Exactus, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
(As Restated - see Note 14)
|
ASSETS
|
|
|
Current Assets:
|
|
|
Cash
and cash equivalents
|
$298,754
|
$18,405
|
Accounts
receivable, net
|
42,895
|
55,725
|
Accounts
receivable - related party
|
107,660
|
18,860
|
Inventory,
net
|
340,528
|
1,337,809
|
Prepaid
expenses and other current assets - current
|
60,114
|
248,776
|
Prepaid
expenses and other current assets - related party -
current
|
622,159
|
622,160
|
Due
from related parties
|
-
|
127,500
|
Total current assets
|
1,472,110
|
2,429,235
|
|
|
|
Other Assets:
|
|
|
Deposits
|
-
|
80,000
|
Prepaid
expenses and other current assets - long-term
|
9,589
|
-
|
Prepaid
expenses and other current assets - related party -
long-term
|
2,175,000
|
2,492,045
|
Property
and equipment, net
|
405,775
|
477,433
|
Intangible
assets, net
|
1,656,894
|
2,147,311
|
Operating
lease right-of-use assets, net (see Note 7)
|
310,694
|
390,810
|
Total other assets
|
4,557,952
|
5,587,599
|
|
|
|
TOTAL ASSETS
|
$6,030,062
|
$8,016,834
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
Accounts
payable
|
$2,026,841
|
$1,442,409
|
Accounts
payable - related parties
|
454,511
|
454,511
|
Accrued
expenses
|
589,148
|
238,010
|
Unearned
revenue - related party
|
-
|
215,000
|
Notes
payable - current portion
|
90,755
|
-
|
Note
payable - related parties
|
78,017
|
55,556
|
Subscription
payable
|
250,000
|
250,000
|
Convertible
notes, net of discounts
|
575,979
|
85,906
|
Derivative
liability
|
468,387
|
880,410
|
Interest
payable
|
39,332
|
16,677
|
Due
to related party
|
84,500
|
-
|
Operating
lease liabilities, current portion (see Note 7)
|
178,541
|
169,869
|
Total current liabilities
|
4,836,011
|
3,808,348
|
|
|
|
Long Term Liabilities:
|
|
|
Convertible
notes payable
|
-
|
100,000
|
Notes
payable - long-term portion
|
244,755
|
-
|
Operating
lease liabilities, long-term portion (see Note 7)
|
132,154
|
220,942
|
Total long term liabilities
|
376,909
|
320,942
|
|
|
|
TOTAL LIABILITIES
|
5,212,920
|
4,129,290
|
|
|
|
Commitment and contingencies (see Note 11)
|
|
|
|
|
|
Equity:
|
|
|
Exactus, Inc. Stockholders' Equity
|
|
|
Preferred
stock: 50,000,000 shares authorized; $0.0001 par value, 5,266,466
undesignated shares
|
|
|
Preferred
stock Series A: 1,000,000 shares designated; $0.0001 par
value,
|
|
|
323,019
and 353,109 shares issued and outstanding,
respectively
|
32
|
35
|
Preferred
stock Series B-1: 32,000,000 shares designated; $0.0001 par
value,
|
|
|
1,650,000
shares issued and outstanding
|
165
|
165
|
Preferred
stock Series B-2: 10,000,000 shares designated; $0.0001 par
value,
|
|
|
7,516,000
shares issued and outstanding
|
752
|
752
|
Preferred
stock Series C: 1,733,334 shares designated; $0.0001 par
value,
|
|
|
none
shares issued and outstanding
|
-
|
-
|
Preferred
stock Series D: 200 shares designated; $0.0001 par
value,
|
|
|
18
shares issued and outstanding
|
-
|
-
|
Preferred
stock Series E: 10,000 shares designated; $0.0001 par
value,
|
|
|
10,000
shares issued and outstanding
|
1
|
1
|
Common
stock: 650,000,000 shares authorized; $0.0001 par
value,
|
|
|
50,266,956
and 43,819,325 shares issued and outstanding,
respectively
|
5,027
|
4,382
|
Common
stock to be issued (287,500 and 664,580 shares to be issued,
respectively)
|
28
|
66
|
Additional
paid-in capital
|
26,905,565
|
25,343,293
|
Due
from related parties
|
(127,500)
|
-
|
Accumulated
deficit
|
(25,119,016)
|
(20,923,681)
|
Total
Exactus Inc. Stockholders' Equity
|
1,665,054
|
4,425,013
|
|
|
|
Non-controlling
interest in subsidiary
|
(847,912)
|
(537,469)
|
|
|
|
Total Stockholders'
Equity
|
817,142
|
3,887,544
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
$6,030,062
|
$8,016,834
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Exactus, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
(As
Restated - see Note 14)
|
|
|
|
Net
revenues
|
$531,240
|
$99,164
|
$1,051,440
|
$115,144
|
Net
revenues - related party
|
-
|
40,519
|
315,800
|
40,519
|
|
|
|
|
|
Total net revenues
|
531,240
|
139,683
|
1,367,240
|
155,663
|
|
|
|
|
|
Cost
of sales
|
562,270
|
-
|
1,604,743
|
-
|
Cost
of sales - related party
|
60,000
|
103,187
|
417,783
|
115,787
|
|
|
|
|
|
Total cost of sales
|
622,270
|
103,187
|
2,022,526
|
115,787
|
|
|
|
|
|
Gross
profit (loss)
|
(91,030)
|
36,496
|
(655,286)
|
39,876
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
General
and administration
|
760,306
|
622,079
|
1,820,893
|
1,274,288
|
Selling
and marketing expenses
|
132,110
|
176,602
|
413,000
|
228,480
|
Professional
and consulting
|
552,197
|
330,891
|
1,280,068
|
2,211,038
|
Research
and development
|
-
|
11,975
|
-
|
26,975
|
|
|
|
|
|
Total
Operating Expenses
|
1,444,613
|
1,141,547
|
3,513,961
|
3,740,781
|
|
|
|
|
|
Loss
from Operations
|
(1,535,643)
|
(1,105,051)
|
(4,169,247)
|
(3,700,905)
|
|
|
|
|
|
Other
Income (expenses):
|
|
|
|
|
Derivative
gain (loss)
|
249,982
|
-
|
356,468
|
(1,454,729)
|
Gain
on extinguishment of debt, net
|
39,142
|
-
|
39,142
|
-
|
(Loss)
gain on settlement of debt, net
|
(16,500)
|
-
|
(23,000)
|
3,007,629
|
Interest
expense
|
(420,675)
|
(2,519)
|
(709,141)
|
(369,432)
|
|
|
|
|
|
Total
Other Income (Expenses), net
|
(148,051)
|
(2,519)
|
(336,531)
|
1,183,468
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
(1,683,694)
|
(1,107,570)
|
(4,505,778)
|
(2,517,437)
|
Provision
for income taxes
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Net
Loss
|
(1,683,694)
|
(1,107,570)
|
(4,505,778)
|
(2,517,437)
|
|
|
|
|
|
Net
Loss attributable to non-controlling interest
|
154,624
|
152,344
|
310,443
|
187,948
|
|
|
|
|
|
Net
Loss Attributable to Exactus, Inc.
|
(1,529,070)
|
(955,226)
|
(4,195,335)
|
(2,329,489)
|
|
|
|
|
|
Deemed
dividend on Preferred Stock
|
-
|
-
|
-
|
(904,450)
|
|
|
|
|
|
Net
Loss available to Exactus, Inc. common stockholders
|
$(1,529,070)
|
$(955,226)
|
$(4,195,335)
|
$(3,233,939)
|
|
|
|
|
|
Net
Loss per Common Share - Basic and Diluted
|
$(0.03)
|
$(0.03)
|
$(0.10)
|
$(0.09)
|
Net
Loss attributable to non-controlling interest per Common Share -
Basic and Diluted
|
$(0.00)
|
$(0.00)
|
$(0.01)
|
$(0.01)
|
Net
Loss available to Exactus, Inc. common stockholders per Common
Share - Basic and Diluted
|
$(0.03)
|
$(0.03)
|
$(0.09)
|
$(0.12)
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
Basic
and Diluted
|
48,203,183
|
35,203,356
|
46,757,076
|
27,227,822
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Exactus, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders'
Equity
For the Three and Six Months Ended June 30, 2020 and
2019
(Unaudited)
|
Preferred
Stock-
Series
A
|
Preferred
Stock-
Series
B-1
|
Preferred
Stock-
Series
B-2
|
Preferred
Stock-
Series
C
|
Preferred
Stock-
Series
D
|
Preferred
Stock-
Series
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As Restated -
see Note 14)
|
|
(As Restated -
see Note 14)
|
Balance, December 31, 2019
|
353,109
|
$35
|
1,650,000
|
$165
|
7,516,000
|
$752
|
-
|
$-
|
18
|
$-
|
10,000
|
$1
|
43,819,325
|
$4,382
|
664,580
|
$66
|
$25,343,293
|
$-
|
$(20,923,681)
|
$(537,469)
|
$3,887,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
500,000
|
50
|
-
|
-
|
99,950
|
-
|
-
|
-
|
100,000
|
Common
stock issued for unissued common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
287,500
|
29
|
(287,500)
|
(29)
|
-
|
-
|
-
|
-
|
-
|
Conversion
of Series A Preferred Stock to Common Stock
|
(30,090)
|
(3)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
150,450
|
15
|
-
|
-
|
(12)
|
-
|
-
|
-
|
-
|
Common
stock issued for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
765,000
|
77
|
-
|
-
|
378,446
|
-
|
-
|
-
|
378,523
|
Stock-based
compensation in connection with restricted common stock award
grants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
209,727
|
21
|
(68,750)
|
(7)
|
117,889
|
-
|
-
|
-
|
117,903
|
Stock
options granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
140,866
|
-
|
-
|
-
|
140,866
|
Net
Loss for the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
-
|
(2,666,265)
|
(155,819)
|
(2,822,084)
|
Balance, March 31, 2020
|
323,019
|
32
|
1,650,000
|
165
|
7,516,000
|
752
|
-
|
-
|
18
|
-
|
10,000
|
1
|
45,732,002
|
4,574
|
308,330
|
30
|
26,080,432
|
-
|
(23,589,946)
|
(693,288)
|
1,802,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,500,000
|
250
|
-
|
-
|
249,750
|
-
|
-
|
-
|
250,000
|
Common
stock issued upon convesion of convertible debt and accrued
interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
811,588
|
81
|
-
|
-
|
99,492
|
-
|
-
|
-
|
99,573
|
Common
stock issued in connection with forbearance agreement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
500,000
|
50
|
-
|
-
|
89,950
|
-
|
-
|
-
|
90,000
|
Stock-based
compensation in connection with restricted common stock award
grants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
723,366
|
72
|
(20,830)
|
(2)
|
279,263
|
-
|
-
|
-
|
279,333
|
Stock
options granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
106,678
|
-
|
-
|
-
|
106,678
|
Due
from related parties reclassified to equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(127,500)
|
-
|
-
|
(127,500)
|
Net
Loss for the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,529,070)
|
(154,624)
|
(1,683,694)
|
Balance, June 30, 2020
|
323,019
|
$32
|
1,650,000
|
$165
|
7,516,000
|
$752
|
-
|
$-
|
18
|
$-
|
10,000
|
$1
|
50,266,956
|
$5,027
|
287,500
|
$28
|
$26,905,565
|
$(127,500)
|
$(25,119,016)
|
$(847,912)
|
$817,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock-
Series
A
|
Preferred
Stock-
Series
B-1
|
Preferred
Stock-
Series
B-2
|
Preferred
Stock-
Series
C
|
Preferred
Stock-
Series
D
|
Preferred
Stock-
Series
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As Restated -
see Note 14)
|
|
(As Restated -
see Note 14)
|
Balance,
December 31, 2018
|
-
|
$-
|
2,800,000
|
$280
|
8,684,000
|
$868
|
1,733,334
|
$173
|
45
|
$1
|
-
|
$-
|
6,233,524
|
$623
|
-
|
$-
|
$7,111,445
|
$-
|
$(10,537,892)
|
$-
|
$(3,424,502)
|
Preferred stock issued
upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
849,360
|
84
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
849,276
|
-
|
-
|
-
|
849,360
|
Preferred stock issued
for private placement
|
55,090
|
6
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
55,084
|
-
|
-
|
-
|
55,090
|
Common stock issued for
private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
15,382,090
|
1,538
|
-
|
-
|
3,308,115
|
-
|
-
|
-
|
3,309,653
|
Common Stock issued for
Master Supply
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
8,385,691
|
839
|
-
|
-
|
(839)
|
-
|
-
|
-
|
-
|
Common stock issued for
debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
203,080
|
20
|
-
|
-
|
40,596
|
-
|
-
|
-
|
40,616
|
Common stock issued for
purchase of membership interest in subsidiary
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
937,500
|
94
|
-
|
-
|
989,906
|
-
|
-
|
-
|
990,000
|
Conversion of Series A
Preferred Stock to Common Stock
|
(296,441)
|
(30)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,482,205
|
148
|
-
|
-
|
(118)
|
-
|
-
|
-
|
-
|
Conversion of Series
B-1 Preferred Stock to Common Stock
|
-
|
-
|
(400,000)
|
(40)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
5
|
-
|
-
|
35
|
-
|
-
|
-
|
-
|
Conversion of Series
B-2 Preferred Stock to Common Stock
|
-
|
-
|
-
|
-
|
(1,000,000)
|
(100)
|
-
|
-
|
-
|
-
|
-
|
-
|
125,000
|
13
|
-
|
-
|
87
|
-
|
-
|
-
|
-
|
Conversion of Series D
Prefered Stock to Common Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4)
|
(1)
|
-
|
-
|
100,000
|
10
|
-
|
-
|
(9)
|
-
|
-
|
-
|
-
|
Common stock issued
upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
250,000
|
25
|
-
|
-
|
195,975
|
-
|
-
|
-
|
196,000
|
Stock warrants granted
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,114,062
|
-
|
-
|
-
|
1,114,062
|
Stock options granted
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
891,799
|
-
|
-
|
-
|
891,799
|
Deemed dividend on
Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
904,450
|
-
|
(904,450)
|
-
|
-
|
Net Loss for the
period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,374,263)
|
(35,604)
|
(1,409,867)
|
Balance,
March 31, 2019
|
608,009
|
60
|
2,400,000
|
240
|
7,684,000
|
768
|
1,733,334
|
173
|
41
|
-
|
-
|
-
|
33,149,090
|
3,315
|
-
|
-
|
15,459,864
|
-
|
(12,816,605)
|
(35,604)
|
2,612,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued and
unissued for private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,282,175
|
128
|
2,606,958
|
261
|
2,168,796
|
-
|
-
|
-
|
2,169,185
|
Common stock unissued
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
20,000
|
2
|
19,498
|
-
|
-
|
-
|
19,500
|
Common stock unissued
for purchase of membership interest in
subsidiary
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
503,298
|
50
|
449,950
|
-
|
-
|
-
|
450,000
|
Stock options granted
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
58,279
|
-
|
-
|
-
|
58,279
|
Net Loss for the
period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(955,226)
|
(152,344)
|
(1,107,570)
|
Balance,
June 30, 2019
|
608,009
|
$60
|
2,400,000
|
$240
|
7,684,000
|
$768
|
1,733,334
|
$173
|
41
|
$-
|
-
|
$-
|
34,431,265
|
$3,443
|
3,130,256
|
$313
|
$18,156,387
|
$-
|
$(13,771,831)
|
$(187,948)
|
$4,201,605
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Exactus, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
Six Months Ended June 30,
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
Net
loss
|
$(4,505,778)
|
$(2,517,437)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
Depreciation
|
53,787
|
11,851
|
Derivative
(gain) loss
|
(356,468)
|
1,454,729
|
Gain
on extinguishment of debt, net
|
(39,142)
|
-
|
Stock-based
compensation
|
1,023,303
|
2,083,638
|
Bad
debt expense
|
51,470
|
-
|
Impairment
expense
|
57,871
|
-
|
Inventory
reserve
|
660,000
|
-
|
Amortization
of prepaid stock-based expenses
|
378,138
|
-
|
Amortization
of discount and debt issuance costs for convertible
notes
|
579,115
|
339,806
|
Amortization
of intangible assets
|
490,417
|
299,355
|
Amortization of operating lease
right-of-use assets
|
80,116
|
-
|
Non-cash
interest expense
|
90,000
|
-
|
Loss
(gain) on settlement of debt
|
23,000
|
(3,007,629)
|
Changes
in operating assets and liabilities:
|
|
|
(Increase)
decrease in operating assets:
|
|
|
Accounts
receivable
|
(38,640)
|
(69,914)
|
Accounts
receivable - related party
|
(88,800)
|
(40,519)
|
Inventory
|
337,281
|
(1,047,781)
|
Advance
to supplier - related party
|
-
|
(820,108)
|
Prepaid
expenses and other current assets - current
|
127,570
|
(289,227)
|
Prepaid
expenses and other current assets - long term
|
(9,589)
|
-
|
Deposit
|
40,000
|
-
|
Increase
(decrease) in operating liabilities:
|
|
|
Accounts
payable
|
561,432
|
105,400
|
Accounts
payable - related party
|
-
|
6,762
|
Accrued
expenses
|
351,138
|
-
|
Unearned
revenues
|
(215,000)
|
-
|
|
28,815
|
6,746
|
Operating lease liabilities
|
(80,116)
|
-
|
Net Cash Used In Operating Activities
|
(400,080)
|
(3,484,328)
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
Purchase
of membership interest in subsidiary
|
-
|
(1,000,000)
|
Purchase
of property and equipment
|
-
|
(385,382)
|
Net Cash Used in Investing Activities
|
-
|
(1,385,382)
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
Advances
from related party
|
97,000
|
30,000
|
Repayments
on related party advances
|
(12,500)
|
-
|
Proceeds
from sale of common stock
|
350,000
|
5,478,838
|
Payments
of principal on notes payable
|
-
|
(11,129)
|
Proceeds
from issuance of notes payable
|
355,929
|
14,229
|
Payments
of principal on convertible notes
|
(110,000)
|
(186,443)
|
Proceeds
from issuance of convertible notes, net of issuance
cost
|
-
|
206,900
|
Net Cash Provided By Financing Activities
|
680,429
|
5,532,395
|
|
|
|
Net increase in cash and cash equivalents
|
280,349
|
662,685
|
|
|
|
Cash and cash equivalents at beginning of year
|
18,405
|
1,960
|
|
|
|
Cash and cash equivalents at end of period
|
$298,754
|
$664,645
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
Cash
paid for interest and finance charges
|
$11,211
|
$22,890
|
Cash
paid for taxes
|
$-
|
$-
|
|
|
|
Non-Cash investing and financing activities:
|
|
|
Proceeds
from sale of Series A preferred stock paid directly to settle
debts
|
$-
|
$55,090
|
Convertible
notes and interest payable settled by Series A preferred stock
issued
|
$-
|
$849,360
|
Note
payable, accrued expense and interest payable settled by common
stock issued
|
$83,160
|
$40,616
|
Convertible
notes settled by common stock issued
|
$-
|
$196,000
|
Common
stock issued for purchase of membership interest in
subsidiary
|
$-
|
$1,440,000
|
Increase
in intangible assets for subscription payable
|
$-
|
$1,650,000
|
Initial
beneficial conversion feature and debt discount on convertible
notes
|
$-
|
$206,910
|
Preferred
deemed dividend
|
$-
|
$904,450
|
Operating
lease right-of-use assets and operating lease
liabilities
|
|
|
recorded
upon adoption of ASC 842
|
$-
|
$506,506
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
EXACTUS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
NOTE 1 - NATURE OF
ORGANIZATION
Organization and Business Description
Exactus,
Inc. (the “Company”) was incorporated on January 18,
2008 as an alternative energy research and development company.
During much of its history the Company had designed solar
monitoring and charging systems which were discontinued in 2016 to
focus on developing point-of-care diagnostic devices. The Company
has recently added to the scope of its activities efforts to
produce, market and sell products made from industrial hemp
containing cannabidiol (“CBD”).
On
January 8, 2019 the Company began pursuing hemp-derived CBD as a
new business segment after passage of the Agriculture Improvement
Act of 2018, also known as the 2018 Farm Bill. The 2018 Farm Bill
declassified industrial hemp as a Schedule I substance, shifted
regulatory authority from the Drug Enforcement Administration to
the Department of Agriculture, and provided autonomy for states to
regulate the industry. The 2018 Farm Bill did not change the Food
and Drug Administration’s oversight authority over CBD
products. The 2018 Farm Bill defined industrial hemp as a variety
of cannabis containing an amount equal to or lower than 0.3%
tetra-hydrocannabinol (THC) and allowed farmers to grow and sell
hemp under state regulation. Industry reports indicate that 41
states have set up cultivation and production programs to regulate
the production of hemp.
Following
passage of the 2018 Farm Bill, the Company entered into a Master
Product Development and Supply Agreement (the “Development
Agreement”) with Ceed2Med, LLC (“C2M”). Under the
Master Agreement, C2M agreed to provide to the Company up to 2,500
kilograms of products (isolate or distillate) for manufacture into
consumer products such as tinctures, edibles, capsules, topical
solutions and animal health products. The Company believes
manufacturing, testing and quality akin to pharmaceutical products
is important when distributing hemp-based products. The
Company’s products originate from third party manufacturers
and farms at which the Company oversee all stages of plant growth
and are manufactured under contract arrangements with
third-parties.
The
Company identified the rapidly growing hemp-based CBD market as a
valuable target for a new company focus. On January 8, 2019, the
Company entered into the Master Product Development and Supply
Agreement with C2M. In consideration for the Development Agreement
(see Note 11), C2M was issued 8,385,691 shares of our Common Stock.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock, with exercise
price of $0.32 per share to three C2M founders. As a result, C2M
became the Company’s largest shareholder holding (inclusive
of the vested options held by its founders) approximately 51% of
the Company’s outstanding Common Stock as of the date of the
Development Agreement which has subsequently been reduced to
approximately 13% as of June 30, 2020. Consequently, such
transaction resulted in a change of control whereby, C2M obtained
majority control through its Common Stock ownership (See Note 11).
In connection with this agreement, the Company received access to
expertise, resources, skills and experience suitable for production
of CBD rich ingredients including isolates, distillates, water
soluble, and proprietary formulations. Under the Development
Agreement, the Company was allotted a minimum of 50 and up to 300
kilograms per month, and up to 2,500 kilograms annually, of CBD
rich ingredients for resale and had placed a $1 million purchase
order for products in fiscal 2019. The Company currently offers
products such as tinctures, edibles, capsules, topical solutions
and animal health products manufactured for the Company as branded
and white-label products.
On
March 11, 2019, with the assistance of C2M and assignment of
rights, the Company acquired a 50.1% limited liability membership
interest in Exactus One World, LLC (“EOW”), an Oregon
limited liability company formed on January 25, 2019, in order to
farm industrial hemp for its own use. Prior to the acquisition, EOW
had no operating activities. The Company acquired its 50.1% limited
liability membership interest pursuant to a Subscription Agreement
and a Membership Interest Purchase Agreement (See Note 3).
Following the events described above, the Company entered into the
business of production and selling of industrial hemp grown for its
own use and for sale to third-parties.
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in this
Report and in the accompanying unaudited condensed consolidated
financial statements are retroactively restated for the effect of
the Reverse Stock Split.
NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The
Company’s unaudited condensed consolidated financial
statements include the financial statements of its 50.1%
subsidiary, EOW and 51% subsidiary, Paradise Medlife. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
The
accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and
the rules and regulations of the United States Securities and
Exchange Commission for interim financial information, which
includes consolidated unaudited interim financial statements and
present the consolidated unaudited interim financial statements of
the Company and its majority-owned subsidiary as of June 30, 2020.
All intercompany transactions and balances have been eliminated. In
the opinion of management, all adjustments necessary to present
fairly our financial position, results of operations,
stockholders’ equity (deficit) and cash flows as of June 30,
2020 and 2019, and for the periods then ended, have been made.
Those adjustments consist of normal and recurring adjustments.
Certain information and note disclosures normally included in our
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
unaudited condensed consolidated financial statements should be
read in conjunction with the audited financial statements as of and
for the year ended December 31, 2019 and footnotes thereto included
in the Company’s Report on Form 10K filed with the SEC on May
22, 2020. The results of operations for the three and six months
ended June 30, 2020 are not necessarily indicative of the results
to be expected for the full year.
Going concern
These
unaudited condensed consolidated financial statements are presented
on the basis that the Company will continue as a going concern. The
going concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. As reflected in
the accompanying unaudited condensed consolidated financial
statements, the Company had a net loss attributable to Exactus Inc.
common stockholders of $4,195,335 for the six months ended June 30,
2020. The net cash used in operating activities was $400,080
for the six months ended June 30, 2020. Additionally, the Company
had an accumulated deficit of $25,119,016 and working capital
deficit of $3,363,901 at June 30, 2020. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern for a period of twelve months from the issuance
date of this report. Management cannot provide assurance that the
Company will ultimately achieve profitable operations or become
cash flow positive, or raise additional debt and/or equity capital.
The Company is seeking to raise capital through additional debt
and/or equity financings to fund its operations in the future.
Although the Company has historically raised capital from sales of
common and preferred shares and from the issuance of convertible
promissory notes, there is no assurance that it will be able to
continue to do so. If the Company is unable to raise additional
capital or secure additional lending in the near future, management
expects that the Company will need to curtail its operations. These
unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Over
the last several months the Company and its advisors have been
evaluating numerous opportunities and relationships to increase
shareholder value. The Company expects to realize revenue through
its efforts, if successful, to sell wholesale and retail products
to third parties. However, as the Company is in a start-up phase,
in a new business venture, in a rapidly evolving industry, many of
its costs and challenges are new and unknown. In order to fund the
Company’s activities, the Company will need to raise
additional capital either through the issuance of equity and/or the
issuance of debt. During the six months ended June 30, 2020, the
Company received proceeds from the sale of the Company’s
Common Stock of approximately $350,000, related party advances of
$97,000 and issuance of a note of $355,929.
In
March 2020, the outbreak of COVID-19 (coronavirus) caused by a
novel strain of the coronavirus was recognized as a pandemic by the
World Health Organization, and the outbreak has become increasingly
widespread in the United States, including in each of the areas in
which the Company operates. The COVID-19 (coronavirus) outbreak has
had a notable impact on general economic conditions, including but
not limited to the temporary closures of many businesses,
“shelter in place” and other governmental regulations,
reduced business and consumer spending due to both job losses and
reduced investing activity, among many other effects attributable
to the COVID-19 (coronavirus), and there continue to be many
unknowns. While to date the Company has not been required to stop
operating, management is evaluating its use of its office space,
virtual meetings and the like. The Company continues to monitor the
impact of the COVID-19 (coronavirus) outbreak closely. The extent
to which the COVID-19 (coronavirus) outbreak will impact the
Company’s operations, ability to obtain financing or future
financial results is uncertain.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Use of Estimates
The
Company prepares its unaudited condensed consolidated financial
statements in conformity with GAAP which 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 date of the financial statements and reported
amounts of revenues and expenses during the reporting period. In
preparing the unaudited condensed consolidated financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet, and
revenues and expenses for the period then ended. Actual results may
differ significantly from those estimates. Significant estimates
made by management include, but are not limited to the fair value
of derivative liabilities, useful life of property and equipment
and intangible assets, fair value of right of use assets,
assumptions used in assessing impairment of long-term assets,
contingent liabilities, and fair value of non-cash equity
transactions.
Fair Value Measurements
The
Company adopted the provisions of Accounting Standard Codification
(“ASC”) Topic 820, “Fair Value Measurements and
Disclosures”, which defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value, and expands disclosure of fair value
measurements. The guidance prioritizes the inputs used in measuring
fair value and establishes a three-tier value hierarchy that
distinguishes among the following:
●
Level
1—Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access.
●
Level
2—Valuations based on 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 and
models for which all significant inputs are observable, either
directly or indirectly.
●
Level
3—Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The
Company measures certain financial instruments at fair value on a
recurring basis. Assets and liabilities measured at fair value on a
recurring basis are as follows at June 30, 2020 and December 31,
2019:
|
|
|
Description
|
|
|
|
|
|
|
Derivative
liabilities
|
—
|
—
|
$468,387
|
—
|
—
|
$880,410
|
A roll
forward of the level 3 valuation financial instruments is as
follows:
|
For
the Six Months Ended June 30, 2020
|
Balance at
beginning of period
|
$880,410
|
Transfers out due
to conversions of convertible notes into common shares
|
(55,555)
|
Change in fair
value included in derivative gain
|
(356,468)
|
Balance at end of
period
|
$468,387
|
As of
June 30, 2020, the Company has no assets that are re-measured at
fair value.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The carrying value of those investments approximates their fair
market value due to their short maturity and liquidity. Cash and
cash equivalents include cash on hand and amounts on deposit with
financial institutions, which amounts may at times exceed federally
insured limits. The Company has not experienced any losses on such
accounts and do not believe the Company is exposed to any
significant credit risk. The Company had $0 cash balances in excess
of FDIC insured limits at June 30, 2020 and December 31, 2019,
respectively. Cash and cash equivalents were $298,754 and $18,405
at June 30, 2020 and December 31, 2019, respectively.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Accounts receivable and allowance for doubtful
accounts
The
Company has a policy of providing an allowance for doubtful
accounts based on its best estimate of the amount of probable
credit losses in its existing accounts receivable. The
Company periodically reviews its accounts receivable to determine
whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization
of an account may be in doubt. Account balances deemed
to be uncollectible are charged to bad debt expense and included in
the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. As of June 30,
2020 and December 31, 2019, allowance for doubtful accounts
amounted to $65,461 and $13,991, respectively. Bad debt expense
amounted $51,470 and $0 during the six months ended June 30, 2020
and 2019, respectively.
Prepaid Expenses and Other Current Assets
Total
prepaid expenses and other current assets - current amounted to
$60,114 and $248,776 at June 30, 2020 and December 31, 2019,
respectively. Total prepaid expenses and other current assets
– long term amounted to $9,589 and $0 at June 30, 2020 and
December 31, 2019, respectively. Prepaid expenses to C2M who is a
related party, amounted to $622,159 – current portion and
$2,175,000 – long-term portion at June 30, 2020. Prepaid
expenses to C2M who is a related party, amounted to $622,160
– current portion and $2,492,045 – long-term portion at
December 31, 2019. Prepaid expenses consist primarily of costs paid
for future services with terms ranging within a year up to 5 years.
Prepaid expenses may include prepayments in cash and equity
instruments for an operating lease, consulting, and insurance fees
which are being amortized over the terms of their respective
agreements.
Inventory
The
Company values inventory, consisting of raw materials, growing
plants and finished goods, at the lower of cost or net realizable
value. Cost is determined on the first-in and first-out
(“FIFO”) method. The Company reduces inventory for the
diminution of value, resulting from product obsolescence, damage or
other issues affecting marketability, equal to the difference
between the cost of the inventory and its estimated net realizable
value. Factors utilized in the determination of the estimated net
realizable value include (i) estimates of future demand, and (ii)
competitive pricing pressures. In accordance with ASC 905,
“Agriculture”, all direct and indirect costs of growing
hemp are accumulated until the time of harvest and are reported at
the lower of cost or net realizable value. Included in inventory is
the Company’s hemp crop under cultivation on farm acreage
leased by the Company. The cost of the hemp crop under cultivation
is determined based upon costs to purchase industrial hemp seed and
industrial hemp cuttings, plus farm labor, fertilizer, water and
power, the cost to harvest and cost for drying services. The costs
of planting, cultivating and harvesting the Company’s hemp
crop are capitalized to hemp crop inventory under cultivation, when
incurred. The Company determined the cost allocation of the hemp
crop (hemp flowers and hemp cuttings) based upon a proforma Market
Value Method. However, based upon current actual sales prices and
after reviewing national sales trends, the Company established an
inventory reserve to write down the inventory to net realizable
value which is the estimated selling prices in the ordinary course
of business, less reasonable predictable costs of completion,
disposal and transportation or shipping. The Company recorded
impairment expense on inventory of it finished goods- hemp flowers
of $660,000 (see Note 4) during the six months ended June 30, 2020
and was included in cost of sales as reflected in the accompanying
unaudited condensed consolidated statements of
operations.
Property and Equipment
Property
and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
ranging from 3 to 10 years. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are
capitalized. When assets are retired, or disposed of, the cost
and accumulated depreciation are removed, and any resulting gains
or losses are included in the unaudited condensed consolidated
statement of operations.
Impairment of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of
impairment is measured as the difference between the asset’s
estimated fair value and its book value. The Company recorded
impairment expense of $57,871 related to leasehold improvement cost
(see Note 5) and impairment of security deposit related to the
termination of a commercial lease agreement (see Note
7).
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Derivatives and Hedging- Contracts in Entity’s Own
Equity
In
accordance with the provisions of ASC 815 “Derivatives and Hedging” the
embedded conversion features in the convertible notes (see Note 9)
are not considered to be indexed to the Company’s stock. As a
result, these are required to be accounted for as derivative
financial liabilities and have been recognized as liabilities on
the accompanying consolidated balance sheets. The fair value of the
derivative financial liabilities is determined using a binomial
model with Monte Carlo simulation and is affected by changes in
inputs to that model including the Company’s stock price,
expected stock price volatility, the expected term, and the
risk-free interest rate. The derivative financial liabilities are
subject to re-measurement at each balance sheet date and any
changes in fair value is recognized as a component in other income
(expenses).
Revenue Recognition
On
January 1, 2018, the Company adopted ASC Topic 606 and the related
amendments, Revenue from Contracts with Customers, which requires
revenue to be recognized in a manner that depicts the transfer of
goods or services to customers in amounts that reflect the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The Company recognizes
revenue by applying the following steps:
Step 1:
Identify the contract(s) with a customer.
Step 2:
Identify the performance obligations in the contract.
Step 3:
Determine the transaction price.
Step 4:
Allocate the transaction price to the performance obligations in
the contract.
Step 5:
Recognize revenue when (or as) the entity satisfies a performance
obligation.
The
Company’s performance obligations are satisfied at the point
in time when products are shipped or delivered to the customer,
which is when the customer has title and the significant risks and
rewards of ownership. Therefore, the Company’s contracts
have a single performance obligation (shipment of
product). The Company primarily receives fixed consideration
for sales of product. Payments received from customers that are
related to unshipped or undelivered products are recorded as
unearned revenue until the shipment of product.
Cost of Sales
The
primary components of cost of sales include the cost of the
product, and, indirect cost such as utilities, farm lease expenses,
and depreciation expenses on farming equipment related to
production and harvesting period.
Research and Development Expenses
The
Company follows ASC 730-10, “Research and Development,” and
expenses research and development costs when
incurred. Accordingly, third-party research and
development costs, including designing, prototyping and testing of
product, are expensed when the contracted work has been performed
or milestone results have been achieved. Indirect costs are
allocated based on percentage usage related to the research and
development. Research and development costs of $0
and $26,975 were incurred for the six months ended June 30, 2020
and 2019, respectively, and $0 and $11,975 were incurred for the
three months ended June 30, 2020 and 2019, respectively, which are
included in operating expenses on the accompanying unaudited
condensed consolidated statements of operations.
Advertising Costs
The
Company applies ASC 720 “Other Expenses” to account for
advertising related costs. Pursuant to ASC 720-35-25-1, the Company
expenses the advertising costs the first time the advertising takes
place. Advertising costs were $61,133 and $238,154 for the six
months ended June 30, 2020 and 2019, respectively, and $4,083 and
$187,623 for the three months ended June 30, 2020 and 2019,
respectively, which are included in selling and marketing expenses
on the accompanying unaudited condensed consolidated statement of
operations.
Shipping and Handling Costs
The
Company accounts for shipping and handling fees in accordance with
ASC 606. The amounts charged to customers for shipping products are
recognized as revenues and the related costs of shipping products
are classified in selling and marketing expenses as incurred.
Shipping costs included in selling and marketing expenses were
$20,152 and $1,959 for the six months ended June 30, 2020 and 2019,
respectively, and $3,564 and $1,411 for the three months ended June
30, 2020 and 2019, respectively.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Reclassifications
Certain
prior period amounts have been reclassified to conform to the
current period presentation. The reclassified amounts have no
impact on the Company’s previously reported financial
position or results of operations.
Stock-Based Compensation
Stock-based
compensation is accounted for based on the requirements of the
Share-Based Payment Topic of ASC 718 which requires recognition in
the financial statements of the cost of employee and director
services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the
services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee
and director services received in exchange for an award based on
the grant-date fair value of the award.
Through
March 31, 2018, pursuant to ASC 505-50 - Equity-Based Payments to
Non-Employees, all share-based payments to non-employees, including
grants of stock options, were recognized in the consolidated
financial statements as compensation expense over the service
period of the consulting arrangement or until performance
conditions are expected to be met. Using a Black Scholes valuation
model, the Company periodically reassessed the fair value of
non-employee options until service conditions are met, which
generally aligns with the vesting period of the options, and the
Company adjusts the expense recognized in the consolidated
financial statements accordingly. In June 2018, the FASB issued ASU
No. 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting, which simplifies several aspects of the accounting for
nonemployee share-based payment transactions by expanding the scope
of the stock-based compensation guidance in ASC 718 to include
share-based payment transactions for acquiring goods and services
from non-employees. ASU No. 2018-07 is effective for annual periods
beginning after December 15, 2018, including interim periods within
those annual periods. Early adoption is permitted, but entities may
not adopt prior to adopting the new revenue recognition guidance in
ASC 606. The Company adoption did not have any material impact on
its consolidated financial statements.
The
expense is recognized over the vesting period of the award. Until
the measurement date is reached, the total amount of compensation
expense remains uncertain. The Company records compensation expense
based on the fair value of the award at the reporting date. The
awards to consultants and other third-parties are then revalued, or
the total compensation is recalculated, based on the then current
fair value, at each subsequent reporting date.
Related Parties
We
follow ASC 850, “Related Party
Disclosures,” for the identification of related
parties and disclosure of related party transactions.
Earnings per Share
We
compute basic and diluted earnings per share amounts in accordance
with ASC Topic 260, “Earnings per Share”. Basic
earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of
common shares outstanding during the reporting period. Diluted
earnings per share reflects the potential dilution that could occur
if preferred stock converted to Common Stock and warrants are
exercised. Preferred stock and warrants are excluded
from the diluted earnings per share calculation if their effect is
anti-dilutive. For the six months ended June 30, 2020 and
2019, the following potentially dilutive shares were excluded from
the computation of diluted earnings per shares because their impact
was anti-dilutive:
|
|
|
|
|
|
Stock
Options
|
4,781,697
|
5,684,375
|
Stock
Warrants
|
2,014,299
|
1,154,500
|
Restricted
stock to be issued upon vesting
|
6,461,536
|
-
|
Convertible
Preferred Stock
|
9,460,845
|
5,542,212
|
Convertible
Debt
|
8,143,768
|
250,000
|
Total
|
30,862,145
|
12,631,087
|
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Income Taxes
The
Company accounts for income taxes pursuant to the provision of ASC
740-10, “Accounting for Income Taxes” (“ASC
740-10”), which requires, among other things, an asset and
liability approach to calculating deferred income taxes. The asset
and liability approach require the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. A valuation allowance is provided
to offset any net deferred tax assets for which management believes
it is more likely than not that the net deferred asset will not be
realized.
The
Company follows the provision of ASC 740-10 related to Accounting
for Uncertain Income Tax Positions. When tax returns are filed,
there may be uncertainty about the merits of positions taken or the
amount of the position that would be ultimately sustained. In
accordance with the guidance of ASC 740-10, the benefit of a tax
position is recognized in the financial statements in the period
during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated
with other positions.
Tax
positions that meet the more likely than not recognition threshold
are measured at the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefit associated
with tax positions taken that exceed the amount measured as
described above should be reflected as a liability for uncertain
tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the
taxing authorities upon examination. The Company believes its tax
positions are all more likely than not to be upheld upon
examination. As such, the Company has not recorded a liability for
uncertain tax benefits.
The
Company has adopted ASC 740-10-25, “Definition of
Settlement”, which provides guidance on how an entity should
determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits and
provides that a tax position can be effectively settled upon the
completion and examination by a taxing authority without being
legally extinguished. For tax positions considered effectively
settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to
be sustained based solely on the basis of its technical merits and
the statute of limitations remains open. The federal and
state income tax returns of the Company are subject to examination
by the IRS and state taxing authorities, generally for three years
after they are filed.
Non-controlling interests in consolidated financial
statements
In
December 2007, the FASB issued ASC 810-10-65,
“Non-controlling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No.
51” (“SFAS No. 160”). This ASC clarifies that a
non-controlling (minority) interest in subsidiaries is an ownership
interest in the entity that should be reported as equity in the
consolidated financial statements. It also requires consolidated
net income to include the amounts attributable to both the parent
and non-controlling interest, with disclosure on the face of the
consolidated income statement of the amounts attributed to the
parent and to the non-controlling interest. In accordance with ASC
810-10-45-21, those losses attributable to the parent and the
non-controlling interest in subsidiaries may exceed their interests
in the subsidiary’s equity. The excess and any further losses
attributable to the parent and the non-controlling interest shall
be attributed to those interests even if that attribution results
in a deficit non-controlling interest balance. On March 11, 2019,
the Company acquired a 50.1% limited liability membership interest
in EOW, pursuant to a Subscription Agreement and a Membership
Interest Purchase Agreement (see Note 3) and has the right to
appoint a manager of the limited liability company. Additionally,
on July 5, 2019, the Company acquired a 51% limited liability
membership interest in Paradise Medlife (see Note 3).
Gain (Loss) on Modification/Extinguishment of Debt
In
accordance with ASC 470, “Gain (Loss) on
Modification/Extinguishment of Debt”, a modification or an
exchange of debt instruments that adds or eliminates a conversion
option that was substantive at the date of the modification or
exchange is considered a substantive change and is measured and
accounted for as extinguishment of the original instrument along
with the recognition of a gain or loss. Additionally, under ASC
470, a substantive modification of a debt instrument is deemed to
have been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of
the new debt instrument is at least 10 percent different from the
present value of the remaining cash flows under the terms of the
original instrument. A substantive modification is accounted for as
an extinguishment of the original instrument along with the
recognition of a gain/loss.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Leases
In
February 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated
guidance requires lessees to recognize lease assets and lease
liabilities for most operating leases. In addition, the updated
guidance requires that lessors separate lease and non-lease
components in a contract in accordance with the new revenue
guidance in ASC 606. The updated guidance is effective for interim
and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company adopted ASU No. 2016-02, applying the
package of practical expedients to leases that commenced before the
effective date whereby the Company elected to not reassess the
following: (i) whether any expired or existing contracts contain
leases and; (ii) initial direct costs for any existing leases. For
contracts entered into on or after the effective date, at the
inception of a contract the Company assessed whether the contract
is, or contains, a lease. The Company’s assessment is based
on: (1) whether the contract involves the use of a distinct
identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the
period, and (3) whether it has the right to direct the use of the
asset. The Company will allocate the consideration in the contract
to each lease component based on its relative stand-alone price to
determine the lease payments.
Operating
lease ROU assets represents the right to use the leased asset for
the lease term and operating lease liabilities are recognized based
on the present value of future minimum lease payments over the
lease term at commencement date. As most leases do not provide an
implicit rate, the Company use an incremental borrowing rate based
on the information available at the adoption date in determining
the present value of future payments. Lease expense for minimum
lease payments is amortized on a straight-line basis over the lease
term and is included in general and administrative expenses in the
consolidated statements of operations.
Recent Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The adoption of this guidance had
no impact on the Company’s unaudited condensed consolidated
financial statements.
The
Company has reviewed the FASB issued ASU accounting pronouncements
and interpretations thereof that have effectiveness dates during
the periods reported and in future periods. We have carefully
considered the new pronouncements that alter previous generally
accepted accounting principles and do not believe that any new or
modified principles will have a material impact on the
Company’s reported financial position or operations in the
near term. The applicability of any standard is subject to the
formal review of the Company’s financial
management.
Recent Accounting Updates Not Yet Effective
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the
Accounting for Income Taxes.” This guidance, among other
provisions, eliminates certain exceptions to existing guidance
related to the approach for intra-period tax allocation, the
methodology for calculating income taxes in an interim period and
the recognition of deferred tax liabilities for outside basis
differences. This guidance also requires an entity to reflect the
effect of an enacted change in tax laws or rates in its effective
income tax rate in the first interim period that includes the
enactment date of the new legislation, aligning the timing of
recognition of the effects from enacted tax law changes on the
effective income tax rate with the effects on deferred income tax
assets and liabilities. Under existing guidance, an entity
recognizes the effects of the enacted tax law change on the
effective income tax rate in the period that includes the effective
date of the tax law. ASU 2019-12 is effective for interim and
annual periods beginning after December 15, 2020, with early
adoption permitted. The Company is currently evaluating the impact
of this guidance.
NOTE 3 – ACQUISITION
OF ASSETS AND OWNERSHIP
Exactus One World
On
March 11, 2019, the Company acquired a 50.1% limited liability
membership interest in Exactus One World, LLC (“EOW”),
an Oregon limited liability company, formed on January 25, 2019
which since inception, had no operations.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
The
Company acquired 50.1% limited liability membership interest
pursuant to a Subscription Agreement (the “Subscription
Agreement”) and a Membership Interest Purchase Agreement (the
“Purchase Agreement”). Under the terms of the
Subscription Agreement, the Company acquired a 30% interest in EOW,
and an additional 20.1% was acquired from existing members pursuant
to the terms of the Purchase Agreement. The existing members are
considered third parties. The Company has the right to appoint a
Manager of the limited liability company and has appointed its
President. Under the Operating Agreement for EOW, as amended, the
Company has the right to appoint, and remove and replace, if
desired, one of three managers of EOW, with each manager having the
full rights to control the business and affairs of EOW. The Company
appointed its Interim Chief Executive Officer, Emiliano Aloi, as
its Manager of EOW.
Under
the term of the Subscription Agreement, the Company acquired 30% of
membership interest in EOW in consideration for cash of $2,700,000
were payable as follows:
●
$400,000
paid previously for purchase of Hemp Seeds;
●
$100,000
upon execution of the LLC Operating Agreement;
●
$500,000
on or before April 1, 2019;
●
$500,000
on or before May 1, 2019;
●
$300,000
on or before August 1, 2019;
●
$450,000
on or before September 1, 2019 and,
●
$450,000
on or before October 1, 2019
The
acquisition of the 30% membership interest is deemed to be an
investment in and capital contribution to EOW and shall be
eliminated upon consolidation. The Company fully paid the
$2,700,000 purchase price during fiscal 2019.
Under
the term of the Purchase Agreement, the Company acquired 20.1% of
EOW from existing members for aggregate consideration of $2,940,000
consisting of total cash payments of $1,500,000, 937,500 shares of
the Company’s Common Stock, and $450,000 worth of shares of
Common Stock on June 14, 2019. Pursuant to the terms of the
Purchase Agreement, the Company issued 937,500 shares of its Common
Stock valued at $990,000, or $1.056 per share, the fair value of
the Company’s Common Stock based on the quoted trading price
on the date of the Purchase Agreement. No goodwill was recorded
since the Purchase Agreement was accounted for as an asset
purchase.
During
fiscal 2019, the Company fully paid the consideration and was paid
to the sellers as follows:
●
$300,000
cash and 937,500 shares of the Company’s Common Stock to the
sellers upon execution, which was paid during the year ended
December 31, 2019;
●
$700,000
on April 20, 2019 which was paid on April 18, 2019;
●
On June
10, 2019, the Company was required to issue and issued the sellers
an additional $450,000 of shares of Common Stock of the Company
based upon the 20 day volume weighted average price per share on
the date of issue which was equivalent to $0.89 per share or
503,298 shares of the Company’s Common Stock and was issued
in August 2019; and
●
$500,000
on September 1, 2019 which was fully paid by November
2019.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
EOW and the related agreements to determine if the Company acquired
a business or acquired assets. Based on this analysis, it was
determined that the Company acquired assets, primarily consisting
of the value of two farm leases for approximately 200 acres of
farmland in southwest Oregon for growing and processing industrial
hemp, with lease terms of one year, and a license to operate such
farms. The leases are renewable on a year-to-year basis at the
option of the Company. Accordingly, the transaction was not
considered a business.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on March 11, 2019.
Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
Intangible asset
– Hemp farming license
|
$10,000
|
Intangible assets
– farm leases
|
2,930,000
|
Total assets
acquired at fair value
|
2,940,000
|
Total purchase
consideration
|
$2,940,000
|
Additionally,
the Company recorded the acquisition of 50.1% of membership
interest in EOW under the FASB issued ASC 810-10-65,
“Non-controlling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No.
51” (“SFAS No. 160”). As of June 30, 2020, the
Company recorded a non-controlling interest balance of $(847,912)
in connection with the majority-owned subsidiary, EOW as reflected
in the accompanying unaudited condensed consolidated balance sheet
and losses attributable to non-controlling interest of $310,443 and
$187,948 during the six months ended June 30, 2020 and 2019,
respectively, and $154,624 and $152,344 during the three months
ended June 30, 2020 and 2019, respectively, as reflected in the
accompanying unaudited condensed consolidated statements of
operations.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Paradise Medlife, LLC
On July
5, 2019, the Company entered into an Operating Agreement (the
“Operating Agreement”) with Paradise Medlife, LLC
(“Paradise Medlife”) and Paradise CBD, LLC. Paradise
Medlife is a Florida Limited Liability Company, organized on April
12, 2019 with no operations since inception. The Company shall
contribute capital of $50,000 in the form of CBD products in
exchange for 51% ownership of Paradise Medlife. Consequently,
Paradise Medlife became a majority owned subsidiary of the
Company. To date, Paradise Medlife has no operations. At June
30, 2020, the Company has not yet contributed the capital of
$50,000. The Company anticipates that it will contribute the
capital in the form of CBD products during fiscal
2020.
Green Goddess Extracts, LLC
On July
31, 2019 the Company entered into an Asset Purchase Agreement (the
“Green Goddess Purchase Agreement”) with Green Goddess
Extracts, LLC (“Green Goddess”), a Florida contract
manufacturer and formulator of hemp and vape products. Under the
Green Goddess Purchase Agreement, the Company acquired the assets
of Green Goddess consisting principally of its right and interest
in the Green Goddess brand, inventory, customer list, intellectual
property including IP addresses and trademarks, and entered into an
option to acquire the seller’s vape assets, and entered into
an employment agreement with the founder (the
“Founder”) of Green Goddess. Green Goddess manufactures
and distributes a premium line of hemp-derived products sold
through distributors and online. Green Goddess has been a contract
manufacturer for C2M and the Company.
Under
the terms of the Green Goddess Purchase Agreement the Company
agreed to issue 250,000 shares of the Company’s Common Stock
and pay $250,000 cash for the acquisition to be paid in six
installments. The first installment of $41,667 shall be due within
90 days of the closing and the five additional installments shall
be paid starting on October 12, 2019 and continuing on the first
day of each following month. At June 30, 2020 and December 31,
2019, the Company has an outstanding balance of $250,000 to the
seller which is included in subscription payable as reflected on
the consolidated balance sheets. The Company is currently in
default under the Asset Purchase Agreement. However, there are no
penalty interest or charges from the default pursuant to the Asset
Purchase Agreement.
The
shares vest 1/24 on the closing date and an additional 1/24 vests
on the first day of each month thereafter provided that the Company
and the Executive under the Employment Agreement discussed below
are neither in breach of this Green Goddess Purchase Agreement or
the Employment Agreement. In addition, the Company entered into an
agreement under which the Company may become obligated to issue up
to an additional $250,000 of Common Stock (the “Additional
Stock Consideration”) based upon the volume weighted average
price per share (“VWAP”) for the 20 days prior to
issuance, in the event that sales of products utilizing
seller’s flavored products exceed $500,000 monthly for a
three month average period. The Additional Stock Consideration
shall vest 1/24 on the signature or execution date of this Green
Goddess Purchase Agreement and an additional 1/24 vests on the
first day of each month thereafter provided that the Company and
the Executive under the Employment Agreement discussed below are
neither in breach of this Green Goddess Purchase Agreement or the
Employment Agreement.
Additionally,
on July 1, 2019, the Company entered into an Executive Employment
Agreement (the “Employment Agreement”) with Alejandro
De La Espriella (the “Executive”) who is the managing
member of Green Goddess Extracts, LLC. The term of the Employment
Agreement shall be for two years and shall be automatically renewed
for successive one-year periods unless either party provides a
written notice of non-renewal. The Company agrees to pay the
Executive an initial base salary of $120,000 per year subject to
annual adjustments determined by the board of directors of the
Company and such Executive shall also be eligible for annual bonus,
performance bonus and equity awards as defined in the Employment
Agreement.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
Green Goddess and the related agreements to determine if the
Company acquired a business or acquired assets. The gross assets
include the intellectual property (the related trademark, brand,
and IP addresses are determined to be a single intangible asset),
the inventory, customer list, non-compete/non-solicitation and the
excess of the consideration transferred over the fair value of the
net assets acquired. The Company concluded that substantially all
of the fair values of the gross assets acquired is not concentrated
in a single identifiable asset or group of similar identifiable
assets.
The set
has outputs through the continuation of revenues, and the Company
considered the criteria in paragraph 805-10-55-5E to determine
whether the set includes both inputs and a substantive process that
together significantly contribute to the ability to create outputs.
The set is not a business because: 1) It does not include an
organized workforce that could meet the criteria in paragraph
805-10-55-5E (a) through (b), 2) There are no acquired processes
that could meet the criteria in paragraph 805-10-55-5E(c) through
(d), and 3) It does not include both an input and a substantive
process. Accordingly, the transaction was not considered a
business.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Additionally,
in accordance with ASC 805-10, the 250,000 shares of common stock
and the Additional Stock Consideration are tied to continued
employment of the Company and as such are recognized as
compensation expenses in the post combination period under
Share-Based Payment Topic of ASC 718 which requires recognition in
the financial statements of the cost of employee and services
received in exchange for an award of equity instruments over the
period the employee is required to perform the services in exchange
for the award (presumptively, the vesting period). The ASC also
requires measurement of the cost of employee and services received
in exchange for an award based on the grant-date fair value of the
award.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on July 31, 2019.
Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
Intangible asset
– trademark
|
$3,500
|
Intangible assets
– customer list
|
212,529
|
Inventory
|
33,971
|
Total assets
acquired at fair value
|
250,000
|
Total purchase
consideration
|
$250,000
|
During
fiscal year 2019 the Company fully impaired the assets and resulted
in an impairment loss of $186,025 related to the Green Goddess
intangible asset.
The
Company, Green Goddess and the founder of Green Goddess have each
asserted various claims against the other for breach of contract
although no proceedings have been commenced. Currently, the
Company has suspended efforts to market and sell CBD products under
the Green Goddess brand and Green Goddess has suspended delivery of
the Company’s inventory due to the disputes which involve,
among other things, the amounts that were due and owing Green
Goddess from C2M for orders placed prior to the asset purchase, the
nature and going concern value of the assets purchased by the
Company and representations concerning the operation of the
business and performance by the founder under the employment
agreement. There can be no assurance the parties will resolve
their differences or that the prior agreements will not be
terminated. The CBD products with a cost of $837,153 held in
inventory had been written down to a value of $0 due to the age and
questionable salability of the product. During fiscal 2019, the
Company fully impaired the finished goods related to CBD products
and resulted in an impairment loss of $837,153.
Levor, LLC
On
September 30, 2019 the Company entered into an Asset Purchase
Agreement (the “Levor Purchase Agreement”) with Levor,
LLC (“Levor”) and the sole owner and manager of Levor
(the “Seller”). Under the Levor Purchase Agreement, the
Company acquired the asset of Levor consisting principally of its
rights and interest in the cosmetic brand collection, “Levor
Collection”, which is an all-virtual brand that offers
cannabinoid-infused cosmetic products. Under the terms of the Levor
Purchase Agreement, the Company agreed to issue 100,000 shares of
the Company’s Common Stock at closing. In addition, the
Company entered into an agreement under which the Company may
become obligated to issue additional shares of the Company’s
common stock to be earned and payable to the Seller on the 12-month
anniversary of the closing date which value is equivalent to 35% of
the total annual net revenue of the Levor brand divided by the then
closing bid price of the common stock on the 12-month anniversary
(the Earn-out Consideration”). The Seller of Levor has been
an employee of the Company since July 24, 2019.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
Levor and the related agreements to determine if the Company
acquired a business or acquired assets. Based on this analysis, it
was determined that the Company acquired assets, primarily
consisting of its rights and interest in the cosmetic brand
collection, “Levor Collection”. The Company concluded
that substantially all of the fair values of the gross assets
acquired is concentrated in a single identifiable asset or group of
similar identifiable assets. Accordingly, the transaction was not
considered a business.
Pursuant
to the terms of the Levor Purchase Agreement, the Company granted
100,000 shares of its Common Stock valued at $70,000, or $0.70 per
share, the fair value of the Company’s Common Stock based on
the sale of common stock in the recent private
placement.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Additionally,
in accordance with ASC 805-10, the Earn-out Consideration is deemed
as contingent payment to an employee and the Company determined
that the arrangement is compensatory in nature and as such are
recognized as compensation expenses in the post combination period
under Share-Based Payment Topic of ASC 718 which requires
recognition in the financial statements of the cost of employee and
services received in exchange for an award of equity instruments
over the period the employee is required to perform the services in
exchange for the award (presumptively, the vesting period). The ASC
also requires measurement of the cost of employee and services
received in exchange for an award based on the grant-date fair
value of the award.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on September 30,
2019. Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
Intangible asset
– Brand
|
$70,000
|
Total assets
acquired at fair value
|
70,000
|
Total purchase
consideration
|
$70,000
|
During
fiscal 2019 the Company fully impaired the remaining carrying value
and recorded an impairment expense of $64,167 related to the Levor
intangible asset.
NOTE 4 – INVENTORY
Inventory,
net consisted of the following:
|
|
|
|
|
|
Finished goods
– CBD products
|
$-
|
$-
|
Finished goods
– hemp flowers and hemp cuttings
|
340,528
|
1,337,809
|
|
$340,528
|
$1,337,809
|
During
the three and six months ended June 30, 2020, the Company recorded
a reserve or inventory write-off related to damaged inventory of
$106,560 and $660,000, respectively, due to mold and is included in
cost of sales as reflected in the accompanying unaudited condensed
consolidated statements of operations.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
NOTE 5 – PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
|
|
|
|
|
|
Greenhouse
|
10
years
|
$34,465
|
$34,465
|
Fencing and
storage
|
5
years
|
44,543
|
44,543
|
Irrigation
|
5
years
|
387,975
|
387,975
|
Office and computer
equipment
|
3
years
|
40,834
|
40,834
|
Farming
Equipment
|
5
years
|
11,500
|
11,500
|
Leasehold
improvement
|
5
years
|
21,886
|
21,886
|
Total
|
|
541,203
|
541,203
|
Less: Accumulated
depreciation
|
|
(117,557)
|
(63,770)
|
Less: Impairment
expense
|
|
(17,871)
|
-
|
|
$405,775
|
$477,433
|
Depreciation
expense amounted to $53,787 and $11,851 for the six months ended
June 30, 2020 and 2019, respectively and $27,060 and $11,851 for
the three months ended June 30, 2020 and 2019, respectively. During
the six months ended June 30, 2020, the Company recorded impairment
expense of $17,871 which was equivalent to the remaining net book
value of leasehold improvement related to a commercial lease with
Skybar Holding, LLC. During the second quarter of fiscal 2020, the
Company has determined that the commercial lease is unenforceable
and should not have been accounted for under ASC 842 (see Note
14).
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
NOTE 6 – INTANGIBLE
ASSET
At June
30, 2020 and December 31, 2019, intangible asset consisted of the
following:
|
|
|
|
|
|
|
|
Farm leases -
EOW
|
3 year
|
$2,930,000
|
$2,930,000
|
Hemp operating
license - EOW
|
1 year
|
10,000
|
10,000
|
Trademark –
Green Goddess
|
3 year
|
-
|
3,500
|
Customer list
– Green Goddess
|
3 year
|
-
|
212,529
|
Brand -
Levor
|
3 year
|
-
|
70,000
|
Total
|
|
2,940,000
|
3,226,029
|
Less: Accumulated
amortization
|
|
(1,283,106)
|
(828,526)
|
Less: Impairment
expense
|
|
-
|
(250,192)
|
|
$1,656,894
|
$2,147,311
|
For the
six months ended June 30, 2020, amortization of intangible assets
amounted to $490,417 and $299,355, respectively. For the three
months ended June 30, 2020, amortization of intangible assets
amounted to $244,167 and $246,667, respectively. During fiscal
2019, the Company fully impaired the intangible assets related to
the Green Goddess and Levor brands. As of June 30, 2020, the
Company offset fully amortized intangible assets of $35,937 against
accumulated amortization.
Amortization
of intangible assets attributable to future periods is as
follows:
Year ending
December 31:
|
|
2020
(remainder)
|
$488,333
|
2021
|
976,667
|
2022
|
191,894
|
|
$1,656,894
|
NOTE 7 - OPERATING LEASE
RIGHT-OF-USE ASSETS AND OPERATING LEASE
LIABILITIES
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consists of approximately 100 acres. The lease requires the Company
to pay 5% of the net income realized by the Company from the
operation of the lease farm. Accordingly, the Company recognized $0
Right-of-use asset (“ROU”) and lease liabilities on
this farm lease as the Company has not determined when it will
generate net income from this lease. The lease shall continue in
effect from year to year except for at least a 30-day written
notice of termination. The Company has not paid any lease payments
under this agreement for the six months ended June 30, 2020 and for
fiscal 2019. EOW is in the process of arranging a sub-lease
agreement with the affiliated company.
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Grants Pass, Oregon and
consists of approximately 100 acres. The lease requires the Company
to pay $120,000 per year, whereby $50,000 was payable upon
execution and $70,000 shall be payable prior to planting for
agricultural use or related purposes. The lease shall continue in
effect from year to year except for at least a 30-day written
notice of termination. EOW is in the process of arranging a
sub-lease agreement with the affiliated company.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
On
April 30, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consists of approximately 38 acres. The lease requires the Company
to pay $76,000 per year, whereby $38,000 was payable upon execution
and $38,000 shall be payable on September 15, 2019 and 2% of the
net income realized by the Company from the operation of the leased
farm. The lease shall continue in effect from year to year for five
years except for at least a 30-day written notice of termination.
The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company.
On July
9, 2019, the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to $40,000
per month in advance in addition to all applicable Florida sales
and/or federal taxes and security deposit of $40,000. Effective one
year from the lease commencement date and each year thereafter, the
rent shall increase at least three percent (3%) per year. The
lessor of the Premises is a limited liability company owned or
controlled by Vladislav (Bobby) Yampolsky, the manager and
controlling member of C2M, the Company’s largest
stockholder. During the second quarter of fiscal 2020, the Company
has determined that the commercial lease with Skybar Holding, LLC is not in
compliance with current laws or regulations in the City of Delray
Beach and does not represent an enforceable contract and was void
from the moment of execution. As a result, the Company has restated
its prior year financial information to correct this accounting
error (see Note 14). Additionally, on August 6, 2020, the Company
submitted a written termination letter to Skybar Holdings, LLC.
During the six months ended June 30, 2020, the Company fully
impaired the security deposit of $40,000.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected
the ‘package of practical expedients’, which permit it
not to reassess under the new standard its prior conclusions about
lease identification, lease classification and initial direct
costs. In addition, the Company elected not to apply ASC Topic 842
to arrangements with lease terms of 12 month or less. The Company
is reasonably certain that it will exercise its option to extend
the three farm leases for a period of three years and the Company
used 5 years lease term for the commercial lease.
The
Company adopted ASC Topic 842 on January 1, 2019. Between March
2019 and April 2019, which are the execution dates of various lease
agreements, the Company recorded right-of-use assets totaling
$506,506 and total lease liabilities of $506,506 based on an
incremental borrowing rate of 10%. The Company recorded lease
expense of $86,200 and $52,667 for the six months ended June 30,
2020 and 2019, respectively, and $46,640 and $42,667 for the three
months ended June 30, 2020 and 2019, respectively. During the three
and six months ended June 30, 2020, lease expenses of $0 was
included in cost of sales. During the three and six months ended
June 30, 2020, $46,640 and $86,200 was included in general and
administrative expenses as reflected in the accompanying unaudited
condensed consolidated statements of operations.
The
cash outflows from operating leases for the six months ended June
30, 2020 was $98,004. The weighted average remaining lease term and
the incremental borrowing rate for operating leases at June 30,
2020 were 2.32 years and 10%, respectively.
Right
of Use (“ROU”) Asset is summarized below:
|
|
|
|
|
(As
Restated- see Note 14)
|
Farm lease, ROU
Asset
|
$506,506
|
$506,506
|
Less: Accumulated
amortization
|
(195,812)
|
(115,696)
|
|
|
|
Balance of ROU
asset
|
$310,694
|
$390,810
|
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Operating
lease liability related to the ROU asset is summarized
below:
|
|
|
|
|
(As
Restated- see Note 14)
|
Farm
lease
|
$506,506
|
$506,506
|
Reduction of lease
liability
|
(195,811)
|
(115,695)
|
Total
|
310,695
|
390,811
|
Less: current
portion
|
(178,541)
|
(169,869)
|
Long term portion
of lease liability
|
$132,154
|
$220,942
|
Minimum
lease payments under non-cancelable operating lease at June 30,
2020 are as follows:
Year ended December
31, 2020
|
$196,000
|
Year ended December
31, 2021
|
196,000
|
Year ended December
31, 2022
|
45,336
|
Total
|
437,336
|
Less: undiscounted
payments during the six months ended June 30, 2020
|
(98,004)
|
Total undiscounted
future minimum lease payments due as of June 30, 2020
|
339,332
|
Imputed
interest
|
(28,637)
|
Total operating
lease liability
|
$310,695
|
NOTE 8 - NOTES
PAYABLE
Notes Payable
Notes
payable to unrelated parties is summarized below:
|
|
|
|
|
|
Principal
amount
|
$335,510
|
$-
|
Less: current
portion
|
(90,755)
|
-
|
Notes payable -
long term portion
|
$244,755
|
$-
|
Minimum
principal payments under notes payable to unrelated parties at June
30, 2020 are as follows:
Year ended December
31, 2020
|
$11,859
|
Year ended December
31, 2021
|
155,501
|
Year ended December
31, 2022
|
68,392
|
Year ended December
31, 2023
|
2,091
|
Year ended December
31, 2024 and thereafter
|
97,667
|
Total principal
payments
|
$335,510
|
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
U.S. Small Business Administration Loan
On May
28, 2020, the Company received a Secured Disaster Loan in the
amount of $99,100 from the U.S. Small Business Administration. The
loan carries interest at a rate of 3.75% per year, requires monthly
payments of principal and interest, and matures in thirty (30)
years. Installment payments, including principal and interest, of
$483 monthly, will begin Twelve (12) months from the date of the
promissory Note. The SBA loan is secured by a security interest in
our tangible and intangible assets. The loan proceeds are to be
used as working capital to alleviate economic injury caused by the
Covid-19 disaster occurring in the month of January 31, 2020 and
continuing thereafter. As of June 30, 2020, the principal balance
of this note amounted to $99,100 and accrued interest of $326.
During the six months ended June 30, 2020, the Company recognized
$326 of interest expense.
Paycheck Protection Program Funding
On May
22, 2020, the Company received federal funding in the amount of
$236,410 through the Paycheck Protection Program (the
“PPP”). PPP funds have certain restrictions on use of
the funding proceeds, and generally must be repaid within two (2)
years at 1% interest. The PPP loan may, under circumstances, be
forgiven. There shall be no payment due by the Company during the
six months period beginning on the date of this note
(“Deferral Period”). Commencing one month after the
expiration of the Deferral Period, the Company shall pay the lender
monthly payments of principal and interest, each in equal amount
required to fully amortize by the maturity date. If a payment on
this note is more than ten days late, the lender shall charge a
late fee of up to 5% of the unpaid portion of the regularly
scheduled payment. As of June 30, 2020, the principal balance of
this note amounted to $236,410 and accrued interest of $253. During
the six months ended June 30, 2020, the Company recognized $253 of
interest expense.
Notes Payable – Related Parties
During
October 2019, the Company entered into two short-term promissory
notes (the “Notes”) for an aggregate principal amount
of $94,056 and gross cash proceeds of $85,000 (original issue
discount of $9,056). A note with principal amount of $55,556 was
subscribed by Andrew Johnson, an officer of the Company. The Notes
became due and payable between October 18, 2019 and December 16,
2019 and bear interest at a rate of twelve (12%) percent per annum
prior to the maturity date, and eighteen (18%) per annum if unpaid
following the maturity date. The Notes are unsecured obligations of
the Company. In addition, the Notes carry a 10% original issue
discount of $9,056 which have been amortized and recorded in
interest expense on the accompanying consolidated statements of
operations. In December 2019, the Company repaid one of the notes
with principal amount of $38,500 and accrued interest of $770. The
Company is currently negotiating to extend the maturity date of the
related party note. As of June 30, 2020, the principal balance of
this note amounted $55,556 and is currently in
default.
During
February 2020, the Company entered into a short-term promissory
note for principal amount of $22,461 and gross cash proceeds of
$20,419 (original issue discount of $2,042) with a certain
stockholder of the Company. The note became due and payable on
March 8, 2020 and bears interest at a rate of eighteen (18%)
percent per annum prior to the maturity date, and eighteen (18%)
per annum if unpaid following the maturity date. The note is
unsecured obligation of the Company. In addition, the note carries
a 10% original issue discount of $2,042 which have been amortized
and recorded in interest expense on the accompanying unaudited
condensed consolidated statements of operations. The Company is
currently negotiating to extend the maturity date of the related
party note. As of June 30, 2020, the principal balance of this note
amounted to $22,461 and is currently in default.
During
the six months ended June 30, 2020 and 2019, the Company recognized
$5,495 and $1,072, respectively, of interest expense. During the
three months ended June 30, 2020 and 2019, the Company recognized
$3,256 and $548, respectively, of interest expense. As of June 30,
2020 and December 31, 2019, the notes had accrued interest balances
of $6,195 and $1,278, respectively. As of June 30, 2020 and
December 31, 2019, the principal balance under the notes was
$78,017 and $55,556, respectively.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
NOTE 9 - CONVERTIBLE NOTES
PAYABLE
The
Company’s convertible notes, net of debt discount, consisted
of the following as of June 30, 2020 and December 31,
2019:
|
June 30, 2020 (Unaudited)
|
|
Convertible Notes
in the aggregate amount of $100,000, issued on March 22, 2018. The
Notes bear interest at a rate of 5% per annum and will mature on
February 1, 2023. If a qualified financing from which at least $5
million of gross proceeds are raised occurs prior to the maturity
date, then the outstanding principal balance of the notes, together
with all accrued and unpaid interest thereon, shall be
automatically converted into a number of shares of the
Company’s Common Stock at $0.40 per Share. The Notes offer
registration rights wherein the Company agrees that within 45 days
of a Qualified Offering, prior to the Maturity Date, the Company
shall file a registration statement with the SEC registering for
resale of the shares of Company’s Common Stock into which the
Notes are convertible. The Company shall send a written conversion
notice to the lender pursuant to the note agreement during fiscal
2020 and as such the principal balance of the convertible note
remains outstanding as of June 30, 2020 and December 31, 2019. The
Company reclassed the principal balance to current portion as of
June 30, 2020.
|
$100,000
|
$100,000
|
Convertible Note in
the amount of $833,333, issued on November 27, 2019. The Company
entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with a single institutional investor (the
“Purchaser”), pursuant to which the Company agreed to
sell to Purchaser in a series of 3 closings up to $1,944,444 in
aggregate principal amount of the Company’s senior secured
convertible promissory notes (the “Notes”) and warrants
to purchase shares of the Company’s Common Stock (the
“Warrants”). On November 27, 2019 (the “Initial
Closing Date”), the Company issued a Note in the principal
amount of $833,333, and a two-year Warrant to purchase 275,612
shares of Common Stock at an exercise price of $0.756 per share
(see Note 10). The Notes will be issued at a 10% original issue
discount and bear an interest rate of 8%. The Notes mature one year
after their issuance unless accelerated due to an event of default.
The Notes are redeemable, in whole or in part, at any time at the
discretion of the Company. At the Initial Closing Date, the Company
received net proceeds, after the original issue discount and the
Purchaser’s counsel fees, of $730,000. Each note is
convertible at the option of the note holder at any time into
shares of our common stock at the fixed conversion rate of $0.50
per share. However, the conversion rate is subject to adjustment in
the event of default, redemption and upon the occurrence of certain
events affecting stockholders generally, such as stock splits and
recapitalizations. The Company must pay amortization redemption
payments equaling one-ninth of the original principal amount due on
each note commencing 90 days after issuance and continuing during
the following eight months (each an “Amortization
Redemption”). The note holder may at its option accelerate up
to six future amortization redemption payments, in which case the
note holder may demand the accelerated amortization amounts be paid
in shares of the Company’s common stock at the lesser of i)
the fixed conversion rate of $0.50 per share of common stock, or
(ii) the rate equal to 80% of the lowest volume weighted average
price, or VWAP, during the 10 trading days immediately before the
applicable date of the amortization redemption payment
(“Amortization Conversion Rate”). Amortization
redemption payment amount is equivalent to 110% of the sum of (i)
one-ninth (1/9th) of the Original Principal Amount of this Note,
(ii) 100% of all accrued and unpaid interest on the principal
amount of this Note that is subject to such Amortization
Redemption, (iii) 100% of the Make-Whole Amount payable in respect
of the principal amount of this Note that is subject to such
Amortization Redemption (as applicable), and (iv) all liquidated
damages, costs of collection and other amounts payable in respect
of this Note as of the applicable amortization redemption payment
Date for such Amortization Redemption. If the Company fails to make
a redemption payment, the note holder may demand the amortization
amounts be paid in shares of the Company’s common stock at
the lesser of fixed conversion rate of $0.50 per share of common
stock or the Amortization Conversion Rate. In addition, in the
event of a subsequent issuance of the Company’s common stock
or debt, the Company is subject to mandatory redemption provisions
as defined in the note agreement. The Company may not issue shares
of the Company’s common stock to third parties at a price
lower than the fixed conversion rate of $0.50 per share of common
stock without the consent of the note holder. At this time, the
Company is delinquent in its payments under the initial convertible
note, with the May 1, 2020, April 1, 2020, and a portion of the
February 25, 2020 payments currently in arrears. The Company
intends to make these payments and the upcoming monthly payments
with receipts from product sales and/or the proceeds of additional
equity funding. The Company paid original issuance cost of $83,333,
cash commission and loan fees of $92,055, and recorded redemption
premium of $88,889 related to the amortization redemption payment
in connection with this note payable and are being amortized over
the term of the note. On the Initial Closing Date, certain FINRA
broker-dealers who acted on behalf of the Company were paid
aggregate cash commissions of approximately $72,055 and were
granted a four-year warrant to acquire an aggregate of 84,187
shares of Common Stock at an exercise price of $0.792 per share of
common stock at any time before the close of business four years
after their issuance, subject to adjustment in the event of stock
dividends, splits, fundamental transactions, or other changes in
our capital structure.
|
475,979
|
85,906
|
Carrying Amount of
Convertible Debt, net of debt discount
|
$575,979
|
$185,906
|
Less: Current
Portion, net of debt discount
|
(575,979)
|
(85,906)
|
Convertible Notes,
Long Term
|
$-
|
$100,000
|
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
The
following is a summary of the carrying amounts of convertible notes
as of June 30, 2020 and December 31, 2019:
|
June
30, 2020 (Unaudited)
|
|
Principal
Amount
|
$933,333
|
$933,333
|
Add: amortization
of redemption premium
|
63,902
|
8,280
|
Less: principal
payments and conversions
|
(187,000)
|
-
|
Less: unamortized
debt discount and debt issuance costs
|
(234,256)
|
(755,707)
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$575,979
|
$185,906
|
Conversion of Notes
On May
27, 2020, the Company issued 247,588 shares of its common stock at
a contractual conversion price of $0.13, as a result of the
conversion of principal of $30,000 and interest of $2,400 of the
convertible note.
On June
10, 2020, the Company issued 564,000 shares of its common stock at
a contractual conversion price of $0.09, as a result of the
conversion of principal of $47,000 and interest of $3,760 of the
convertible note.
Notice of Delinquent Payment
At this
time, the Company is delinquent in its payments under the initial
convertible note executed on November 27, 2019 (see Note 9), with
the May 1, 2020 and April 1, 2020 payments currently in arrears.
The Company intends to make these payments and the upcoming monthly
payments with receipts from product sales and/or the proceeds of
additional equity funding. On May 20, 2020, the Company entered
into a Forbearance Agreement with the investor (the
“Holder”) regarding the initial convertible note. Under
the Forbearance Agreement, the investor has agreed to forebear from
exercising any default-related rights and remedies subject to the
following conditions and material terms:
●
|
The
Company has paid the Holder $60,000 in cash before July 1, 2020.
Additional monthly payments required under the Amortization
Schedule for the note shall continue to be due on or before the
first day of each calendar month thereafter, commencing with the
$110,000 payment originally due April 1, 2020 now due on or before
August 1, 2020, and the subsequent monthly payments listed on the
Amortization Schedule to be paid monthly in the sequence listed.
Interest shall continue to accrue on the principal balance of the
Note at the rate(s) stated therein, with all additional accrued
interest resulting from this extension of payment deadlines to be
paid as part of the last monthly payment. The Company paid the
$110,000 on August 1, 2020.
|
|
|
|
●
|
The
payments that are in arrears from February, April and May can be
paid in whole or in part at any time at the sole election of the
Holder in shares of common stock at the Amortization Conversion
Price (defined as 80% of the lowest volume weighted average price,
or VWAP, during the 10 trading days immediately before the
applicable date of the amortization redemption
payment).
|
●
|
Unless
or until a default under the Forbearance Agreement occurs, the
fixed conversion price under the note will remain $0.50 per share,
and the note shall continue to bear interest at the non-default
rate of 8% per annum.
|
●
|
Unless
or until a default under the Forbearance Agreement occurs, the
contractual limit on issuances of shares to issue shares of common
stock or options to employees, officers, directors, consultants,
advisors or contractors will be increased from 5% to 10% or our
issued an outstanding common stock.
|
●
|
The
Company has issued the Holder 500,000 shares of the Company’s
common stock in consideration for the forbearance.
|
Derivative Liabilities Pursuant to Securities Purchase
Agreement
In
connection with the issuance of notes during fiscal 2019, on the
initial measurement date of the notes, the fair values of the
embedded conversion option of $1,457,290 was recorded as derivative
liabilities of which $786,823 was charged to current period
operations as initial derivative expense and $670,467 was recorded
as a debt discount which was amortized into interest expense over
the term of the note.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
The
Company recognized change in fair value of derivative liabilities
of $249,982 and $356,468 during the three and six months ended June
30, 2020, respectively. Upon conversions during the six months
ended June 30, 2020, the derivative liability was marked to fair
value at the conversion, and then a related fair value amount of
$55,555 relating to the portion of debt converted was reclassified
to other income as part of gain on debt extinguishment.
Additionally, the Company recorded loss on debt extinguishment of
$16,413, in connection with the conversions (see Note 10) during
the six months ended June 30, 2020 resulting in a net gain on
extinguishment of debt of $39,142 during the six months ended June
30, 2020, as reflected in the accompanying unaudited condensed
consolidated statements of operations.
The
Company recognized gain on extinguishment of debt due to repayment
and conversions of notes into shares of common and preferred stock
of $3,007,629 and change in fair value of derivative liabilities of
$896,000 during the six months ended June 30, 2019. The Company
determined that the conversion options embedded in the convertible
notes require liability presentation at fair value. Each of these
instruments provide the holder with the right to convert into
Common Stock at a fixed discount market, with certain notes subject
to a cap on the conversion price. These clauses cause uncertainty
as to the number of shares issuable upon conversion of convertible
debt and accordingly require liability presentation on the balance
sheet in accordance with US GAAP. For the six months ended June 30,
2020 and 2019, the Company measured the fair value of the embedded
derivatives using a binomial model and Monte Carlo simulations, and
the following assumptions:
|
June
30, 2020
(Unaudited)
|
|
Expected
Volatility
|
|
|
Expected
Term
|
|
|
Risk Free
Rate
|
|
|
Dividend
Rate
|
0.00%
|
0.00%
|
During
the six months ended June 30, 2020 and 2019, the Company recognized
$34,431 and $25,780, respectively, of interest expense. During the
three months ended June 30, 2020 and 2019, the Company recognized
$16,555 and $1,246, respectively, of interest expense. During the
six months ended June 30, 2020 and 2019, the Company amortized debt
discount of $579,115 and $339,806, respectively, of interest
expense. During the three months ended June 30, 2020 and 2019, the
Company amortized debt discount of $312,807 and $0, respectively,
of interest expense.
As of
June 30, 2020 and December 31, 2019, the notes had accrued interest
balances of $32,559 and $15,399, respectively.
NOTE
10 - STOCKHOLDERS’
EQUITY (DEFICIT)
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in the
accompanying consolidated financial statements are retroactively
restated for the effect of the Reverse Stock Split.
In
January 2019, the Company approved the 2019 Equity Incentive Plan
(the “2019 Plan”) which provides for the issuance of
incentive awards in the form of non-qualified and incentive stock
options, stock appreciation rights, restricted stock awards and
restricted stock unit awards. The 2019 Plan provides for a share
limit equal to 15% of the total of the number of the issued and
outstanding shares of the Company’s Common Stock and all
shares of Common Stock issuable upon conversion or exercise of any
outstanding securities of the Company.
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001.
Series A - On
February 17, 2016, the Board of Directors voted to designate a
class of preferred stock entitled Series A Preferred Stock,
consisting of up to five million (5,000,000) shares, par value
$0.0001 per share.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
On
December 21, 2018, the Company filed a Certificate of Cancellation
of its previously filed Certificate of Designation of Preferences,
Rights and Limitations of Series A Preferred Stock in order to
designate 1,000,000 shares as a new Series of Preferred Stock for
issuance to former Holders of the Company’s Notes under the
Exchange Agreements (See Note 8), and filed a new Certificate of
Designation of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock.
Pursuant
to the Series A Preferred Certificate of Designation, the Company
issued shares of Series A Preferred. Each share of Series A
Preferred has a stated value of $1.00 per share. In the
event of a liquidation, dissolution or winding up of the Company,
each share of Series A Preferred Stock will be entitled to a
payment as set forth in the Certificate of Designation. The Series
A Preferred is convertible into such number of shares of the
Company’s common stock, par value $0.0001 per share equal to
the Stated Value of $1.00, divided by $0.20, subject to adjustment
in the event of stock split, stock dividends, and recapitalization
or otherwise. Pursuant to the Exchange Agreements each
holder of Notes shall be issued Series A Preferred in the amount of
the purchase price paid for such Notes by the buyer under the
Exchange Agreement, including any penalty, interest and premium
payments. Each share of Series A Preferred entitles the holder to
vote on all matters voted on by holders of Common Stock as a single
class. With respect to any such vote, each share of Series A
Preferred entitles the holder to cast such number of votes equal to
the number of shares of Common Stock such share of Series A
Preferred is convertible into at such time, but not in excess of
the conversion limitations set forth in the Series A Preferred
Certificate of Designation. The Series A Preferred will be entitled
to dividends to the extent declared by the Company.
On
January 20, 2020, the Company converted 30,090 Series A Preferred
Stock into 150,450 shares of Common Stock.
There
are 323,019 and 353,109 shares of Series A Preferred Stock
outstanding as of June 30, 2020 and December 31, 2019,
respectively.
Series B-1 - On February 29, 2016, the Company’s Board
of Directors voted to designate a class of preferred stock entitled
Series B-1 Convertible Preferred Stock (“Series B-1 Preferred
Stock”), consisting of up to 32,000,000 shares, par value
$0.0001 per share. With respect to rights on
liquidation, winding up and dissolution, the Series B-1 Preferred
Stock ranks pari passu to the class of Common Stock.
Shares of Series B-1 Preferred Stock have no dividend rights except
as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-1 Preferred Stock are convertible, at the option of the
holder, into shares of Common Stock at a conversion rate of 0.125
shares for 1 share basis. Holders of Series B-1 Preferred Stock
have the right to vote as-if-converted to Common Stock on all
matters submitted to a vote of holders of the Company’s
Common Stock. On February 29, 2016, the Company issued 30,000,000
shares of Series B-1 Preferred Stock.
There
are 1,650,000 shares of Series B-1 preferred stock outstanding,
which are convertible into 206,250 shares of common stock, as of
June 30, 2020 and December 31, 2019.
Series B-2 - On February 17, 2016, the Company’s Board
of Directors voted to designate a class of preferred stock entitled
Series B-2 Convertible Preferred Stock (“Series B-2 Preferred
Stock”), consisting of up to 10,000,000 shares, par value
$0.0001 per share, with a stated value of $0.25 per
share. With respect to rights on liquidation, winding up
and dissolution, holders of Series B-2 Preferred Stock will be paid
in cash in full, before any distribution is made to any holder of
common or other classes of capital stock, an amount of $0.25 per
share. Shares of Series B-2 Preferred Stock have no dividend rights
except as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-2 Preferred Stock are convertible, at the option of the
holder, into shares of Common Stock at a conversion rate of 0.125
shares for 1 share basis. Holders of Series B-2
Preferred Stock have the right to vote as-if-converted to Common
Stock on all matters submitted to a vote of the holders of the
Company’s Common Stock. For so long as any shares of Series
B-2 Preferred Stock are issued and outstanding, the
Corporation shall not issue any notes, bonds, debentures, shares of
preferred stock, or any other securities that are convertible to
Common Stock unless such conversion rights are at a fixed ratio or
a fixed monetary price (Note 9). On February 29, 2016, the Company
issued 2,084,000 shares of Series B-2 Preferred Stock.
There
are 7,516,000 shares of Series B-2 preferred stock outstanding,
which were convertible into 939,500 shares of common stock as of
June 30, 2020 and December 31, 2019.
Series C - On June 30, 2016, the Company’s Board of
Directors approved a Certificate of Designation authorizing
1,733,334 shares of new Series C Preferred Stock, par value $0.0001
per share. The Series C Preferred Stock ranks equally
with the Company’s Common Stock with respect to liquidation
rights and is convertible to Common Stock at a conversion rate of
0.125 shares for 1 share basis. The conversion rights of
holders of the Series C Preferred Stock are limited such that no
holder may convert any shares of preferred stock to the extent that
such holder, immediately following the conversion, would own in
excess of 4.99% of the Company’s issued and outstanding
shares of common stock. This limitation may be increased
to 9.99% upon 61 days written notice by a holder of the Series C
Preferred Stock to the Company.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
As of
June 30, 2020 and December 31, 2019, there were no shares of Series
C Preferred Stock issued and outstanding.
Series D - On March 1, 2018, the Company’s Board of
Directors voted to designate a class of preferred stock entitled
Series D Convertible Preferred Stock consisting of up to 200
shares, par value $0.0001 per share, to offer for sale to certain
accredited investors, including affiliates of the Company, with a
maximum offering amount of $2,200,000. Pursuant to the terms of the
Series D Subscription Agreement, immediately following the
consummation of an offering of the Company’s Common Stock for
which the gross proceeds of the offering exceed $5,000,000, each
share of Series D automatically converts into 25,000 shares of
Common Stock. Upon the liquidation, dissolution or winding up of
the Company, each holder of Series D Convertible Preferred Stock
shall be entitled to receive, for each share of Series D
Convertible Preferred Stock held, $10,000 per share payable pari
passu with the Company’s Series B-2 Convertible Preferred
Stock. Shares of Series D Preferred Stock have no
dividend rights except as may be declared by the Board in its sole
and absolute discretion, out of funds legally available for that
purpose. Holders of Series D Preferred Stock have the right to vote
as-if-converted to Common Stock on all matters submitted to a vote
of holders of the Company’s Common Stock. At no time may
shares of Series D Convertible Preferred Stock be converted if such
conversion would cause the holder to hold in excess of 4.99% of our
issued and outstanding Common Stock, subject to an increase in such
limitation up to 9.99% of the issued and outstanding Common Stock
on 61 days’ written notice to the Company.
There
are 18 shares of Series D preferred stock outstanding which were
convertible into 450,000 shares of common stock as of June 30, 2020
and December 31, 2019.
Series E - On August 1, 2019 the Company issued 10,000
shares of newly designated Series E 0% Convertible Preferred Stock,
par value $0.0001 per share (the “Series E Preferred”)
to C2M pursuant to the MSA. Under the terms of the Series E
Preferred, C2M may only convert such shares of Series E Preferred
into shares of the Company’s Common Stock, if the closing
price of Common Stock on the principal trading market, shall exceed
$2.00 per share for 5 consecutive trading days. Once vested, the
shares of Series E Preferred held by C2M are intended to either be
converted at $1.60 per share of Common Stock or optionally redeemed
out of the proceeds of future financings, at the option of
C2M.
Each
share of Series E Preferred is convertible into 625 shares of the
Company’s Common Stock and have a stated value of $1,000 per
share. The conversion ratio is subject to adjustment in the event
of stock splits, stock dividends, combination of shares and similar
recapitalization transactions. The Company is prohibited from
effecting conversions of the Series E Preferred to the extent that,
as a result of such conversion, the holder beneficially owns more
than 4.99% (which may be increased to 9.99% upon 61 days’
written notice), in the aggregate, of the issued and outstanding
shares of Common Stock calculated immediately after giving effect
to the issuance of shares of Common Stock upon the conversion of
the Series E Preferred. Holders of the Series E Preferred shall be
entitled to vote on all matters submitted to shareholders and shall
be entitled to the number of votes equal to the number of shares of
Common Stock into which the shares of Series E Preferred Stock are
convertible, subject to applicable beneficial ownership
limitations. The Series E Preferred Stock provides a liquidation
preference equal to par value.
The
Series E Preferred has a no mandatory redemption rights however, in
the event that we raise $5,000,000 from a capital raising
transaction involving any equity or equity-linked financing during
any fiscal quarter in an amount which would cause the
Company’s cash or cash equivalents to exceed $5,000,000 (a
“Fundamental Transaction”), the Company is required
from the proceeds of such offering, to offer C2M a right to redeem
Series E Preferred then outstanding as follows:
(A) 0%
percent of the net proceeds of the Fundamental Transaction, after
deduction of the amount of net proceeds required to leave the
Company (together with our existing cash on hand immediately prior
to the completion of the Fundamental Transaction) with cash on hand
of $5,000,000; plus
(B) 10%
percent of the next $5,000,000 of net proceeds of the Fundamental
Transaction; plus
(C)
100% of the net proceeds of the Fundamental Transaction thereafter
(until the Series E Preferred is redeemed in full).
The
shares of Series E Preferred are convertible into Common Stock,
once vested, at a price of $1.60 per share. The Company is not
obligated to file a registration statement with respect to the
shares of Common Stock into which Series E Preferred shares may be
converted. The Company believes that the occurrence of the
Fundamental Transaction is considered a conditional event and as a
result the instrument does not meet the definition of mandatorily
redeemable financial instrument based from ASC 480-10-25,
“Distinguishing Liabilities from Equity”. This
financial instrument was assessed at each reporting period to
determine whether circumstances have changed such that the
instrument met the definition of a mandatorily redeemable
instrument (that is, the event is no longer conditional). If the
event has occurred, the condition is resolved, or the event has
become certain to occur, the financial instrument will be
reclassified as a liability.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
On July
31, 2019, the Company granted 10,000 Series E Preferred in
connection with a Management and Services Agreement (the
“MSA”) with C2M, the Company’s largest
shareholder (see Note 11). The Company valued the 10,000 Series E
Preferred shares which is equivalent into 6,250,000 common shares
at a fair value of $0.54 per common share or $3,375,000 based on
the sales of common stock on recent private placements on the dates
of grant. During the six months ended June 30, 2020, the Company
recorded stock-based compensation of $158,523 and prepaid expense
– related party of $2,955,681 to be amortized over the term
of the MSA.
As of
June 30, 2020 and December 31, 2019, there were 10,000 shares of
Series E Preferred Stock issued and outstanding which were
convertible into 6,250,000 shares of common stock.
Common Stock
The
Company’s authorized Common Stock consists of 650,000,000
shares with a par value of $0.0001 per share.
Sale of Common Stock for private placement
During
the six months ended June 30, 2020, the Company sold an aggregate
of 3,000,000 shares of Common Stock for total proceeds of
$350,000.
Conversion of Series A Preferred stock into Common
Stock
On
January 20, 2020, the Company converted 30,090 Series A Preferred
Stock into 150,450 shares of Common Stock.
Conversion of Notes into Common Stock
On May
27, 2020, the Company issued 247,588 shares of its common stock at
a contractual conversion price of $0.13, as a result of the
conversion of principal of $30,000 and interest of $2,400 of the
convertible note.
On June
10, 2020, the Company issued 564,000 shares of its common stock at
a contractual conversion price of $0.09, as a result of the
conversion of principal of $47,000 and interest of $3,760 of the
convertible note.
These
shares of common stock had an aggregate fair value of $99,573 and
the Company recorded $16,413 of loss on debt extinguishment related
to these note conversions (see Note 9).
Common Stock pursuant to Forbearance Agreement
On May
20, 2020, the Company entered into a Forbearance Agreement with the
note holder regarding the initial convertible note executed on
November 27, 2019 (see Note 9). The Company has issued the Holder
500,000 shares of the Company’s common stock in consideration
for the forbearance and valued the shares of Common Stock at the
fair value of approximately $0.18 per common share or $90,000 based
on the quoted trading price on the date of grant. The Company
recorded interest expense of $90,000 during the six months ended
June 30, 2020.
Common Stock for services
On
January 23, 2020, the Company issued 250,000 shares of Common Stock
for legal services to be rendered in fiscal 2020 and valued the
shares of Common Stock at the fair value of approximately $0.4948
per common share or $123,700 based on the quoted trading price on
the date of grant. The Company recorded stock-based compensation of
$123,700 during the six months ended June 30, 2020.
On
January 23, 2020, the Company issued an aggregate of 515,000 shares
of Common Stock to two officers and three employees of the Company
for services in fiscal 2020 and as an incentive to retain such
employees and valued the shares of Common Stock at the fair value
of approximately $0.4948 per common share or $254,823 based on the
quoted trading price on the date of grant. The Company recorded
stock-based compensation of $254,823.
Common Stock issued for Vested Restricted Common Stock
Award
During
the six months ended June 30, 2020, the Company issued an aggregate
of 933,093 of Common Stock to employees and consultants for vested
restricted stock awards (see Restricted Common Stock
below).
Common Stock issued for Unissued Stock
There
were 287,500 shares of common stock issuable which were issued
during the six months ended June 30, 2020.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Common Stock Warrants
A
summary of the Company’s outstanding stock warrants as of
June 30, 2020 and changes during the period ended are presented
below:
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (Years)
|
Balance at December
31, 2019
|
2,014,299
|
$0.45
|
3.31
|
Granted
|
—
|
—
|
—
|
Cancelled
|
—
|
—
|
—
|
Exercised
|
—
|
—
|
—
|
Forfeited
|
—
|
—
|
—
|
Balance at June 30,
2020
|
2,014,299
|
$0.45
|
2.81
|
|
|
|
|
Warrants
exercisable at June 30, 2020
|
2,014,299
|
$0.45
|
2.81
|
|
|
|
|
Weighted average
fair value of warrants granted during the period
|
|
$—
|
|
As of
June 30, 2020, aggregate intrinsic value in connection with
exercisable warrants amounted to $0. During the six months ended
June 30, 2020 and 2019, the Company recorded stock-based
compensation of $0 and $1,114,062, respectively.
Common Stock Options
Stock Option Plan
In
September 2018, the Company’s stockholders approved the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
provides for the issuance of incentive awards in the form of
non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards, and restricted stock unit awards.
The awards may be granted by the Company’s Board of Directors
to its employees, directors and officers and to consultants,
agents, advisors and independent contractors who provide services
to the Company or to a subsidiary of the Company. The exercise
price for stock options must not be less than the fair market value
of the underlying shares on the date of grant. The incentive awards
shall either be fully vested and exercisable from the date of grant
or shall vest and become exercisable in such installments as the
Board or Compensation Committee may specify. Stock options expire
no later than ten years from the date of grant. The aggregate
number of shares of Common Stock which may be issued pursuant to
the Plan is 9,500,000. Unless sooner terminated, the Plan shall
terminate in 10 years.
On
January 11, 2019, the Company’s shareholders approved the
2019 Equity Incentive Plan (the “2019 Plan”). The
purpose of the 2019 Plan is to provide a means for the Company to
continue to attract, motivate and retain management, key employees,
consultants and other independent contractors, and to provide these
individuals with greater incentive for their service to the Company
by linking their interests in the Company’s success with
those of the Company and its shareholders. The 2019 Plan is limited
such that the maximum number of shares of Common Stock that may be
delivered pursuant to awards granted under the 2019 Plan may not
exceed fifteen percent (15%) of the total of: (a) the issued and
outstanding shares of our Common Stock, and (b) all shares of
common stock issuable upon conversion or exercise of any of our
outstanding securities which are convertible or exercisable into
shares of Common Stock under the terms thereof.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Stock
option activity for the six months ended June 30, 2020 is
summarized as follows:
|
|
Weighted
Average ExercisePrice
|
Weighted
Average Remaining Contractual Life(Years)
|
Balance at December
31, 2019
|
4,671,280
|
$0.29
|
7.29
|
Granted
|
1,000,000
|
0.30
|
10.00
|
Forfeited
|
(889,583)
|
0.57
|
0.00
|
Balance at June 30,
2020
|
4,781,697
|
0.29
|
8.75
|
Options exercisable
at June 30, 2020
|
3,605,916
|
$0.25
|
8.62
|
Weighted
average fair value of options granted during the period
$0.33.
As of
June 30, 2020, aggregate intrinsic value in connection with
exercisable options amounted to $69,375. As of June 30, 2020,
1,175,781 outstanding options are unvested and there was $423,219
unrecognized compensation expense in connection with unvested stock
options.
In
February 2020, the Company granted 1,000,000 options to purchase
shares of the Company’s Common Stock to Derek Du Chesne, the
Company’s President in connection with his employment
agreement (see Note 11). The options have a 10-year term from the
date of grant and was exercisable at an exercise price of $0.30 per
share. The fair value of the options granted amounted to $0.33 per
option or $332,900.
The
Company estimates the fair value of stock options using the
Black-Scholes valuation model. Compensation expense related to
stock options granted is measured at the grant date based on the
estimated fair value of the award and is recognized on a
straight-line basis over the requisite service period. The
assumptions used in the Black-Scholes model for the options granted
during the six months ended June 30, 2020 are presented
below:
Risk-free interest
rate
|
1.55%
|
Expected
volatility
|
263%
|
Expected term (in
years)
|
10
|
Expected dividend
yield
|
0%
|
The
risk-free interest rate is based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect at
the time of the grant. Expected volatility is based on the
historical volatility of the Company’s common stock. The
expected term assumption for stock options granted is the
contractual term of the option award. The Company has never
declared or paid dividends on its common stock and has no plans to
do so in the foreseeable future. Forfeitures are recognized as a
reduction of stock-based compensation expense as they
occur.
The
Company recognized $247,544 and $950,078 of compensation expense
relate to the vesting of stock options for the six months ended
June 30, 2020 and 2019, respectively. The Company recognized
$106,678 and $58,279 of compensation expense relate to the vesting
of stock options for the three months ended June 30, 2020 and 2019,
respectively. These amounts are included in general and
administrative expenses on the accompanying unaudited consolidated
statement of operations.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Restricted Common Stock
A
summary of the status of the restricted common stock and changes
during the six months ended June 30, 2020 is as
follows:
|
Restricted Stock
Common Stock
|
Weighted
Average Grant-Date Fair Value Per Share
|
Balance at December
31, 2019
|
3,583,328
|
$0.68
|
Granted
|
4,523,800
|
0.14
|
Vested and
issued
|
(933,093)
|
0.46
|
Forfeited
|
(712,499)
|
0.70
|
Balance at June 30,
2020
|
6,461,536
|
$0.38
|
On
January 14, 2020, in connection with his appointment to the Board
of Directors, Alvaro Daniel Alberttis was awarded $100,000 worth of
restricted common stock, valued at the closing market price of the
Company’s common stock on the date of the appointment. These
shares vest at a rate of 1/24th on the date of grant, and 1/24th
per month thereafter, contingent upon his continued service. The
Company valued the shares of restricted common stock at the fair
value of $0.36 per common share or $100,000 based on the quoted
trading price on the date of grant.
On
April 29, 2020, the Company appointed two new board members and
shall each be granted $100,000 worth of restricted common stock
under the 2019 Equity Incentive Plan with vesting period of 1/24th
upon date of grant and 1/24th per month on the first day of each
calendar month thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
On
April 29, 2020, the Company appointed a new advisory board member
of the Company and shall be granted $50,000 worth of restricted
common stock under the 2019 Equity Incentive Plan with vesting
period of 1/24th upon date of grant and 1/24th per month on the
first day of each calendar month thereafter until fully vested so
long as they continue in their service as member of the Advisory
Board of the Company.
On
April 29, 2020, Derek Du Chesne accepted his appointment to the
additional positions of President and a member of our Board of
Directors (see Note 11). Following his appointment as President,
the Company granted 1,000,000 shares of restricted common stock as
additional compensation, with vesting and other terms to be decided
by the Company’s Compensation Committee.
On June
11, 2020, the Company appointed Julian Pittam as Board Chairman and
has granted Mr. Pittam $100,000 worth of restricted common stock
under the 2019 Equity Incentive Plan with vesting period of 1/24th
upon date of grant and 1/24th per month on the first day of each
calendar month thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
On June
24, 2020, the Company appointed Emiliano Aloi as new board member
and has granted Mr. Aloi $100,000 worth of restricted common stock
under the 2019 Equity Incentive Plan with vesting period of 1/24th
upon date of grant and 1/24th per month on the first day of each
calendar month thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
During
the six months ended June 30, 2020, the Company recorded
stock-based compensation of $397,236 in connection with vested
restricted common stock grants. During the three months ended June
30, 2020, the Company recorded stock-based compensation of $279,333
in connection with vested restricted common stock grants. As of
June 30, 2020, unamortized or unvested stock-based compensation
costs related to restricted share arrangements was $2,738,135 and
will be recognized over a weighted average period of 1.01
years.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
NOTE 11 - COMMITMENTS AND
CONTINGENCIES
Legal Matters-
In the
ordinary course of business, the Company enters into agreements
with third parties that include indemnification provisions which,
in its judgment, are normal and customary for companies in the
Company’s industry sector. These agreements are typically
with business partners, clinical sites, and suppliers. Pursuant to
these agreements, the Company generally agrees to indemnify, hold
harmless, and reimburse indemnified parties for losses suffered or
incurred by the indemnified parties with respect to the
Company’s product candidates, use of such product candidates,
or other actions taken or omitted by us. The maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company
has not incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is
minimal. Accordingly, the Company has no liabilities recorded for
these provisions as of June 30, 2020 and December 31,
2019.
In July
2018 the Company received notice of the expiration and termination
of a license agreement dated January 19, 2016 acquired through the
Share Exchange by our subsidiary Exactus BioSolutions, Inc that the
Company recognized as an intangible asset from Digital Diagnostics,
Inc. (“Digital Diagnostics”) related to our FibriLyzer
and MatriLyzer technologies. In addition, on December 14,
2018 we received a letter from KD Innovation, Ltd.
(“KDI”) and Dr. Krassen Dimitrov, our former director
seeking payment for alleged past due consulting fees from June 2017
through November 2018 pursuant to a Consulting Agreement dated
January 20, 2016. On January 23, 2019, Digital Diagnostics,
made a demand for compensation against the Company in connection
with an alleged breach of a License Agreement. Under the terms of
these agreements, the parties are required to arbitrate
claims. Although we dispute the material allegations made by
Digital Diagnostics and KDI, if such actions were successful
damages could be awarded against us.
On
December 14, 2018, the Company received a termination and demand
notice from KD Innovation, Ltd, an entity 100% owned by a former
Board member, in connection with a consulting agreement KDI entered
into with the Company’s subsidiary, Exactus Biosolutions,
Inc., on or about January 20, 2016. No lawsuit has been filed;
however, in the event a lawsuit is filed, the Company intends to
vigorously contest the matter. On September 9, 2019, Dr. Krassen
Dimitrov, a former director, commenced an arbitration proceeding
against the Company and its wholly-owned subsidiary Exactus
Biosolutions, Inc. before the American Arbitration
Association. The complaint alleges breach of a consulting
agreement for services by Dr. Dimitrov during 2017-2019, among
other claims, and seeks $750,000 in damages. The Company has
filed an answer denying the claims and asserting numerous
counterclaims against Dr. Dimitrov and his affiliated entities, KD
Innovation Ltd., and Digital Diagnostics, Inc. An arbitrator
has been appointed in the matter and on May 1, 2020 issued a
procedural order suspending further proceedings.
On September
25, 2019, Jonathan Gilbert, a former director, filed and served a
complaint against the Company in the courts of Nassau County, New
York. The complaint alleges that Mr. Gilbert is entitled to retain
certain cancelled equity awards and seeks specific performance and
damages. In February 2019, the Company granted 1,000,000 options to
purchase shares of the Company’s Common Stock to a former
director of the Company, Jonathan Gilbert, with vesting terms
pursuant to the respective stock option agreement. The former
director resigned as a director of the Company in August 2019. The
options have a term of 10 years from the date of grant and was
exercisable at an exercise price at $0.01. The Company already
recognized $320,000 of compensation expense which relates to the
vesting of 500,000 stock options prior to his resignation. After
Jonathan Gilbert’s resignation, he filed a complaint against
the Company disputing his rights to receive the Company’s
common stock through the exercise of his stock options. In January
10, 2020, Mr. Gilbert and the Company entered into a Settlement and
General Release Agreement and both parties agreed to such
consideration. The Company will issue to Mr. Gilbert 375,000 shares
of the Company’s common stock whereby 187,500 shares of
common stock shall be issued immediately (“First
Tranche”) and another 187,500 shares of common stock shall be
issued immediately and held by the transfer agent and delivered on
the six month anniversary of this agreement (“Second
Tranche”) (collectively the First and Second Tranche shall be
called “Settlement Stock”). The Settlement Stock is by
virtue of the exercise of Mr. Gilbert’s stock options and any
required payments from the exercise of the stock options have been
credited or forgiven. The Settlement Stock which is issued under
the Stock Option Plan based upon the exercise of the stock options
registered pursuant to the Company’s registration statement
on form S-8 (File no. 333-229025). The Company and Mr. Gilbert have
released and discharged each other from all claims and demands. In
January 2020, Mr. Gilbert dismissed the lawsuit against the
Company. Pursuant to the Settlement and General Release Agreement
dated in January 2020, the Company recorded the issuance of 375,000
shares at par value upon the exercise of the 375,000 stock options
and cancelled the remaining 625,000 stock options during fiscal
2019.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
On
February 26, 2020 a complaint was filed against the Company in the
Circuit Court, Palm Beach County, Florida on behalf of two former
employees of the Company. The case is entitled Ryan Borcherds
and Miriam Martinez vs. Exactus, Inc. (Case No. 103978709). These
former employees were hired in January 2020. The complaint
alleges the Company failed to pay wages and compensation to 2
employees under the Fair Labor Standards Act, breach of contract
and violation of various Florida statutes, including allegations on
behalf of other similarly situated persons. On May 8, 2020,
an amended complaint was filed against the Company in the Circuit
Court, Palm Beach County, Florida on behalf of six former
employees, with one additional employee added to the suit in June
2020. The amended case is entitled Ryan Bocherds, Marc Reiss,
Jeannine Boffa, Benjamin Blair, Miriam Martinez and Michael Amoroso
vs. Exactus, Inc, (Case No. 50-2020-CA-002274-MB). The other four
former employees were hired between April 2019 and December 2019.
As of June 30, 2020 and December 31, 2019, the Company has recorded
total accrued salaries of $90,974 and $26,494 related to these
former employees, respectively. The complaint seeks approximately
$106,000 in unpaid wages plus special damages, liquidated damages,
interest and attorney’s fees. The Company has retained legal
representation and intends to vigorously contest the
matter.
Leases
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consist of approximately 100 acres. The lease requires the Company
to pay 5% of the net income realized by the Company from the
operation of the lease farm. The lease shall continue in effect
from year to year except for at least a 30-day written notice of
termination (see Note 7).
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Glendale, Oregon and consist
of approximately 100 acres. The lease requires the Company to pay
$120,000 per year, whereby $50,000 was payable upon execution and
$70,000 shall be payable prior to planting for agricultural use or
related purposes. The lease shall continue in effect from year to
year except for at least a 30-day written notice of termination
(see Note 7).
On
April 30, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consists of approximately 38 acres. The lease requires the Company
to pay $76,000 per year, whereby $38,000 was payable upon execution
and $38,000 shall be payable on September 15, 2019 and 2% of the
net income realized by the Company from the operation of the lease
farm. The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company. The lease shall continue in
effect from year to year for five years except for at least a
30-day written notice of termination (see Note 7).
On July
9, 2019, the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to forty
thousand dollars per month in advance in addition to all applicable
Florida sales and/or federal taxes. Effective one year from the
lease commencement date and each year thereafter, the rent shall
increase at least three percent (3%) per year. The lessor of the
Premises is a limited liability company owned or controlled
by Vladislav (Bobby) Yampolsky, the manager and controlling
member of C2M, the Company’s largest stockholder. During
the second quarter of fiscal 2020, the Company has determined that
the commercial lease with Skybar
Holding, LLC is not in compliance with current laws or regulations
in the City of Delray Beach and does not represent an enforceable
contract and was void from the moment of execution. As a result,
the Company has restated its prior year financial information to
correct this accounting error (see Note 14). Additionally, on
August 6, 2020, the Company submitted a written termination letter
to Skybar Holdings, LLC. Because the Lease was void and
unenforceable under applicable law, the Company believes that the
probability of Skybar Holdings, LLC successfully asserting a claim
under the Lease is to be remote.
On July
1, 2019, the Company entered into an office lease agreement for a
lease term of six months beginning July 1, 2019 ending December 31,
2019 for a total rental of $6,052 for six months. The lease premise
is located in Delray Beach, Florida. In December 2019, the Company
and landlord agreed to extend the lease for another 6-month term
from January 2020 to June 2020 with the same terms in the original
lease agreement.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Master Product Development and Supply Agreement
On
January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement (the “Development
Agreement”) with Ceed2Med, LLC (“C2M”). C2M has
provided the Company access to expertise, resources, skills and
experience suitable for producing products with active
phyto-cannabinoid (CBD) rich ingredients including isolates,
distillates, water soluble, and proprietary formulations. Under the
Development Agreement, the Company has been allotted a minimum of
50 and up to 300 kilograms per month, and up to 2,500 kilograms
annually, of active phyto-cannabinoid (CBD) rich ingredients for
resale. The Company expects to be able to offer tinctures, edibles,
capsules, topical solutions and animal health products manufactured
for us by C2M to satisfy demand for branded and white-label
products that the Company intends to offer to sell in the future.
The founders of C2M established their first CBD business in 2014.
C2M will also be responsible for overseeing all farming and
manufacturing activities of the Company.
Whereas,
in consideration for the Development Agreement, C2M was issued
8,385,691 shares of our Common Stock on January 8, 2019.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock to founders of
C2M and our Interim Chief Executive Officer, Emiliano Aloi, with
exercise price of $0.32 per share. As a result, C2M was our largest
shareholder holding (inclusive of the vested options) approximately
51% of our outstanding Common Stock on the date of the Development
Agreement.
C2M
will provide personnel necessary for the Company's growth.
Utilizing C2M employees and facilities, the Company has been able
to rapidly access resources and opportunities in the hemp-derived
CBD industry. Emiliano Aloi of C2M became a member of the
Company’s Advisory Board in January 2019 and was appointed
President of the Company on March 11, 2019. On August 13, 2019, the
Company appointed Mr. Aloi as Interim Chief Executive Officer and
on June 24, 2020, the Company appointed Mr. Aloi as a new member of
the Board of Directors of the Company.
Management and Services Agreement
As
previously disclosed, on March 11, 2019, the Company acquired,
through our majority-owned subsidiary, EOW, from the
Company’s largest shareholder, C2M, certain rights to a 50.1%
limited liability membership interest in certain farm leases and
operations in Oregon in order to enter into the business of hemp
farming for the 2019 grow season. During May 2019, the Company
appointed Emiliano Aloi, the President of the Company, to the
additional position of co-manager of EOW. The Company farmed
approximately 200 acres of hemp for harvest and production during
2019.
On July
31, 2019, the Company finalized and entered into a Management and
Services Agreement in order to provide the Company project
management and various other benefits associated with the farming
rights, operations and opportunities with C2M, including assignment
by C2M of C2M’s agreements and rights to acquire
approximately 200 acres of hemp farming. Under the terms of the
MSA, C2M agreed to provide further access to the opportunities and
know-how of C2M, consented to the appointment of Emiliano Aloi, a
seasoned hemp veteran previously an advisor and currently the
Company’s Interim Chief Executive Officer, and to provide the
Company and EOW additional services consisting of, among other
things:
●
right
of participation for further investment and business opportunities
in order to rapidly expand our business and operations in
hemp-derived CBD;
●
executive,
sourcing, vendor, product, production and other expertise and
resources;
●
appointment
of Aloi to the position of President;
●
introductions
to farming and other financing;
●
designs
for international “Hemp-Café” store design and
franchise opportunities including plans, drawings, approvals and
authorizations, leads and contacts;
●
access
to leasing of prime real estate in Delray Beach Florida with an
option to purchase, and the continuing assistance of the founder of
C2M in connection with management, design, and promotion of the
project;
●
drawings,
designs and specifications for extraction, production and
manufacturing facilities and resources;
●
brand
development and support services.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
The
Company finalized the compensation arrangements for C2M as
contemplated in connection with the March 2019 transactions and the
additional agreements with C2M under the MSA following tax,
accounting and legal review including the treatment of the issuance
of preferred stock in connection with the transactions. While the
assignment initially contemplated a $9 million payment from the
Company to C2M, the parties agreed to payment in a new class of
preferred stock, convertible above market. As a further condition
to payment of the consideration, the value of the 50.1% interest in
EOW was required to be not less than $25 million, with a
third-party valuation and fairness opinion from a third-party prior
to payment. The term of the MSA commenced on the date of this
agreement.
In
October 2019, the Company entered into an amendment to the MSA (the
“MSA Amendment”). The MSA Amendment extended the
termination date of the MSA to December 31, 2024 and expanded the
scope of services to be provided by C2M to the
Company. Included in the scope of services was to negotiate
with the minority owners of EOW, an amendment to the Operating
Agreement of EOW for the distribution and allocation to provide for
up to 100% (from 50.1%) of the results of operations of the 2019
harvest or yield resulting from all plants germinated during the
calendar year December 31, 2019.
Distribution and Profit-Sharing Agreement
On
November 20, 2019, the Company entered into the Non-Exclusive
Distribution and Profit-Sharing Agreement with Canntab Therapeutics
USA (Florida), Inc. Pursuant to the agreement, which has a term of
2 years and is subject to automatic renewal. The Company is a
non-exclusive distributor of certain Canntab products throughout
the U.S. Canntab will not grant a third-party the right to promote,
sell or deliver the products within the U.S. during the term of the
agreement, subject to certain exceptions. In addition, the Company
agreed to share equally with Canntab in the gross profits received
from the sale of their products by the Company. With respect to
Canntab’s sales of products, the Company will receive 10% of
the gross profits. In connection with the Canntab Agreement, the
Company also entered into a Supply Agreement with Canntab, which
has a term of 2 years and is subject to automatic renewal, pursuant
to which the Company agreed to sell hemp extracts to Canntab. Due
to a need for additional warehouse space and disruptions caused by
the Covid-19 pandemic, the Company has not distributed Canntab
products to date.
Employment Agreements
Andrew
Johnson, the Company’s Chief Strategy Officer, is serving
under a two-year employment agreement adopted on March 11, 2019 at
an annual salary of $110,000, which was increased to $150,000 on
January 23, 2020. In addition, he will be entitled to an
annual cash bonus, in an amount as determined by the board of
directors, if the Company meets or exceeds criteria adopted by the
Compensation Committee of the Board of Directors. He shall
also be eligible for grants of awards under stock option or other
equity incentive plans of the Company as the Company’s
Compensation Committee. For the 2019 year, he received a cash bonus
of $100,000 to be paid in equal installments over the next 12
months which have been recorded in accrued expenses on the
consolidated balance sheet as of June 30, 2020 and December 31,
2019.
Derek
Du Chesne, the Company’s current President, Chief Growth
Officer, and a Director, is serving under a two-year employment
agreement dated February 18, 2020 and entered into in connection
with his service as Chief Growth Officer. Du Chesne’s base
salary for the initial year of service will be $150,000, increasing
to not less than $250,000 for the second year of service, subject
to annual review by the Board of Directors. He will be entitled to
quarterly cash bonuses based on a percentage of our net sales to be
determined. In addition, Mr. Du Chesne will be entitled to annual
cash bonuses as follows: (1) up to 250% of base salary for the 2020
calendar year, if: (A) Company’s net income on a consolidated
basis for the 2020 fiscal year is equal to or in excess of
$5,000,000; or (B) Company’s net sales on a consolidated
basis is equal to or in excess of $40,000,000 during the 2020
fiscal year; and (2) 200% of base salary for the 2021 calendar
year, subject to the satisfaction of performance criteria set by
the Board in consultation with a third-party compensation expert
and Mr. Du Chesne. He will be eligible to participate in the
Company’s Equity Incentive Plan during his employment. Upon
execution of the Agreement, he was granted options to purchase up
to 1,000,000 shares of the Company’s common stock at a price
of $0.50 per share. 250,000 of these options were vested
immediately, with the remaining 750,000 options to vest in equal
installments over the next twenty-four months. The employment
agreement with Mr. Du Chesne is intended to provide direct
incentives to increase company sales, while providing a reasonable
base compensation for his service. Following his appointment as
President, he received 1,000,000 shares of restricted common stock
as additional compensation, with vesting and other terms to be
decided by the Company’s Compensation Committee. On March 5,
2020, the Board of directors of the Company approved the repricing
of Mr. Du Chesne’s stock options to 90% of the market price
on the original date of grant or exercise price of $0.30 per share
(see Note 10).
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Distribution Agreements
On
February 4, 2020, the Company entered into a Supply and
Distribution Agreement with HTO Holdings Inc (dba “Hemptown,
USA”), enabling the Company to purchase and sell
Hemptown’s Cannabigerol (CBG) and Cannabidiol (CBD) products,
including top flower, biomass and extracts (crude, isolates,
distillates, and water soluble). Ceed2Med, LLC, the Company’s
largest shareholder, is also a significant investor in Hemptown USA
and is party to a distribution agreement with the Company. The
Interim Chief Executive Officer and C2M, LLC will cooperate in
developing plans to coordinate the Company’s efforts to
introduce CBG and expand its efforts to sell CBD products. This
agreement shall remain in force for a period of one year from
effective date and shall renew automatically in one-year increments
for three years unless either party gives written notice of its
intention not to renew at least 60 days prior to expiration. On
March 28, 2020, the Company amended the Supply and Distribution
Agreement Pursuant to the amendment whereby the Company agreed to
also (i) aid Hemptown’s management with product compliance
requirements, (ii) participate in discussions related to
Hemptown’s 2020 farming, harvesting and processing plans as
well as joint supply scenarios, (iii) interact with
Hemptown’s ingredient and manufacturing divisions to
facilitate development of documents for selected SKUs to service
the white label market, and (iv) aid Hemptown’s CEO in
overseeing the entire supply chain to establish best practices in
quality and compliance and lower costs. In addition, Hemptown
agrees to pay the Company $3,500 a month in consulting fees. On
July 21, 2020, Hemptown discontinued the consulting arrangement
entered into under the March 28, 2020 amendment.
On
November 20, 2019, the Company entered into the Non-Exclusive
Distribution and Profit-Sharing Agreement with Canntab Therapeutics
USA (Florida), Inc. Pursuant to the agreement, which has a term of
2 years and is subject to automatic renewal. The Company is a
non-exclusive distributor of certain Canntab products throughout
the U.S. Canntab will not grant a third-party the right to promote,
sell or deliver the products within the U.S. during the term of the
agreement, subject to certain exceptions. In addition, the Company
agreed to share equally with Canntab in the gross profits received
from the sale of their products by us. With respect to
Canntab’s sales of products, the Company will receive 10% of
the gross profits. In connection with the Canntab Agreement, the
Company also entered into a Supply Agreement with Canntab, which
has a term of 2 years and is subject to automatic renewal, pursuant
to which we agreed to sell hemp extracts to Canntab. Due to a need
for additional warehouse space and disruptions caused by the
Covid-19 pandemic, the Company has not distributed Canntab products
to date.
NOTE 12 - RELATED PARTY
CONSIDERATIONS
Some of
the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On
November 20, 2017, Dr. Dimitrov, former director of the Company,
provided a notice to the Company stating that he was resigning from
the Board, effective immediately. Dr. Dimitrov indicated that his
resignation from the Board was based on the deteriorating
relationship between the Company and Digital Diagnostics over the
non-payment of fees owed by the Company pursuant to the licensing
agreement between the Company and Digital Diagnostics (See Note
11). The Company paid $0 during the six months ended June 30, 2020
and 2019. There was no change during the six months ended June 30,
2020.
For the
six months ended June 30, 2020 and 2019, $0 and $26,975,
respectively, was recognized in Research and Development expenses
for consulting provided by Dr. Dimitrov, respectively. As of June
30, 2020 and December 31, 2019, $575,000 was included in accounts
payable for both periods to KD Innovation Ltd., an affiliated
entity of Dr. Dimitrov. There was no change during the six months
ended June 30, 2020.
On
January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement with C2M (see Note 11). At June
30, 2020 and December 31, 2019, accounts payable to C2M related to
purchase of finished products amounted to $8,342. During the six
months ended June 30, 2020, the Company did not purchase any
finished products from C2M. C2M is a majority stockholder of the
Company. During the six months ended June 30, 2020, the Company
recognized revenues from C2M of $315,800 from sales of flowers and
recorded related cost of sales of $417,783. Additionally, accounts
receivable from C2M as of June 30, 2020 amounted to
$94,800.
From
time to time, the Company’s subsidiary, EOW, receives
advances from an affiliated company which is owned by three members
of EOW for working capital purposes. The advances are non-interest
bearing and are payable on demand. The Company advanced $127,500
during fiscal 2019 to these related parties which resulted in a
receivable or due from related parties of $127,500 as of June 30,
2020 and December 31, 2019. These advances are short-term in
nature, non-interest bearing and due on demand. The Company
reclassed the $127,500 related party receivable to the
stockholders’ equity section as of June 30,
2020.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
As of
June 30, 2020 and December 31, 2019, accounts receivable from a
related party customer amounted to $12,860 and $18,860,
respectively. The customer is an affiliated company which is
substantially owned by a managing member of EOW.
On July
9, 2019, the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to $40,000
per month in advance in addition to all applicable Florida sales
and/or federal taxes and security deposit of $40,000. Effective one
year from the lease commencement date and each year thereafter, the
rent shall increase at least three percent (3%) per year. The
lessor of the Premises is a limited liability company owned or
controlled by Vladislav (Bobby) Yampolsky, a member of the
Board and the founder, manager and controlling member of C2M,
the Company’s largest stockholder. During the second
quarter of fiscal 2020, the Company has determined that the
commercial lease with Skybar Holding,
LLC is not in compliance with current laws or regulations in the
City of Delray Beach and does not represent an enforceable contract
and was void from the moment of execution. As a result, the Company
has restated its prior year financial information to correct this
accounting error (see Note 14). Additionally, on August 6, 2020,
the Company submitted a written termination letter to Skybar
Holdings, LLC.
As of
June 30, 2020 and December 31, 2019, accounts payable from two
affiliated companies and C2M totaled to $454,511 ($350,000, $96,169
and $8,342, respectively) for both periods.
From
January 31, 2020 through June 30, 2020, the Company’s Interim
Executive Chairman, Bobby Yampolsky, made a series of advances to
the Company in the approximate total amount of $97,000 and has been
included in due to related party as reflected in the accompanying
unaudited condensed consolidated balance sheets. These advances are
short-term in nature and non-interest bearing. On June 11, 2020,
Mr. Yampolsky tendered his resignation as a member and interim
chairman of the board of directors of the Company. Additionally,
the Company agreed to pay $12,500 on June 11, 2020 and a monthly
installment payment of approximately $7,084 beginning July 15, 2020
to June 15, 2021. On June 11, 2020, the Company paid $12,500 of
these related party advances. The Company paid the first monthly
installment in July 2020. As of June 30, 2020, due to related party
amounted to $84,500.
Note 13 – CONCENTRATION OF REVENUE AND SUPPLIER
During
the six months ended June 30, 2020, total sale of CBD products and
hemp flowers to two customers represented approximately 83% (60%,
and 23% - related party) of the Company’s net sales.
During the six months ended June 30,
2019, total sale of CBD products to five customers represented
approximately 90% (19%, 26% - related party, 24%, 11% and 10%) of
the Company’s net sales.
As of
June 30, 2020, total accounts receivable from two customers
represented approximately 86% (23% and 63% - related party) of
total accounts receivable. As of December 31, 2019, total accounts
receivable, net from two customers and one related party customer
represented approximately 82% (18%, 38%, and 26% - related party)
of total accounts receivable.
As of
June 30, 2020, total accounts payable from two vendors represented
approximately 37% (23% and 14%-related party) of total accounts
payable. As of December 31, 2019, total accounts payable from two
vendors and one affiliated company represented approximately 60%
(12%, 30% and 18% -related party) of total accounts payable. The
affiliated company is owned by three members of
EOW.
During
the six months ended June 30, 2020, the Company purchased finished
products from one vendor totaling approximately $846,320 (98% of
the purchases). During the six months ended June 30, 2019, the
Company purchased finished products from C2M (see Note 11) totaling
approximately $197,117 (100% of the purchases).
NOTE 14 – RESTATEMENT
OF PRIOR FINANCIAL INFORMATION
Subsequent
to the Company’s external auditor’s periodic review of
the Form 10-Q for the Periods Ended September 30, 2019 and March
31, 2020, annual audit for the year ended December 31, 2019 and, in
the process of review, the current Form 10-Q for the Period Ended
June 30, 2020, the Company conducted further reviews of the
consolidated financial statements. Based on such reviews, the
following determinations were made:
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
Error in Accounting for Operating Lease Right-of-Use Asset and
Operating Lease Liabilities
During
the second quarter of fiscal 2020, the Company has determined that
the commercial lease with Skybar
Holding, LLC is not in compliance with current laws or regulations
in the City of Delray Beach and does not represent an enforceable
contract and was void from the moment of execution. Therefore, the
accounting treatment for the recognition of the operating lease
right-of -use asset and operating lease liabilities upon adoption
of ASC 842 related to this commercial lease was incorrect.
As a result of a detailed review of this commercial lease, the
Company has made an assessment in the second quarter of fiscal 2020
that the lease is unenforceable and should not have been accounted
for under ASC 842. Additionally, the Company reversed previously
recorded accrued expenses related to this commercial lease
agreement.
In
accordance with the guidance provided by the Accounting Standards
Codification (“ASC”) 250 – “Accounting
Changes and Error Corrections” (“ASC 250”),
SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and
Staff Accounting Bulletin 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements (“SAB 108”), the Company
has determined that the impact of adjustments relating to the
corrections of this accounting error are not material to previously
issued annual audited and unaudited financial
statements and
as such no restatement was necessary. Correcting prior year
financial statements for immaterial errors would not require
previously filed reports to be amended. Such correction may be made
the next time the registrant files the prior year financial
statements. Accordingly, these misstatements were corrected during
the period ended June 30, 2020 and will be disclosed
prospectively.
The
effect on these revisions on the Company’s consolidated
balance sheets is as follows:
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
Current
assets
|
$1,661,211
|
$-
|
$1,661,211
|
Current
liabilities
|
$5,338,486
|
$(564,628)
|
$4,773,858
|
Working
capital (deficit)
|
$(3,677,275)
|
$564,628
|
$(3,112,647)
|
Total
assets
|
$8,458,826
|
$(1,705,115)
|
$6,753,711
|
Total
liabilities
|
$6,985,191
|
$(2,034,232)
|
$4,950,959
|
Total
stockholders' equity
|
$1,473,635
|
$329,117
|
$1,802,752
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
Current
assets
|
$2,429,235
|
$-
|
$2,429,235
|
Current
liabilities
|
$4,190,544
|
$(382,196)
|
$3,808,348
|
Working
capital (deficit)
|
$(1,761,309)
|
$382,196
|
$(1,379,113)
|
Total
assets
|
$9,799,277
|
$(1,782,443)
|
$8,016,834
|
Total
liabilities
|
$6,117,431
|
$(1,988,141)
|
$4,129,290
|
Total
stockholders' equity
|
$3,681,846
|
$205,698
|
$3,887,544
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
Current
assets
|
$3,255,169
|
$-
|
$3,255,169
|
Current
liabilities
|
$2,052,454
|
$(302,196)
|
$1,750,258
|
Working
capital (deficit)
|
$1,202,715
|
$302,196
|
$1,504,911
|
Total
assets
|
$11,449,203
|
$(1,858,284)
|
$9,590,919
|
Total
liabilities
|
$4,054,527
|
$(1,940,563)
|
$2,113,964
|
Total
stockholders' equity
|
$7,394,676
|
$82,279
|
$7,476,955
|
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
The
effect on these revisions on the Company’s consolidated
statements of operations is as follows:
|
For the Three Months Ended
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
Revenues
|
$836,000
|
$-
|
$836,000
|
Operating
expenses
|
$2,192,767
|
$(123,419)
|
$2,069,348
|
Loss
from operations
|
$(2,757,023)
|
$123,419
|
$(2,633,604)
|
Other
income (expenses)
|
$(188,480)
|
$-
|
$(188,480)
|
Net
loss
|
$(2,945,503)
|
$123,419
|
$(2,822,084)
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(2,789,684)
|
$123,419
|
$(2,666,265)
|
Basic
& diluted EPS
|
$(0.06)
|
$0
|
$(0.06)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
Revenues
|
$345,680
|
$-
|
$345,680
|
Operating
expenses
|
$9,177,988
|
$(205,698)
|
$8,972,290
|
Loss
from operations
|
$(10,878,442)
|
$205,698
|
$(10,672,744)
|
Other
income (expenses)
|
$653,936
|
$-
|
$653,936
|
Net
loss
|
$(10,224,506)
|
$205,698
|
$(10,018,808)
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(10,591,487)
|
$205,698
|
$(10,385,789)
|
Basic
& diluted EPS
|
$(0.31)
|
$0
|
$(0.31)
|
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
|
For the Nine Months Ended
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
Revenues
|
$215,816
|
$-
|
$215,816
|
Operating
expenses
|
$5,803,458
|
$(82,279)
|
$5,721,179
|
Loss
from operations
|
$(5,803,847)
|
$82,279
|
$(5,721,568)
|
Other
income (expenses)
|
$1,178,363
|
$-
|
$1,178,363
|
Net
loss
|
$(4,625,484)
|
$82,279
|
$(4,543,205)
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(5,168,306)
|
$82,279
|
$(5,086,027)
|
Basic
& diluted EPS
|
$(0.16)
|
$0
|
$(0.15)
|
|
For the Three Months Ended
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
Revenues
|
$60,153
|
$-
|
$60,153
|
Operating
expenses
|
$2,062,677
|
$(82,279)
|
$1,980,398
|
Loss
from operations
|
$(2,102,942)
|
$82,279
|
$(2,020,663)
|
Other
income (expenses)
|
$(5,105)
|
$-
|
$(5,105)
|
Net
loss
|
$(2,108,047)
|
$82,279
|
$(2,025,768)
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(1,934,367)
|
$82,279
|
$(1,852,088)
|
Basic
& diluted EPS
|
$(0.05)
|
$0
|
$(0.05)
|
The
revisions had no effect in the cash used in operating activities on
the Company’s consolidated statements of cash
flows.
NOTE 15 - SUBSEQUENT
EVENTS
In
accordance with authoritative guidance, the Company has evaluated
any events or transactions occurring after June 30, 2020, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the unaudited condensed
consolidated financial statements as of and for the quarter ended
June 30, 2020, except as disclosed below.
Common Stock issued for services
On July
1, 2020, the Company entered into a consulting agreement for
corporate legal advisor services. The consultant shall receive
compensation of 750,000 shares of the Company’s Common Stock
for services rendered and to be rendered until September 30,
2020.
Conversion of Notes
On July
17, 2020, the Company issued 708,148 shares of its common stock at
a contractual conversion price of approximately $0.09, as a result
of the conversion of principal of $47,000 and interest of $3,760 of
the convertible note.