Panacea Life Sciences Holdings, Inc 10-K for FY2020
Panacea Life Sciences Holdings, Inc. (PLSH)
10-K
2021-04-15
For: 2020-12-31
View Original
Added on
April 06, 2026
About this 10-K
Panacea Life Sciences Holdings, Inc filed this 10-K on April 15, 2021, covering the fiscal year ended December 31, 2020 (FY2020).
Headline figures
Fiscal year ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.07M
- up 499.1% from $345.68K a year earlier
- Net loss
- $10.94M
- compared with a net loss of $10.02M 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,
2020
[ ]
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.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☐
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Smaller reporting company
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☑
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Emerging
growth company
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☐
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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 ☑
The
aggregate market value of the common stock held by non-affiliates
as of June 30, 2020 was $3.5 million.
The
outstanding number of shares of common stock as of March 31, 2021
was 99,632,710.
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Cautionary Statement Regarding Forward-Looking
Statements
This annual report on Form 10-K (this “Annual Report”)
contains forward-looking statements, which are subject to the safe
harbor provisions created by the Private Securities Litigation
Reform Act of 1995. Words such as “expects,”
“anticipates,” “plans,”
“believes,” “seeks,”
“estimates,” “could,” “would,”
“may,” “intends,” “targets” and
similar expressions or variations of such words are intended to
identify forward-looking statements but are not the exclusive means
of identifying forward-looking statements in this Annual Report.
The identification of certain statements as
“forward-looking” is not intended to mean that other
statements not specifically identified are not forward-looking. All
statements other than statements about historical facts are
statements that could be deemed forward-looking statements,
including, but not limited to, statements that relate to our future
revenue, product development, customer demand, market acceptance,
growth rate, competitiveness, gross margins, and
expenditures.
Although forward-looking statements in this Annual Report reflect
the good faith judgment of our management, such statements can only
be based on facts and factors currently known by us. Consequently,
forward-looking statements are inherently subject to risks,
uncertainties, and changes in condition, significance, value and
effect, including those discussed below under the heading
“Risk Factors” within Part I, Item 1A of this Annual
Report and other documents we file from time to time with the
Securities and Exchange Commission (the “SEC”), such as
our annual reports on Form 10-K, our quarterly reports on Form 10-Q
and our current reports on Form 8-K. Such risks, uncertainties and
changes in condition, significance, value, and effect could cause
our actual results to differ materially from those expressed herein
and in ways not readily foreseeable. Readers are urged not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this Annual Report and are based on
information currently and reasonably known to us. We undertake no
obligation to revise or update any forward-looking statements to
reflect any event or circumstance that may arise after the date of
this Annual Report, other than as required by law. Readers are
urged to carefully review and consider the various disclosures made
in this Annual Report, which attempt to advise interested parties
of the risks and factors that may affect our business, financial
condition, results of operations and prospects.
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 have
pursued opportunities in Cannabidiol, which we refer to as CBD,
since 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.
Our
principal executive offices were located at 80 NE 4th Avenue, Suite
28 Delray Beach, FL 33483 until mid-2020 when we commenced remote
operations due to Covid-19, and our telephone number is (800)
881-9352.
Farming Operations
During most of 2020 we were engaged in marketing
of hemp derived products sourced from our leased farming
operations. Through our majority-owned subsidiary, Exactus One
World, LLC (“EOW”) we held one-year leases, for
approximately 200 acres of farmland in southwest Oregon for growing
hemp. Our initial efforts to pursue agricultural development,
including farm soil preparation, planting, harvesting,
transportation and drying, were situated at farms from which we
shipped hemp biomass to third parties for processing. Due to a
rapid decline in commodity prices for industrial hemp experienced
during 2020 we suspended all farming operations during 2020, and
entered into a supply agreement with Hemptown USA, Inc. to provide
us with industrial hemp.
Industrial Hemp
We
seek to take advantage of an emerging worldwide trend to utilize
the production of cannabinoids derived from industrial hemp, such
as CBD, CBG and CBN, to produce consumer products. Hemp is being
used 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.
The therapeutic potential of cannabinoids 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 trials 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. One company, GW
Pharmaceuticals pls, a leading company developing pharmaceutical
drugs and cannabinoid-based medicines, has sought and obtained US
and foreign approvals since 2018. EPIDIOLEX®/EPIDYOLEX® (cannabidiol), the
first prescription, plant-derived cannabis-based medicine approved
by the U.S. Food and Drug Administration (FDA) for use in the U.S.
and the European Commission (EC) for use in Europe, is an oral
solution which contains highly purified cannabidiol (CBD). In the
U.S., EPIDIOLEX® is indicated for the treatment of seizures
associated with Lennox-Gastaut syndrome (LGS), Dravet syndrome or
Tuberous Sclerosis Complex (TSC) in patients one year of age and
older. EPIDIOLEX® has received approval in the European Union
under the tradename EPIDYOLEX® for adjunctive use in
conjunction with clobazam to treat seizures associated with LGS and
Dravet syndrome in patients two years and older. In September 2020,
EPIDYOLEX® was approved by the Australian Therapeutic Goods
Administration (TGA) for use in Australia for the treatment of
seizures associated with LGS or Dravet syndrome in patients two
years of age and older. EPIDYOLEX® has received Orphan Drug
Designation from the European Medicines Agency (EMA) for the
treatment of seizures associated TSC.
Healthcare
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, have
launched or intend to launch retail brands and white label products
containing cannabinoids like CBD. Many of these 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 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.
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.
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.
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 considering 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, 2020 and 2019. Our loss from
operations for the year ended December 31, 2020 was $10.6 million
and our net loss was $10.9 million for the year ended December 31,
2020. Our accumulated deficit was $30.4 million at December 31,
2020, which includes significant non-cash charges. 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, 2020 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 soon, management expects that we will
need to curtail our operations.
We may not be able to successfully implement our strategy on a
timely basis or at all.
Our
future success depends on our ability to implement our strategy of
expanding into new markets and new distribution channels and
attracting new consumers to our brand. Our ability to implement
this strategy depends, among other things, on our ability
to:
●
establish
our 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;
●
identify,
expand and maintain loyal customers;
●
maintain
and, to the extent necessary, improve our 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 strategy and may need to
change our strategy in order to maintain our growth. If we fail to
implement our strategy or if we invest resources in a 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 purchase and sell hemp-based
products. We may not be able to successfully buy and 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.
There
is significant risk involved in connection with our activities in
which we seek to pursue hemp-based businesses. We have no prior
experience as an operator of hemp-based businesses. The investment
in farm operations intended to produce sales and our business model
failed to produce anticipated benefits, due to oversupply, rapidly
declining prices and our inability to establish significant
markets. Failure to successfully effectively utilize our biomass
created from farming and extract ingredients to produce or sell, or
scale our operations, had had and may continue to have a material
adverse effect on our business, financial condition and results of
operations.
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 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 purchasing capabilities
with customer demand, our business, financial condition and results
of operations may be materially adversely affected.
During
2020, we relied upon five outside suppliers for our supply of CBD
and CBG. During 2021, we intend to leverage and build upon existing
relationships with suppliers. We will remain, 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. 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 while making the change. Moreover, we might not be
able to obtain terms as favorable as those received from our
current third-party suppliers and contract manufacturers, which in
turn would increase our costs.
In
addition, we must continuously monitor our inventory and product
mix against anticipated demand. If we underestimate demand, we risk
having inadequate supplies and damaging supplier relationships. 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 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 raw materials. No assurances can be
given that we will be successful in maintaining a required supply
of skilled labor, equipment, facilities or raw
materials.
We rely
on third parties for extraction, processing, and manufacturing. 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. If we are unable to
obtain access to a cGMP manufacturer, for example, or any of the
other supply chain elements involved in our plans, we may be
restricted from operations which would have a materially adverse
effect on our business and operations.
We are heavily reliant on a small number of customers and
suppliers.
During
the year ended December 31, 2020, 3 customers represented 82% of
our total net sales of CBD products, including Ceed2Med, LLC
(“C2M”), a related party. 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 most of our finished products from three
suppliers. In January 2021, the Company and C2M agreed to cancel
all obligations and agreements. C2M is also engaged in the business
of farming and selling hemp and hemp-derived products and is a
competitor. Our heavy reliance on a limited number of suppliers for
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 any supplier could significantly impact our
business and results of operation.
If we fail to manage our existing assets and third-party
relationships (such as, 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 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 several 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.
Fluctuations in the cost of ingredients, labor and other costs
could adversely affect our operating results.
Our
principal products contain hemp-derived CBD oil and isolate.
Increases and unexpected decreases 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. Decreases in demand
or excess availability of biomass may cause unexpected decreases in
raw materials and corresponding decrease in the retail price of CBD
products. As a result, as experienced during 2020, we may
experience situations where the cost paid for inventory exceeds the
current retail market. Many of the factors affecting costs are
beyond our control and we may not be able to pass along 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.
The
Company is currently subject to disputes and litigation with
several vendors and former employees principally related to
termination, failure to perform and unpaid wages.
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, regulatory compliance, 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 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 manufacture, package or distribute 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, boxes, shipping materials 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.
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 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 our 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.
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 carry product
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 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.
If we make acquisitions, it could divert management’s
attention, cause ownership dilution to our stockholders and be
difficult to integrate.
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. To date, our previous acquisitions
have been unsuccessful. Future acquisitions may 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.
We have
strategically acquired several operations, which to date have not
provided the anticipated operational or financials benefits. These
acquisitions involved a number of financial, accounting,
managerial, operational, legal, compliance and other risks and
challenges and may continue to negatively affect our business and
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. 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.
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, and sales. 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.
Our
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") which has dramatically impacted the
adoption of cannabinoid products due to store closures and
restrictions on in-person sales. Such events may cause customers to
suspend their decisions on using 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, 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. These events also pose
significant risks to our personnel and to physical facilities,
transportation and operations, which could materially adversely
affect the Company's financial results.
Any
significant disruption to communications, gathering and travel,
including 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. Restrictions and
protective measures against COVID-19 could cause additional
unexpected labor costs and expenses or could restrain our ability
to retain the highly skilled personnel 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 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 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 $0.04 and as high as $0.49
between January 1, 2020 and December 31, 2020. 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:
●
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;
●
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 and concentration of
ownership and control of our common and preferred stock, as well as
the terms and conversion rights thereof and revisions to such
terms;
●
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 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.
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 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 56.4 million were issued and outstanding as of
December 31, 2020. Moreover, our Board of Directors is authorized
to issue additional shares of our common stock and preferred stock
and revise the terms of conversion of preferred stock outstanding
and conversion of debt into equity of the Company as well as issue
common stock in connection with the settlement of litigations and
claims. The future issuance of additional shares of our common
stock or preferred stock or debt 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. During 2020 and early 2021, we
issued approximately 40 million additional shares of common stock
in settlements, cancellations and conversions.
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 extraction,
production, purchasing, manufacturing and selling of
product;
●
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.
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 through December 31, 2020, C2M, owns a
substantial percentage of our outstanding voting capital. On
January 21, 2021 the Company entered
into a settlement agreement with C2M and their principals
cancelling all agreements, obligations and claims and providing
full mutual releases of the Company and such persons. The
business interests of C2M 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, 2020 and
December 31, 2019, 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. 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. 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 had 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 (other cannabinoids), 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. 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 which presently we believe is deficient in
significant respects related to our accounting for and effective
control over raw materials, inventory, and supply-chain in general.
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 and Alibaba. 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. Credit card processing companies have
periodically declined to associate with companies engaged in hemp
and cannabinoid sales.
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
During
2020, we leased offices in Delray Beach Florida which was vacated
for virtual operations with the onset of Covid-19. If additional or
alternative space is needed in the future, we believe such space
will be available on commercially reasonable terms as
necessary.
Item 3. Legal Proceedings
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 March 31, 2021 the closing bid price on the OTC
Markets for our Common Stock was $0.17.
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 March 31, 2021, we had 99,632,710 shares of our common stock issued
and outstanding, and approximately 166 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
General
Through
January 2021 we conducted certain of our operations under a Master
Product Development and Supply Agreement (the “Development
Agreement”) and Management and Services Agreement with
Ceed2Med, LLC (“C2M”) entered in 2018 in order rapidly
enter into the CBD business. C2M agreed to provide 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 had
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, and offered tinctures, edibles,
capsules, topical solutions and animal health products
manufactured, directly or indirectly, under this arrangement. C2M
was also responsible for overseeing our farming and manufacturing
activities.
Results of Operations
Year ended December 31, 2020 and 2019:
Net Revenues The Company is principally engaged in the
business of selling products made from industrial hemp. During the
year ended December 31, 2020, we generated total revenues of $2.1
million from the sale of CBD products, including revenues of $0.3
million from a related party, C2M, for the year ended December 31,
2020.
Cost of Sales The primary components of cost of sales
include the cost of the CBD product. For the year ended December
31, 2020, the Company’s cost of sales amounted to $2.7
million which includes cost of sales with a related party of $.4
million. Cost of sales primarily increased related to increase in
volume.
Operating Expenses
For the
year ended December 31, 2020, we incurred $10.0 in operating
expenses as compared to $9.0 million during the year ended December
31, 2019, an increase of $1.0 million. The increase in operating
expenses mainly was related to a $4.5 million increase in
impairment charges, offset by a 2.9 million decrease in
professional and consulting fees related to a reduction in costs
related to our farming activities and $0.3 million decrease in
selling and marketing expenses as more of our revenue was generated
from product distribution requiring less sales and marketing
efforts, and $0.4 million decrease in general and administrative
costs mainly related to a reduction in head count costs
..
Other Expenses, net
Derivative gain increased by $2.4 million from $1.9 million
loss for the year ended December 31, 2019 to $0.5 million gain for
the year ended December 31, 2020, due to the change in value of the
underlying derivative liability and conversion of notes in
2020.
Gain on stock settlement of debt decreased by $3.1 million
from $3.0 million loss for the year ended December 31, 2019 to $0.1
million gain for the year ended December 31, 2020 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, 2020 as there
was less conversion activity in 2020 by the note
holders.
Interest expense increased by $0.5 million from $0.5 million
for the year ended December 31, 2019 to $1.0 million for the year
ended December 31, 2020. The increase in interest expense is
primarily related to increase in principle balance outstanding,
amortization of debt discount and debt issuance cost related to our
convertible note payable issued during 2019.
Liquidity and Capital Resources
Since
our inception in 2008, we have generated losses from operations. As
of December 31, 2020, our accumulated deficit was $30.4
million. As of December 31, 2020, we had $25,139 of cash
and working capital deficit of $5.0 million. 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 reduce our
operations and may not be able to continue as a going
concern.
The
Company has various principal balances outstanding as of December
31, 2020, under debt agreements with the Small Business
Administration (SBA) of the federal government, related parties and
convertible notes with a third party. A total of $335,510 is due
under a Secured Disaster Loan and Paycheck Protection Program (PPP)
with the SBA, $115,517 is due to various related party shareholders
of the Company and $696,286 was due under convertible notes (which
subsequent to year end was converted into newly-issued shares of
our Series A Preferred Stock). The convertible notes bear interest
at a rate ranging from 5% to 8% per annum and prior to conversion
had maturity dates mature of November 26, 2020 and February 1,
2023.
On February 16, 2021, the Company entered into a Securities
Purchase Agreement with 3i, LP (“3i”) and an
institutional investor (“Investor”) under which the
Investor agreed to purchase and 3i agreed to sell that certain 8%
senior secured convertible note dated November 27, 2019 (the
“Note”) and all of our warrants previously issued to 3i
and 3i agreed settle and release all claims asserted against us. As
a result, 3i agreed to dismissal of all pending litigation against
the Company. As a result, the Subsidiary Guaranty, IP Security
Agreement and Registration Rights Agreement with 3i were also
terminated. In addition, the Company entered into an Exchange
Agreement with the Investor and filed with the Secretary of State
of the State of Nevada a Certificate of Designation of
Preferences, Rights and Limitations for Series A Preferred
Stock under which the Note in the original principal amount of
$750,000 would be exchanged for $500,000 of a new series of
preferred stock designated 0% Series A Convertible Preferred Stock
(the “Series A Preferred”) with a stated value of
$1,000 per share (the “Stated Value”).
Net
cash used in operating activities for the year ended December 31,
2020 was $0.7 million due to our net loss of $10.9 million,
non-cash charges related to convertible loan notes derivative gain
of $0.5 million and $0.1 million gain on extinguishment of debt,
offset by $0.1 million of depreciation, $1.3 million of stock based
compensation, $0.1 million of bad debt, $4.6 million of impairment
charges, $0.7 million of inventory reserves, $0.6 million of
prepaid stock based compensation amortization, $0.8 million of
amortization of debt discounts and debt issuance cost related to
convertible notes, $.7 million of intangible amortization, $0.1
million of non-cash interest expense, and $0.1 million of right of
use lease asset amortization. Net changes in operating assets and
liabilities totaled of $1.6 million, which is primarily
attributable to increases in total accounts receivable of $0.1
million, decrease of $0.6 million of inventory, decrease in prepaid
assets of $0.2 million, and $1.0 million increase in accounts
payable and accruals.
Net
cash used in investing activity for the year ended December 31,
2020 was $0.
Net
cash provided by financing activities for the year ended December
31, 2020 was $0.7 million mainly from the sale of $0.4 million of
common stock and $0.4 million from the issuance of notes offset by
$0.2 million of payments on notes.
Going Concern
The
audit report prepared by our independent registered public
accounting firm relating to our financial statements for the year
ended December 31, 2020 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, 2020. As of the date
of the filing of this Form 10-K, the Company had nearly no
cash.
Off-Balance Sheet Arrangements
As of
December 31, 2020, 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 doen not believe the
adoption of the standard will have an impact to our consolidated
financial statements.
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.
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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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Exactus, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
December
31,
|
|
|
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2020
|
2019
|
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Restated
|
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ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$25,139
|
$18,405
|
|
Accounts
receivable, net
|
-
|
55,725
|
|
Accounts
receivable - related party
|
-
|
18,860
|
|
Inventory,
net
|
10,712
|
1,337,809
|
|
Prepaid
expenses and other current assets
|
15,258
|
248,776
|
|
Prepaid
expenses and other current assets - related party
|
-
|
622,160
|
|
Due
from related parties
|
-
|
127,500
|
|
Total
current assets
|
$51,109
|
2,429,235
|
|
Deposits
|
-
|
80,000
|
|
Prepaid
expenses and other assets - related party
|
-
|
2,492,045
|
|
Property
and equipment, net
|
20,159
|
477,433
|
|
Intangible
assets, net
|
-
|
2,147,311
|
|
Operating
lease right-of-use assets, net
|
-
|
390,810
|
|
Total
Assets
|
$71,268
|
$8,016,834
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$2,027,507
|
$1,442,409
|
|
Accounts
payable - related parties
|
506,585
|
454,511
|
|
Accrued
expenses
|
620,391
|
238,010
|
|
Unearned
revenue - related party
|
-
|
215,000
|
|
Notes
payable - current portion
|
130,344
|
-
|
|
Note
payable - related parties
|
115,517
|
55,556
|
|
Subscription
payable
|
250,000
|
250,000
|
|
Convertible
notes, net of discounts
|
696,286
|
85,906
|
|
Derivative
liability
|
237,022
|
880,410
|
|
Interest
payable
|
52,051
|
16,677
|
|
Operating
lease liabilities, current portion
|
269,115
|
169,869
|
|
Total
current liabilities
|
4,904,818
|
3,808,348
|
|
|
|
|
|
Notes
payable - long term
|
205,166
|
-
|
|
Convertible
notes payable - long-term portion
|
-
|
100,000
|
|
Operating
lease liabilities - long-term portion
|
-
|
220,942
|
|
Total long
term liabilities
|
205,166
|
320,942
|
|
Total
Liabilities
|
5,109,984
|
4,129,290
|
|
Commitment and contingencies (see Note 11)
|
|
|
|
|
|
|
|
Stockholders’ (Deficit) Equity:
|
|
|
|
Exactus, Inc. Stockholders' (Deficit) Equity
|
|
|
|
Preferred stock: 50,000,000 shares authorized;
$0.0001 par value, 5,266,466 undesignated shares
|
|
|
|
Preferred
stock Series A: 1,000,000 shares designated; $0.0001 par
value,
323,019
and 353,109 shares issued and outstanding,
respectively
|
32
|
35
|
|
Preferred
stock Series B-1: 32,000,000 shares designated; $0.0001 par
value,
1,650,000,
shares issued and outstanding
|
165
|
165
|
|
Preferred
stock Series B-2: 10,000,000 shares designated; $0.0001 par
value,
7,516,000
shares issued and outstanding
|
752
|
752
|
|
Preferred
stock Series C: 1,733,334 shares designated; $0.0001 par
value,
none
shares issued and outstanding
|
-
|
-
|
|
Preferred
stock Series D: 200 shares designated; $0.0001 par
value,
18
shares issued and outstanding
|
-
|
-
|
|
Preferred
stock Series E: 10,000 shares designated; $0.0001 par
value,
10,000
shares issued and outstanding
|
1
|
1
|
|
Common
stock: 650,000,000 shares authorized; $0.0001 par value,
56,356,431
and 43,819,325 shares issued and outstanding,
respectively
|
5,636
|
4,382
|
|
Common
stock to be issued (100,000 and 664,580 shares to be issued,
respectively)
|
10
|
66
|
|
Additional
paid-in capital
|
27,485,796
|
25,343,293
|
|
Due
from related party
|
(128,489)
|
-
|
|
Accumulated
deficit
|
(30,384,380)
|
(20,923,681)
|
|
Total
Exactus Inc. Stockholders' (Deficit) Equity
|
(3,020,477)
|
4,425,013
|
|
|
|
|
|
Non-controlling
interest in subsidiary
|
(2,018,239)
|
(537,469)
|
|
|
|
|
|
Total Stockholders' (Deficit) Equity
|
(5,038,716)
|
3,887,544
|
|
|
|
|
|
Total Liabilities and (Deficit) Equity
|
$71,268
|
$8,016,834
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exactus, Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
Years Ended December 31,
|
|
|
|
2020
|
2019
|
|
|
|
(Restated)
|
|
|
|
|
|
Net
revenues
|
$1,755,210
|
$183,234
|
|
Net
revenues - related party
|
315,800
|
162,446
|
|
Total
net revenues
|
2,071,010
|
345,680
|
|
Cost
of sales
|
2,301,843
|
1,939,382
|
|
Cost
of sales - related party
|
417,783
|
106,752
|
|
Total
cost of sales
|
2,719,626
|
2,046,134
|
|
Gross
loss
|
(648,616)
|
(1,700,454)
|
|
Operating
Expenses:
|
|
|
|
General
and administration
|
2,679,337
|
3,066,500
|
|
Impairment
|
4,577,406
|
-
|
|
Selling
and marketing expenses
|
638,632
|
948,296
|
|
Professional
and consulting
|
2,010,935
|
4,935,394
|
|
Research
and development
|
-
|
22,100
|
|
Total
operating expenses
|
9,906,310
|
8,972,290
|
|
Loss
from operations
|
(10,554,926)
|
(10,672,744)
|
|
Other
(expenses) income
|
|
|
|
Derivative
gain (loss)
|
513,674
|
(1,871,583)
|
|
Loss
on stock settlement
|
(23,000)
|
-
|
|
Gain
on settlement of debt, net
|
126,222
|
3,004,630
|
|
Interest
expense
|
(1,003,439)
|
(479,111)
|
|
Total
other (expense) income, net
|
(386,543)
|
653,936
|
|
Loss
before provision for income taxes
|
(10,941,469)
|
(10,018,808)
|
|
Provision
for income taxes
|
-
|
-
|
|
Net
loss
|
(10,941,469)
|
(10,018,808)
|
|
Net
loss attributable to non-controlling interest
|
1,480,770
|
537,469
|
|
Net
loss attributable to Exactus, Inc.
|
(9,460,699)
|
(9,481,339)
|
|
Deemed
dividend on preferred stock
|
-
|
(904,450)
|
|
Net
loss available to Exactus, Inc. common stockholders
|
$(9,460,699)
|
$(10,385,789)
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
$(0.22)
|
$(0.30)
|
|
Net
loss attributable to non-controlling interest per common share
– basic and diluted
|
$(0.03)
|
$(0.02)
|
|
Net
loss available to Exactus, Inc. common stockholders per common
share - basic and diluted
|
$(0.19)
|
$(0.31)
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
basic
and diluted
|
49,688,543
|
33,899,585
|
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, 2020 and 2019
|
|
Preferred
Stock
|
Common
Stock
|
|
|
|
|
|
||||||||||||||
|
|
Series
A
|
Series
B-1
|
Series
B-2
|
Series
C
|
Series
D
|
Series
E
|
Issued
|
Unissued
|
Paid
in
|
Due from
related
|
Accumulated
Deficit
(As
|
Non-controlling
|
Total
(As
|
||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
party
|
restated)
|
Interest
|
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
-
|
84
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
849,276
|
|
-
|
-
|
849,360
|
|
Preferred stock issued
for private placement
|
-
|
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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
(9,481,339)
|
(537,469)
|
(10,224,506)
|
|
Balance,
December 31, 2019
|
353,109
|
$35
|
1,650,000
|
$165
|
7,516,000
|
$752
|
-
|
$-
|
18
|
$-
|
10,000
|
|
43,819,325
|
$4,382
|
664,580
|
$66
|
$25,343,293
|
|
$(20,923,681)
|
$(537,469)
|
$3,887,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for
private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,700,000
|
370
|
-
|
-
|
384,630
|
-
|
-
|
-
|
385,000
|
|
Common stock issued for
unissued common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
475,000
|
47
|
(475,000)
|
(47)
|
-
|
-
|
-
|
-
|
-
|
|
Conversion of Series A
Preferred Stock to Common Stock
|
(30,090)
|
(3)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
150,450
|
15
|
-
|
-
|
(12)
|
-
|
-
|
-
|
-
|
|
Common stock issued for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
765,000
|
77
|
-
|
-
|
378,446
|
-
|
-
|
-
|
378,523
|
|
Stock-based
compensation in connection with restricted common stock award
grants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,766,635
|
377
|
(89,580)
|
(9)
|
664,418
|
-
|
-
|
-
|
696,786
|
|
Stock options granted
for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
276,736
|
-
|
-
|
-
|
276,736
|
|
Common stock issued
upon conversion of convertible debt and accrued
interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,397,937
|
240
|
-
|
-
|
239,838
|
-
|
-
|
-
|
240,078
|
|
Common stock issued in
connection with forbearance agreement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
500,000
|
50
|
-
|
-
|
89,950
|
-
|
-
|
-
|
90,000
|
|
Due from related
parties reclassified to equity
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(128,489)
|
-
|
-
|
(128,489)
|
|
Common stock issued for
private placement in fiscal 2019
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
12,084
|
1
|
-
|
-
|
(1)
|
-
|
-
|
-
|
-
|
|
Common stock issued for
services and accounts payable
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
750,000
|
75
|
-
|
-
|
70,500
|
-
|
-
|
-
|
70,575
|
|
Common stock issued for
exercise of stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
20,000
|
2
|
-
|
-
|
5,998
|
-
|
-
|
-
|
6,000
|
|
Net Loss for the
period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(9,460,699)
|
(1,480,770)
|
(10,941,469)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323,019
|
32
|
1,650,000
|
165
|
7,516,000
|
752
|
-
|
-
|
18
|
-
|
10,000
|
|
56,356,431
|
5,636
|
100,000
|
10
|
27,485,796
|
(128,489)
|
(30,384,380)
|
(2,018,239)
|
(5,038,716)
|
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,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(10,941,469)
|
$(10,224,506)
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
Depreciation
|
85,233
|
63,770
|
|
Derivative
(gain) loss
|
(513,674)
|
1,871,583
|
|
Gain
on extinguishment of debt
|
(126,222)
|
-
|
|
Stock-based
compensation
|
1,321,045
|
3,774,640
|
|
Bad
debt expense
|
149,907
|
32,577
|
|
Impairment
expense
|
4,577,406
|
1,087,346
|
|
Inventory
reserve
|
678,870
|
723,391
|
|
Amortization
of prepaid stock-based expenses
|
630,682
|
285,494
|
|
Amortization
of discount and debt issuance costs for convertible
notes
|
836,316
|
425,712
|
|
Amortization
of intangible assets
|
734,584
|
828,526
|
|
Deferred
rent
|
-
|
85,699
|
|
Non-cash
interest expense
|
99,449
|
-
|
|
Non-cash
settlement of payable
|
75,000
|
-
|
|
Amortization
of operating lease right-of-use assets
|
121,695
|
-
|
|
Loss
(gain) on settlement of debt
|
23,000
|
(3,004,630)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Accounts
receivable
|
(94,182)
|
(88,302)
|
|
Accounts
receivable - related party
|
18,860
|
(18,860)
|
|
Inventory
|
648,227
|
(2,864,383)
|
|
Prepaid
expenses and other assets
|
233,518
|
(140,765)
|
|
Deposit
|
40,000
|
(80,000)
|
|
Accounts
payable
|
684,579
|
518,979
|
|
Accounts
payable - related party
|
(25,842)
|
454,511
|
|
Accrued
expenses
|
338,381
|
321,135
|
|
Unearned
revenues
|
(215,000)
|
215,000
|
|
Settlement
payable
|
-
|
(20,000)
|
|
Interest
payable
|
49,054
|
6,793
|
|
Operating
lease liabilities
|
(121,696)
|
-
|
|
Net Cash Used In Operating Activities
|
(692,279)
|
(5,746,290)
|
|
|
|
|
|
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:
|
|
|
|
Increase
in due to related party classified as equity
|
(989)
|
-
|
|
Proceeds
from exercise of stock options
|
6,000
|
-
|
|
Advances
from related party
|
97,000
|
242,500
|
|
Repayments
on related party advances
|
(19,084)
|
(370,000)
|
|
Proceeds
from sale of common stock
|
385,000
|
7,215,380
|
|
Payments
of principal on notes payable
|
-
|
(59,500)
|
|
Proceeds
from issuance of notes payable
|
335,510
|
97,156
|
|
Proceeds
from issuance of notes payable - related party
|
57,919
|
-
|
|
Payments
of principal on convertible notes
|
(212,593)
|
(186,443)
|
|
Proceeds
from issuance of convertible notes, net of issuance
cost
|
50,250
|
864,845
|
|
Net Cash Provided By Financing Activities
|
699,013
|
7,803,938
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
6,734
|
16,445
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
18,405
|
1,960
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
$25,139
|
$18,405
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
Cash
paid for interest and finance charges
|
$46,025-
|
$40,116
|
|
Cash
paid for taxes
|
$-
|
$-
|
|
|
|
|
|
Non-Cash investing and financing activities:
|
|
|
|
Forgiveness
of debt by officers and directors
|
$-
|
$-
|
|
Proceeds
from sale of Series D preferred stock paid directly to settle
amounts
|
|
|
|
due
to officers and directors
|
$-
|
$-
|
|
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
|
$240,078
|
$40,616
|
|
Convertible
notes settled by common stock issued
|
$-
|
$196,000
|
|
Accounts
payable and accrued liabilities settled by common stock
issued
|
$70,575
|
$-
|
|
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
|
|
Stock
warrants granted as debt discount
|
$-
|
$194,388
|
|
Initial
derivative liability on convertible notes
|
$-
|
$-
|
|
Fair
value of common stock issued on conversion of notes
|
$-
|
$-
|
|
Fair
value of common stock issued for settlement of accounts
payable
|
$-
|
$-
|
|
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.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2020
NOTE 1 - NATURE OF
ORGANIZATION
Organization and Business Description
Exactus,
Inc. (the “Company”) was incorporated on January 18,
2008 as an alternative energy research and development company.
During much of its history the Company had designed solar
monitoring and charging systems which were discontinued in 2016 to
focus on developing point-of-care diagnostic devices. In January
2019, the Company added to the scope of its business activities,
efforts to produce, market and sell products made from industrial
hemp containing cannabidiol (“CBD”).
On
January 8, 2019, the Company entered into the Master Product
Development and Supply Agreement with C2M. In consideration for the
Development Agreement, C2M was issued 8,385,691 shares of Common
Stock. Additionally, the Company granted 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. Consequently, such transaction resulted in a
change of control whereby, C2M obtained majority control through
its Common Stock ownership. 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.
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
Development 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 products. The Company believes
manufacturing, testing and quality akin to pharmaceutical products
is important when distributing hemp-based products. The
Company’s products originated from farms at which the Company
or C2M oversaw all stages of plant growth and are manufactured
under contract arrangements with third-parties.
In
consideration for the Development Agreement, C2M was issued
8,385,691 shares of Common Stock. Additionally, the Company granted
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. Consequently, such
transaction resulted in a change of control whereby, C2M obtained
majority control through its Common Stock ownership. 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.
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. Following the events
with C2M, 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 21, 2021 we entered into a Settlement Agreement with
Ceed2Med, LLC and its principals cancelling all agreements,
obligations and claims and providing full mutual releases of the
Company and such persons. The Company no longer plans to farm
industrial hemp for its own commercial purposes.
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.
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, 2020. All
significant 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’ (deficit) equity and cash flows as of December
31, 2020 and 2019, and for the years then ended, have been made.
Those adjustments consist of normal and recurring
adjustments.
Going concern
The
accompanying 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 $9.5
million for the year ended December 31, 2020. The net cash
used in operating activities was $784,000 for the year ended
December 31, 2020. Additionally, the Company had an accumulated
deficit of $30.4 million and working capital deficit of $4.8
million at December 31, 2020. These factors raise substantial doubt
about the Company’s ability to continue as a going concern
for a period of twelve months from the issuance date of this
report. Management cannot provide assurance that the Company will
ultimately achieve profitable operations or become cash flow
positive, or raise additional debt and/or equity capital. The
Company is seeking to raise capital through additional debt and/or
equity financings to fund its operations in the future. Although
the Company has historically raised capital from sales of common
and preferred shares and from the issuance of convertible
promissory notes, there is no assurance that it will be able to
continue to do so. If the Company is unable to raise additional
capital or secure additional lending in the near future, management
expects that the Company will need to curtail its operations. The
accompanying 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, its Board of Directors, 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, 2020, the Company received proceeds from the
sale of the Company’s Common Stock of approximately
$385,000.
The
COVID-19 pandemic has resulted in a global slowdown of economic
activity which is likely to continue to reduce the future demand
for a broad variety of goods and services, while also disrupting
sales channels, marketing activities and supply chains for an
unknown period of time until the virus is fully contained. The
Company’s business operations have been negatively impacted
by the COVID-19 pandemic and related events and the Company expects
this disruption to continue to have a negative impact on its
revenue and results of operations, the size and duration of which
is currently difficult to predict. The impact to date has included
a decline in product and sales demand. Although the Company is
unable to predict the full impact and duration of COVID-19 on its
business, the Company is actively managing its financial
expenditures in response to the current uncertainty.
The
impact of the COVID-19 pandemic and related events, including
actions taken by various government authorities in response, have
increased market volatility and make the estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes more difficult. As of the date of issuance of
the financial statements, the Company is not aware of any specific
event or circumstance that would require it to update its
estimates, judgments or revise the carrying value of its assets or
liabilities. These estimates may change, as new events occur and
additional information is obtained, and are recognized in the
consolidated financial statements as soon as they become
known.
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.
|
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, 2020 and
2019:
|
|
At
December 31, 2020
|
At
December 31, 2019
|
||||
|
Description
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
|
Derivative
liabilities
|
—
|
—
|
$237,022
|
—
|
—
|
$880,410
|
A roll
forward of the level 3 valuation financial instruments is as
follows:
|
|
December 31,
2020
|
|
Balance at
beginning of year
|
$880,410
|
|
Transfers out due
to conversions of convertible notes
|
(129,714)
|
|
Change in fair
value included in derivative gain
|
(513,674)
|
|
Balance at end of
year
|
$237,022
|
|
|
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
|
As of
December 31, 2020 and 2019, 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, 2020 and 2019, respectively.
Cash and cash equivalents were $25,139 and $18,405 at December 31, 2020 and
2019, 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,
2020 and 2019, allowance for doubtful accounts amounted to
$0 and $13,991, respectively.
The allowance for doubtful accounts balance at December 31, 2020 is
$0 as the Company wrote off the uncollectible receivables and
corresponding reserve. Bad debt expense amounted to $251,638 and $32,577 during the year ended
December 31, 2020 and 2019, respectively.
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other assets consisted of the following:
|
|
December
31,
2020
|
December
31,
2019
|
|
Prepaid
services
|
$-
|
$248,767
|
|
Prepaid
insurance
|
9,288
|
-
|
|
Other
assets
|
6,000
|
-
|
|
|
$15,258
|
$248,776
|
Prepaid
expenses and other assets – related party consisted of the
following:
|
|
December
31,
2020
|
December
31,
2019
|
|
Prepaid expense:
C2M - current
|
$-
|
$622,160
|
|
Prepaid expense:
C2M - noncurrent
|
-
|
2,492,045
|
|
|
$-
|
$3,114,205
|
Prepaid
expenses with C2M consisted primarily of costs paid for future
services. Prepaid expenses included prepayments in cash and equity
instruments for an operating lease, consulting, and insurance fees
which were being amortized over the terms of their respective
agreements. During the year ended December 31, 2020, the Company
impaired the prepaid assets – related party as the Company no
longer plans to farm industrial hemp for its own commercial
purposes. Furthermore, on January 21,
2021 the Company entered into a Settlement Agreement with Ceed2Med,
LLC, Skybar Holding, LLC, and their principals cancelling all
agreements, obligations and claims and providing full mutual
releases of the Company and such persons.
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 $4,577,406 and $1,087,346 as
follows:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Prepaid
expenses and other assets – related party
|
$2,483,523
|
$-
|
|
Deposit
|
40,000
|
-
|
|
Property
and equipment
|
372,041
|
-
|
|
Intangible
assets
|
1,412,727
|
250,192
|
|
Operating
lease – right of use asset
|
269,115
|
-
|
|
Total
|
$4,577,406
|
$1,087,346
|
During
the year ended December 31, 2020, the Company impaired $4.577,406
of assets as follows:
$2,483,523
of prepaid assets – related party with C2M, $372,041 of farm
property and equipment, $1,412,727 of intangible assets related to
EOW farm leases and related assets, and $269,115 of operating lease
right of use assets as the Company no longer plans to farm
industrial hemp for its own commercial purposes.
$40,000
related to a leasehold deposit with Skybar holdings, LLC as the
Company determined the respective commercial lease was not
enforceable and the leased space would not be
utilized.
Furthermore,
on January 21, 2021 the Company
entered into a Settlement Agreement with Ceed2Med, LLC, Skybar
Holding, LLC, and their principals cancelling all agreements,
obligations and claims and providing full mutual releases of the
Company and such persons.
During
the year ended December 31, 2019, the Company impaired $250,192 related to the write off of intangible
assets.
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 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,
2020 and 2019, the Company had $0 and $215,000, respectively, of
unearned revenue recorded from the Company’s related party
customer, C2M.
Cost of Sales
The
primary components of cost of sales include the cost of the
product, and, indirect cost such as utilities, farm lease expenses,
and depreciation expenses on farming equipment related to
production and harvesting period.
Research and Development Expenses
The
Company follows ASC 730-10, “Research and Development,” and
expenses research and development costs when
incurred. Accordingly, third-party research and
development costs, including designing, prototyping and testing of
product, are expensed when the contracted work has been performed
or milestone results have been achieved. Indirect costs are
allocated based on percentage usage related to the research and
development. Research and development costs of
$0 and $22,100 were incurred
for the year ended December 31, 2020 and 2019, respectively and are
included in operating expenses in 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 $61,118 and $496,908 for the year ended
December 31, 2020 and 2019, respectively, and are included as a
component of selling and marketing expenses in 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 are included as a component of selling and marketing
expenses and were $24,687 and
$11,835 for the year ended December 31, 2020 and 2019,
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
The
Company applies ASC 850, “Related Party
Disclosures,” for the identification of related
parties and disclosure of related party transactions.
Earnings per Share
The
Company computes 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, 2020 and 2019, the following potentially
dilutive shares were excluded from the computation of diluted
earnings per shares because their impact was
anti-dilutive:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Stock
options
|
3,751,749
|
4,671,280
|
|
Stock
warrants
|
1,578,549
|
2,014,299
|
|
Restricted
stock to be issued upon vesting
|
1,734,161
|
3,583,328
|
|
Convertible
preferred stock
|
9,460,845
|
9,611,295
|
|
Convertible
debt
|
11,404,548
|
3,027,778
|
|
Total
|
27,929,852
|
22,907,980
|
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 statement of operations 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 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.
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.
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 was 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 the Company obtained the right to
substantially all the economic benefit from the use of the asset
throughout the period, and (3) whether the Company 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 August 2020, the FASB issued ASU 2020-06, “Debt –
Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging – Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity”, to reduce
complexity in applying GAAP to certain financial instruments with
characteristics of liabilities and equity. ASU 2020-06 is effective
for interim and annual periods beginning after December 15, 2023,
with early adoption permitted. We are currently evaluating the
impact of this guidance.
In
December 2019, the FASB released ASU 2019-12, “Simplifying
the Accounting for Income Taxes” (“ASU 2019-12”).
The purpose of the update is to reduce the complexity pertaining to
certain areas in accounting for income taxes. Key amendments from
ASU 2019-12 include, but are not limited to, the accounting for
hybrid tax regimes, step-up in tax basis for goodwill in
non-business combination transactions, intraperiod tax allocation
exception to the incremental approach, and interim period
accounting for enacted changes in tax law. ASU 2019-12 is effective
for the Company in the first quarter of the year ending December
31, 2021. The Company does not expect that the adoption of the
standard will have a material impact on its consolidated financial
statements.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform
(Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting (“ASU 2020-04”). ASU 2020-04
provides optional expedients and exceptions for applying GAAP to
contracts, hedging relationships, and other transactions affected
by reference rate reform if certain criteria are met. The
amendments in ASU 2020-04 apply only to contracts, hedging
relationships, and other transactions that reference the London
Interbank Offered Rate (“LIBOR”) or another reference
rate expected to be discontinued because of reference rate reform.
ASU 2020-04 is effective beginning on March 12, 2020 and may be
applied prospectively through December 31, 2022. The does not
expect that the adoption of the standard will have a material
impact on its consolidated financial statements.
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.
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. 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.
Under
the term of the Subscription Agreement, the Company acquired 30% of
membership interest in EOW in consideration for cash of $2,700,000
initially 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 is eliminated
upon consolidation. The Company paid a total of $2.7 million
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 valued at $990,000, 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
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
paid by November 2019.
|
At
December 31, 2020, the Company has an outstanding balance of $0 to
the members.
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, and goodwill was not recorded since the
Purchase Agreement was accounted for as an asset
purchase.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on March 11, 2019.
Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
|
Intangible asset
– Hemp farming license
|
$10,000
|
|
Intangible assets
– farm leases
|
2,930,000
|
|
Total assets
acquired at fair value
|
2,940,000
|
|
Total purchase
consideration
|
$2,940,000
|
Additionally,
the Company recorded the acquisition of 50.1% of membership
interest in EOW under the FASB issued ASC 810-10-65,
“Non-controlling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No.
51” (“SFAS No. 160”). As of December 31, 2020 and
2019, the Company recorded a non-controlling interest balance of
$2,018,239 and $537,469, respectively, in connection with the
majority-owned subsidiary, EOW as reflected in the accompanying
consolidated balance sheet and losses attributable to
non-controlling interest of $1,480,770 and $537,469, respectively,
during the years ended December 31, 2020 and 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 agreed to 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 and the Company to date has not contributed the capital
of $50,000.
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 due within 90 days
of the closing and the five additional installments paid starting
on October 12, 2019 and continuing on the first day of each
following month. At December 31, 2020 and 2019, the Company has an
outstanding balance of $250,000 to the seller which is included in
subscription payable in the accompanying consolidated balance
sheets. The Company is currently in default under the Asset
Purchase Agreement. However, there are no penalty interest or
charges from the default pursuant to the Asset Purchase
Agreement.
The
shares vest 1/24 on the closing date and an additional 1/24 vests
on the first day of each month thereafter provided that the Company
and the Executive under the Employment Agreement discussed below
are neither in breach of this Green Goddess Purchase Agreement or
the Employment Agreement. In addition, the Company entered into an
agreement under which the Company may become obligated to issue up
to an additional $250,000 of Common Stock (the “Additional
Stock Consideration”) based upon the volume weighted average
price per share (“VWAP”) for the 20 days prior to
issuance, in the event that sales of products utilizing
seller’s flavored products exceed $500,000 monthly for a
three-month average period. The Additional Stock Consideration
shall vest 1/24 on the signature or execution date of this Green
Goddess Purchase Agreement and an additional 1/24 vests on the
first day of each month thereafter provided that the Company and
the Executive under the Employment Agreement discussed below are
neither in breach of this Green Goddess Purchase Agreement or the
Employment Agreement.
Additionally,
on July 1, 2019, the Company entered into an Executive Employment
Agreement (the “Employment Agreement”) with Alejandro
De La Espriella (the “Executive”) who is the managing
member of Green Goddess Extracts, LLC. The term of the Employment
Agreement shall be for two years and shall be automatically renewed
for successive one-year periods unless either party provides a
written notice of non-renewal. The Company agrees to pay the
Executive an initial base salary of $120,000 per year subject to
annual adjustments determined by the board of directors of the
Company and such Executive shall also be eligible for annual bonus,
performance bonus and equity awards as defined in the Employment
Agreement.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
Green Goddess and the related agreements to determine if the
Company acquired a business or acquired assets. The gross assets
include the intellectual property (the related trademark, brand,
and IP addresses are determined to be a single intangible asset),
the inventory, customer list, non-compete/non-solicitation and the
excess of the consideration transferred over the fair value of the
net assets acquired. The Company concluded that substantially all
of the fair values of the gross assets acquired is not concentrated
in a single identifiable asset or group of similar identifiable
assets.
The set
has outputs through the continuation of revenues, and the Company
considered the criteria in paragraph 805-10-55-5E to determine
whether the set includes both inputs and a substantive process that
together significantly contribute to the ability to create outputs.
The set is not a business because: 1) It does not include an
organized workforce that could meet the criteria in paragraph
805-10-55-5E (a) through (b), 2) There are no acquired processes
that could meet the criteria in paragraph 805-10-55-5E(c) through
(d), and 3) It does not include both an input and a substantive
process. Accordingly, the transaction was not considered a
business.
Additionally,
in accordance with ASC 805-10, the 250,000 shares of common stock
and the Additional Stock Consideration are tied to continued
employment of the Company and as such are recognized as
compensation expenses in the post combination period under
Share-Based Payment Topic of ASC 718 which requires recognition in
the financial statements of the cost of employee and services
received in exchange for an award of equity instruments over the
period the employee is required to perform the services in exchange
for the award (presumptively, the vesting period). The ASC also
requires measurement of the cost of employee and services received
in exchange for an award based on the grant-date fair value of the
award.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on July 31, 2019.
Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
|
Intangible asset
– trademark
|
$3,500
|
|
Intangible assets
– customer list
|
212,529
|
|
Inventory
|
33,971
|
|
Total assets
acquired at fair value
|
250,000
|
|
Total purchase
consideration
|
$250,000
|
During
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.
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 were
written down to a value of $0 during the year ended December 31,
2019, due to the age and questionable salability of the
product. The cost of the inventory write off is included in
cost of sales in the accompanying 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 was an
employee of the Company from July, 2019 through November
2020.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
Levor and the related agreements to determine if the Company
acquired a business or acquired assets. Based on this analysis, it
was determined that the Company acquired assets, primarily
consisting of its rights and interest in the cosmetic brand
collection, “Levor Collection”. The Company concluded
that substantially all of the fair values of the gross assets
acquired is concentrated in a single identifiable asset or group of
similar identifiable assets. Accordingly, the transaction was not
considered a business.
Pursuant
to the terms of the Levor Purchase Agreement, the Company granted
100,000 shares of its Common Stock valued at $70,000, or $0.70 per
share, the fair value of the Company’s Common Stock based on
the sale of common stock in the recent private
placement.
Additionally,
in accordance with ASC 805-10, the Earn-out Consideration is deemed
as contingent payment to an employee and the Company determined
that the arrangement is compensatory in nature and as such are
recognized as compensation expenses in the post combination period
under Share-Based Payment Topic of ASC 718 which requires
recognition in the financial statements of the cost of employee and
services received in exchange for an award of equity instruments
over the period the employee is required to perform the services in
exchange for the award (presumptively, the vesting period). The ASC
also requires measurement of the cost of employee and services
received in exchange for an award based on the grant-date fair
value of the award.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on September 30,
2019. Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
|
Intangible asset
– Brand
|
$70,000
|
|
Total assets
acquired at fair value
|
70,000
|
|
Total purchase
consideration
|
$70,000
|
During
the year ended December 31, 2019 the Company recorded an impairment
expense of $64,167 related to the Levor intangible
asset.
NOTE 4 – INVENTORY
Inventory,
net consisted of the following:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Finished goods
– CBD
|
$10,712
|
$-
|
|
Finished goods
– hemp flowers and hemp cuttings
|
-
|
1,337,809
|
|
|
$10,712
|
$1,337,809
|
During
the years ended December 31, 2020 and 2019, the Company recorded a
reserve or inventory write-off related to inventory of
$678,870 and $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 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 accompanying consolidated
statements of operations.
NOTE 5 – PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
|
As
of December 31,
|
|
|
|
Estimated
life
|
2020
|
2019
|
|
|
|
|
|
|
Greenhouse
|
10
years
|
$34,465
|
$34,465
|
|
Fencing and
storage
|
5
years
|
44,543
|
44,543
|
|
Irrigation
|
5
years
|
387,975
|
387,975
|
|
Office and computer
equipment
|
3
years
|
40,834
|
40,834
|
|
Farming
Equipment
|
5
years
|
11,500
|
11,500
|
|
Leasehold
improvement
|
5
years
|
21,886
|
21,886
|
|
Total
|
|
541,203
|
541,203
|
|
Less: Accumulated
depreciation
|
|
(149,003)
|
(63,770)
|
|
Less: Impairment
expense
|
|
(372,041)
|
-
|
|
|
$20,159
|
$477,433
|
|
Depreciation
expense amounted to $85,233 and
$63,770 for the years ended December 31, 2020 and 2019,
respectively.
During the year ended December 31, 2020, the Company recorded
impairment expense of $372,041 which was equivalent to the
remaining net book values of the greenhouse, fencing and storage,
irrigation, farming equipment and leasehold improvement related to
a commercial lease with Skybar Holding, LLC.
NOTE 6 – INTANGIBLE
ASSET
At
December 31, 2020 and 2019, intangible asset consisted of the
following:
|
|
Useful
life
|
December
31,
2020
|
December
31,
2019
|
|
Participation
rights - EOW
|
3 year
|
$2,930,000
|
$2,930,000
|
|
Hemp operating
license - EOW
|
1 year
|
10,000
|
10,000
|
|
Trademark –
Green Goddess
|
3 year
|
-
|
3,500
|
|
Customer list
– Green Goddess
|
3 year
|
-
|
212,529
|
|
Brand -
Levor
|
3 year
|
-
|
70,000
|
|
Total
|
2,940,000
|
3,226,029
|
|
|
Less: accumulated
amortization
|
(1,527,273)
|
(828,526
|
|
|
Less: Impairment
expenses
|
(1,412,727)
|
(250,192
|
|
|
Intangible assets,
net
|
$-
|
$2,147,311
|
|
For the
years ended December 31, 2020 and 2019, amortization of intangible
assets amounted to $734,584 and
$828,526, respectively.
During
fiscal 2019, the Company fully impaired the intangible assets
related to the Green Goddess and Lever Brands.
During the third quarter of fiscal 2020, the Company determined
that intangible assets related to EOW farm leases were impaired due
to management’s intent of not pursuing farm operations in
Oregon and the non-renewal of the related EOW farm leases.
Accordingly, the Company fully impaired the remaining carrying
value of the intangible assets related to EOW farm leases and
recorded an impairment expense of $1,412,727 for the year ended
December 31, 2020.
Amortization
of intangible assets attributable to future periods is $0 as all
acquired intangible assets were written off as of September 30,
2020.
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, located in Cave Junction, Oregon,
consisted of approximately 100 acres. The lease required 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 had not determined
when net income would be generated from this lease. The lease was
to continue in effect 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 years ended December 31, 2020 and
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, located in Glendale, Oregon, consisted of
approximately 100 acres. The lease required the Company to pay
$120,000 per year, whereby $50,000 was payable upon execution and
$70,000 payable prior to planting for agricultural use or related
purposes. The lease was to continue in effect from year-to-year
except for at least a 30-day written notice of termination. The
Company recognized lease expense of $100,000 for the year ended
December 31, 2019 and was included in cost of sales on the
accompanying 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, located in Cave Junction, Oregon,
consisted 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 payable on September 15, 2019 and 2% of the net income
realized by the Company from the operation of the leased farm. The
lease was to continue in effect from year-to-year for five years
except for at least a 30-day written notice of termination. The
Company 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. 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 amortized over the term of the 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 planned 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 was
5 years commencing August 1, 2019, with two 5-year extension
options. The Lease included 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 agreed to
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 was to increase at least three
percent (3%) per year. The lessor of the Premises is a limited
liability company owned or controlled by Vladislav (Bobby)
Yampolsky, the manager and controlling member of C2M, the
Company’s largest stockholder and former Board Member. During
the second quarter of fiscal 2020, the Company determined that the
commercial lease with Skybar Holding, LLC was not in
compliance with current laws or regulations in the City of Delray
Beach, did not represent an enforceable contract and was void from
the moment of execution. As a result, the Company restated its
prior year financial information to correct this accounting error.
Additionally, on August 6, 2020, the Company submitted a written
termination letter to Skybar Holdings, LLC. During the twelve
months ended December 31, 2020, the Company fully impaired the
security deposit of $40,000.
On January 21, 2021 the Company entered into a Settlement Agreement
with Ceed2Med, LLC, Skybar Holding, LLC, and their principals
cancelling all agreements, obligations and claims and providing
full mutual releases of the Company and such persons.
In
adopting ASC Topic 842, Leases (Topic 842), the Company 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 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
$506,506 and total lease liabilities of $506,506 based on an
incremental borrowing rate of 10%. The Company recorded lease
expense of $129,200 and $340,365 for the years ended December 31,
2020 and 2019, respectively.
The
cash outflows from operating leases for the year ended December 31,
2020 was approximately $100,000.
ROU is
summarized below:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
|
Restated
|
|
Farm
lease ROU
|
$506,506
|
$506,506
|
|
Less
accumulated amortization
|
(237,391)
|
(115,695)
|
|
Less
impairment expense
|
(269,115)
|
-
|
|
Balance
of ROU asset
|
$-
|
$390,811
|
During the third quarter of fiscal 2020, the Company determined
that ROU assets related to EOW farm leases were impaired due to
management’s intent of not pursuing farm operations in Oregon
in year 2021 crop season and the non-renewal of the related EOW
farm leases. Accordingly, the Company fully impaired the remaining
carrying value of the ROU assets related to EOW farm leases and
recorded an impairment expense of $269,115 during the year ended
December 31, 2020.
Operating
lease liability related to the ROU asset is summarized
below:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
|
Restated
|
|
Farm
lease ROU
|
$506,506
|
$506,506
|
|
Reduction
of lease liability
|
(237,391)
|
(115,695)
|
|
Total
|
$269,115
|
390,811
|
|
Less: current
portion
|
(269,115)
|
(168,869)
|
|
Long term portion
of lease liability
|
-
|
$220,942
|
NOTE 8 - NOTES
PAYABLE
Notes payable
U.S. Small Business Administration Loan
On May 28, 2020, the Company received a Secured Disaster Loan in
the amount of $99,100 from the U.S. Small Business Administration.
The loan carries interest at a rate of 3.75% per year, requires
monthly payments of principal and interest, and matures in thirty
(30) years. Installment payments, including principal and interest,
of $483 monthly, will begin twelve (12) months from the date of the
promissory Note. The SBA loan is secured by a security interest in
the Company's tangible and intangible assets. The loan proceeds are
to be used as working capital to alleviate economic injury caused
by the Covid-19 disaster occurring in the month of January 31, 2020
and continuing thereafter. As of December 31, 2020, the principal
balance of this note amounted to $99,100.
Paycheck Protection Program Funding
On May 22, 2020, the Company received federal funding in the amount
of $236,410 through the Paycheck Protection Program (the
“PPP”). PPP funds have certain restrictions on use of
the funding proceeds, and generally must be repaid within two (2)
years at 1% interest. The PPP loan may, under circumstances, be
forgiven. There shall be no payment due by the Company during the
six months period beginning on the date of this note
(“Deferral Period”). Commencing one month after the
expiration of the Deferral Period, the Company shall pay the lender
monthly payments of principal and interest, each in equal amount
required to fully amortize by the maturity date. If a payment on
this note is more than ten days late, the lender shall charge a
late fee of up to 5% of the unpaid portion of the regularly
scheduled payment. As of December 31, 2020, the principal balance
of this note amounted to $236,410. The Company has formally applied
for forgiveness of this PPP loan.
Notes payable to unrelated parties is summarized
below:
|
|
As
of December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Principal
amount
|
$335,510
|
$-
|
|
Less: current
portion
|
(130,344)
|
-
|
|
Notes payable -
long term portion
|
$205,166
|
$-
|
Minimum principal payments under notes payable to unrelated parties
at December 31, 2020 are as follows:
|
Year ended December
31, 2020
|
$11,859
|
|
Year ended December
31, 2021
|
155,501
|
|
Year ended December
31, 2022
|
68,392
|
|
Year ended December
31, 2023
|
2,091
|
|
Year ended December
31, 2024 and thereafter
|
97,667
|
|
Total principal
payments
|
$335,510
|
Notes payable – related party
During the fourth quarter 2020, the Company received $37,000 in
cash proceeds from the former Chief Executive Officer and
stockholder of the Company as an unsecured obligation. The Company
is currently negotiating to settle the outstanding obligation with
the issuance of the Company’s common stock. As of December
31, 2020, the principal balance due is $37,000 and is currently in
default.
During February 2020, the Company entered a short-term promissory
note for principal amount of $22,461 and gross cash proceeds of
$20,419 (original issue discount of $2,042) with a stockholder of
the Company. The note became due and payable on March 8, 2020 and
bore interest at a rate of eighteen (18%) percent per annum prior
to the maturity date, and eighteen (18%) per annum if unpaid
following the maturity date. The note is unsecured obligation of
the Company. In addition, the note carries a 10% original issue
discount of $2,042 which have been amortized and recorded in
interest expense on the accompanying unaudited statements of
operations. The Company is currently negotiating to extend the
maturity date of the related party note. As of December 31, 2020,
the principal balance of this note amounted to $22,461 and is
currently in default.
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. As
of December 31, 2020, and 2019, the principal balance under the
notes was $55,556, respectively. The Company is
currently negotiating on extending the maturity date of the related
party note.
On June
28, 2017, the Company issued promissory notes to two of the
Company’s then executive officers. The promissory notes
accrued 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 of 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 the respective severance arrangements.
During the year ended December 31, 2019, the Company recognized
$1,214 of interest expense. As of December 31, 2019, the notes had
an accrued interest balance of $0. As of December 31, 2019, the
principal balance under the notes was $0.
NOTE 9 - CONVERTIBLE NOTES
PAYABLE
|
The Company’s
convertible notes consist of the following as of December 31, 2020
and 2019:
|
2020
|
2019
|
|
|
|
|
|
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 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 and as such the
principal balance of the convertible note remains outstanding as of
December 31, 2020 and 2019. The Company
reclassed the principal balance to current portion as of December
31, 2020.
|
$100,000
|
$100,000
|
|
|
|
|
|
Convertible Note in
the amount of $833,333, issued on November 27, 2019. The Company
entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with a single institutional investor (the
“Purchaser”), pursuant to which the Company agreed to
sell to Purchaser in a series of 3 closings up to $1,944,444 in
aggregate principal amount of the Company’s senior secured
convertible promissory notes (the “Notes”) and warrants
to purchase shares of the Company’s Common Stock (the
“Warrants”). On November 27, 2019 (the “Initial
Closing Date”), the Company issued a Note in the principal
amount of $833,333, and a two-year Warrant to purchase 275,612
shares of Common Stock at an exercise price of $0.756 per share
(see Note 10). The Notes will be issued at a 10% original issue
discount and bear an interest rate of 8%. The Notes mature one year
after their issuance unless accelerated due to an event of default.
The Notes are redeemable, in whole or in part, at any time at the
discretion of the Company. At the Initial Closing Date, the Company
received net proceeds, after the original issue discount and the
Purchaser’s counsel fees, of $730,000. Each note is
convertible at the option of the note holder at any time into
shares of our common stock at the fixed conversion rate of $0.50
per share. However, the conversion rate is subject to adjustment in
the event of default, redemption and upon the occurrence of certain
events affecting stockholders generally, such as stock splits and
recapitalizations. The Company must pay amortization redemption
payments equaling one-ninth of the original principal amount due on
each note commencing 90 days after issuance and continuing during
the following eight months (each an “Amortization
Redemption”). The note holder may at its option accelerate up
to six future amortization redemption payments, in which case the
note holder may demand the accelerated amortization amounts be paid
in shares of the Company’s common stock at the lesser of i)
the fixed conversion rate of $0.50 per share of common stock, or
(ii) the rate equal to 80% of the lowest volume weighted average
price, or VWAP, during the 10 trading days immediately before the
applicable date of the amortization redemption payment
(“Amortization Conversion Rate”). Amortization
redemption payment amount is equivalent to 110% of the sum of (i)
one-ninth (1/9th) of the Original Principal Amount of this Note,
(ii) 100% of all accrued and unpaid interest on the principal
amount of this Note that is subject to such Amortization
Redemption, (iii) 100% of the Make-Whole Amount payable in respect
of the principal amount of this Note that is subject to such
Amortization Redemption (as applicable), and (iv) all liquidated
damages, costs of collection and other amounts payable in respect
of this Note as of the applicable amortization redemption payment
Date for such Amortization Redemption. If the Company fails to make
a redemption payment, the note holder may demand the amortization
amounts be paid in shares of the Company’s common stock at
the lesser of fixed conversion rate of $0.50 per share of common
stock or the Amortization Conversion Rate. In addition, in the
event of a subsequent issuance of the Company’s common stock
or debt, the Company is subject to mandatory redemption provisions
as defined in the note agreement. The Company may not issue shares
of the Company’s common stock to third parties at a price
lower than the fixed conversion rate of $0.50 per share of common
stock without the consent of the note holder. At this time, the
Company is delinquent in its payments under the initial convertible
note, with the May 1, 2020, April 1, 2020, and a portion of the
February 25, 2020 payments currently in arrears. The Company
intends to make these payments and the upcoming monthly payments
with receipts from product sales and/or the proceeds of additional
equity funding. The Company paid original issuance cost of $83,333,
cash commission and loan fees of $92,055, and recorded redemption
premium of $88,889 related to the amortization redemption payment
in connection with this note payable and are being amortized over
the term of the note. On the Initial Closing Date, certain FINRA
broker-dealers who acted on behalf of the Company were paid
aggregate cash commissions of approximately $72,055 and were
granted a four-year warrant to acquire an aggregate of 84,187
shares of Common Stock at an exercise price of $0.792 per share of
common stock at any time before the close of business four years
after their issuance, subject to adjustment in the event of stock
dividends, splits, fundamental transactions, or other changes in
our capital structure.
|
546,036
|
85,906
|
|
|
|
|
|
Carrying Amount of
Convertible Debt
|
$646,036
|
$185,906
|
|
Less: Current
Portion
|
(646,036)
|
(85,906)
|
|
Convertible Notes,
Long Term
|
$-
|
$100,000
|
During October 2020, the Company entered into a short-term
convertible note for principal amount of $50,250 with a stockholder
of the Company. The note became due and payable on January 27, 2021
and bear interest at a rate of twelve (12%) percent per annum prior
to the maturity date, and twelve (12%) per annum if unpaid
following the maturity date. The note is unsecured obligation of
the Company. As of December 31, 2020, the principal balance of this
note amounted to $50,250 . On January 22, 2021 the notes principal
and interest were converted into 2,070,300 shares of the
company’s common stock in full satisfaction of the note and
accrued interest.
The
following is a summary of the carrying amounts of convertible notes
as of December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Principal
Amount
|
$933,333
|
$933,333
|
|
Add: additional
principal
|
50,250
|
-
|
|
Add: amortization
of redemption premium
|
88,889
|
8,280
|
|
Less: redemption
premium payments
|
(20,800)
|
-
|
|
Less: principle
payments and conversions
|
(356,186)
|
-
|
|
Less: unamortized
debt discount and debt issuance costs
|
-
|
(755,707)
|
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$696,286
|
$185,906
|
Between March 2020 and August, 2020, the Company made cash
repayments towards the principal of $185,186 and accrued interest
of $14,814.
Conversion of Convertible Notes into Common Stock
On May 27, 2020, the Company issued 247,588 shares of its common
stock at a contractual conversion price of $0.13, as a result of
the conversion of principal of $30,000 and interest of $2,400 of
the convertible note.
On June 10, 2020, the Company issued 564,000 shares of its common
stock at a contractual conversion price of $0.09, as a result of
the conversion of principal of $47,000 and interest of $3,760 of
the convertible note.
Between July 2020 and August 2020, the Company issued 1,586,349
shares of its common stock at a contractual conversion price of
$0.06, as a result of the conversion of principal of $94,000 and
interest of $7,520 of the convertible note.
Notice of Delinquent Payment
The Company was delinquent in its payments under the initial
convertible note executed on November 27, 2019, with the May 1,
2020 and April 1, 2020 payments. On May 20, 2020, the Company
entered into a Forbearance Agreement with the investor (the
“Holder”) regarding the initial convertible note. Under
the Forbearance Agreement, the investor has agreed to forebear from
exercising any default-related rights and remedies subject to the
following conditions and material terms:
|
●
|
The
Company has paid the Holder $60,000 in cash before July 1, 2020.
Additional monthly payments required under the Amortization
Schedule for the note shall continue to be due on or before the
first day of each calendar month thereafter, commencing with the
$110,000 payment originally due April 1, 2020 now due on or before
August 1, 2020, and the subsequent monthly payments listed on the
Amortization Schedule to be paid monthly in the sequence listed.
Interest shall continue to accrue on the principal balance of the
Note at the rate(s) stated therein, with all additional accrued
interest resulting from this extension of payment deadlines to be
paid as part of the last monthly payment. The Company paid the
$110,000 on August 1, 2020.
|
|
|
|
|
|
|
●
|
The
payments that were in arrears from February, April and May can be
paid in whole or in part at any time at the sole election of the
Holder in shares of common stock at the Amortization Conversion
Price (defined as 80% of the lowest volume weighted average price,
or VWAP, during the 10 trading days immediately before the
applicable date of the amortization redemption
payment).
|
|
|
●
|
Unless
or until a default under the Forbearance Agreement occurs, the
fixed conversion price under the note will remain $0.50 per share,
and the note shall continue to bear interest at the non-default
rate of 8% per annum.
|
|
●
|
Unless
or until a default under the Forbearance Agreement occurs, the
contractual limit on issuances of shares to issue shares of common
stock or options to employees, officers, directors, consultants,
advisors or contractors will be increased from 5% to 10% or our
issued an outstanding common stock.
|
|
●
|
The
Company has issued the Holder 500,000 shares of the Company’s
common stock in consideration for the forbearance.
|
Derivative Liabilities Pursuant to Securities Purchase
Agreements
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 change in fair value of
derivative liabilities of $251,638 and $32,577 during the years
ended December 31, 2020 and 2019, respectively. Upon conversions
during the years ended December 31, 2020, the derivative liability
was marked to fair value at the conversion, and then a related fair
value amount of $129,714 relating to the portion of debt converted
was reclassified to other income as part of gain on debt
extinguishment. Additionally, the Company recorded loss on debt
extinguishment of $55,398, in connection with the conversions
during the years ended December 31, 2020.
The Company recognized gain on extinguishment of debt due to
repayment and conversions of notes into shares of common and
preferred stock of $3,004,629 and change in fair value of
derivative liabilities of $896,000 during the year ended December
31, 2019. The Company determined that the conversion options
embedded in the convertible notes require liability presentation at
fair value. Each of these instruments provide the holder with the
right to convert into Common Stock at a fixed discount market, with
certain notes subject to a cap on the conversion price. These
clauses cause uncertainty as to the number of shares issuable upon
conversion of convertible debt and accordingly require liability
presentation on the balance sheet in accordance with US GAAP. For
the years ended December 31, 2020 and 2019, the Company measured
the fair value of the embedded derivatives using a binomial model
and Monte Carlo simulations, and the following
assumptions:
|
|
2020
|
2019
|
|
Expected
Volatility
|
213.48% to
216.44%
|
239.97% to
567.11%
|
|
Expected
Term
|
0.16
to 0.66 Years
|
0.25
to 1.0 Years
|
|
Risk Free
Rate
|
0.08% to
0.18%
|
1.59% to
2.54%
|
|
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”). 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 years ended December 31,
2020 and 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 year ended December 31, 2020 and 2019, the Company
recognized $1,003,439 and $479,111, respectively, of interest
expense, of which $838,358 and $425,712 represent non-cash
amortization of debt discount and issuance costs. As of
December 31, 2020, the principal balance under the notes was
$165,767 and $55,556, respectively.
As of
December 31, 2020 and 2019, total accrued interest was $52,051 and
$16,677, respectively.
NOTE 10 - STOCKHOLDERS’ EQUITY
(DEFICIT)
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in the
accompanying consolidated financial statements are retroactively
restated for the effect of the Reverse Stock Split.
In
January 2019, the Company approved the 2019 Equity Incentive Plan
(the “2019 Plan”) which provides for the issuance of
incentive awards in the form of non-qualified and incentive stock
options, stock appreciation rights, restricted stock awards and
restricted stock unit awards. The 2019 Plan provides for a share
limit equal to 15% of the total of the number of the issued and
outstanding shares of the Company’s Common Stock and all
shares of Common Stock issuable upon conversion or exercise of any
outstanding securities of the Company.
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001.
Series A - On
February 17, 2016, the Board of Directors voted to designate a
class of preferred stock entitled Series A Preferred Stock,
consisting of up to five million (5,000,000) shares, par value
$0.0001 per share.
On
December 21, 2018, the Company 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, 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, 2020, the Company converted 30,090
Series A Preferred Stock into 150,450 shares of common 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 323,019 and 353,109 shares of Series A Preferred
Stock outstanding as of December 31, 2020 and 2019, respectively,
which were convertible into 1,615,095 and 1,765,545 shares of
common stock as of December 31, 2020 and 2019,
respectively.
On February 16, 2021, the Company entered into a Securities
Purchase Agreement with 3i, LP (“3i”) and an institutional investor
(“Investor”)
under which the Investor agreed to purchase and 3i agreed to sell
certain 8% senior secured convertible note dated November 27, 2019
(the “Note”)
and all of our warrants previously issued to 3i and 3i agreed
settle and release all claims asserted against the Company. As a
result, 3i agreed to dismiss all pending litigation against the
Company. Furthermore, the Subsidiary Guaranty, IP Security
Agreement and Registration Rights Agreement with 3i were also
terminated.
In addition, the Company entered into an Exchange Agreement with
the Investor and filed with the Secretary of State of the State of
Nevada a Certificate of Designation of Preferences, Rights and
Limitations for Series A Preferred Stock under which the Note
in the original principal amount of $750,000 would be exchanged for
$500,000 of a new series of our preferred stock designated 0%
Series A Convertible Preferred Stock (the
“Series
A Preferred”) with a
stated value of $1,000 per share (the “Stated
Value”).
The Company authorized the issuance of a total of 1,000
($1,000,000) of Series A Preferred for issuance. Each share of
Series A Preferred is convertible at the option of the Holder, into
that number of shares of our common stock, par value $0.0001 per
share) (the “Common
Stock”) (subject to
certain limitations on beneficial ownership) determined by dividing
the Stated Value by $0.05 per share (the “Conversion
Price”), subject to
adjustment in the event of stock dividends, stock splits, stock
combinations, reclassifications or similar transactions that
proportionately decrease or increase the Common
Stock.
The Company is prohibited from effecting the conversion of the
Series A 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 to the
Company), in the aggregate, of the issued and outstanding shares of
the Common Stock calculated immediately after giving effect to the
issuance of shares of Common Stock upon the conversion of the
Series A Preferred. Holders of the Series A Preferred shall be
entitled to vote on all matters submitted to the Company’s
stockholders and shall be entitled to the number of votes equal to
the number of shares of Common Stock into which the shares of
Series A Preferred Stock are convertible, subject to applicable
beneficial ownership limitations. The Series A Preferred Stock
provides a liquidation preference equal to the Stated Value, plus
any accrued and unpaid dividends, fees or liquidated
damages.
The Series A Preferred can be redeemed at the Company’s
option upon payment of a redemption premium between 120% to 135% of
the Stated Value of the outstanding Series A Preferred redeemed.
The Company is not obligated to file a registration statement under
the Securities Act of 1933, as amended (the
“Act”), with respect to the shares of Common
Stock into which Series A Preferred may be converted however the
Investor will be deemed to have held the Series A Preferred on the
original issue date to 3i for the purposes of the availability of
an exemption from registration provided by Rule 144 under the
Act.
On February 16, 2021 the Company offered to our prior Series A
preferred stock enhanced conversion inducements to voluntarily
convert preferred shares into our Common Stock and filed a
Certificate of Cancellation and Withdrawal with the Secretary of
State of the State of Nevada cancelling our prior Certificate
of Designation of Preferences, Rights and Limitations for
Series A Preferred Stock, all of which has been converted to Common
Stock, in order to issue the new Series A Preferred stock described
herein.
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 shares of Series B-1
preferred stock outstanding, which were convertible into 206,250
shares of common stock, as of December 31, 2020 and
2019.
On February 16, 2021, the Company offered to our Series B-1
preferred stock enhanced conversion inducements to voluntarily
convert preferred shares into our Common Stock and expects to file
a Certificate of Cancellation and Withdrawal with
the Secretary of State of the State of Nevada cancelling our
previous Certificate of Designation of Preferences, Rights and
Limitations for Series B-1, Preferred Stock upon conversion or
cancellation of Series B-1.
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. On February 29, 2016, the Company issued
2,084,000 shares of Series B-2 Preferred Stock.
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 shares of Series B-1
preferred stock outstanding, which
were convertible into 939,500 shares of common stock as of
December 31, 2020 and 2019.
On February 16, 2021, the Company offered to our Series B-2
preferred stock enhanced conversion inducements to voluntarily
convert preferred shares into our Common Stock and expect to file a
Certificate of Cancellation and Withdrawal with the Secretary
of State of the State of Nevada cancelling our previous Certificate
of Designation of Preferences, Rights and Limitations for Series
B-2, Preferred Stock upon conversion or cancellation of Series
B-2.
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.
As the
Company was 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, 2020 and 2019, there were no shares of Series C
Preferred Stock issued and outstanding.
On April 7, 2021 the Company filed a Certificate of Cancellation
and Withdrawal with the Secretary of State of the State of Nevada
cancelling our prior Certificate of Designation of
Preferences, Rights and Limitations for Series C Preferred Stock,
all of which has been cancelled or converted into Common
Stock.
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 were 18 shares of
Series D preferred stock outstanding which were convertible into 450,000 shares of
common stock as of December 31, 2020 and 2019.
On February 16, 2021, the Company offered to our Series D preferred
stock enhanced inducements to voluntarily convert preferred shares
into our Common Stock and expect to file a Certificate of
Cancellation and Withdrawal with the Secretary of State of the
State of Nevada cancelling our previous Certificate of Designation
of Preferences, Rights and Limitations for Series D, Preferred
Stock upon conversion or cancellation of Series D.
On April 7, 2021 the Company filed a Certificate of Cancellation
and Withdrawal with the Secretary of State of the State of Nevada
cancelling our prior Certificate of Designation of
Preferences, Rights and Limitations for Series D Preferred Stock,
all of which has been cancelled or converted into Common
Stock.
Series E - On August 1, 2019 the Company issued 10,000
shares of newly designated Series E 0% Convertible Preferred Stock,
par value $0.0001 per share (the “Series E Preferred”)
to C2M pursuant to the MSA. Under the terms of the Series E
Preferred, C2M may only convert such shares of Series E Preferred
into shares of the Company’s Common Stock, if the closing
price of Common Stock on the principal trading market, shall exceed
$2.00 per share for 5 consecutive trading days. Once vested, the
shares of Series E Preferred held by C2M are intended to either be
converted at $1.60 per share of Common Stock or optionally redeemed
out of the proceeds of future financings, at the option of
C2M.
Each
share of Series E Preferred is convertible into 625 shares of the
Company’s Common Stock and have a stated value of $1,000 per
share. The conversion ratio is subject to adjustment in the event
of stock splits, stock dividends, combination of shares and similar
recapitalization transactions. The Company is prohibited from
effecting conversions of the Series E Preferred to the extent that,
as a result of such conversion, the holder beneficially owns more
than 4.99% (which may be increased to 9.99% upon 61 days’
written notice), in the aggregate, of the issued and outstanding
shares of Common Stock calculated immediately after giving effect
to the issuance of shares of Common Stock upon the conversion of
the Series E Preferred. Holders of the Series E Preferred shall be
entitled to vote on all matters submitted to shareholders and shall
be entitled to the number of votes equal to the number of shares of
Common Stock into which the shares of Series E Preferred Stock are
convertible, subject to applicable beneficial ownership
limitations. The Series E Preferred Stock provides a liquidation
preference equal to par value.
The
Series E Preferred has a no mandatory redemption rights however, in
the event the Company raisee $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 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. During fiscal year 2020, the Company impaired the remaining
unamortized prepaid balance and recognized an impairment charge of
$2,483,523 as the Company no longer anticipates utilizing the
services under the MSA.
As
of December 31, 2020 and 2019, there were 10,000 shares of Series E
Preferred Stock issued and outstanding which were convertible into 6,250,000 shares of
common stock.
On February 16, 2021, the Company offered to our Series E preferred
stock enhanced conversion inducements to voluntarily convert
preferred shares into our Common Stock.
On April 7, 2021 the Company filed a Certificate of Cancellation
and Withdrawal with the Secretary of State of the State of Nevada
cancelling our prior Certificate of Designation of
Preferences, Rights and Limitations for Series E Preferred Stock,
all of which has been cancelled or converted into Common
Stock.
Common Stock
The
Company’s authorized Common Stock consists of 650,000,000
shares with a par value of $0.0001 per share.
The following were transactions during the year ended December 31,
2020:
Sale of Common Stock for private placement
During the year ended December 31, 2020, the Company sold an
aggregate of 3,000,000 shares of Common Stock for total proceeds of
$350,000.
Conversion of Series A Preferred stock into Common
Stock
On January 20, 2020, the Company converted 30,090 Series A
Preferred Stock into 150,450 common shares.
Conversion of Notes into Common Stock
On May 27, 2020, the Company issued 247,588 shares of its common
stock at a contractual conversion price of $0.13, as a result of
the conversion of principal of $30,000 and interest of $2,400 of
the convertible note.
On June 10, 2020, the Company issued 564,000 shares of its common
stock at a contractual conversion price of $0.09, as a result of
the conversion of principal of $47,000 and interest of $3,760 of
the convertible note.
Between July 2020 and August 2020, the Company issued 1,586,349
shares of its common stock at a contractual conversion price of
$0.06, as a result of the conversion of principal of $94,000 and
interest of $7,520 of the convertible note.
These shares of common stock had an aggregate fair value of
$240,078 and the Company recorded $55,398 of loss on debt
extinguishment related to these note conversions.
Common Stock pursuant to Forbearance Agreement
On May 20, 2020, the Company entered into a Forbearance Agreement
with the note holder regarding the initial convertible note
executed on November 27, 2019. The Company has issued the Holder
500,000 shares of the Company’s common stock in consideration
for the forbearance and valued the shares of Common Stock at the
fair value of approximately $0.18 per common share or $90,000 based
on the quoted trading price on the date of grant. The Company
recorded interest expense of $90,000 during the year ended December
31, 2020.
Common Stock for services
On
December 31, 2020, the Company issued approximately 2 million
shares to an executive and board member of the Company in
settlement of an accrued payroll balance of $75,000. The Company
recognized $31,000 of stock-based compensation in relation to the
settlement.
On January 23, 2020, the Company issued 250,000 shares of Common
Stock for legal services to be rendered in fiscal 2020 and valued
the shares of Common Stock at the fair value of approximately
$0.4948 per common share or $123,700 based on the quoted trading
price on the date of grant which the Company recorded as
stock-based compensation during the year ended December 31,
2020.
On January 23, 2020, the Company issued an aggregate of 515,000
shares of Common Stock to two officers and three employees of the
Company for services in fiscal 2020 and as an incentive to retain
such employees and valued the shares of Common Stock at the fair
value of approximately $0.4948 per common share or $254,823 based
on the quoted trading price on the date of grant. The Company
recorded stock-based compensation of $254,823.
On July 1, 2020, the Company entered into a consulting agreement
for corporate legal advisor services. The consultant shall receive
compensation of 750,000 shares of the Company’s Common Stock
for services rendered and to be rendered until September 30, 2020.
The Company valued the shares of Common Stock at the fair value of
approximately $0.0941 per common share or $70,575 based on the
quoted trading price on the date of grant. The Company recorded
stock-based legal fees of $59,086 during the year ended December
31, 2020 and a reduction of $11,490 of accounts
payable.
Common Stock related to exercise of Stock Options
In September 2020, the Company issued 20,000 shares of common stock
for the exercise of stock options by the former President of the
Company and received proceeds of $6,000.
Common Stock issued for Vested Restricted Common Stock
Award
During the year ended December 31, 2020, the Company issued an
aggregate of 1,948,486 of Common Stock to employees and consultants
for vested restricted stock awards.
Common Stock issued for Unissued Stock
There were 564,580 shares of common stock issuable which were
issued during the year ended December 31, 2020 and accordingly,
there remains 100,000 shares of common stock to be issued at
December 31, 2020.
Sale of Common Stock for private placement
During
the year ended December 31, 2020, the Company sold an aggregate of
3,700,000 shares of Common Stock for total proceeds of
$385,000.
The following were transaction during the year ended December 31,
2019:
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.
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.
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 – former Director
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Cancelled.
|
|
Emiliano
Aloi – former CEO
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Cancelled.
|
|
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.
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, 2020 and 2019 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, 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
|
|
Granted
|
50,000
|
0.50
|
0.17
|
|
Cancelled
|
(485,750)
|
0.49
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
-
|
-
|
|
|
Balance at December
31, 2020
|
1,578,549
|
0.49
|
3.01
|
|
|
|
|
|
|
Warrants
exercisable at December 31, 2020
|
1,578,549
|
$0.49
|
2.50
|
|
Weighted average
fair value of warrants granted during the period
|
|
$0.50
|
|
As of
December 31, 2020, aggregate intrinsic value in connection with
exercisable warrants amounted to approximately
$50,000.
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. 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.
Stock
option activity for the year ended December 31, 2020 and 2019 is
summarized as follows:
|
|
Number of
Options
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life(Years)
|
|
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
|
|
Granted
|
1,000,000
|
0.30
|
9.75
|
|
Exercise
|
(20,000)
|
0.30
|
9.18
|
|
Forfeited
|
(1,899,531)
|
0.41
|
-
|
|
Balance at December
31, 2020
|
3,751,749
|
$0.23
|
8.0
|
|
Options exercisable
at December 31, 2020
|
3,517,638
|
$0.24
|
8.0
|
Weighted
average fair value of options granted during the period
$0.33
As of December 31, 2020, aggregate intrinsic value in connection
with exercisable options amounted to approximately
$31,500.
On February 2020, the Company granted 1,000,000 options to purchase
shares of the Company’s Common Stock to Derek Du Chesne, the
Company’s former President, Chief Growth Officer and Director
in connection with his employment agreement . The options have a
10-year term from the date of grant and were exercisable at an
exercise price of $0.30 per share. The fair value of the options
granted amounted to $0.33 per option or $332,900. In September
2020, the former President tendered his resignation and exercised
20,000 options for $6,000. The remaining 980,000 options were
cancelled upon his resignation.
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 nine months ended September 30, 2020 are presented
below:
|
Risk-free interest
rate
|
1.55%
|
|
Expected
volatility
|
263%
|
|
Expected term (in
years)
|
10
|
|
Expected dividend
yield
|
0%
|
The risk-free interest rate is based on the U.S. Treasury yield for
a period consistent with the expected term of the option in effect
at the time of the grant. Expected volatility is based on the
historical volatility of the Company’s common stock. The
expected term assumption for stock options granted is the
contractual term of the option award. The Company has never
declared or paid dividends on its common stock and has no plans to
do so in the foreseeable future. Forfeitures are recognized as a
reduction of stock-based compensation expense as they
occur.
The Company recognized $282,326 and $227,394 of compensation
expense relate to the vesting of stock options for the year ended
December 31, 2020 and 2019. These amounts are included in
general and administrative expenses on the accompanying unaudited
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.
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.
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, 2020 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
|
|
Granted
|
4,871,022
|
0.08
|
|
Vested
and issued
|
(1,948,486)
|
0.39
|
|
Forfeited
|
(4,771,703)
|
0.36
|
|
Balance
at December 31, 2020
|
1,734,161
|
0.41
|
As of
December 31, 2020, unamortized or unvested stock-based compensation
costs related to restricted share arrangements was approximately
$935,000 and will be recognized over a weighted average period of
0.75 years.
On January 14, 2020, in connection with his appointment to the
Board of Directors, Alvaro Daniel Alberttis was awarded $100,000
worth of restricted common stock, valued at the closing market
price of the Company’s common stock on the date of the
appointment. These shares vest at a rate of 1/24th on the date of
grant, and 1/24th per month thereafter, contingent upon his
continued service. The Company valued the shares of restricted
common stock at the fair value of $0.36 per common share or
$100,000 based on the quoted trading price on the date of
grant.
On April 29, 2020, the Company appointed two new board members and
shall each be granted $100,000 worth of restricted common stock
under the 2019 Equity Incentive Plan with vesting period of 1/24th
upon date of grant and 1/24th per month on the first day of each
calendar month thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
On April 29, 2020, the Company appointed a new advisory board
member of the Company and shall be granted $50,000 worth of
restricted common stock under the 2019 Equity Incentive Plan with
vesting period of 1/24th upon date of grant and 1/24th per month on
the first day of each calendar month thereafter until fully vested
so long as they continue in their service as member of the Advisory
Board of the Company.
On April 29, 2020, Derek Du Chesne accepted his appointment to the
additional positions of President and a member of our Board of
Directors. Following his appointment as President, the Company
granted 1,000,000 shares of restricted common stock as additional
compensation, with vesting and other terms to be decided by the
Company’s Compensation Committee. In September 2020, Derek Du
Chesne tendered his resignation as President, Chief Growth Officer
and Director and as such, the unvested 1,000,000 shares of
restricted common stock have been cancelled as of September 30,
2020.
On June 11, 2020, the Company appointed Julian Pittam as Board
Chairman and has granted Mr. Pittam $100,000 worth of restricted
common stock under the 2019 Equity Incentive Plan with vesting
period of 1/24th upon date of grant and 1/24th per month on the
first day of each calendar month thereafter until fully vested so
long as they continue in their service as board of directors of the
Company.
On June 24, 2020, the Company appointed Emiliano Aloi as new board
member and has granted Mr. Aloi $100,000 worth of restricted common
stock under the 2019 Equity Incentive Plan with vesting period of
1/24th upon date of grant and 1/24th per month on the first day of
each calendar month thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
On September 1, 2020, the Company has granted John Price as a
continuing director of the Company, $25,000 worth of restricted
common stock under the 2019 Equity Incentive Plan with vesting
period of 1/24th upon date of grant and 1/24th per month on the
first day of each calendar month thereafter until fully vested so
long as they continue in their service as board of directors of the
Company.
During the year ended December 31, 2020 and 2019, the Company
recorded stock-based compensation of approximately $347,667 and
$13,500 in connection with vested restricted common stock grants,
respectively.
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,
2020 or 2019.
On January 22, 2021, we settled all outstanding claims and
obligations to Dr. Krassen Dimitrov. Previously, we had recorded an
obligation on our balance sheet of $575,000 for claims asserted
against us. The terms of the settlement are confidential, other
than no cash was paid in connection with the settlement. As a
result, we expect to eliminate $575,000 of indebtedness from our
financial statements during the quarter ended March 31,
2021.
On September 25, 2019, Jonathan Gilbert, a former director,
filed and served a complaint against the Company in the courts of
Nassau County, New York. The complaint alleges that Mr. Gilbert is
entitled to retain certain cancelled equity awards and seeks
specific performance and damages. In February 2019, the Company
granted 1,000,000 options to purchase shares of the Company’s
Common Stock to a former director of the Company, Jonathan Gilbert,
with vesting terms pursuant to the respective stock option
agreement. The former director resigned as a director of the
Company in August 2019. The options have a term of 10 years from
the date of grant and was exercisable at an exercise price at
$0.01. The Company already recognized $320,000 of compensation
expense which relates to the vesting of 500,000 stock options prior
to his resignation. After Jonathan Gilbert’s resignation, he
filed a complaint against the Company disputing his rights to
receive the Company’s common stock through the exercise of
his stock options. In January 10, 2020, Mr. Gilbert and the Company
entered into a Settlement and General Release Agreement and both
parties agreed to such consideration. The Company will issue to Mr.
Gilbert 375,000 shares of the Company’s common stock whereby
187,500 shares of common stock shall be issued immediately
(“First Tranche”) and another 187,500 shares of common
stock shall be issued immediately and held by the transfer agent
and delivered on the six month anniversary of this agreement
(“Second Tranche”) (collectively the First and Second
Tranche shall be called “Settlement Stock”). The
Settlement Stock is by virtue of the exercise of Mr.
Gilbert’s stock options and any required payments from the
exercise of the stock options have been credited or forgiven. The
Settlement Stock which is issued under the Stock Option Plan based
upon the exercise of the stock options registered pursuant to the
Company’s registration statement on form S-8 (File no.
333-229025). The Company and Mr. Gilbert have released and
discharged each other from all claims and demands. In January 2020,
Mr. Gilbert dismissed the lawsuit against the Company. Pursuant to
the Settlement and General Release Agreement dated in January 2020,
the Company recorded the issuance of 375,000 shares at par value
upon the exercise of the 375,000 stock options and cancelled the
remaining 625,000 stock options during fiscal 2019.
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 alleged the Company failed to pay wages
and compensation to 2 employees under the Fair Labor Standards Act,
breach of contract and violation of various Florida statutes,
including allegations on behalf of other similarly situated
persons. On May 8, 2020, an amended complaint was filed
against the Company in the Circuit Court, Palm Beach County,
Florida on behalf of six former employees, with one additional
employee added to the suit in June 2020. The amended case is
entitled Ryan Bocherds, Marc Reiss, Jeannine Boffa, Benjamin Blair,
Miriam Martinez and Michael Amoroso vs. Exactus, Inc, (Case No.
50-2020-CA-002274-MB). The other four former employees were hired
between April 2019 and December 2019. As of September 30, 2020 and
December 31, 2019, the Company has recorded total accrued salaries
of $31,960 and $26,494 related to these former employees,
respectively. On September 8, 2020, the Company entered into
settlement agreements and mutual releases with all plaintiffs.
Under the settlement agreements, the Company is obligated to pay a
total of $131,130 (including $16,000 in legal fees, and excluding
any applicable payroll taxes) to the plaintiffs. Under the
settlement agreements, the Company paid each plaintiff 50% of the
settlement amount at the time of signing, and are obligated to pay
the remaining settlement amounts in six monthly
installments.
The 50% amount as well as the first monthly installment for each
plaintiff was paid and we are in default for the remaining 5
monthly payments.
On
November 19th, 2020 a complaint
was filed in United States District Court Southern District of New
York on behalf of 3i, LP, 3i, LP v. Exactus, Inc. 1:20-cv-09734.
The complaint claimed that the Company had defaulted on the
promissory note issued by 3i, LP in November 27, 2019 and sought a
judgment of $703,268.21. On February 16, 2021, the
Company entered into a Securities Purchase Agreement with 3i, LP
and an institutional investor under which the Investor agreed to
purchase and 3i agreed to sell that certain 8% senior secured
convertible note dated November 27, 2019 and all of our warrants
previously issued to 3i and 3i agreed settle and release all claims
asserted against us. As a result, 3i agreed to dismissal of all
pending litigation against us, with prejudice.
On October 26, 2020 two complaints were filed in the Circuit Court,
Palm Beach County, Florida on behalf of a former vendors of the
Company. The cases entitled SEP COMMUNICATIONS LLC V EXACTUS INC.
50-2020-CA-011680-XXXX-MB and SOUTHEASTERN PRINTING COMPANY V
EXACTUS INC 50-2020-CC-009475-XXXX-SB seeks approximately
$54,612.80 & $19,528.36 respectively, plus interests and court
costs.
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. The Company does not intend to renew the
lease.
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. The Company does not intend to renew the
lease.
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). The
Company does not intend to renew the 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
forty thousand dollars per month in advance in addition to all
applicable Florida sales and/or federal taxes. Effective one year
from the lease commencement date and each year thereafter, the rent
shall increase at least three percent (3%) per year. The lessor of
the Premises is a limited liability company owned or controlled
by Vladislav (Bobby) Yampolsky, the manager and controlling
member of C2M, the Company’s largest stockholder. During
the second quarter of fiscal 2020, the Company has determined that
the commercial lease with Skybar Holding, LLC is not in compliance
with current laws or regulations in the City of Delray Beach and
does not represent an enforceable contract and was void from the
moment of execution. As a result, the Company has restated its
prior year financial information to correct this accounting error
(see Note 14). Additionally, on August 6, 2020, the Company
submitted a written termination letter to Skybar Holdings,
LLC.
On January 21, 2021 we entered into a Settlement Agreement with
Ceed2Med, LLC, Skybar Holding, LLC ,and their principals cancelling
all agreements, obligations and claims and providing full mutual
releases of the Company and such persons.
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 as the original lease agreement. Since the end of the 6-month
lease in June 2020, the company continued on a
month-to-month.
Ceed2Med
As previously disclosed, on January 8, 2019, the Company entered
into a Master Product Development and Supply Agreement (the
“Development Agreement”) with Ceed2Med, LLC. Emiliano
Aloi of C2M became a member of the Company’s Advisory Board
in January 2019 and was appointed President of the Company on March
11, 2019. On August 13, 2019, the Company appointed Mr. Aloi as
Interim Chief Executive Officer and on June 24, 2020, the Company
appointed Mr. Aloi as a new member of the Board of Directors of the
Company. On December 11, 2020 Mr. Aloi resigned from his positions
as Interim Chief Executive Officer and Director of the company and
on January 21, 2021 the Company entered into a Settlement Agreement
with Ceed2Med, LLC and its principals cancelling all agreements,
obligations and claims and providing full mutual releases of the
Company and such persons, although Mr Aloi was not released from any claims or
obligations that could be asserted by the Company. In connection
with the settlement, Ceed2Med, LLC agreed to assignment of all
rights to convert its outstanding shares of Series E Preferred
Stock at a price of $1.60 per share to third parties in connection
with settlement and releases of third party claims, resulting in no
further dilution from issuances of settlement shares other than the
right for Ceed2Med to have received such shares upon conversion and
thereupon the Series E Preferred Stock was simultaneously converted
into shares of common stock.
On December 22,
2020 Ken Puzder, the
Company’s former Chief Financial officer and member of the
Board of Directors, resigned from all positions with the Company.
Mr. Puzder served as Chief Financial officer of C2M during his
tenure with the Company, and previously and subsequently. Mr.
Puzder was not released from any claims or obligations that could
be asserted by the Company under the C2M Settlement Agreement
entered on January 21, 2021.
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.
As previously disclosed, 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.
Employment Agreements
Andrew Johnson, the Company’s Chief Strategy Officer, was
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, 2020 and 2019. On
January 22, 2021 the company reached an agreement with Mr. Johnson
to exchange all accrued salaries, unpaid expenses and unpaid bonus
for 7,752,880 shares of the company’s common stock and to
terminate his employment agreement.
Derek Du Chesne, the Company’s former President, Chief Growth
Officer, and a Director, was 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 was 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 was 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 was intended to provide direct
incentives to increase company sales, while providing a reasonable
base compensation for his service. Following his appointment as
President, he received 1,000,000 shares of restricted common stock
as additional compensation, with vesting and other terms to be
decided by the Company’s Compensation Committee. On March 5,
2020, the Board of directors of the Company approved the repricing
of Mr. Du Chesne’s stock options to 90% of the market price
on the original date of grant or exercise price of $0.30 per share
(see Note 10). In September 2020, Mr. Du Chesne tendered his
resignation as President, Chief Growth Officer and Director of the
Company and the company and he entered into a Separation and
Release Agreement.
Distribution Agreements
On February 4, 2020, the Company entered into a Supply and
Distribution Agreement with HTO Holdings Inc (dba “Hemptown,
USA”), enabling the Company to purchase and sell
Hemptown’s Cannabigerol (CBG) and Cannabidiol (CBD) products,
including top flower, biomass and extracts (crude, isolates,
distillates, and water soluble). Ceed2Med, LLC, the Company’s
largest shareholder, is also a significant investor in Hemptown USA
and is party to a distribution agreement with the Company. The
Interim Chief Executive Officer and C2M, LLC will cooperate in
developing plans to coordinate the Company’s efforts to
introduce CBG and expand its efforts to sell CBD products. This
agreement shall remain in force for a period of one year from
effective date and shall renew automatically in one-year increments
for three years unless either party gives written notice of its
intention not to renew at least 60 days prior to expiration. On
March 28, 2020, the Company amended the Supply and Distribution
Agreement Pursuant to the amendment whereby the Company agreed to
also (i) aid Hemptown’s management with product compliance
requirements, (ii) participate in discussions related to
Hemptown’s 2020 farming, harvesting and processing plans as
well as joint supply scenarios, (iii) interact with
Hemptown’s ingredient and manufacturing divisions to
facilitate development of documents for selected SKUs to service
the white label market, and (iv) aid Hemptown’s CEO in
overseeing the entire supply chain to establish best practices in
quality and compliance and lower costs. In addition, Hemptown
agrees to pay the Company $3,500 a month in consulting fees. On
July 21, 2020, Hemptown discontinued the consulting arrangement
entered into under the March 28, 2020 amendment.
On November 20, 2019, the Company entered into the Non-Exclusive
Distribution and Profit-Sharing Agreement with Canntab Therapeutics
USA (Florida), Inc. Pursuant to the agreement, which has a term of
2 years and is subject to automatic renewal. The Company is a
non-exclusive distributor of certain Canntab products throughout
the U.S. Canntab will not grant a third-party the right to promote,
sell or deliver the products within the U.S. during the term of the
agreement, subject to certain exceptions. In addition, the Company
agreed to share equally with Canntab in the gross profits received
from the sale of their products by us. With respect to
Canntab’s sales of products, the Company will receive 10% of
the gross profits. In connection with the Canntab Agreement, the
Company also entered into a Supply Agreement with Canntab, which
has a term of 2 years and is subject to automatic renewal, pursuant
to which we agreed to sell hemp extracts to Canntab. Due to a need
for additional warehouse space and disruptions caused by the
Covid-19 pandemic, the Company has not distributed Canntab products
to date. On November 13, 2020, the Company entered into a
Termination Agreement with Canntab, under which we terminated our
agreements with Canntab and exchanged mutual releases.
NOTE 12 - RELATED PARTY
CONSIDERATIONS
Some of the officers and directors of the Company are involved in
other business activities and may, in the future, become involved
in other business opportunities that become available. They may
face a conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On November 20, 2017, Dr. Dimitrov, former director of the Company,
provided a notice to the Company stating that he was resigning from
the Board, effective immediately. Dr. Dimitrov indicated that his
resignation from the Board was based on the deteriorating
relationship between the Company and Digital Diagnostics over the
non-payment of fees owed by the Company pursuant to the licensing
agreement between the Company and Digital Diagnostics. The Company
paid $0 during the years ended December 31, 2020 and
2019.
For the year ended December 31, 2020 and 2019, $0 and $22,100,
respectively, was recognized in Research and Development expenses
for consulting provided by Dr. Dimitrov, respectively. As of
December 31, 2020 and 2019, $575,000 was included in accounts
payable for both periods to KD Innovation Ltd., an affiliated
entity of Dr. Dimitrov.
On January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement with C2M. As of December 31,
2020 C2M is a majority stockholder of the Company. At
December 31, 2020 and December 31, 2019, accounts payable to C2M
related to purchase of inventory amounted to $0 and $8,342,
respectively. During the year ended December 31, 2020 and 2019, the
Company recognized revenues from C2M of $3,300 and $125,000,
respectively from sales of inventory and recorded related cost of
sales of $1,701 and $96,647, respectively. Additionally, accounts
receivable from C2M as of December 31, 2020 and 2019 amounted to
$0. As of December 31, 2019, the Company had recorded unearned
revenue of $215,000 with C2M. On January 21, 2021 the Company
entered into a Settlement Agreement with Ceed2Med, LLC and certain
of its principals cancelling all agreements, obligations and claims
and providing full mutual releases of the Company and such
persons.
From time to time, the Company’s subsidiary, EOW, receives
advances from an affiliated company which is owned by three members
of EOW for working capital purposes. The advances are non-interest
bearing and are payable on demand. The Company advanced $127,500
during fiscal 2019 to these related parties which resulted in a
receivable or due from related parties of $128,489 and $127,500 as
of December 31, 2020 and 2019, respectively. These advances are
short-term in nature, non-interest bearing and due on
demand. The Company reclassed the $128,489 related party
receivable to the stockholders’ equity section as of December
31, 2020.
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 former
member of the Board and the founder, manager and controlling member
of C2M, the Company’s largest stockholder. During
the second quarter of fiscal 2020, the Company has determined that
the commercial lease with Skybar Holding, LLC is not in compliance
with current laws or regulations in the City of Delray Beach and
does not represent an enforceable contract and was void from the
moment of execution. As a result, the Company has restated its
prior year financial information to correct this accounting error.
Additionally, on August 6, 2020, the Company submitted a written
termination letter to Skybar Holdings, LLC. On January 21, 2021 we
entered into a Settlement Agreement with Ceed2Med, LLC and its
principals, including Mr. Yampolsky and Skybar Holdings, LLC,
cancelling all agreements, obligations and claims and providing
full mutual releases of the Company and such persons.
NOTE 13 – CONCENTRATION OF REVENUE AND
SUPPLIERS
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 accounts
receivable.
During
the year ended December 31, 2019, the Company purchased inventory
from C2M totaling approximately $1,033,213 (98% of the
purchases). During the year ended December 31, 2019, the
Company fully reserved finished goods related to purchased CBD
products from C2M and resulted in an inventory reserve loss of
$837,153 which is included in cost of sales on the consolidated
statements of operations.
At
December 31, 2020, total accounts payable with one vendor was
approximately 27% of total accounts payable.
As of
December 31, 2019, total accounts payable from two vendors and one
affiliated company represented approximately 60% (12%, 30% and 18%
-related party) of total accounts payable. The affiliated company
is owned by three members of EOW.
NOTE 14 – INCOME
TAXES
The
Company has incurred aggregate net operating losses of
approximately $21.1 million for income tax purposes as of December
31, 2020. 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, 2020 and 2019:
|
|
December
31,
2020
|
December
31,
2019
|
|
US Federal
Statutory Tax Rate
|
21.0%
|
21.6%
|
|
State
taxes
|
4.35%
|
4.6%
|
|
Bad
debt
|
(1.62%)
|
-
|
|
Derivative
loss
|
1.02
|
-
|
|
Stock-based
compensation
|
(3.17%)
|
-
|
|
Depreciation
|
0.19%
|
-
|
|
Amortization
|
2.17%
|
-
|
|
Impairment
|
(12.00%)
|
-
|
|
Change in valuation
allowance
|
(11.92%)
|
(25.6%)
|
|
|
0.00%
|
0.00%
|
The tax
effects of temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 2020 and 2019 are
summarized as follows:
|
Deferred Tax
Asset:
|
December
31,
2020
|
December
31,
2019
|
|
Net operating loss
carryforward
|
$8,337,000
|
$4,226,345
|
|
Valuation
allowance
|
(8,337,000)
|
(4,226,345)
|
|
Net deferred tax
asset
|
$-
|
$-
|
Of the
approximately $21.1 million of available net operating losses, $2.3
million begin to expire in 2034 and $1.9 million 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, 2020 because it was not
known whether future taxable income will be sufficient to utilize
the loss carryforward. The increase in the allowance was $4.0
million in fiscal 2020. 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, 2019 and 2020
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 – RESTATEMENT OF PRIOR FINANCIAL
INFORMATION
Subsequent to the Company’s external auditor’s periodic
review of the Form 10-Q for the Periods Ended September 30, 2019
and March 31, 2020, annual audit for the year ended December 31,
2019 and, in the process of review, the current Form 10-Q for the
Period Ended June 30, 2020, the Company conducted further reviews
of the consolidated financial statements. Based on such reviews,
the following determinations were made:
Error in Accounting for Operating Lease Right-of-Use Asset and
Operating Lease Liabilities
During the second quarter of fiscal 2020, the Company has
determined that the commercial lease with Skybar Holding, LLC is
not in compliance with current laws or regulations in the City of
Delray Beach and does not represent an enforceable contract and was
void from the moment of execution. Therefore, the accounting
treatment for the recognition of the operating lease right-of -use
asset and operating lease liabilities upon adoption of ASC 842
related to this commercial lease was incorrect. As a result of a
detailed review of this commercial lease, the Company has made an
assessment in the second quarter of fiscal 2020 that the lease is
unenforceable and should not have been accounted for under ASC 842.
Additionally, the Company reversed previously recorded accrued
expenses related to this commercial lease agreement.
In accordance with the guidance provided by the Accounting
Standards Codification (“ASC”) 250 –
“Accounting Changes and Error Corrections” (“ASC
250”), SEC’s Staff Accounting Bulletin
99, Materiality (“SAB 99”) and Staff
Accounting Bulletin 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements (“SAB 108”), the Company has
determined that the impact of adjustments relating to the
corrections of this accounting error are not material to previously
issued annual audited and unaudited financial statements and
as such no restatement was necessary. Correcting prior year
financial statements for immaterial errors would not require
previously filed reports to be amended. Such correction may be made
the next time the registrant files the prior year financial
statements. Accordingly, these misstatements were corrected during
the period ended September 30, 2020 and will be disclosed
prospectively.
The effect on these revisions on the Company’s consolidated
balance sheets is as follows:
|
|
As
of March 31, 2020
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Balance Sheet
|
|
|
|
|
Current
assets
|
$1,661,211
|
$-
|
$1,661,211
|
|
Current
liabilities
|
$5,338,486
|
$(564,628)
|
$4,773,858
|
|
Working capital
(deficit)
|
$(3,677,275)
|
$564,628
|
$(3,112,647)
|
|
Total
assets
|
$8,458,826
|
$(1,705,115)
|
$6,753,711
|
|
Total
liabilities
|
$6,985,191
|
$(2,034,232)
|
$4,950,959
|
|
Total stockholders'
equity
|
$1,473,635
|
$329,117
|
$1,802,752
|
|
|
As
of December 31, 2019
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Balance Sheet
|
|
|
|
|
Current
assets
|
$2,429,235
|
$-
|
$2,429,235
|
|
Current
liabilities
|
$4,190,544
|
$(382,196)
|
$3,808,348
|
|
Working capital
(deficit)
|
$(1,761,309)
|
$382,196
|
$(1,379,113)
|
|
Total
assets
|
$9,799,277
|
$(1,782,443)
|
$8,016,834
|
|
Total
liabilities
|
$6,117,431
|
$(1,988,141)
|
$4,129,290
|
|
Total stockholders'
equity
|
$3,681,846
|
$205,698
|
$3,887,544
|
|
|
As
of September 30, 2019
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Balance Sheet
|
|
|
|
|
Current
assets
|
$3,255,169
|
$-
|
$3,255,169
|
|
Current
liabilities
|
$2,052,454
|
$(302,196)
|
$1,750,258
|
|
Working capital
(deficit)
|
$1,202,715
|
$302,196
|
$1,504,911
|
|
Total
assets
|
$11,449,203
|
$(1,858,284)
|
$9,590,919
|
|
Total
liabilities
|
$4,054,527
|
$(1,940,563)
|
$2,113,964
|
|
Total stockholders'
equity
|
$7,394,676
|
$82,279
|
$7,476,955
|
The effect on these revisions on the Company’s consolidated
statements of operations is as follows:
|
|
For
the Three Months Ended
|
||
|
|
March 31,
2020
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Statements of Operations
|
|
|
|
|
Revenues
|
$836,000
|
$-
|
$836,000
|
|
Operating
expenses
|
$2,192,767
|
$(123,419)
|
$2,069,348
|
|
Loss from
operations
|
$(2,757,023)
|
$123,419
|
$(2,633,604)
|
|
Other income
(expenses)
|
$(188,480)
|
$-
|
$(188,480)
|
|
Net
loss
|
$(2,945,503)
|
$123,419
|
$(2,822,084)
|
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(2,789,684)
|
$123,419
|
$(2,666,265)
|
|
Basic & diluted
EPS
|
$(0.06)
|
$0
|
$(0.06)
|
|
|
For
the Year Ended
|
||
|
|
December 31,
2019
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Statements of Operations
|
|
|
|
|
Revenues
|
$345,680
|
$-
|
$345,680
|
|
Operating
expenses
|
$9,177,988
|
$(205,698)
|
$8,972,290
|
|
Loss from
operations
|
$(10,878,442)
|
$205,698
|
$(10,672,744)
|
|
Other income
(expenses)
|
$653,936
|
$-
|
$653,936
|
|
Net
loss
|
$(10,224,506)
|
$205,698
|
$(10,018,808)
|
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(10,591,487)
|
$205,698
|
$(10,385,789)
|
|
Basic & diluted
EPS
|
$(0.31)
|
$0
|
$(0.31)
|
|
|
For
the Nine Months Ended
|
||
|
|
September 30,
2019
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Statements of Operations
|
|
|
|
|
Revenues
|
$215,816
|
$-
|
$215,816
|
|
Operating
expenses
|
$5,803,458
|
$(82,279)
|
$5,721,179
|
|
Loss from
operations
|
$(5,803,847)
|
$82,279
|
$(5,721,568)
|
|
Other income
(expenses)
|
$1,178,363
|
$-
|
$1,178,363
|
|
Net
loss
|
$(4,625,484)
|
$82,279
|
$(4,543,205)
|
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(5,168,306)
|
$82,279
|
$(5,086,027)
|
|
Basic & diluted
EPS
|
$(0.16)
|
$0
|
$(0.15)
|
|
|
For
the Three Months Ended
|
||
|
|
September 30,
2019
|
||
|
|
Previously
Reported
|
Adjustments
|
As
Corrected
|
|
Consolidated
Statements of Operations
|
|
|
|
|
Revenues
|
$60,153
|
$-
|
$60,153
|
|
Operating
expenses
|
$2,062,677
|
$(82,279)
|
$1,980,398
|
|
Loss from
operations
|
$(2,102,942)
|
$82,279
|
$(2,020,663)
|
|
Other income
(expenses)
|
$(5,105)
|
$-
|
$(5,105)
|
|
Net
loss
|
$(2,108,047)
|
$82,279
|
$(2,025,768)
|
|
Net Loss available
to Exactus, Inc. common stockholders
|
$(1,934,367)
|
$82,279
|
$(1,852,088)
|
|
Basic & diluted
EPS
|
$(0.05)
|
$0
|
$(0.05)
|
The revisions had no effect in the cash used in operating
activities on the Company’s consolidated statements of cash
flows.
NOTE 16 - SUBSEQUENT
EVENTS
In
accordance with authoritative guidance, the Company has evaluated
any events or transactions occurring after December 31, 2020, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the consolidated financial
statements as of and for the year ended December 31, 2020, except
as disclosed below.
On February 16, 2021, the Company entered into a Securities
Purchase Agreement with 3i, LP (“3i”) and an
institutional investor (“Investor”) under which the
Investor agreed to purchase and 3i agreed to sell that certain 8%
senior secured convertible note dated November 27, 2019 (the
“Note”) and all of our warrants previously issued to 3i
and 3i agreed settle and release all claims asserted against us. As
a result, 3i agreed to dismissal of all pending litigation against
the Company.
As a result, the Subsidiary Guaranty, IP Security Agreement and
Registration Rights Agreement with 3i were also
terminated.
In addition, the Company entered into an Exchange Agreement with
the Investor and filed with the Secretary of State of the State of
Nevada a Certificate of Designation of Preferences, Rights and
Limitations for Series A Preferred Stock under which the Note
in the original principal amount of $750,000 would be exchanged for
$500,000 of a new series of preferred stock designated 0% Series A
Convertible Preferred Stock (the “Series A Preferred”)
with a stated value of $1,000 per share (the “Stated
Value”).
The Company authorized the issuance of a total of 1,000
($1,000,000) of our Series A Preferred for issuance. Each share of
Series A Preferred is convertible at the option of the Holder, into
that number of shares of our common stock, par value $0.0001 per
share) (the “Common Stock”) (subject to certain
limitations on beneficial ownership) determined by dividing the
Stated Value by $0.05 per share (the “Conversion
Price”), subject to adjustment in the event of stock
dividends, stock splits, stock combinations, reclassifications or
similar transactions that proportionately decrease or increase the
Common Stock.
The Company is prohibited from effecting the conversion of the
Series A 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 to the
Company), in the aggregate, of the issued and outstanding shares of
the Common Stock calculated immediately after giving effect to the
issuance of shares of Common Stock upon the conversion of the
Series A Preferred. Holders of the Series A Preferred shall be
entitled to vote on all matters submitted to the Company’s
stockholders and shall be entitled to the number of votes equal to
the number of shares of Common Stock into which the shares of
Series A Preferred Stock are convertible, subject to applicable
beneficial ownership limitations. The Series A Preferred Stock
provides a liquidation preference equal to the Stated Value, plus
any accrued and unpaid dividends, fees or liquidated
damages.
The Series A Preferred can be redeemed at the Company's option upon
payment of a redemption premium between 120% to 135% of the Stated
Value of the outstanding Series A Preferred redeemed. We are not
obligated to file a registration statement under the Securities Act
of 1933, as amended (the “Act”), with respect to the
shares of Common Stock into which Series A Preferred may be
converted however the Investor will be deemed to have held the
Series A Preferred on the original issue date to 3i for the
purposes of the availability of an exemption from registration
provided by Rule 144 under the Act.
On February 16, 2021 the Company filed a Certificate of
Cancellation and Withdrawal with the Secretary of State of the
State of Nevada cancelling our previous Certificate
of Designation of Preferences, Rights and Limitations for
Series A Preferred Stock, all of which has been converted to Common
Stock.
The foregoing description of the Securities Purchase Agreement,
Exchange Agreement and Certificate of Designation of
Preferences, Rights and Limitations for Series A Preferred
Stock of is a summary of the material terms of such
Agreements. The Agreements contain additional terms,
covenants, and conditions and should be reviewed in their entirety
for additional information
On February 16, 2021, our board of directors authorized the
issuance of up to 1,000 shares of our Series A
Preferred.
The Company has also offered to Series B-1 and Series B-2 preferred
stock holders inducements to voluntarily convert preferred shares
into Common Stock and expect to file a Certificate of Cancellation
and Withdrawal with the Secretary of State of the State of
Nevada cancelling the Company's previous Certificate of Designation
of Preferences, Rights and Limitations for Series B-1, B-2, C. D
and E Preferred Stock upon conversion or cancellation of all such
Series.
On January 22, 2021, the Board of Directors formed a Strategic
Alternatives Committee, for the purpose of evaluating potential
acquisitions, mergers, and other strategic business combinations.
The new committee consists of Directors Larry Wert and Julian
Pittam, with Mr. Wert serving as its chairman. During 2021, the
Strategic Alternatives Committee reviewed various business
combination proposals and entered into separate negotiations to
acquire two companies with existing business and operations in the
electric vehicle industry. Ongoing due diligence is
continuing.
As previously reported, on January 22, 2021, the Board of Directors
authorized a possible reverse split of our common stock at a ratio
of between 1 share for every 40 shares held and 1 share for every
50 shares held, to be determined in the further discretion of the
Board, revised to 1 share for every 25-100 shares held on March 31,
2021, and approved by a majority of the holders of common stock of
the Company. The reverse split is subject to approval by our
shareholders unless the number of authorized shares of the
Company's capital stock is reduced proportionately in accordance
with Nevada law, and may be authorized, if at all, in connection
with a recapitalization required in connection with an acquisition
or similar event. In connection with a potential acquisition, the
Company is continuing recapitalization efforts through, among other
things, cancellation and exchange of existing indebtedness for
equity, cancellation of our outstanding series of preferred stock,
and a reverse split.
On January 22, 2021, the Company entered into a Settlement and
Release Agreement with Ceed2Med, LLC, a former affiliate of the
company. Over the course of 2018-2019 the Company had entered into
a series of agreements for product and funding with C2M in
connection with our seed-to-sale strategy for our hemp-derived CBD
business, to secure farming rights and expertise, and to secure
product, distribution and funding. The Company previously issued
10,000 shares of Series E Preferred Stock convertible into
6,250,000 shares of common stock to C2M. Pursuant to the Agreement,
C2M will permit the Company to transfer all outstanding shares of
Series E Preferred stock to settle various third-party claims and
obligations, avoiding dilution in furtherance of ongoing
restructuring efforts. Under the Settlement and Release Agreement
with Ceed2Med, all existing agreements, obligations and claims have
been cancelled and rescinded, the parties exchanged full mutual
releases. and the Company is to receive a cash payment of $200,000,
a portion of which has been paid.
On January 22, 2021, the Company settled all outstanding claims and
obligations to Dr. Krassen Dimitrov, a former director, Digital
Diagnostics, Inc., and KD Innovation Ltd. Previously, the
Company had recorded an obligation of $575,000 for claims asserted
against the Company. The terms of the settlement are
confidential, other than no cash was paid in connection with the
settlement. As a result, the Company expects to eliminate $575,000
of indebtedness from the financial statements during the quarter
ended March 31, 2021.
On January 22, 2021, our board of directors authorized the issuance
of up to approximately 25,000,000 shares common stock in settlement
of approximately $1,250,000 in outstanding liabilities and accounts
payable owed to 11 persons. Such amount and number of shares is
inclusive of a payment to C2M and under the Krassen Settlement
described above.
On January 22, 2021, our board of directors approved private offers
to be made through January 31, 2021, subject to extension, to
holders of our Series A, Series B-1 and Series B-2 preferred stock
with inducements to voluntarily convert preferred shares into our
common stock with full general releases of all claims against the
company. Holders of Series A Preferred Stock may exchange their
shares at a conversion price of $0.025 per share. Holders of our
Series B-1 and Series B-2 Preferred Stock may exchange their shares
at a conversion price equal to .25 shares of common stock for each
share of preferred stock exchanged. There were 323,019 shares
of Series A, 1,650,000 shares of Series B-1 and 7,516,000 shares of
Series B-2 preferred stock outstanding as of December 31, 2020.
Outstanding shares of Series B-1 and Series B-2 convertible stock
were convertible into 206,250 shares of common stock and 939,500
shares of common stock, respectively, as of December 31, 2019 at
the original conversion rate of .125 shares of common stock for
each share of preferred stock.
The Company agreed to permit transfer of Series E Preferred Stock
and conversion into 6,250,000 shares of common stock ($1.60 per
share) and purchase of 8,000,000 shares of restricted common stock
for $200,000 in connection with the settlement with C2M as
described above.
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,
2020.
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, 2020. 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 Chief Operating 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, 2020 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, 2020, 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 15,
2021.
|
Name
|
Age
|
Present Positions
|
|
Andrew L. Johnson
|
36
|
Chief
Strategy Officer
|
|
Alvaro Daniel Alberttis
|
44
|
Chief
Operating Officer & Director
|
|
Julian Pittam
|
51
|
Director
|
|
John Price
|
51
|
Director
|
|
Larry Wert
|
64
|
Director
|
Director Information
The
Board of Directors of the Company is currently comprised of four
(4) 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.
John Price, age 51, was appointed to the Board of Directors
of the Company on February 7, 2019. Mr. Price has over 25 years of
experience in accounting, financial planning and analysis, and
business process improvement. He is also highly experienced in
capital raise and debt financing, M&A, accounting operations,
compliance, and system implementations.
Mr. Price currently serves as Chief Financial Officer of Assure
Holdings Corp. Mr. Price’s prior positions include serving as
Chief Accountant of National Beverage, Chief Financial Officer at
Alliance MMA and MusclePharm and in various accounting and finance
roles in high growth technology companies in the Silicon Valley.
Price spent the first seven years of his career at Ernst &
Young with nearly three years in the San Jose, California office
and nearly five years in the Pittsburgh, Pennsylvania office. 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 44, 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.
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.
Julian Pittam, age 51, was appointed to our Board of
Directors on June 11, 2020. Mr. Pittam is an experienced
advisor to start-up and fast-growing companies. From March 2019 to
the present, Mr. Pittam has been a non-executive Director of Urban
Markets Ltd., a company producing financial technology for the
residential property market. From December 2018 to March 2019, he
was a non-executive director of TCOC Ltd., a CBD wholesaler. From
March 2017 to January 2019, Mr. Pittam served as a non-executive
Director of Certua Ltd. a software-as-a-service firm focused on
financial technology and artificial intelligence. From January 2008
to September 2018 he was a Member of The Invicta Film Partnership,
a film finance firm. From February 2014 to February 2018, Mr.
Pittam was a non-executive Director of We Are Infinite Ltd., an
advertising technology firm. From March 2013 to March 2017, he was
a non-executive Director of Disciple Media Ltd., a creator of
Google and Apple-based apps for communities. From May 2015 to July
of 2016, Mr. Pittam was the Managing Director for Europe and Asia
for Enso Financial Management Ltd., a firm focused on balance sheet
and funding optimization for hedge funds.
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.
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.
Item 11. Executive
Compensation
Compensation Discussion and Analysis
With
regard to our full-time executive officer, 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. Equity grants for our full-time
executive officers are currently under review by the compensation
committee. The goal of our anticipated equity grants will be to
provide an appropriate mixture of short term and long-term
incentives to increase shareholder value.
Andrew Johnson, the Company’s Chief Strategy
Officer, was 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. On January 22, 2021 the
company reached an agreement with Mr. Johnson to exchange all
accrued salaries, unpaid expenses and unpaid bonus for 7,752,880
shares of the company’s common stock and to terminate his
employment agreement.
On September 1, 2020, the Company granted John Price as a
continuing director of the Company, $25,000 worth of restricted
common stock under the 2019 Equity Incentive Plan with vesting
period of 1/24th upon date of grant and 1/24th per month on the
first day of each calendar month thereafter until fully vested so
long as he continues in his service as board of directors of the
Company.
On June 11, 2020, the Company appointed Julian Pittam as Board
Chairman and granted Mr. Pittam $100,000 worth of restricted common
stock under the 2019 Equity Incentive Plan with vesting period of
1/24th upon date of grant and 1/24th per month on the first day of
each calendar month thereafter until fully vested so long as he
continues in his service as board of directors of the
Company.
On June 24, 2020, the Company appointed Emiliano Aloi as new board
member and granted Mr. Aloi $100,000 worth of restricted common
stock under the 2019 Equity Incentive Plan with vesting period of
1/24th upon date of grant and 1/24th per month on the first day of
each calendar month thereafter until fully vested so long as he
continues in his service as board of directors of the Company. Mr.
Aloi resigned on December 8th,
2020 having vested 271,317 shares of common
stock.
On June 24, 2020, the Company appointed Justin Viles as new board
member and granted Mr. Viles $100,000 worth of restricted common
stock under the 2019 Equity Incentive Plan with vesting period of
1/24th upon date of grant and 1/24th per month on the first day of
each calendar month thereafter until fully vested so long as he
continues in his service as board of directors of the Company. Mr.
Viles resigned on September 15th,
2020 having vested 131,577 shares of common
stock.
On January 14, 2020, the Company appointed Alvaro Alberttis as new
board member and granted Mr. Alberttis $100,000 worth of restricted
common stock under the 2019 Equity Incentive Plan with vesting
period of 1/24th upon date of grant and 1/24th per month on the
first day of each calendar month thereafter until fully vested so
long as he continues in his service as board of directors of the
Company.
On June 24, 2019, Vladislav Yampolsky was appointed to our board of
directors and was awarded 1,000,000 restricted common stock as
compensation with vesting term of 1/48th per month starting on October 1, 2019. Mr.
Yampolsky resigned on June 11th, 2020 having vested 287,501 shares
of common stock and the balance was cancelled.
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, 2020 and December 31, 2019.
Summary Compensation Table
|
|
Year
|
Salary
|
Option
Award(s)(1)
|
Total
|
|
Emiliano
Aloi(2)
|
2020
|
$62,308
|
$—
|
$62,308
|
|
Former Interim CEO
|
2019
|
$108,036
|
$32,000
|
$140,036
|
|
Alvaro
Alberttis(3)
|
2020
|
$—
|
$50,980
|
$50,980
|
|
Chief Operating Officer
|
2019
|
$—
|
$—
|
$—
|
|
Kenneth E.
Puzder(4)
|
2020
|
$76,731
|
$122,500
|
$199,231
|
|
Former Chief Financial Officer
|
2019
|
$81,428
|
$70,000
|
$151,428
|
|
Andrew
Johnson(5)
|
2020
|
$75,962
|
$122,500
|
$198,462
|
|
Chief Strategy Officer
|
2019
|
$92,977
|
$174,500
|
$267,477
|
|
Derek du
Chesne(6)
|
2020
|
$76,730
|
$500,000
|
$575,000
|
|
Former
President
|
2019
|
$—
|
$—
|
$—
|
(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
resigned as our interim CEO on December 08, 2020.
(3)
Mr. Alberttis was
appointed COO on June 22, 2020
(4)
Mr. Puzder resigned
as our CFO on December 22, 2020
(5)
Mr. Johnson was
appointed to serve as Chief Strategy Officer on March 1,
2019.
(6)
Mr. Du Chesne
resigned from all positions held on September 15, 2020
Employment Agreements and Change in Control
Arrangements
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 2020 year, he received a stock
bonus of 250,000 shares of common stock with immediate vesting 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.
Derek
Du Chesne, the Company’s former President, Chief Growth
Officer, and a Director, was 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 was 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 was 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 was intended to provide direct
incentives to increase company sales, while providing a reasonable
base compensation for his service. Following his appointment as
President, he received 1,000,000 shares of restricted common stock
as additional compensation, with vesting and other terms to be
decided by the Company’s Compensation Committee. On March 5,
2020, the Board of directors of the Company approved the repricing
of Mr. Du Chesne’s stock options to 90% of the market price
on the original date of grant or exercise price of $0.30 per share.
In September 2020, Mr. Du Chesne tendered his resignation as
President, Chief Growth Officer and Director of the
Company.
Generally, our
executives shall be entitled to an annual cash bonus in an
amount as determined by the board of directors, if the Company
meets or exceeds criteria adopted by the Compensation Committee of
the Board of Directors. The executives shall also be eligible
for grants of awards under stock option or other equity incentive
plans of the Company as the Company’s Compensation Committee
or, in the absence thereof, the Company’s Board of Directors
may from time to time determine and shall be entitled to
participate in all benefits plans the Company provides to its
senior executives. The Company shall reimburse the
executives for all reasonable expenses incurred in the course of
employment. In the event employment is terminated
without Cause or by the executives with Good Reason (as such terms
are defined in the Employment Agreements), the Executives shall be
entitled to receive severance benefits equal to the lesser of 50%
of their base salaries or the amount of salary unpaid for the
remaining term then in effect, continued coverage under the
Company’s benefit plans and payment of their pro-rated earned
annual bonus, provided certain conditions are met. The executives
are subject to a one (1) year non-competition and non-solicitation
provision.
Equity Awards At Year End Table
The
following table sets forth certain information regarding all
outstanding equity awards held by our named executive officers as
of December 31, 2020.
|
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
|
Equity
Incentive Plan Award: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
|
Emiliano Aloi
*
|
250,000
|
(1)
|
—
|
$0.320
|
01/09/2029
|
|
Former Interim
Chief Executive Officer
|
|
|
|
|
|
|
Kenneth E. Puzder
*
|
250,000
|
(2)
|
149,739
|
$0.200
|
01/11/2029
|
|
Former Chief
Financial Officer
|
|
|
|
|
|
|
Andrew
Johnson
|
12,500
|
(3)
|
—
|
$0.320
|
01/15/2029
|
|
Chief Strategy Officer
|
31,250
|
(4)
|
15,625
|
$0.960
|
01/15/2029
|
|
|
125,000
|
(5)
|
20,832
|
$0.560
|
03/12/2029
|
*
Resigned from positions in 2020.
(1)
One
hundred percent of the options vested immediately at grant
date.
(2)
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
(3)
One
hundred percent of the options vested immediately at grant
date.
(4)
Fifty
percent of the options vested immediately at grant date, with the
balance vesting upon the achievement of certain goals.
(5)
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
2019 Plan, the terms of which are described below under “2019
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, 2020.
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, 2020, 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, 2020 to our non-employee director.
|
|
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 ($)
|
Total
($)
|
|
Lawrence J.
Wert
Executive Chairman
|
(a)
|
-
|
100,000
|
-
|
-
|
-
|
-
|
100,000
|
|
John
Price
Board Member
|
(b)
|
-
|
25,000
|
-
|
-
|
-
|
-
|
-
|
|
Alvaro Daniel
Alberttis
Board Member
|
(c)
|
-
|
100,000
|
-
|
-
|
-
|
-
|
100,000
|
|
Julian
Pittam
Board Member
|
(d)
|
-
|
100,000
|
-
|
-
|
-
|
-
|
100,000
|
|
Emiliano
Aloi
Former Board Member
|
(e)
|
-
|
29,167
|
-
|
-
|
-
|
-
|
29,167
|
|
Justin A.
Viles
Former Board Member
|
(f)
|
-
|
24,500
|
-
|
-
|
-
|
-
|
24,500
|
(a)
Includes 526,316
shares of common stock at $0.19per share, vesting 1/24th on date of
grant and 1/24th per month until fully vested
(b)
Includes 347,222
shares of common stock at $0.07 per share, vesting 1/24th on date
of grant and 1/24th per month until fully vested.
(c)
Includes 277,778
shares of common stock at $0.36 per share, vesting 1/24th on date
of grant and 1/24th per month until fully vested.
(d)
Includes 1,000,000
shares of common stock at $0.10 per share, vesting 1/24th on date
of grant and 1/24th per month until fully vested
(e)
Includes 271,317
shares of common stock at $0.1075 per share. All shares are fully
vested at December 31, 2020. Mr. Aloi resigned from the Board on
December 08, 2020.
(f)
Includes 131,577
shares of common stock at $0.19 per share. All shares are fully
vested at December 31, 2020. Mr. Viles resigned from the Board on
September 17, 2020.
Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth information as of March 31, 2021,
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 March 31, 2021 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
|
Julian
Pittam
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
3,914,791
|
(2)
|
13.75%
|
|
Common
Stock
|
John
Price
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
2,672,111
|
(3)
|
2.70%
|
|
Common
Stock
|
Andrew
Johnson
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
8,486,240
|
(4)
|
8.58%
|
|
Common
Stock
|
Alvaro
Alberttis
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
4,770,726
|
(5)
|
4.81%
|
|
Common
Stock
|
Lawrence J.
Wert
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
8,620,297
|
(6)
|
8.70%
|
|
Common Stock Total of All Current Directors and Executive
Officers:
|
28,464,147
|
|
38.54%
|
|
Based on 99,632,710
shares of our common stock issued and outstanding as of March 31,
2021.
(2)
Includes 3,924,790
shares of Common Stock.
(3)
Includes
2,672,111 shares of Common
Stock.
(4)
Includes (i)
8,486,240 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.
(5)
Includes
4,770,726 shares of Common
Stock.
(6)
Includes
8,620,297 shares of Common
Stock.
|
Title of class
|
Name and address of beneficial owner
|
Amount and Nature of Beneficial Ownership
|
|
Percent of Class(1)
|
|
Former Named Executive Officers & Directors:
|
|
|
||
|
Common
Stock
|
Kevin
Esval
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
817,000
|
(2)
|
0.82%*
|
|
Common
Stock
|
Jeffrey
Thompson
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
350,000
|
(3)
|
0.35%*
|
|
Common
Stock
|
Vladislav
Yampolsky
80
NE 4th Avenue, Suite 28
Delray
Beach, FL 33483
|
8,723,192
|
(4)
|
8.76%
|
|
Common
Stock
|
Justin
Viles
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
631,577
|
(5)
|
0.63%*
|
|
Common
Stock
|
Emiliano
Aloi
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
271,317
|
(6)
|
0.27%*
|
|
Common
Stock
|
Derek
DuChesne
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
20,000
|
(7)
|
0.02%*
|
|
Common
Stock
|
Ken
Puzder
80 NE 4th Avenue,
Suite 28
Delray Beach, FL
33483
|
250,000
|
(8)
|
0.25%*
|
|
Common Stock Total of All Former Directors and Former Executive
Officers:
|
11,043,106
|
|
11.08%
|
|
* Less
than 1%.
Based
on 99,632,710 shares of our common stock issued and outstanding as
of March 31, 2021.
(2)
Includes (i)
100,000 shares of common stock, (ii) 279,500 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 and (iv) vested options to
purchase 250,000 shares of common stock exercisable at $0.20 per
share.
(3)
Includes (i)
100,000 shares of common stock and (ii) 250,000 vested stock
options to purchase Common Stock exercisable at $0.20 per
share.
(4)
Includes 8,723,192
shares of Common Stock
(5)
Includes 631,577
shares of Common Stock.
(6)
Includes 271,317
shares of Common Stock.
(7)
Includes 20,000
shares of Common Stock.
(8)
Includes 250,000
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, 2020 and 2019, $0 and $300,000 was recognized in
Research and Development expenses for consulting provided by Dr.
Dimitrov. As of December 31, 2020 and 2019, $575,000 was included
in accounts payable, respectively. During the year ended December
31, 2020 and 2019, $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
January 21, 2021 we entered into a Settlement Agreement with
Ceed2Med, LLC and its principals cancelling all agreements,
obligations and claims and providing full mutual releases of the
Company and such persons. In connection with the settlement,
Ceed2Med, LLC agreed to assignment of all rights to convert its
outstanding shares of Series E Preferred Stock at a price of $1.60
per share to third parties in connection with settlement and
releases of third party claims, resulting in no further dilution
from issuances of settlement shares other than the right for
Ceed2Med to have received such shares upon conversion and thereupon
the Series E Preferred Stock was simultaneously converted into
shares of common stock.
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. As of March 31, 2020, 287,501 have vested and been issued.
The remaining shares are not eligible for vesting, have been
cancelled, and the awardees are no longer with the
company.
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. As
of March 31, 2021 only the note with the officer remains with a
balance.
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. On January 21, 2021, the Company entered into a
Settlement Agreement with Ceed2Med, LLC, Skybar Holding, LLC, and
their principals cancelling all agreements, obligations and claims
and providing full mutual releases of the Company and such
persons.
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 Julian Pittam and Larry
Wert, 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,
2020
|
$45,000
|
n/a
|
n/a
|
n/a
|
|
December 31,
2019
|
$100,700
|
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
|
|
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).
|
|
|
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)
|
|
|
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).
|
|
|
Certificate of
Designation for Series A Preferred Stock (attached as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed February
18, 2021 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).
|
|
|
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)
|
|
|
Supply and
Distribution Agreement with HTO Holdings, Inc. (Hemptown,
USA)
|
|
|
10.4*
|
Amendment to Supply
and Distribution Agreement with HTO Holdings, Inc. (Hemptown,
USA)
|
|
21.1
|
Subsidiary
List
|
|
23.1*
|
Consent of Independent
Registered Public Accounting Firm
|
|
Certification of
Principal Executive 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
Principal 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
Principal Executive 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
|
Item
16. Form 10-K Summary.
Not Applicable.
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/ Alvaro
Alberttis
Alvaro
Alberttis
Chief Operating Officer and Director
(Principal Executive
Officer)
April 15, 2021
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/ Lawrence
Wert
Lawrence
Wert
Executive Chairman and Director
April 15, 2021
By: /s Jullian
Pittam
Julian
Pittam
Director
April 15, 2021
By: /s/ John
Price
John
Price
Director
April 15, 2021
By: /s/
Alvaro Daniel
Alberttis
Alvaro
Daniel Alberttis
Director
April 15, 2021
-48-
Exhibit
10.3
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.
-1-
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.
-2-
(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 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.
-3-
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.
-4-
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.
-5-
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.
-6-
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.
-7-
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.
-8-
***************
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
Title:
Corporate Secratary
Exactus,
Inc.
By: /s/ Emiliano
Aloi
Name:
Emiliano Aloi
Title:
President and CEO
-9-
|
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.
-10-
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-11-
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:
-12-
EXHIBIT 31.1
CERTIFICATION
I,
Alavaro Alberttis, certify that:
1. I
have reviewed this Annual Report on Form 10-K 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 officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rule 13a-15 (f) and 15 d-15(f)) for the registrant and we
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 annual 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; and
5. The
registrant’s other certifying officers 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 control over financial reporting.
|
Date:
April 15, 2021
|
/s/Alvaro
Alberttis
|
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
EXHIBIT 31.2
CERTIFICATION
I, John
Price, certify that:
1. I
have reviewed this Annual Report on Form 10-K 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 officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rule 13a-15 (f) and 15 d-15(f)) for the registrant and we
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 annual 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; and
5. The
registrant’s other certifying officers 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 control over financial reporting.
|
Date:
April 15, 2021
|
/s/ John
Price
|
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer)
|
Exhibit 32.1
Certification
Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title
18, United States Code
Pursuant to Section
1350, Chapter 63 of Title 18, United States Code, the undersigned
officers of Exactus, Inc.. (the “Company”), do hereby
certify, to such officers’ knowledge, that:
The
Annual Report on Form 10-K for the period ending December 31, 2020
(the “Form 10-K”) of the Company fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Form
10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date:
April 15, 2021
/s/ Alvaro Alberttis
Alvaro
Alberttis
Chief
Officer Officer
/s/ John Price
John
Price
Chief
Financial Officer