Panacea Life Sciences Holdings, Inc 10-K for FY2019
Panacea Life Sciences Holdings, Inc. (PLSH)
10-K
2020-05-22
For: 2019-12-31
View Original
Added on
April 06, 2026
About this 10-K
Panacea Life Sciences Holdings, Inc filed this 10-K on May 22, 2020, covering the fiscal year ended December 31, 2019 (FY2019).
Headline figures
Fiscal year ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $345.68K
- compared with $0 a year earlier
- Net loss
- $10.22M
- compared with a net loss of $4.34M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31,
2019
[
] Transition Report
Under Section 13 or 15(d) of the Securities Exchange Act of
1934
for the transition period from _________ to ________
..
Commission File Number: 001-38190
Exactus, Inc
(Exact
name of registrant as specified in its charter)
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Nevada
(State or other
jurisdiction
of incorporation or
organization)
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27-1085858
(I.R.S.
Employer
Identification
No.)
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80
NE 4th Avenue, Suite 28 Delray Beach, FL 33483
(Address
of principal executive offices) (Zip code)
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(800)
881-9352
(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(g) of the Act:
Common stock, par value of $0.0001
(Title
of class)
I
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
☐ No ☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
☐ No ☑
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☑ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer
|
☐
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Accelerated filer
|
☐
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Non-accelerated
filer
|
☐
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Smaller reporting company
|
☑
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Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes ☐ No ☑
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter on
June 30, 2019, was $26,922,402 (1)Indicate the number of shares
outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 45,522,275 as of May 22,
2020.
(1)
Based on a closing sale price of $0.95 per share on June 30, 2019.
Excludes 10,639,120 shares of the registrant’s common stock
held by executive officers, directors and stockholders that the
registrant has concluded were affiliates at June 30,
2019.
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EXPLANATORY NOTE
On
March 17, 2020, Exactus, Inc. (the “Company”) filed a
Current Report on Form 8-K, and is filing this Annual Report on
Form 10-K (the “Annual Report”), in reliance on the
Order of the Securities and Exchange Commission (the
“SEC”), dated March 4, 2020, as updated March 25, 2020,
pursuant to Section 36 of the Securities Exchange Act of 1934
modifying exemptions from the reporting and proxy delivery
requirements for public companies (Release No.
34-22465).
As a
result of “stay at home” orders and other restrictions
imposed as a result of the COVID-19 pandemic, certain Company
officers and management as well as professional staff and
consultants have been hindered and delayed in conducting all of the
work required to prepare the financial statements for the Annual
Report. This has, in turn, impacted the Company’s ability to
complete its audit and file this Annual Report by its original due
date, March 30, 2020.
PART I
Item 1. Business
Business Overview
We
are a Nevada corporation organized under the name Solid Solar
Energy, Inc in 2008 and renamed Exactus, Inc. in 2016. We began to
pursue opportunities in Cannabidiol, which we refer to as CBD, in
2019.
In
December 2018, we expanded our focus to pursue opportunities in
hemp-derived CBD. This decision was based in part on the passing of
the 2018 Farm Bill, known as the Agriculture Improvement Act of
2018, which will remain in force through 2023. The 2018 Farm Bill
authorized the production of hemp and removed hemp and hemp seeds
from the Drug Enforcement Administration’s, or the
DEA’s, schedule of Controlled Substances. It also directed
the U.S. Department of Agriculture, or the USDA, to issue
regulations and guidance to implement a program to create a
consistent regulatory framework around production of hemp
throughout the United states. On October 31, 2019, the USDA,
Agricultural Marketing Services, issued an interim final rule (with
request for comments). The rule outlines provisions for the USDA to
approve plans submitted by states and Indian tribes. The U.S.
Domestic Hemp Production Program establishes federal regulatory
oversight of the production of hemp in the U.S. The program
authorizes the USDA to approve plans submitted by states and Indian
tribes for the domestic production of hemp and establishes a
federal plan for producers in states or territories that choose not
to administer a state or tribe specific plan, provide the state or
tribe does not ban hemp production.
Prior
to the 2018 Farm Bill, Cannabis sativa L. with delta-9
tetrahydrocannabinol, or THC, levels greater than 0.3% fell within
the definition of “marijuana” under the Controlled
Substances Act, or the CSA, and was therefore a Schedule I
controlled substance unless it fell under a narrow range of
exceptions (e.g., the “mature stalks” of the plant). As
a result, many aspects of domestic production of what is now
defined as hemp was limited to persons registered under the CSA to
do so. Under the Agricultural Act of 2014, which we refer to as the
2014 Farm Bill, State departments of agriculture and institutions
of higher education were permitted to produce hemp as part of a
pilot program for research purposes. The authority for hemp
production provided in the 2014 Farm Bill was extended by the 2018
Farm Bill, which was signed into law on December 20,
2018.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for CBD
end-products to be sold to humans and for animal health, such as
nutraceuticals, supplements and pet and farm products.
Our
principal executive offices are located at 80 NE 4th Avenue, Suite
28 Delray Beach, FL 33483 and our telephone number is (800)
881-9352.
Farming Operations
On
March 11, 2019, we acquired a 50.1% limited liability membership
interest in Exactus One World, LLC, an entity formed on January 25,
2019 and which we refer to as EOW, in order to produce hemp. EOW
holds one-year leases, which commenced on March 1, 2019, for
approximately 200 acres of farmland in southwest Oregon for growing
and processing hemp. The leases are renewable on a year-to-year
basis. EOW will farm and process hemp to be manufactured into CBD
and related products, sold or processed as biomass and other
agricultural products. EOW will be responsible for our
initial efforts to pursue agricultural development, including farm
soil preparation, planting, harvesting, transportation and drying.
We have been responsible for funding and the minority owners will
be responsible for management, servicing and operating the farm
properties.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop to us. As a
result, we acquired the right to receive 100% of the distributions
of net profit from the 2019 hemp crop. In addition, the members
amended the payment schedule under which farm costs are required to
be made by us.
Due
to declining market prices for industrial hemp and a shortage of
available capital, we do not currently intend to farm hemp on the
Oregon properties in 2020. Our current plan is to sub-lease the
properties for the 2020 growing season to another farmer, although
no subleases have been made at this time.
Green Goddess Extracts, LLC
On
July 31, 2019, we entered into an Asset Purchase Agreement with
Green Goddess Extracts, LLC (“Green Goddess”) and an
Executive Employment Agreement with its founder. Under the
agreement, we agreed to acquire the business and assets of Green
Goddess relating to the manufacture, marketing and sale of CBD
products, including the right to manufacture, warehouse and ship
products under the Green Goddess brand, existing, inventory,
ingredients and materials, customer lists, websites, intellectual
property and trademarks. We also entered into an option to acquire
Green Goddess’ vape assets. Under the terms of the
Asset Purchase Agreement we agreed to issue 250,000 shares of our
restricted Common Stock and pay $250,000 cash for the acquisition.
The shares vest at a rate of 1/24 per month until fully vested. We
have issued 62,500 shares under the Agreement to date, and have not
made any payments toward the cash component of the purchase price.
We are 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
Company, Green Goddess Extracts and the founder 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 product with a cost of $837,153 currently held inventory has
been written down to a value of $0 due to the age and questionable
salability of the product.
Additional Brands
We
have taken steps to introduce Green GoddessTM brands, LeVor
CollectionTM, Paradise CBDTM and ExactusTM, for selected markets
which, to date, have not resulted in material
revenues.
Industrial Hemp
We
seek to take advantage of an emerging worldwide trend to utilize
the production of industrial hemp in consumer products. Hemp is
being used today in cosmetics, nutritional supplements, and animal
feed, where we also intend to focus our efforts. The market for
hemp-derived products is expected to increase substantially over
the next five years, and we are endeavoring to prepare the Company
to be positioned as a significant player in the industry. According
to industry reports, CBD is expected to conservatively generate
sales of $16 billion by 2025. In one survey, nearly 7% (of 2,500
respondents) reported using CBD as a supplement in January 2019,
with retail sales of CBD consumer products in 2018 estimated as
being only between $600 million and $2 billion.
According
to the report, cannabis’ therapeutic potential is
attributable to the valuable overlap between phyto-cannabinoids
(i.e. plant-derived cannabinoids) and the endogenous cannabinoid
system in humans, termed a “therapeutic handshake”.
Clinical trial results to date demonstrate few adverse effects from
oral CBD doses of up to 1,500 mg/day or up to 30 mg IV. The
scientific understanding of CBD’s clinical effects is based
mostly on studies in specific indications, like epilepsy. GW
Pharma’s Epidiolex (a highly potent, pure formulation of CBD)
was approved by the FDA in 2018 for the treatment of seizures
associated with Lennox-Gastaut syndrome and Dravet syndrome, and
other companies have clinical trials underway in seizure
disorders.
Healthcare
CBD
products appear to be gaining traction with independent pharmacies.
The industry, including the Company, has also been approached by
several large chain pharmacies with inquiries concerning sourcing,
quality, accountability and volume. According to the report,
pharmacies likely find the high-margin profile of CBD attractive,
similar to over-the-counter drugs. We believe pharmacies will
appreciate our “seed-to-consumer” approach and our cGMP
manufacturing focus and our planned QR Code traceability and
reporting.
Currently,
CBD products are not a covered benefit, or an extra benefit, under
managed care, insurance, Medicare, Medicaid or any state programs.
This will likely continue to be the case for the intermediate term.
Legal issues and confusion concerning legality, lack of FDA
regulation and availability as an OTC medication will likely
continue for an indefinite period impeding adoption and payor
acceptance.
Competition
We
believe a multitude (hundreds) of companies, large and small,
including mom and pops, have launched or intend to launch retail
brands and white label products containing CBD. Many of these are
offering CBD and are dependent upon third parties to provide raw
material inventory for sale. We believe this makes many of the
participants in the industry vulnerable to shortages, quality
issues, reliability and pricing variability. Our management
team’s extensive experience and industry relationships may
allow us to build an efficient supply chain that will put us among
the few companies that maintain a competitive pricing and supply
advantage, poised for revenue growth during 2020 and
beyond.
The
CBD-based consumer product industry is highly fragmented with
numerous companies, many of which are under-capitalized. There are
also large, well-funded companies that currently do not offer
hemp-based consumer products including large agribusiness companies
such as Cargill and Tyson Foods, but may do so in the future and
become significant competitors.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for
end-products, such as nutraceuticals, supplements and pet and farm
products. We intend to follow regulatorily compliant pathways by
adopting practices established by the FDA for CBD and to pursue FDA
approval for our activities upon adoption of federal regulations,
including conducting independent clinical and non-clinical
trials.
Companies such as CV Sciences, Inc. (OTCQB:CVSI)
in the US and recent acquisitions by Canadian cannabis producers
reflect the growing acceptance of CBD products as a lynchpin for
growth. Transactions such as Tilray, Inc. (NASDAQ:TLRY-Manitoba Harvest $419 million
February 2019), cbdMD Inc. (NYSE:YCBD - Cure Based Development LLC December
2018), and Aurora Cannabis, Inc. (OTCQB:ACBFF–Agropro UAB
EUR6.5 million) reflect
the growing interest and M&A activity in the industry among our
competition and increasing consolidation.
Non-CBD
Competition. We do not intend
to offer and do not compete with companies that offer cannabis
products containing high levels of psychoactive THC. Although legal
in some states, and in Canada, we do not intend to enter into this
market. We may offer our industrial-hemp based products in
dispensaries, but will not compete with any medical or recreational
marijuana sellers for high THC content sales due to legal and
regulatory restrictions and uncertainty in the United States.
Because of regulatory challenges facing marijuana companies in the
United States, the vast majority of the companies focused on THC
are Canadian and foreign, although several have begun to pursue
domestic activities in states that permit marijuana sales. Federal
law does not generally recognize marijuana (or hemp that exceeds
0.3% THC) as lawful, although that may change in the future.
Because of these factors, our competitors that have focused
exclusively on CBD are limited.
Retail
Competition. Many of our
competitors are private companies and as a result, little or no
reliable information is available. Of the publicly reporting
companies, we believe many of the CBD companies are principally
focused on high THC content marijuana.
Retail Strategy
Our
focus will include establishing wholesale and retail distribution
by developing our own brands, selling white label branded products
to others and making acquisitions of existing businesses engaged in
marketing or sales, in both online and retail channels. We may
supply to wholesalers, retailers, and distribution centers as we
seek to launch our retail strategy. We intend to initially focus on
developing products to reach medical and health communities to be
sold or promoted by or through medical professionals such as
internists, dermatologists, osteopaths, chiropractors, pharmacists,
and other holistic or natural products purveyors, but will not be
limited to such efforts. We intend to focus on higher margin
opportunities utilizing online sales and sales in stores, offices
or pharmacies.
Environmental Matters
Compliance
with federal, state and local requirements regulating the discharge
of materials into the environment, or otherwise relating to the
protection of the environment, have not had, nor are they expected
to have, any direct material effect on our capital expenditures,
earnings or competitive position, however such factors could
indirectly affect us as well as participants in the supply chain
for our products, and our business, operations, vendors or
suppliers.
Point of Care Diagnostics
As
previously reported under “Business” in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2018 the
second segment of our business is the development of point of care
diagnostic devices. We have since February 2016 been developing
devices for measuring proteolytic enzymes in the blood, known as
the FibriLyzer and collagenase levels in the blood, known as the
MatriLyzer. We believe our diagnostic business has been severely
hampered by a shortage of capital for development and as a result
our licenses for the underlying technology FibriLyzer and
MatriLyzer technology have been threatened and may be discontinued.
We have received notice of termination of certain of our licenses
for non-payment of fees. For the past 9 months, we have been
engaged in discussions with third-parties regarding funding and a
possible third-party merger candidate to develop our diagnostic
business. Accordingly, we have determined to continue to look for
third-parties to partner with and/or buyers to invest in or acquire
this business segment. If successful, we could sell or license our
rights to third parties with substantially greater resources than
us. We also may be required to terminate this segment and may not
realize any benefit from our prior investment in developing this
business.
Recent Developments
Private Placement of Convertible Notes and Warrants
On
November 27, 2019, we entered into a Securities Purchase Agreement,
referred to as the SPA, with an institutional investor, pursuant to
which it agreed to lend us up to $1,944,444 in three tranches. On
November 27, 2019, we issued to the investor an 8% convertible note
in the principal amount of $833,333 and a warrant to purchase
275,612 shares of our common stock at an exercise price of $0.756,
in exchange for payment by the investor of $750,000. The principal
amount of the note reflects the amount invested, plus a 10%
original issue discount, or OID. We received gross proceeds of
$750,000 in exchange for the initial tranche note and warrant and
$730,000 net proceeds after the payment of fees and expenses of the
sale.
Pursuant
to the SPA, a second tranche of funding from the investor is
available in the form of a second 8% convertible note in the
principal amount of $277,778 and a warrant to purchase 91,871
shares of our common stock. This additional financing is available
within three business days after the date of the filing of a
registration statement covering the shares issuable upon conversion
of the notes and the warrants, in exchange for payment by the
investor of the sum of $250,000. The principal amount of the second
tranche note will reflect the amount invested plus the
OID.
Pursuant
to the SPA, subject to fulfillment of certain conditions, a third
tranche of funding is available from the investor in the form of an
8% convertible note in the principal amount of $833,333 and a
warrant to purchase 275,612 shares of our common stock on the date
the registration statement is declared effective by the SEC, in
exchange for payment by the investor of the sum of $750,000. The
principal amount of the third tranche note will reflect the amount
invested plus the OID.
The
notes are fully and unconditionally guaranteed on a senior secured
basis by our direct and indirect subsidiaries. The notes and the
guarantees are secured by a perfected, first priority security
interest in all of our and the guarantors’
assets.
Also
on November 27, 2019, we issued to an advisor a warrant to purchase
84,187 shares of common stock in connection with the private
placement. We agreed to issue to the advisor a warrant to purchase
28,062 shares of our common stock upon the closing of the second
tranche.
Below
is a summary of the notes and warrants. This summary is not
complete and is subject to, and qualified in its entirety by the
provisions of the notes and warrants, which are filed as exhibits
hereto. We have not completed the second or third tranches, and our
completion of these tranches are subject to conditions of the SPA.
If we do complete the second or third tranche, the terms of the
notes and warrants will be identical to those issued in the first
tranche.
At
this time, we are delinquent in our 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. We
intend to make these payments and the upcoming monthly payments
with receipts from product sales and/or the proceeds of additional
equity funding.
At
this time, we are delinquent in our 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. We
intend 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, we 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:
●
We
must pay the Holder $60,000 in cash on or 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 being 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
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.
●
We have issued the
Holder 500,000 shares of our common stock in consideration for the
forbearance.
Terms of the Notes
The
principal amount of the notes includes an OID of 10%.
Interest
on the aggregate unconverted and outstanding principal amount is
payable at the interest rate of 8% per annum at our option
either:
●
in
cash; or
●
in
shares of our 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, which we refer to as
the amortization conversion rate, as described below.
Each
note matures one year after its issuance unless accelerated due to
an event of default or extended by the investor. Each note is
convertible at the option of the investor 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.
Included
in the amount that the investor may convert into common stock is
the sum of:
●
the
unpaid and unconverted principal amount outstanding on the
note;
●
100%
of the accrued and unpaid interest on the principal amount of the
note to be converted;
●
100%
of the make-whole amount (as described below) payable in respect of
the principal amount of the note to be converted; and
●
all
liquidated damages, costs of collection and other amounts payable
in respect of the note as applicable.
The
make-whole amount is the amount of interest that would have accrued
with respect to any principal amount that has been converted or
redeemed as if that principal amount was held through the maturity
date of the note.
We
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. The
investor may at its option accelerate up to six future amortization
redemption payments, in which case the investor may demand the
accelerated amortization amounts be paid in shares of our common
stock at the lesser of:
●
the
fixed conversion rate of $0.50 per share of common stock;
and
●
the
amortization conversion rate, as described above.
In
addition, if we fail to make any amortization redemption payment,
the investor may convert an amount equal to the sum
of:
●
one-ninth
of the original principal amount of the note;
●
100%
of all accrued and unpaid interest on the principal amount of the
note that is subject to the amortization redemption;
●
100%
of the make-whole amount payable in respect of the principal amount
of the note that is subject to the amortization redemption;
and
●
all
liquidated damages payable in respect of the note as of the
applicable date of the amortization redemption payment, into our
shares of common stock at the lower of (i) the fixed conversion
rate of $0.50 per share of common stock and (ii) the amortization
conversion rate.
If
we fail to make a redemption payment, the investor may demand the
amortization amounts be paid in shares of our common stock at the
lesser of fixed conversion rate of $0.50 per share of common stock
or the amortization conversion rate. For the purposes of estimating
the number of common stock shares issuable upon conversion of
principal and interest under our 8% senior secured convertible
notes, we have assumed an amortization conversion rate of $0.4208,
calculated as of November 26, 2019.
In
addition, the investor may at its option send a deferral notice and
demand that amortization amounts be paid in shares of our common
stock at the amortization conversion rate.
We
may redeem at our discretion 110% of the outstanding principal
amount of the notes, plus accrued but unpaid interest, the
make-whole amount, and liquidated damages for cash. In addition, in
the event of a subsequent issuance our common stock or debt, we are
subject to mandatory redemption provisions. We may not issue shares
of 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 investor.
The
investor may not convert notes to the extent that conversion would,
together with its affiliates and attribution parties, cause the
investor to beneficially own a number of common shares which would
exceed 4.99% of our then outstanding common shares following
conversion. The investor may increase its beneficial ownership
limitation up to 9.99%.
The
notes contain standard and customary events of default, including,
but not limited to, failure to make payments when due, failure to
observe or perform covenants or agreements contained in the notes,
the breach of any material representation or warranty contain
therein, our bankruptcy or insolvency, the suspension of trading of
our common stock, failure to file required reports with the SEC,
and a change of control. If any event of default occurs, subject to
a cure period, the full principal amount, together with interest
(including default interest of 18% per annum) and other amounts
owing in respect thereof to the date of acceleration shall become
immediately due and payable in cash.
Terms of Warrants
The
warrants issued to the investor are exercisable at an exercise
price of $0.756 per share of common stock at any time before the
close of business two years after their issuance, subject to
adjustment in the event of stock dividends, splits, fundamental
transactions, or other changes in our capital structure, and
contain provisions that permit cashless exercise if a registration
statement covering the resale of the shares issuable pursuant to
the warrants is not filed within 180 days of their issuance. The
investor may not exercise warrants to the extent that exercise
would cause it, together with its affiliates and attribution
parties, to beneficially own a number of common shares which would
exceed 4.99% of our then outstanding common shares following
exercise. The investor may increase its beneficial ownership
limitation up to 9.99%.
The
warrants issued to the advisor are exercisable 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. The advisor may not
exercise warrants to the extent that exercise would cause it,
together with its affiliates and attribution parties, to
beneficially own a number of common shares which would exceed 4.99%
of our then outstanding common shares following exercise. The
advisor may remove this beneficial ownership
limitation.
Ceed2Med Agreements
On
January 8, 2019, we entered into a Master Product Development and
Supply Agreement with Ceed2Med, LLC. Under the agreement, C2M
agreed to provide us a minimum of 50 and up to 300 kilograms per
month, and up to 2,500 kilograms annually, of CBD rich ingredients
for resale. In addition, C2M will manufacture for us tinctures,
edibles, capsules, topical solutions and animal health products. In
connection with the agreement, we issued C2M 8,385,691 shares of
our common stock, or approximately 51% percent of our issued and
outstanding shares of common stock on a fully-diluted basis, on
January 8, 2019. As a result, C2M is our largest
stockholder.
On
July 31, 2019, we entered into a Management and Services Agreement
with C2M under which it will provides us and our subsidiary, EOW,
with project management, farming, and operational services,
including:
●
executive,
sourcing, vendor, product, production and other expertise and
resources;
●
drawings,
designs and specifications for extraction, production and
manufacturing facilities and resources; and
●
brand
development and support services.
In
addition, C2M has assigned us its agreements and rights to acquire
approximately 200 acres of industrial hemp farmland and will
provide us with business opportunities, know-how, knowledge, and
experience.
In
return, we issued 10,000 shares of Series E 0% Convertible
Preferred Stock to C2M pursuant to the agreement. Under the terms
of the Series E Preferred, C2M may only convert such shares of
Series E Preferred into shares of our common stock if our closing
price 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. For more information about the terms of the
Series E Preferred, please see the section entitled
“Description of Securities”.
On
October 23, 2019, we amended the Management and Services Agreement
to extend the termination date to December 31, 2024 and expand the
scope of services to be provided by C2M. 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
On
November 14, 2019, we entered into a Supply and Distribution
Agreement with C2M, pursuant to which C2M agreed to purchase a
minimum of 10,000 pounds of our 2019 hemp flower harvest. During
the one-year term of the agreement, we have the option to purchase
the distribution operations of C2M.
Canntab Agreements
On
November 20, 2019, we 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 We are 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, we 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, we will receive 10% of the gross profits. In connection
with the Canntab Agreement, we 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, we have not
distributed Canntab products to date.
Hemptown USA Agreement
On
February 4, 2020, we 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 will work to develope plans to coordinate
the Company’s efforts to introduce CBG and to expand its
efforts to sell CBD products. On March 28, 2020, we amended the
Supply and Distribution Agreement Pursuant to the amendment, we
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.
Item 1A. Risk Factors
Risks Related to Our Company and Our Business
Because we have a limited operating history to evaluate our
company, the likelihood of our success must be considered in light
of the problems, expenses, difficulties, complications and delay
frequently encountered by an early-stage company.
Since
we have a limited operating history in our current business of
hemp-based CBD, it will make it difficult for investors and
securities analysts to evaluate our business and prospects. You
must consider our prospects in light of the risks, expenses and
difficulties we face as an early stage company with a limited
operating history. Investors should evaluate an investment in our
company in light of the uncertainties encountered by early-stage
companies in an intensely competitive industry and in which the
potential hemp-based CBD competition and farming, extraction,
production and manufacturing companies are large well capitalized
companies with resources (financial and otherwise) significantly
greater than the Company’s. There can be no assurance that
our efforts will be successful or that we will be able to become
profitable.
We have sustained losses in the past and we may sustain losses in
the foreseeable future.
We have incurred
losses from operations in prior periods, including the years ended
December 31, 2019 and 2018. Our loss from operations for the
year ended December 31, 2019 was $10,878,442 and our net loss was
$10,224,506 for the year ended December 31, 2019. Our accumulated
deficit was $21,129,379 at December 31, 2019. Our loss from
operations for the year ended December 31, 2018 was $2,436,226 and
our net loss was $4,337,319 for the year ended December 31,
2018. Our accumulated deficit was $10,537,892 at December 31,
2018. We expect to sustain losses in the foreseeable future and may
never be profitable.
Because we expect to need additional capital to fund our growing
operations, we may not be able to obtain sufficient capital and may
be forced to limit the scope of our operations.
We
expect that as our business continues to grow, we will need
additional working capital. If adequate additional debt
and/or equity financing is not available on reasonable terms or at
all, we may not be able to continue to expand our business, and we
will have to modify our business plans accordingly. These factors
would have a material and adverse effect on our future operating
results and our financial condition.
If we
reach a point where we are unable to raise needed additional funds
to continue as a going concern, we will be forced to cease our
activities and dissolve the Company. In such an event, we
will need to satisfy various creditors and other claimants,
severance, lease termination and other dissolution-related
obligations.
Our independent auditors have expressed substantial doubt about our
ability to continue as a going concern, which may hinder our
ability to obtain future financing.
The
audit report prepared by our independent registered public
accounting firm relating to our consolidated financial statements
for the year ended December 31, 2019 includes an explanatory
paragraph expressing substantial doubt about our ability to
continue as a going concern. Our auditor’s doubts are based
on our recurring losses from operations, negative cash flows from
operating activities and accumulated deficit. Our ability to
continue as a going concern will be determined by our ability to
obtain additional funding in the short term to enable us to fund
our operations. If we are unable to raise additional capital or
secure additional lending in the near future, management expects
that we will need to curtail our operations.
We may not be able to successfully implement our growth strategy on
a timely basis or at all.
Our
future success depends on our ability to implement our growth
strategy of introducing new products and expanding into new markets
and new distribution channels and attracting new consumers to our
brand. Our ability to implement this growth strategy depends, among
other things, on our ability to:
●
establish our
brands and reputation as a well-managed enterprise committed to
delivering premium quality products;
●
enter into
distribution and other strategic arrangements with retailers and
other potential distributors of our products;
●
continue to
effectively compete in specialty channels and respond to
competitive developments;
●
expand and maintain
brand loyalty;
●
develop new
proprietary value-branded products and product line extensions that
appeal to consumers;
●
maintain and, to
the extent necessary, improve our high standards for product
quality, safety and integrity;
●
maintain sources
from suppliers that comply with all federal, state and local laws
for the required supply of quality ingredients to meet our growing
demand;
●
identify and
successfully enter and market our products in new geographic
markets and market segments;
●
maintain compliance
with all federal, state and local laws related to our products;
and
●
attract, integrate,
retain and motivate qualified personnel. We may not be able to
successfully implement our growth strategy and may need to change
our strategy in order to maintain our growth. If we fail to
implement our growth strategy or if we invest resources in a growth
strategy that ultimately proves unsuccessful, our business,
financial condition and results of operations may be materially
adversely affected.
We may have difficulties managing our anticipated growth, or we may
not grow at all.
If we
succeed in growing our business, such growth could strain our
management team and capital resources. Our ability to manage
operations and control growth will be dependent on our ability to
raise and spend capital to successfully attract, train, motivate,
retain and manage new members of senior management and other key
personnel and continue to update and improve our management and
operational systems, infrastructure and other resources, financial
and management controls, and reporting systems and procedures.
Failure to manage our growth effectively could cause us to
misallocate management or financial resources, and result in
additional expenditures and inefficient use of existing human and
capital resources or we otherwise may be forced to grow at a slower
pace that could impair or eliminate our ability to achieve and
sustain profitability. Such slower than expected growth may require
us to restrict or cease our operations and go out of
business.
The focus of our business is to produce hemp-based products,
including through farming and manufacturing. We may not be able to
successfully farm, manufacture or sell products and, if we acquire
hemp-based products from third parties, we may fail to realize all
of the anticipated benefits of our business plans and
efforts.
We
acquired our farm interests and commenced hemp-based activities in
2019 in transactions which significantly changed the focus of our
business and operations. We currently own several assets and
although we may seek to commercialize and develop products, alone
or with others, there is no assurance that we will be able to
successfully commercialize or develop products and such
commercialization and development is not a core focus of our
business. There is significant risk involved in connection with our
activities in which we acquire and seek to pursue hemp-based
businesses. We have no prior experience as an operator of
hemp-based businesses. The acquisition of the farm and operations
intended to produce sales and our business model could fail to
produce anticipated benefits, or could have other adverse effects
that we do not currently foresee. Failure to successfully produce
biomass from agricultural crops, or failure of extraction,
production or manufacturing operations may have a material adverse
effect on our business, financial condition and results of
operations.
In
addition, the pursuit of hemp-based businesses, including
acquisition of businesses intended to pursue hemp-based sales, is
subject to a number of risks, including, but not limited to the
following:
●
There
is a significant time lag between investing in farm properties and
harvest, during which time crops of hemp may fail. During that time
lag, in the event of unforeseen occurrence, such as natural or
man-made events that impact crops, material costs are likely to be
incurred that would have a negative effect on our results of
operations, cash flows and financial position;
●
The
integration of a farm-based infrastructure is unpredictable and
requires that we rely on the efforts of others, including the
skills and experience of our farm partner, who are responsible for
providing personnel and overseeing farming, extraction, production
and manufacturing. This will be a time consuming and expensive
process which is unpredictable and that may disrupt our operations.
If our integration efforts are not successful, our results of
operations could be harmed. In addition, we may not achieve
anticipated synergies or other benefits from such
acquisitions;
●
Integration
of infrastructure, and acquisitions that increase our ability to
sell hemp-based consumer products, is unpredictable and requires
that our management oversee integration and acquisitions related to
marketing and sales. This will be a time consuming and expensive
process which is unpredictable and that may disrupt our operations.
If our integration efforts are not successful, our results of
operations could be harmed. In addition, we may not achieve
anticipated synergies or other benefits from such acquisitions;
and
●
Our
largest stockholder, C2M, also competes with us and will continue
to compete with us. C2M may require payments for business
opportunities provided to us in exchange for its lost
opportunities.
Therefore, there is
no assurance that the hemp-based business will be successful, will
occur timely or in a timeframe that is capable of prediction, or
will generate enough revenue to recoup our investment.
We may not be able to manage our manufacturing and supply chain
effectively, which may adversely affect our results of
operations.
We must
accurately forecast demand for all of our products in order to
ensure that we have enough products available to meet the needs of
our customers. Our forecasts are based on multiple assumptions that
may cause our estimates to be inaccurate and affect our ability to
obtain adequate third-party contract manufacturing capacity in
order to meet the demand for our products, which could prevent us
from meeting increased customer demand and harm our brand and our
business. If we do not accurately align our manufacturing
capabilities with demand, our business, financial condition and
results of operations may be materially adversely
affected.
During
2019, we relied upon a single supplier, which is our largest
stockholder, C2M, for all of our supply of CBD. During 2020, we
intend to manufacture some of our own products and to engage 2-3
additional suppliers. We will remain, however, dependent on a small
number of suppliers for our products. If any of our limited number
of suppliers were to go out of business, we might be unable to find
a replacement for such sources in a timely manner, if at all. If a
supplier were to be acquired by a competitor, the competitor may
elect not to sell to us at all. The loss of a supplier could cause
additional difficulties in finding a substitute supplier given the
strict licensing requirements in this industry and there are a
limited number of suppliers that currently hold such licenses and
comply with the 2014 Farm Bill (as defined below). If for any
reason we were to change any one of our third-party contract
manufacturers, we could face difficulties that might adversely
affect our ability to maintain an adequate supply of our products,
and we would incur costs and expend resources in the course of
making the change. Moreover, we might not be able to obtain terms
as favorable as those received from our current third-party
contract manufacturers, which in turn would increase our
costs.
As the
largest stockholder, C2M has the ability to exert significant
control in matters regarding stockholder approval. Any inability to
secure required supplies and services or to do so on appropriate
terms could have a materially adverse impact on our business,
financial condition, results of operations or
prospects.
In
addition, we must continuously monitor our inventory and product
mix against forecasted demand. If we underestimate demand, we risk
having inadequate supplies. We also face the risk of having too
much inventory on hand that may reach its expiration date and
become unsalable, and we may be forced to rely on markdowns or
promotional sales to dispose of excess or slow-moving inventory. If
we are unable to manage our supply chain effectively, our operating
costs could increase, and our profit margins could
decrease.
Reliance on other Manufacturers.
The
ability of the Company to compete and grow will be dependent on it
having access, at a reasonable cost and in a timely manner, to
skilled labor, equipment, facilities and CBD. No assurances can be
given that the Company will be successful in maintaining its
required supply of skilled labor, equipment,
facilities.
The
Company relies on third parties to supply the materials for and the
functions of extraction, processing and manufacturing, as well
research of the retail private label and customer product
candidates. The Company cannot provide assurance that access to
other manufacturers for supply, expertise, or materials will not be
limited, not be interrupted, not be restricted in certain
geographic regions, or be of satisfactory quality or be delivered
in a timely manner. In this regard, we will require continued
access to Current Good Manufacturing Practices (“cGMP”) manufacturer
facilities, testing laboratories, qualified extraction facilities,
processing, manufacturing and related services until we are
fully-funded and can acquire our own capabilities for each of these
functions. If the Company is unable to obtain access to a cGMP
manufacturer, for example, or any of the other supply chain
elements involved in our full-integration plans, the Company may be
restricted from operations which would have a materially adverse
effect on the business and operations of the Company.
We are heavily reliant on a small number of customers and
suppliers.
During
the year ended December 31, 2019, three customers represented 58%
of our total net sales of CBD products, and as of December 31,
2019, four customers represented approximately 82% of our total
accounts receivable. The loss of any of these customers or their
inability to make future payments could significantly impact our
business and results of operation. In addition, we purchased all of
our finished products from one supplier, C2M, during the year ended
December 31, 2019. Our heavy reliance on our major supplier for the
supply of our products could have significant impact on our
business and results of operation in the event of any shortage of,
or delay in, the supply. The loss of this supplier could
significantly impact our business and results of
operation.
If we fail to manage our existing assets and third party
relationships (such as farmers, extractors, producers,
distributors, shippers and retail distribution clients)
effectively, our revenue and profits could decline, and should we
fail to acquire additional revenues, our growth could be
impeded.
Our
success depends in part on our ability to manage our existing
assets and manage the third-party relationships necessary to
effectively manage our assets. Our vendors and providers
are not bound by long-term contracts that ensure us a consistent
access to necessary expertise, which is crucial to our ability to
generate revenues and earnings. The ability to utilize
third-parties and benefit from our assets will depend on various
factors, some of which are beyond our control.
We are reliant on key inputs and changes in their costs could
negatively impact our profitability.
Our
business is dependent on a number of key inputs and their related
costs including raw materials and supplies related to product
development and manufacturing operations. Any significant
interruption or negative change in the availability or economics of
the supply chain for key inputs could materially impact our
business, financial condition, results of operations or prospects.
Some of these inputs may only be available from a single supplier
or a limited group of suppliers. If a sole source supplier was to
go out of business, we might be unable to find a replacement for
such source in a timely manner or at all. If a sole source supplier
were to be acquired by a competitor, that competitor may elect not
to sell to us in the future. Any inability to secure required
supplies and services or to do so on appropriate terms could have a
materially adverse impact on our business, financial condition,
results of operations or prospects.
Increases in the cost of ingredients, labor and other costs could
adversely affect our operating results.
Our
principal products contain hemp-derived CBD oil. Increases in the
cost of ingredients in our products could have a material adverse
effect on our operating results. Significant price increases,
market conditions, weather, acts of God and other disasters could
materially affect our operating results. An increase in our
operating costs could adversely affect our profitability. Factors
such as inflation, increased labor and employee benefit costs and
increased energy costs may adversely affect our operating costs.
Many of the factors affecting costs are beyond our control and we
may not be able to pass along these increased costs to our
customers.
If the ingredients used in our products are contaminated, alleged
to be contaminated or are otherwise rumored to have adverse
effects, our results of operations could be adversely
affected.
We buy
ingredients from other manufacturers. If these materials are
alleged or prove to include contaminants that affect the safety or
quality of our products or are otherwise rumored to have adverse
effects, for any reason, we may sustain the costs of and possible
litigation resulting from a product recall and need to find
alternate ingredients, delay production, or discard or otherwise
dispose of products, which could adversely affect our business,
financial condition and results of operations. In addition, if any
of our competitors experience similar events, our reputation could
be damaged, including as a result of a loss of consumer confidence
in the types of products we sell.
Although we insure
on an economically reasonable basis against product recalls and
product contamination, and carry a cannabis regulatory and
enforcement endorsement under our Directors and Officers insurance
policy, our insurance may not be adequate to cover all liabilities
that we may incur in connection with product liability claims,
including among others, that the products we sell caused injury or
illness, include inadequate instructions for use or include
inadequate warnings concerning possible side effects or
interactions with other substances. For example, punitive damages
are generally not covered by insurance. If we are subject to
substantial product liability claims in the future, we may not be
able to continue to maintain our existing insurance, obtain
comparable insurance at a reasonable cost, if at all, or secure
additional coverage. This could result in future product liability
claims being uninsured. If there is a product liability judgment
against us or a settlement agreement related to a product liability
claim, our business, financial condition and results of operations
may be materially adversely affected. In addition, even if product
liability claims against us are not successful or are not fully
pursued, these claims could be costly and time-consuming and may
require management to spend time defending claims rather than
operating our business.
We may become the subject of litigation and, due to the nature of
our business, may be the target of future legal proceedings that
could have an adverse effect on our business.
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
February 26, 2020 a complaint was filed in the Circuit Court, Palm
Beach County, Florida on behalf of five former employees of the
Company. The case is entitled Ryan Borcherds and Miriam
Martinez vs. Exactus, Inc.. 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. The complaint seeks approximately
$82,000 in unpaid wages as well as special damages, liquidated
damages, interest and attorney’s fees.
The
Company may become subject to similar actions in the future which
will be costly and time consuming to defend, and the outcomes of
which are uncertain.
We may seek to internally develop additional hemp-based products,
which would take time and be costly. Moreover, the failure to
successfully develop, or obtain or maintain intellectual property
rights for, such products would lead to the loss of our investments
in such activities.
Part of
our business may include the internal development of products that
we will seek to offer and sell. However, this aspect of our
business would likely require significant capital and would take
time to achieve. Such activities could also distract our management
team from its present business initiatives, which could have a
material and adverse effect on our business. There is also the risk
that our initiatives in this regard would not yield any viable new
products or developments, which would lead to a loss of our
investments in time and resources in such activities.
In
addition, even if we are able to internally develop new products,
in order for those products to be viable and to compete
effectively, we would need to develop and maintain, and we would
heavily rely upon, a proprietary position with respect to such
products. However, there are significant risks associated with any
such efforts and products we may develop principally including the
following:
●
efforts may not
result in success, or may take longer than we expect;
●
we may be subject
to litigation or other proceedings;
●
any patents or
trademarks that are issued to us may not provide meaningful
protection;
●
we may not be able
to develop additional proprietary technologies;
●
other companies may
challenge our efforts or intellectual property rights that are
issued to us;
●
other companies may
have independently developed and/or patented (or may in the future
independently develop and patent) similar or alternative
technologies, or duplicate our technologies; and
●
other companies may
design around technologies we have developed.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
processes of identifying and commercializing new products is
complex and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging trends, our business
could be harmed. We have already and may have to continue to commit
significant resources to commercializing new products before
knowing whether our investments will result in products the market
will accept. Furthermore, we may not execute successfully on
commercializing those products because of errors in product
planning or timing, technical hurdles that we fail to overcome in a
timely fashion, or a lack of appropriate resources. This could
result in competitors providing those solutions before we do and a
reduction in net sales and earnings.
The
success of new products depends on several factors, including
proper new product definition, timely completion, and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify additional new
product opportunities, develop and bring new products to market in
a timely manner, or achieve market acceptance of our products, or
that products and technologies developed by others will not render
our products or technologies obsolete or
noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or expansion
could materially harm our business.
To
date, our revenue growth plans have been derived from projected
sales of our products, not actual sales or historical experience.
Our success and the planned growth and expansion of our business
depends on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
Our
suppliers could fail to fulfill our orders or provide raw materials
to assemble our products, which would disrupt our business,
increase our costs, harm our reputation, and potentially cause us
to lose our market.
We
depend on third party suppliers for materials used for our
products, such as bottles, caps, vapes, batteries and labels. These
suppliers could fail to produce products to our specifications or
in a workmanlike manner and may not deliver the material or
products on a timely basis. Our suppliers may also have to obtain
inventories of the necessary materials and tools for production.
Any change in our suppliers’ approach to resolving production
issues could disrupt our ability to fulfill orders and could also
disrupt our business due to delays in finding new suppliers,
providing specifications and testing initial production. Such
disruptions in our business and/or delays in fulfilling orders
could harm our reputation and could potentially cause us to lose
our market.
The Company’s ultimate success will be dependent in part on
our ability to successfully grow, develop, produce and market a
portfolio of hemp products and market acceptance of our planned
products.
We are
an agribusiness and grow our product outdoors, and there are risks
associated with the production of our product relating to such
things as weather, soil deterioration, and infestation that could
affect our supplies and inventory. In addition, market acceptance
by and demand for our planned products from consumers will also be
key factors in our ability to succeed. If we are unable to develop
and market our portfolio of existing and planned products or if
they are not accepted by consumers, our business, results of
operations and financial condition could be seriously harmed. We do
not currently carry products liability insurance. As a result, a
successful product liability claim brought against us would have a
material adverse effect on our business and results of
operations.
Any damage to our reputation or our brands may materially adversely
affect our business, financial condition and results of
operations.
Maintaining,
developing and expanding our reputation with our customers and our
suppliers is critical to our success. Our brand may suffer if our
marketing plans or product initiatives are not successful. The
importance of our brand may decrease if competitors offer more
products similar to the products that we manufacture. Further, our
brands may be negatively impacted due to real or perceived quality
issues or if consumers perceive us as being untruthful in our
marketing and advertising, even if such perceptions are not
accurate. Product contamination, the failure to maintain high
standards for product quality, safety and integrity, including raw
materials and ingredients obtained from suppliers, or allegations
of product quality issues, mislabeling or contamination, even if
untrue or caused by our third-party contract manufacturing partners
or raw material suppliers, may reduce demand for our products or
cause production and delivery disruptions. However, we may be
unable to detect or prevent product and/or ingredient quality
issues, mislabeling or contamination, particularly in instances of
fraud or attempts to cover up or obscure deviations from our
guidelines and procedures. If any of our products become unfit for
consumption, cause injury or are mislabeled, we may have to engage
in a product recall and/or be subject to liability. Damage to our
reputation or our brands or loss of consumer confidence in our
products for any of these or other reasons could result in
decreased demand for our products and our business, financial
condition and results of operations may be materially adversely
affected. In addition, if any of our competitors experience similar
events, our reputation could be damaged, including as a result of a
loss of consumer confidence in the types of products we
sell.
Further, our
corporate reputation is susceptible to damage by actions or
statements made by current or former employees, competitors,
vendors, adversaries in legal proceedings and government
regulators, as well as members of the investment community and the
media. There is a risk that negative information about our company,
even if based on false rumor or misunderstanding, could adversely
affect our business, results of operations, and financial
condition. In particular, damage to our reputation could be
difficult and time-consuming to repair, could make potential or
existing retail customers reluctant to select us for new
engagements, resulting in a loss of business, and could adversely
affect our recruitment and retention efforts.
Our business depends, in part, on the sufficiency and effectiveness
of our marketing and trade promotion programs and
incentives.
Due to
the competitive nature of our industry, we must effectively and
efficiently promote and market our products through advertisements
as well as through trade promotions and incentives to sustain and
improve our competitive position in our market. Marketing
investments may be costly. In addition, we may, from time to time,
change our marketing strategies and spending, including the timing
or nature of our trade promotions and incentives. We may also
change our marketing strategies and spending in response to actions
by our customers, competitors and other companies that manufacture
and/or distribute pet health and wellness products. The sufficiency
and effectiveness of our marketing and trade promotions and
incentives are important to our ability to retain and improve our
market share and margins. If our marketing and trade promotions and
incentives are not successful or if we fail to implement sufficient
and effective marketing and trade promotions and incentives or
adequately respond to changes in industry marketing strategies, our
business, financial condition and results of operations may be
adversely affected.
If we
are unable to enter into such arrangements on favorable terms, are
unable to achieve the desired results under these arrangements and
programs, are unable to maintain these relationships, fail to
generate sufficient traffic or generate sufficient revenue from
purchases pursuant to these arrangements and programs, or properly
manage the actions of these providers, our ability to generate
revenue and our ability to attract and retain our customers may be
impacted, negatively affecting our business and results of
operations. In addition, if Facebook restricts our ability to use
such arrangements and programs or takes limits or restricts access
to its platform by us or our applications as a result of
advertisements or actions taken by third-party advertising or
marketing providers, it could have a material adverse effect on our
business or results of operations.
A significant product defect or product recall could materially and
adversely affect our brand image, causing a decline in our sales
and profitability, and could reduce or deplete our financial
resources.
A
significant product defect could materially harm our brand image
and could force us to conduct a product recall. This could damage
our relationships with our customers and reduce end-user
loyalty. A product recall
would be particularly harmful to us because we have limited
financial and administrative resources to effectively manage a
product recall and it would detract management’s attention
from implementing our core business strategies. As a result, a
significant product defect or product recall could cause a decline
in our sales and profitability and could reduce or deplete our
financial resources.
We may be subject to product liability claims or regulatory action
if our products are alleged to have caused significant loss or
injury.
We may
be subject to product liability claims, regulatory action and
litigation if our products are alleged to have caused loss or
injury or failed to include adequate instructions for use or failed
to include adequate warnings concerning possible side effects or
interactions with other substances. Previously unknown adverse
reactions resulting from use and consumption of CBD products alone
or in combination with other medications or substances could also
occur. In addition, the sale of any ingested product involves a
risk of injury due to tampering by unauthorized third parties or
product contamination. Our products may also be subject to product
recalls, including voluntary recalls or withdrawals, if they are
alleged to pose a risk of injury or illness, or if they are alleged
to have been mislabeled, misbranded or adulterated or to otherwise
be in violation of governmental regulations. We may in the future
have to recall, certain of our products as a result of potential
contamination and quality assurance concerns. A product liability
claim or regulatory action against us could result in increased
costs and could adversely affect our reputation and goodwill with
our patients and consumers generally. We do not currently carry
products liability insurance. As a result, a successful product
liability claim brought against us would have a material adverse
effect on our business and results of operations. Although we are
seeking to acquire product liability insurance, there can be no
assurance that we will be able to obtain product liability
insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive and may not be
available on acceptable terms, or at all. The inability to obtain
sufficient insurance coverage on reasonable terms or to otherwise
protect against potential product liability claims could result in
us becoming subject to significant liabilities that are uninsured
and also could adversely affect our commercial arrangements with
third parties.
If product liability lawsuits are successfully brought against us,
we will incur substantial liabilities.
We face
an inherent risk of product liability. For example, we may be sued
if any product we sell allegedly causes injury or is found to be
otherwise unsuitable during product testing, manufacturing,
marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing, defects in design, a
failure to warn of dangers inherent in the product, negligence,
strict liability and a breach of warranties. Claims could also be
asserted under state consumer protection acts. If we cannot
successfully defend ourselves against product liability claims, we
may incur substantial liabilities or be required to limit sales of
our products. Even successful defense would require significant
financial and management resources. Regardless of the merits or
eventual outcome, liability claims may result in:
●
decreased demand
for our products;
●
injury to our
reputation;
●
costs to defend the
related litigation;
●
a diversion of
management's time and our resources;
●
substantial
monetary awards to users of our products;
●
product recalls or
withdrawals;
●
loss of revenue;
and or a decline in our stock price.
In
addition, while we continue to take what we believe are appropriate
precautions, we may be unable to avoid significant liability if any
product liability lawsuit is brought against us.
Our acquisitions may be time consuming, complex and costly, which
could adversely affect our operating results.
Acquisitions are
critical to our business plan, and are often time consuming,
complex and costly to consummate. We may elect to not pursue any
additional acquisitions while we focus our efforts on our existing
assets. We may utilize many different transaction structures in our
acquisitions and the terms of such acquisition agreements tend to
be heavily negotiated. As a result, we expect to incur significant
operating expenses and will likely be required to raise capital
during the negotiations even if the acquisition is ultimately not
consummated, if we determine to acquire additional patents or other
assets. Even if we are able to acquire particular assets, there is
no guarantee that we will generate sufficient revenue related to
those assets to offset the acquisition costs. While we will seek to
conduct confirmatory due diligence on the assets we are considering
for acquisition, because we are operating in a new and uncertain
industry we place less emphasis on due diligence and we may acquire
assets from a seller for whom we do not have complete analysis of
their history or business operations, for example, if we view the
acquisition to be important strategically, the seller may not have
proper title or ownership to those assets, or otherwise provides us
with flawed ownership rights, including invalid or unenforceable
assets. In those cases, we may be required to spend significant
resources to defend our interest in the assets and, if we are not
successful, our acquisition may be worthless, in which case we
could lose part or all of our investment in the
assets.
We may
also identify assets that cost more than we are prepared to spend
with our own capital resources. We may incur significant costs to
organize and negotiate a structured acquisition that does not
ultimately result in an acquisition of any assets or, if
consummated, proves to be unprofitable for us. Acquisitions
involving issuance of our securities could be dilutive to existing
stockholders and could be at prices lower than those prices
reflected in the trading markets. These higher costs could
adversely affect our operating results and, if we incur losses, the
value of our securities will decline.
In
addition, we may acquire assets that are in the early stages of
adoption. Demand for some of these assets will likely be untested
and may be subject to fluctuation based upon the rate at which our
customers or associates adopt our products or utilize our materials
in their products and services. As a result, there can be no
assurance as to whether assets we acquire or develop will have
value that can be realized through sales or other
activities.
If we make acquisitions, it could divert management’s
attention, cause ownership dilution to our stockholders and be
difficult to integrate.
Following our
acquisition of Exactus One World in March 2019, we have
grown rapidly and we expect to continue to evaluate and consider
future acquisitions. Acquisitions generally involve significant
risks, including difficulties in the assimilation of the assets,
services and technologies we acquire or industry overlay on which
the assets are applicable, diversion of management's attention from
other business concerns, overvaluation of the acquired assets, and
the acceptance of the acquired assets and/or
businesses. Acquisitions may not be successful, which
can have a number of adverse effects upon us including adverse
financial effects and may seriously disrupt our management’s
time. The integration of acquired assets may place a significant
burden on management and our internal resources. The diversion of
management attention and any difficulties encountered in the
integration process could harm our business.
We face risks associated with strategic acquisitions.
As an
important part of our business strategy, we have strategically
acquired several businesses, and plan to continue strategic
acquisitions, some of which may be material. These acquisitions may
involve a number of financial, accounting, managerial, operational,
legal, compliance and other risks and challenges, including the
following, any of which could adversely affect our results of
operations:
●
Any acquired
business could under-perform relative to our expectations and the
price that we paid for it, or not perform in accordance with our
anticipated timetable;
●
We may incur or
assume significant debt in connection with our
acquisitions;
●
Acquisitions could
cause our results of operations to differ from our own or the
investment community’s expectations in any given period, or
over the long term; and
●
Acquisitions could
create demands on our management that we may be unable to
effectively address, or for which we may incur additional
costs.
●
Additionally,
following any business acquisition, we could experience difficulty
in integrating personnel, operations, financial and other systems,
and in retaining key employees and customers.
We may
record goodwill and other intangible assets on our consolidated
balance sheet in connection with our acquisitions. If we are not
able to realize the value of these assets, we may be required to
incur charges relating to the impairment of these assets, which
could materially impact our results of operations.
If we fail to retain our key personnel, we may not be able to
achieve our anticipated level of growth and our business could
suffer.
Our
future depends, in part, on our ability to attract and retain key
personnel and the continued contributions of our executive
officers, each of whom may be difficult to replace. In particular,
Emiliano Aloi, our interim CEO, is important to the management of
our business and operations and the development of our strategic
direction. The loss of the services of any such individual and the
process to replace any key personnel would involve significant time
and expense and may significantly delay or prevent the achievement
of our business objectives.
We depend on the knowledge and skills of our senior management and
other key employees, and if we are unable to retain and motivate
them or recruit additional qualified personnel, our business may
suffer.
We have
benefited substantially from the leadership and performance of our
senior management, as well as other key employees. Our success will
depend on our ability to retain our current management and key
employees, and to attract and retain qualified personnel in the
future, and we cannot guarantee that we will be able to retain our
personnel or attract new, qualified personnel. In addition, we do
not maintain any “key person” life insurance policies.
The loss of the services of members of our senior management or key
employees could prevent or delay the implementation and completion
of our strategic objectives, or divert management’s attention
to seeking qualified replacements.
We will be required to attract and retain top quality talent to
compete in the marketplace.
We
believe our future growth and success will depend in part on our
ability to attract and retain highly skilled managerial, product
development, sales and marketing, and finance personnel. There can
be no assurance of success in attracting and retaining such
personnel. Shortages in qualified personnel could limit our ability
to increase sales of existing products and services and launch new
product and service offerings.
If we fail to retain key personnel and hire, train and retain
qualified employees, we may not be able to compete effectively,
which could result in reduced revenue or increased
costs.
Our
success is highly dependent on the continued services of key
management and technical personnel. Our management and other
employees may voluntarily terminate their employment at any time
upon short notice. The loss of the services of any member of the
senior management team or any of the managerial or technical staff
or members of our Advisory Board on which we principally rely for
expertise on our CBD segment may significantly delay or prevent the
achievement of product development, our growth strategies and other
business objectives. Our future success will also depend on our
ability to identify, recruit and retain additional qualified
technical and managerial personnel. We operate in several
geographic locations where labor markets are particularly
competitive, and where demand for personnel with these skills is
extremely high and is likely to remain high. As a result,
competition for qualified personnel is intense, particularly in the
areas of general management, finance, engineering and science. The
process of hiring suitably qualified personnel is often lengthy and
expensive, and may become more expensive in the future. If we are
unable to hire and retain a sufficient number of qualified
employees, our ability to conduct and expand our business could be
seriously reduced.
War, terrorism, other acts of violence or natural or manmade
disasters such as a global pandemic may affect the markets in which
the Company operates, the Company's customers, the Company's
delivery of products and customer service, and could have a
material adverse impact on our business, results of operations, or
financial condition.
The
Company's business may be adversely affected by instability,
disruption or destruction in a geographic region in which it
operates, regardless of cause, including war, terrorism, riot,
civil insurrection or social unrest, and natural or manmade
disasters, including famine, food, fire, earthquake, storm or
pandemic events and spread of disease (including the recent
outbreak of the coronavirus commonly referred to as "COVID- 19").
Such events may cause customers to suspend their decisions on using
the Company's products and services, make it impossible to attend
or sponsor trade shows or other conferences in which our products
and services are presented to distributors, customers and potential
customers, for our customers to visit our farms, extraction
facilities, manufacturing locations or other physical locations,
cause restrictions, postponements and cancellations of events that
attract large crowds and public gatherings such as trade shows at
which we have historically presented our products, and give rise to
sudden significant changes in regional and global economic
conditions and cycles that could interfere with purchases of goods
or services, commitments to develop new brands and white label
products, or agriculture and farming. Furthermore, our agriculture
and farming depends on the availability of labor which in turn is
dependent upon the ability of agricultural/farm workers to travel,
sometimes from foreign countries, and the ability of third parties
to contract with us for services on which we depend. The inability
or delays in preparing farms for future crops starting in 2020, and
planting, harvesting, drying, trimming, warehousing and
transportation disruptions in 2020 and later could result from
events such as COVID-19. These events also pose significant risks
to the Company's personnel and to physical facilities,
transportation and operations, which could materially adversely
affect the Company's financial results.
Any
significant disruption to communications and travel, including
travel restrictions and other potential protective quarantine
measures against COVID-19 by governmental agencies, may increase
the difficulty and could make it impossible for the Company to
deliver goods services to its customers. Travel restrictions and
protective measures against COVID-19 could cause the Company to
incur additional unexpected labor costs and expenses or could
restrain the Company's ability to retain the highly skilled
personnel the Company needs for its operations. The extent to which
COVID-19 impacts the Company's business, sales and results of
operations will depend on future developments, which are highly
uncertain and cannot be predicted.
We
believe the novel coronavirus (COVID-19) has negatively affected
our corporate operations necessary to prepare and maintain accurate
accounting and reporting, and could continue to do so in the
foreseeable future. The coronavirus has resulted in restrictions,
postponements and cancelations and the impact, extent and duration
of the government imposed restrictions on travel and public
gatherings as well as the overall effect of the COVID-19 virus is
currently unknown.
The
ongoing circumstances resulting from the COVID-19 virus outbreak
magnify the challenges faced from our continuing efforts to
introduce and sell our products in a challenging environment and
could have an impact on our business and financial
results.
Risks Related to Ownership of Our Common Stock.
The price of our common stock has been highly volatile due to
several factors that will continue to affect the price of our
stock.
Our
common stock has traded as low as $0.08 and as high as $4.00
between January 1, 2019 and December 31, 2019. The reason for the
volatility in our stock is not well understood and the volatility
may continue. Some of the factors we believe that have contributed
to our common stock volatility and which may be applicable in
future periods, include:
●
uncertainty
surrounding our rights to development since notice of termination
was received from Digital Diagnostics, Inc.
●
inability to secure
funding or partners for our development of the FibriLyzer and
MatriLyzer;
●
entry into new
business ventures;
●
asset acquisitions
or dispositions;
●
commencement of
litigation;
●
small amounts of
our stock available for trading, expiration of any lockup
agreements and terms of any leak-out rights with respect
thereto;
●
obligations to and
filing of registration statements registering the sale of new or
outstanding shares of our common stock;
●
options and
derivatives availability or unavailability;
●
short selling and
potential “short and distort” campaigns and other short
attacks involving our stock;
●
small public float
of our outstanding common stock;
●
expiration of Rule
144 holding periods with respect to our outstanding common
stock;
●
fluctuations in our
operating results;
●
changes in the
capital markets and ability for the Company to raise
capital;
●
legal developments
and public awareness with respect to hemp-based and/or CBD business
plans, generally, and involving the Company;
●
confusion with
Companies engaged in the business of marijuana, and the legal and
regulatory concerns that our business is related to the marijuana
business;
●
general economic
conditions;
●
and legal and
regulatory environment.
We cannot guarantee the continued existence of an active
established public trading market for our shares.
Our
shares are currently quoted on the OTCQB tier of the
over-the-counter market operated by OTC Markets Group, Inc. Trading
in stock quoted on the OTCQB is often thin and characterized by
wide fluctuations in trading prices, due to many factors that may
have little to do with our operations or business prospects. This
volatility could depress the market price of our shares for reasons
unrelated to operating performance. Accordingly, OTCQB may provide
less liquidity for holders of our shares than a national securities
exchange such as the Nasdaq Stock Market. There is no assurance
that we can successfully maintain an active established trading
market for our shares.
Market
prices for our shares may also be influenced by a number of other
factors, including:
●
the issuance of new
equity securities pursuant to a public or private
offering;
●
changes in interest
rates;
●
competitive
developments, including announcements by competitors of new
products or services or significant contracts, acquisitions,
strategic partnerships, joint ventures or capital
commitments;
●
variations in
quarterly operating results;
●
change in financial
estimates by securities analysts;
●
the depth and
liquidity of the market for our shares;
●
investor
perceptions of Exactus and its industry generally; and
●
general economic
and other national conditions.
Our shares of common stock are thinly traded and, as a result,
stockholders may be unable to sell at or near ask prices, or at
all, if they need to sell shares to raise money or otherwise desire
to liquidate their shares.
Our
common stock has been “thinly-traded,” meaning that the
number of persons interested in purchasing our common stock at or
near ask prices at any given time may be relatively small or
non-existent. We believe this situation is attributable
to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company
such as ours or purchase or recommend the purchase of our shares
until such time as we become more seasoned and
viable. In addition, we believe that due to the limited
number of shares of our common stock outstanding, an options market
has not been established for our common stock, limiting the ability
of market participants to hedge or otherwise undertake trading
strategies available for larger companies with broader stockholder
bases which prevents institutions and others from acquiring or
trading in our securities. Consequently, there may be periods of
several days or more when trading activity in our shares is minimal
or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share
price. We cannot give stockholders any assurance that a
broader or more active public trading market for our common shares
will develop or be sustained, or that current trading levels will
be sustained.
There may not be sufficient liquidity in the market for our
securities in order for investors to sell their shares. The market
price of our common stock may be volatile.
The
market price of our common stock will likely be highly volatile, as
is the stock market in general. Some of the factors that may
materially affect the market price of our common stock are beyond
our control, such as conditions or trends in the industry in which
we operate or sales of our common stock. This situation is
attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts,
stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company
such as ours or purchase or recommend the purchase of our shares
until such time as we became more seasoned and viable.
As a
consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as
compared to a mature issuer which has a large and steady volume of
trading activity that will generally support continuous sales
without an adverse effect on share price. It is possible that a
broader or more active public trading market for our common stock
will not develop or be sustained, or that trading levels will not
continue. These factors may materially adversely affect the market
price of our common stock, regardless of our performance. In
addition, the public stock markets have experienced extreme price
and trading volume volatility. This volatility has significantly
affected the market prices of securities of many companies for
reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely
affect the market price of our common stock.
We can sell additional shares of common stock without consulting
stockholders and without offering shares to existing stockholders,
which would result in dilution of existing stockholders’
interests in the Company and could depress our stock
price.
Our
Articles of Incorporation authorize 650,000,000 shares of common
stock, of which 6,233,524 were issued and outstanding as of
December 31, 2018 and a total of 44,483,905 were issued and
outstanding and to be issued on December 31, 2019. Moreover, our
Board of Directors is authorized to issue additional shares of our
common stock and preferred stock. Although our Board of Directors
intends to utilize its reasonable business judgment to fulfill its
fiduciary obligations to our then existing stockholders in
connection with any future issuance of our capital stock, the
future issuance of additional shares of our common stock or
preferred stock convertible into common stock would cause
immediate, and potentially substantial, dilution to our existing
stockholders, which could also have a material effect on the market
value of the shares.
We do not intend to pay any cash dividends in the foreseeable
future and, therefore, any return on your investment in our capital
stock must come from increases in the fair market value and trading
price of the capital stock.
We have
not paid any cash dividends on our common stock and do not intend
to pay cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, for
reinvestment in the development and expansion of our business. Any
credit agreements, which we may enter into with institutional
lenders, may restrict our ability to pay dividends. Whether we pay
cash dividends in the future will be at the discretion of our board
of directors and will be dependent upon our financial condition,
results of operations, capital requirements and any other factors
that the board of directors decides is relevant. Therefore, any
return on your investment in our capital stock must come from
increases in the fair market value and trading price of the capital
stock.
We may issue additional equity shares to fund our operational
requirements, which would dilute share ownership. Such sales of
additional equity securities may adversely affect the market price
of our common stock and your rights in the company may be
reduced.
The
company’s continued viability depends on its ability to raise
capital. We expect to continue to incur product development and
selling, general and administrative costs. Changes in economic,
regulatory or competitive conditions may lead to cost increases.
Management may determine that it is in the best interest of the
company to develop new services or products. In any such case
additional financing is required for the company to meet its
operational requirements. We may choose to raise additional capital
due to market conditions or strategic considerations even if we
believe we have sufficient funds for our current or future
operating plans. The sale or the proposed sale of substantial
amounts of our common stock in the public markets may adversely
affect the market price of our common stock. Also, any new
securities issued may have greater rights, preferences or
privileges than our existing common stock. Our stockholders may
experience substantial dilution upon such issuances and a reduction
in the price that they are able to obtain upon sale of their
shares. There can be no assurances that the company will be able to
obtain such financing on terms acceptable to the company and at
times required by the company, if at all. In such event, the
company may be required to materially alter its business plan or
curtail all or a part of its operational plans.
We may issue preferred stock whose terms could adversely affect the
voting power or value of our common stock.
Our
certificate of incorporation authorizes us to issue, without the
approval of our stockholders, one or more classes or series of
preferred stock having such designations, preferences, limitations
and relative rights, including preferences over our common stock
with respect to dividends and distributions, as our board of
directors may determine. The terms of one or more classes or series
of preferred stock could adversely impact the voting power or value
of our common stock. For example, we might grant holders of
preferred stock the right to elect some number of our directors in
all events or on the happening of specified events, or the right to
veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences we might grant to
holders of preferred stock could affect the value of the common
stock.
Our common stock may be considered a “penny stock” and
may be difficult to sell.
The
Commission has adopted regulations which generally define
“penny stock” to be an equity security that has a
market price of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to specific exemptions.
Historically, the price of our common stock has fluctuated greatly.
If, the market price of the common stock is less than $5.00 per
share and the common stock does not fall within any exemption, it
therefore may be designated as a “penny stock”
according to SEC rules. The “penny stock” rules impose
additional sales practice requirements on broker-dealers who sell
securities to persons other than established customers and
accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the
purchase of securities and have received the purchaser’s
written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a
disclosure schedule prescribed by the SEC relating to the penny
stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in
decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to
other securities.
Because we will be subject to “penny stock” rules, the
level of trading activity in our stock may be reduced.
Broker-dealer
practices in connection with transactions in “penny
stocks” are regulated by penny stock rules adopted by the
Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than
securities registered on some national securities exchanges). The
penny stock rules require a broker-dealer to deliver to its
customers a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in
the penny stock market prior to carrying out a transaction in a
penny stock not otherwise exempt from the rules. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and, if the
broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer’s presumed control
over the market, and monthly account statements showing the market
value of each penny stock held in the customer’s account. In
addition, broker-dealers who sell these securities to persons other
than established customers and “accredited investors”
must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the
purchaser’s written agreement to the
transaction.
It may be difficult to predict our financial performance because
our quarterly operating results may fluctuate.
Our
revenues, operating results and valuations of certain assets and
liabilities may vary significantly from quarter to quarter due to a
variety of factors, many of which are beyond our control. You
should not rely on period-to-period comparisons of our results of
operations as an indication of our future performance. Our results
of operations may fall below the expectations of market analysts
and our own forecasts. If this happens, the market price
of our common stock may fall significantly. The factors that may
affect our quarterly operating results include the
following:
●
fluctuations in
results of our operations and capital raising efforts;
●
the timing and
amount of expenses incurred to establish a hemp-based
operation;
●
the impact of our
anticipated need for personnel and expected substantial increase in
headcount;
●
worsening economic
conditions which cause revenues or profits attributable to sales of
products or services to decline;
●
changes in the
regulatory environment, including regulation of hemp-based products
or CBD by the FDA or comparable state regulatory agencies or
agricultural authorities
●
the timing and
amount of expenses associated with farming, extraction, production,
manufacturing and selling;
●
Any changes we make
in our Critical Accounting Estimates described in the
Management’s Discussion and Analysis of Financial Condition
and Results of Operations sections of our periodic
reports;
●
the adoption of new
accounting pronouncements, or new interpretations of existing
accounting pronouncements, that impact the manner in which we
account for, measure or disclose our results of operations,
financial position or other financial measures; and
●
costs related to
acquisitions of technologies or businesses.
Our operating results, including net sales, gross margin and net
income (loss), as well as our stock price have varied in the past,
and our future operating results will continue to be subject to
quarterly and annual fluctuations based upon numerous factors. Our
stock price will continue to be subject to daily variations as
well. Our future operating results and stock price may not follow
any past trends or meet our guidance and expectations.
Our net
sales and operating results, net income (loss) and operating
expenses, and our stock price have varied in the past and may vary
significantly from quarter to quarter and from year to year in the
future. We believe a number of factors, many of which are outside
of our control, could cause these variations and make them
difficult to predict, including:
●
fluctuations in
demand for our products or downturns in the industries that we
serve;
●
the ability of our
suppliers, both internal and external, to produce and deliver
products including sole or limited source components, in a timely
manner, in the quantity, quality and prices desired;
●
the timing of
receipt of bookings and the timing of and our ability to ultimately
convert bookings to net sales;
●
rescheduling of
shipments or cancellation of orders by our customers;
●
fluctuations in our
product mix;
●
the ability of our
customers' other suppliers to provide sufficient material to
support our customers' products;
●
currency
fluctuations and stability, in particular the U.S. dollar as
compared to, other currencies;
●
introductions of
new products and product enhancements by our competitors, entry of
new competitors into our markets, pricing pressures and other
competitive factors;
●
our ability to
develop, introduce, manufacture and ship new and enhanced products
in a timely manner without defects;
●
our ability to
manage our manufacturing capacity across our diverse product lines
and that of our suppliers, including our ability to successfully
expand our manufacturing capacity in various locations around the
world;
●
our ability to
successfully and fully integrate acquisitions, into our operations
and management;
●
our ability to
successfully internally transfer products as part of our
integration efforts;
●
our reliance on
contract manufacturing;
●
our customers'
ability to manage their susceptibility to adverse economic
conditions;
●
the rate of market
acceptance of our new products;
●
the ability of our
customers to pay for our products;
●
expenses associated
with acquisition-related activities;
●
access to
applicable credit markets by us and our customers;
●
our ability to
control expenses;
●
potential excess
and/or obsolescence of our inventory;
●
impairment of
goodwill, intangible assets and other long-lived
assets;
●
our ability to meet
our expectations and forecasts and those of public market analysts
and investors;’
●
our ability and the
ability of our contractual counterparts to comply with the terms of
our contracts;
●
damage to our
reputation as a result of coverage in social media, Internet blogs
or other media outlets;
●
managing our
internal and third-party sales representatives and distributors,
including compliance with all applicable laws;
●
costs, expenses and
damages arising from litigation;
●
individual
employees intentionally or negligently failing to comply with our
internal controls; and
●
distraction of
management related to acquisition, integration or divestment
activities.
Our
expenses for any given quarter are typically based on expected
sales and if sales are below expectations in any given quarter, the
adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust spending quickly enough to
compensate for the shortfall. We also base our inventory levels on
our forecasted product mix for the quarter. If the actual product
mix varies significantly from our forecast, we may not be able to
fill some orders during that quarter, which would result in delays
in the shipment of our products. Accordingly, variations in timing
of sales, particularly for our higher priced, higher margin
products, can cause significant fluctuations in quarterly operating
results. The foregoing description is not reflective of periods
prior to December 31, 2018 before our entry into our current
business segment and will be of minimal importance for our ramp up
phase commencing in the first quarter of 2019, but will be of
increasing significance as we book new sales orders for hemp-based
products.
Due to
these and other factors, such as varying product mix,
quarter-to-quarter and year-to-year comparisons of our historical
operating results may not be meaningful. You should not rely on our
results for any quarter or year as an indication of our future
performance. Our operating results in future quarters and years may
be below public market analysts' or investors' expectations, which
would likely cause the price of our stock to fall. In addition,
over the past several years, U.S. and global equity markets have
experienced significant price and volume fluctuations that have
affected the stock prices of many companies involved in the
cannabis industry and are expected to affect the hemp-based
industry as well, both within and outside our industry. There has
not always been a direct correlation between this volatility and
the performance of particular companies subject to these stock
price fluctuations. These factors, as well as general economic and
political conditions, may have a material adverse effect on the
market price of our stock in the future.
Our largest outside stockholder can exert significant control over
our business and affairs and may have actual or potential interests
that may depart from those of our other stockholders.
Our
largest outside stockholder, C2M, owns a substantial percentage of
our outstanding voting capital. The interests of such
persons may differ from the interests of other stockholders. There
can be no assurance C2M or other significant stockholders will, in
future matters submitted for stockholder approval, vote in favor of
such matters, even if such matters are recommended for approval by
management or are in the best interests of stockholders generally.
As a result, such persons will have the ability to vote their
significant holdings in favor (or not in favor) of proposals
presented to our stockholders for approval, including proposals
to:
●
elect or defeat the
election of our directors;
●
amend or prevent
amendment of our articles of incorporation or bylaws;
●
effect or prevent a
merger, sale of assets or other corporate transaction;
and
●
control the outcome
of any other matter submitted to the stockholders for
vote.
In
addition, such persons’ stock ownership may discourage a
potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium
over our stock price. C2M could also utilize their significant
ownership interest to seek to influence management and decisions of
the Company.
We are subject to the periodic reporting requirements of the
Exchange Act, which will require us to incur audit fees and legal
fees in connection with the preparation of such reports. These
additional costs will reduce or might eliminate our
profitability.
We are
required to file periodic reports with the SEC pursuant to the
Exchange Act and the rules and regulations promulgated thereunder.
To comply with these requirements, our independent registered
auditors will have to review our quarterly financial statements and
audit our annual financial statements. Moreover, our legal counsel
will have to review and assist in the preparation of such reports.
The costs charged by these professionals for such services cannot
be accurately predicted at this time, because factors such as the
number and type of transactions that we engage in and the
complexity of our reports cannot be determined at this time and
will have a major effect on the amount of time to be spent by our
auditors and attorneys. However, the incurrence of such costs will
obviously be an expense to our operations and thus have a negative
effect on our ability to meet our overhead requirements and earn a
profit. We may be exposed to potential risks resulting from new
requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
If we cannot provide reliable financial reports or prevent fraud,
our business and operating results could be harmed, investors could
lose confidence in our reported financial information, the trading
price of our Common Stock, if a market ever develops, could drop
significantly, or we could become subject to Commission enforcement
proceedings.
If we fail to maintain an effective system of internal controls
over financial reporting, we may not be able to accurately report
our financial results or prevent fraud and our business may be
harmed and our stock price may be adversely impacted.
Effective internal
controls over financial reporting are necessary for us to provide
reliable financial reports and to effectively prevent fraud. Any
inability to provide reliable financial reports or to prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires
management to evaluate and assess the effectiveness of our internal
control over financial reporting. In order to continue to comply
with the requirements of the Sarbanes-Oxley Act, we are required to
continuously evaluate and, where appropriate, enhance our policies,
procedures and internal controls. If we fail to maintain
the adequacy of our internal controls over financial reporting, we
could be subject to litigation or regulatory scrutiny and investors
could lose confidence in the accuracy and completeness of our
financial reports. We cannot assure you that in the
future we will be able to fully comply with the requirements of the
Sarbanes-Oxley Act or that management will conclude that our
internal control over financial reporting is
effective. If we fail to fully comply with the
requirements of the Sarbanes-Oxley Act, our business may be harmed
and our stock price may decline.
Our
assessment, testing and evaluation of the design and operating
effectiveness of our internal control over financial reporting
resulted in our conclusion that, as of December 31, 2019 and
December 31, 2018, our internal control over financial reporting
was not effective, as a result of: (1) we lacked a sufficient
number of employees to properly segregate duties and provide
adequate review of the preparation of the financial statements and
(2) we lacked sufficient independent directors on our Board of
Directors to maintain Audit and other committees consistent with
proper corporate governance standards. In the first quarter of
2019, we expanded our Board to include three independent directors.
We can provide no assurance as to conclusions of management with
respect to the effectiveness of our internal control over financial
reporting in the future.
Because we are a “smaller reporting company,” we will
not be required to comply with certain disclosure requirements that
are applicable to other public companies and we cannot be certain
if the reduced disclosure requirements applicable to smaller
reporting companies will make our common stock less attractive to
investors.
We are
a “smaller reporting company,” as defined in Item
10(f)(1) of Regulation S-K. As a smaller reporting company, we are
eligible for exemptions from various reporting requirements
applicable to other public companies that are not smaller reporting
companies, including, but not limited to:
●
Reduced disclosure
obligations regarding executive compensation in our periodic
reports, proxy statements and registration statements.
●
Not being required
to comply with the auditor attestation requirements of Section
404(b) of the Sarbanes-Oxley Act of 2002. and
●
Reduced disclosure
obligations for our annual and quarterly reports, proxy statements
and registration statements.
We will continue to incur increased costs as a result of operating
as a public company, and our management will be required to devote
substantial time to new compliance initiatives.
As a
public company, we incur significant legal, accounting and other
expenses that we did not incur as a private company. In addition,
the Sarbanes-Oxley Act of 2002 and rules subsequently implemented
by the SEC, impose various requirements on public companies,
including establishment and maintenance of effective disclosure and
financial controls and corporate governance practices. Our
management and other personnel devote a substantial amount of time
to these compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly,
particularly after we are no longer a smaller reporting company.
For example, we expect that these rules and regulations may make it
more difficult and more expensive for us to obtain director and
officer liability insurance.
Pursuant to Section
404, we will be required to furnish a report by our management on
our internal control over financial reporting, including an
attestation report on internal control over financial reporting
issued by our independent registered public accounting firm. To
achieve compliance with Section 404 within the prescribed period,
we will be engaged in a process to document and evaluate our
internal control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants and
adopt a detailed work plan to assess and document the adequacy of
internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing
that controls are functioning as documented and implement a
continuous reporting and improvement process for internal control
over financial reporting. Despite our efforts, there is a risk that
neither we nor our independent registered public accounting firm
will be able to conclude within the prescribed timeframe that our
internal control over financial reporting is effective as required
by Section 404. This could result in an adverse reaction in the
financial markets due to a loss of confidence in the reliability of
our financial statements.
Short sellers of our stock may be manipulative and may drive down
the market price of our common stock.
Short
selling is the practice of selling securities that the seller does
not own but rather has borrowed or intends to borrow from a third
party with the intention of buying identical securities at a later
date to return to the lender. A short seller hopes to profit from a
decline in the value of the securities between the sale of the
borrowed securities and the purchase of the replacement shares, as
the short seller expects to pay less in that purchase than it
received in the sale. As it is therefore in the short
seller’s interest for the price of the stock to decline, some
short sellers publish, or arrange for the publication of, opinions
or characterizations regarding the relevant issuer, its business
prospects and similar matters calculated to or which may create
negative market momentum, which may permit them to obtain profits
for themselves as a result of selling the stock short. Issuers
whose securities have historically had limited trading volumes
and/or have been susceptible to relatively high volatility levels
can be particularly vulnerable to such short seller attacks. The
publication of any such commentary regarding us in the future may
bring about a temporary, or possibly long term, decline in the
market price of our common stock. In the past, the publication of
commentary regarding us by a disclosed short seller has been
associated with the selling of shares of our common stock in the
market on a large scale, resulting in a precipitous decline in the
market price per share of our common stock. No assurances can be
made that similar declines in the market price of our common stock
will not occur in the future, in connection with such commentary by
short sellers or otherwise.
Financial Industry Regulatory Authority (FINRA) sales practice
requirements may also limit your ability to buy and sell our stock,
which could depress our share price.
FINRA
rules require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending
speculative low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax
status, investment objectives and other information. Under
interpretations of these rules, FINRA believes that there is a high
probability that speculative low-priced securities will not be
suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers
buy our common stock, which may limit your ability to buy and sell
our stock and have an adverse effect on the market for our shares,
depressing our share price.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers of our
common stock may be restricted under the securities or securities
regulations laws promulgated by various states and foreign
jurisdictions, commonly referred to as "blue sky" laws. Absent
compliance with such individual state laws, our common stock may
not be traded in such jurisdictions. Because the securities held by
many of our stockholders have not been registered for resale under
the blue sky laws of any state, the holders of such shares and
persons who desire to purchase them should be aware that there may
be significant state blue sky law restrictions upon the ability of
investors to sell the securities and of purchasers to purchase the
securities. These restrictions may prohibit the secondary trading
of our common stock. Investors should consider the secondary market
for our securities to be a limited one.
“Anti-Takeover” provisions in our Articles of
Incorporation and Bylaws may cause a third party to be discouraged
from making a takeover offer that could be beneficial to our
stockholders.
Certain
provisions of our Articles of Incorporation, By-Laws, and the
anti-takeover provisions of the Nevada Revised Statutes, could
delay or prevent a third party from acquiring us or replacing
members of our Board of Directors, or make more costly any attempt
to acquire control of the Company, even if the acquisition or the
Board designees would be beneficial to our stockholders. These
factors could also reduce the price that certain investors might be
willing to pay for shares of the common stock and result in the
market price being lower than it would be without these
provisions.
In
addition, large stockholders may seek to influence our Board of
Directors and stockholders by acquiring positions in the Company to
force consideration of proposals that may be less desirable than
other outcomes. The effect of such influences on our Company or our
corporate governance could reduce the value of our monetization
activities and have an adverse effect on the value of our assets.
The effect of Anti-Takeover provisions could impact the ability of
prospective stockholders to obtain influence in the Company or
representation on the Board of Directors or acquire a significant
ownership position and such result may have an adverse effect on
the Company and the value of its securities.
Regulatory Risks Related to Our Business
FDA regulation could negatively affect the hemp industry, which
would directly affect our financial condition.
The
U.S. Food and Drug Administration ("FDA") may seek expanded
regulation of hemp under the Food, Drug and Cosmetics Act of 1938.
Additionally, the FDA may issue rules and regulations, including
certified good manufacturing practices, or cGMPs, related to the
growth, cultivation, harvesting and processing of hemp. Clinical
trials may be needed to verify efficacy and safety. It is also
possible that the FDA would require that facilities where hemp is
grown register with the FDA and comply with certain federally
prescribed regulations. In the event that some or all of these
regulations are imposed, we do not know what the impact would be on
the hemp industry, including what costs, requirements and possible
prohibitions may be enforced. If we or our manufacturing
partners are unable to comply with the regulations or registration
as prescribed by the FDA, we or our manufacturing
partners may be unable to continue to operate their and our
business in its current or planned form or at all.
Changes in the Law and Development Programs
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. According to the
National Conference of State Legislatures, 41 states have set up
cultivation and production programs to regulate the production of
hemp.
For the
first time since 1937, industrial hemp has been decriminalized at
the federal level and can be grown legally in the United States,
but on a limited basis. A landmark provision passed in the
Agricultural Act of 2014 had previously classified hemp as distinct
from its genetic cousin, marijuana. Marijuana cannabis remains
illegal under federal law, and therefore, strict enforcement of
federal laws regarding cannabis will likely affect the perception
of the lawfulness of our activity for a continuing period of time,
which could result in our inability and the inability of our
customers to execute their respective business plans.
Although we believe
the foregoing will be applicable to business other than hemp-based
CBD businesses, there is risk that confusion or uncertainty
surrounding our products with regulated cannabis could occur on the
state or federal level and impact us. We may have difficulty with
establishing banking relationships, working with investment banks
and brokers who would be willing to offer and sell our securities
or accept deposits from stockholders, and auditors willing to
certify our financial statements if we are confused with businesses
that are in the cannabis business. Any of these additional factors,
should they occur, could also affect our business, prospects,
assets or results of operation could have a material adverse effect
on the business, prospects, results of operations or financial
condition of the Company.
We and our manufacturers and suppliers are subject to extensive
governmental regulation and may be subject to enforcement if we are
not in compliance with applicable requirements.
We, our
manufacturers, and suppliers are subject to a broad range of
federal, state and local laws and regulations governing, among
other things, the testing, development, manufacture, distribution,
marketing and post-market reporting of foods, including those that
contain CBD. These include laws administered by the FDA, the U.S.
Federal Trade Commission (“FTC”), the U.S.
Department of Agriculture (“USDA”), and other
federal, state and local regulatory authorities.
Failure
by us or our third-party contract manufacturers and suppliers to
comply with applicable laws and regulations or to obtain and
maintain necessary permits, licenses and registrations relating to
our or our partners’ operations could subject us to
administrative and civil penalties, including fines, injunctions,
recalls or seizures, warning letters, restrictions on the marketing
or manufacturing of our products, or refusals to permit the import
or export of products, as well as potential criminal sanctions,
which could result in increased operating costs resulting in a
material effect on our operating results and business.
The markets for businesses in the CBD and hemp extracts
industries are competitive and evolving.
In
particular, the Company will face strong competition from both
existing and emerging companies that offer similar products to the
Company. Some of the Company’s current and potential
competitors may have longer operating histories, greater financial,
marketing and other resources and larger customer bases. Given the
rapid changes affecting the global, national and regional economies
generally and the CBD industry, in particular, the Company may not
be able to create and maintain a competitive advantage in the
marketplace. The Company’s success will depend on its ability
to keep pace with any changes in such markets, especially in light
of legal and regulatory changes. The Company’s success will
depend on its ability to respond to, among other things, changes in
the economy, market conditions and competitive pressures. Any
failure to anticipate or respond adequately to such changes could
have a material adverse effect on the Company’s financial
condition, operating results, liquidity, cash flow and operational
performance.
We are subject to the risk of potential changes to state laws
pertaining to industrial hemp.
As of
the date hereof, approximately forty-seven states authorized
industrial hemp programs pursuant to the Farm Bill. Continued
development of the industrial hemp industry will be dependent upon
new legislative authorization of industrial hemp at the state
level, and further amendment or supplementation of legislation at
the federal level. Any number of events or occurrences could slow
or halt progress all together in this space. While progress within
the industrial hemp industry is currently encouraging, growth is
not assured. While there appears to be ample public support for
favorable legislative action, numerous factors may impact or
negatively affect the legislative process(es) within the various
states where the Company has business interests. Any one of these
factors could slow or halt use of industrial hemp, which could
negatively impact the business up to possibly causing the Company
to discontinue operations as a whole.
Our product candidates are not approved by the FDA or other
regulatory authority, and we face risks of unforeseen medical
problems, and up to a complete ban on the sale of our product
candidates.
The
efficacy and safety of pharmaceutical products is established
through a process of clinical testing under FDA oversight. Our
products have not gone through this process because we believe that
the topical products we sell are not subject to this process.
However, if an individual were to use one of our products in an
improper manner, we cannot predict the potential medical harm to
that individual. If such an event were to occur, the FDA or similar
regulatory agency might impose a complete ban on the sale or use of
our products.
There are numerous costs associated with numerous laws and
regulations.
The
manufacture, labeling and distribution of the Company products will
be regulated by various federal, state and local agencies. These
governmental authorities may commence regulatory or legal
proceedings, which could restrict the permissible scope of the
Company’s product claims or the ability to sell products in
the future. The FDA may regulate the Company’s products to
ensure that the products are not adulterated or misbranded. The
Company is subject to regulation by the federal government and
other state and local agencies as a result of its CBD products. The
shifting compliance environment and the need to build and maintain
robust systems to comply with different compliance in multiple
jurisdictions increases the possibility that the Company may
violate one or more of the requirements. If the Company’s
operations are found to be in violation of any of such laws or any
other governmental regulations that apply to the Company, it may be
subject to penalties, including, without limitation, civil and
criminal penalties, damages, fines, the curtailment or
restructuring of the Company’s operations, any of which could
adversely affect the ability to operate the Company’s
business and its financial results. Failure to comply with FDA
requirements may result in, among other things, injunctions,
product withdrawals, recalls, product seizures, fines and criminal
prosecutions. The Company’s advertising will be subject to
regulation by the Federal Trade Commission (“FTC”) under the Federal
Trade Commission Act. In recent years, the FTC has initiated
numerous investigations of dietary and nutrition supplement
products and companies. Additionally, some states also permit
advertising and labeling laws to be enforced by private attorney
generals, who may seek relief for consumers, seek class-action
certifications, seek class-wide damages and product recalls of
products sold by the Company. Any actions against the Company by
governmental authorities or private litigants could have a material
adverse effect on the Company’s business, financial condition
and results of operations.
Risks Related to Information Technology and Intellectual
Property
We are subject to cyber-security risks, including those related to
customer, employee, vendor or other company data and including in
connection with integration of acquired businesses and
operations.
We
currently do not utilize automated technology or software to
maintain important records necessary to the successful performance
of our business. We are evaluating various selling, inventory and
contact management software tools, such as Shopify, in order to
begin to adopt processes to track inventory, generate sales orders
and invoices, promote leads and sales and support customer
interaction such as customer service and warranty claims. Without
these tools we operate at a significant disadvantage to our
competitors who have implemented more sophisticate systems than
us.
We use
information technologies to securely manage certain operations and
various business functions. We rely on various technologies, some
of which are managed by third parties, to process, transmit and
store electronic information, and to manage or support a variety of
business processes and activities, including reporting on our
business and interacting with customers, vendors and employees. In
addition, we collect and store certain data, including proprietary
business information, and may have access to confidential or
personal information that is subject to privacy and security laws,
regulations and customer-imposed controls. Our systems are subject
to repeated attempts by third parties to access information or to
disrupt our systems. Despite our security design and controls, and
those of our third-party providers, we may become subject to system
damage, disruptions or shutdowns due to any number of causes,
including cyber-attacks, breaches, employee error or malfeasance,
power outages, computer viruses, telecommunication or utility
failures, systems failures, service providers, natural disasters or
other catastrophic events. It is possible for such vulnerabilities
to remain undetected for an extended period. We may face other
challenges and risks as we upgrade and standardize our information
technology systems as part of our integration of acquired
businesses and operations. We do not have contingency plans in
place to prevent or mitigate the impact of these events, and these
events could result in operational disruptions or the
misappropriation of sensitive data, and depending on their nature
and scope, could lead to the compromise of confidential
information, improper use of our systems and networks, manipulation
and destruction of data, defective products, production downtimes
and operational disruptions and exposure to liability. Such
disruptions or misappropriations and the resulting repercussions,
including reputational damage and legal claims or proceedings, may
adversely affect our results of operations, cash flows and
financial condition, and the trading price of our common
stock.
Our intellectual property rights may be inadequate to protect our
business.
Our
failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material
adverse effect on our business, results of operations and financial
condition.
We also
rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. To protect
our trade secrets and other proprietary information, we require
employees, consultants, advisors and collaborators to enter into
confidentiality agreements. We cannot assure you that these
agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of
any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information. If we are
unable to maintain the proprietary nature of our technologies, we
could be materially adversely affected.
We rely
on our trademarks, trade names, and brand names to distinguish our
products from the products of our competitors, and have registered
or applied to register many of these trademarks. We cannot assure
you that our trademark applications will be approved. Third parties
may also oppose our trademark applications, or otherwise challenge
our use of the trademarks. In the event that our trademarks are
successfully challenged, we could be forced to rebrand our
products, which could result in loss of brand recognition, and
could require us to devote resources advertising and marketing new
brands. Further, we cannot assure you that competitors will not
infringe our trademarks, or that we will have adequate resources to
enforce our trademarks.
If third parties claim that we infringe upon their intellectual
property rights, our business and results of operations could be
adversely affected.
We face
the risk of claims that we have infringed third parties’
intellectual property rights. Any claims of intellectual property
infringement, even those without merit, could be expensive and time
consuming to defend; could require us to cease selling the products
that incorporate the challenged intellectual property, could
require us to redesign, reengineer, or rebrand the product, if
feasible, could divert management’s attention and resources,
or could require us to enter into royalty or licensing agreements
in order to obtain the right to use a third party’s
intellectual property.
Any
royalty or licensing agreements, if required, may not be available
to us on acceptable terms or at all. A successful claim of
infringement against us could result in our being required to pay
significant damages, enter into costly license or royalty
agreements, or stop the sale of certain products, any of which
could have a negative impact on our business, financial condition,
results of operations and our future prospects.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition, and our results of
operations.
We may
be unable to obtain intellectual property rights to effectively
protect our branding, products, and other intangible assets. Our
ability to compete effectively may be affected by the nature and
breadth of our intellectual property rights. While we intend to
defend against any threats to our intellectual property rights,
there can be no assurance that any such actions will adequately
protect our interests. If we are unable to secure intellectual
property rights to effectively protect our branding, products, and
other intangible assets, our revenue and earnings, financial
condition, or results of operations could be adversely
affected.
We also
rely on non-disclosure and non-competition agreements to protect
portions of our intellectual property portfolio. There can be no
assurance that these agreements will not be breached, that we will
have adequate remedies for any breach, that third parties will not
otherwise gain access to our trade secrets or proprietary
knowledge, or that third parties will not independently develop
competitive products with similar intellectual
property.
A failure of one or more key information technology systems,
networks or processes may materially adversely affect our ability
to conduct our business.
The
efficient operation of our business will depend on our information
technology systems. We rely on our information technology systems
to effectively manage our sales and marketing, accounting and
financial and legal and compliance functions, engineering and
product development tasks, research and development data,
communications, supply chain, order entry and fulfillment and other
business processes. We also rely on third parties and virtualized
infrastructure to operate and support our information technology
systems. The failure of our information technology systems, or
those of our third-party service providers, to perform as we
anticipate could disrupt our business and could result in
transaction errors, processing inefficiencies and the loss of sales
and customers, causing our business and results of operations to
suffer.
In
addition, our information technology systems may be vulnerable to
damage or interruption from circumstances beyond our control,
including fire, natural disasters, power outages, systems failures,
security breaches, cyber-attacks and computer viruses. The failure
of our information technology systems to perform as a result of any
of these factors or our failure to effectively restore our systems
or implement new systems could disrupt our entire operation and
could result in decreased sales, increased overhead costs, excess
inventory and product shortages and a loss of important
information.
Further, it is
critically important for us to maintain the confidentiality and
integrity of our information technology systems. To the extent that
we have information in our databases that our customers consider
confidential or sensitive, any unauthorized disclosure of, or
access to, such information due to human error, breach of our
systems through cybercrime, a leak of confidential information due
to employee misconduct or similar events could result in a
violation of applicable data protection and privacy laws and
regulations, legal and financial exposure, damage to our
reputation, a loss of confidence of our customers, suppliers and
manufacturers and lost sales. Actual or suspected cyber-attacks may
cause us to incur substantial costs, including costs to
investigate, deploy additional personnel and protection
technologies, train employees and engage third-party experts and
consultants. We have taken steps to protect the security of our
systems. Despite the implementation of these security measures, our
systems may still be vulnerable to physical break-ins computer
viruses, programming errors, attacks by third parties or similar
disruptive problems. If any of these risks materialize, our
reputation and our ability to conduct our business may be
materially adversely affected.
We rely heavily on third-party commerce platforms to conduct our
businesses. If one of those platforms is compromised, our business,
financial condition and results of operations could be
harmed.
We
intend to rely upon third-party commerce platforms, including
Shopify. We also rely on e-mail service providers, bandwidth
providers, Internet service providers and mobile networks to
deliver e-mail and “push” communications to customers
and to allow customers to access our website.
Any
damage to, or failure of, our systems or the systems of our
third-party commerce platform providers could result in
interruptions to the availability or functionality of our website
and mobile applications. As a result, we could lose customer data
and miss order fulfillment deadlines, which could result in
decreased sales, increased overhead costs, excess inventory and
product shortages. If for any reason our arrangements with our
third-party commerce platform providers are terminated or
interrupted, such termination or interruption could adversely
affect our business, financial condition, and results of
operations. We exercise little control over these providers, which
increases our vulnerability to problems with the services they
provide. We could experience additional expense in arranging for
new facilities, technology, services and support. In addition, the
failure of our third-party commerce platform providers to meet our
capacity requirements could result in interruption in the
availability or functionality of our website and mobile
applications.
Failure to comply with federal, state and foreign laws and
regulations relating to privacy, data protection and consumer
protection, or the expansion of current or the enactment of new
laws or regulations relating to privacy, data protection and
consumer protection, could adversely affect our business and our
financial condition.
We may
collect, store, process, and use personal information and other
customer data, and we rely in part on third parties that are not
directly under our control to manage certain of these operations
and to collect, store, process and use payment information. Due to
the volume and sensitivity of the personal information and data we
and these third parties manage and expect to manage in the future,
as well as the nature of our customer base, the security features
of our information systems are critical. A variety of federal,
state and foreign laws and regulations govern the collection, use,
retention, sharing and security of this information. Laws and
regulations relating to privacy, data protection and consumer
protection are evolving and subject to potentially differing
interpretations. These requirements may not be harmonized, may be
interpreted and applied in a manner that is inconsistent from one
jurisdiction to another or may conflict with other rules or our
practices. As a result, our practices may not have complied or may
not comply in the future with all such laws, regulations,
requirements and obligations.
We
expect that new industry standards, laws and regulations will
continue to be proposed regarding privacy, data protection and
information security in many jurisdictions. We cannot yet determine
the impact such future laws, regulations and standards may have on
our business. Complying with these evolving obligations is costly.
For instance, expanding definitions and interpretations of what
constitutes “personal data” (or the equivalent) within
the United States and elsewhere may increase our compliance costs
and legal liability. A significant data breach or any failure, or
perceived failure, by us to comply with any federal, state or
foreign privacy or consumer protection-related laws, regulations or
other principles or orders to which we may be subject or other
legal obligations relating to privacy or consumer protection could
adversely affect our reputation, brand and business, and may result
in claims, investigations, proceedings or actions against us by
governmental entities or others or other penalties or liabilities
or require us to change our operations and/or cease using certain
data sets. Depending on the nature of the information compromised,
we may also have obligations to notify users, law enforcement or
payment companies about the incident and may need to provide some
form of remedy, such as refunds, for the individuals affected by
the incident.
We are subject to risks related to online payment
methods.
We
accept payments using a variety of methods, including credit card
and debit card. As we offer new payment options to customers, we
may be subject to additional regulations, compliance requirements
and fraud. For certain payment methods, including credit and debit
cards, we pay interchange and other fees, which may increase over
time and raise our operating costs and lower profitability. We are
also subject to payment card association operating rules and
certification requirements, including the Payment Card Industry
Data Security Standard and rules governing electronic funds
transfers, which could change or be reinterpreted to make it
difficult or impossible for us to comply. As our business changes,
we may also be subject to different rules under existing standards,
which may require new assessments that involve costs above what we
currently pay for compliance. If we fail to comply with the rules
or requirements of any provider of a payment method we accept, if
the volume of fraud in our transactions limits or may, among other
things, be subject to fines or higher transaction fees and may
lose, or face restrictions placed upon, our ability to accept
credit card and debit card payments from customers or facilitate
other types of online payments. If any of these events were to
occur, our business, financial condition and operating results
could be materially adversely affected. We occasionally receive
orders placed with fraudulent credit card data. We may suffer
losses as a result of orders placed with fraudulent credit card
data even if the associated financial institution approved payment
of the orders. Under current credit card practices, we may be
liable for fraudulent credit card transactions. If we are unable to
detect or control credit card fraud, our liability for these
transactions could harm our business, financial condition and
results of operations.
Significant merchandise returns or refunds could harm our
business.
We
allow our customers to return products or offer refunds, subject to
our return and refunds policy. If merchandise returns or refunds
are significant or higher than anticipated and forecasted, our
business, financial condition, and results of operations could be
adversely affected. Further, we modify our policies relating to
returns or refunds from time to time, and may do so in the future,
which may result in customer dissatisfaction and harm to our
reputation or brand, or an increase in the number of product
returns or the amount of refunds we make.
Item 1B. Unresolved Staff
Comments.
None.
Item 2. Properties
We
entered into three farm leases, which we entered into through our
majority-owned subsidiary, EOW. Two of the leases are located in
Cave Junction, Oregon and the third lease is located in Glendale,
Oregon. EOW has farmed and processed industrial hemp on the farm
leases, which hemp will be manufactured into cannabidiol (CBD) and
related products. Due to declining market prices for industrial
hemp and a shortage of available capital, we do not currently
intend to farm hemp on the Oregon properties in 2020. Our current
plan is to sub-lease the properties for the 2020 growing season to
another farmer, although no subleases have been made at this
time.
We have
leased a small office in Delray Beach Florida to establish
operations in close vicinity to our partner C2M, and it is
anticipated that corporate functions will move to this location and
staff will be hired as required to meet our growth. If additional
or alternative space is needed in the future, we believe such space
will be available on commercially reasonable terms as necessary. 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.
On
July 9, 2019, we entered into a Commercial Lease Agreement with
Skybar Holdings, LLC, a Florida limited liability company. Pursuant
to the lease, we planned to lease the entire first floor
(consisting of approximately 4,000 square feet) of a property
located in Delray Beach, Florida. We planned to develop the
premises to create a hemp-oriented health and wellness retail
venue, including education, clothing and cosmetics, and to explore
franchise opportunities. We have determined not to move forward
with the project at this time and will pursue a cancellation of the
lease.
Item 3. Legal Proceedings
On
January 10, 2020, the Company and Jonathan Gilbert, a former
director, entered into a Settlement Agreement and stipulation of
dismissal of certain pending litigation in New York.
Under the agreement Mr. Gilbert retained 375,000 shares of common
stock previously awarded and all other awards and obligations to
Mr. Gilbert were cancelled and the Company and Mr. Gilbert
exchanged mutual releases.
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
February 26, 2020 a complaint was filed in the Circuit Court, Palm
Beach County, Florida on behalf of five former employees of the
Company. The case is entitled Ryan Borcherds and Miriam
Martinez vs. Exactus, Inc.. 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. The complaint seeks approximately
$82,000 in unpaid wages as well as special damages, liquidated
damages, interest and attorney’s fees.
From
time to time, we may become involved in legal proceedings arising
in the ordinary course of business. We are unable to predict the
outcome of any such matters or the ultimate legal and financial
liability, and at this time cannot reasonably estimate the possible
loss or range of loss and accordingly have not accrued a related
liability.
Item 4. Mine Safety
Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our Common Stock is quoted on the OTCQB over-the-counter market
under the symbol “EXDI.” Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual
transactions. On May 13, 2020 the closing bid price on the OTC
Markets for our Common Stock was $0.1894.
Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in penny stocks. Penny stocks are
generally equity securities with a market price of less than $5.00,
other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current
price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock
rules require a broker-dealer, prior to a transaction in a penny
stock, to deliver a standardized risk disclosure document prepared
by the SEC, that: (a) contains a description of the nature and
level of risk in the market for penny stocks in both public
offerings and secondary trading; (b) contains a description of the
broker's or dealer's duties to the customer and of the rights and
remedies available to the customer with respect to a violation of
such duties or other requirements of the securities laws; (c)
contains a brief, clear, narrative description of a dealer market,
including bid and ask prices for penny stocks and the significance
of the spread between the bid and ask price; (d) contains a
toll-free telephone number for inquiries on disciplinary actions;
(e) defines significant terms in the disclosure document or in the
conduct of trading in penny stocks; and (f) contains such other
information and is in such form, including language, type size and
format, as the SEC shall require by rule or
regulation.
The broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with (a) bid and offer
quotations for the penny stock; (b) the compensation of the
broker-dealer and its salesperson in the transaction; (c) the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and (d) a monthly account statement showing
the market value of each penny stock held in the customer's
account.
In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and
receive the purchaser's written acknowledgment of the receipt of a
risk disclosure statement, a written agreement as to transactions
involving penny stocks, and a signed and dated copy of a written
suitability statement.
These disclosure requirements may have the effect of reducing the
trading activity for our common stock. Therefore, stockholders may
have difficulty selling our securities.
Holders of Our Common Stock
As of May 22, 2020, we had 45,522,275 shares of our common stock
issued and outstanding, and approximately 157 shareholders of
record.
Dividends
There are no restrictions in our articles of incorporation or
bylaws that prevent us from declaring dividends. The Nevada Revised
Statutes, however, do prohibit us from declaring dividends where
after giving effect to the distribution of the
dividend:
1. we would not be able to pay our debts as they become due in the
usual course of business, or;
2. our total assets would be less than the sum of our total
liabilities plus the amount that would be needed to satisfy the
rights of shareholders who have preferential rights superior to
those receiving the distribution.
We have not declared any dividends and we do not plan to declare
any dividends in the foreseeable future.
Item 6. Selected Financial
Data
A smaller reporting company is not required to provide the
information required by this Item.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements
Certain statements, other than purely historical information,
including estimates, projections, statements relating to our
business plans, objectives, and expected operating results, and the
assumptions upon which those statements are based, are
“forward-looking statements.” These forward-looking
statements generally are identified by the words
“believes,” “project,”
“expects,” “anticipates,”
“estimates,” “intends,”
“strategy,” “plan,” “may,”
“will,” “would,” “will be,”
“will continue,” “will likely result,” and
similar expressions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially
from the forward-looking statements. Our ability to predict results
or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on
our operations and future prospects on a consolidated basis
include, but are not limited to: changes in economic conditions,
legislative/regulatory changes, availability of capital, interest
rates, competition, and generally accepted accounting principles.
These risks and uncertainties should also be considered in
evaluating forward-looking statements and undue reliance should not
be placed on such statements.
General
In
December 2018, the Company expanded its focus to pursue
opportunities in Cannabidiol (“CBD”). This decision was
based in part on the passing of The Hemp Farming Act of 2018. The
Act was signed into law during December 2018 and removes hemp
(cannabis with less than 0.3% THC) from the Schedule I controlled
substances list. Following passage, CBD derived from industrial
hemp became legal in the US under federal law and in all 50 states,
opening the door to develop and sell hemp-based CBD products
nationwide. The Company’s goal is to rapidly establish one or
more principal sources of supply and to develop wholesale and
retail sales channels for CBD end-products to be sold to humans and
for animal health, such as nutraceuticals, supplements and pet and
farm products. The Company intends to follow regulatorily compliant
pathways by adopting practices established by the FDA for
CBD.
On
January 8, 2019 we 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, we have
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. We expect 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 we intend 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, with exercise price of $0.32 per share. As a result, C2M was
our largest shareholder holding (inclusive of the vested options
held by its founders) approximately 51% of our outstanding Common
Stock on the date of the Development Agreement. These options were
granted to two owners and a co-founder of C2M.C2M will provide
personnel necessary for our 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 our Advisory Board in January 2019 and
was appointed President of the Company on March 11,
2019.
On
March 11, 2019, with the assistance of C2M and assignment of
rights, we acquired a 50.1% limited liability membership interest
in Exactus One World, LLC, (“EOW”), an Oregon limited
liability company, newly formed on January 25, 2019, in order to
produce industrial hemp for our own use. EOW has leases starting on
March 1, 2019 for approximately 200 acres of farmland in southwest
Oregon for growing and processing industrial hemp, with a lease
term of one year. The leases are renewable on a year-to-year basis.
We acquired the 50.1% limited liability membership interest
pursuant to a subscription agreement (the “Subscription
Agreement”) and a Membership Interest Purchase Agreement (the
“Purchase Agreement”). EOW will farm and process
industrial hemp to be manufactured into cannabidiol (CBD) and
related products. EOW will be responsible for the
Company’s initial efforts to pursue agricultural development,
including farm soil preparation, planting, harvesting,
transportation and drying. We will be responsible for funding
and the minority owners will be responsible for management,
servicing and operating the farm properties.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop underway to
the Company. As a result, the Company acquired the right to receive
100% of the distributions of net profit from the 2019 hemp crop on
approximately 226 acres of farmland currently growing in Oregon. In
addition, the members amended the payment schedule under which farm
costs are required to be made by the Company. As consideration for
the amendment, the Company agreed to issue 1,223,320 shares of its
common stock, par value $0.0001 per share, to the minority members
of EOW.
On
July 31, 2019, we finalized and entered into a Management and
Services Agreement in order to provide us 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 our Interim Chief
Executive Officer, and to provide to us 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;
●
drawings, designs
and specifications for extraction, production and manufacturing
facilities and resources; and
●
brand development
and support services.
We 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. On July 31,
2019, we granted 10,000 Series E Preferred in connection with the
Management and Services Agreement (the “MSA”) with C2M,
our largest shareholder. In October 2019, we 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 us. The MSA Amendment was approved by a majority of
the disinterested directors of the Company.
Results of Operations
Year ended December 31, 2019 and 2018:
Net Revenues The Company is principally engaged in the
business production and selling of products made from industrial
hemp. During the year ended December 31, 2019, we generated total
revenues of $345,680 from the sale of CBD products, including
revenues of $162,446 from a related party, C2M, who is a majority
stockholder of the Company, for the year ended December 31, 2019.
We did not have comparable revenues during the year ended December
31, 2018.
Cost of Sales The primary components of cost of sales
include the cost of the CBD product. For the year ended December
31, 2019, the Company’s cost of sales amounted to $2,046,134
which primarily represents purchase of CBD products from C2M and
cost of hemp crop sold to C2M for a total of $106,752, an inventory
reserve of $723,391, inventory write-off of CBD products of
$837,153 and indirect cost such as utilities, farm lease expenses,
and depreciation expenses on farming equipment related to
production and harvesting period of $171,788. We reduced inventory
by $723,391 which is equal to the difference between the cost of
the inventory and its estimated net realizable value. Additionally,
CBD products under the Green Goddess
brand with a cost of $837,153 has been written down to a value of
$0 due to the age and questionable salability of the
product. We did not have comparable cost of sales during the
year ended December 31, 2018.
Operating Expenses
For the
year ended December 31, 2019, we incurred $9,177,988 in operating
expenses as compared to $2,436,226 for the year ended December 31,
2018, an increase of $6,741,762 or 277%. The increase in operating
expenses consisted of the following:
General and administrative expenses increased by $1,357,627,
or 71%, from $1,914,571 for the year ended December 31, 2018 to
$3,272,198 for the year ended December 31, 2019, increase in
amortization of intangible asset and depreciation expenses of
approximately $866,000, increase lease expense related to our
commercial lease and rent expense of approximately $247,000,
increase in impairment expense related to our intangible assets and
inventory of $250,000, and increase in other general administrative
expenses of approximately $172,000 primarily due to travel expenses
and increase in operations, offset by decrease in compensation
including employee benefits of approximately $177,000 due to a
decrease in contractual bonuses and stock options given to
management.
Selling and marketing expenses increased by $930,260, or
5,158%, from $18,036 for the year ended December 31, 2018 to
$948,296 for the year ended December 31, 2019 primarily due to
increase in marketing and advertising expenses due to promotions,
endorser’s fee, trade shows, samples, product awareness and
salaries of our sales and marketing staff.
Professional and consulting fees increased by $4,731,775, or
2,324%, from $203,619 for the year ended December 31, 2018 to
$4,935,394 for the year ended December 31, 2019 due to increased
stock based consulting fees related with the grant of stock options
and warrants, issuance of stocks to consultants and C2M, increase
in hiring of consultant for business development and investor
relations services, and increase in accounting fees and legal fees
related to our public company filings.
Research and development decreased by $277,900 or 93%, from
$300,000 for the year ended December 31, 2018 to $22,100 for the
year ended December 31, 2019, as the Company delayed projects until
additional funds are raised.
Other Expenses, net
Derivative loss increased by $1,042,889 or 126%, from
$(828,694) for the year ended December 31, 2018 to $(1,871,583) for
the year ended December 31, 2019, due to the issuance of new
convertible notes in 2019 and adjustments to fair
value.
Loss on stock settlement decreased by $607,929, or 100%,
from $607,929 for the year ended December 31, 2018 to $0 for the
year ended December 31, 2019, due to issuing shares to settle
accounts payable balances and conversion of convertible notes and
interest in year 2018. We did not have comparable gains or losses
during the year ended December 31, 2019.
Gain on stock settlement of debt increased by $3,004,630, or
100%, from $0 for the year ended December 31, 2018 to $3,004,630
for the year ended December 31, 2019 due to the conversion of notes
and interest into common and preferred shares during the year ended
December 31, 2019. We did not have comparable gains or losses
during the year ended December 31, 2018.
Interest expense increased by $14,641, or 3%, from $464,470
for the year ended December 31, 2018 to $479,111 for the year ended
December 31, 2019. The increase in interest expense is primarily
related to increase in amortization of debt discount and debt
issuance cost related to our convertible note payable issued in
year 2019.
Net Loss
As a
result of the foregoing, we generated a net loss of $10,224,506 for
the year ended December 31, 2019 as compared to a net loss of
$4,337,319 for the year ended December 31, 2018, as a result of the
discussion above.
As a
result of the foregoing, we generated a net loss available to
stockholders of $10,591,487 or $(0.31) per common share –
basic and diluted, for the year ended December 31, 2019 as compared
to a net loss of $4,337,319 or $(0.91) per common share –
basic and diluted, for the year ended December 31, 2018, as a
result of the discussion above.
Liquidity and Capital Resources
Since
our inception in 2008, we have generated losses from operations. As
of December 31, 2019, our accumulated deficit was
$21,129,379. As of December 31, 2019, we had $18,405 of
cash and working capital deficit of $1,761,309. Accordingly, we
will need to obtain further funding through public or private
equity offerings, debt financing, collaboration arrangements or
other sources. The issuance of any additional shares of Common
Stock, preferred stock or convertible securities could be
substantially dilutive to our shareholders. In addition, adequate
additional funding may not be available to us on acceptable terms,
or at all. If we are unable to raise capital, we will be forced to
delay, reduce or eliminate our research and development programs
and may not be able to continue as a going concern.
The
Company has various principal outstanding balance for a total of
$933,333 from convertible notes as of December 31, 2019. The
convertible notes bear interest at a rate of ranging from 5% to 8%
per annum and will mature from November 26, 2020 and February 1,
2023.
Net
cash used in operating activities for the year ended December 31,
2019 was $5,746,290, due to our net loss of $10,224,506, offset by
non-cash charges related to convertible loan notes derivative loss
of $1,871,583 , amortization of debt discounts and debt issuance
cost of $425,712, amortization of intangible assets of $828,526,
amortization prepaid stock-based expenses of $285,494,depreciation
expense of $63,770, deferred rent of $85,699, bad debt expense of
$32,577, impairment expense of $1,087,346, inventory reserve of
$723,391 and stock-based compensation of $3,774,640 offset by
$3,004,630 for a debt settlement gain. Net changes in operating
assets and liabilities totaled of $(1,695,892), which is primarily
attributable to increases in total accounts receivable of $107,162,
inventory of $2,864,383, prepaid expenses and other current assets
of $140,765, deposit of $80,000 and total accounts payable and
accrued expenses of $1,294,625, and unearned revenues of
$215,000.
Net
cash used in operating activities for the year ended December 31,
2018 was $465,755, due to our net loss of $4,337,319, offset by
non-cash charges related to convertible loan notes derivative
expense of $828,694, amortization of debt discounts of $405,173,
$607,929 for a debt settlement loss, stock-based compensation of
$892,073. Changes in operating assets and liabilities totaled a
gain of $1,137,695, which primarily consisted of an increase
in accrued expenses of $905,946 and increase in account
payable of $188,378.
Net
cash used in investing activity for the year ended December 31,
2019 was $2,041,203. We paid cash for the purchase of membership
interest in subsidiary for $1,500,000 in connection with a Purchase
Agreement and purchase of equipment for $541,203 as compared to
none during the year ended December 31, 2018.
Net
cash provided by financing activities for the year ended December
31, 2019 was $7,803,938, due to proceeds from sale of our Common
Stock of $7,215,380, net proceeds from the issuance of notes
payable and convertible notes $962,001, advance from related party
of $242,500 offset by total note repayments of $245,943 and
repayment on related party advances of
$370,000.
Net
cash provided by financing activities for the year ended December
31, 2018 was $306,500 due to $178,100 in proceeds from convertible
loan notes, $103,400 in proceeds from the issuance of a note
payables, $50,000 of net proceeds from sale of Series D Preferred
Stock and the repayment of $25,000 of principal on convertible
notes.
The
Company had principal outstanding balance of $100,000 from
convertible notes as of December 31, 2019. The convertible 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 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 common stock at $0.40 per Share. We believe this
threshold has been met, and conversion of the note is
pending
In
addition, the Company had a principal balance of $833,333.33 under
senior secured convertible promissory notes issued to an
institutional investor under the Securities Purchase Agreement
dated November 27, 2019. These notes bear interest at a rate of 8%
and mature one year after their issuance. These notes are issued at
10% original issue discount and include 1/3 warrant coverage as
additional consideration to the lender. All warrants are
exercisable at $0.756 per share. The notes are convertible at a
price of $0.50 per share. Additional debt financing on the same
terms is available under the Securities Purchase Agreement, with:
(1) an additional purchase of $277,778 in notes and associated
warrants expected to occur on the third business day after the date
of the filing of a registration statement on Form S-1 for the
shares issuable upon conversion of the notes as required under a
Registration Rights Agreement; and (2) an additional purchase of
$833,333.33 in notes and associated warrants upon effectiveness of
the registration statement. At this time, we are delinquent in our
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. We intend to make these payments and the
upcoming monthly payments with receipts from product sales and/or
the proceeds of additional equity funding.
Going Concern
The
audit report prepared by our independent registered public
accounting firm relating to our financial statements for the year
ended December 31, 2019 includes an explanatory paragraph
expressing substantial doubt about our ability to continue as a
going concern. We have concluded that the circumstances described
above continue to raise substantial doubt about our ability to
continue as a going concern as of December 31,
2019.
Off-Balance Sheet Arrangements
As of
December 31, 2019, we had no material off-balance sheet
arrangements.
In the
normal course of business, we may be confronted with issues or
events that may result in a contingent liability. These generally
relate to lawsuits, claims or the actions of various regulatory
agencies. We consult with counsel and other appropriate experts to
assess the claim. If, in our opinion, we have incurred a probable
loss as set forth by accounting principles generally accepted in
the United States, an estimate is made of the loss and the
appropriate accounting entries are reflected in our financial
statements. After consultation with legal counsel, we do not
anticipate that liabilities arising out of currently pending or
threatened lawsuits and claims will have a material adverse effect
on our financial position, results of operations or cash
flows.
Critical Accounting Estimates and New Accounting
Pronouncements
Critical Accounting Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported
amounts and related disclosures in the financial statements.
Management considers an accounting estimate to be critical if it
requires assumptions to be made that were uncertain at the time the
estimate was made, and changes in the estimate or different
estimates that could have been selected could have a material
impact on our results of operations or financial
condition.
Application of Significant Accounting Policies
Section
107 of the JOBS Act provides that an emerging growth company can
take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards. In other words, an emerging growth
company can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies.
We have elected to take advantage of the benefits of this extended
transition period. Our financial statements may, therefore, not be
comparable to those of companies that comply with such new or
revised accounting standards.
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 Company is currently
evaluating the impact of this standard.
We have
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.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the
information required by this Item.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Required by Article 8 of Regulation
S-X:
Audited Financial Statements:
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CONTENTS
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CONSOLIDATED
FINANCIAL STATEMENTS
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Exactus,
Inc. and Subsidiaries
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Exactus,
Inc. and Subsidiaries (the “Company”) as of December
31, 2019 and 2018, and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for
each of the years in the two-year period ended December 31, 2019
and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the years in the two-year period ended
December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has recurring losses from operations, limited cash flow,
and an accumulated deficit. These conditions raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are
also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of the Company’s internal control over
financial reporting. As part of our audits, we are required to
obtain an understanding of internal control over financial
reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such
opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ RBSM LLP
We have
served as the Company’s auditor since 2014.
Henderson,
NV
May 22,
2020
Exactus, Inc. and
Subsidiaries
Consolidated Balance Sheets
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December 31,
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2019
|
2018
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ASSETS
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Current Assets:
|
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Cash
and cash equivalents
|
$18,405
|
$1,960
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Accounts
receivable, net
|
55,725
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-
|
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Accounts
receivable - related party
|
18,860
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-
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Inventory,
net
|
1,337,809
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-
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Prepaid
expenses and other current assets
|
248,776
|
12,330
|
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Prepaid
expenses and other current assets - related party -
current
|
622,160
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-
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Due
from related parties
|
127,500
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-
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Total current assets
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2,429,235
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14,290
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Other Assets:
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Deposits
|
80,000
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-
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Prepaid
expenses and other current assets - related party -
long-term
|
2,492,045
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-
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Property
and equipment, net
|
477,433
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-
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Intangible
assets, net
|
2,147,311
|
-
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Operating
lease right-of-use assets, net
|
2,173,253
|
-
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Total other assets
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7,370,042
|
-
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TOTAL ASSETS
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$9,799,277
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$14,290
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LIABILITIES AND EQUITY (DEFICIT)
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Current Liabilities:
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Accounts
payable
|
$1,442,409
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$923,429
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Accounts
payable - related parties
|
454,511
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-
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Accrued
expenses
|
358,010
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46,875
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Unearned
revenue - related party
|
215,000
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-
|
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Note
payable - related parties
|
55,556
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51,400
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Subscription
payable
|
250,000
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-
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Convertible
notes, net of discounts
|
85,906
|
491,788
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Derivative
liability
|
880,410
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1,742,000
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Settlement
payable
|
-
|
17,000
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Interest
payable
|
16,677
|
66,300
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Operating
lease liabilities, current portion
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432,065
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-
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Total current liabilities
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4,190,544
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3,338,792
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Long Term Liabilities:
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Convertible
notes payable
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100,000
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100,000
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Operating
lease liabilities, long-term portion
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1,826,887
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-
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Total long-term liabilities
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1,926,887
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100,000
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TOTAL LIABILITIES
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6,117,431
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3,438,792
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Commitment and contingencies (see Note 11)
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Equity (Deficit):
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Exactus, Inc. Stockholders' Equity (Deficit)
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Preferred
stock: 50,000,000 shares authorized; $0.0001 par value, 5,266,466
undesignated shares
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||
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issued
and outstanding
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-
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-
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Preferred
stock Series A: 1,000,000 shares designated; $0.0001 par
value,
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353,109
shares issued and outstanding
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35
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-
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Preferred
stock Series B-1: 32,000,000 shares designated; $0.0001 par
value,
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1,650,000,
and 2,800,000 shares issued and outstanding,
respectively
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165
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280
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Preferred
stock Series B-2: 10,000,000 shares designated; $0.0001 par
value,
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7,516,000
and 8,684,000 shares issued and outstanding,
respectively
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752
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868
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Preferred
stock Series C: 1,733,334 shares designated; $0.0001 par
value,
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none
and 1,733,334 shares issued and outstanding,
respectively
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-
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173
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Preferred
stock Series D: 200 shares designated; $0.0001 par value, 18 and
45
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shares
issued and outstanding, respectively
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-
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1
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Preferred
stock Series E: 10,000 shares designated; $0.0001 par value, 10,000
and none
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shares
issued and outstanding, respectively
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1
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-
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Common
stock: 650,000,000 shares authorized; $0.0001 par
value,
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43,819,325
and 6,233,524 shares issued and outstanding,
respectively
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4,382
|
623
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Common
stock to be issued (664,580 and none shares to be issued,
respectively)
|
66
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-
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Additional
paid-in capital
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25,343,293
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7,111,445
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Accumulated
deficit
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(21,129,379)
|
(10,537,892)
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Total
Exactus Inc. Stockholders' Equity (Deficit)
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4,219,315
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(3,424,502)
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Non-controlling
interest in subsidiary
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(537,469)
|
-
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Total Stockholders' Equity (Deficit)
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3,681,846
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(3,424,502)
|
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TOTAL LIABILITIES AND EQUITY (DEFICIT)
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$9,799,277
|
$14,290
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Years Ended December 31,
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2019
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2018
|
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Net
revenues
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$183,234
|
$-
|
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Net
revenues - related party
|
162,446
|
-
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|
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Total net revenues
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345,680
|
-
|
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|
|
Cost
of sales
|
1,939, 382
|
-
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Cost
of sales - related party
|
106,752
|
-
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|
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Total cost of sales
|
2,046,134
|
-
|
|
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Gross
loss
|
(1,700,454)
|
-
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
General
and administration
|
3,272,198
|
1,914,571
|
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Selling
and marketing expenses
|
948,296
|
18,036
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Professional
and consulting
|
4,935,394
|
203,619
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Research
and development
|
22,100
|
300,000
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Total
Operating Expenses
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9,177,988
|
2,436,226
|
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Loss
from Operations
|
(10,878,442)
|
(2,436,226)
|
|
|
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|
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Other
Income (expenses):
|
|
|
|
Derivative
loss
|
(1,871,583)
|
(828,694)
|
|
Loss
on stock settlement
|
-
|
(607,929)
|
|
Gain
on settlement of debt, net
|
3,004,630
|
-
|
|
Interest
expense
|
(479,111)
|
(464,470)
|
|
|
|
|
|
Total
Other Income (Expenses), net
|
653,936
|
(1,901,093)
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
(10,224,506)
|
(4,337,319)
|
|
Provision
for income taxes
|
-
|
-
|
|
|
|
|
|
Net
Loss
|
(10,224,506)
|
(4,337,319)
|
|
|
|
|
|
Net
Loss attributable to non-controlling interest
|
537,469
|
-
|
|
|
|
|
|
Net
Loss Attributable to Exactus, Inc.
|
(9,687,037)
|
(4,337,319)
|
|
|
|
|
|
Deemed
dividend on Preferred Stock
|
(904,450)
|
-
|
|
|
|
|
|
Net
Loss available to Exactus, Inc. common stockholders
|
$(10,591,487)
|
$(4,337,319)
|
|
|
|
|
|
Net
Loss per Common Share - Basic and Diluted
|
$(0.30)
|
$(0.91)
|
|
Net
Loss attributable to non-controlling interest per Common Share -
Basic and Diluted
|
$(0.02)
|
$-
|
|
Net
Loss available to Exactus, Inc. common stockholders per Common
Share - Basic and Diluted
|
$(0.31)
|
$(0.91)
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
Basic
and Diluted
|
33,899,585
|
4,764,056
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exactus, Inc. and
Subsidiaries
Consolidated Statements of Stockholders' Equity
(Deficit)
For the Years Ended December 31, 2019 and 2018
|
|
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
|
Common Stock
|
Common
Stock -
Unissued
|
Paid
in
|
Accumulated
|
Non-controlling
|
|
||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Total
|
|
Balance,
December 31, 2017
|
-
|
$-
|
2,800,000
|
$280
|
8,684,000
|
$868
|
1,733,334
|
$173
|
-
|
$-
|
-
|
$-
|
4,383,983
|
$439
|
-
|
$-
|
$3,983,171
|
$(6,200,573)
|
$-
|
$(2,215,642)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D
preferred stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
45
|
1
|
|
|
-
|
-
|
|
|
549,999
|
-
|
-
|
550,000
|
|
Common stock issued for
debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
214,834
|
21
|
|
|
343,714
|
-
|
-
|
343,735
|
|
Common stock issued
upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
685,644
|
69
|
|
|
400,411
|
-
|
-
|
400,480
|
|
Common stock issued for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
375,000
|
37
|
|
|
25,963
|
-
|
-
|
26,000
|
|
Common stock issued for
settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
574,063
|
57
|
|
|
86,742
|
-
|
-
|
86,799
|
|
Warrants issued to
Series B-2 holders
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
-
|
-
|
|
|
138,679
|
-
|
-
|
138,679
|
|
Related party debt
forgiveness
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
-
|
-
|
|
|
1,355,372
|
-
|
-
|
1,355,372
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
-
|
-
|
|
|
227,394
|
-
|
-
|
227,394
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
(4,337,319)
|
-
|
(4,337,319)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Preferred stock issued
pursuant to Management and Services Agreement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10,000
|
1
|
-
|
-
|
-
|
-
|
3,374,999
|
-
|
-
|
3,375,000
|
|
Conversion of Series A
Preferred Stock to Common Stock
|
(551,341)
|
(55)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,756,705
|
276
|
-
|
-
|
(221)
|
-
|
-
|
-
|
|
Conversion of Series
B-1 Preferred Stock to Common Stock
|
-
|
-
|
(1,150,000)
|
(115)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
143,750
|
14
|
-
|
-
|
101
|
-
|
-
|
-
|
|
Conversion of Series
B-2 Preferred Stock to Common Stock
|
-
|
-
|
-
|
-
|
(1,168,000)
|
(116)
|
-
|
-
|
-
|
-
|
-
|
-
|
146,000
|
15
|
-
|
-
|
101
|
-
|
-
|
-
|
|
Conversion of Series D
Prefered Stock to Common Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(27)
|
(1)
|
-
|
-
|
675,000
|
68
|
-
|
-
|
(67)
|
-
|
-
|
-
|
|
Deemed dividend on
Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
904,450
|
(904,450)
|
-
|
-
|
|
Common
stock issued
for private
placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
22,187,007
|
2,219
|
-
|
-
|
7,213,161
|
-
|
-
|
7,215,380
|
|
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
|
|
Common
stock issued for purchase of membership interest in
subsidiary
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
503,298
|
50
|
-
|
-
|
449,950
|
-
|
-
|
450,000
|
|
Common stock unissued
for pursuant to Asset Purchase Agreement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
100,000
|
10
|
69,990
|
-
|
-
|
70,000
|
|
Common stock issued
upon conversion of convertible debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
250,000
|
25
|
-
|
-
|
195,975
|
-
|
-
|
196,000
|
|
Common stock issued and
unissued for prepaid services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
150,000
|
15
|
100,000
|
10
|
120,355
|
-
|
-
|
120,380
|
|
Common stock issued and
unissued for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,312,490
|
131
|
20,830
|
2
|
925,714
|
-
|
-
|
925,847
|
|
Stock-based
compensation in connection with restricted common stock award
grants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
115,280
|
11
|
68,750
|
7
|
143,896
|
-
|
-
|
143,914
|
|
Common stock and
preferred stock cancelled per Surrender and Release
Agreement
|
|
|
|
-
|
-
|
-
|
(1,733,334)
|
(173)
|
-
|
-
|
-
|
-
|
(180,000)
|
(18)
|
-
|
-
|
191
|
-
|
-
|
-
|
|
Common stock issued for
exercise of stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
375,000
|
37
|
(37)
|
-
|
-
|
-
|
|
Stock options granted
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,276,636
|
-
|
-
|
1,276,636
|
|
Stock warrants granted
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,428,243
|
-
|
-
|
1,428,243
|
|
Stock warrants granted
as debt discount
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
194,388
|
-
|
-
|
194,388
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(9,687,037)
|
(537,469)
|
(10,224,506)
|
|
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
|
$(21,129,379)
|
$(537,469)
|
$3,681,846
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exactus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
Years Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(10,224,506)
|
$(4,337,319)
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
Depreciation
|
63,770
|
-
|
|
Derivative
loss
|
1,871,583
|
828,694
|
|
Stock-based
compensation
|
3,774,640
|
892,073
|
|
Bad
debt expense
|
32,577
|
-
|
|
Impairment
expense
|
1,087,346
|
-
|
|
Inventory
reserve
|
723,391
|
-
|
|
Amortization
of prepaid stock-based expenses
|
285,494
|
-
|
|
Amortization
of discount and debt issuance costs for convertible
notes
|
425,712
|
405,173
|
|
Amortization
of intangible assets
|
828,526
|
-
|
|
Deferred
rent
|
85,699
|
-
|
|
Loss
on stock settlement
|
-
|
607,929
|
|
Gain
on settlement of debt
|
(3,004,630)
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Accounts
receivable
|
(88,302)
|
-
|
|
Accounts
receivable - related party
|
(18,860)
|
-
|
|
Inventory
|
(2,864,383)
|
-
|
|
Prepaid
expenses and other current assets
|
(140,765)
|
(872)
|
|
Deposit
|
(80,000)
|
-
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
Accounts
payable
|
518,979
|
188,378
|
|
Accounts
payable - related party
|
454,511
|
-
|
|
Accrued
expenses
|
321,135
|
905,946
|
|
Unearned
revenues
|
215,000
|
-
|
|
Settlement
payable
|
(20,000)
|
(3,000)
|
|
Interest
payable
|
6,793
|
47,243
|
|
Net Cash Used In Operating Activities
|
(5,746,290)
|
(465,755)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Purchase
of membership interest in subsidiary
|
(1,500,000)
|
-
|
|
Purchase
of property and equipment
|
(541,203)
|
-
|
|
Net Cash Used in Investing Activities
|
(2,041,203)
|
-
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Proceeds
from sale of Series D preferred stock
|
-
|
50,000
|
|
Advances
from related party
|
242,500
|
-
|
|
Repayments
on related party advances
|
(370,000)
|
-
|
|
Proceeds
from sale of common stock
|
7,215,380
|
-
|
|
Payments
of principal on notes payable
|
(59,500)
|
-
|
|
Proceeds
from issuance of notes payable
|
97,156
|
103,400
|
|
Payments
of principal on convertible notes
|
(186,443)
|
(25,000)
|
|
Proceeds
from issuance of convertible notes, net of issuance
cost
|
864,845
|
178,100
|
|
Net Cash Provided By Financing Activities
|
7,803,938
|
306,500
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
16,445
|
(159,255)
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
1,960
|
161,215
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
$18,405
|
$1,960
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
Cash
paid for interest and finance charges
|
$40,116
|
$-
|
|
Cash
paid for taxes
|
$-
|
$-
|
|
|
|
|
|
Non-Cash investing and financing activities:
|
|
|
|
Forgiveness
of debt by officers and directors
|
$-
|
$1,355,372
|
|
Proceeds
from sale of Series D preferred stock paid directly to settle
amounts
|
|
|
|
due
to officers and directors
|
$-
|
$500,000
|
|
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
|
$40,616
|
$-
|
|
Convertible
notes settled by common stock issued
|
$196,000
|
$46,295
|
|
Accounts
payable settled by common stock issued
|
$-
|
$85,934
|
|
Common
stock issued for purchase of membership interest in
subsidiary
|
$1,440,000
|
$-
|
|
Common
stock and preferred stock issued for prepaid services
|
$3,495,380
|
$-
|
|
Common
stock issued pursuant to asset purchase agreement
|
$70,000
|
$-
|
|
Increase
in intangible assets for subscription payable
|
$250,000
|
$-
|
|
|
|
|
|
Initial
beneficial conversion feature and debt discount on convertible
notes
|
$670,467
|
$236,500
|
|
Stock
warrants granted as debt discount
|
$194,388
|
$-
|
|
Initial
derivative liability on convertible notes
|
$-
|
$469,000
|
|
Fair
value of common stock issued on conversion of notes
|
$-
|
$400,480
|
|
Fair
value of common stock issued for settlement of accounts
payable
|
$-
|
$343,735
|
|
Preferred
deemed dividend
|
$904,450
|
$-
|
|
Operating
lease right-of-use assets and operating lease
liabilities
|
|
|
|
recorded
upon adoption of ASC 842
|
$2,431,362
|
$-
|
|
Reduction
of operating lease right-of-use asset and operating lease
liabilities
|
$258,109
|
$-
|
|
Prepaid
expenses directly paid by a related party
|
$35,000
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 farms at which the Company
(or C2M) 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 19% as of December 31, 2019. 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 placed a $1 million purchase order
for products. 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 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 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.
F-6
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The
accompanying 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, which present the
consolidated financial statements of the Company and its
majority-owned subsidiaries as of December 31, 2019. 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 December 31, 2019 and 2018,
and for the years then ended, have been made. Those adjustments
consist of normal and recurring adjustments.
Going
concern
These
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 consolidated financial statements, the Company had a
net loss attributable to Exactus Inc. common stockholders of
$10,591,487 for the year ended December 31, 2019. The net cash
used in operating activities was $5,746,290 for the year ended
December 31, 2019. Additionally, the Company had an accumulated
deficit of $21,129,379 and working capital deficit of $1,761,309 at
December 31, 2019. 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 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 year ended December 31, 2019, the
Company received proceeds from the sale of the Company’s
Common Stock of approximately $7.2 million.
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.
Use of Estimates
The
Company prepares its 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
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, 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.
|
F-7
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 December 31, 2019 and
2018:
|
|
At
December 31, 2019
|
At
December 31, 2018
|
||||
|
Description
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
|
Derivative
liabilities
|
—
|
—
|
$880,410
|
—
|
—
|
$1,742,000
|
A roll
forward of the level 3 valuation financial instruments is as
follows:
|
|
December 31,
2019
|
|
Balance at
beginning of year
|
$1,742,000
|
|
Initial fair value
of derivative liabilities as debt discount
|
670,467
|
|
Initial fair value
of derivative liabilities as derivative expense
|
786,823
|
|
Reduction through
conversion of debt
|
(3,403,640)
|
|
Change in fair
value included in derivative loss
|
1,084,760
|
|
Balance at end of
year
|
$880,410
|
|
|
December 31, 2018 |
|
Balance at
beginning of year
|
$930,000
|
|
Initial fair value
of derivative liabilities as debt discount
|
236,500
|
|
Initial fair value
of derivative liabilities as derivative expense
|
232,500
|
|
Reduction through
conversion of debt
|
(90,855)
|
|
Change in fair
value included in derivative loss
|
433,855
|
|
Balance at end of
year
|
$1,742,000
|
As of
December 31, 2019 and 2018, 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 December 31, 2019 and 2018, respectively.
Cash and cash equivalents were $18,405 and $1,960 at December 31,
2019 and 2018, respectively.
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 December 31,
2019, and 2018, allowance for doubtful accounts amounted to $13,991
and $0, respectively. Bad debt expense amounted $32,577 and $0
during the year ended December 31, 2019 and 2018,
respectively.
Prepaid Expenses and Other Current Assets
Total
prepaid expenses and other current assets amounted to $248,776 and
$12,330 at December 31, 2019 and 2018, respectively. 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 (see Note 10). Prepaid expenses consist primarily
of costs paid for future services which will occur within a year.
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.
F-8
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
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 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 $250,192 and $0 related to its intangible
assets (see Note 6) and impairment expense on inventory of its CBD
products of $837,153 (see Note 3) during the year ended December
31, 2019 and 2018, respectively and was included in cost of sales
as reflected in the accompanying consolidated statements of
operations.
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. As of December 31,
2019 and 2018, the Company had $215,000 and $0, respectively, of
unearned revenue recorded from the Company’s related party
customer, C2M (see Note 12).
F-9
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 follow 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
$22,100 and $300,000 were incurred for the year ended December 31,
2019 and 2018, respectively and are included in operating expenses
on the accompanying 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 when the first time the advertising
takes place. Advertising costs were $496,908 and $18,036 for the
year ended December 31, 2019 and 2018, respectively, and are
included in selling and marketing expenses on the accompanying
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
$11,835 and $0 for the year ended December 31, 2019 and 2018,
respectively.
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.
F-10
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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
year ended December 31, 2019 and 2018, the following potentially
dilutive shares were excluded from the computation of diluted
earnings per shares because their impact was
anti-dilutive:
|
|
2019
|
2018
|
|
Stock
Options
|
4,671,280
|
959,375
|
|
Stock
Warrants
|
2,014,299
|
644,083
|
|
Restricted
stock to be issued upon vesting
|
3,583,328
|
-
|
|
Convertible
Preferred Stock
|
9,611,295
|
2,602,167
|
|
Convertible
Debt
|
3,027,778
|
22,134,849
|
|
Total
|
22,907,980
|
26,340,474
|
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.
F-11
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 Company is currently
evaluating the impact of this standard.
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, an Oregon limited
liability company, formed on January 25, 2019 which since
inception, had no operations.
F-12
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 President, 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
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 paid a total of
approximately $2,344,000 between April 2019 and September
2019fully paid the $2,700,000 purchase
price as of December 31, 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.
The
consideration shall be 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.
|
At
December 31, 2019, the Company has an outstanding balance of $0 to
the existing members which was included in subscription payable in
the consolidated balance sheets.
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
|
F-13
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 December 31, 2019,
the Company recorded a non-controlling interest balance of $537,469
in connection with the majority-owned subsidiary, EOW as reflected
in the accompanying consolidated balance sheet and losses
attributable to non-controlling interest of $537,469 during the
year ended December 31, 2019, as reflected in the accompanying
consolidated statements of operations.
Paradise Medlife, LLC
On July
5, 2019, the Company entered into an Operating Agreement (the
“Operating Agreement”) with Paradise Medlife, LLC 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 December 31, 2019, the Company has not yet
contributed the capital of $50,000. The Company anticipates to
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 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 December 31, 2019, the Company has
an outstanding balance of $250,000 to the seller which is included
in subscription payable in 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.
F-14
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
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 (see Note 10).
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 the year ended December 31, 2019 the Company fully impaired
the assets and resulted in an impairment loss of $186,025 related
to the Green Goddess intangible asset (see Note
6).
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
currently held inventory has been written down to a value of $0 due
to the age and questionable salability of the product.
During the year ended December 31, 2019, the Company fully impaired
the finished goods related to CBD products and resulted in an
impairment loss of $837,153 which is included in cost of sales on
the consolidated statements of operations.
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 the 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.
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.
F-15
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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
the year ended December 31, 2019 the Company recorded an impairment
expense of $64,167 related to the Levor intangible asset (see Note
6).
NOTE 4 – INVENTORY
Inventory,
net consisted of the following:
|
|
December
31,2019
|
December
31,2018
|
|
|
|
|
|
Finished goods
– hemp flowers and hemp cuttings
|
$1,337,809
|
$-
|
During
the year ended December 31, 2019, the Company recorded a reserve or
inventory write-off related to inventory of $723,391 which is equal
to the difference between the cost of the inventory and its
estimated net realizable value and is included in cost of sales as
reflected in the accompanying consolidated statements of
operations. Additionally, during the year ended December 31, 2019,
the Company fully impaired the finished goods related to purchased
CBD products from C2M and resulted in an impairment loss of
$837,153 which is included in cost of sales on the consolidated
statements of operations (see Note 3).
NOTE 5 – PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
Estimated
life
|
As
of
December
31,2019
|
As
of December 31,2018
|
|
|
|
|
|
|
Greenhouse
|
10
years
|
$34,465
|
$-
|
|
Fencing and
storage
|
5
years
|
44,543
|
-
|
|
Irrigation
|
5
years
|
387,975
|
-
|
|
Office and computer
equipment
|
3
years
|
40,834
|
-
|
|
Farming
Equipment
|
5
years
|
11,500
|
-
|
|
Leasehold
improvement
|
5
years
|
21,886
|
-
|
|
Less: Accumulated
depreciation
|
|
(63,770)
|
-
|
|
|
$477,433
|
$-
|
|
Depreciation
expense amounted to $63,770 and $0 for the year ended December 31,
2019 and 2018, respectively. During the year ended December 31,
2019, depreciation expense of $26,069 was included in cost of sale
and $37,701 was included in general and administrative expenses as
reflected in the accompanying consolidated statements of
operations.
NOTE 6 – INTANGIBLE
ASSET
At
December 31, 2019 and 2018, intangible asset consisted of the
following:
|
|
Useful
life
|
December 31,
2019
|
December 31,
2018
|
|
Participation
rights - EOW
|
3 year
|
$2,930,000
|
$-
|
|
Hemp operating
license - EOW
|
1 year
|
10,000
|
-
|
|
Trademark –
Green Goddess
|
3 year
|
3,500
|
-
|
|
Customer list
– Green Goddess
|
3 year
|
212,529
|
-
|
|
Brand -
Levor
|
3 year
|
70,000
|
-
|
|
|
3,226,029
|
-
|
|
|
Less: accumulated
amortization
|
(828,526)
|
-
|
|
Less: Impairment
expenses
|
(250,192)
|
-
|
|
|
$2,147,311
|
$-
|
F-16
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
For the
year ended December 31, 2019 and 2018, amortization of intangible
assets amounted to $828,526 and $0, respectively. Amortization of
intangible assets attributable to future periods is as
follows:
|
Year ending
December 31:
|
Amount
|
|
2020
|
$978,750
|
|
2021
|
976,667
|
|
2022
|
191,894
|
|
|
$2,147,311
|
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 under
this agreement for the year ended December 31, 2019.
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 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.
The Company has recognized lease expense of $100,000 for the year
ended December 31, 2019 and was included in cost of sales on the
consolidated statements of
operations.
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. The Company recognized lease
expense of $134,667 included in cost of sales for the year ended
December 31, 2019 and recorded $17,333 as prepaid expense to be
amortized over the term of this lease.
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.
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 August 2019 which are the execution dates of various lease
agreements, the Company recorded right-of-use assets totaling
$2,431,362 and total lease liabilities of $2,431,362 based on an
incremental borrowing rate of 10%. The Company recorded lease
expense of $340,365 and $0 for the year ended December 31, 2019 and
2018, respectively. During the year ended December 31, 2019, lease
expenses of $134,667 was included in cost of sale and $205,698 was
included in general and administrative expenses as reflected in the
accompanying consolidated statements of operations.
The
cash outflows from operating leases for the year ended December 31,
2019 was $172,410. The weighted average remaining lease term and
the incremental borrowing rate for operating leases at December 31,
2019 were 2.81 years and 10%, respectively.
F-17
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
ROU is
summarized below:
|
|
December
31, 2019
|
|
Farm lease
ROU
|
$506,506
|
|
Commercial lease
ROU
|
1,924,856
|
|
Less accumulated
amortization
|
(258,109)
|
|
Balance of ROU
asset as of December 31, 2019
|
$2,173,253
|
Operating
lease liability related to the ROU asset is summarized
below:
|
|
December
31, 2019
|
|
Farm
lease
|
$506,506
|
|
Commercial lease
ROU
|
1,924,856
|
|
Total lease
liability
|
2,431,362
|
|
Reduction of lease
liability
|
(172,410)
|
|
Total
|
2,258,952
|
|
Less: current
portion
|
(432,065)
|
|
Long term portion
of lease liability as of December 31, 2019
|
$1,826,887
|
Minimum
lease payments under non-cancelable operating lease at December 31,
2019 are as follows:
|
Year ended December
31, 2019
|
$270,672
|
|
Year ended December
31, 2020
|
682,000
|
|
Year ended December
31, 2021
|
696,580
|
|
Year ended December
31, 2022
|
560,933
|
|
Year ended December
31, 2023
|
531,063
|
|
Year ended December
31, 2024
|
315,140
|
|
Total
|
3,056,388
|
|
Less: undiscounted
payments during the year ended December 31, 2019
|
(270,672)
|
|
Total undiscounted
future minimum lease payments due as of December 31,
2019
|
2,785,716
|
|
Imputed
interest
|
(526,764)
|
|
Total operating
lease liability
|
$2,258,952
|
NOTE 8 - NOTES PAYABLE
– RELATED PARTIES
On June
28, 2017, the Company issued promissory notes to two of the
Company’s then executive officers. The promissory notes
accrue interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. During the year
ended December 31, 2019, the Company had borrowed $14,229 under the
promissory notes. Between February 2019 and March 2019, the Company
paid $11,129 under the promissory notes. Additionally, in March
2019, the Company issued 153,080 shares of its Common Stock to a
former executive officer upon the conversion of $27,000 of
principal amount and accrued interest of $3,267 under a promissory
note. In August 2019, the Company repaid principal amount of
$21,000 and accrued interest of $1,769. The remaining principal
balance of $6,500 and accrued interest of $2,107 were deemed paid
pursuant to their severance arrangements. During the year ended
December 31, 2019 and 2018, the Company recognized $1,214 and
$3,981, respectively, of interest expense. As of December 31, 2019
and 2018, the notes had accrued interest balances of $0 and $5,928,
respectively. As of December 31, 2019 and 2018, the principal
balance under the notes was $0 and $51,400,
respectively.
F-18
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
During the year ended December 31, 2019 and 2018, the Company
recognized $2,048 and $0, respectively, of interest expense. As of
December 31, 2019 and 2018, the notes had accrued interest balances
of $1,278 and $0, respectively. As of December 31, 2019 and 2018,
the principal balance under the notes was $55,556 and $0,
respectively. The Company is currently negotiating on
extending the maturity date of the related party note with
principal amount of $55,556.
NOTE 9 - CONVERTIBLE NOTES
PAYABLE
|
The Company’s
convertible notes consist of the following as of December 31, 2019
and 2018:
|
2019
|
2018
|
|
|
|
|
|
Convertible note in
the amount of $110,000 dated, August 14, 2017, accruing interest at
an annual rate of 8%, matured on August 14, 2018, and convertible
into Common Stock of the Company at a conversion price equal to the
lesser of (i) $2.00 and (ii) 60% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $87,000
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. On December 18, 2017, the Company
further amended the Note to (i) increase the aggregate principal
amount of the Note to $115,000 and (ii) extend the date by which
the Company is required to cause the Registration Statement to
become effective to January 4, 2018. On January 4, 2018, the
Company further amended the Note to (i) increase the aggregate
principal amount of the Note to $125,000 and (ii) extend the date
by which the Company is required to cause the Registration
Statement to become effective to February 1, 2018. In March 2018,
the Company paid $25,000 towards principal of the Note. On May 7,
2018, the Company further amended the Note to (i) increase the
aggregate principal amount of the Note to $121,481 and (ii) extend
the date by which the Company is required to cause the Registration
Statement to become effective to May 31, 2018. On June 11,
2018, the holder of the Note converted $10,000 of the principal of
the Note into 22,727 shares of Common Stock. On July 13, 2018, the
holder of the note converted $10,500 of the principal of the Note
to 116,667 shares of Common Stock. On August 30, 2018, the holder
of the Note converted $10,500 of the principal of the Note to
218,750 shares of Common Stock. On November 13, 2018, the Company
further amended the Note to (i) increase the aggregate principal
amount of the Note by $10,000 and (ii) extend the date by which the
Company is required to cause the Registration Statement to become
effective to December 13, 2018. The Company determined that the
conversion feature embedded in the Note required bifurcation and
presentation as a liability.
|
$-
|
$101,481
|
|
|
|
|
|
Convertible note in
the amount of $27,500 dated, September 27, 2017, accruing interest
at an annual rate of 8%, matured on September 27, 2018, and
convertible into Common Stock of the Company at a conversion price
equal to the lesser of (i) $2.00 and (ii) 60% of the average of the
three lowest trading prices of the Company’s Common Stock
during the twenty-day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $21,750
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. On May 7, 2018, the Company
further amended the Note to increase the aggregate principal amount
of the Note to $4,125. On November 13, 2018, the Company
amended the Note to (i) increase the aggregate principal amount of
the Note by $5,000 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
December 13, 2018.
|
-
|
36,625
|
|
Convertible note in
the amount of $65,000 dated, December 21, 2017, accruing interest
at an annual rate of 12%, matured on December 21, 2018, and
convertible into Common Stock of the Company at a conversion price
equal to the lesser of (i) closing sale price of the Common Stock
on the principal market on the trading day immediately preceding
the closing date and (ii) 60% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $62,400
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. On March 28, 2018, the Company
amended the Note to (i) increase the aggregate principal amount of
the Note to $71,500 and (ii) adjust the conversion price to the
lesser of (i) closing sale price of the Common Stock on the
principal market on the trading day immediately preceding the
closing date and (ii) 51% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-five day trading period prior to the conversion. On November
11, 2018, the holder of the note converted $5,325 of the principal
of the Note to 187,500 shares of Common Stock. On December 18,
2018, the holder of the Note converted $4,850 of the principal of
the Note to 100,000 shares of Common Stock. The Company determined
that the conversion feature embedded in the Note required
bifurcation and presentation as a liability.-
|
89,588
|
|
F-19
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
|
Convertible note in
the amount of $125,000 dated, December 26, 2017, accruing interest
at an annual rate of 12%, matured on September 26, 2018, and
convertible into Common Stock of the Company at a conversion price
equal to the lesser of (i) the lowest trading price of the
Company's Common Stock during the twenty-five-day trading period
prior to the issue date of the Note and (ii) 50% of the average of
the three lowest trading prices of the Company’s Common Stock
during the twenty-five day trading period prior to the conversion
(the “Note”). The Company received net proceeds of
$112,250 from the issuance of the Note, after deducting an original
issue discount and debt issuance costs. On July 11, 2018, the
holder of the note elected to convert interest of $3,120 into
15,000 shares of Common Stock. On November 28, 2018, the holder of
the Note converted $2,000 of the interest of the Note to 25,000
shares of Common Stock. The Company determined that the conversion
feature embedded in the Note required bifurcation and presentation
as a liability.
|
-
|
125,000
|
|
Convertible note in
the amount of $58,500 dated, March 16, 2018, accruing interest at
an annual rate of 9%, matures on December 16, 2018, and convertible
into Common Stock of the Company at a conversion price equal to the
lesser of (i) $2.00 and (ii) 51% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-five day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $41,050
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. The Company determined that the
conversion feature embedded in the Note required bifurcation and
presentation as a liability.
|
-
|
58,500
|
|
Convertible note in
the amount of $60,000 dated, June 29, 2018, accruing interest at an
annual rate of 12%, maturing on June 29, 2019, and convertible into
Common Stock of the Company at a conversion price equal to 50% of
the average of the three lowest trading prices of the
Company’s Common Stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $51,900 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
In December 2018, the Company agreed to increase the principal
balance of note by $30,000 in relation to the assignment of the
Note by the holder to another third party. The Company determined
that the conversion feature embedded in the Note required
bifurcation and presentation as a liability.
|
-
|
55,881
|
|
Convertible note in
the aggregate amount of $30,000 dated, July 3, 2018, accruing
interest at an annual rate of 12%, maturing on July 3, 2019, and
convertible into Common Stock of the Company at a conversion price
equal to 50% of the average of the three lowest trading prices of
the Company’s Common Stock during the twenty-day trading
period prior to the conversion (the “Notes”). The
Company received net proceeds of $28,000 from the issuance of the
Note, after deducting an original issue discount and debt issuance
costs. The Company determined that the conversion feature embedded
in the Note required bifurcation and presentation as a liability.
During the year ended December 31, 2018, the Company recorded an
initial derivative liability of $68,000, resulting in initial
derivative expense of $40,000, and an initial debt discount of
$28,000 to be amortized into interest expense through the maturity
of the Note.
|
-
|
14,120
|
|
|
|
|
|
Convertible notes
in the aggregate amount of $70,500 dated October 23, 2018 ($35,250)
and October 26, 2018 ($35,250), accruing interest at an annual rate
of 12%, maturing in one year, and convertible into Common Stock of
the Company at a conversion price equal to the lesser of i) the
closing sale price of the Company's Common Stock on closing date
and ii) 60% of the lowest trading price of the Company’s
Common Stock during the twenty-day trading period prior to the
conversion (the “Note”). The Company received net
proceeds of $57,000 from the issuance of the Note, after deducting
an original issue discount and debt issuance costs. The Company
determined that the conversion features embedded in the Notes
required bifurcation and presentation as liabilities. During the
year ended December 31, 2018, the Company recorded initial
derivative liabilities of $187,000, resulting in initial derivative
expense of $127,000, and initial debt discounts of $60,000 to be
amortized into interest expense through the maturity of the
Note.
|
-
|
10,593
|
|
|
|
|
|
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 offers
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 the
second quarter of fiscal 2020 and as such the principal balance of
the convertible note remains outstanding as of December 31,
2019.
|
100,000
|
100,000
|
F-20
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
|
|
|
|
||||
|
Convertible
Notes in the amount of $229,890, issued on January 11, 2019 which
features an original issue discount of 10%. The Note bears interest
at a rate of 8% per year, and is due 12 months from the date of
issue. Beginning on the 170th day after issue, the Note is
convertible to our Common Stock at price equal to the lesser of
$2.00 ($0.25 pre-split) per share, or the variable conversion
price. The variable conversion price is defined as 60% of the
average of our 3 lowest trading prices in the 20 trading days prior
to the conversion.
|
-
|
-
|
||||
|
|
|
|
||||
|
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 (see Note 10).
|
85,906
|
-
|
||||
|
Carrying Amount of
Convertible Debt
|
$185,906
|
$591,788
|
|
Less: Current
Portion
|
(85,906)
|
(491,788)
|
|
Convertible Notes,
Long Term
|
$100,000
|
$100,000
|
F-21
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The
following is a summary of the carrying amounts of convertible notes
as of December 31, 2019 and 2018:
|
|
2019
|
2018
|
|
Principal
Amount
|
$933,333
|
$701,694
|
|
Add: amortization
of redemption premium
|
8,280
|
-
|
|
Less: unamortized
debt discount and debt issuance costs
|
(755,707)
|
(109,906)
|
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$185,906
|
$591,788
|
In
connection with the issuance of notes during the year ended
December 31, 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. The Company recognized
gain on extinguishment of debt due to repayment and conversions of
notes into shares of common and preferred stock of $3,004,630 and
change in fair value of derivative liabilities of $1,084,760 during
the year ended December 31, 2019. The Company determined that the
conversion options embedded in the 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 year ended December 31, 2019 and
2018, the Company measured the fair value of the embedded
derivatives using a binomial model and Monte Carlo simulations, and
the following assumptions:
|
|
2019
|
|
|
2018
|
|
Expected
Volatility
|
239.97%
to 567.11%
|
|
|
85.80%
to 455.80%
|
|
Expected
Term
|
0.25 to
1.0 Years
|
|
|
0.25 to
1.0 Years
|
|
Risk
Free Rate
|
1.59%
to 2.54%
|
|
|
1.60%
to 2.60%
|
|
Dividend
Rate
|
0.00%
|
|
|
0.00%
|
During
the year ended December 31, 2019, the Company issued an aggregate
of 849,360 Series A preferred stock to various note holders and
also sold an aggregate of 55,090 shares of preferred stock for
$55,090 which were used to repay and convert a total of $842,791 of
principal amount (includes penalty fees of $149,313, included in
derivative expenses) during the year ended December 31, 2019 and
accrued interest of $61,569 pursuant to the Exchange Agreements
(the “Exchange Agreements”) (see Note 10). During the
year ended December 31, 2019, the Company issued 250,000 shares of
Common Stock to a note holder upon the conversion of $4,000 of
accrued interest. In March 2019, the Company paid off the principal
notes of $186,443 (includes penalty fees of $48,337, included in
derivative expenses) during the year ended December 31, 2019 and
accrued interest of $20,467. During the year ended December 31,
2019, the Company recorded a gain on settlement of debt of
$3,004,630 in connection with the exchange and repayments of
various convertible notes.
During
the years ended December 31, 2019 and 2018, the Company recognized
$11,481 and $55,877, respectively, of interest expense. During the
years ended December 31, 2019 and 2018, the Company amortized debt
discount of $425,712 and $405,173, respectively, of interest
expense.
As of
December 31, 2019 and 2018, the notes had accrued interest balances
of $15,399 and $60,372, 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.
F-22
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
On
December 21, 2018, we filed a Certificate of Cancellation of our
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 our Notes under the Exchange Agreements (see Note
9), and filed a new Certificate of Designation of Preferences,
Rights and Limitations of Series A Convertible Preferred Stock (the
“Series A Preferred Certificate of
Designation”).
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.
During
the year ended December 31, 2019, the Company issued an aggregate
of 849,360 shares of Series A Preferred Stock to various note
holders and also sold an aggregate of 55,090 shares of Series A
preferred stock for $55,090 in a private placement, which was used
to repay and convert a total of $842,791 of principal amount
(includes penalty fees of $149,313 during the year ended December
31, 2019) and accrued interest of $61,569 pursuant to Exchange
Agreements. Accordingly, the Company recognized a deemed dividend
of $904,450 during the year ended December 31, 2019 in connection
with the issuance of these Series A Preferred Stock.
During
the year ended December 31, 2019, the Company converted 551,341
Series A Preferred Stock into 2,756,705 shares of Common Stock.
There are 353,109 and 0 shares of Series A Preferred Stock
outstanding as of December 31, 2019 and 2018,
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.
During
the year ended December 31, 2019, the Company converted 1,150,000
Series B-1 Preferred Stock into 143,750 shares of Common
Stock. There are 1,650,000 and 2,800,000 shares of
Series B-1 preferred stock outstanding, which are convertible into
206,250 and 350,000 shares of common stock, as of December 31, 2019
and 2018, respectively.
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.
F-23
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
During
the year ended December 31, 2019, the Company converted 1,168,000
Series B-2 Preferred Stock into 146,000 shares of Common
Stock. There are 7,516,000 and 8,684,000 shares of
Series B-1 preferred stock outstanding, which were convertible into 939,500 and
1,085,500 shares of common stock as of December 31, 2019 and
2018, respectively.
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.
Due to
the Company had been unable to proceed with the clinical trials and
research, on July 31, 2019, the Company entered into a Surrender
and Mutual Release Agreement (the “Cancellation
Agreement”) to terminate the agreements and to cancel all
issued and outstanding shares of Series C Preferred. Accordingly,
the Company cancelled 1,733,334 shares of Series C Preferred Stock
which was recorded at par value.
As of
December 31, 2019 and 2018, there were 0 and 1,733,334 shares of
Series C Preferred Stock issued and outstanding which were convertible into 0 and 216,667 shares
of common stock, respectively.
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.
On
March 28, 2018, the Company issued 45 shares of Series D Preferred
Stock. The Company received $550,000 in connection with the
Offering including $50,000 in cash for 5 shares of Series D
Preferred Stock and $500,000 in debt re-payment to officers and
directors for 2016 and 2017 bonuses for 40 shares of Series D
Preferred Stock. During the year ended December 31, 2019, the
Company converted 27 shares of Series D Preferred Stock into
675,000 shares of Common Stock. There are 18 and 45
shares of Series D preferred stock outstanding which were convertible into 450,000 and 1,125,000
shares of common stock as of December 31, 2019 and 2018,
respectively.
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.
F-24
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
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 year ended December 31, 2019, the Company
recorded stock-based compensation of $260,795 and prepaid expense – related
party of $3,114,204 to be
amortized over the term of the
MSA.
As of
December 31, 2019 and 2018, there were 10,000 and 0 shares of
Series E Preferred Stock issued and outstanding which were convertible into 6,250,000 and 0 shares
of common stock, respectively.
Common Stock
The
Company’s authorized Common Stock consists of 650,000,000
shares with a par value of $0.0001 per share.
The following were transaction during the year ended December 31,
2018:
Common stock issued for the settlement of accounts
payable
During
the year ended December 31, 2018, the Company issued 214,834
post-split shares (1,718,675 pre-split shares) of its common stock
with a fair value of $343,735 to settle $85,934 of accounts payable
and the balance of $257,801 recorded as loss on stock
settlement.
Common stock issued for the service
During
the year ended December 31, 2018, the Company issued 250,000
post-split shares (2,000,000 pre-split shares) of its common stock
with a fair value of $18,000 recorded as expenses.
Common stock upon conversion of convertible debt
During
the year ended December 31, 2018, the Company issued 685,644
post-split shares (5,485,152 pre-split shares) of common stock upon
the conversion of convertible notes and interest of $46,295. The
fair value of shares on conversion was $400,480 having a derivative
value on date of conversion of $90,855 and balance $263,330 was
recorded as loss on stock settlement.
F-25
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Common stock issued for services
During
the year ended December 31, 2018, the Company issued 125,000
post-split shares (1,000,000 pre-split shares) of common stock,
with a fair value of $8,000 for services rendered.
Common stock issued for settlement of Preferred B-2
During
the year ended December 31, 2018, the Company issued 574,063
post-split shares (4,592,500 pre-split shares) of common stock,
with a fair value of $86,798 in settlement with two holders of our
Series B-2 Preferred Stock in exchange for their agreement to
convert their shares of Series B-2 Preferred Stock into Common
Stock, an additional further investment or agreement to purchase
and thereafter restructure certain outstanding notes of the Company
by cancelling such notes in exchange for shares of newly-designated
Series A Preferred Stock of the Company, and release of any and all
claims in connection with their prior investments.
The following were transaction during the year ended December 31,
2019:
Sale of Common Stock for private placement
During
the year ended December 31, 2019, the Company sold an aggregate of
22,187,007 shares of Common Stock for total proceeds of
$7,215,380.
Common Stock issued for Development Agreement
In
consideration for the Development Agreement (see Note 11), 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, with exercise
price of $0.32 per share to certain 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. Consequently, such transaction resulted in a
change of control whereby, C2M obtained majority control through
its Common Stock ownership (See Note 11). Therefore, the Company
accounted for the 8,385,691 shares of Common Stock under ASC
845-10-S99 “Transfer of Nonmonetary Assets by Promoters or
Shareholders” whereby the transfer of nonmonetary assets to a
company by its promoters or shareholders in exchange for stock
prior to or at the time of the company's initial public offering
normally should be recorded at the transferors' historical cost
basis determined under GAAP. The Company determined that the value
of the Development Agreement is $0 and recording it in a step-up
basis would not be appropriate since C2M is considered a promoter,
majority shareholder and also a related party having an ownership
interest of 51% in the Company on the execution date of the
Development Agreement. Accordingly, the Company recorded the
issuance of 8,385,691 shares of Common Stock at par value. The
750,000 options were valued on the grant date at approximately
$0.13 per option for a total of $96,000 using a Black-Scholes
option pricing model with the following assumptions: stock price of
$0.13 per share (based on the quoted trading price on the dates of
grants), volatility of 296%, expected term of 10 year, and a risk
free interest rate of 2.74%. During the year ended December 31,
2019, the Company recorded stock-based compensation of
$96,000.
Common Stock issued for settlement of debt
During
the year ended December 31, 2019, the Company issued 250,000 shares
of Common Stock to note holders upon the conversion of $4,000 of
accrued interest. The fair value of shares on conversion was
$196,000 having a derivative value on date of conversion of $18,000
and the balance of $178,000 was recorded as loss on settlement of
debt. Additionally, in March 2019, the Company issued an aggregate
of 203,080 shares of Common Stock to a noteholder upon the
conversion of $27,000 of principal amount, accrued interest of
$3,267 and $10,349 of accrued expenses.
Common Stock for membership interest in subsidiary
On
March 11, 2019, with the assistance of C2M and assignment of
rights, under the term of the Purchase Agreement, the Company
acquired additional 20.1% from existing members in consideration
for payment of 937,500 shares of Common Stock (see Note 3).
The 937,500 shares of Common Stock were valued at the fair value of
$1.056 per common share or $990,000 based on the quoted trading
price on the date of grant. Additionally, on June 10, 2019, the
Company was required to issue the existing members 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.
F-26
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Common Stock for services
In
April 2019, the Company entered into a consulting agreement for
investor relations services. The consultant shall receive
compensation of 50,000 shares of the Company’s Common Stock
and shall vest over one year with 4,174 common stock to vest on the
date of this agreement and 4,166 common shares on the first day of
each month thereafter. During the year ended December 31, 2019, the
Company granted 50,000 shares of Common Stock and valued the shares
of Common Stock at the fair value of $1.55 per common share or
$77,500 based on the quoted trading price on the date of grant. The
Company recorded stock-based compensation of $58,128 during the
year ended December 31, 2019. In connection with this transaction,
there were 20,830 shares of Common Stock to be issued as of
December 31, 2019.
In May
2019, the Company entered into a 6-month consulting agreement for
investor relations services. The consultant shall receive
compensation of 10,000 shares of the Company’s Common Stock
per month or a total of 60,000 shares of Common Stock. During the
year ended December 31, 2019, the Company issued an aggregate of 60,000 shares of Common
Stock and valued the shares of Common Stock at the average fair
value of $0.72 per common share or $43,000 based on the sales of
common stock on recent private placements on the dates of grants
at the end of each month. The
Company recorded stock-based compensation of $43,000 during the
year ended December 31, 2019.
Between
August 2019 and November 2019, the Company entered into various
consulting agreements with terms from 6 months to 2 years. The
Consultants shall receive compensation in aggregate of 150,000
shares of the Company’s Common Stock. During the year ended
December 31, 2019, the Company issued 50,000 shares of Common Stock
and 100,000 shares remains to be unissued as of December 31, 2019
and valued the shares of Common Stock at the fair value ranging
from approximately $0.50 to $0.61 per common share or $80,500 based
on the sales of common stock on recent private placements on the
dates of grants. During the year ended December 31, 2019, the
Company recorded stock-based compensation of $24,699 and prepaid
expense of $55,801 to be amortized over the term of this
agreement.
In
December 2019, the Company issued 100,000 shares of Common Stock
for legal services to be rendered and valued the shares of Common
Stock at the fair value of approximately $0.40 per common share or
$39,880 based on the based on the quoted trading price on the date
of grant. During the year ended December 31, 2019, the Company
recorded prepaid expense of $39,880 to be amortized over the term
of this agreement.
On October 23, 2019, the Amended and Restated
Operating Agreement (the “Amended Operating Agreement”)
of EOW was amended. Under the terms of the Amended Operating
Agreement, the minority members of EOW conveyed their rights to
distributions related to the current 2019 hemp crop. As a result,
the Company shall receive 100% of the distributions of net profit
from the 2019 hemp crop on approximately 226 acres of farmland
currently growing in Oregon. The minority EOW members acknowledge
and agree that each is waiving their right to participate, to the
extent of their respective percentage interest, in distributions
arising from the profits generated from the harvest of the 2019
hemp crop. Thereafter, the distributions shall continue as set
forth in Section 5.02(a) of the Operating Agreement. Since March
2019, the Company has owned 50.1% of the limited liability
membership interests in EOW. In addition, the members amended the
payment schedule under which farm costs are required to be made by
the Company. As consideration for the amendment, the Company agreed
to issue 1,223,320 shares of its common stock, par value $0.0001
per share, to the minority members of EOW (“EOW
Members”). The Company determined that the 1,223,320
shares of common stock is deemed compensation to the EOW Members in
exchange for their right to receive their respective membership
distribution which is considered income to them. As such the
Company valued the shares of Common Stock at the fair value of
$0.69 per common share or $844,091 based on the quoted trading
price on the date of grant. The Company recorded stock-based
compensation of $844,091 during the year ended December 31,
2019.
Common Stock in connection with Asset Purchase
Agreements
On July
31, 2019, under the terms of the Green Goddess Purchase Agreement
the Company agreed to issue 250,000 shares of the Company’s
Common Stock to the Founder (see Note 3). 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). During the year ended December 31, 2019, the Company
recorded stock-based compensation of $33,750 in connection with
this agreement. In connection with this transaction, the Company
issued 62,500 shares of commons stock which represents the vested
shares and there remains 187,500 unvested shares as of December 31,
2019.
F-27
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
On
September 30, 2019, pursuant to the terms of an asset purchase
agreement with Levor, LLC, 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 (see Note 3). In
connection with this transaction, there were 100,000 shares of
Common Stock to be issued as of December 31,
2019.
Common Stock grants under the 2019 Plan
On
September 13, 2019, the board of directors (the
“Board”) of the Company appointed Vladislav
“Bobby” Yampolsky to serve as its Interim Executive
Chairman. Prior to his appointment, Mr. Yampolsky served as a
member of the Board. In addition, the Board also appointed the
Company’s current President, Emiliano Aloi, to serve as the
Company’s Interim Chief Executive Officer. The appointments
were made following the departure of the Company’s Chairman
and CEO in August 2019. Vladislav (Bobby) Yampolsky is the founder,
manager and controlling member of C2M, the Company’s
largest stockholder.
On
September 13, 2019, the Board delegated authority to the Chairman
of the Board and/or the CEO to issue restricted stock and options
under the 2019 Equity Incentive Plan (the “2019 Plan”)
to non-executive employees and consultants. The aggregate
number of shares of common stock of the Company, par value $0.0001
(“Common Stock”), issuable under delegated authority
may not exceed 500,000 shares, and no individual award may exceed
100,000 shares, provided, further, that the minimum exercise price
of awards made shall be the fair market value of the Common Stock
determined in accordance with the 2019 Plan.
On
September 13, 2019, the Board approved additional awards to
officers, directors and consultants under the 2019 Plan as
follows:
|
Name
|
Amount of Grant
|
Vesting Period
|
Vesting Commencement Date
|
|
Bobby
Yampolsky - Director
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests
October 1, 2019.
|
|
Emiliano
Aloi - CEO
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests
on the first day of calendar month following:
(A) the
date that the 2019 Exactus One World agriculture total yield is at
least 400,000 pounds of total biomass for production and held for
sale or processing (including top flower harvest) and (B) the date
that the Company has reported at least $5 million of revenue on a
consolidated basis.
|
|
Consultant
– Legal and consulting services
|
100,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests
October 1, 2019.
|
|
Consultant
– consulting services
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests
on the first day of calendar month following:
(A) the
date that the 2019 Exactus One World agriculture total yield is at
least 400,000 pounds of total biomass for production and held for
sale or processing (including top flower harvest) and (B) the date
that the Company has reported at least $5 million of revenue on a
consolidated basis.
|
The
Company valued the shares of Common Stock at the average fair value
of $0.70 per common share or $2,170,000 based on the sales of
common stock on recent private placements on the dates of grants.
During the year ended December 31, 2019, the Company recorded
stock-based compensation of $48,125 in connection with these
restricted common stock grants. In connection with this
transaction, there were an aggregate of 68,750 shares of Common
Stock to be issued as of December 31, 2019 which represents the
vested shares and there remains 3,031,250 unvested shares as of
December 31, 2019.
F-28
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Approval of Director Compensation Plan
On
September 13, 2019, the Board established a new Director
Compensation Plan (the “Director Plan”) to be
administered under the 2019 Plan applicable to each
non-employee/non-executive director, which Director Plan replaces
the prior compensation arrangements previously applicable to
non-employee/non-executive directors. The material terms of the
Director Plan are set forth below:
|
Timing
|
Amount
|
Vesting
|
|
Initial
appointment
(non-employee/non-executive
directors)
|
$100,000
of the Company’s Common Stock issued on and priced at fair
market value of the Common Stock on the last calendar date prior to
appointment.
|
1/24th vests
upon date of grant and 1/24th vests on the first calendar date of
each calendar month following appointment until fully vested as
long as continuing as a director.
|
|
Directors
continuing after initial appointment
(non-employee/non-executive
directors)
|
$25,000
of Common Stock issued annually on the first day of September and
priced at fair market value of the Common Stock as of the calendar
date prior to the issuance for each continuing director that has
served a minimum of 9 consecutive months as of the first day of
September each year.
|
1/24th
vests upon date of grant and 1/24th vests on the first
calendar date of each calendar month following appointment until
fully vested as long as continuing as a director.
|
In June
2019, the Company granted 100,000 shares of restricted common stock
to a former director who resigned in December 2019. The vesting
period was 1/24th vests upon date of grant and 1/24th vests on
the first calendar date of each calendar month following
appointment until fully vested as long as continuing as a director.
In December 2019, the Company issued the 27,778 vested shares of
Common Stock and was valued at the fair value of $1.05 per common
share or $29,167 based on the quoted trading price on the date of
grant. During the year ended December 31, 2019, the Company
recorded stock-based compensation of $29,167 in connection with
these restricted common stock grants.
In
December 2019, the Company granted an aggregate of 300,000 shares
of restricted common stock to three directors of the Company. The
vesting periods are 1/24th vests upon date of grant and
1/24th vests on the first calendar date of each calendar month
following appointment until fully vested as long as continuing as a
director. The Company valued the shares of Common Stock at the fair
value of $0.54 per common share or $162,000 based on the quoted
trading price on the date of grant. During the year ended December
31, 2019, the Company recorded stock-based compensation of $13,500
in connection with these restricted common stock grants. In
connection with this transaction, there were an aggregate of 25,002
shares of Common Stock issued as of December 31, 2019 which
represents the vested shares and there remains 274,998 unvested
shares as of December 31, 2019.
Cancellation of Common Stock
On July
31, 2019, the Company entered into a Surrender and Mutual Release
Agreement (the “Cancellation Agreement”) to terminate
the agreements and to cancel all issued and outstanding shares of
Series C Preferred and 180,000 shares of Common Stock, and all
warrants issued under these arrangements. Accordingly, the Company
cancelled 180,000 shares of Common Stock which was recorded at par
value.
Common Stock Warrants
A
summary of the Company’s outstanding stock warrants as of
December 31, 2019 and 2018 and changes during the period ended are
presented below:
|
|
Number of
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Balance at December
31, 2017
|
208,333
|
$4.80
|
1.50
|
|
Granted
|
435,750
|
0.32
|
1.79
|
|
Balance at December
31, 2018
|
644,083
|
1.77
|
1.38
|
|
Granted
|
1,578,549
|
0.45
|
5.00
|
|
Cancelled
|
—
|
—
|
—
|
|
Exercised
|
—
|
—
|
—
|
|
Forfeited
|
(208,333)
|
4.80
|
—
|
|
Balance at December
31, 2019
|
2,014,299
|
$0.45
|
3.31
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2019
|
|
$0.45
|
3.31
|
|
|
|
|
|
|
Weighted average
fair value of warrants granted during the period
|
|
$1.05
|
|
F-29
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
As of
December 31, 2019, aggregate intrinsic value in connection with
exercisable warrants amounted to $178,610.
On
October 15, 2018, the Company issued 435,750 warrants with an
exercise price of $0.32 per share and exercisable for two years to
a Series B-2 Holder. These warrants have a grant date fair value of
$0.32 per warrant, determined using the Black-Scholes method based
on the following assumptions: (1) risk free interest rate of 2.54%;
(2) dividend yield of 0%; (3) volatility factor of the expected
market price of our common stock of 396.30%; and (4) an expected
life of the warrants of 2 years. The Company recorded an expense on
these warrants of $138,679.
On
March 21, 2019, the Company issued 718,750 warrants to purchase
shares of the Company’s Common Stock in connection with a
consulting agreement in exchange for corporate development and
advisory services. The warrants have a term of 5 years from the
date of grant and are exercisable at an exercise price of $0.20.
The 718,750 warrants were valued on the grant date at approximately
$1.55 per warrant for a total of $1,114,062 using a Black-Scholes
option pricing model with the following assumptions: stock price of
$1.55 per share (based on the quoted trading price on the dates of
grants), volatility of 602%, expected term of 5 year, and a risk
free interest rate of 2.35%. During the year ended December 31,
2019, the Company recorded stock-based compensation of
$1,114,062.
On
November 13, 2019, the Company issued 500,000 warrants to purchase
shares of the Company’s Common Stock in connection with a
consulting agreement in exchange for corporate development and
advisory services. The warrants have a term of 5 years from the
date of grant and are exercisable at an exercise price of $0.70.
The 500,000 warrants were valued on the grant date at approximately
$0.63 per warrant for a total of $314,181 using a Black-Scholes
option pricing model with the following assumptions: stock price of
$0.63 per share (based on the quoted trading price on the dates of
grants), volatility of 270%, expected term of 5 year, and a risk
free interest rate of 1.69%. During the year ended December 31,
2019, the Company recorded stock-based compensation of
$314,181.
On November 27, 2019, the Company issued a convertible note in the
principal amount of $833,333, and a warrant to purchase 275,612
shares of Common Stock (see Note 9). The Company granted the
note holder warrants in connection with the issuance of this note.
The warrants had a term of 2 years from the date of grant.
The
warrants are exercisable at an exercise price of $0.756 per share
of Common Stock at any time before the close of business on the day
two years after their issuance subject to adjustment in the event of stock
dividends, splits, fundamental transactions, or other changes in
capital structure, and contain provisions that permit cashless
exercise if a registration statement covering the resale of the
shares issuable pursuant to the warrants is not filed within 180
days of their issuance. The Company accounted for the
warrants by using the relative fair value method and recorded debt
discount from the relative fair value of the warrants of $140,243
using the Binomial Lattice method and is being amortized over the
term of the note. Additionally, the Company issued 84,187 warrants
to purchase shares of the Company’s common stock to a certain
FINRA broker-dealer who acted on behalf of the Company in
connection with the issuance of this convertible note. The warrants
had a term of 4 years from the date of grant and was exercisable at
an exercise price of approximately $0.08. The 84,187 warrants were
valued on the grant date at approximately $0.64 per warrant for a
total of $54,145 using a Binomial Lattice method with the following
assumptions: stock price of $0.65 per share (based on the quoted
trading price on the date of grant), volatility of 270%, expected
term of 4 years, and a risk free interest rate of 1.63%. The
Company recorded these warrants as debt discount which is being
amortized over the term of the note. The Company assessed the
classification of its common stock purchase warrants as of the date
of each equity offering and determined that such instruments met the criteria for equity
classification under the guidance in ASU 2017-11 “Earnings
Per Share (Topic 260); Distinguishing Liabilities from Equity
(Topic 480); Derivatives and Hedging (Topic 815): (Part I)
Accounting for Certain Financial Instruments with Down Round
Feature”. The Company has no warrants that contain a
‘round down’ feature under Topic 815 of ASU
2017-11.
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.
F-30
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Stock
option activity for the year ended December 31, 2019 and 2018 is
summarized as follows:
|
|
Number of
Options
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life(Years)
|
|
Balance at December
31, 2017
|
-
|
$-
|
-
|
|
Granted
|
959,375
|
0.41
|
9.00
|
|
Balance at December
31, 2018
|
959,375
|
0.41
|
8.79
|
|
Granted
|
4,753,572
|
0.21
|
8.54
|
|
Exercise
|
(375,000)
|
0.01
|
9.12
|
|
Forfeited
|
(666,667)
|
0.05
|
8.56
|
|
Balance at December
31, 2019
|
4,671,280
|
0.29
|
7.29
|
|
Options exercisable
at December 31, 2019
|
3,798,888
|
$0.31
|
6.88
|
Weighted
average fair value of options granted during the period
$0.55
As of December 31, 2019, aggregate intrinsic value in connection
with exercisable options amounted to $726,371.
The following were transactions during the year ended December 31,
2018:
On
September 4, 2018, the Company granted a total of 209,375 five-year
non-qualified stock options to the Company’s former officers
exercisable at $0.712 per share, of which 138,844 vested
immediately, 11,179 vest monthly in equal increments over a
16-month period beginning on September 1, 2018, and 57,812 vest
monthly in equal increments over a 28-month period beginning on
September 1, 2018. As part of the employment agreements with three
of the Company’s former officers, 18,750 of their remaining
unvested options on December 1, 2018 vested immediately. As of
December 31, 2019, there were a total of 167,708 vested stock
options to these former officers which are exercisable one year
from the date of terminations.
On
October 22, 2018, the Company granted 250,000 ten-year
non-qualified stock options to a consultant exercisable at $0.32
per share, all of which vested immediately.
On
December 28, 2018, the Company granted 500,000 ten-year
non-qualified stock options to a consultant exercisable at $0.32
per share, all of which vested immediately.
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 year ended December 31, 2018 are presented
below:
|
Risk-free interest
rate
|
2.72 – 3.20%
|
|
Expected
volatility
|
343.72 –
412.31%
|
|
Expected term (in
years)
|
5-10
|
|
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 $227,394 of compensation expense relate to the
vesting of stock options for the year ended December 31, 2018.
These amounts are included in general and administrative expenses
on the accompanying consolidated statement of
operations.
The following were transactions during the year ended December 31,
2019:
Between
January 2019 and March 2019, the Company granted 4,003,572 options
to purchase shares of the Company’s Common Stock to various
members of the Board of Directors of the company and consultants
with vesting terms pursuant to their respective sock option
agreements. The options have a term of 10 years from the date of
grant and were exercisable at an exercise price ranging from $0.01
to $0.96. The Company recognized $1,276,637 of compensation expense
related to the vesting of stock options for the year ended December
31, 2019. These amounts are included in general and administrative
expenses on the accompanying consolidated statement of
operations.
F-31
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
In
February 2019 and April 2019, the Company granted an aggregate of
750,000 options to purchase shares of the Company’s Common
Stock to an investor in connection with the sale of Common Stock.
The options have a nine-month term from the date of grant and was
exercisable at an exercise price of $0.50 per share. The fair value
of the options granted amounted to $0.92 per option or
$688,674.
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 shall
cancel the remaining 625,000 stock options as of December 31, 2019
(see Note 11).
As of
December 31, 2019, aggregate intrinsic value in connection with
exercisable options amounted to $726,371. As of December 31, 2019,
872,392 outstanding options are unvested and there was $337,863
unrecognized compensation expense in connection with unvested stock
options (see Note 11).
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 year ended December 31, 2019 are presented
below:
|
Risk-free
interest rate
|
2.43
– 2.7495%
|
|
Expected
volatility
|
293
– 296%
|
|
Expected
term (in years)
|
10
|
|
Expected
dividend yield
|
0%
|
Restricted Common Stock
A summary of the status of the restricted common stock and changes
during the year ended December 31, 2019 is as follows. There was no
activity during the year ended December 31, 2018.
|
|
Restricted Stock Common Stock
|
Weighted Average Grant-Date Fair Value Per Share
|
|
Balance
at December 31, 2018
|
-
|
$-
|
|
Granted
|
3,727,778
|
0.69
|
|
Vested
and issued
|
(144,450)
|
(0.84)
|
|
Forfeited
|
-
|
-
|
|
Balance
at December 31, 2019
|
3,583,328
|
$0.68
|
As of
December 31, 2019, unamortized or unvested stock-based compensation
costs related to restricted share arrangements was $2,390,997 and
will be recognized over a weighted average period of 1.34
years.
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 December 31, 2019 and 2018.
On
January 20, 2017, Robert F. Parker (the “petitioner”)
filed a petition in the Supreme Court of the State of New York,
County of New York (the “Court”), naming, among others,
the Company and Ezra Green, a former shareholder, director and
officer of the Company, as respondents. The petition was received
by the Company on February 7, 2017. The parties reached an
agreement on settlement which requires co-defendant Ezra Green to
make an initial payment with subsequent, additional payments over
time. The Company has agreed, in exchange for the dismissal of all
claims with prejudice, to pay up to $20,000, at $1,000 per month
beginning in January 2018 at the earliest, if co-defendant Ezra
Green defaults on his subsequent payment obligations under the
terms of the settlement agreement. During the year ended December
31, 2018, the Company paid $3,000 towards the settlement with a
remaining balance due of $17,000. During the year ended December
31, 2019, the Company paid an aggregate of $20,000 towards the
settlement and recorded a loss on settlement of $3,000 on the
consolidated statements of operations. Accordingly, the Company has
$0 balance as of 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.
F-32
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 shall cancel the remaining 625,000 stock options as of December
31, 2019.
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, a member of the Board and the
founder, manager and controlling member of C2M, the
Company’s largest stockholder.
F-33
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
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, with exercise price of $0.32 per share (see Note 10). 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 our Advisory
Board in January 2019 and was appointed President of the Company on
March 11, 2019.
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 currently is
farming 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 President, 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.
F-34
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 (see Note 14).
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 Agreement
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 December 31, 2019.
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 provided a notice dated November
21, 2017 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). Dr. Dimitrov currently serves as the President of Digital
Diagnostics, and the Company has licensed the right to develop,
produce and commercialize certain diagnostic products, including
the FibriLyzer and MatriLyzer, utilizing certain intellectual
property rights owned or licensed by Digital Diagnostics. Dr.
Dimitrov believes that, in light of these concerns, his role as
both a Director of the Company and the President of Digital
Diagnostics creates a conflict of interest and has decided to focus
his time and energy on doing what is best for the shareholders of
Digital Diagnostics. For the year ended December 31, 2017, the
Company accrued $30,000 in licensing fees expenses to Digital
Diagnostics. As of December 31, 2017, $126,032 was included in
accounts payable. The Company has also accrued interest at 3%
over the prime rate, per the Licensing Agreement, of $9,802 for the
remaining balance due as of December 31, 2017. The Company paid $0
and $126,032 during the years ended December 31, 2019 and 2018.
There was no change during the year ended December 31,
2019.
For the
years ended December 31, 2019 and 2018, $22,100 and $300,000,
respectively, was recognized in Research and Development expenses
for consulting provided by Dr. Dimitrov. As of December 31, 2019
and 2018, $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 year ended December 31,
2019.
On June
28, 2017, the Company issued promissory notes to two of the
Company’s then executive officers and directors. The
promissory note bore interest at a rate of 8.0% per annum and
matured on the earlier of (i) one (1) year from the date of the
promissory note, and (ii) the closing the sale of the
Company’s securities in a single transaction or a series of
related transactions from which at least $500,000 of gross proceeds
are raised (See Note 8). As of December 31, 2019 and 2018, the
principal balance under the notes was $0 and $51,400,
respectively.
On
January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement with C2M (see Note 11). At
December 31, 2019, accounts payable to C2M related to purchase of
finish products amounted to $8,342. During the year ended December
31, 2019, the Company purchased finished products from C2M totaling
approximately $1,033,213. During the year ended December 31, 2019,
cost of sales of $217,156 represents the purchase of CBD products
from C2M. C2M is a majority stockholder of the Company. During the
year ended December 31, 2019, the Company recognized revenues from
C2M of $125,000 from sales of flowers and recorded related cost of
sales of $96,647. Additionally, the Company recorded unearned
revenues of $215,000 related to advance payments for unshipped
products as of December 31, 2019.
F-35
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 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.
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 year ended December 31, 2019, the Company
recorded stock-based compensation of $260,795 and prepaid expense
– related party of $3,114,205 to be amortize over the term of
the MSA.
During
the year ended December 31, 2019, the Company reimbursed a managing
member of EOW and an affiliated company which is owned by two
managing members of EOW, for operating expenses paid on behalf of
EOW for the following:
●
$400,000
worth of hemp seeds
●
$50,000
lease payment related to a lease agreement (see Note
11)
●
$100,000
for irrigation cost
During
the year ended December 31, 2019, the Company paid a total of
$1,005,825 to affiliated companies which are owned by three members
of EOW, for farm labor, farming supplies and other cost related to
planting, harvesting and drying the hemp which was recorded in
inventory.
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 affiliated company provided
advances to the Company for working capital purposes for a total of
$242,500 and the Company paid back these advances. The Company also
advanced $127,500 to these related parties which resulted to a
receivable or due from related parties of $127,500 as of December
31, 2019. These advances are short-term in nature, non-interest
bearing and due on demand.
The
Company recognized revenues from a related party customer of
$37,446 during the year ended December 31, 2019. As of December 31,
2019, accounts receivable from a related party customer amounted to
$18,860. Additionally, the Company wrote-off $18,586 of accounts
receivable from this related party customer into bad debt expense
during the year ended December 31, 2019. 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.
On October 23, 2019, the Amended and Restated Operating Agreement
(the “Operating Agreement”) of EOW was amended (the
“First Amendment”). Under the terms of the First
Amendment, the minority members of EOW conveyed their 49.9%
membership interest and rights to distributions related to the
current 2019 hemp crop underway to the Company. As a result, the
Company acquired the right to receive 100% of the distributions of
net profit from the 2019 hemp crop on approximately 226 acres of
farmland currently growing in Oregon. Since March 2019, the Company
has owned 50.1% of the limited liability membership interests in
EOW. In addition, the members amended the payment schedule under
which farm costs are required to be made by the Company. As
consideration for the amendment, the Company issued 1,223,320
shares of its common stock, par value $0.0001 per share, to the
minority members of EOW.
F-36
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
During October 2019, the Company entered into a short-term
promissory note for an aggregate principal amount of $55,556 and
gross cash proceeds of $50,000 (original issue discount of $5,556).
The note with principal amount of $55,556 was subscribed by Andrew
Johnson, an officer of the Company. The note became due and payable
on December 16, 2019 and bears 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 note carries
a 10% original issue discount. The Company is currently
negotiating on extending the maturity date of the related party
note.
On December 20, 2019, the CFO of the Company provided advances of
$5,000 to the Company for working capital purposes. The short-term
advance was paid back on December 23, 2019 and was non-interest
bearing.
As of
December 31, 2019, accounts payable from two affiliated companies
and C2M totaled to $454,511 ($350,000, $96,169 and $8,342,
respectively).
NOTE 13 – CONCENTRATION OF REVENUE AND
SUPPLIERS
During
the year ended December 31, 2019, total sale of CBD products to one
customer and two related party customers represented approximately
58% (11%, 36% - related party, and 11% - related party) of the
Company’s net sales. There were no revenues generated during
the year ended December 31, 2018.
As of
December 31, 2019, total accounts receivable, net from two
customers and one related party customer represented approximately
82% (18%, 38%, 25% - related party, and 27%) of total accounts
receivable as compared to none as of December 31,
2018.
During
the year ended December 31, 2019, the Company purchased finished
products from C2M (see Note 11) totaling approximately $1,033,213
(98% of the purchases). During the year ended December
31, 2019, the Company fully impaired finished goods related to
purchased CBD products from C2M and resulted in an impairment loss
of $837,153 which is included in cost of sales on the consolidated
statements of operations (see Note 3).
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.
NOTE 14 – INCOME
TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (the
“Act”) was signed into law. The Act decreased the U.S.
corporate federal income tax rate from a maximum of 35% to a flat
21% effective January 1, 2018. The Act also includes a number
of other provisions including, among others, the elimination of net
operating loss carrybacks and limitations on the use of future
losses, the repeal of the Alternative Minimum Tax regime and the
repeal of the domestic production activities deduction. These
provisions are not expected to have a material effect on the
Corporation. Given the significant complexity of the Act and
anticipated additional implementation guidance from the Internal
Revenue Service, further implications of the Act may be identified
in future periods.
The
Company has incurred aggregate net operating losses of
approximately $16,509,160 for income tax purposes as of December
31, 2019. The net operating losses carry forward for United States
income taxes, which may be available to reduce future years’
taxable income. Management believes that the realization of the
benefits from these losses appears not more than likely due to the
Company’s limited operating history and continuing losses for
United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset to
reduce the asset to zero. Management will review this valuation
allowance periodically and make adjustments as
necessary.
The
following table summarizes the significant differences between the
U.S. Federal statutory tax rate and the Company’s effective
tax rate for financial statement purposes for the years ended
December 31, 2019 and 2018:
|
|
December
31,
2019
|
December
31,
2018
|
|
US Federal
Statutory Tax Rate
|
21.00%
|
21.00%
|
|
State
taxes
|
4.60%
|
4.35%
|
|
Change in valuation
allowance
|
(25.60%)
|
(25.35%)
|
|
|
0.00%
|
0.00%
|
F-37
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The tax
effects of temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 2019 and 2018 are
summarized as follows:
|
Deferred Tax
Asset:
|
December
31,
2019
|
December
31,
2018
|
|
Net operating loss
carryforward
|
$4,226,345
|
$2,668,829
|
|
Valuation
allowance
|
(4,226,345)
|
(2,668,829)
|
|
Net deferred tax
asset
|
$-
|
$-
|
Of the
$16,509,160 of available net operating losses, $2,257,487 begin to
expire in 2034 and $14,251,673 which were generated after the
Act’s effective date can be utilized indefinitely subject to
annual usage limitations.
The
Company provided a valuation allowance equal to the deferred income
tax asset for the year ended December 31, 2019 because it was not
known whether future taxable income will be sufficient to utilize
the loss carryforward. The increase in the allowance was
$1,5577,516 in fiscal 2019. Additionally, the future utilization of the net
operating loss carryforward to offset future taxable income may be
subject to an annual limitation, based upon IRC Section 382/383
Ownership change rules that may have or could occur in the future.
The Company does not have any uncertain tax positions or events
leading to uncertainty in a tax position. The Company’s 2017,
2018 and 2019 Corporate Income Tax Returns are subject to Internal
Revenue Service examination.
IRC
Section 280E of the Internal Revenue Code forbids businesses from
deducting otherwise ordinary business expenses from gross income
associated with the “trafficking” of Schedule I or II
substances, as defined by the Controlled Substances Act. The IRS
has subsequently applied Section 280E to state-legal cannabis
businesses, since cannabis is still a Schedule I substance.
Management is in the process of evaluating IRC Section 280E, as it
relates to the Companies business and the amount of net operating
losses above that the Companies Management has provided a Full
Valuation Reserve on.
NOTE 15 - SUBSEQUENT
EVENTS
In
accordance with authoritative guidance, the Company has evaluated
any events or transactions occurring after December 31, 2019, 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 consolidated financial
statements as of and for the year ended December 31, 2019, except
as disclosed below.
Sale of Common Stock
Subsequent
to the reporting period, and up through May 13, 2020, the Company
accepted shareholder subscriptions in the total amount of $100,000
in exchange for issuance of 500,000 shares of Common Stock in an
offering exempt under Rule 506 of Regulation D.
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 $0.49 per
common share or $122,500 based on the based on the quoted trading
price on the date of grant.
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 $0.49 per common share or $225,350 based on the
based on the quoted trading price on the date of
grant.
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.
Legal Matters
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, 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 December 31, 2019, the
Company has recorded total accrued salaries of $26,494 from these
four former employees who were hired in fiscal 2019. The complaint seeks approximately $82,000 in
unpaid wages plus special damages, liquidated damages, interest and
attorney’s fees. The Company intends to vigorously contest
the matter.
F-38
Employment Agreement
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 is to receive 1,000,000 shares of common stock as
additional compensation, with vesting and other terms to be decided
by our 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.
Loans – Related party
From
January 31, 2020 through April 10, 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.
There are currently no specific terms of repayment.
Supply and Distribution Agreement
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.
Restricted Common Stock Grants
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
continued service to the company.
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 months 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 months thereafter until fully vested so long as they
continue in their service as member of the Advisory Board of the
Company.
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, 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. 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 must pay the Holder $60,000 in cash on or 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 being 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
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 our common stock in
consideration for the forbearance.
Covid-19
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. 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. Since the Company closed its office and travel is limited,
the Company’s sales operations were impacted substantially.
The extent to which the COVID-19 (coronavirus) outbreak will impact
our operations, ability to obtain financing or future financial
results is uncertain.
Item 9. Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure
No
events occurred requiring disclosure under Item 307 and 308 of
Regulation S-K during the fiscal year ending December 31,
2019.
Item 9A. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of
1934, we have carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the fiscal year
ended December 31, 2019. This evaluation was carried out under the
supervision and with the participation of our management, including
our Interim Chief Executive Officer and Chief Financial
Officer.
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to
be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Disclosure controls
and procedures include controls and procedures designed to ensure
that information required to be disclosed in our company’s
reports filed under the Securities Exchange Act of 1934 is
accumulated and communicated to management, including our Interim
Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
Based upon that evaluation, including our Interim Chief Executive
Officer and Chief Financial Officer, we have concluded that our
disclosure controls and procedures were ineffective as of the end
of the period covered by this annual report.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934).
Management has assessed the effectiveness of our internal control
over financial reporting as of December 31, 2019 based on criteria
established in Internal Control-Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. As a result of this assessment, management concluded
that, as of December 31, 2019, our internal control over financial
reporting was not effective. Our management identified the
following material weaknesses in our internal control over
financial reporting, which are indicative of many small companies
with small staff: (1) we lacked a sufficient number of employees to
properly segregate duties and provide adequate review of the
preparation of the financial statements and (2) due to turnover on
our Board of Directors, our Audit and other committees have not
always been fully staffed.
We plan to take steps to enhance and improve the design of our
internal control over financial reporting. During the period
covered by this annual report on Form 10-K, we have not been able
to remediate the material weaknesses identified above. To remediate
such weaknesses, we have appointed additional independent directors
and we plan to appoint additional qualified personnel to address
inadequate segregation of duties. Our ability to retain additional
personnel is largely dependent upon our securing additional
financing to cover the costs required. If we are unsuccessful in
securing such funds, remediation efforts may be adversely affected
in a material manner.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to an
exemption for non-accelerated filers set forth in Section 989G of
the Dodd-Frank Wall Street Reform and Consumer Protection
Act.
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
The following information sets forth the names, ages, and positions
of our current directors and executive officers as of May 14,
2020.
|
Name
|
Age
|
Present Positions
|
|
Bobby Yampolsky
|
42
|
Director,
Interim Executive Chairman
|
|
Kenneth E. Puzder
|
53
|
Director,
Chief Financial Officer
|
|
John Price
|
50
|
Director
|
|
Alvaro Daniel Alberttis
|
43
|
Director
|
|
Derek Du Chesne
|
32
|
Director,
President, and Chief Growth Officer
|
|
Larry Wert
|
63
|
Director
|
|
Justin A. Viles
|
48
|
Director
|
|
Emiliano Aloi
|
46
|
Interim
Chief Executive Officer
|
|
Andrew L. Johnson
|
35
|
Chief
Strategy Officer
|
Director Information
The
Board of Directors of the Company is currently comprised of seven
(7) members. The following biographical information discloses each
director’s age, business experience and other directorships
held during the past five years. It also includes the experiences,
qualifications, attributes and skills that led to the conclusion
that the individual should serve as a director for the
Company.
Bobby Yampolsky, 42, was appointed to our Board of Directors on
June 24, 2019, and was appointed Interim Executive Chairman on
September 13, 2019. He is the founder ECJ Luxe, a family-owned
luxury shopping destination that specializes in an array of
ultra-exclusive items including everything from high end time
pieces, jewelry and diamonds, to exotic cars and yachts. The
Yampolsky family established the business as East Coast Jewelry in
1986 and Bobby opened the West Palm Beach, Florida location in
1996. East Coast Jewelry evolved into ECJ Luxe in 2015 and has
expanded to multiple locations throughout southern Florida. Mr.
Yampolsky owns and operates multiple other businesses, including
restaurant, nightclub, yacht and exotic car sales, and real estate
investments. In addition, Mr. Yampolsky is the Co-Founder and CEO
of Ceed2Med, LLC, a hemp and hemp-derivative supply sourcing,
production, distribution, and development company that secures
production of industrial hemp biomass and raw ingredients that
invests in developing supply chain partners and distribution
channels worldwide. Ceed2Med is heavily invested in the hemp
industry and is currently the largest shareholder of Exactus Inc.
as well as substantial shareholder in Hemptown Organics
Corp.
The
Board nominated Mr. Yampolsky to serve as director of the Board
because of his executive and management experience and
understanding of the CBD business.
Kenneth E.
Puzder, age
53, was appointed to the Board of Directors of the
Company on January 9, 2019 and as our CFO on July 10, 2019. Mr.
Puzder previously served as Chief Financial Officer of C2M and is
currently President of that company. In addition, from December of
2014 to December of 2018, he served as the co-founder, Managing
Member, and CFO of the Lukens Group, LLC, a behavioral therapy firm
that focuses on a variety of behavioral struggles including
alcoholism, drug abuse, depression and anxiety with a special
emphasis on PTSD. Previously, from January of 2007 to December of
2017, Mr. Puzder was president of his own consulting firm, Kenneth
E. Puzder Consulting. As a seasoned financial executive, Mr. Puzder
specialized in debtor side representations in financial leadership,
mergers and acquisitions, restructuring and turnaround, and
personal and partnership tax returns. From July of 2003 through
December of 2006, he served in various positions with the
Arby’s Restaurant Group (“ARG”) family of
companies, including as Chief Financial Officer of AFA Service
Corporation (a sister company to ARG), VP of Accounting and Finance
or Arby’s Restaurant Group, Inc., and Regional Controller or
RTM, Inc. (a subsidiary of ARG). From August of 2000 through April
of 2003, Mr. Puzder served as Corporate Controller for Panera Bread
Company and President of Panera Enterprises, LLC. From January of
1999 through August of 2000, he served as Vice President and
Secretary of the Linder Funds, a series of mutual funds. Prior to
serving that position, from March of 1998 through August of 2000,
he served as Financial Operations Principal and Assistant Secretary
of Lindner Asset Management, the asset management firm for the
Linder Funds. From February of 1996 until March of 1998, he was an
audit manager with KPMG Peat Marwick, LLP, a Big 4 accounting firm.
From June of 1990 through February of 1996, Mr. Puzder served as
the Chief Financial Officer and Treasurer of Mills Group,
Inc.
Mr.
Puzder holds a B.S. in Accounting from the University of Missouri,
St. Louis and is a Certified Public Accountant in the state of
Missouri.
The
Board nominated Mr. Puzder to serve as a director of the Board
because of his expensive senior management and operational
experience, and in particular his accounting and audit
experience.
John Price, age 50, was appointed to the Board of Directors
of the Company on February 7, 2019. Mr. Price previously served as
Chief Financial Officer, Treasurer and Secretary of SCWorx Corp., a
publicly-traded provider of data normalization, application
interoperability and big data analytics within the healthcare
provider market. Mr. Price was the CFO of SCWorx Corp. (f/k/a
Alliance MMA, Inc.) since August 2016. Previously, Mr. Price was
Chief Financial Officer of MusclePharm Corporation, a
publicly-traded nutritional supplement company. Prior to joining
MusclePharm in 2013, Mr. Price served as Vice President of Finance
– North America at Opera Software, a Norwegian public company
focused on digital advertising. From 2011 to 2013, he served as
Vice President of Finance and Corporate Controller of GCT
Semiconductor. From 2004 to 2011, Mr. Price served in various roles
at Tessera Technologies, including VP of Finance & Corporate
Controller. Prior to Tessera Technologies, Mr. Price served various
roles at Ernst &Young LLP. Mr. Price served nearly three years
in the San Jose, California office and nearly five years in the
Pittsburgh, Pennsylvania office of Ernst & Young. Mr. Price has
been a certified public accountant (currently inactive) since 2000
and attended Pennsylvania State University, where he earned a
Bachelor’s of Science Degree in
Accounting.
The
Board nominated Mr. Price to serve as a director of the Board
because of his past experience as a Chief Financial Officer and
other financial oversight positions at public
companies.
Alvaro Daniel Alberttis, age 43, was
appointed to the Board of Directors of the Company on January 16,
2020. Mr. Alberttis is an entrepreneurial executive, advisor and
investor with over twenty years of experience across diverse
small-middle market businesses and nonprofit organizations. Since
2013, he has served as the Managing Director of Strategic
Philanthropy for The Kannico Agency, LLC. At the Kannico Agency,
Mr. Alberttis directs strategy and execution of the firm’s
global philanthropic consulting operations. In addition, Mr.
Alberttis is an experienced commercial banking executive, and has
served in a multitude of financial advisory positions for consumers
and corporations for over thirteen years. He began his commercial
banking career as a Senior Branch Manager with a staff of thirty
and transitioned into a Senior Commercial Banker advising clients
in all industries with a specialization in Government, Large
Nonprofit and Educational clients across the South East U.S. As a
commercial banker, Mr. Alberttis has served with JP Morgan Chase,
NA (2011-2017); PNC Bank NA (2007-2011); and TD Bank, NA
(2004-2007). Since 2013, he has also served as a Trustee of the
Quantum Foundation, a private philanthropic foundation focused
solely on supporting healthcare initiatives. Mr. Alberttis holds a
B.S. in Business Management from Lynn University (2010), and a
Master's Degree in Nonprofit Management from Florida Atlantic
University (2013). Mr. Alberttis has not had any material direct or
indirect interest in any of our transactions or proposed
transactions over the last two years.
The Board
nominated Mr. Alberttis to serve as a director of the Board because
of his past experiences with small to middle market businesses
providing strategic advising and consulting services.
Derek Du Chesne, age
32, was appointed as
our President and a member of the Board of Directors effective
April 24, 2020. He also serves as our Chief Growth Officer, a
position he assumed in February of 2020. Mr. Du Chesne has been the
Chief Growth Officer for EcoGen Laboratories, a
vertically-integrated manufacturer and supplier of hemp-derived
specialty ingredients. Mr. Du Chesne is a brand management
professional who has a proven track record of
success through concept, development, and launch, building
iconic brands by orchestrating successful campaign deployment on
both a global and regional scale. He is a strategic leader
who has repeatedly led teams to maximize performance in order to
achieve stakeholders’ goals on time and in full. Prior
to serving at EcoGen, Mr. Du Chesne served as CEO and co-founder
at Healing Ventures, a full-service marketing and supply
chain management firm dedicated to servicing the hemp
industry. Earlier in his career Mr. Du Chesne served as Chief
Marketing Officer of Klique, Inc., a group dating platform created
to help curb sexual assaults on campuses. Previously Derek
was known as a film/television producer and actor, working with
Bruce Willis, Robert DeNiro, and a multitude of prominent film
makers.
Larry Wert, age 63, was appointed
to our Board of Directors on April 29, 2020. Mr. Wert has over 40 years in broadcasting.
He served as the President of Broadcast Media for Tribune Media
Company from 2013 through September of 2019. He was responsible for
overseeing the strategy and day-to-day activities of Tribune Media
Company’s forty-two owned or operated television stations,
their related websites, digital properties and the company’s
Chicago radio station WGN-AM. Wert previously served on the NAB TV
Board of Directors, Fox Board and the CBS Board of Governors. In
2017, he was named “Broadcaster of the Year” by the
Illinois Broadcaster’s Association. In 2018, under his
leadership, Tribune Broadcasting was named “Station Group of
the Year” by Broadcasting and Cable. Prior to his time at
Tribune Media, Mr. Wert served from 1998 until 2013 as the
President and General Manager of WMAQ-TV, the NBC owned and
operated station in Chicago. During his tenure there, he expanded
local news hours, launched the first street side studio in the city
and oversaw integration of WSNS-TV/Telemundo into the station.
Under his leadership, he brought key events to the station
including the Chicago Marathon and Chicago Auto Show. During his
time at NBC, Mr. Wert also had group responsibilities. He was named
president of NBC Local’s central and western regions in 2008,
overseeing NBC-owned stations in Los Angeles, San Francisco, San
Diego, Dallas and Chicago. In September, 2011, he became executive
vice president of station initiatives for all ten NBC-owned
stations. Mr. Wert started his career at Leo Burnett Advertising in
Chicago in 1978, and moved on to television sales with ABC, working
in Los Angeles, New York and Chicago, where he became local sales
manager at WLS-Ch. 7. In 1989, Mr. Wert shifted to radio as
president and general manager of WLUP-97.9 FM and AM 1000 in
Chicago, better known as “The Loop.” In 1996, he was
named president of Evergreen Media. When it merged with Chancellor
Broadcasting he became senior vice president of Chancellor,
overseeing 13 radio properties.
Mr.
Wert is very involved in the community and recently finalized his
term as Chairman of the Museum of Broadcast Communications in
Chicago. Currently, he serves on the Board of Directors for several
charities, including the Children’s Brittle Bone Foundation,
Catholic Charities, the Chicagoland Chamber of Commerce and the 100
Club. He is a member of the Governing Board of Gilda’s Club
of Chicago, an advisor the Chicago Chapter of Make-A-Wish
Foundation and an honorary board member of RAINBOWS, an
organization that helps children cope with loss. In 2018, he was
inducted into the Chicago Catholic League Hall of Fame. Mr. Wert
also sits on Board of Trustees for Fenwick High School in Oak Park,
Ill. Mr. Wert holds a BA degree in Journalism from the University
of Wisconsin, Madison.
Justin A. Viles, age
48, was appointed to
our Board of Directors on April 29, 2020. He is the Chief
Innovation Officer of Rokt, a leading e-commerce marketing
technology company he founded in March of 2010. Prior to serving as
Chief Innovation Officer, Mr. Viles served as CEO of Rokt from
March of 2010 until January of 2013. From February of 2003 until
March of 2009, he was Head of Content Acquisition for Australia and
New Zealand at Google / YouTube. Mr. Viles studied tourism at
Southern Cross University.
Executive Officers Who Are Not Directors
The
following provides certain biographical information with respect to
each executive officer of the Company who is not a
director.
Emiliano Aloi, age 46, was appointed as
our Interim Chief Executive Officer on April 24, 2020, after having
served previously as Interim CEO. He also served as our President
from March 11, 2019 through April 24, 2020, and has served as a
member of our Advisory Board since January 9, 2019. Prior to
joining Exactus Inc., Mr. Aloi co-founded Ceed2Med, LLC
(“C2M”) in 2018 a global sourcing and distribution
platform for industrial hemp and industrial hemp-derived products.
From January, 2017 to November, 2017, Mr. Aloi served as Vice
President and Director of Strategic Development for GenCanna
Global, Inc., where he initiated a go-to-strategy, recruited the
commercial leadership team, developed compliance, executed product
launches, and advanced manufacturing in European markets. In 2016
Mr. Aloi achieved the first country-wide agricultural permit for
flower cultivation in Uruguay. In addition, Mr. Aloi co-sponsored
research programs for Stevia and Aloe Vera extraction methods from
2010 to 2013 and participated in the insertion of Chia as a novel
crop in Paraguay in 2011 in a program later merged into Cargill.
Mr. Aloi also co-developed the agricultural solid biofuels program
for Camargo Correas Cement company, a Loma Negra subsidiary from
2009 to 2011.
Andrew L. Johnson, age 35, was appointed
Chief Strategy Officer on March 11, 2019 and has been working with
the company since January 2019. From November 2014 to November
2018, he served as Director of Investor Relations at ChromaDex
Corp. (NASDAQ:CDXC), an integrated, global nutraceutical company
devoted to improving the way people age. While at ChromaDex, the
company raised over $50 million without an investment bank,
transitioned from the OTC Market to the Nasdaq, significantly
increased institutional ownership, and improved liquidity by over
500%. Mr. Johnson was instrumental in establishing an investor
relations platform including, but not limited, to composing and
disseminating corporate messaging, press releases, quarterly
earnings, conference call transcripts, shareholder update letters,
and marketing materials. Before joining ChromaDex, he held the role
of Director of Outreach at Alliance Advisors, an investor relations
consulting firm from April 2014 to July 2014. During this time, Mr.
Johnson worked with various C-level management teams of small and
micro-cap companies to increase investor awareness through the
facilitation and attendance of non-deal roadshows, investment
conferences, group meetings, and one-on-one meetings with
institutional investors. From September 2011 to January 2013, he
worked at Sidoti & Company, an institutional equity research
firm, where he sat on the sales desk. During his time in the firm,
he built relationships, presented investment ideas, and provided
equity research, including corporate access to over 750 small and
mid-cap companies. Mr. Johnson has over ten years of experience
communicating with investors and has held the Series 3, 7, and 63
licenses in the past. He has a Bachelor of Arts degree in Social
Sciences from Washington State University.
Term of Office
Our Directors are appointed for a one-year term to hold office
until the next annual general meeting of our shareholders or until
removed from office in accordance with our bylaws. Our officers are
appointed by our board of directors and hold office until removed
by the board.
Family Relationships
There are no family relationships between or among the directors,
executive officers or persons nominated or chosen by the Company to
become directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of
the following occurred with respect to a present or former
director, executive officer, or employee: (1) any bankruptcy
petition filed by or against any business of which such person was
a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses); (3) being subject to any order, judgment or decree, not
subsequently reversed, suspended vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his or her involvement in any type
of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC
or the Commodities Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment
has not been reversed, suspended or vacated.
Code of Ethics
On January 9, 2019, our board of directors adopted a Code of
Business Conduct and Ethics applicable to all directors, executive
officers, and employees of the Company.
Audit Committee
On February 7, 2019, John Price was appointed to the Board of
Directors of the Company. Mr. Price was also appointed to serve as
the Chairman of our Audit Committee.
Item 11. Executive
Compensation
Compensation Discussion and Analysis
Our
former CEO, Philip J. Young resigned on August 15, 2019 and our
former CFO Kelley Wendt resigned on April 30, 2019. They were
serving under two-year employment agreements adopted January 11,
2019. Mr. Young’s annual salary was $150,000 and Ms.
Wendt’s annual salary was $120,000 per
annum.
Our
Interim Chief Executive Officer, Emiliano Aloi, has signed an offer
letter and will receive an annual base salary of $150,000. He will
also be eligible to participate in our benefit plans. Mr. Aloi will
also receive an equity award, which will be determined and approved
by the Board. The offer letter has no set term and may be
terminated by Mr. Aloi or us on two weeks written
notice.
Our
Chief Financial Officer, Ken Puzder, has signed an offer letter
featuring an annual base salary of $120,000, which was increased to
$150,000 on January 23, 2020. He will also be eligible to
participate in our benefit plans. In January of 2020, Mr. Puzder
received an equity award as additional compensation in the amount
of 250,000 shares.
Andrew Johnson, our Chief Strategy Officer, is
serving under a two-year employment agreement adopted 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. For the 2019 year, he received a cash
bonus of $100,000 to be paid in equal installments over the next 12
months. 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. He has been awarded 250,000
shares as additional compensation in January
2020.
Derek
Du Chesne, our 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) our net income on a consolidated basis for
the 2020 fiscal year is equal to or in excess of $5,000,000; or (B)
our 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 our Equity Incentive Plan during his
employment. Upon execution of the Agreement, he was granted options
to purchase up to 1,000,000 shares of our common stock at a price
equal to 90% of the market price for our common stock on the date
of grant. 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 is to receive
1,000,000 shares of common stock as additional compensation, with
vesting and other terms to be decided by our Compensation
Committee.
With
regard to our full-time executive officers, the goal of the salary
component of our compensation policy is to provide reasonable
compensation for their full-time service within the constraints
faced by a rapidly developing business with significant cash needs
for its planned expansion. Option grants for our full-time
executive officers are currently under review by the compensation
committee. The goal of our anticipated option grants to these
executives will be to provide an appropriate mixture of short term
and long-term incentives to increase shareholder
value.
Kevin Esval, Jeffrey Thompson, and Ken Puzder,
each directors, have each been awarded 250,000 10 year
options under the 2019 Equity Incentive Plan, exercisable at $0.20
per share and vesting 1/24 on the date of award and 1/24 on the
first day of each calendar month thereafter until fully vested. The
goal of these grants, with their vesting gradually over the course
of two years, is to provide a blend of short and long-term
incentives to contribute toward the growth of the company’s
value. Effective April 29, 2020, Mr. Thompson and Mr. Esval
resigned from the Board of Directors. Per the approval of the
Board, their remaining unvested shares and options were deemed
fully vested on the resignation date.
In
connection with his appointment on February 10, 2019 to the Board
of Directors and as our Executive Chairman, Jonathan Gilbert was
granted options to purchase 1,000,000 shares of our common stock at
an exercise price of $0.01 per share, exercisable for ten years.
Mr. Gilbert’s stock options vest as follows:
|
Date
Installment Becomes Exercisable
|
Number
of Common Shares
|
|
February
11, 2019
|
250,000
|
|
Upon
the raise of > $2.5m new equity capital
|
250,000
|
|
Upon
the filing of a Nasdaq listing application
|
250,000
|
|
Upon $150,000 gross
revenue from operations
|
250,000
|
With
regard to Mr. Gilbert, the goal of the options grant and vesting
schedule was to incentivize the achievement of certain key company
objectives. Mr. Gilbert resigned from the board on July 1, 2019.
On September 25, 2019, Jonathan Gilbert, a former director,
filed and served a complaint against us in the U.S. District Court
- Eastern District of New York. The complaint alleged that Mr.
Gilbert is entitled to retain certain cancelled equity awards and
seeks specific performance and damages. On January 10, 2020, we
entered into a Settlement Agreement and Mutual Release with Mr.
Gilbert. Under the settlement agreement, we agreed to issue Mr.
Gilbert a total of 375,000 shares of common stock, with 187,500
shares issued immediately and 187,500 shares to be issued in six
months. Resales of these shares by Mr. Gilbert on any given day are
limited to no more than 10% of the average daily market volume for
our common stock calculated from the prior week. The settlement
agreement also contains general mutual releases between us and Mr.
Gilbert.
In
connection with his appointment to the Board Directors and Chair of
the Audit Committee, John Price was granted immediately vested
options to purchase 250,000 shares of our common stock at a price
of $0.20 per share, exercisable for ten years.
On June 24, 2019, Vladislav Yampolsky was
appointed to our board of directors and is currently serving as our
interim executive chairman. In 2019, he was awarded 1,000,000
restricted common stock as compensation with vesting term of
1/48th
per month starting on October 1,
2019.
On January 14, 2020, in connection with his
appointment to the Board of Directors, Alvaro Daniel Alberttis was
awarded $100,000 worth of common stock, valued at the closing
market price of our common stock on the date of the appointment
(277,778 shares). These shares vest at a rate of 1/24th on the date
of grant, and 1/24th
per month thereafter, contingent upon
continued service to the company. April 29, 2020, in connection
with their appointments to the Board of Directors, Lawrence J. Wert
and Justin Viles were also issued 100,000 worth of common stock,
valued at the closing market price of our common stock on the date
of the appointment (526,316 shares). These shares also vest at a
rate of 1/24th on the date of grant and 1/24th
per month thereafter, contingent upon
continued service to the company. The goal of these grants, with
their vesting gradually over the course of two years, is to provide
a blend of short-term and long-term incentives to contribute toward
the growth of the company’s value.
Summary Compensation Table
The table below summarizes all compensation awarded to, earned by,
or paid to our former or current executive officers for the fiscal
years ended December 31, 2019 and December 31, 2018.
Summary Compensation Table
|
|
Year
|
Salary
|
Option
Award(s)(1)
|
Total
|
|
Emiliano
Aloi(2)
|
2019
|
$108,036
|
$32,000
|
$140,036
|
|
Interim Chief Executive Officer
|
2018
|
$—
|
$—
|
$—
|
|
Philip J.
Young(2)(3)
|
2019
|
$150,000
|
$—
|
$150,000
|
|
Former Chief Executive Officer
|
2018
|
$165,417
|
$20,025
|
$185,442
|
|
Kenneth E.
Puzder(4)
|
2019
|
$81,428
|
$70,000
|
$151,428
|
|
Chief Financial Officer
|
2018
|
$—
|
$—
|
$—
|
|
Andrew
Johnson(5)
|
2019
|
$92,977
|
$174,500
|
$267,477
|
|
Chief Strategy Officer
|
2018
|
$—
|
$—
|
$—
|
(1)
The amounts in
these columns do not reflect compensation actually received by the
named executive officer nor do they reflect the actual value that
will be recognized by the named executive officer. Instead the
amounts reflect the aggregate grant date fair value of awards
computed in accordance with FASB ASC Topic 718. For additional
information on the valuation assumptions regarding the option
awards, refer to Note 3 to our financial statements for the year
ended December 31, 2019, which are included in our Annual Report on
Form 10-K for the year ended December 31, 2019 filed with the
SEC.
(2)
Mr. Aloi was
appointed to serve as our interim CEO on September 13, 2019. Our
former CEO, Mr. Young, resigned on August 15, 2019.
(3)
Mr. Young's 2018
salary includes 11 shares of Series D preferred stock.
(4)
Mr. Puzder was
appointed to our Board of Directors on January 11, 2019 and was
appointed to serve as CFO on July 1, 2019.
(5)
Mr. Johnson was
appointed to serve as Chief Strategy Officer on March 1,
2019.
Employment Agreements and Change in Control
Arrangements
On
January 11, 2019, we entered into new employment agreement with our
CEO, Philp J. Young, and our CFO Kelley Wendt. Under their new
Employment Agreements, Mr. Young and Ms. Wendt each agreed to a
service period of two (2) years, subject to renewal. Mr.
Young’s annual salary was $150,000 per annum and Ms.
Wendt’s annual salary was $120,000 per annum.
On
August 15, 2019, Philip J. Young, agreed to resign as our Chief
Executive Officer and Chairman, effective July 31, 2019 and
entered into a Confidential Severance, Settlement and
Non-Disparagement Agreement and General Release. Under the terms of
the Severance Agreement the Company agreed to pay Mr. Young 50% of
his base salary ($75,000) payable over a 6-month period in exchange
for ongoing consulting and transition assistance. In addition, Mr.
Young will receive payment consisting of 2 weeks of vacation, and
continuation of health benefits, and reimbursement for documented
expenses. In addition, all unvested options and share awards will
be cancelled. Pursuant to the Severance Agreement, Mr. Young also
agreed to the terms of a 6-month lock-up under which he may not
sell, transfer, assign, or otherwise dispose of more than 15% of
the average daily volume of our common stock per week, subject to
certain exclusions. In addition, we repaid a $21,000 loan made to
us by Mr. Young, plus $1,769 in accrued interest pursuant to the
Severance Agreement. Mr. Young also provided a general waiver and
release of claims against the Company and is subject to certain
restrictive covenants, including confidentiality,
non-disparagement, non-solicitation, and
non-competition.
On
April 30, 2019 Ms. Wendt agreed to resign as Chief Financial
Officer.
Our
Interim Chief Executive Officer, Emiliano Aloi, has signed an offer
letter and will receive an annual base salary of $150,000. He will
also be eligible to participate in our benefit plans. Mr. Aloi will
also receive an equity award, which will be determined and approved
by the Board. The offer letter has no set term and may be
terminated by Mr. Aloi or us on two weeks written
notice.
Our
Chief Financial Officer, Ken Puzder, has signed an offer letter
featuring an annual base salary of $120,000, which was increased to
$150,000 on January 23, 2020. He will also be eligible to
participate in our benefit plans. In January of 2020, Mr. Puzder
received an equity award as additional compensation in the amount
of 250,000 shares.
Andrew Johnson, our Chief Strategy Officer, is
serving under a two-year employment agreement adopted 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. For the 2019 year, he received a cash
bonus of $100,000 to be paid in equal installments over the next 12
months. 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. He has been awarded 250,000
shares as additional compensation in January
2020.
Derek
Du Chesne, our 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) our net income on a consolidated basis for
the 2020 fiscal year is equal to or in excess of $5,000,000; or (B)
our 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 our Equity Incentive Plan during his
employment. Upon execution of the Agreement, he was granted options
to purchase up to 1,000,000 shares of our common stock at a price
equal to 90% of the market price for our common stock on the date
of grant. 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 is to receive
1,000,000 shares of common stock as additional compensation, with
vesting and other terms to be decided by our Compensation
Committee.
Generally, our
executives shall 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. The executives 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
or, in the absence thereof, the Company’s Board of Directors
may from time to time determine and shall be entitled to
participate in all benefits plans the Company provides to its
senior executives. The Company shall reimburse the
executives for all reasonable expenses incurred in the course of
employment. In the event employment is terminated
without Cause or by the executives with Good Reason (as such terms
are defined in the Employment Agreements), the Executives shall be
entitled to receive severance benefits equal to the lesser of 50%
of their base salaries or the amount of salary unpaid for the
remaining term then in effect, continued coverage under the
Company’s benefit plans and payment of their pro-rated earned
annual bonus, provided certain conditions are met. The executives
are subject to a one (1) year non-competition and non-solicitation
provision.
Equity Awards At Year End Table
The
following table sets forth certain information regarding all
outstanding equity awards held by our named executive officers as
of December 31, 2019.
|
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Equity
Incentive Plan Award: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
|
Emiliano
Aloi(1)
|
250,000(1)
|
—
|
$0.320
|
01/09/2029
|
|
Interim Chief Executive Officer
|
|
|
|
|
|
Philip J.
Young(2)(3)
|
28,125(2)
|
—
|
$0.712
|
09/04/2023
|
|
Former Chief Executive Officer
|
|
|
|
|
|
Kenneth E.
Puzder(4)
|
250,000(3)
|
149,739
|
$0.200
|
01/11/2029
|
|
Chief Financial Officer
|
|
|
|
|
|
Andrew
Johnson(5)
|
12,500(4)
|
—
|
$0.320
|
01/15/2029
|
|
Chief Strategy Officer
|
31,250(5)
|
15,625
|
$0.960
|
01/15/2029
|
|
|
125,000(6)
|
20,832
|
$0.560
|
03/12/2029
|
*
Resigned from his positions in 2019.
(1)
One hundred percent
of the options vested immediately at grant date.
(2)
Seventy-eight
percent of the options vested immediately at grant date. The
balance vested on December 1, 2018.
(3)
1/24th of the options vested immediately at grant
date, with the balance vesting 1/24th per month on the
first calendar date of each calendar month following appointment
until fully vested so long as continuing as a
director.
(4)
One hundred percent
of the options vested immediately at grant date.
(5)
Fifty percent of
the options vested immediately at grant date, with the balance
vesting upon the achievement of certain goals.
(6)
1/12th of the options
vested immediately at grant date, with the balance vesting
1/12th per
month on the first calendar date of each calendar month flowing
grant date until fully vested.
All of
the stock options held by our named executive officers listed in
the table above were granted under and subject to the terms of our
2018 Plan, the terms of which are described below under “2018
Stock Option Plan”.
Option Exercises and Stock Vested
Our
named executive officers did not exercise any stock option awards
during the year ended December 31, 2019.
2018 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 1,187,500. Unless sooner terminated, the Plan
shall terminate in 10 years.
As
of December 31, 2019, the Company had reserved shares of its common
stock for future issuance under the 2018 Plan as follows (figures
reflect the effect of the 1 for 8 Reverse Stock Split in January
2019):
|
|
Shared
Reserved
|
|
Stock options
outstanding
|
959,375
|
|
Available for
future grants under the 2018 Plan
|
228,125
|
|
Warrants
outstanding
|
644,083
|
|
Total shares
reserved
|
1,861,583
|
2019 Equity Incentive Plan
On
January 11, 2019, our shareholders approved the Exactus, Inc. 2019
Equity Incentive Plan (the “Plan”). The purpose of the
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 Plan is limited such that the
maximum number of shares of Common Stock that may be delivered
pursuant to awards granted under the 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 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.
Compensation of Directors Table
The
following table shows the compensation paid during the year ended
December 31, 2019 to our non-employee directors, other than Mr.
Puzder, whose 2019 compensation is set forth above under
“Executive Compensation.”
|
DIRECTOR
COMPENSATION
|
||||||||
|
Name
|
|
Fees
Earned or Paid in Cash ($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non-Equity Incentive
Plan Compensation ($)
|
Non-Qualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
|
Vladislav
Yampolsky
Interim Executive Chairman
|
(a)
|
-
|
700,000
|
32,000
|
-
|
-
|
-
|
732,000
|
|
Philip J.
Young
Former Board Chairman
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
John
Price
Board Member
|
(b)
|
-
|
54,000
|
70,000
|
-
|
-
|
-
|
124,000
|
|
Kevin J.
Esval
Former Board Member
|
(c)
|
-
|
54,000
|
70,000
|
-
|
-
|
-
|
124,000
|
|
Jeffrey
Thompson
Former Board Member
|
(d)
|
-
|
54,000
|
70,000
|
-
|
-
|
-
|
124,000
|
|
Jonathan R.
Gilbert
Former Board Member
|
(e)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Steven
Schwartz
Former Board Member
|
(f)
|
-
|
29,167
|
-
|
-
|
-
|
-
|
29,167
|
|
Alvaro Daniel
Alberttis
Board Member
|
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Derek Du
Chesne
Board Member
|
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Lawrence J.
Wert
Board Member
|
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Justin A.
Viles
Board Member
|
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
(a)
Includes 1,000,000
shares of common stock at $0.70 per share, vesting 1/48th on date
of grant and 1/48th per month until fully vested and 250,000 vested
stock options to purchase Common Stock exercisable at $0.32 per
share.
(b)
Includes 100,000
shares of common stock at $0.54 per share, vesting 1/24th on date
of grant and 1/24th per month until fully vested and 250,000 stock
options exercisable at $0.20 per share, vesting 1/24th on date of
grant and 1/24th per month until fully vested.
(c)
Includes 100,000
shares of common stock at $0.54 per share, vesting 1/24th on date
of grant and 1/24th per month until fully vested and 250,000 stock
options exercisable at $0.20 per share, vesting 1/24th on date of
grant and 1/24th per month until fully vested. Mr. Esval resigned
from the Board on April 29, 2020. All shares of
common stock and all options were deemed fully vested upon the
director’s resignation on April 29, 2020.
(d)
Includes 100,000
shares of common stock at $0.54 per share, vesting 1/24th on date
of grant and 1/24th per month until fully vested and 250,000 stock
options exercisable at $0.20 per share, vesting 1/24th on date of
grant and 1/24th per month until fully vested. Mr. Thompson
resigned from the Board on April 29, 2020. All shares of
common stock and all options were deemed fully vested upon the
director’s resignation on April 29, 2020.
(e)
Mr. Gilbert
resigned from the Board on July 1, 2019. On January 10, 2020, we
entered into a Settlement Agreement and Mutual Release with Mr.
Gilbert. Under the settlement agreement, we agreed to issue Mr.
Gilbert a total of 375,000 shares of common stock, with 187,500
shares issued immediately and 187,500 shares to be issued in six
months. Resales of these shares by Mr. Gilbert on any given day are
limited to no more than 10% of the average daily market volume for
our common stock calculated from the prior week. The settlement
agreement also contains general mutual releases between us and Mr.
Gilbert.
(f)
Includes 27,778
shares of common stock at $1.05 per share. All shares are fully
vested at December 31, 2019. Mr. Schwartz resigned from the Board
on December 17, 2019
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth information as of April 30, 2020,
regarding the number of shares of our common stock beneficially
owned by each director, each named executive officer and by all
directors and executive officers as a group. Beneficial ownership
includes shares, if any, held in the name of the spouse, minor
children or other relatives of the director or executive officer
living in such person’s home, as well as shares, if any, held
in the name of another person under an arrangement whereby the
director or executive officer can vest title in himself at once or
at some future time. In determining the number and percentage of
shares beneficially owned by each person, shares that may be
acquired by such person pursuant to options exercisable within 60
days after April 30, 2020 are deemed outstanding for purposes of
determining the total number of outstanding shares for such person
and are not deemed outstanding for such purpose for all other
shareholders. To our knowledge, except as otherwise indicated,
beneficial ownership includes sole voting and dispositive power
with respect to all shares. Unless otherwise noted, each
shareholder’s address is 80 NE 4th Avenue, Suite 28, Delray
Beach, FL 33483, and each shareholder has sole voting power and
investment power with respect to securities shown in the table
below.
|
Title of class
|
Name and address of beneficial owner
|
Amount and Nature of Beneficial Ownership
|
|
Percent of Class(1)
|
|
Current Named Executive Officers & Directors:
|
||||
|
Common
Stock
|
Vladislav
Yampolsky
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
6,873,192
|
(2)
|
15.10%
|
|
Common
Stock
|
Philip
Young**
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
28,141
|
(3)
|
0.06%
|
|
Common
Stock
|
Kevin
Esval**
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
639,742
|
(4)
|
1.41%
|
|
Common
Stock
|
John
Price
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
283,336
|
(5)
|
0.62%
|
|
Common
Stock
|
Emiliano
Aloi
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
250,000
|
(6)
|
0.55%*
|
|
Common
Stock
|
Andrew
Johnson
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
453,125
|
(7)
|
1.00%
|
|
Common
Stock
|
Jeffrey
Thompson**
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
193,492
|
(8)
|
0.43%
|
|
Common
Stock
|
Kenneth
E. Puzder
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
410,156
|
(9)
|
0.90%
|
|
Common
Stock
|
Alvaro Daniel
Alberttis
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
69,444
|
(10)
|
0.15%
|
|
Common
Stock
|
Derek
Du Chesne
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
1,312,500
|
(11)
|
2.88%
|
|
Common
Stock
|
Lawrence J.
Wert
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
3,859,986
|
(12)
|
8.48%
|
|
Common
Stock
|
Justin
A. Viles
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
63,962
|
(13)
|
0.14%
|
|
Common Stock Total of All Current Directors and Executive
Officers:
|
14,437,076
|
|
31.72%
|
|
* Less
than 1%.
**No
longer serving in his previous positions with the
Company.
Based
on 45,522,275 shares of our common stock issued and outstanding as
of April 30, 2020.
(2)
Includes (i) 187,501 shares of Common Stock, (ii) 6,435,691 shares
of common stock held by Ceed2med, LLC over which Mr. Yampolsky has
sole voting power and investment power and (iii) 250,000 vested
stock options to purchase Common Stock exercisable at $0.32 per
share.
(3)
Includes (i) 16 shares of common stock and (ii) 28,125 vested stock
options to purchase common stock exercisable at $0.712 per
share.
(4)
Includes (i) 33,586 shares of common stock, (ii) 237,500 shares of
common stock held by Velocity Health Capital over which Mr. Esval
has sole voting power and investment power, (iii) 187,500 shares of
common stock held by Donegal Bio Ventures, over which Mr. Esval has
sole voting power and investment power, (iv) 21,000 shares issuable
upon conversion of shares of Series B-2 held by Velocity Health
Capital over which Mr. Esval has sole voting power and investment
power, and (v) vested options to purchase 160,156 shares of common
stock exercisable at $0.20 per share.
(5)
Includes (i) 250,0000 vested stock options to purchase Common Stock
exercisable at $0.20 per share and (ii) 33,336 shares of Common
Stock.
(6)
Includes 250,000 vested stock options to purchase Common Stock
exercisable at $0.32 per share.
(7)
Includes (i) 300,000 shares of Common Stock, (ii) 12,500 vested
stock options to purchase Common Stock exercisable at $0.32 per
share, (iii) 15,625 vested stock options to purchase Common Stock
exercisable at $0.96 per share and (iv) 125,000 vested stock
options to purchase Common Stock exercisable at $0.56 per
share.
(8)
Includes (i) 33,336 shares of common stock and (ii) 160,156 vested
stock options to purchase Common Stock exercisable at $0.20 per
share.
(9)
Includes (i) 250,000 shares of Common Stock, and (ii) 160,156
vested stock options to purchase Common Stock exercisable at $0.20
per share.
(10)
Includes 69,444 shares of Common Stock.
(11)
Includes (i) 1,000,000 shares of Common Stock, and (ii) 312,500
vested stock options to purchase Common Stock exercisable at $0.30
per share.
(12)
Includes 3,859,986 shares of Common Stock.
(13)
Includes 63,962 shares of Common Stock.
The
following table sets forth information, as of April 30, 2020,
regarding the number of shares of our common stock beneficially
owned by all persons known by us, other than those set forth in the
table above, who own five percent or more of our outstanding shares
of common stock.
|
Title of class
|
Name and address of beneficial owner
|
Amount and Nature
of Beneficial
Ownership
|
Percent of Class(1)
|
|
Common
Stock
|
Ceed2Med,
LLC(2)
95 NE 4th
Ave.
Delray Beach, FL
33483
|
6,435,691
|
14.14%
|
(1)
Based on 45,522,275 shares of our common stock outstanding as of
April 30, 2020.
(2)
Vladislav Yampolsky is the Manager of Ceed2Med, LLC, and, in that
capacity, has the ability to make voting and investment decisions
with regard to its shares of common stock.
Item 13. Certain Relationships and
Related Transactions, and Director Independence
We have
entered into agreements in 2019 with Ceed2Med, LLC, our largest
stockholder. For more information about these agreements please see
“Business Overview – Ceed2Med Agreements”
above.
We are
party to an arbitration proceeding commenced September 2019 in San
Francisco, California currently pending before the American
Arbitration Association in New York, New York. The proceeding was
brought by our former director, Dr. Krassen Dimitrov. The complaint
generally alleges that we and our subsidiary Exactus Biosolutions,
Inc. breached an alleged consulting agreement with Dr. Dimitrov and
owe unpaid consulting fees, plus interest. Dr. Dimitrov also
licensed certain technology to Exactus Biosolutions, Inc. The
Company is conducting an investigation into matters concerning the
licenses and payments previously made, and disputes that any
amounts are due and the existence of any contract. The Company
intends vigorously to defend such action. The Company believes that
there exist grounds to assert various counter-claims and
third-party claims against Dr. Dimitrov and his affiliated
companies for return of amounts previously paid. For the years
ended December 31, 2019 and 2018, $0 and $300,000 was recognized in
Research and Development expenses for consulting provided by Dr.
Dimitrov. As of December 31, 2019 and 2018, $575,000 was included
in accounts payable, respectively. During the year ended December
31, 2019 and 2018, $0 was paid.
On June
28, 2017, we issued to two of our former executive officers a
promissory note in the principal amount up to $100,000, which
amount may be drawn upon by the Company as bridge financing for
general working capital purposes. The promissory note accrues
interest at a rate of 8.0% per annum and matures on the earlier of
(i) one (1) year from the date of the promissory note, and (ii) the
closing the sale of our securities in a single transaction or a
series of related transactions from which at least $500,000 of
gross proceeds are raised.
On July
5, 2018, we issued our officer 15 shares of Series D Preferred
shares in exchange for the forgiveness of $200,000 worth of accrued
debt owed to the officer by the us.
On
January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement with C2M (see note 12). At
December 31, 2019, accounts payable to C2M related to purchase of
finish products amounted to $8,342. Ceed2Med is our largest
stockholder.
On
March 29, 2019, we retired a note payable owing to our former
officer in the amount of $30,616. To retire the note, we issued the
officer shares of common stock valued at $0.20 per share, for a
total of 153,080 shares issued to retire the debt.
On
March 1, 2019, we, through our 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 us to pay 5% of the
net income realized by us from the operation of the lease farm.
Accordingly, we recognized $0 Right-of-use asset and lease
liabilities on this farm lease as we have 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.
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 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.
On
April 30, 2019, we through our 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 us from the operation of the lease 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. We have
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 us. 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 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
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 Bobby Yampolsky, a
member of the Board and the founder, manager and controlling member
of Ceed2Med, the Company’s largest
stockholder.
On July 31, 2019, we granted 10,000 Series E
Preferred in connection with a Management and Services Agreement
with Ceed2Med, our largest stockholder. We 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.
On
September 13, 2019, we issued 2,000,000 shares of restricted common
stock to officers and directors of the Company subject to vesting
periods.
During
the nine months ended September 30, 2019, we reimbursed a managing
member of EOW and an affiliated company which is owned by two
managing members of EOW, for operating expenses paid on behalf of
EOW for the following:
●
$400,000 worth of
hemp seeds
●
$50,000 lease
payment related to a lease agreement
●
$100,000 for
irrigation cost
During
October 2019, we entered into two short-term promissory notes for a
total net proceeds of $85,000 with an officer and an
investor.
During
October 2019, we entered into a short-term promissory note for a
total net proceeds of $50,000 and a principal amount of $55,556
with an officer (See Note 12 to financial statements).
We
recognized revenues from a related party customer of $37,446 during
the year ended December 31, 2019. As of December 31, 2019, accounts
receivable from a related party customer amounted to $18,860. The
customer is an affiliated company which is substantially owned by a
managing member of EOW.
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 affiliated company provided
advances to the Company for working capital purposes for a total of
$242,500 and the Company paid back these advances. The Company also
advanced $127,500 to these related parties which resulted to a
receivable or due from related parties of $127,500 as of December
31, 2019. These advances are short-term in nature, non-interest
bearing and due on demand.
From
January 31, 2020 through April 10, 2020, our Interim Executive
Chairman, Bobby Yampolsky, made a series of advances to us in the
approximate total amount of $97,000. There are currently no
specific terms of repayment.
On
February 4, 2020, we entered into a Supply and Distribution
Agreement with HTO Holdings Inc (dba “Hemptown, USA”).
On March 28, 2020, we amended the Supply and Distribution
Agreement. Ceed2Med, LLC, our largest shareholder, is also a
significant investor in Hemptown USA and is party to a distribution
agreement.
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.
Director Independence
We are not a “listed issuer” within the meaning of Item
407 of Regulation S-K and there are no applicable listing standards
for determining the independence of our directors. Applying the
definition of independence set forth in Rule 4200(a)(15) of The
Nasdaq Stock Market, Inc., we believe that Daniel Alberttis, John
Price, Larry Wert, and Justin Viles are independent
directors.
Item 14. Principal Accountant Fees
and Services
The following table presents the aggregate fees billed for each of
the last two fiscal years by the Company’s independent
registered public accounting firm, RBSM LLP, in connection with the
audit of the Company’s consolidated financial statements and
other professional services rendered.
|
Year
Ended:
|
Audit
Services
|
Audit Related
Fees
|
Tax
Fees
|
Other
Fees
|
|
December 31,
2019
|
$100,700
|
n/a
|
n/a
|
n/a
|
|
December 31,
2018
|
$71,300
|
n/a
|
n/a
|
n/a
|
Audit fees represent the professional services rendered for the
audit of the Company’s annual consolidated financial
statements and the review of the Company’s consolidated
financial statements included in quarterly reports, along with
services normally provided by the accounting firm in connection
with statutory and regulatory filings or other engagements.
Audit-related fees represent professional services rendered for
assurance and related services by the accounting firm that are
reasonably related to the performance of the audit or review of the
Company’s consolidated financial statements that are not
reported under audit fees.
Tax fees represent professional services rendered by the accounting
firm for tax compliance, tax advice, and tax planning. All other
fees represent fees billed for products and services provided by
the accounting firm, other than the services reported for the other
categories.
Pre–Approval Policy of Services Performed by Independent
Registered Public Accounting Firm
The
Audit Committee’s policy is to pre–approve all audit
and non–audit related services, tax services and other
services. Pre–approval is generally provided for up to one
year, and any pre–approval is detailed as to the particular
service or category of services and is generally subject to a
specific budget. The Audit Committee has delegated the
pre–approval authority to its chairperson when expedition of
services is necessary. The independent registered public accounting
firm and management are required to periodically report to the full
Audit Committee regarding the extent of services provided by the
independent registered public accounting firm in accordance with
this pre–approval and the fees for the services performed to
date.
PART IV
Item 15. Exhibits, Financial Statements Schedules
(a) Financial Statements and Schedules
The following financial statements and schedules listed below are
included in this Form 10-K.
Financial Statements (See Item 8)
|
(b)
|
Exhibits
|
|
Exhibit Number
|
Description
|
|
Share
Exchange Agreement, dated February 29, 2016, by and among Spiral
Energy Tech, Inc., Exactus BioSolutions, Inc. and the stockholders
of Exactus BioSolutions, Inc. signatories thereto (attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 4, 2016 and incorporated herein by
reference).
|
|
|
Amended
and Restated Articles of Incorporation (attached as Exhibit 3.2 to
the Company’s Registration Statement on Form S-1
(Registration No. 333-183360), filed August 16, 2012 and
incorporated herein by reference).
|
|
|
Certificate
of Amendment to Amended and Restated Articles of Incorporation
(attached as Exhibit 3.1 to Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 333-183360, filed December
19, 2013 and incorporated herein by reference).
|
|
|
Bylaws
(attached as Exhibit 3.3 to the Company’s Registration
Statement on Form S-1 (Registration No. 333-183360), filed August
16, 2012 and incorporated herein by reference).
|
|
|
Articles
of Merger, dated March 10, 2016, between Exactus Acquisition Corp.
and Spiral Energy Tech, Inc. (attached as Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed March 28, 2016 and
incorporated herein by reference)
|
|
|
Certificate
of Designation for Series A Preferred Stock (attached as Exhibit
3.2 to the Company’s Current Report on Form 8-K filed January
14, 2019 and incorporated herein by reference)
|
|
|
Certificate
of Designation for Series B-1 Preferred Stock (attached as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed March
4, 2016 and incorporated herein by reference)
|
|
|
Certificate
of Designation for Series B-2 Preferred Stock (attached as Exhibit
3.2 to the Company’s Amendment to the Current Report on Form
8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Amendment
to Certificate of Designation After Issuance of Class or Series
(attached as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed November 1, 2016 and incorporated herein by
reference).
|
|
|
Certificate
of Amendment to Articles of Incorporation (attached as Exhibit 3.1
to the Company’s Current Report on Form 8-K filed October 12,
2018 and incorporated herein by reference)
|
|
|
Certificate
of Designation for Series D Preferred Stock (attached as Exhibit
3.11 to the Company’s Annual Report on 10-K filed March 29,
2019)
|
|
|
Form of
Certificate of Designation of Preferences, Rights and Limitations
of 0% Series E Convertible Preferred Stock (attached as Exhibit 3.1
to the Company’s Current Report on Form 8-K filed August 1,
2019 and incorporated herein by reference)
|
|
|
4.1
|
Form of
Common Stock Certificate**
|
|
Warrant
to Purchase Common Stock of Exactus, Inc., dated June 30, 2016
(attached as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed July 7, 2016 and incorporated herein by
reference)
|
|
|
Form of
8% Convertible Promissory Note (attached as Exhibit 10.2 to the
Current Report on Form 8-K filed December 4, 2019 and incorporated
by reference herein).
|
|
|
|
Form of
Warrant (attached as Exhibit 10.3 to the Current Report on Form 8-K
filed December 4, 2019 and incorporated by reference
herein).
|
|
Warrant
to Purchase Common Stock, issued on November 27, 2019 (attached as
Exhibit 10.7 to the Current Report on Form 8-K filed December 4,
2019 and incorporated by reference herein)
|
|
Form of
12% Promissory Note (attached as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed October 24, 2019
and incorporated herein by reference)
|
|
|
Warrant
to Purchase Common Stock, issued November 27, 2019 (attached as
Exhibit 10.7 to the Company’s Current Report on Form 8-K
filed December 4, 2019 and incorporated herein by
reference)
|
|
|
Form of
Subscription Agreement for Series B-2 Preferred Stock (attached as
Exhibit 10.2 to the Company’s Amendment to the Current Report
on Form 8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
2018
Equity Incentive Plan (attached as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed September 5, 2018
and incorporated herein by reference)
|
|
|
2019
Equity Incentive Plan (attached as Exhibit 10.7 to the
Company’s Amended Current Report on Form 8-K/A filed January
22, 2019 and incorporated herein by reference)
|
|
|
Master
Product Development and Supply Agreement with Ceed2Med, LLC dated
January 8, 2019 (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed January 14, 2019 and incorporated
herein by reference)
|
|
|
Form of
Subscription Agreement for Common Stock (attached as Exhibit 10.2
to the Company’s Current Report on Form 8-K filed January 14,
2019 and incorporated herein by reference)
|
|
|
Form of
Exchange Agreement for Series A Preferred Stock (attached as
Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed January 14, 2019 and incorporated herein by
reference)
|
|
|
Form of
2019 Incentive Plan Non-Qualified Option Award Certificate
(attached as Exhibit 10.8 to the Company’s Current Report on
Form 8-K filed January 14, 2019 and incorporated herein by
reference)
|
|
|
Form of
Subscription Agreement for Series A Preferred Stock (attached as
Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed January 29, 2019 and incorporated herein by
reference)
|
|
|
Form of
Subscription Agreement for Common Stock (attached as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed February
21, 2019 and incorporated herein by reference)
|
|
|
Termination
an Mutual Release Agreement with James R. Erickson (attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed February 22, 2019 and incorporated herein by
reference)
|
|
|
Securities
Purchase Agreement for 8% Notes, dated November 27, 2019 (attached
as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed December 4, 2019 and incorporated herein by
reference)
|
|
|
Subsidiary
Guarantee, executed by Exactus, Inc. and its subsidiaries named
therein, dated November 27, 2019 (attached as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed December 4, 2019
and incorporated herein by reference)
|
|
|
Security
Agreement, dated November 27, 2019 (attached as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed December 4, 2019
and incorporated herein by reference)
|
|
|
Intellectual
Property Security Agreement, dated November 27, 2019 (attached as
Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed December 4, 2019 and incorporated herein by
reference)
|
|
|
Registration
Rights Agreement, dated November 27, 2019 (attached as Exhibit 10.8
to the Company’s Current Report on Form 8-K filed December 4,
2019 and incorporated herein by reference)
|
|
|
Green
Goddess Extracts Purchase Agreement (attached as Exhibit 10.1 to
the Current Report on Form 8-K filed August 1, 2019 and
incorporated herein by reference)
|
|
|
Management
and Services Agreement (attached as Exhibit 10.2 to the Current
Report on Form 8-K filed August 1, 2019 and incorporated herein by
reference)
|
|
|
Commercial
Lease Agreement, dated July 9, 2019, by and between Skybar
Holdings, LLC and the Company (attached as Exhibit 10.1 to the
Current Report on Form 8-K filed July 15, 2019 and incorporated
herein by reference)
|
|
|
First
Amendment to Operating Agreement of Exactus One World, LLC, dated
October 23, 2019 (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed October 24, 2019 and incorporated
herein by reference)
|
|
|
Amendment
to Management and Services Agreement, dated October 23, 2019
(attached as Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed October 24, 2019 and incorporated herein by
reference)
|
|
|
Severance
Agreement, by and between the Company and Philip J. Young, dated
August 15, 2019 (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed August 21, 2019 and incorporated
herein by reference)
|
|
Subscription
Agreement with Exactus One World, LLC (attached as Exhibit 10.1 to
the Quarterly Report on Form 10-Q filed May 31, 2019 and
incorporated herein by reference)
|
||
|
Membership
Purchase Agreement (attached as Exhibit 10.2 to the Quarterly
Report on Form 10-Q filed May 31, 2019 and incorporated herein by
reference)
|
||
|
Operating
Agreement for Exactus One World, LLC (attached as Exhibit 10.3 to
the Quarterly Report on Form 10-Q filed May 31, 2019 and
incorporated herein by reference)
|
||
|
Unanimous
Written Consent of the Managers of Exactus One World, LLC (attached
as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed May 31,
2019 and incorporated herein by reference)
|
||
|
Lease
for Premises in Delray Beach, Florida (attached as Exhibit 10.4 to
the Company’s Current Report on Form 8-K filed March 11, 2019
and incorporated herein by reference)
|
||
|
Employment
Agreement with Andrew Johnson (attached as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed March 11, 2019 and
incorporated herein by reference)
|
||
|
First
Amendment to Employment Agreement with Philip Young (attached as
Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed March 11, 2019 and incorporated herein by
reference)
|
||
|
First
Amendment to Employment Agreement with Kelley Wendt (attached as
Exhibit 10.7 to the Company’s Current Report on Form 8-K
filed March 11, 2019 and incorporated herein by
reference)
|
||
|
Separation
Agreement and Consulting Agreement with Timothy Ryan (attached as
Exhibit 10.8 to the Company’s Current Report on Form 8-K
filed March 11, 2019 and incorporated herein by
reference)
|
||
|
Non-Exclusive
Distribution and Profit Sharing Agreement by and between the
Company and Canntab Therapeutics USA (Florida), Inc., dated
November 20, 2019 (attached as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed November 20, 2019 and incorporated
herein by reference)
|
||
|
Supply
Agreement by and between the Company and Canntab Therapeutics USA
(Florida), Inc., dated November 20, 2019 (attached as Exhibit 10.3
to the Company’s Current Report on Form 8-K filed November
20, 2019 and incorporated herein by reference)
|
||
|
Registration
Rights Agreement, dated November 27, 2019 (attached as Exhibit 10.8
to the Company’s Current Report on Form 8-K filed December 4,
2019 and incorporated herein by reference)
|
||
|
Supply
and Distribution Agreement by and between the Company and Ceed2Med,
LLC, dated November 14, 2019 (attached as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed November 20, 2019
and incorporated herein by reference)
|
||
|
Employment
Agreement with Derek Du Chesne (attached as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 20, 2020
and incorporated herein by reference)
|
||
|
Supply
and Distribution Agreement with HTO Holdings, Inc. (Hemptown,
USA)
|
||
|
Amendment
to Supply and Distribution Agreement with HTO Holdings, Inc.
(Hemptown, USA)
|
||
|
10.38*
|
Forbearance Agreement with 3i, LP
|
|
|
Subsidiary
List (attached as Exhibit 21.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2016 and
incorporated herein by reference)
|
||
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||
|
Certification
of Interim Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
||
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
||
|
101**
|
The
following materials from the Company’s Annual Report on Form
10-K for the year ended December 31, 2019 formatted in Extensible
Business Reporting Language (XBRL).
|
|
|
|
101.INS
|
XBRL
Instance Document
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Exactus,
Inc.
By: /s/ Emiliano
Aloi
Emiliano
Aloi
Interim
Chief Executive Officer
(Principal
Executive Officer)
May
22, 2020
By: /s/ Kenneth Puzder
Kenneth
Puzder
Chief
Financial Officer and Director
(Principal
Financial Officer and Principal Accounting Officer)
May
22, 2020
In
accordance with Section 13 or 15(d) of the Exchange Act, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated:
By: /s/ Bobby
Yampolsky
Bobby
Yampolsky
Interim
Executive Chairman and Director
May
22, 2020
By: /s Kenneth Puzder
Kenneth
Puzder
Chief
Financial Officer and Director
May
22, 2020
By: /s/ John
Price
John
Price
Director
May
22, 2020
By: /s/
Alvaro Daniel Alberttis
Alvaro
Daniel Alberttis
Director
May
22, 2020
-65-
Exhibit
10.36
SUPPLY AGREEMENT
THIS
SUPPLY AGREEMENT (this “Agreement
”)
is made as of Feburary 3rd,
2020 (the "Effective Date" ), by and between
HTO Holdings Inc., a
corporation under the laws of the State of Delaware, having a place
of business at 78000 Fred Waring Dr. Ste 103. Palm Desert CA,
92211, ("
Supplier"),
and Exactus, Inc., a corporation existing and organized under the
laws of the Nevada, having a place of business at 80 NE
4th
Avenue,
Suite 28, Delray Beach, Florida 33483, (hereinafter
"Buyer"
or the "Company")
(Buyer and Supplier may be referred as the "Parties"
or “Party”).
WITNESSETH:
WHEREAS,
Buyer and Supplier have agreed to enter into this Agreement
pursuant to which Supplier will grow, harvest, process, extract and
supply Products, as defined below, to Buyer (referred to below as
"Production").
NOW THEREFORE, in consideration of the premises and preamble, which
are incorporated herein by reference, and other good and valuable
consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as
follows:
1.
AGREEMENT TO PURCHASE AND SELL PRODUCTS
1.1
General.
During the Term, Supplier hereby agrees to produce and sell to
Buyer, and Buyer hereby agrees to purchase and accept from
Supplier, such amounts of Products, when available, as from time to
time shall be ordered by Buyer. Supplier shall furnish the products
identified on
Exhibit 1.1 hereto,
in the form described in Exhibit 1.1 (the "Products").
1.2
Product Specifications.
Supplier shall supply all Products according to the Specifications
in effect as of the date of this Agreement, with such changes or
additions to the Specifications of the Products related thereto as
shall be requested by Buyer in accordance with this Section or as
otherwise agreed in writing by the Parties. All other Products
shall be manufactured with such Specifications as the Parties shall
agree in writing. "Specifications"
means, with respect to any Product, the design, composition,
dimensions, other physical characteristics, chemical
characteristics, packaging, unit count and trade dress of such
Product. The Specifications hereby incorporate the Laws and all
rules and regulations promulgated thereunder by any governmental
authority, including but not limited to the Oregon Department of
Agriculture and the U.S Agricultural Improvement Act of 2018. The
Products shall not contain any substance or chemical prohibited by
such Laws, rules and regulations.
2.
PURCHASE ORDERS
2.1
Purchase Orders.
Buyer shall furnish to Supplier a purchase order in the form of
Exhibit 2.1 attached hereto (each, a "Purchase
Order") for
the quantity of the Products which Buyer shall purchase, and
Supplier shall deliver in accordance with the Purchase Order and
this Agreement. Supplier shall acknowledge receipt of such Purchase
Order and acceptance thereof as soon as practicable after Supplier
receives a Purchase Order. The Supplier retains the right to accept
or reject any Purchase Order at its sole discretion. Upon
acceptance by Supplier, each such Purchase Order shall be binding
on all parties. Each such Purchase Order shall designate the
quantity of the Products ordered and payment terms. In the event of
a conflict between this Agreement and a Purchase Order, this
Agreement governs.
3.
SHIPMENTS AND ACCEPTANCE
3.1
Delivery.
Supplier shall deliver all Products F.O.B. at Supplier’s
shipping point for delivery to Buyer's facility as specified in the
Purchase Order.
Title
and risk of loss will transfer from Supplier to Buyer upon delivery
of Product to Buyer’s shipment carrier. Buyer shall provide
instruction on when the product is to be delivered, and how much
product is to be picked up each month. The Buyer shall be
responsible for shipping costs from the Supplier’s shipping
point.
3.2
Inspection; Rejection.
(a)
Buyer will inspect each shipment of Product upon receipt to verify
such shipment's conformity to the relevant Purchase Order, Laws,
and Specifications as of the time the Product was delivered to
Buyer. If Buyer determines that any portion or all of any shipment
of the Product did not conform to the Purchase Order as of the time
it was delivered to Buyer (each non-conforming Product , a "
Defective Product" ),
then Buyer shall be entitled to reject such portion or all of any
shipment of Product that includes Defective Product. Buyer shall
notify Supplier in writing if the shipment of Product includes
Defective Product that existed at the time of the delivery of the
Products to Buyer. Such notification shall be made as soon as
reasonably practicable after discovery of the nonconformity, but
not later than thirty (30) days after delivery of the Products.
Such notice shall: (i) specify the reasons for rejection, and (ii)
contain the testing results and methodology used to determined
non-conformance of the Defective Product. If Buyer does not so
reject the Products within thirty (30) days after delivery, Buyer
shall be deemed to have accepted the Products. After notice of
rejection is received by Supplier, Buyer shall cooperate with
Supplier in determining whether such rejection is justified.
Supplier shall notify Buyer as soon as reasonably possible, but not
later than thirty (30) days after receipt of the notice from Buyer,
whether it accepts Buyer' s basis for rejection. Notwithstanding
anything to the contrary, if a portion or all of any shipment of
Product has a latent defect that renders such Product a Defective
Product prior to the expiry date of such Product and that (a) was
not reasonably discoverable within the inspection period specified
in this Section 3.2 an (b) was attributable to Supplier' s
manufacture and/or supply and (iii) did not occur after receipt of
such Product by Buyer as described in Section 3.2 (each such
defect, a "
Latent Defect" ),
Buyer shall promptly, and in no event more than twenty (20) days
after the discovery or notification of such Latent Defect, notify
Supplier of such Latent Defect. If Supplier accepts Buyer's
determination that the Product is a Defective Product or that the
Product contain s a Latent Defect, then Buyer shall be entitled to
the remedies set forth in Section 6.4 hereof. If Supplier does not
accept Buyer's determination that the Product is a Defective
Product or that the Product contains a Latent Defect, and Buyer
does not accept Supplier's conclusion, then Supplier and Buyer
shall jointly select an independent Third Party to determine
whether it conforms to the Purchase Order (the "Third Party
Determination"). The Parties agree that the Third Party
Determination shall be final. If the Third Party rules that the
Product conformed to the Purchase Order as of the time the Product
was delivered to Buyer or that the Product does not contain a
Latent Defect, as applicable, then Buyer shall be deemed to have
accepted the Product at the agreed upon price and Buyer shall bear
the cost of the Third Party Determination. If the Third Party rules
that the Product does not conform to the Purchase Order at the time
the Product was delivered to Buyer or that the Product contains a
Latent Defect, then Buyer shall be entitled to the remedies set
forth in Section 6.4 hereof and Supplier shall bear the cost of
such Third Party Determination. In the event the Product is
determined to have a Latent Defect, the Product will be promptly
returned to the Supplier by the Buyer.
4.
RECORDS AND AUDIT RIGHTS, PUBLIC STATEMENTS;
RECALLS
4.1
Records; Audit Rights.
Supplier shall maintain, and shall cause its agents to maintain,
all records necessary to comply with all applicable Laws relating
to the production, filling, packaging, testing, storage and
shipment of Products. "Laws"
means any statute, law, ordinance, regulation, rule, code, order,
constitution, treaty, common law, judgment, decree, other
requirement or rule of law of any governmental entity, but does not
include any United States federal law concerning cannabis,
including the Controlled Substances Act, 21 U.S.C. §§
801, et. seq. All such records shall be maintained for such period
as may be required by applicable Laws; provided, however, that all
records relating to the production, stability and quality control
of Products shall be retained until the parties agree to dispose of
such records.
5.
PRICE, PAYMENT COOPERATIVE ADVERTISING
5.1
Price.
(a) The
purchase price for Products supplied hereunder (the
"Purchase
Price”),
shall be calculated in accordance with
Exhibit 1.1 and
paid in accordance with this Section. For purposes hereof "cGMP"
means current good manufacturing practices of the FDA and other
appropriate agencies, as set forth in 21C.F.R. Part 111 and all
applicable FDA rules, regulations, guides and guidance(s,) as
amended from time to time and in effect during the term of this
Agreement.
(b) Buyer
will pay Supplier amounts due pursuant to this Agreement in
accordance with Exhibit 1.1.
5.2
Taxes.
(a) Supplier
and Buyer each shall cooperate with the other party, as reasonably
requested by the other party, to minimize or eliminate Taxes to the
extent legally permissible, including by making available to such
other party any existing resale certificates, exemption
certificates or other existing information relevant for such
purpose. “Taxes"
means all state, local, foreign and other income, gross receipts,
sales, use, production, ad valorem, transfer, franchise,
registration, profits, service use, withholding, payroll,
employment, unemployment, estimated, excise, severance,
environmental, stamp, occupation, premium, property personal,
customs, duties or other taxes, fees, assessments or charges of any
kind whatsoever, together with any interest, additions or penalties
with respect thereto and any interest in respect of such additions
or penalties.
(b) If
applicable Laws relating to Taxes require Buyer to withhold any
Taxes from a payment to Supplier, Buyer to withhold any Taxes from
a payment to Supplier, Buyer shall withhold such Taxes and shall
pay the amount withheld to the relevant Taxes authority.
6.
REPRESENTATIONS AND WARRANTIES
6.1
Representations and Warranties of Supplier.
Supplier represents and warrants to Buyer
that:
(a) the
Products shall be manufactured and packaged in compliance with the
provisions of the Laws governing the production, storage and
transportation of the Products, including without limitation, laws
promulgated by a state specific department of agriculture and the
federal Farm Bill (aka as the Agricultural Act of 2014 and the
Agriculture Improvement Act of 2018, as such either act may be
amended, restated, or re-enacted), and shall be devoid of the use
of any pesticides or any other harmful chemicals or
and;
(b) as
of the time any Products are delivered to Buyer and during the
shelf life of such Products, such Products shall conform to the
Specifications;
(c) upon
transfer of the risk of loss of a Product, as provided in Section
3.1, good and valid title to such Product sold hereunder will be
conveyed by Supplier to Buyer free and clear of any liens or
encumbrances created by Supplier;
(d) Supplier
has all necessary corporate power and authority to enter into this
Agreement and, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby.
The execution and delivery by Supplier of this Agreement, the
performance by Supplier of its obligations hereunder and thereunder
and the consummation by Supplier of the transactions contemplated
hereby and thereby have been duly authorized by all requisite
corporate action on the part of Supplier; and
(e) Supplier
is in material compliance with all Laws applicable to its business
and operations as presently
conducted.
6.2
Representations and Warranties of Buyer.
(a) Buyer has all necessary corporate power and authority to enter
into this Agreement and, to carry out its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby
and thereby. The execution and delivery by Buyer of this Agreement,
the performance by Buyer of its obligations hereunder and
thereunder and the consummation by Buyer of the transactions
contemplated hereby and thereby have been duly authorized by all
requisite corporate action on the part of
Buyer.
6.3
THE WARRANTIES SET FORTH IN SECTION 6.2 OF THIS AGREEMENT ARE THE
EXCLUSIVE WARRANTIES GIVEN BY BUYER TO SUPPLIER WITH RESPECT TO THE
PURCHASE OF PRODUCTS HEREUNDER, AND ARE GIVEN AND ACCEPTED IN LIEU
OF ANY AND ALL OTHER WARRANTIES, GUARANTEES, CONDITIONS AND
REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
6.4 Defective Products. Any Products delivered to Buyer by Supplier
which are finally determined to be a Defective Product or contain a
Latent Defect in accordance with Section 3.2, shall be replaced at
Supplier's expense. In the event the Product is determined to have
a Latent Defect, the Product will be promptly returned to the
Supplier by the Buyer.
7.
COOPERATION ON LAWS
7.2
General.
Supplier and Buyer shall comply with all applicable Laws relevant
to this Agreement and the subject matter hereof and each party
shall actively assist the other in its compliance with same. Buyer
shall immediately cease any activity under this Agreement with
respect thereto upon written notice by Supplier to the extent
reasonably required in Supplier's reasonable discretion in
connection with Supplier's efforts to cooperate or comply with any
actual or potential government action relevant to any
Product.
8.
INDEMNIFICATION
8.1
Supplier Indemnification.
Supplier shall be responsible for and control Production. Supplier
shall indemnify and hold Buyer harmless from and against any actual
incurred Liability, including reasonable attorney's fees and
disbursements, arising out of any third-party claim for death,
injury or damage to property resulting from
Production.
8.2
Buyer Indemnification.
Buyer shall be responsible for use of the Products in the
Buyer’s finished consumer packaged goods
(“Buyer’s
Products”).
Buyer shall indemnify and hold harmless Supplier from and against
any actual incurred Liability, including reasonable attorneys' fees
and disbursements, arising out of any third-party claim for death,
injury or damage to property resulting from sale or use of the
Buyer’s Products.
8.3
Liability.
"Liability"
means, with respect to any person, any and all losses, claims,
charges, debts, demands, actions, causes of action, suits, damages,
obligations, payments, costs and expenses, sums of money, accounts,
reckonings, bonds, specialties, indemnities and similar
obligations, exoneration covenants, obligations under contracts,
guarantees, make whole agreements and similar obligations, and
other liabilities and requirement s, including all contractual
obligations, whether absolute or contingent, matured or unmatured,
liquidated or unliquidated, accrued or unaccrued, known or unknown,
joint or several, whenever arising, and including those arising
under applicable Laws, action, threatened or contemplated action
(including the costs and expenses of demands, assessments,
judgments, settlements and compromises relating thereto and
attorneys' fees and any and all costs and expenses, whatsoever
reasonably incurred in investigating, preparing or defending
against any such actions or threatened or contemplated actions) or
order of any governmental entity or any award of any arbitrator or
mediator of any kind, including any Liability for
taxes.
8.4
Notification of Liability and Process. Any
Party seeking indemnification pursuant to this Section 12 shall
promptly notify the other Party of the claim as to which
indemnification is sought , shall afford the other Part y, at the
other Part y's sole expense, the opportunity to defend or settle
the claim (in which case the indemnifying Party shall not be
responsible for the attorney's fee s of the indemnified Party with
respect such claim) and shall cooperate to the extent reasonably
requested by the other Party in the investigation and defense of
such claim; provided, however, that any settlement of any such
claim that would adversely affect the rights of the indemnified
Party shall require the written approval of such indemnified Party;
and provided further that an indemnified Party shall not settle any
such claim without the written approval of the indemnifying
Party.
8.5
Duration of Indemnification. The
foregoing indemnification obligations shall survive any termination
or expiration of this Agreement, in whole or in part, or the
expiration or termination of the Term.
9.
TERM AND TERMINATION
9.1
Term. This
Agreement shall come into effect on the Effective Date. Unless
otherwise terminated as provided in Section 9.2, this Agreement
shall remain in force for a period of one year from the Effective
Date (for the purpose of this Section 9 the "Initial
Term").
This Agreement shall renew automatically in one (1) year increments
after the Initial Term, with a revised list of Products based on
the Supplier’s future novel cannabinoid extracts (each, a
"Renewal
Term" and,
collectively with the Initial Term, the "Term"),
for three (3) years, unless either party gives written notice to
the other of its intention to not renew at least sixty (60) days
prior to expiration of the Initial Term or the then applicable
Renewal Term.
9.2
Termination.
(a) Insolvency.
A party may immediately terminate this Agreement without written
notice to the other party, if (i) the other party is the subject of
voluntary or involuntary bankruptcy proceedings instituted on
behalf of or against such it (except for involuntary bankruptcy
proceedings which are dismissed within sixty (60) days); (ii) an
administrative receiver, receiver and manager, interim receiver
custodian, sequestrator or similar officer is appointed in respect
of the other party (collectively, the "Receiver")
and that party has not caused the underlying action or the Receiver
to be dismissed within sixty (60) days after the Receiver's
appointment; (iii) the Board of Directors of the other party shall
have passed a resolution to wind up that party, or such a
resolution shall have been passed other than a resolution for the
solvent reconstruction or reorganization of that part y; (iv) a
resolution shall have been passed by that party or that party's
directors to make an application for an administration order or to
appoint an administrator; or (v) the other party makes a general
assignment, composition or arrangement with or for the benefit of
all or the majority of that party's creditors, or makes, suspends
or threatens to suspend making payments to all or the majority of
that party's creditors. In the event Buyer is anticipating a
voluntary or involuntary bankruptcy, Buyer will immediately return
all Product Buyer has in its possession to the Supplier to be
credited to any/all outstanding balances due
Supplier.
(b) Default.
In the event either party commits a material breach or defaults in
the performance or observance of any of the material provisions of
this Agreement, and such breach or default is not cured within
sixty (60) days after the receipt of notice thereof from the other
party specifying such breach or default, the party not in breach or
default shall be entitled (without prejudice to any of its other
rights) to terminate this Agreement, without additional penalty,
termination fee or cost, by giving notice to take effect
immediately.
10.
EFFECT OF EXPIRATION OR TERMINATION
10.1
Mutual Obligations. Upon
expiration or termination of this Agreement pursuant to Section 10
with effect as of the effective date of
termination:
(a) the
party terminating this Agreement shall be released from all
obligations and duties imposed or assumed hereunder except from
those provided in Sections 4.1, 4.2, 6 and this Section 10;
and
(b) the
other party shall lose the benefit of any rights granted in this
Agreement, except for those accrued prior to the effective date of
termination and those set forth in Sections 4.1, 4.2, 6 and this
Section 10.
10.2
Purchase Orders.
(a) Where
this Agreement is terminated by Supplier pursuant to Section
9.2(b), Supplier will be entitled, at its option, to fill or cancel
any Purchase Orders that were submitted by Buyer prior to such
termination. If Supplier elects to fill any such Purchase Orders,
Supplier shall use commercially reasonable efforts to fill any such
Purchase Orders. If Supplier elects not to fill any such Purchase
Orders, Buyer shall reimburse Supplier for the costs (including,
but not limited to, raw material costs) incurred in connection with
Purchase Orders that Supplier had started to supply prior to the
termination of this Agreement and that are canceled by Supplier
pursuant to this Section 10.2(a).
(b) Where
this Agreement is terminated by Buyer pursuant to Section 9.2(b),
or 9.2(c), then Buyer shall be entitled, at its option, to cancel
any Purchase Orders that were submitted by Buyer prior to such
termination, or to have such Purchase Orders filled by
Supplier.
10.3
No Release.
Termination of this Agreement for any reason whatsoever shall
neither be deemed a release,
nor shall it relieve either party from any obligation under this
Agreement which may have accrued prior thereto.
11.
FORCE MAJEURE
11.1
Suspension of Obligations. If
by reason of “Force
majeure",
which shall mean for the purpose of this Agreement (a) acts of God,
war, riots, civil unrest, acts of the public enemy, fires,
earthquakes, severe weather or storms, or (b) to the extent beyond
the reasonable control of the affected party, strikes, labor
disputes, labor shortages, product transportation interruptions or
short ages, accidents, unavailability of raw materials or supplies,
or any act in consequence of compliance with any order of any
government or governmental authority, and, in the case of either
(a) or (b), the affected party is delayed or prevented from
complying with its obligations under this Agreement, such affected
party shall promptly give notice to the other party with an
estimated date by which the contingency will be
removed.
11.2
Termination. To
the extent that a party is or has been delayed or prevented by
force majeure from complying with its obligation s under this
Agreement, the other party may suspend the performance of its
obligations until the contingency is removed. If the party delayed
or prevented from complying with its obligations under this
Agreement cannot permanently remove the contingency, or if the
contingency affecting such party results in a delay extending
beyond three (3) months, the other party (upon notice) shall have a
right to terminate this Agreement and Section 13, subject to
Section 6.4, if applicable, shall apply, with the party delayed or
prevented from complying with its obligations under this Agreement
deemed to be the non-terminating party.
12.
NOTICES
All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly
given (a) when received if delivered personally, (b) when
transmitted if telecopied (which is confirmed) or sent via email,
(c) upon receipt, if sent by registered or certified mail (postage
prepaid, return receipt requested) and (d) the day after it is
sent, if sent for next-day delivery to a domestic address by
overnight mail or courier, to the parties at the following
addresses:
If to Supplier, to:
HTO Holdings Inc.
Attn: Zayn Kalyan
78000 Fred Waring Dr., Ste. 103
Palm Desert CA, 92211
Email: zayn@hemptownusa.com
If to Buyer, to:
Exactus, Inc.
Attn: Kenneth E. Puzder
80 NE
4th
Avenue,
Suite 28
Delray Beach, Florida 33483
provided, however, that if any party shall have designated a
different address by notice to the others, then to the last address
so designated.
13.
ASSIGNMENT
Neither party may assign its rights and obligations under this
Agreement without the other part y's prior written consent. Any
attempted assignment in contravention of the foregoing shall be
void. Subject to the terms of this Agreement, this Agreement shall
be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assign s. For avoidance
of doubt, in the event of a Change in Control of either party, the
Agreement shall continue in force and effect and both parties shall
be subject to the terms, covenants and provisions in the Agreement.
A "Change of Control" shall mean a change in control of either
party (and not any person or entity that hereafter becomes a
successor to all or substantially all of the business or assets of
such party by reason of a Change of Control) and shall be deemed to
have taken place if: (i) a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of the capital stock of
either party having more than 50% of the total number of votes that
may be cast for the election of directors of the entity, (ii) the
sale or other disposition (excluding mortgage or pledge) of all or
substantially all of the assets of the part y, or (iii) the merger
or other business combination of the party with or into another
corporation or entity pursuant to which the party will not survive
or will survive only as a subsidiary of another corporation or
entity, in either case with the stockholders of the party prior to
the merger or other business combination holding less than 50% of
the voting shares of the merged or combined companies or entities
after such merger or other business
combination.
14.
NO WAIVER
The failure of either party to enforce any condition or part of
this Agreement at any time shall not be construed as a waiver of
that condition or part, nor shall it forfeit any rights to future
enforcement thereof.
15.
RELATIONSHIP OF THE PARTIES
Nothing contained in this Agreement shall be deemed to constitute a
partnership, joint venture, or legal entity of any type between
Supplier and Buyer, or to constitute one as the agent of the other.
Both parties shall act solely as independent contractors, and
nothing in this Agreement shall be construed to give either party
the power or authority to act for, bind, or commit the other
party.
16.
HEADINGS, INTERPRETATION
The headings of sections of this Agreement are for convenience of
reference only and shall not affect the meaning or interpretation
of this Agreement in any way. Words denoting the singular shall
include the plural and vice versa; words denoting any gender shall
include all genders; and words denoting persons shall include
bodies corporate, and vice versa.
17.
SEVERABILITY
If any term , provision, covenant, or restriction of this Agreement
is to any extent illegal, otherwise invalid, or incapable of being
enforced, such term shall be excluded to the extent of such
invalidity or unenforceability; all other terms hereof shall remain
in full force and effect; and, to the extent permitted and
possible, the invalid or unenforceable term shall be deemed
replaced by a term that is valid and enforceable and that comes
closest to expressing the intention of such invalid or
unenforceable t erm. If application of this Severability provision
should materially and adversely affect the economic substance of
the transactions contemplated hereby, the Party adversely impacted
shall be entitled to compensation for such adverse impact, provided
the reason for the invalidity or unenforceability of a term is not
due to serious misconduct by the party seeking such
compensation.
18.
ENTIRE AGREEMENT; AMENDMENT OR
MODIFICATION
This Agreement may not be amended, supplemented or otherwise
modified except by an instrument in writing signed by both parties
hereto. This Agreement contains the entire agreement of the parties
hereto with respect to the subject matter hereof, superseding all
negotiations, prior discussions and preliminary agreements made
prior to the date hereof. No provision of this Agreement may be
amended or modified other than by a written document signed by
authorized representatives of both parties.
19.
FORMS
The
parties recognize that, during the Term, a Purchase Order,
acknowledgement form or similar routine document (collectively
"Forms")
may be used to implement or administer provisions of this
Agreement. Therefore, the parties agree that the terms of this
Agreement will prevail in the event of any conflict between this
Agreement and the printed provision of such Forms, or typed
provisions of Forms that add to, vary, modify or are at conflict
with the provisions of this Agreement with respect to Products sold
hereunder during the Term.
20.
GOVERNING LAW
This Agreement is governed by and construed and enforced in
accordance with the laws of the State of Delaware, without giving
effect to any conflict or choice of law provision that would result
in imposition of another jurisdiction’s
Laws.
***************
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date and year first above
mentioned.
HTO HOLDINGS
INC.
By: /s/ Zayn Kalyan
Name: Zayn Kalyan
Name: Zayn Kalyan
Title Corporate
Secretary
EXACTUS INC.
By: /s/ Emiliano
Aloi
Name:
Emiliano
Aloi
Title:
President and
CEO
EXHIBIT 1.1
|
Product
|
Price (USD$) *
|
|
CBG Top Flower
|
|
|
CBD Top Flower
|
|
|
CBG Biomass
|
|
|
CBD Biomass
|
|
|
Extracts of CBG/CBD
|
|
|
Crudes of CBG/CBD
|
|
|
Distillates of CBG/CBD
|
|
|
Isolates of CBG/CBD
|
|
|
Water Soluble Powders of CBG/CBD
|
|
* Pricing for each Product will be mutually agreed upon by both
Parties at the time of placement of a Purchase Order. Payment terms
to be maximum of Net 30 unless otherwise agreed upon by both
Parties prior to placement of a Purchase Order. Inventory may be
delivered to secured warehouse of Buyer for inspection and
packaging prior to orders to facilitate transactions, for which
Buyer shall be responsible for storage and finalization
costs.
EXHIBIT 2.1
PURCHASE ORDER FORM:
|
To:
Hemptown Organics Corp.
750-1095 W Pender St.
Vancouver BC,
V6E2M6
Canada
|
Order by:
|
|
Date of Order:
|
Purchase Order Number:
|
|
Delivery Date Requested:
|
|
ORDER DETAILS
|
Quantity
|
Unit
|
Item Number SPEC
|
Description
|
Unit Price
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPECIAL INSTRUCTIONS TO SUPPLIER
This Purchase Order is submitted as a part of a certain Supply
Agreement (the "Agreement") between ________________________ and
Supplier. The Purchase Order is an offer by Buyer to purchase
Products from Supplier in accordance with and subject to the terms
herein and the Agreement. All of the terms and conditions of the
Agreement shall control in the event of any conflict between the
terms of this Purchase Order and the Agreement. Undefined terms
shall have the meaning ascribed to them in the Agreement. In
fulfilling the Purchase Order, Supplier is bound by the term s,
conditions and restrictions in the Agreement which shall also apply
to any replacement Products provided hereunder. Finally, any
disputes between the Parties over the terms of this Purchase Order
will be settled in accordance with the resolution process set forth
in the Agreement.
Buyer: ___________ Date: __________
Exhibit
10.37
AMENDMENT TO THE SUPPLY AGREEMENT
THIS AMENDMENT TO THE SUPPLY AGREEMENT (this
Amendment ) is
made as of March
28th,
2020 (the "Effective Date"), by and between HTO Holdings Inc., a
corporation under the laws of the State of Delaware, having a place
of business at 78000 Fred Waring Dr. Ste 103. Palm Desert CA,
92211, (" Supplier"), and Exactus Inc., a corporation existing and
organi ed under the laws of the Nevada, having a place of business
at 80 NE 4th Avenue, Suite 28, Delray Beach, Florida 33483,
(hereinafter "Buyer" or the "Company") (Buyer and Supplier may be
referred as the "Parties" or Party ), and amends certain terms of
the Supply Agreement among the Parties dated as of February
3rd,
2020 (the
Original Agreement ).
WHEREAS the
Parties are subject to the terms and conditions of the Original
Agreement to which Supplier will grow, harvest, process, extract
and supply Products, as defined below, to Buyer (referred to below
as "Production").
NOW THEREFORE in
consideration of the promises and of the respective covenants and
agreements herein contained, it is agreed by and between the
parties hereto as follows:
1.
Capitali ed terms used in this Amendment and not otherwise defined
shall have the respective meanings specified in the Original
Agreement.
2.
Unless otherwise provided, all references herein to Sections,
Articles or Schedules of an agreement other than this Agreement are
references to Sections, Subsections, Articles and Schedules of or
to the Original Agreement.
3.
The provisions of the Original Agreement shall be amended as set
out in this Agreement as and from the date of this
Amendment.
4.
An additional Section 21 shall be added to the Original Agreement,
with the following provision:
21.
ADDITIONAL SERVICES
In addition to the supply of the Products described in the
Agreement herein, the Buyer shall provide the Supplier with the
following services:
21.1
Aid
Supplier s management in building the out the necessary compliance
requirements for the Products.
21.2 Participate
in discussions related to Supplier s 2020 farming, harvesting and
processing plans as well as joint supply
scenarios.
21.3 Interact
with the Supplier s ingredient and manufacturing divisions to
facilitate development of documents for selected SKUs to service
white label market
21.4
Aid the CEO of the Supplier in overseeing the entire supply chain
and work jointly in establishing higher quality and compliance
standards, lower production costs and maximi e
scalability
21.5 The
Supplier agrees to pay the Buyer USD$3500 a month, beginning March
15th,
and paid on the 1st
of
each month thereafter, in consulting fees (the Consulting Fee ).
The Supplier reserves the right to cancel the Consulting Fee with
30 days notice.
5.
Any reference to the Original Agreement made in any document
delivered pursuant thereto or in connection therewith shall be
deemed to refer to the Original Agreement as amended, supplemented,
modified, restated or replaced by this Amendment and otherwise from
time to time.
6.
With the exception of the foregoing amendment, the Original
Agreement shall continue in full force and effect unamended and the
Original Agreement, as amended and modified by this Amendment, is
in all respects ratified and confirmed and the Original Agreement
and this Amendment shall be read, taken and construed as one and
the same instrument.
7.
Each of the parties hereto shall promptly do, make, execute,
deliver or cause to be done, made, executed or delivered, all such
further acts, documents and things as the other parties hereto may
require, acting reasonably, from time to time for the purpose of
giving effect to this Amendment and shall use reasonable efforts
and take all such steps as may be reasonably within its power to
implement to the full extent the provisions of this
Amendment.
8.
This Amendment constitutes the only agreement between the parties
with respect to the subject matter hereof and shall supersede any
and all prior negotiations and understandings.
9.
The terms and provisions of this Amendment shall be binding upon
and enure to the benefit of the Parties and their respective
executors, heirs, successors and permitted
assigns.
10.
This Amendment shall be governed by and interpreted and enforced in
accordance with laws of the laws of the State of
Delaware.
11.
This Agreement may be executed in any number of counterparts, which
taken together shall form one and the same agreement. Counterparts
may be delivered either in original or faxed form and the parties
adopt any signatures received by a receiving fax machine as
original signatures of the parties.
IN WITNESS WHEREOF the
Parties hereto have executed this Amendment as of the date first
written above.
HTO
HOLDINGS INC.
By: /s/ Zayn Kalyan
Name: Zayn Kalyan
Name: Zayn Kalyan
Title Corporate
Secretary
Date: March 28, 2020
EXACTUS INC.
By: /s/ Emiliano
Aloi
Name:
Title:
Emiliano Aloi -
CEO
Date: March 28,
2020
Exhibit 10.38
FORBEARANCE AGREEMENT
This
FORBEARANCE AGREEMENT (this “Agreement”) is entered
into as of May 20, 2020, by and between Exactus, Inc., a Nevada
corporation, (the “Company”), and 3i, LP, a
Delaware limited partnership, (“Holder”). Capitalized
terms used but not otherwise defined herein shall have the
respective meanings ascribed to such terms in that certain
Securities Purchase Agreement, dated as of November 27, 2019, by
and between the Company and Holder.
A. The Company issued
to Holder that certain 8% Senior Secured Convertible Promissory
Note, in the original principal amount of $833,333.33, dated
November 27, 2019 (the “Note”).
B.
The
Company is currently in arrears in payments required under the
Note, having paid $50,000 of the required $110,000 payment due
February 25, 2020, and having paid $0 of the payments due April 1,
2020 and May 1, 2020. Such failures to make the payments required
under the Note each constitute an Event of Default (the
“Specified
Defaults”) under the Transaction
Documents.
C. As a result of the
Specified Defaults, the indebtedness evidenced by the Transaction
Documents is due and payable immediately, and Holder has the right,
among other things, pursuant to the terms of the Transaction
Documents and applicable law, to collect the indebtedness due to
Holder under the Note.
D. The Company has
requested that during the Forbearance Period (as hereinafter
defined), Holder forbear from exercising its rights and remedies
against Company with
respect to the Specified Defaults, notwithstanding the existence of
the Specified Defaults.
E. Subject to the
terms and conditions set forth herein, and without prejudice to
anything contained in Section 2(b) below, Holder has agreed to
forbear from exercising any default-related rights and remedies
against the Company for a limited period of time in accordance with
this Agreement.
NOW, THEREFORE, in consideration of the
foregoing, the terms, covenants and conditions contained herein and
other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION
1. Confirmation
of Principal and Specified Defaults.
(a) The Company
acknowledges and agrees that as of the close of business on May 15,
2020, the aggregate principal balance of the outstanding amount
under the Note (the “Principal”) was not less
than $791,245.79. The foregoing amount does not include interest,
fees, expenses and other amounts which are chargeable or otherwise
reimbursable under the Transaction Documents (together with the
Principal, the “Obligations”).
(b) The Company
acknowledges and agrees that ((i) the Specified Defaults constitute
an Event of Default and that there are no disputes as to the
occurrence and continued existence of the Specified Defaults; (ii)
the Specified Defaults are not curable; (iii) Holder has the
right to payment of the Obligations, to immediately enforce its
right to payment of the Obligations, to immediately enforce its
security interests in the collateral securing the Note, and to
exercise all other rights, powers and remedies provided to Holder
under the Transaction Documents; and (iii) the Company has no
defenses, offsets and/or counterclaims against Holder and/or its
agents in connection with the Note or against the enforcement of
the Note.
SECTION
2. Forbearance.
(a) Effective as of the
date hereof, Holder agrees that until the expiration or termination
of the Forbearance Period (as hereinafter defined), it will
temporarily forbear from exercising any Default-related rights and
remedies against the Company, in each case solely with respect to
the Specified Defaults; provided, however, that:
(i) except as otherwise
expressly provided herein, the Specified Defaults shall each
continue to constitute an actionable Event of Default for the
purpose of triggering all limitations, restrictions or prohibitions
on certain actions that may be taken or omitted or otherwise
acquiesced to by or on behalf of Company pursuant to the
Transaction Documents, including, without limitation, any
limitations, restrictions or prohibitions with respect to any
distribution, advance or other payment directly or indirectly from
or for the benefit of Company to any direct or indirect owner of an
equity interest in Company; and any actions or inactions taken or
omitted or otherwise acquiesced to by or on behalf of Company in
violation of such provisions, in each case while any Default or
Event of Default (including the Specified Defaults) exists, will
constitute additional Events of Default under the Transaction
Documents, as well as a Forbearance Default (as hereinafter
defined) under this Agreement; and
(ii) default
and/or other notices and correspondence to Company may be delivered
in accordance with the terms of this Agreement.
(b)
As used herein, the term “Forbearance Period” shall
mean the period beginning on the date hereof and ending on the
earliest to occur of: (i) the date on which Holder delivers to the
Company a written notice terminating the Forbearance Period, which
notice may be delivered at any time upon or after the occurrence of
any Forbearance Default (as hereinafter defined), and (ii) the date the Company
repudiates or asserts any defense to any Obligation or other
liability under or in respect of this Agreement or the Transaction
Documents or applicable law, or makes or pursues any claim or cause
of action against Holder; (the occurrence of any of the foregoing
clauses (i) and (ii), a “Termination Event”). As
used herein, the term “Forbearance Default”
shall mean the occurrence of any Default or Event of Default other
than the Specified Defaults or the failure of Company to timely
comply with any material term, condition, or covenant set forth in
this Agreement. Any Forbearance
Default will not be effective until five (5) Business Days after
receipt by Company of written notice from Holder of such
Forbearance Default. Any effective Forbearance Default shall
constitute an immediate Event of Default under the Transaction
Documents.
(c)
Upon the occurrence of a Termination Event, the agreement of Holder
hereunder to forbear from exercising any default-related rights and
remedies shall immediately terminate without the requirement of any
demand, presentment, protest, or notice of any kind, all of which
the Company waives. The Company agrees that Holder may at any time
thereafter proceed to exercise any and all of its rights and
remedies under any or all of the Transaction Document and/or
applicable law, including, without limitation, its rights and
remedies with respect to any of the Specified Defaults that are
continuing at such time.
(d)
Any agreement to extend the Forbearance Period, if any, must be set
forth in writing and signed by a duly authorized signatory of
Holder, and the Company acknowledges that Holder has not made any
assurances concerning any possibility of an extension of the
Forbearance Period.
SECTION
3. Transaction
Documents.
(a) Except as expressly
modified hereby, all terms, conditions, covenants, representations
and warranties contained in the Transaction Documents, and all
rights of Holder and all of the Obligations, shall remain in full
force and effect.
(b) Except as expressly
set forth herein, the execution, delivery and effectiveness of this
Agreement shall not directly or indirectly (i) create any
obligation to defer any enforcement action after the occurrence and
continuance of any Default or Event of Default (including, without
limitation, any Forbearance Default), (ii) constitute a consent or
waiver of any past, present or future violations of any provisions
of the Transaction Documents, or (iii) amend, modify or
operate as a waiver of any provision of the Transaction Documents
or any right, power or remedy of Holder. Except as expressly set
forth herein, Holder reserves all of its respective rights, powers,
and remedies under the Agreement, the Transaction Documents and
applicable law.
(c) From and after the
Forbearance Effective Date, the term “Transaction
Documents” in the Transaction Documents shall include,
without limitation, this Agreement and any agreements, instruments
and other documents executed and/or delivered in connection
herewith.
(d) This Agreement
shall not be deemed or construed to be a satisfaction,
reinstatement, novation or release of the Transaction Documents or
any obligations arising thereunder.
SECTION
4. Additional
Covenants.
(a) The Company shall
issue to Holder 500,000 shares of its common stock pursuant to Rule
506 under Regulation D on or prior to May 22, 2020.
(b) Unless or until a
Forbearance Default occurs, interest under the Note shall continue
to accrue at the non-default rate of 8% per annum as stated
therein.
(c) Unless or until a
Forbearance Default occurs or as otherwise specified in the Note,
the Fixed Conversion Price under the note shall remain at
$0.50.
(d) Unless or until a
Forbearance Default occurs, the Company shall be permitted to issue
shares of Common Stock or options to employees, officers,
directors. consultants, advisors or contractors of the Company
during the period commencing on the Original Issuance Date and
ending on the date on which no Notes are outstanding, in an amount
not to exceed ten (10%)
percent of the number of issued and outstanding shares of
Common Stock of the Company.
(e)
The Company shall pay Holder $60,000 in cash on or before July 1,
2020. Additional monthly payments
required under the Amortization Schedule 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 being 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. For the
avoidance of doubt, 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.
SECTION
5. Construction.
The
Company and Holder have participated jointly in the negotiating and
drafting of this Agreement and agree that any rule of construction
to the effect that ambiguities are to be resolved against the
drafting party shall not be applied in the construction or
interpretation of this Agreement, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
the authorship of any provision of this Agreement.
SECTION
6. Counterparts.
This
Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed an original, but all such
counterparts shall constitute one and the same instrument, and all
signatures need not appear on any one counterpart.
SECTION
7. Governing
Law.
The law
of the State of New York shall govern all matters arising out of,
in connection with or relating to this Agreement, including,
without limitation, its validity, interpretation, construction,
performance and enforcement.
SECTION
8. Severability.
The
invalidity, illegality, or unenforceability of any provision in or
obligation under this Agreement in any jurisdiction shall not
affect or impair the validity, legality, or enforceability of the
remaining provisions or obligations under this Agreement or of such
provision or obligation in any other jurisdiction. If feasible, any
such offending provision shall be deemed modified to be within the
limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain
valid and enforceable.
SECTION
9. Final
Agreement.
This
Agreement, the Transaction Documents, and the other written
agreements, instruments, and documents entered into in connection
therewith set forth in full the terms of agreement between the
parties hereto and thereto and are intended as the full, complete,
and exclusive contracts governing the relationship between such
parties, superseding all other discussions, promises,
representations, warranties, agreements, and understandings between
the parties with respect thereto. Holder’s exercise or
failure to exercise any rights or remedies in a particular instance
shall not operate as a waiver of its right to exercise the same or
different rights and remedies in any other instances. No course of
dealing between Holder, on one hand, and the Company, on the other
hand, is established by virtue of the Company’s
non-compliance therewith. The Company understands that
Holder’s failure to insist on strict performance as of such
date shall not be interposed as a defense to Holder’s
exercise of its legal rights, nor shall it constitute a waiver of
any thereof.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto
have executed this Agreement as of the day and year first above
written.
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COMPANY:
EXACTUS, INC., as
Company
By:
/s/ Emiliano
Aloi
Name:
Emiliano Aloi
Title:
Interim Chief Executive Officer
HOLDER:
3i, LP,
as Holder
By:
/s/ Maier
Tarlow
Name:
Maier Tarlow
Title:
General Partner
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I,
Emiliano Aloi, certify that:
1.
I have reviewed this annual report on Form 10K of
Exactus, Inc.
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report.
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report.
4.
The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a15(e) and
15d15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a 15(f) and 15d15(f))
for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation;. and
(d)
Disclosed in this report any change in the
registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal
control over financial reporting.
5.
The registrant’s other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent
functions):
(a)
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal controls over financial
reporting.
Date:
May 22, 2020
/s/ Emiliano Aloi
Emiliano
Aloi
Interim
Chief Executive Officer
(Principal
Executive Officer)
I,
Kenneth E. Puzder, certify that:
1.
I have reviewed this annual report on Form 10K of Exactus,
Inc.
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report.
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report.
4.
The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a15(e) and
15d15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a 15(f) and 15d15(f))
for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d)
Disclosed in this report any change in the
registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal
control over financial reporting.
5.
The registrant’s other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent
functions):
(a)
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal controls over financial
reporting.
Date:
May 22, 2020
/s/ Kenneth E.
Puzder
Kenneth
E. Puzder
Chief Financial Officer
(Principal Financial
Officer)
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
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PURSUANT TO
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18 U.S.C. SECTION 1350,
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AS ADOPTED PURSUANT TO
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SECTION 906 OF THE SARBANESOXLEY ACT OF 2002
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I,
Emiliano Aloi, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the SarbanesOxley Act of
2002, that to the best of my knowledge the Annual Report of
Exactus, Inc. on Form 10K for the fiscal period ended December 31,
2019 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and that
information contained in this Annual Report on Form 10K
fairly presents in all material respects the financial condition
and results of operations of Exactus, Inc.
Date:
May 22, 2020
By:
/s/ Emiliano
Aloi
Name:
Emiliano Aloi
Title:
Interim Chief
Executive Officer (Principal Executive Officer)
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EXHIBIT
32.2
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PURSUANT TO
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18 U.S.C. SECTION 1350,
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AS ADOPTED PURSUANT TO
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SECTION 906 OF THE SARBANESOXLEY ACT OF 2002
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I,
Kenneth E. Puzder, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the SarbanesOxley Act of
2002, that to the best of my knowledge the Annual Report of
Exactus, Inc. on Form 10K for the fiscal period ended
December 31, 2019 fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
and that information contained in this Annual
Report on Form 10K fairly presents in all material respects
the financial condition and results of operations of Exactus,
Inc.
Date:
May 22, 2020
By:
/s/ Kenneth E.
Puzder
Name:
Kenneth E. Puzder
Title:
Chief Financial Officer (Principal
Financial Officer)