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EX-32.2 - American Patriot Brands, Inc.ex32-2.htm
EX-32.1 - American Patriot Brands, Inc.ex32-1.htm
EX-31.2 - American Patriot Brands, Inc.ex31-2.htm
EX-31.1 - American Patriot Brands, Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2015

 

OR

 

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

 

For the transition period from ______________ to ______________

 

Commission file number: 000-54070

 

American Patriot Brands, Inc.

(f/k/a THE GRILLED CHEESE TRUCK, INC.)

 

Nevada   27-3120288
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

4570 Campus Drive, Suite 1,

Newport Beach, CA 92660

949-478-2571

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

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

None

 

Name of each exchange on which registered

N/A

 

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

Common Stock, par value $0.001 per share

 

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

 

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

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. Yes [  ] No [X]

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ]   Smaller reporting company [  ]
Emerging growth company [X]    

 

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

 

At June 30, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting stock held by non-affiliates (based on the closing sale price of the registrant’s Common Stock on the OTC, and for the purpose of this computation only, on the assumption that all of the Registrant’s directors and officers are affiliates, was approximately $18,590,290. 

 

As of September 30, 2017, there were 55,693,216 shares of common stock outstanding, 14,135,284 shares of common stock issuable upon the exercise of all of our outstanding warrants and 5,000,000 shares of common stock issuable upon the exercise of all vested options.

 

DOCUMENTS INCORPORATED BY REFERENCE None

 

 

 

   
 

 

TABLE OF CONTENTS

 

PART I    
Item 1. Business 4
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Mine Safety Disclosures 18
     
PART II  
Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 19
Item 6. Selected Financial Data  
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 29
     
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 30
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 40
Item 13. Certain Relationships and Related Transactions, and Director Independence 41
Item 14. Principal Accountant Fees and Services 41
     
PART IV    
Item 15. Exhibits and Financial Statement Schedules 42

 

 2 
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (the “Annual Report”) contains “forward-looking statements.” Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations of the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Annual Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets, business strategies, future cash flows, financing plans, plans and objectives of management, any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts. These risks and others described under “Risk Factors” may not be exhaustive.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this Annual Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Annual Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Annual Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

Unless otherwise provided in this Annual Report, references to the “Company,” the “Registrant,” “we,” “us” and “our” refer to “The Grilled Cheese Truck, Inc.” and “American Patriot Brands, Inc.”

 

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PART I

 

Item 1. Our Business

 

COMPANY OVERVIEW

 

We are a vertically integrated cannabis-focused agriculture company that is committed to cultivating and distributing the highest quality medical and recreational cannabis.

 

Since May 2016 our primary focus is on the cultivation and distribution of medicinal and recreational cannabis. 

 

In May 2016 we decided to discontinue our food truck operations. 

 

In September 2016 we sold our Trademarks and Intellectual Property relating to our food truck business to a former company officer in exchange 3 million shares of the company’s stock he owned upon satisfaction of the terms of the Settlement Agreements. These shares are to be held in escrow until their release.

 

In September 2016 we acquired 100% of the ownership interests in Urban Pharms, LLC, DJ&S, LLC and DJ&S Property #1, LLC (collectively, “Urban Pharms”) for 12,000,000 newly issued shares of the Company’s common stock of which 7,000,000 shares were issued to our new subsidiary Urban Pharms, LLC as condition to satisfy trust deed holders. 

 

In September 2016 we changed our corporate name to American Patriot Brands, Inc. 

 

Urban Pharms, LLC is a medical and recreational cannabis business which collectively owns: indoor and outdoor cannabis facilities, greenhouses, cloning facilities, and manufacturing facilities all primarily conducted on Urban Pharms’ approximate 280 acre property in southern Oregon.

 

In January 2017 we acquired TSL Distribution, LLC, a licensed cannabis distributor located in Oregon, that does business as The SWEET Life Distribution. In exchange we paid $50,00 in cash, issued 200,000 shares of common stock, 200,000 3 year warrants with a $1.00 strike price and a 24 month note for $150,000.

 

We are committed to conducting business and make accretive cannabis business acquisitions relating to growing and distributing cannabis, in jurisdictions where it is legal to do so.

 

The company generated revenue from food and beverage sales through the company-operated food trucks in Southern California and Phoenix, Arizona until September 2016.

 

During the fiscal years 2015 through our formerly wholly owned subsidiary, Grilled Cheese, Inc., owned a food truck operation which sold various types of gourmet grilled cheese sandwiches and other comfort foods principally in the areas of Los Angeles, California and Phoenix Arizona.

 

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2015 contains an explanatory paragraph regarding our ability to continue as a going concern. Our business will require significant amounts of capital to sustain operations and make the investments we need to execute our longer-term business plan.

 

Our net loss for the year ended December 31, 2015 was $6,146,501 and the deficit accumulated by us amounts of $21,775,487 as of December 31, 2015. This raises substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

 

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In order to continue as a going concern and achieve a profitable level of operations, we will need, among other things, additional capital resources. Management’s plan to continue as a going concern includes raising capital through increased sales and growing operations to profitability and through additional debt and/or equity financing. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans of raising additional funds or increasing sales.  Our ability to continue as a going concern is dependent upon our management’s ability to successfully implement the plans described above. Management cannot provide any assurance that unforeseen circumstances that may occur at any time within the next twelve months or thereafter will not increase the need for us to raise additional capital on an immediate basis. There can be no assurance that we will be able to continue to raise funds in subsequent debt or equity financings, in which case the Company may be unable to meet its obligations.

 

Our Corporate History and Background

 

In May 2016 we decided to discontinue our food truck operations and in September 2016 we sold our Trademarks and Intellectual Property relating to our food truck business to a former company officer in exchange for 3 million shares of the company’s stock he owned upon satisfaction of the terms of the Settlement Agreements. These shares are to be held in escrow until their release.

 

In May 2016 we the acquired several medicinal cannabis operations and our primary focus became the cultivation, manufacture, and distribution of medicinal and recreational cannabis.

 

Going forward, our primary focus is on the cultivation and distribution of medicinal and recreational cannabis.

 

We changed our name to “American Patriot Brands, Inc.” in September 2016, and we filed a Certificate of Amendment to our Articles of Incorporation and concurrently changed our corporate headquarters to 4570 Campus Drive, Suite 1, Newport Beach, CA 92660.

 

Our company was incorporated in the state of Nevada on December 31, 2009 as GSP-1, Inc. We were formed as a vehicle to pursue a business combination. The Company selected December 31 as its fiscal year end.

 

In July 2011, we filed a Certificate of Amendment to our Articles of Incorporation to change our name from “GSP-1, Inc.” to “TRIG Acquisition 1, Inc.” In February 2013, we filed a Certificate of Amendment to our Articles of Incorporation to change our name from “TRIG Acquisition 1, Inc.” to “The Grilled Cheese Truck, Inc.” to reflect our acquisition of Grilled Cheese, Inc.

 

Our Industry

 

Cannabis / Marijuana Industry Overview

 

Marijuana cultivation refers to the planting, tending, improving and harvesting of the flowering plant Cannabis, primarily for the production and consumption of cannabis flowers, often referred to as “buds”. The cultivation techniques for marijuana cultivation differ than for other purposes such as hemp production and generally references to marijuana cultivation and production do not include hemp.

 

As of March 2017, there are a total of 28 states, plus the District of Columbia, with legislation passed as it relates to medicinal cannabis. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as having a high potential for abuse, has no currently-accepted use for medical treatment in the U.S., and lacks acceptable safety for use under medical supervision.

 

 5 
 

 

These 28 states, and the District of Columbia, have adopted laws that exempt patients who use medicinal cannabis under a physician’s supervision from state criminal penalties. These are collectively referred to as the states that have decriminalized medicinal cannabis, although there is a subtle difference between decriminalization and legalization, and each state’s laws are different.

 

The states that have legalized medicinal cannabis are as follows (in alphabetical order):

 

1. Alaska 11. Maine 21. New York
2. Arizona 12. Maryland 22. North Dakota
3. Arkansas 13. Massachusetts 23. Ohio
4. California 14. Michigan 24. Oregon
5. Colorado 15. Minnesota 25. Pennsylvania
6. Connecticut 16. Montana 26. Rhode Island
7. Delaware 17. Nevada 27. Vermont
8. Florida 18. New Hampshire 28. Washington
9. Hawaii 19. New Jersey  
10. Illinois 20. New Mexico  

 

Medical cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts. Legalization is generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal, and regulated source.

 

The dichotomy between federal and state laws has also limited the access to banking and other financial services by marijuana businesses. Recently the U.S. Department of Justice and the U.S. Department of Treasury issued guidance for banks considering conducting business with marijuana dispensaries in states where those businesses are legal, pursuant to which banks must now file a Marijuana Limited Suspicious Activity Report that states the marijuana business is following the government’s guidelines with regard to revenue that is generated exclusively from legal sales. However, since the same guidance noted that banks could still face prosecution if they provide financial services to marijuana businesses, it has led to the widespread refusal of the banking industry to offer banking services to marijuana businesses operating within state and local laws.

 

In November 2016, California and Nevada voters both approved marijuana use for adults over the age of 21 without a doctor’s prescription or recommendation, so called recreational marijuana, and permitted the cultivation and sale of marijuana, in each case subject to certain limitations. We intend to seek to obtain the necessary permits and licenses to expand our existing business to cultivate and distribute marijuana in compliance with these laws, although there is no guarantee that we will be successful in doing so. Despite the changes in state laws, marijuana remains illegal under federal law.

 

In November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things, cultivate, process and distribute marijuana products under certain conditions. Many of the provisions of the AUMA do not become effective until January 1, 2018 and the California Bureau of Marijuana Control is expected to enact regulations to implement the AUMA by that date.

 

Nevada voters approved Question 2 in a ballot initiative in November 2016. Among other things, Question 2 makes it legal for adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one- eighth of an ounce of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions. The Nevada Department of Taxation has indicated that it will enact regulations to implement Question 2 by the summer of 2017.

 

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In an effort to provide guidance to federal law enforcement, the Department of Justice (the “DOJ”) has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the Controlled Substances Act (the “CSA”), but, the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.

 

The August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement priorities that are important to the federal government:

 

Distribution of marijuana to children;
Revenue from the sale of marijuana going to criminals;
Diversion of medical marijuana from states where it is legal to states where it is not;
Using state authorized marijuana activity as a pretext of other illegal drug activity;
Preventing violence in the cultivation and distribution of marijuana;
Preventing drugged driving;
Growing marijuana on federal property; and
Preventing possession or use of marijuana on federal property.

 

The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.

 

We currently operate medical marijuana businesses in Oregon. Although the possession, cultivation and distribution of marijuana for medical use is permitted in Oregon, provided compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. We believe we operate our business in compliance with applicable Oregon law and regulations. Any changes in federal, state or local law enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law regarding marijuana would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes in banking, insurance or other business services may also affect our ability to operate our business.

 

INTERNATIONAL OPPORTUNITY

 

In recent years, the actions of governments around the world have signaled a significant change in attitudes towards cannabis. Governments in Australia, Brazil, Canada, Germany, Chile, Jamaica, Israel, Mexico, South Africa, and others have taken steps to foster research into cannabis-based medical treatments and/or towards increasing legal access to medical cannabis.

 

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On January 19, 2017, the German parliament passed legislation that legalized medical cannabis and included provisions for medical cannabis treatment expenses to be covered by health insurance. In early April 2017, the German government issued a Request for Proposal seeking submissions from parties interested in obtaining one of up to 10 licenses to produce medical marijuana in Germany.

 

Canada has developed a regulatory model, companies acting within that framework have an opportunity to grow market share in the global community. Australia began the rollout of a regulatory framework in 2016.

 

The opening of legal cannabis markets around the world presents an opportunity for us. Medical cannabis opportunities are becoming increasingly available as new jurisdictions move towards establishing new or improved medical cannabis systems.

 

We remain committed to only conducting business, related to growing cannabis, in jurisdictions where it is legal to do so. We believe that operating and investing in markets without federal legal frameworks, puts the company at risk of prosecution, puts at risk its ability to operate freely, and potentially could jeopardize its listing on major exchanges and in turn its access to capital from reputable investment funds.

 

Strategy - Cannabis

 

We are committed to conducting business and make accretive acquisitions relating to growing and distributing cannabis, in jurisdictions where it is legal to do so both domestically and abroad

 

Food Truck Business [Discontinued in May 2016]

 

We discontinued our Food Truck Business in May 2016. We thought that the retail market for gourmet food trucks was a fast growing and fragmented industry with the potential for growth; however we found operating profitably in this space to be difficult and chose to exit this business.

 

In September 2016 we sold our Trademarks and Intellectual Property relating to our food truck business to a former company officer in exchange for 3 million shares of the company’s stock he owned and we reimbursed him $100,000 in cash for back pay and expenses.

 

License Agreements [Transferred as part of sale in September 2016]

 

As part of our business, and in conjunction with expanding our overall business plan, we entered into license agreements with individuals or entities regarding our intellectual property. Specifically, we granted certain exclusive licensing rights regarding our intellectual property, including but not limited to trademarks, copyrights, know-how, trade secrets, software, patents, certain goods and services pertaining to our business, to entities in designated areas, whereby such individuals or entities will be entitled to the use of our intellectual property in connection with their use and sale of our products and our brand name. In exchange for such licenses, we receive a specifically negotiated cash payments, royalty payments and/or equity interests in the licensees.

 

Intellectual Property [Transferred as part of sale in September 2016]

 

Our intellectual property consists of our copyrighted website content and social media pages on Facebook and Twitter. We have and will continue to file applications with the United States Patent and Trademark Office (the “USPTO”) to protect our intellectual property. As of the date of this report, we have obtained federal registration for certain trademarks and logos, including but not limited to “GCT”, “CHEESY MAC AND RIB MELT”, “PEPPERBELLY MELT”, “PLAIN AND SIMPLE MELT”, “S’MORE MELT”, “THE CHEESE MAC MELT”, “THE FULLY LOADED”, “YOU CANT SAY GRILLED CHEESE WITHOUT SMILING” and the “Reclining Girl Eating Sandwich Design” logo. We have additional trademark and logo applications pending with the USPTO and will continue to file additional applications to protect our intellectual property in the future.

 

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Charitable Foundation and Not-For-Profit Initiatives

 

In September 2013, our Board of Directors approved the creation of a new charitable foundation. This foundation is intended to provide financial assistance to the surviving spouses and children of United States military personnel who have died in combat and to United States military personnel suffering from physical and mental disabilities. We initially intend to donate up to 1,000,000 shares of our common stock to the foundation, with such shares to be donated from time to time as the Board of Directors determines is prudent.

 

In November 2014, the Company issued 1,000,000 restricted shares of its Common Stock to certain nonprofits that support people in need with a focus on veterans.

 

The issuance of the restricted shares to the charitable foundations is subject to the following resale restrictions: each of the charitable foundations receiving restricted shares from the Company may only sell up to 1/12th of such shares in any given month following the eligibility for resale of such shares either pursuant to 1) a registration statement filed by the Company to register such shares or 2) Rule 144 of the Securities Act.

 

Brick and Mortar - Ruby’s Pennsylvania proposed transactions

 

We entered into a series of agreements in January 2015, with franchisees of Ruby’s Franchise Systems, Inc. to acquire all, or substantially all, of the assets of each of DJ Brinton Lake, LLC, DJR King of Prussia, Inc. and DJR Suburban Square, Inc. (which we collectively refer to as the Ruby’s Franchisees). Accordingly each of the Ruby’s Franchisees agreed not to negotiate with, or agree to sell or otherwise dispose of, directly or indirectly, any of their respective assets to any other third party, until March 31, 2015 and the extended expiration date of October 31, 2015.

 

We did not and will not complete these transactions as part of discontinuing our food business.

 

Environmental Matters

 

We are subject to various federal, state and local environmental regulations. However, compliance with applicable environmental regulations is not believed to have a material effect on capital expenditures, financial condition, results of operations, or our competitive position.

 

Employees

 

At December, 31 2015, the Company had 54 employees, including 4 executives, 39 in food services and 11 administrative employees.

 

In August 2017 we had 46 employees, including 2 corporate executives and 44 in farming and distribution activities.

 

Legal Proceedings

 

In the normal course of our business, we may periodically become subject to various lawsuits. However, there are currently no legal actions pending against us, or, to our knowledge, are any such proceedings contemplated.

 

Corporate Information

 

Our principal office is located at 4570 Campus Drive, Suite 1, Newport Beach, CA 92660.

 

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Item 1A. Risk Factors

 

You should carefully consider the following risk factors and all other information contained in this Annual Report. If any of the following risks occur, our business, financial conditions or results of operations may be materially and adversely affected. This Annual Report also contains forward-looking statements that involve risks and uncertainties. There can be no assurance that actual results will not materially differ from expectations. Important factors could cause actual results to differ materially from those indicated by such forward-looking statements.

 

Risks Related to Our Business

 

We changed our primary business to cannabis cultivation and distribution from the food truck business

 

Since May 2016 our primary focus is on the cultivation, and distribution of medicinal and recreational cannabis. In May 2016 the company decided to discontinue its food business. It is possible that we may not be successful in the cannabis business.

 

We have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow.

 

We have incurred significant losses in prior periods. For the year ended December 31, 2015, we incurred a net loss of $6,146,501 and, as of that date, we had an accumulated deficit of $21,775,487. Any losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flow.

 

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 report of our independent auditors on our consolidated financial statements for the year ended December 31, 2015 included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our incurring significant net loss and our working capital deficit position. 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 realize the commercialization of our planned business operations.

 

Risks Relating to Our Business and Industry

 

CANNABIS

 

Federal regulation and enforcement may adversely affect the implementation of medical cannabis laws and regulations may negatively impact our revenues and profits.

 

Currently, there are 28 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such potential amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be producing, cultivating, or dispensing marijuana in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. In February 2017, the Trump administration announced that there may be “greater enforcement” of federal laws regarding marijuana. Any such enforcement actions could have a negative effect on our business and results of operations.

 

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In an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the CSA, but, the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.

 

The August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts.

 

The memorandum sets forth certain enforcement priorities that are important to the federal government:

 

  Distribution of marijuana to children;
  Revenue from the sale of marijuana going to criminals;
  Diversion of medical marijuana from states where it is legal to states where it is not;
  Using state authorized marijuana activity as a pretext of other illegal drug activity;
  Preventing violence in the cultivation and distribution of marijuana;
  Preventing drugged driving;
  Growing marijuana on federal property; and
  Preventing possession or use of marijuana on federal property.

 

The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits. Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including Nevada and California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical marijuana. This prohibition is currently in place until April 28, 2017.

 

We could be found to be violating laws related to medical cannabis.

 

Currently, there are 28 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. Because we cultivate, produce, sell and distribute medical marijuana, we have risk that we will be deemed to facilitate the selling or distribution of medical marijuana in violation of federal law.

 

Finally, we could be found in violation of the CSA in connection with the sale of our products. This would cause a direct and adverse effect on our subsidiaries’ businesses, or intended businesses, and on our revenue and prospective profits.

 

Variations in state and local regulation, and enforcement in states that have legalized medical cannabis, may restrict marijuana-related activities, including activities related to medical cannabis, which may negatively impact our revenues and prospective profits.

 

Individual state laws do not always conform to the federal standard or to other states laws. A number of states have decriminalized marijuana to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. As of March 2017, eight states and the District of Columbia have legalized the recreational use of cannabis. Variations exist among states that have legalized, decriminalized, or created medical marijuana exemptions. For example, certain states have limits on the number of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical marijuana needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of marijuana may indirectly and adversely affect our business and our revenue and profits.

 

 11 
 

 

In November 2016, California voters approved Proposition 64, also known as the Adult Use of Marijuana Act (“AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things, cultivate, process and distribute marijuana products under certain conditions. Many of the provisions of the AUMA do not become effective until January 1, 2018 and the California Bureau of Marijuana Control is expected to enact regulations to implement the AUMA by that date.

 

Also in November 2016, Nevada voters approved Question 2 in a ballot initiative. Among other things, Question 2 makes it legal for adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one- eighth of an ounce of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions. The Nevada Department of Taxation has indicated that it will enact regulations to implement Question 2 by the summer of 2017.

 

If we are unable to obtain the permits and licenses required to operate our business in compliance with the new regulations in California or Nevada, we may experience negative effects on our business and results of operations.

 

Prospective customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.

 

Our website will be visible in jurisdictions where medicinal and/or recreational use of marijuana is not permitted and, as a result, we may be found to be violating the laws of those jurisdictions.

 

Marijuana remains illegal under federal law.

 

Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed with our business plan, especially in respect of our marijuana cultivation, production and dispensaries. In addition, our assets, including real property, cash, equipment and other goods, could be subject to asset forfeiture because marijuana is still federally illegal.

 

In February 2017, the Trump administration announced that there may be “greater enforcement” of federal laws regarding marijuana. Any such enforcement actions could have a negative effect on our business and results of operations.

 

We are not able to deduct some of our business expenses.

 

Section 280E of the Internal Revenue Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our marijuana business may be less profitable than it could otherwise be.

 

We may not be able to attract or retain a majority of independent directors.

 

We currently have only three directors on our board of directors and our board is not currently comprised of a majority of independent directors. We may in the future desire to list our common stock on The New York Stock Exchange (“NYSE”) or The NASDAQ Stock Market (“NASDAQ”), both of which require that a majority of our board be comprised of independent directors. We may have difficulty attracting and retaining independent directors because, among other things, we operate in the marijuana industry, and as a result we may be delayed or prevented from listing our common stock on the NYSE or NASDAQ.

 

 12 
 

 

We may not be able to successfully execute on our merger and acquisition strategy

 

Our business plan depends in part on merging with or acquiring other businesses in the marijuana industry. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses, and to retain their customers. Any acquisition may result in diversion of management’s attention from other business concerns, and such acquisition may be dilutive to our financial results and/or result in impairment charges and write-offs. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction.

 

Although we expect to realize strategic, operational and financial benefits as a result of our acquisitions, we cannot predict whether and to what extent such benefits will be achieved. There are significant challenges to integrating an acquired operation into our business.

 

Any future acquisition could involve other risks, including the assumption of unidentified liabilities for which we, as a successor owner, may be responsible. These transactions typically involve a number of risks and present financial and other challenges, including the existence of unknown disputes, liabilities, or contingencies and changes in the industry, location, or regulatory or political environment in which these investments are located, that our due diligence review may not adequately uncover and that may arise after entering into such arrangements.

 

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our cultivation, production and dispensary operations

 

Local, state, and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects of our planned operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to certain aspects of our cultivation, production and dispensary businesses, and our business of selling cannabis products. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

We may not obtain the necessary permits and authorizations to operate the medical marijuana business.

 

We may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations for our cultivation, production and dispensary businesses, or may only be able to do so at great cost. In addition, we may not be able to comply fully with the wide variety of laws and regulations applicable to the medical marijuana industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations, or accreditations could result in restrictions on our ability to operate the medical marijuana business, which could have a material adverse effect on our business.

 

If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.

 

Our participation in the medical marijuana industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities against us. Litigation, complaints, and enforcement actions could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability, and growth prospects. We have not been, and are not currently, subject to any material litigation, complaint, or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority. We are presently engaged in the distribution of marijuana; however, we have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority with respect to our business.

 

We may have difficulty accessing the service of banks, which may make it difficult for us to operate.

 

Since the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. The inability to open or maintain bank accounts may make it difficult for us to operate our medical marijuana businesses. If any of our bank accounts are closed, we may have difficulty processing transactions in the ordinary course of business, including paying suppliers, employees and landlords, which could have a significant negative effect on our operations.

 

 13 
 

 

A drop in the retail price of commercially grown produce may negatively impact our business.

 

The demand for our produce depends in part on the price of commercially grown produce. Fluctuations in economic and market conditions that impact the prices of commercially grown produce, such as increases in the supply of such produce and the decrease in the price of commercially grown produce, could cause the demand for produce to decline, which would have a negative impact on our business.

 

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

 

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

 

Risks Related to Our Common Stock

 

There is a limited market for our common stock, which may make it difficult for you to sell your stock.

 

Our common stock trades on the OTC Pink under the symbol “GRLD” There is a limited trading market for our common stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.

 

The market price of our common stock may be highly volatile, and you could lose all or part of your investment.

 

The trading price of our common stock is likely to be volatile. This volatility may prevent you from being able to sell your shares at or above the price you paid for your shares. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:

 

  actual or anticipated fluctuations in our quarterly or annual financial results;
  additional needs for financing;
  failure of industry or securities analysts to maintain coverage of us, changes in financial estimates by any industry or securities analysts that follow us or our failure to meet such estimates;
  market factors, including rumors, whether or not correct, involving us, our products, or our competitors;
  fluctuations in stock market prices and trading volumes of securities of similar companies;
  sales or anticipated sales of large blocks of our stock;
  short selling of our common stock by investors;
  additions or departures of key personnel;
  regulatory or political developments;
  changes in accounting principles or methodologies;
  litigation or governmental investigations;
  negative publicity about us in the media and online; and
  general financial market conditions or events.

 

Our common stock is considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.

 

Our common stock is considered to be a low-priced security, or a “penny stock,” under rules promulgated under the Exchange Act. A stock is considered to be a “penny stock” if it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted on The NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three year period, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.

 

 14 
 

 

The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Securities Exchange Act of 1934. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

As an issuer of “penny stock”, the protection provided by the federal securities laws relating to forward-looking statements does not apply to us.

 

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, as our common stock is considered “penny stock”, we do not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.

 

Future issuance of our common stock could dilute the interests of existing stockholders.

 

We may issue additional shares of our common stock in the future in connection with a financing or an acquisition. The issuance of a substantial number of shares of common stock could have the effect of substantially diluting the interests of our existing stockholders and any subsequent sales or resales by our stockholders could have an adverse effect on the market price of our common stock.

 

FINRA sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares.

 

FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the 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 and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, 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 shares, have an adverse effect on the market for our shares, and thereby depress our share price.

 

We have no plans to pay dividends.

 

To date, we have paid no cash dividends on our common shares. For the foreseeable future, earnings generated from our operations will be retained for use in our business and not to pay dividends.

 

 15 
 

 

If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, 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.

 

As a public company, we have significant additional requirements for enhanced financial reporting and internal controls. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

 

We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.

 

Lack of experience as officers of publicly-traded companies of our management team may hinder our ability to comply with Sarbanes-Oxley Act.

 

It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain.

 

We have incurred the costs as a public company which may affect our profitability.

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to the SEC’s rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial expenditure of financial resources. Compliance with these rules and regulations significantly increase our legal and financial compliance costs and some activities are more time-consuming and costly. Management may need to increase compensation for senior executive officers, engage additional senior financial officers who are able to adopt financial reporting and control procedures, allocate a budget for an investor and public relations program, and increase our financial and accounting staff in order to meet the demands and financial reporting requirements as a public reporting company. Such additional personnel, public relations, reporting and compliance costs may negatively impact our financial results.

 

Because we became a public company by means of a reverse merger, and became a cannabis company we may not be able to attract the attention of major brokerage firms.

 

Additional risks may exist since we became public through a “reverse merger” and became a cannabis company securities analysts of major brokerage firms may not provide our Company coverage since there is little incentive to brokerage firms to recommend the purchase of its common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.

 

“Emerging growth companies” are subject to lessened disclosure requirements.

 

“Emerging growth companies” as defined in the JOBS Act, permits certain qualifying companies to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
taking advantage of an extension of time to comply with new or revised financial accounting standards;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

We have elected not to take advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and such election not use such transition period is irrevocable.

 

 16 
 

 

Public company compliance may make it more difficult to attract and retain officers and directors.

 

The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The requirements of these laws and the rules and regulations promulgated thereunder entail significant accounting, legal and financial compliance costs, and have made, and will continue to make, some activities more difficult, time consuming or costly and may place significant strain on the Company’s personnel, systems and resources.

 

The Sarbanes-Oxley Act and rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs and to make certain activities more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers.

 

Because our directors and executive officers are among our largest shareholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from investors.

 

As of September 30, 2017 our directors, executive officers and affiliates collectively and beneficially own or control 31% of outstanding common stock. Additionally, the holdings of our directors and executive officers may increase in the future upon vesting or other maturation of exercise rights under any of the options or warrants they may hold or in the future be granted or if they otherwise acquire additional shares of our common stock. The interests of such persons may differ from the interests of our other shareholders. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including the following actions:

 

to elect or defeat the election of our directors;
to amend or prevent amendment of our Certificate of Incorporation or By-laws;
to effect or prevent a merger, sale of assets or other corporate transaction; and
to control the outcome of any other matter submitted to our shareholders for vote.

 

Such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.

 

We have a substantial number of convertible securities outstanding. The exercise of our outstanding warrants and conversion of our outstanding convertible notes can have a dilutive effect on our common stock.

 

If the price per share of our common stock at the time of exercise of any warrants or other convertible securities is in excess of the various exercise or conversion prices of such convertible securities and the holders of our convertible securities decide to convert such securities into shares of common stock, it will have a dilutive effect on our common stock. As of December 31, 2015, we had (i) outstanding warrants to purchase 10,322,284 shares of our common stock at a weighted average exercise price of $2.14 per share and (ii) outstanding convertible notes that, upon conversion, would provide note holders with an aggregate of 1,470,667 shares of our common stock. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and result in additional dilution of the existing ownership interests of our common stockholders. 

 

 17 
 

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

ITEM 2. PROPERTIES

 

Our corporate office is located at 4570 Campus Drive, Suite 1, Newport Beach, CA 92660

 

A summary of the offices and properties we lease or own are presented in the table below. Our facilities are considered to be in good condition, adequate for its purpose and suitably utilized according to the requirements of the relevant operations.

 

Purpose      Location  Lease /
Own
  Monthly
payment
   Begin
Date
  End Date  Term
Corporate Office   1   Newport Beach, CA  Lease  $1,300         Month to month
Office   2   Portland, OR  Lease  $2,198   6/1/2016  6/30/2019  37 months
Cultivation Facility   3   Medford, OR  Own  $none          

 

1 We rent 600 sq.ft. of office space which is sufficient for our needs
2 We rent a 1,600 sq.ft office space in Portland, OR
3 We own a 280 acre farm in Medford, OR

 

In 2016 we vacated and settled all obligations relating to the kitchen facilities in Gardenia, CA and Phoenix, AZ

 

Item 3. Legal Proceedings

 

In the normal course of our business, we may periodically become subject to various lawsuits. However, there are currently no legal actions pending against us or, to our knowledge, are any such proceedings contemplated.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 18 
 

 

PART II

 

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

 

Market Information

 

Our common stock began trading on the OTC Pink under the symbol “GRLD” in January of 2015.

 

An active and liquid market may never exist for our stock.

 

The following is a summary of the high and low closing bid prices of our Common Stock (rounded to the nearest penny) for the periods indicated, as reported by the OTC Markets Group, Inc. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.

 

Closing Bid Price Per        
   HIGH   LOW 
Year Ending December 31, 2017        
First Quarter  $0.50   $0.35 
Second Quarter  $0.45   $0.35 
           
Year Ended December 31, 2016          
First Quarter  $0.85   $0.17 
Second Quarter  $0.34   $0.09 
Third Quarter  $0.70   $0.21 
Fourth Quarter  $0.62   $0.26 
           
Year Ended December 31, 2015          
First Quarter  $5.94   $1.00 
Second Quarter  $1.93   $1.00 
Third Quarter  $1.50   $0.70 
Fourth Quarter  $1.22   $0.57 

 

Holders

 

On August 30, 2017, we had approximately 500 shareholders of record of our common stock.

 

Dividends

 

The Registrant has not paid any cash dividends to date and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Registrant’s business.

 

Penny Stock Regulations

 

The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our Common Stock, when and if a trading market develops, may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 individually, 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 such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated 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, current quotations for the securities 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. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our Common Stock and may affect the ability of investors to sell their Common Stock in the secondary market.

 

 19 
 

 

Recent Sales of Unregistered Securities for the year ended December 31, 2016

 

This is the summary of the unregistered sales of our common shares in 2016:

 

   SHARES   Total 
   Shares  Warrant  Conversion/   $ Amount 
   Sold  Conversion  Sales Price   Sold 
2016              
Q1  none  -  -   - 
Q2  none  -  -   - 
Q3  1,449,604    $.15 - $.25   $267,500 
Q4   400,000    $.25   $80,000 
Total  1,849,604         $347,500 

 

This is the summary of the unregistered sales of our promissory and secured notes in 2016:

 

      NOTES
      $      Warrant   
      Notes   Interest  Conversion  TERM
      Amount   Rate %  Price  MONTHS
2016         -  -  -
Q1      none   -  -  -
Q2      none   -  -  -
Q3  A  $250,000   10%  0  24
Q4  B  $265,000   Various  0  1
Total     $515,000          

 

A        In September 2016 we sold a $250,000 note that was secured by the farm property we purchased in Oregon.

 

B        In November and December 2016 we sold 6 unsecured promissory notes for a total of $265,000 in cash and in addition we issued these investors 500,000 shares of our common stock. The average life term of these notes is approximately 1 month with a range of interest rates. We also rolled over on of these notes for an additional 30 day term and in exchange we issued an additional 80,000 shares of common stock.

 

Repurchase of Equity Securities by the Issuer and Affiliated Purchasers

 

None

 

 20 
 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forwarding looking statements as a result of certain factors, including but not limited to, those which are not within our control.

 

Although we qualify as an “emerging growth company” as defined in the JOBS Act, and have elected not to take advantage of certain exemptions from various reporting requirements that are available to “emerging growth companies.”

 

Overview

 

We are a vertically integrated cannabis-focused agriculture company that is committed to cultivating and providing the highest quality medical and recreational cannabis, as well as other agricultural products, such as herbs and leafy greens.

 

In May 2016 we decided to discontinue our food truck operations and in September 2016 we spun-out our food operations to a former company officer in exchange for 3 million shares of the company’s stock he owned upon satisfaction of the terms of the Settlement Agreements. These shares are to be held in escrow until their release.

 

In May 2016 we acquired several medicinal cannabis operations and our primary focus became the cultivation, manufacture, and distribution of medicinal and recreational cannabis.

 

Going forward, our primary focus is on the cultivation and distribution of medicinal and recreational cannabis.

 

We changed our name to “American Patriot Brands, Inc.” in September 2016.

 

We are currently an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (which we refer to herein as the JOBS Act), which permits us to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
taking advantage of an extension of time to comply with new or revised financial accounting standards;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

Although we qualify as an emerging growth company under the JOBS Act, we have elected not to take advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and such election not use such transition period is irrevocable.

 

 21 
 

 

Results of Operations

 

Revenues:  For the Years Ended December 31,
      % of       % of   Amount   % of 
   2015   Revenue   2014   Revenue   Increase / (decrease) 
Food truck sales  $2,004,655    78%  $2,392,342    66%  $(387,687)   (16%)
Catering and special events   522,428    20%   710,446    19%   (188,018)   (26%)
Licensed truck   37,406    2%   547,233    15%   (509,827)   (93%)
Total revenue  $2,564,489    100%  $3,650,021    100%  $(1,085,532)   (30%)

 

Revenues decreased for the year in 2015 compared to 2014, due to the reduction in the amount of company and licensed food trucks in operation from 8 to 4 and many fewer catered events.

 

Cost of Sales:  For the Years Ended December 31,
       % of       % of   Amount   % of 
   2015   Revenue   2014   Revenue   Increase / (decrease) 
Food and beverage  $733,452    29%  $899,847    25%  $(166,395)   (18%)
Food truck expenses   1,162,176    45%   2,050,453    56%   (888,277)   (43%)
Commissary and kitchen expenses   265,936    10%   417,846    11%   (151,910)   (36%)
Total cost of sales  $2,161,565    84%  $3,368,146    92%  $(1,206,581)   (36%)

 

Food and beverage expenses consist of bread, cheese, meats, seafood and other types of foods and various types of beverages.

 

Food truck expenses consist of truck staff payroll, truck insurance, gas, repairs and maintenance and other truck related expenses.

 

The decrease in the cost of sales in 2015 compared to 2014 is due to the decrease in the number of trucks in operation from 8 (eight) to 4 (four) and fewer catered events.

 

Commissary and Kitchen expenses consist of occupancy, equipment and commissary employee compensation. The kitchen expenses decreased in 2015 compared to 2014 due to the closing of both kitchen operations in 2015 as compared to operating the two kitchens for most of 2014.

 

Operating Expenses:  For the Years Ended December 31,
       % of       % of   Amount   % of 
   2015   Revenue   2014   Revenue   Increase / (decrease)
General and administrative  $4,496,037    175%  $7,064,874    194%  $(2,568,837)   (36%)
Selling costs   275,333    11%   223,322    6%   52,011    23%
Consulting expenses - related parties   602,758    24%   74,357    2%   528,401    711%
Depreciation   85,007    3%   75,357    2%   9,650    13%
Bad debts   61,377    2%   278551    8%   (217,174)   (78%)
Impairment of intangible asset   334,856    13%   0    0%   344,856    100%
Total operating expenses  $5,855,368    228%  $7,716,461    211%  $(1,861,093)   (24%)

 

General and administrative expenses consist of general corporate expenses, including but not limited to market development, insurance, professional costs, clerical and administrative overhead. The decrease in general and administrative expenses in 2015 compared to 2014 is primarily due to the decrease in stock compensation for consultants and executive compensation; and reduced legal, accounting and other public company expenses related to our being a publicly traded company.

 

Selling costs include, but are not limited to, marketing and promotion, printing, processing fees and utility vehicle rental which is used to transport employees to and from the food trucks. The increase in selling costs during the year ended December 31, 2015, compared to 2014 relates to certain marketing events held in Los Angeles and Phoenix

 

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Consulting expense – related parties The increase is due to the increase in the number of our executive non-employees in 2015 compared to 2014.

 

The increase in Depreciation is related to the number of food trucks and service kitchens that were operated for a full year in 2015 as compared to part of the year in 2014 

 

The decrease in Bad Debts is related to a reduction of license and catering income in 2015 and uncollectible non-reoccurring license revenue in 2014

 

Impairment – is related to the termination of our “Soupman” rights in 2015.

 

Other Income and Expenses

 

   For the Years Ended December 31,
       % of       % of   Amount   % of 
Other Expenses:  2015   Revenue   2014   Revenue   Increase/(decrease)
Interest expense  $(220,549)   (9%)  $(273,783)   -8%  $53,234    (19%)
Amortization   (436,296)   (17%)   (410,039)   -11%   (26,257)   (6%)
Other income from asset sale   -         406,200    11%   (406,200)   (100%)
Loss on settlement of debt   (37,213)   (1%)   0    0%   (37,213)   (100%)
Total other expenses  $(694,057)   (27%)  $(277,622)   -8%  $416,435    150%

 

Other Income (Expenses) – includes the recognition of other income from asset sale, interest, amortization and loss on settlement of debt. The changes in other income (expenses) are primarily due to us recognizing net other income of $406,200 in 2014, an increase in amortization of debt discount related to debt satisfied during the year ended December 31, 2014 and was amortized through that period offset by an increase in interest expense primarily attributable to the excess of fair value of shares of our Common Stock in excess of the carrying value of the liabilities settled during the first quarter of 2014.

 

Liquidity and Capital Resources

 

   For the Years Ended December 31,
           Amount   % of 
   2015   2014   Increase / (decrease)
                 
NET CASH USED IN OPERATING ACTIVITIES  $(1,539,895)  $(2,454,023)  $914,127    37%
NET CASH USED IN INVESTING ACTIVITIES   (228,400)   18,409    (246,809)   (1341%)
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,420,196    2,726,314    (1,321,158)   (48%)
NET CHANGE IN CASH   (348,099)   305,740    (653,839)   (214%)
CASH AT END OF PERIOD  $0   $348,099   $(348,099)   (100%)

 

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Going Concern

 

We have never reported net income. We incurred net losses for the years ended December 31, 2015 and 2014 and have an accumulated deficit of approximately $21.8 million at December 31, 2015.

 

At December 31, 2015, we had a working capital deficit of approximately $6.9 million. At December 31, 2015, we were overdrawn at the bank by approximately $27,000, compared to a cash balance of approximately $348,000 at December 31, 2014.  

 

We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through private sales of preferred stock, common stock, and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.

 

We anticipate requiring additional capital for making additional acquisitions and the commercial development of our subsidiaries.

 

We will need to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations, or if we are able to raise capital, that it will be available to us on acceptable terms, on an acceptable schedule, or at all.

 

The issuance of additional securities may result in a significant dilution in the equity interests of our current stockholders. Obtaining loans, assuming these loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available for use when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations. 

 

NET CASH USED IN OPERATING ACTIVITIES for the Year ended December 31, 2015 

 

Net cash used in operations was $1,539,895 for the year ended December 31, 2015 consists primarily of our net loss of approximately $6.1 million less non-cash expense and payments of approximately $4.6 million as follows:

 

Non Cash expenses & payments    
Depreciation & Amortization  $521,303 
Fair value of securities issued for compensation & vendor payments   673,800 
Impairments & bad debts   396,233 
Net change in current asset & liability accounts   3,015,270 
Total  $4,606,607 

 

NET CASH USED IN INVESTING ACTIVITIES for the Year ended December 31, 2015 

 

Net cash used in investing activities was $228,400 for the year ending December 31, 2015. We invested:

 

  $200,000 for the rights for a Soupman franchise [subsequently impaired – no soup for us!]
  $28,400 for food service equipment.

 

NET CASH PROVIDED BY FINANCING ACTIVITIES for the Year ended December 31, 2015 

 

Net cash provided by financing activities of $1,420,196 during the year ended December 31, 2015 consists of the net proceeds from the sale of:

 

Convertible notes and promissory notes (net of Debt Discount of $330,000)  $1,293,027 
Common Stock  $100,000 
Bank Overdraft  $27,169 

 

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Financial Position at December 31, 2015

 

Balance Sheet Data          Increase 
   2015   2014   (Decrease) 
             
Cash (overdraft)  $(27,169)  $348,099   $(375,268)
Other current assets   20,338    76,787    (56,449)
Net fixed assets   49,190    240,652    (191,462)
Other assets   63,395    87,755    (24,360)
                
Accounts payables & accrued expenses   4,486,104    1,912,540    2,573,564 
Amounts due to related parties   499,465    214,625    284,840 
Current portion of notes payable   1,911,434    270,957    1,640,477 
Long-term portion of notes payable   -    523,124    (523,124)
Net stockholders deficit   (6,791,250)   (2,167,953)  $(4,623,297)
Working capital deficit  $(6,903,835)  $(1,973,236)   (4,930,599)

 

The Company had a bank overdraft of approximately $27,000 and a working capital deficiency of approximately $7.1 million (including notes payable) at December 31, 2015.

 

Current assets and net fixed assets decreased in 2015 primarily due to the reduction in our business operations resulting in fewer accounts receivable and the disposal of food production equipment.

 

Other assets decreased due to a decrease of approximately $25,000 in rental deposits.

 

Accounts payable and accrued expenses increased due to the slowing in the payment of accounts payable of approximately $937,000 and executive compensation of approximately $1,485,000.

 

The current and the long-term portion of notes payable increased approximately $1,641,000 as notes payable became the primary source of funding for us.

 

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Critical Accounting Policies

 

Our significant accounting policies are more fully described in Note 3 to our consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions.

 

For other critical accounting policies, please refer Note 3 – Summary of Significant Accounting Policies in notes to consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

Intra-Entity Transfers of Assets Other Than Inventory

 

In October 2016, the FASB issued guidance that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs instead of when the asset is sold to an outside party. The new guidance is effective beginning with the first quarter of our 2019 fiscal year (with early adoption permitted as of the beginning of an annual period). The guidance is required to be adopted retrospectively by recording a cumulative- effect adjustment to retained earnings as of the beginning of the adoption period. We are assessing the potential impact this guidance will have on its financial statements.

 

Stock Compensation - Employee Share-Based Payments

 

In March 2016, the FASB issued guidance to amend certain aspects of accounting for employee share-based awards, including accounting for income taxes related to those transactions. This guidance will require recognizing excess tax benefits and deficiencies (that result from an increase or decrease in the fair value of an award from grant date to the vesting date or exercise date) on share-based compensation arrangements in the tax provision, instead of in equity as under the current guidance. In addition, these amounts will be classified as an operating activity in the statement of cash flows, instead of as a financing activity, hi addition, cash paid for shares withheld to satisfy employee taxes will be classified as a financing activity, instead of as an operating activity. The guidance is effective beginning in the first quarter of our 2018 fiscal year (with early adoption permitted) and is required to be adopted as follows:

 

Prospectively for the recognition of excess tax benefits and deficiencies in the tax provision.
Retrospectively or prospectively for the classification of excess tax benefits and deficiencies in the statement of cash flows.
Retrospectively for the classification of cash paid for shares withheld to satisfy employee taxes in the statement of cash flows.

 

Leases

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842) “ (“ASU 2016-02”). ASU 2016-02 requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new standard also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The new standard will be effective for us on January 1, 2019. Early adoption is permitted. We are in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.

 

Balance Sheet Classification of Deferred Taxes

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The new standard is effective for public entities for annual periods beginning after December 15, 2016, with early adoption allowed on either a prospective or retrospective basis. We adopted ASU 2015-17, on a prospective basis, for our annual period ended December 31, 2015. Accordingly, the accompanying consolidated balance sheets at December 31, 2016 and 2015 reflect the presentation of deferred tax assets and deferred tax liabilities in accordance with ASU 2015-17.

 

 26 
 

 

Inventory Measurement

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”), which requires entities to measure inventory at the lower of cost and net realizable value (“NRV”). ASU 2015-11 defines NRV as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The guidance in ASU 2015-11 is effective prospectively for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. Upon transition, entities must disclose the nature of and reason for the accounting change. We do not expect that the adoption of this standard will have a material effect on its consolidated financial statements.

 

Going Concern Disclosures

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties hi the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual and interim reporting periods ending after December 15, 2015, with early adoption permitted. We do not expect that the adoption of this standard will have a material effect on its consolidated financial statements.

 

Our primary market risks are attributable to fluctuations in commodity prices and interest rates. These fluctuations can affect revenues and cash flow from operating, investing and financing activities.

 

Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs related to a recognized debt liability be reported on the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and is required to be applied retrospectively. Early adoption is permitted and we adopted ASU 2015-03 in the second quarter of 2015. Subsequently, in August 2015, the FASB issued No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 codifies the SEC’s position that it would be allowable for an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

 

We retrospectively adjusted our December 31, 2015 balance sheet by decreasing other assets by approximately $259,000 and the current portion of long-term debt by approximately $259,000. In accordance with ASU 2015-15, we will continue presenting debt issuance costs for our asset-based revolving credit facility as an asset because of the potential volatility of borrowings and repayments under the facility. The adoption of this guidance had no impact on our results of operations or cash flows.

 

Commodity Price Risk

 

Our most significant market risk relates to fluctuations in marijuana prices. Management expects the prices of these commodities to remain volatile and unpredictable. As these prices decline or rise significantly, revenues and cash flow will also decline or rise significantly.

 

Interest Rate Risk

 

At December 31, 2015, we had no outstanding variable-rate debt and $1,911,434 of principal fixed-rate debt. 

 

Credit Risk

 

Our exposure to non-payment or non-performance by our customers and counterparties presents a credit risk. Generally, non-payment or non-performance results from a customer’s or counterparty’s inability to satisfy obligations. We may also be exposed to credit risk due to the concentration of our customers in the medical marijuana industry, as our customers may be similarly affected by changes in regulatory and legal conditions in the states and municipalities in which we operate.

 

 27 
 

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

 

Inflation

 

We do not believe that inflation has had a material effect on our Company’s results of operations.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

The Company did not have any Level 2 or Level 3 assets or liabilities as of December 31, 2015 with the exception of its notes payable. The carrying amounts of these liabilities at December 31, 2015 are approximate their respective fair value based on the Company’s incremental borrowing rate.

 

Item 8. Financial Statements and Supplementary Data

 

The information required by this item appears beginning on page F-1 following the signature pages of this report and is incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” and “internal control over financial reporting” as of the end of the period covered by this Annual Report.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective.

 

Limitations on the Effectiveness of Controls

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives.

 

 28 
 

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated 2013 Framework. Internal control over financial reporting is a process designed 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 and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Based on our evaluation under the framework described above, our management concluded that we had “material weaknesses” (as such term is defined below) in our control environment and financial reporting process consisting of the following as of the Evaluation Date:

 

1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our Board of Directors, resulting in ineffective oversight in the establishment and monitoring of required internal control and procedures;
2) inadequate segregation of duties consistent with control objectives;  
3) ineffective controls over period end financial disclosure and reporting processes; and  
4) lack of accounting personnel with adequate experience and training.  

 

A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

 

As of the date of this Annual Report, the Company does not intend to remedy the foregoing and therefore such material weaknesses in our control environment and financial reporting process will continue.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permits the Company to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

No change in our system of internal control over financial reporting occurred during the period covered by this report, fourth quarter of the fiscal year ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

  None

 

 29 
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

The following table sets forth certain information concerning our executive officers and directors as of the date of the Annual Report:

 

Name   Since   To   Director or Officer Position
Robert Y. Lee   2012   current   CHB, CEO, CFO & Director
Brian Pallas   2016   current   Interim COO & Director
James Anderson   2016   current   Director
David Danhi   2013   2016   Former CCO & Director
Algie Hodges   2015   2016   Former CEO & Director
Deepak Devaraj   2013   2016   Former Director
General Wesley Clark   2013   2016   Former Director
Peter Goldstein   2013   2015   Former CFO & Director
Peter Freix   2015   2016   Former Director
Scott Cosper   2015   2016   Former CFO

 

Robert Y. Lee, Chairman of the Board of Directors, CEO & CFO has served the company in a number of executive positions:

 

ROLE:   From   To
Chairman of the Board   2012   current
CEO   May 2016   current
CEO   July 2013   January 2015
CFO   May 2016   current
CFO   June 2013   September 2013

 

Mr. Lee was the Founder, Chairman and Chief Executive Officer of U.S. Dry Cleaning, the largest operator of dry cleaning operations in the United States. Mr. Lee was an independent investor from 2001 through 2005 and became Chairman of U.S. Dry Cleaning in 2005. Mr. Lee successfully restructured the company in 2010 and 2011 pursuant to a Chapter 11 reorganization, positioning the company for the next generation of activity, overseeing financing, secured new management and oversaw the development of a pipeline of accretive acquisitions.

 

From 1981 through 2000 Mr. Lee led the growth of Video City, Inc., a California-based operator of video retail stores. Under his leadership Video City, Inc. opened, acquired, managed, and operated over 500 video retail stores.

 

Starting as an 18 store regional chain in 198, by March 2000 (following the sale of forty-nine stores located in Oregon and Washington to Blockbuster, Inc.) Video City owned or managed 307 corporate stores and an additional 80-franchised locations over a 12 state area. Mr. Lee is qualified to serve on our Board of Directors because of his experience as a successful entrepreneur and a capital markets executive.

 

 30 
 

 

Brian Pallas, Director and Chief Operating Officer since March 2017 and has been a board director since July 1, 2016. In addition Mr. Pallas has been an investor in the company since 2012.

 

He has over 36 years experience in owning, operating, growing and starting retail, consumer services and manufacturing companies. Mr. Pallas founded and grew a single frozen yogurt shop into the first publicly traded franchise of its kind with 120 stores (owned and franchised) throughout the Southwest and Hawaii with system wide revenues in excess of $45 million.

 

Mr. Pallas has a degree in business management (UCONN) and leadership skills as a Vistage International facilitator (Chair) of a think tank for CEOs and business owners (private and public) ranging in size from $5 million to $550 million in annual revenue across a wide array of industries. Mr. Pallas is qualified to serve on our Board of Directors because of his experience as a successful entrepreneur.

 

James Anderson has been a director of the company since 2016 is an executive who has performed in many roles from startup organizations to a sales leadership position at a Fortune 300 Company.

 

In 2005 he started a new mortgage company growing it to a national platform and ultimately selling his interest in 2008. In 1996 he joined the startup NovaStar Financial where he was part of the executive team that took the company from formation to becoming publicly traded in 1997 and grew the company to over 3,500 employees with a market cap in excess of $1 Billion.

 

In 1986 Mr. Anderson entered the Mortgage Lending industry, later joining Saxon Mortgage Funding where he was responsible for launching both their Wholesale and Correspondent divisions. Jim graduated with a BS in Business from USC in 1986. Mr. Anderson is qualified to serve on our Board of Directors because of his experience as a successful entrepreneur.

 

David Danhi, Chief Creative Officer and Director. Resigned in April 2016 and in September 2016 he purchased the intellectual property rights and trademarks to our food business from us. From September 2013 to September 2016 Mr. Danhi has served as our Chief Creative Officer. From October 2012 through September 2013, Mr. Danhi served as our Chief Executive Officer and served as a director of the Company since October 2012.

 

Algie Hodges, Chief Executive Officer and Director. Resigned as an officer and director on May 1, 2016 when we decided to exit the food business. Mr. Hodges has served as our Chief Executive Officer and as a director of the Company from January 2015 to May 2016.

 

Peter Goldstein, Director, President, Interim Chief Financial Officer and Secretary. Resigned as an officer and director on December 29, 2015. Mr. Goldstein served as our Director, President and Interim Chief Financial Officer since September 2013. Mr. Goldstein was also a co-founder and served as our President and Director from December 2009 to April 2012.

 

General Wesley Clark, Director. Resigned on April 8, 2016 while we were deciding to exit the food business. General Clark had served as the Vice Chairman of the Board of Director since July 2013.

 

Deepak Devaraj, Director Resigned on April 15, 2016. Mr. Devaraj served as a Director since September 2013.

 

Peter Freix, Director Resigned on April18, 2016 when we decided to exit the food business after being appointed as a director on December 28, 2015.

 

Scott Cosper, CFO Resigned on April 12, 2017 after being appointed as CFO on December 28, 2016. Mr. Cosper continues to provide accounting services on a consulting basis.

 

 31 
 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act, requires that our directors and executive officers and persons who beneficially own more than 10% of our Common Stock (referred to herein as the “Reporting Persons”) file with the SEC various reports as to their ownership of and activities relating to our Common Stock. Such Reporting Persons are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file.

 

At the filing date of this Form 10K our current officers, board of directors and affiliates (10% holders) have met their filing requirements.

 

Based solely on our review of the copies of the forms received by us and written representations from certain reporting persons, we believe that for the year ended December 31, 2015, some of our former executive officers, directors and greater-than-ten percent stockholders did not comply with the Section 16(a) filing requirements. Subsequently, all of these officers and directors have resigned from our company.

 

Code of Conduct and Ethics

 

We have adopted a corporate Code of Conduct and Ethics that applies to our officers, employees and directors.

 

Director Independence

 

We are not currently subject to any standards regarding the “independence” of directors on our Board, or otherwise subject to any requirements of any national securities exchange or an inter-dealer quotation system with respect to the need to have a majority of our directors be independent. Although we are not required to comply with these requirements, our Board of Directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, the board has determined that none of the directors are “independent directors” as defined by in the rules of The NASDAQ OMX Group, Inc. listing standards and Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended.

 

Committees

 

We have not formed an Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee as of the filing of this report. Our Board of Directors performs the principal functions of an Audit Committee. We currently do not have an audit committee financial expert on our Board of Directors. We believe that an audit committee financial expert is not required because the cost of hiring an audit committee financial expert to act as one of our directors and to be a member of an Audit Committee outweighs the benefits of having an audit committee financial expert at this time. However, we intend to implement a comprehensive corporate governance program, including establishing various board committees in the future. In addition, we have secured Directors and Officers insurance consistent with the Company’s and Board of Director’s mandates.

 

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Item 11. Executive Compensation

 

Summary Compensation Table

 

The following table sets forth all information concerning the compensation received for the fiscal years ended December 31, 2015 and 2016 for services rendered to us by persons who served as our principal executive officer our two most highly compensated executive officers (other than the principal executive officer) who were serving as executive officers at the end of the last completed fiscal year, and two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the smaller reporting company at the end of the last completed fiscal year. Aside from the salary amounts as described below, none of our officers are entitled to any additional compensation. No amounts have been paid or accrued to any named executive officer pursuant to a plan or arrangement in connection with any termination or change of control.

 

    Fiscal             Equity   All Other
Compensation
   
Name and Principal Position     Year   Salary($)   Bonus     Awards   (shares)   Total ($)
                                 
Robert Lee   1 2016   $                          
Executive Chairman,     2015   $                   980,000      
Interim CEO & CFO                                    
                                     
Brian Pallas   2 2016   $ 120,000           1,750,000     500,000   $ 120,000
Chief Operating Officer                                    
                                     
Algie Hodges   3 2016   $ 80,769           333,333     294,231   $ 80,769
former CEO and President     2015   $ 49,039                        
                                     
David Danhi   4 2016   $ 8,750                     $ 8,750
former Chief Creative Officer     2015   $ 136,428                     $ 136,428
                                     
Peter Goldstein   5 2016   $     $                 $  
former President, CFO     2015   $ 180,000                        
& Treasurer                                    

 

Mr. Lee, our Executive Chairman, earned $243,333 and $240,000 in 2016 and 2015 respectively, as compensation from his employment agreement, dated July 16, 2012, as amended on September 6, 2013 and has amended on November 18, 2014 and further updated on May 1, 2016. In September 2016 the company issued Mr. Lee 980,000 shares of stock in exchange for $480,421 in back pay and expenses. At December 31, 2016 the company owed Mr Lee $246,667 in back pay and $104,000 in expenses.

 

Brian Pallas was appointed COO on May 1, 2017 and has been a director of our company since April 27, 2016. On May 1, 2016, the Company entered into a director and consulting agreement with its Director, Brian Pallas. The agreement is for a one year term. Mr. Pallas’ duties under the agreement include assisting the company with accretive acquisitions. For his services, Mr. Pallas will receive a salary of $10,000 per month. He will also be entitled to bonuses based on the purchase price of the acquisitions, ranging from 2%-5%. As a signing bonus, Mr. Pallas was issued 500,000 shares of the Company’s common stock. He also received warrants as follows: (i) 500,000 at $0.50 each with 7 year terms and a cashless option, (ii) 500,000 at $1.00 with 7 year terms and a cashless option, and (ii) 750,000 at $2.00 each with 5 year terms. At December 31, 2016 the company owed Mr. Pallas $458,400 in back pay.

 

Algie Hodges resigned on May 1, 2016. resigned as an officer and director on May 1, 2016. Mr. Hodges was our CEO & President was appointed CEO on January 26, 2015 and was appointed President on December 28, 2015. Amount paid to Mr. Hodges are per his termination agreement.

 

Mr. Danhi, our former CCO and CEO resigned in April 2016. He was became Chief Executive Officer of the Company on October 18, 2012 to September 6, 2013, when Mr. Danhi changed roles to become our Chief Creative Officer.

 

Mr. Goldstein resigned December 28, 2015. He was a Director, President and Interim Chief Financial Officer from September 6, 2013 to December 28, 2015. Mr. Goldstein earned $180,000 in 2015, as compensation from his employment agreement. Prior to his appointment as Director, President and Interim Chief Financial Officer. At December 31, 2016 the company has accrued $180,000 in back pay and $123,022 for expenses.

 

 33 
 

 

Employment Agreements

 

Robert Y Lee Chairman of the Board of Directors, CEO & CFO

 

Mr. Lee has had entered a series of employment agreements with the company since 2012 as summarized below:

 

Employment Agreements  Salary     Bonus  Term  Other terms
May 2016  $250,000    A    100 - 300%    3 years   Options + expenses
November 2014  $240,000    B    performance    1 year   expenses
September 2013  $240,000    C    performance    1 year   expenses
July 2012  $120,000    D   $80,000    1 year   expenses
                        
              Price    Life    
Options   1,000,000        $0.50    7    
Options   1,000,000        $1.00    7    
Options   2,000,000        $2.00    5    

 

A.       On May 1, 2016 the Company entered into a new employment agreement with Mr. Lee. Mr. Lee shall be paid the compensation and shall be provided with the benefits described below :

 

Annual Base Salary of $250,000 (on an annualized basis). The annual base salary payable to Mr. Lee for each Contract Year thereafter shall be an amount determined by the Board in its discretion.

 

Bonus. Mr. Lee will be eligible for a success bonus in an amount of 100% of Mr. Lee’s Annual Base Salary for closing the Urban Pharms acquisition. Thereafter, based upon the annual goals and objectives agreed to with the Board of Directors, for each fiscal year that Mr. Lee is employed by the Company in which he achieves these annual goals Mr. Lee will be awarded up to three times his then base salary.

 

Equity Compensation. The company shall grant concurrent with the effective date to Mr. Lee four (4) million fully vested stock options. This stock option shall be exercisable according to the following terms; one million options exercisable on a cashless basis at a price of fifty cents per share until the seventh (7th) anniversary of the date of grant; one million options exercisable on a cashless basis at a price of one dollar per share until the seventh (7th) anniversary of the date of grant; two million options exercisable at a price of two dollars per share until the fifth (5th) anniversary of the date of grant.

 

Benefits. Mr. Lee shall be entitled to receive benefits under any employee benefit plan or other arrangement made available by the Company to any of its employees (including, without limitation, the Company’s medical, 401(k) and similar plans as may be approved by the Board, collectively, the “Benefits”).

 

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Mr. Lee shall be entitled to twenty days of paid vacation during each year.

 

Expenses. The Company shall reimburse Mr. Lee for all reasonable travel and other business expenses incurred by Mr. Lee in the performance of his duties to the Company. Such expenses shall be reimbursable in accordance with prevailing policies of the Company upon submission of verifiable receipts. Further, the Company will provide Mr. Lee with a $2,000 per month car allowance.

 

B.        On November 18, 2014, the Company entered into Amendment No. 2 to its employment agreement with Robert Y. Lee (the “Second Amended Lee Agreement”), which amends Mr. Lee’s employment agreement originally dated July 16, 2013, as amended by Amendment No. 1 dated September 6, 2013. The Second Amended Lee Agreement has a term ending December 31, 2015 and provides that in the event that the Company completes a private placement offering commencing in May 2013, Mr. Lee shall receive a cash payment of $100,000 if the Company raises a minimum of $5,000,000 in that offering. Also, the Company shall pay Mr. Lee a success fee, if it closes on an acquisition, merger or joint venture or similar transaction, payable in the same form of consideration paid by the Company in the amount of (i) 2.5% of the first $5,000,000 of total consideration paid, or any part; (ii) plus, 2% of the second $5,000,000 of total consideration paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total consideration paid, or any part; (iv) plus, 1% of the next $5,000,000 of total consideration paid, or any part; (v) plus, 0.5% of the balance of total consideration paid. No other material amendments were made to Mr. Lee’s employment agreement.

 

Mr. Lee will be entitled to certain milestone and performance based bonuses, as described below. In the event that our common stock is listed for quotation on the OTC Bulletin Board, OTCQB Market, or any other quotation or exchange and within 18 months of commencement of trading, the stock price exceeds $5.00 per share, the Mr. Lee will be granted warrants to purchase 700,000 shares of common stock at an exercise price of $2.00. These warrants will contain cashless exercise and will be exercisable for a period of three years from the date that they are granted. Additionally, the Mr. Lee is entitled to a cash bonus of $100,000 if the Company completes a private placement offering pursuant to the new Jumpstart Our Business Startups Act in which the Company raises a minimum of $5,000,000 in net proceeds. Mr. Lee is also entitled to certain performance bonuses if we meet certain revenue driven milestones.

 

In addition to the milestone and performance bonuses, Mr. Lee is entitled to receive certain payments, on a case-by-case basis and on terms and compensation to be negotiated separately from the Amended Lee Agreement and evidenced in a separate agreement, for Mr. Lee’s role with respect to any business development or any management support activities as may be requested or desired by the Company. Mr. Lee will also receive compensation for any referrals that cause us to consummate a licensing agreement.

 

C.       On September 6, 2013, we entered into Amendment No. 1 to the Employment Agreement (the “Amended Lee Agreement”) with Robert Y. Lee which amends the Lee Employment Agreement dated July 16, 2013. The Amended Lee Agreement provides that Mr. Lee will be appointed as Interim Chief Executive Officer of the Company. Mr. Lee will also continue in his role as Executive Chairman of the Board of Directors. The Amended Lee Agreement has a one year term and will pay Mr. Lee a salary of $240,000 per annum with certain expense reimbursements. In the event that Mr. Lee is replaced as Chief Executive Officer and this agreement is terminated, Mr. Lee is entitled to receive all compensation, benefits and expenses, as provided in the Amended Lee Agreement, for a period of 12 months following the replacement.

 

D.       On July 16, 2012, the Company entered into an employment agreement (the “Lee Employment Agreement”) with Robert Y. Lee to serve as our Executive Chairman. The agreement stipulates that Mr. Lee will work no fewer than twenty (20) horns per week. In addition, the parties agreed that Mr. Lee shall not engage or participate in any business that is in competition in any manner whatsoever with the business of our company, or any business which our company contemplates conducting or intends to conducts.

 

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Pursuant to the terms of the Lee Employment Agreement, as amended, we will pay Mr. Lee $120,000 annually. In addition, Mr. Lee will receive reimbursement for all reasonable expenses which Lee incurs during the course of performance under the Lee Employment Agreement. In addition to his annual compensation, we paid Mr. Lee a signing bonus of $80,000, of which $40,000 was paid from the proceeds at the final closing of the 2012 Private Placement Offering on April 18, 2013 and an additional $40,000 remains due. The term of the Lee Employment Agreement is for eighteen months. Mr. Lee can terminate the Lee Employment Agreement after four months with 30 days notice. We can terminate the Lee Employment Agreement upon notice to Mr. Lee.

 

Brian Pallas, Chief Operating Officer & Director

 

On May 1, 2016 the Company entered into a new consulting agreement with Mr. Brian Pallas. 

 

Mr. Pallas shall be paid the compensation and shall be provided with the benefits described below:

 

A. Annual base compensation: $120,000 ($10,000 per month)
   
B. Mr. Pallas shall receive a success bonus based on the value of the purchase price of each acquisition (cash and equivalent) per an agreed formula.
   
C. Mr. Pallas shall receive a signing bonus of 500,000 shares of our company’s common stock.
   
D. Benefits. Mr. Pallas shall be entitled to receive benefits under any employee benefit plan or other arrangement made available by the Company to any of its employees (including, without limitation, the Company’s medical, 401(k) and similar plans as may be approved by the Board, collectively, the “Benefits”).
   
E. Expenses. The Company shall reimburse Mr. Pallas for all reasonable travel and other business expenses incurred in the performance of his duties to the Company. Such expenses shall be reimbursable upon submission of verifiable receipts in accordance with the policies of the Company.
   
F. 1.75 Million Warrants as follows:

 

Number of  Issue  Strike  Expire
Warrants  Date  Price  Date
 500,000    5/1/2016   $0.50    5/1/2023 
 500,000    5/1/2016   $1.00    5/1/2023 
 750,000    5/1/2016   $2.00    5/1/2021 

 

 36 
 

 

Outstanding Equity Awards at 2016 Fiscal Year End

 

   Option & Warrant awards   Stock awards 
                               Equity 
                               incentive 
                           Equity   plan 
                           incentive   awards: 
                           plan   Market 
                           awards;   or 
                           Number   payout 
       Equity                   of   value of 
       incentive           Number   Market   unearned   unearned 
       plan           of   value of   shares,   shares, 
       awards:           shares   shares   units or   units or 
   Number of   Number of           or units   or units   other   other 
   securities   securities           of stock   of stock   rights   rights 
   underlying   underlying           that   that   that   that 
   unexercised   unexercised   Option   Option   have not   have not   have not   have not 
   options (#)   unearned   exercise   expiration   vested   vested   vested   vested 
Name  exercisable   options (#)   price   date   (#)   ($)   (#)   ($) 
                                 
Options                                        
Deepak Devaraj   250,000       $2.00    9/8/2023                     
    250,000       $3.00    9/8/2023                     
    250,000       $4.00    9/8/2023                     
    250,000       $5.00    9/8/2023                     
                                         
Robert Y Lee   1,000,000       $0.50    5/1/2023                     
    1,000,000       $1.00    5/1/2023                     
    2,000,000       $2.00    5/1/2021                     
                                         
Warrants                                        
Brian Pallas   500,000       $0.50    5/1/2023                     
    500,000       $1.00    5/1/2023                     
    750,000       $2.00    5/1/2021                     

 

2013 Equity Plan

 

On September 6, 2013, our board of directors adopted the 2013 Equity Plan. Under this plan, we may grant options to employees, directors, senior management of the company and, under certain circumstances, consultants. The purpose of the 2013 Equity Plan is to retain the services of the group of persons eligible to receive option awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the company and its affiliates. A maximum of 4,000,000 shares of common stock has been reserved for issuance under this plan. The plan expires on September 6, 2023. Our board of directors will administer the plan unless and until the board of directors delegates administration to a committee, consisting of one or more members, that has been appointed by the board of directors, except that once our common stock begins trading publicly, the committee will consist solely of two or more outside directors as defined in the Treasury Regulations promulgated under Section 162(m) of the Internal Revenue Code of 1986, as amended. The board of directors will have the power to determine which persons eligible under the plan will be granted option awards, when and how each option award will be granted, and the provisions and terms of each option award. If the board of directors delegates administration of the plan to a committee, the committee will inherit all of the powers possessed by the board of directors.

 

Transferability

 

Option awards are not transferable other than by will or by the laws of descent and distribution unless otherwise provided in the individual option agreement.

 

 37 
 

 

Change of Control Event

 

In the event of a change in control, then, without the consent or action required of any holder of an option award (in such holder’s capacity as such):

 

(i) Any surviving corporation or acquiring corporation or any parent or affiliate thereof, as determined by the board of directors in its discretion, will assume or continue any option awards outstanding under the plan in all or in part or shall substitute to similar stock awards in all or in part; or

 

(ii) In the event any surviving corporation or acquiring corporation does not assume or continue any option awards or substitute to similar stock awards, for those outstanding under the plan, then: (a) all unvested option awards will expire (b) vested options will terminate if not exercised at or prior to such change in control; or

 

(iii) Upon change in control the board of directors may, in its sole discretion, accelerate the vesting, partially or in full, in the sole discretion of the board of directors and on a case-by-case basis of one or more option awards as the board of directors may determine to be appropriate prior to such events.

 

Notwithstanding the above, in case of change in control, in the event all or substantially all of the shares of the company are to be exchanged for securities of another company, then each holder of an option award shall be obliged to sell or exchange, as the case may be, any shares such holder hold or purchased under the plan, in accordance with the instructions issued by the board of directors, whose determination shall be final.

 

Termination of Employment/Relationship

 

In the event of termination of the option holders employment with the company or any of its affiliates, or if applicable, the termination of services given to the company or any of its affiliates by consultants of the company or any of its affiliates for cause (as defined in the plan), all outstanding option awards granted to such option holder (whether vested or not) will immediately expire and terminate on the date of such termination and the holder of option awards will not have any right in connection to such outstanding option awards, unless otherwise determined by the board of directors. The shares of common stock covered by such option awards will revert to the plan.

 

 38 
 

 

Director Compensation

 

Our directors did not receive any compensation during the years ended December 31, 2015 and 2016, except as follows:

 

        Fees earned               Option    
    Fiscal   or paid in   Stock       Awards   All Other    
Name   Year   cash ($)   Awards   Bonus   ($)   Compensation   Total ($)
                               
Robert Lee 1 2016   $                    
    2015                          
                               
Brian Pallas 2 2016   $                    
                               
James Anderson 3 2016   $                    
                               
Peter Freix 4 2016   $   50,000                
                               
General 5 2016                          
Wesley K. Clark   2015   $                    

 

1 See Officer compensation above
   
2 See Officer compensation above
   
3 James Anderson does not have a compensations agreement
   
4 Peter Freix was appointed to the board of directors on December 28, 2015 and subsequently resigned on April 18, 2016. For his services Mr. Freix received 50,000 shares of common stock.
   
5 General Clark resigned from the board of directors on April 8, 2016 . On September 6, 2013, the Company issued warrants to the Clark Group to purchase 500,000 shares of the Company’s common stock. These warrants have expired. The warrants had an exercise price of $1.00 and were exercisable for a period of three [3] years.

 

 39 
 

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of December 31, 2016  for: (i) each of our directors; (ii) each of our executive officers: (iii) all of our directors and executive officers as a group; and (iv) all persons, to our knowledge, are the beneficial owners of more than five percent (5%) of the outstanding shares of common stock. Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the securities.

 

Except as indicated in footnotes to this table, we believe each person named in this table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name. Percentage ownership is based on 45,734,208  shares of common stock outstanding on December 31, 2016 .

 

          Common Stock   
Name of Beneficial      Convertible  Beneficially  Percent of
Owner (1)(2)   Common Stock  Securities  Owned  Class **
              
Urban Pharms, LLC  3   7,000,000         7,000,000    15%
John E. Walker  4   5,000,000         5,000,000    11%
Robert Y. Lee  5   3,734,003    4,712,000    8,446,003    17%
Brian Pallas  6   535,133    2,000,000    2,535,133    5%
James Anderson  7   526,670    37,500    2,526,670    6%
David Danhi  8   4,345,000    70,000    4,415,000    10%
                        
Directors, officers and 5% holders as a group       (6 persons)    29,922,806      
                        
Total Common Stock shares issued and outstanding at December 31, 2016       45,734,208      

 

  The percentage ownership of each person is calculated by assuming that only such person exercises all of his or her convertible securities as noted in the footnotes and the table above. Therefore, the amount of common stock issuable upon exercise of such convertible securities are added to the total shares currently issued and outstanding.
   
1 Unless otherwise indicated, the address of each person is at American Patriot Brands, Inc. 4570 Campus Drive, Suite 1, Newport Beach, CA 92660.
2 Unless otherwise indicated, all ownership is direct beneficial ownership
3 Urban Pharms is a subsidiary of American Patriot Brands, Inc.
4 John E. Walker was a former owner of Urban Pharms and has no ongoing role with the company
5 Includes (i) options & warrants to purchase 4,712,000 shares of common stock which are currently exercisable and (ii) 350,000 shares of common stock held by Joshua Capital, LLC, of which Mr. Lee is the sole owner.
6 Includes warrants to purchase 2,000,000 shares of common stock which are currently exercisable.
7 Includes 37,500 shares of common stock issuable upon the exercise of warrants which are currently exercisable
8 Includes 3,000,000 common shares held in escrow to be returned to the company upon the company meeting specific conditions.

 

**