these notes have an option to convert at a variable amount upon default, they are subject to derivative liability treatment. The Company has applied ASC 81