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EX-32 - Notis Global, Inc.ex32.htm
EX-31 - Notis Global, Inc.ex31.htm
EX-21.1 - Notis Global, Inc.ex21-1.htm
EX-10.130 - Notis Global, Inc.ex10-130.htm
EX-10.129 - Notis Global, Inc.ex10-129.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2016

or

 

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

 

Commission File Number 000-54928

 

 

 

NOTIS GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   45-3992444

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1715 Highway 35 North, Suite 101    
Middletown, NJ   07748
(Address of Principal Executive Offices)   (Zip Code)

 

(800) 762-1452

(Issuer’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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

 

Common Stock, Par Value $0.001 Per Share

(Title of Class)

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the OTC markets on June 30, 2016 was $592,086.

 

As of January 2, 2019, the Company had 9,982,923,868 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

   
 

 

TABLE OF CONTENTS

 

PART I  
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 8
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. MINE SAFETY DISCLOSURE 20
PART II    
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 21
ITEM 6. SELECTED FINANCIAL DATA 21
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 80
ITEM 9A. CONTROLS AND PROCEDURES 80
ITEM 9B. OTHER INFORMATION 80
PART III    
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 81
ITEM 11. EXECUTIVE COMPENSATION 85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 89
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 90
PART IV    
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 91
ITEM 16. FORM 10-K SUMMARY 99
  SIGNATURES 100

 

2

 

 

PART I

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

3

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

We are a diversified holding company in the industrial hemp market. Based upon our knowledge and expertise in the regulation of the cannabis industry, we are refocusing our business plan to create a sustainable business model to grow crops and manufacture products from hemp farmland and to market, sell and distribute hemp derivative products such as cannabidiol (“CBD”) distillate and isolate, while exploring other business opportunities that complements our core business. At this time, we cultivate industrial hemp and then through a toll processing and extraction process we sell the hemp derivative product such as CBD IMA on a wholesale basis. We plan to cultivate industrial hemp based on our 320-acre farm in Pueblo, Colorado, through our wholly owned subsidiary, EWSD I, LLC. In 2017, we completed a pilot study on the Pueblo farm where we planted 15 acres of land, which was processed by a third- party contractor and distributed through our network. Based on the pilot study, we planted and harvested an aggregate of 100 acres of land in the planting season (early June to the end of September) of 2018.

 

Through our subsidiary, NY – SHI, LLC, we conducted a similar pilot study on 1.5 acres in the Hudson Valley region of New York State in 2018 through a contractor to determine if it is viable to cultivate industrial hemp in New York on a larger scale. We have received good education on our pilot study and are considering scaling in 2019. In addition to hemp cultivation, we also plan to establish our own pre-processing plant through a joint venture agreement with one of the leading hemp processors in the nation. The plant will not only have the capacity to process our own hemp but also service other hemp farmers. Leveraging our industry experience and existing logistics, we also plan to contract other farmers to grow hemp for us at pre-determined prices so be processed and distributed by us.

 

In February 2018, we, through a newly formed subsidiary, SOCO Processing, LLC, entered into a non-binding memorandum of understanding with Mile High Labs LLC and Rush Ventures LLC to build a pre-processing hemp extraction line on our farm in Pueblo, which we plan to license to Rush Ventures LLC for a monthly fee. The plant will not only have the capacity to process hemp grown by EWSD I, LLC, but allow us to generate revenues by referring customers to utilize the pre-processing hemp extraction line at an agreed upon rate. We may also generate revenues by referring customers to utilize the pre-processing hemp extraction line at an agreed upon rate. We are in negotiation for a definitive agreement as of the date of this report.

 

State and local laws regarding farming and growing hemp and processing centers for hemp vary. In June, 2018, the Senate passed the Farm Bill which contains provisions to legalize the cultivation, processing and sale of industrial hemp. With an eye focused on the future and ultimately anticipated FDA approval of hemp and CBD production and sales in the United States, we are honing our focus to controlling our supply chain. From “seed to sale,” we will control our own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products.

 

Leveraging our industry experience and existing logistics, we also plan to contract other farmers to grow hemp at pre-determined prices to be processed and distributed by us

 

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

 

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We operate through the following subsidiaries:

 

  EWSD I, LLC d/b/a Shi Farms, a Delaware corporation established in March 2016 that cultivate and process industrial hemp in Colorado;
     
  NY-SHI, LLC, a New York limited liability company established in May 2018 to conduct our pilot study in New York;
     
 

 

SHI Cooperative, LLC, a Colorado limited liability company established in May 2018 to contract with third party farmers to cultivate hemp;
     
  Pueblo Agriculture Supply and Equipment, LLC, a Delaware corporation that was established in July of 2016 to own extraction equipment;
     
  SOCO Processing, LLC, a Colorado limited liability company established in May 2018 to establish a pre-processing plant; and
     
  Rock Acquisition Corporation, a New Jersey corporation established in December 2017, which has a mining permit with the State of Colorado and manages land containing the potential sand and gravel assets of our company.

 

Corporate History

 

We were originally incorporated on June 16, 1977 in the State of Nevada under the name “Rabatco, Inc.” In May 2000, we changed our name to MindfulEye, Inc. On November 25, 2011, P. Vincent Mehdizadeh purchased 50% of the outstanding shares of our common stock. On August 30, 2011, in anticipation of the transaction discussed below, we changed our name to “Medbox, Inc.” Pursuant to a Stock Purchase Agreement with PVM International, Inc. dated December 31, 2011, we acquired all of the outstanding shares of common stock in various entities controlled by Mr. Mehdizadeh, in exchange for 2,000,000 shares of our common stock and a $1 million promissory note. The promissory note was repaid in full on April 16, 2013. In August 2012, Mr. Mehdizadeh purchased the remainder of our outstanding shares in a private transaction. During December of 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 12 to our consolidated financial statements.)

 

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

 

Government Regulations

 

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

 

5

 

 

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

 

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

 

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

 

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

 

In addition, our subsidiaries, including but not limited to EWSD I, LLC, are also subject to other federal and local regulations, including the Pesticide Act of the State of Colorado.

 

6

 

 

Competition

 

Our competitors in both the hemp space include sellers of products and services dedicated to the hemp and compliance regulated cannabis industry, including the cultivation, processing and distribution of industrial hemp products. We compete in markets where cannabis has been legalized and regulated, which includes various states within the United States. We expect that the quantity and composition of our competitive environment will continue to evolve as the industry matures. Additionally, increased competition is possible to the extent that new states and geographies enter the marketplace as a result of continued enactment of regulatory and legislative changes that de-criminalize and regulate cannabis products. We believe that by diligently establishing and expanding our brands, product offerings and services in new and existing locations, we will become well established in this growing industry. Additionally, we expect that establishing our product offerings in new and existing locations are factors that mitigate the risk associated with operating in a developing competitive environment. Additionally, the contemporaneous growth of the industry as a whole will result in new customers entering the marketplace, thereby further mitigating the impact of competition on our operations and results. Our competitors may have substantially greater resources, experience in obtaining regulatory approvals, operating experience, marketing capabilities, name recognition and production capabilities.

 

Employees

 

As of November 19, 2018, we have no full time employees and one of our subsidiaries, EWSD I, LLC, has ten (10) full time employees. The number of our, and our subsidiaries, part time employees fluctuates over the course of one year due to the nature of our business. We also use the services of five (5) independent contractors, of whom two (2) are through EWSD I, LLC. Neither we nor our subsidiaries have experienced any work stoppages and we consider the relations with their respective employees and independent contractors to be good.

 

Implications of Emerging Growth Company Status

 

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

 

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

 

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

 

7

 

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

Risks Related to our Securities

 

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

 

Our Articles of Incorporation authorize 10,000,000,000 shares of common stock, of which 9,942,223,868 shares of common stock are issued and outstanding as of December 31, 2016, and 10,000,000 shares of preferred stock, of which 5,000,000 shares were issued as Series A Preferred Stock and then converted into common stock and retired and of which 5,000,000 remain unissued and undesignated. The Company may also be obligated to issue an additional 114,889,067,758 shares of common stock including shares of common stock issuable upon exercise of options and warrants and excluding shares of common stock issuable upon conversion of convertible notes. There is no assurance that the Company will ever have enough authorized shares of common stock to honor the exercise and conversion requests of its options and warrants.

 

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

 

Our Board of Directors is authorized to issue our common stock and preferred stock, up to the amount authorized. Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares.

 

In order to raise capital to fund our business plan, including developing and operating the farm in Pueblo, CO, and the operating expenses of the Company, we have issued convertible debentures to our lenders that are convertible into shares of our common stock at a discount to the current market prices, upon conversion by the lenders. Conversion of these debentures by the lenders leads to immediate and substantial dilution to holders of our common stock and could depress the price of our stock, having a material effect on the market value of the shares.

 

8

 

 

Our stock price has been extremely volatile.

 

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

 

Among the factors that could affect our stock price are:

 

  our announcements regarding our Restatements and the status of the ongoing SEC investigation and related stockholder litigation;
     
  industry trends;
     
  actual or anticipated fluctuations in our quarterly financial and operating results and operating results that vary from the expectations of our management or of securities analysts and investors;
     
  our failure to meet the expectations of the investment community and changes in investment community;
     
  recommendations or estimates of our future operating results;
     
  announcements of strategic developments, acquisitions, dispositions, financings, product developments and other materials events by us or our competitors;
     
  regulatory and legislative developments;
     
  litigation;
     
  general market conditions;
     
  other domestic and international macroeconomic factors unrelated to our performance; and
     
  additions or departures of key personnel.

 

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

 

Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our common stock is traded on the OTC markets, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchanges. These factors may have an adverse impact on the trading and price of our common stock.

 

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

 

A substantial portion of our total outstanding shares of common stock may be sold into the market under Rule 144 promulgated under the Securities Act. Such sales could cause the market price of our common stock to drop, even if our business is doing well. Such sales may include sales by officers and directors of the Company, who have entered into pre-arranged stock trading plans to sell shares of the Company’s common stock beneficially owned by them, established under Rule 10b-5-1 of the Securities Exchange Act of 1934, as amended.

 

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

 

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

 

Our Articles of Incorporation give our Board of Directors the authority to issue additional series of preferred stock without a vote or action by our stockholders. The Board of Directors also has the authority to determine the terms of preferred stock, including price, preferences and voting rights. The rights granted to holders of preferred stock in the future may adversely affect the rights of holders of our common stock. Any such authorized class of preferred stock may have a liquidation preference – a pre-set distribution in the event of a liquidation – that would reduce the amount available for distribution to holders of common stock or superior dividend rights that would reduce the amount of dividends that could be distributed to common stockholders. In addition, an authorized class of preferred stock may have voting rights that are superior to the voting right of the holders of our common stock. There are no shares of preferred stock presently outstanding.

 

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

 

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

 

Risks Related to Our Business

 

Our continued success is dependent on legalizing industrial hemp.

 

Continued development of the industrial hemp market is dependent upon continued legislative authorization of industrial hemp at the both the federal and the state level. The Farm Bill was signed into law in December 2018, which legalizes hemp cultivation broadly and the transfer of hemp-derived products across state lines. Pursuant to the Farm Bill, there will be significant shared state-federal regulatory power over hemp cultivation and production. See “Government Regulations.” In certain states, such as Colorado, based on the specifics of the legislation passed in that state, and on local governments authorizing a sufficient number of dispensaries. Any number of factors could slow or halt the progress. Furthermore, progress, while encouraging, is not assured, and the process normally encounters set-backs before achieving success. While there may be ample public support for legislative proposal, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of these factors could slow or halt the progress of hemp legalization, which would limit the market for our products and negatively impact our business and revenues.

 

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

 

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

 

10

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

11

 

 

Currently, industrial hemp remains illegal under federal law.

 

In June, 2018, the Senate passed the Farm Bill which contains provisions to legalize the cultivation, processing and sale of industrial hemp. However, industrial hemp remains illegal under federal law as of the date of this report. It is a Schedule-I controlled substance. Even in those jurisdictions in which the use of hemp has been legalized at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of hemp preempts state laws that legalize its use for medicinal purposes. Presently, despite federal law, many states are maintaining existing laws and passing new ones in this area. This may be because the Trump Administration has made a policy decision to allow states to implement these laws and not prosecute anyone operating in accordance with applicable state law.

 

Regardless of the Trump Administration’s policy decision, the federal government may at any time choose to enforce the federal law, and, in the past, it has investigated hemp businesses in the various states in which we do business. Moreover, a change in the federal attitude towards enforcement could cripple the industry.

 

Adverse actions taken by the federal government may lead to delays on our business operations, disruptions to our revenue streams, losses of substantial assets, and substantial litigation expenses.

 

We and people and businesses that we do business with may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.

 

As discussed above, the use of hemp is illegal under federal law. Therefore, there is a compelling argument that banks cannot accept for deposit funds from the drug trade and therefore cannot do business with our clients that traffic in hemp, and clinic operators often have trouble finding a bank willing to accept their business. On February 14, 2014, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks “clarifying Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to hemp-related businesses.” In addition, U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized hemp businesses. While these are positive developments, there can be no assurance this legislation will be successful, or that, even with the FinCEN guidance, banks will decide to do business with hemp retailers, or that, in the absence of actual legislation, state and federal banking regulators will not strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal law. The inability of potential clients in our target markets to open accounts and otherwise use the services of banks may make it difficult for such potential clients to purchase our products and services and could materially harm our business.

 

We may have difficulty accessing bankruptcy courts.

 

As discussed above, the use of hemp is illegal under federal law. Therefore, there is a compelling argument that the federal bankruptcy courts cannot provide relief for parties who engage in the hemp or hemp-related businesses. Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute hemp assets as such action would violate the Controlled Substances Act. Therefore, we may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability to obtain credit.

 

12

 

 

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

 

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

 

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

 

Our auditors have raised concerns about our ability to continue operations as a “going concern.” Investors may lose all of their investment if we are unable to continue operations and generate revenues.

 

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

 

The Company received an event of default regarding a promissory note and is unable to predict the outcome of this matter.

 

On September 22, 2016, the Company received notice of an Event of Default and Acceleration from one of its lenders regarding a Promissory Note issued on March 14, 2016. (See Item 1A. Risk Factors). As of the date of this filing, the Company is in technical default on all notes outstanding. On October 31, 2018, the Company and the affiliates of YA PN, LTD., entered into a Forbearance Agreement regarding the notes, Security Agreement, related documents and the financing arrangements described within the Forbearance Agreement pursuant to which the affiliates of YA PN, LTD. agreed not to enforce certain of its claims. The Company is unable to predict the outcome of these matters, however, legal action taken by the Company’s lenders could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan.

 

13

 

 

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

 

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

 

  cash provided by operating activities;
     
  available cash and cash investments; and
     
  capital raised through debt and equity offerings.

 

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

 

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

 

The Company and some of its subsidiaries are currently delinquent with their respective federal and applicable state tax returns filings for the years ending December 31, 2016 and December 31, 2017. Therefore, we may incur additional taxes and costs. At this time, we are unable to determine whether or not such additional taxes or costs would have a material adverse effect on the company or its net operating losses, as discussed below.

 

Although we have been experiencing recurring losses, we are obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. Our subsidiary, EWSD I, LLC, has approximately $1,618,129 of net operating losses during the year ended December 31, 2016. This net operating loss will be eligible to be carried forward for tax purposes at federal and applicable states level, but the use of such net operating losses may be subject to restrictions under applicable tax law. A full valuation allowance has been recorded related to the deferred tax assets generated from the net operating losses. The Company is currently delinquent on filing their tax returns.

 

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

 

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements for the years ended December 31, 2016 and 2015, we determined that our disclosure controls and procedures were ineffective, and that there was a material weakness in our internal controls over financial reporting, due to insufficient segregation of duties in our finance and accounting function because of our limited personnel. We currently have no employees and rely (and anticipate continuing to rely) heavily on third-party contractors for the provision of professional and other services. This resulted in not ensuring appropriate segregation of duties between incompatible functions, and made it more difficult to ensure that financial information is adequately analyzed and reviewed on a timely basis to detect misstatements. These above deficiencies represent a material weakness in our internal control over financial reporting given that they result in a reasonable possibility that a material misstatement to the annual or interim financial statements would not have been prevented or detected.

 

14

 

 

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

 

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

 

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an “emerging growth company” as defined in the recently enacted JOBS Act, if we take advantage (as we expect to do) of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” until the fifth anniversary of the date of the first sale of common equity securities pursuant to the registration statement that went effective on December 11, 2014, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future.

 

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

 

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

 

We have committed, and expect to continue to commit, significant resources and capital to develop and market existing product and service enhancements and new products and services. These products and services are relatively untested, and we cannot assure you that we will achieve market acceptance for these products and services, or other new products and services that we may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business of dispensing regulated pharmaceutical products. In addition, new products, services and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services or enhancements or to hire qualified employees could seriously harm our business, financial condition and results of operations.

 

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

 

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

 

15

 

 

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

 

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

 

Our prior operating results may not be indicative of our future results.

 

You should not consider prior operating results with respect to revenues, net income or any other measure to be indicative of our future operating results. In 2016, we transitioned to a new business model. The timing and amount of future revenues will depend almost entirely the success of our new model and our ability to service new customers. Our future operating results will depend upon many other factors, including:

 

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

 

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

 

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

 

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

 

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

 

16

 

 

We depend upon key personnel, the loss of which could seriously harm our business.

 

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

 

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

 

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

 

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

 

ITEM 2. PROPERTIES

 

On August 7, 2015, we purchased certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (“Farm”), pursuant to an Agreement of Purchase and Sale of Membership Interest, where we plan to farm hemp plants. As consideration, we, among other things, issued a secured promissory in the principal amount of $3,670,000. The note is secured by a deed of trust and assignment of rents encumbering the acquired property.

 

The transaction was structured as a purchase, pursuant to a certain Agreement of Purchase and Sale of Membership Interest (the “Acquisition Agreement”) entered into July 23, 2015 between East West Secured Development, LLC (the “Seller”) and the Company, of 100% of the membership interest of EWSD I, LLC (“EWSD”) upon EWSD’s simultaneous purchase from Southwest Farms, Inc. (“Southwest”) of the Farm. The closing occurred on August 7, 2015, as a result of which the Company, through its new, wholly-owned subsidiary, EWSD, became the owner of the Acquired Property.

 

In connection with EWSD’s purchase of the Acquired Property, EWSD entered into a secured promissory note with Southwest in the principal amount of $3,670,000. Interest on the outstanding principal balance of the Note shall accrue at the rate of five percent (5.0%) per annum. The note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. The note is secured by a deed of trust and assignment of rents encumbering the Acquired Property.

 

In connection with the Closing, EWSD also entered into an unsecured promissory note with the Seller, in respect of payments previously made by Seller to Southwest, in the principal amount of $830,000. Interest on the outstanding principal balance of the Unsecured Note shall accrue at the rate of six percent (6.0%) per annum. The unsecured note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018.

 

17

 

 

The purchase price to acquire EWSD (subject to the note and the unsecured note) consisted of (i) $500,000 paid by the Company in cash as a deposit into the escrow for the Acquired Property, and (ii) the Company’s agreement to pay Seller a royalty of 3% of the adjusted gross revenue, if any, from operation of the Acquired Property (including sale of any portion of or interest in the Acquired Property less any applicable expenses) for the three-year period beginning on January 1, 2016 payable 50% in cash and 50% in the Company’s common stock. The number of shares due in connection with any such payment shall be determined by dividing the dollar amount of such payment by the volume-weighted average price of the Company’s common shares for the thirty trading days prior to the due date of the payment.

 

In June 2018, we extended the maturity date of the note to August 20, 2019. In consideration for the extension, we agreed to make a payment of $250,000 by May 31, 2019 in addition to the regularly scheduled payments under the note. We also agreed to a loan extension fee of $40,000 payable by July 16, 2018 and $2,500 as reimbursement for seller’s costs and expenses.

 

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

 

The security granted to the Junior Lender pursuant to the Second Trust Deed and the Assignment of Rents is subordinate to the rights of Southwest as set forth in the Deed of Trust, Security Agreement and Financing Statement dated as of August 7, 2015 granted by EWSD in favor of Senior Lender and the Assignment of Rents and Leases by and between EWSD and Southwest dated as of August 7, 2015. Such subordination is documented in a Subordination Agreement dated as of August 23, 2016 by and among Southwest, Junior Lender, Company, EWSD, and Pueblo Agriculture Supply and Equipment, LLC, another wholly-owned subsidiary of the Company, as amended by a First Amendment to Subordination Agreement dated as of September 19, 2016 (collectively, the “Subordination Agreement”) pursuant to which Southwest consented to the Second Trust Deed and the Assignment of Rents. The Subordination Agreement also provides that the Junior Lender may not increase the principal amount of indebtedness pursuant to the Securities Purchase Agreement beyond $1,500,000.

 

ITEM 3. LEGAL PROCEEDINGS

 

Medvend

 

On May 22, 2013, Medbox initiated litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings LLC (“Medvend”) in connection with a contemplated transaction that Medbox entered into for the purchase of an approximate 50% ownership stake in Medvend for $4.1 million. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. In January 2017, we settled the litigation and agreed to pay the original shareholders of Medvend an aggregate of $375,000 in 6 installments over three years. We defaulted on the original settlement agreement and are currently in negotiation with Medvend for a payment plan and settlement agreement.

 

SEC Investigation and Wells Notice

 

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

 

In March 2016, the staff of the U.S. Securities and Exchange Commission advised counsel for the Company in a telephone conversation, followed by a written “Wells” notice, that it is has made a preliminary determination to recommend that the Commission file an enforcement action against the Company in connection with misstatements by prior management in the Company’s financial statements for 2012, 2013 and the first three quarters of 2014. According to the final judgement entered into in March 2017, The Company agreed to be permanently enjoined from violating Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 15(a)(1) of the Exchange Act and Sections 5 and 17(a) of the Securities Act.

 

18

 

 

Derivative Lawsuits and Class Action

 

On February 20, 2015, Michael A. Glinter, derivatively and on behalf of nominal defendants Medbox the Board and certain executive officers filed a suit in the Superior Court of the State of California for the County of Los Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015.

 

From January to October, 2015, there were various shareholder derivative lawsuits and class actions against the Company and certain past and present members of the Board, alleging that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. On October 16, 2015, the parties to the class actions and derivative lawsuits entered into settlements that collectively effect a global settlement of all claims asserted in the class actions and the derivative actions. Under the terms of the settlement, we agreed to adopt and adhere to certain corporate governance processes in the future. In addition, our insurers made a payment of $300,000 into the settlement escrow account and Messrs. Mehdizadeh and Bedrick delivered 2,000,000 and 300,000 shares, respectively, of their Medbox common stock into the settlement escrow account. The funds and common stock in the settlement escrow account will be paid as attorneys’ fees and expenses, or as service awards to plaintiffs.

 

On October 27, 2015, separate from the above lawsuits and settlement, Richard Merritts, derivatively and on behalf of nominal defendant Medbox, filed a suit in the Superior Court of the State of California for the County of Los Angeles against the Board and certain executive officers, alleging breach of fiduciary duties by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. On September 16, 2016, the parties entered into a settlement regarding Merritts’ claims. Under the terms of the settlement, we agreed to adopt and to adhere to certain corporate governance processes in the future. In addition, we made a payment of $135,000 in cash to be used to pay Merritts’ counsel for any attorneys’ fees and expenses, or as service awards to plaintiff Merritts. The settlement has been approved by the court.

 

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Other Litigations

 

Whole Hemp

 

A complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming the Company as defendants in Pueblo County, CO district court. The complaint alleges five causes of action against the Company: misappropriation of trade secrets, civil theft, intentional interference with prospective business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and the Company for the Farming Agreement and the Distributor Agreement. On August 12, 2016, the court ordered that all of Whole Hemp’s plants in the Company’s possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties filed a motion to dismiss the district court action. The Company commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between the parties. Whole Hemp filed its answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted to the court. On September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. On September 30, 2016, the arbitrator held an initial status conference and agreed to allow Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with prejudice.

 

Mani Brothers

 

The lease for the former office at 8439 West Sunset Blvd. in West Hollywood, CA has been partially subleased. The Company plans to sublease the remainder of the office in West Hollywood, CA and continues to incur rent expense while the space is being marketed. The landlord for the prior lease filed a suit in Los Angeles Superior Court in April 2015 against the Company for damages they allege have been incurred from unpaid rent and otherwise. In January 2016, the landlord filed a first amended complaint adding the independent guarantors under the lease as co-defendants and specifying damages claim of approximately $300,000. On September 8, 2016, the court approved Mani Brothers’ application for writ of attachment in the State of California in the amount of $374,402 against Prescription Vending Machines, Inc. (“PVM”). On March 1, 2017 the Company paid $40,000. On March 16, 2017 the Company and Mani Brothers agree to settle the amount owed if the Company pays $40,000 before July 2017. The Company did not pay the $40,000. A trial date has been set in May 2017. On July 24, 2017, the case was dismissed against the Company.

 

Bank Leumi

 

The Company’s former landlord, Bank Leumi, filed an action against the Company in Los Angeles Superior Court for breach of lease on August 31, 2016, seeking $29,977 plus fees and interest, in addition to rent payment for September 2016. In November 2016, the parties entered into a Settlement Agreement and General Release, pursuant to which the Company agreed to an eight-payment plan in favor of Bank Leumi, commencing December 2016 and terminating July 2017. All of the payments, which aggregated $46,521.65 for rent, fees, and costs, have been made as of the date of this Report.

 

Creaxion

 

On August 23, 2017, Creaxion Corporation filed a Complaint in the Superior Court of Fulton County, Georgia, styled Creaxion Corporation, Plaintiff, v. Notis Global, Inc., Defendant, Civil Action No. 2017CV294453. Plaintiff plead counts for (1) Breach of Contract in the amount of $89,000, (2) Prejudgment interest, and (3) Attorney’s fees. The Company was served on September 26, 2017, and did not respond to the Complaint. On November 30, 2017, the Court granted plaintiff’s request for a Default Judgment in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses, attorney’s fees, and interest at a rate of 6.25%. On December 14, 2017, the court entered into default judgement for the plaintiff for $89,000 and pre judgement interest at a rate of 6.25%.

 

Sheppard Mullin

 

On October 27, 2017, Sheppard Mullin filed a Complaint in the Superior Court of the State of California for the County of Los Angeles, styled Sheppard, Mullin, Richter & Hampton LLP, a California limited liability partnership, plaintiff v. Notis Global, Inc., a Nevada corporation, formerly known as Medbox, Inc.; and Does 1-10, inclusive, Defendants, Case No. BC681382. Plaintiff plead causes of action for (1) Breach of Contract; (2) Account Stated; and (3) and Unjust Enrichment, seeking approximately $240,000. The Company accepted service on November 10, 2017, and, as of the date of this Report, has not responded to the complaint. On May 17, 2018, the court entered judgement in favor of Sheppard Mullin in the amount of $277,998.77. On June 25, 2018, we entered into a settlement agreement with Sheppard Mullin pursuant to which we agreed to pay $50,000 due by June 29, 2018 and $25,000 due by June 28, 2019.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

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PART II

 

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

 

Market for Securities

 

Our common stock is quoted on the OTCQB under the symbol “MDBX” through March 20, 2016. Beginning March 21, 2016, the Company’s common stock is quoted on the OTCQB under the symbol “NGBL”. As of January 4, 2018, the Company’s common stock is quoted on the OTC pink sheet due to delinquent SEC reporting.

 

The following table sets forth, for the periods indicated, the range of high and low intraday closing bid information per share of our common stock.

 

   High Sale   Low Sale 
Fiscal Quarters  Price   Price 
First Quarter 2016  $0.0415   $0.0071 
Second Quarter 2016  $0.0125   $0.0001 
Third Quarter 2016  $0.0020   $0.0001 
Fourth Quarter 2016  $0.0025   $0.0002 
First Quarter 2017  $0.0004   $0.0002 
Second Quarter 2017  $0.0003   $0.0001 
Third Quarter 2017  $0.0004   $0.0001 
Fourth Quarter 2017  $0.0003   $0.0001 
First Quarter 2018  $0.0003   $0.0001 
Second Quarter 2018  $0.0003   $0.0001 
Third Quarter 2018  $0.0003   $0.0001 
Fourth Quarter 2018  $

0.0003

   $0.0001 
First Quarter 2019 (through January 4, 2018)  $0.0002   $0.0001 

 

The above prices reflect representative inter-dealer quotations, without retail markup, markdown or other fees or commissions, and may not represent actual transactions.

 

As of January 7, 2019, there were approximately 1,407 holders of record of our common stock.

 

Dividends

 

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

 

Recent Sales of Unregistered Securities

 

All sales of unregistered securities during the period covered by this Report have been reported on a Current Report on Form 8-K or Quarterly Report on Form 10-Q.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

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

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. For cautions about relying on such forward looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to Item 1.

 

Overview

 

Notis Global entered into joint ventures and operating and management agreements with its partners and acted as a distributor of hemp products processed by our contract partners. As of December 31, 2016, the Company has exited all these arrangements. Presently we own and manage real estate used for cultivation of hemp.

 

We are building a consistent, predictable and valuable revenue model as we refocus the Company to create a sustainable business model to grow crops and manufacture products from hemp farmland and to market, sell and distribute CBD oil. State and local laws regarding farming and growing marijuana and cultivation centers for marijuana vary.

 

With an eye focused on the future-and ultimately anticipated FDA approval of hemp and CBD oil production and sales in the United States-we are honing our focus to controlling our supply chain. From “Seed to Sale,” Notis Global will influence its own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products. We believe this tight control of our supply chain will eventually be mandated by the Federal Government as a condition of legalizing hemp and CBD oil production, manufacturing and distribution in the United States. We have elected to take action now, and intend to lead our industry by doing so. As we continue to navigate the emerging world of hemp and CBD growing, cultivation, production and sales, it is clear that controlling all aspects of the business is the best strategy to meet our goals.

 

In August 2015, we purchased a 320 acre farm located outside of Pueblo, CO, in order to cultivate hemp for our products.

 

During December of 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 12 to our consolidated financial statements.)

 

Whole Hemp Agreement

 

In December 2015, we entered into a Farming Agreement with Whole Hemp Company (“Whole Hemp”), now known as Folium Biosciences, pursuant to which Whole Hemp would manufacture products from hemp and cannabis crops that it would grow on our farm, and the Company would build greenhouses for such activities up to an aggregate size of 200,000 square feet. Whole Hemp would pay all preapproved costs of such construction on or before September 2017 as partial consideration for a revocable license to use the greenhouses and a separate 10-acre plot of our farmland. We would retain ownership of the greenhouses. Under the 10 year amended agreement with Whole Hemp, Notis Global would receive a percentage of gross sales of all Whole Hemp products paid on a monthly basis. The Farming Agreement was amended and restated in March 2016.

 

Since May 12, 2016, we believe Whole Hemp has been in default, principally because they abandoned their obligation to perform farming activities under the First Amended and Restated Farming Agreement. On May 12, 2016, EWSD notified Whole Hemp of its defaults under the First Amended and Restated Farming Agreement and EWSD’s election to terminate the First Amended and Restated Farming Agreement.

 

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

 

In addition, in December 2015, we entered into a Grower’s Distributor Agreement with Whole Hemp, pursuant to which we would provide marketing, sales, and related services on behalf of Whole Hemp in connection with the sale of its Cannabidiol oil product, and pursuant to which the Company would receive a percentage of gross revenues. The Grower’s Distributor Agreement was effective until September 30, 2025. The Grower’s Distributor Agreement was amended and restated in March 2016.

 

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Because we believe Whole Hemp has been in default, principally because they abandoned their obligation to perform farming activities under the First Amended and Restated Farming Agreement since May 12, 2016, EWSD notified Whole Hemp on May 12, 2016 of its election to terminate the Restated Grower’s Distributor Agreement.

 

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

 

Whole Hemp complaint

 

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

 

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

 

On August 12, 2016, the court ordered that all of Whole Hemp’s plants in Notis’ possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties will soon file a motion to dismiss the district court action. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with prejudice.

 

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

 

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

 

In light of the court order to destroy all Whole Hemp plants, the Company has immediately expensed all Capitalized agricultural costs of $73,345 related to Whole Hemp plants.

 

As noted above, our long-term strategy is to maintain tight control of our supply chain. The continuing default by Whole Hemp was conductive to our efforts to eliminate outside vendors in the supply chain and control production from “Seed to Sale.” Our decision to terminate the Whole Hemp Agreements comports with our long-term strategy to maintain tight control of our supply chain.

 

Dispensaries

 

Historically, we generated revenue from various sources on a “one-time basis” for services that we provided to clients in helping them obtain licenses, build out and open dispensaries and cultivation centers. During this period we obtained five licenses or registrations in the States of Oregon, Illinois, Washington and California for or on behalf of clients or for potential clients. Most of the current dispensary and cultivation sites that are opening under these licenses began conducting business in 2015. As of the second quarter of 2016, we have sold all of our interests and rights as concerns the dispensaries.

 

In the second quarter of 2015, we contracted with an independent operator to operate a dispensary in Portland, Oregon. In December 2015, we terminated the operator due to low sales volume and entered an operating agreement with a new partner to operate the Portland dispensary. Under the management of our new partner, the dispensary reached expected sales volume levels in December 2015 through March 2016 and is rated as the top dispensary in Portland, Oregon according to Leafly.com. On June 30, 2016, we entered into an assignment agreement whereby we sold and assigned all of our rights in the operating agreement, including but not limited to the assets and liabilities we held in relation to the Portland dispensary, resulting in a net loss of $178,000 on sale of assets.

 

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On December 31, 2015, our operating partner made a matching investment to close on our escrow for a dispensary site in San Diego, CA. Notis Global, through an affiliated company, holds the approved conditional use permit to operate a dispensary on this site. In two transactions in February and April 2016 we sold our interest in the operating entity for approximately $299,000 and our interest in the underlying real estate for $335,000 to our operating partner and other third parties along with a forgiveness of $65,000 owed by Notis for improvements on the property, recognizing a gain of approximately $631,000. After the April 6, 2016 transaction, we have no further interest in the dispensary in San Diego, CA.

 

In the State of Washington, we held two licenses to operate dispensaries. These two dispensaries were to be operated by an independent operating partner, with whom we had entered into operating contracts as of August 31, 2015. We also held the underlying real estate for one of the two dispensaries, for which we received monthly rental income of $2,500. On August 2, 2016, we were notified that we are in default on the Note payable related to the underlying property and are incurring interest at the default rate of 18%. On September 27, 2016 the Company entered into a default settlement with the note holder where by the note was settled by conveying the property to the note holder recognizing the loss on default settlement of approximately 168,000.

 

During January and February 2016, we were selling a line of portable vaporizers and accessories under the brand name Vaporfection. In January 2016, we decided to exit the portable vaporizer business in 2016 so that the Company can more aggressively pursue additional business opportunities in its core business. On March 25, 2016 we sold our assets in Vaporfection for $70,000, which was payable $35,000 upon the sale and $35,000 was loaned to the buyer under a 6% note payable due September 30, 2016. As of September 30, 2016, the Company collected approximately $19,000 and determined that the remainder was not collectable and recognized a reserve of approximately $51,000.

 

Comparison of the year ended December 31, 2016 and 2015

 

The Company reported a consolidated net loss of approximately $17.7 million for the year ended December 31, 2016 and consolidated net loss of approximately $50.4 million for the year ended December 31, 2015. The fluctuation of approximately $33 million was due to an increase in the change in fair value of the derivative liabilities of approximately $24 million, increase in amortization of debt discount of approximately $8.3 million. These expenses primarily include decreases in general and administrative expenses of approximately $6 million.

 

Revenue

 

During the first quarter of 2016, the Company launched its CBD oil sales program under the Grower’s Distribution agreement. As noted under the Overview above, this agreement was terminated in May 2016. The Company is currently planning to extract CBD oil from their own hemp plants cultivated on the Farm, as well as process CBD oil from other farmers.

 

The increase of approximately $258,000 in total revenue was due to a change in the company’s business plan. During 2015 revenue was mostly based on consulting compared to the 2016 revenue from CBD Oil sales. The Company will no longer recognize any revenue related to the Oregon and Washington operations, as they have exited both locations, as described previously.

 

Costs of revenue

 

Costs of revenues increased by approximately $456,000 for the year ended December 31, 2016, as compared to the same period of 2015. Our CBD oil sale program launched in the first quarter of 2016, the Company incurred cost of revenue related to procurement of CBD oils in the amount of approximately $220,000 during the year ended December 31, 2016. There were no corresponding costs for the same period of 2015.

 

The incurred cost of Crops Cultivation for December 31, 2016 in the amount of approximately $230,000 as compared to $0 for December 31, 2015 impacted the increase in cost of revenue.

 

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

 

24

 

 

Operating Expenses

 

Operating expenses consist of all other costs incurred during the period, other than cost of revenue. The Company incurred approximately $10 million in operating expenses for the year ended December 31, 2016, compared to approximately $16 million for the year ended December 31, 2015. The decrease of approximately $6 million was primarily due to the decrease in general and administrative expenses of $6 million.

 

General and administrative

 

General and administrative expenses consist primarily of salary costs, including stock - based compensation, professional costs, including the costs associated with being a public company and consultants, rent and other costs. For the year ended December 31, 2016, the company expended $9,944,022 as compared to $15,867,799 for the year ended December 31, 2015. The decrease of $5,923,777, resulted primarily from a decrease in miscellaneous general administrative expenses.

 

Other Expense

 

Other expense decreased by approximately $22.7 million, primarily from the decrease in gain on change in fair value of warrant liability, gain on sale of interest in subsidiary, gain on debt forgiveness and gain on extinguishment of debt.

 

Net Loss

 

The net loss for December 31, 2016 was approximately $17.7 million compared to $50.4 million for December 31, 2015. The decrease of approximately $32.7 million was primarily due to the increase in total other income (expense) and increase in net income from discontinued operations.

 

Liquidity and Capital Resources

 

As of December 31, 2016, the Company had cash on hand of approximately $24,000 compared to approximately $53,000 at December 31, 2015.

 

Cash Flow

 

During the year ended December 31, 2016, cash was primarily used to fund operations of the Company, as well as operations and development of the Farm.

 

   For the year ended December 31, 
Cash flow  2016   2015 
Net cash used in operating activities  $(3,552,099)  $(4,617,019)
Net cash used in investing activities   (638,048)   (1,188,173)
Net cash provided by financing activities   4,179,138    10,789,122 
Cash Flows from discontinued operations   (17,858)   (5,032,278)
           

Net decrease in cash

  $(28,867)  $(48,348)

 

25

 

 

Cash Flows - Operating Activities

 

During the year ended December 31, 2016, cash flows used in operating activities were approximately $3.6 million, consisting primarily of an increase in change in fair value of derivative liability, gain on extinguishment of debt, a decrease in financing costs.

 

Cash Flows - Investing Activities

 

During the year ended December 31, 2016, cash flows used in investing activities was approximately $640,000, consisting primarily of the $617,207 in costs related to construction in progress for the build out of greenhouses on the Farm.

 

Cash Flows - Financing Activities

 

During the year ended December 31, 2016, cash flows provided by financing activities were approximately $4.2 million, consisting primarily of approximately $3,166,500 of net proceeds from the issuance of convertible notes payable.

 

Future Liquidity and Cash Flows

 

Management believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, proceeds from current and future expected debt issuances and proceeds from future share capital issuances, if any, may not be sufficient to fund the Company’s net cash requirements through January 2018. As noted in the footnotes to the accompanying condensed consolidated financial statements, the Company recently received a Notice of Default from a creditor following non-payment of the balance under a certain promissory note at maturity thereof, pursuant to which the Company will incur penalties and an increased interest rate as well as potential legal expenses associated with the creditor’s legal actions. (See Item 1A. Risk Factors elsewhere in this document) As of the date of this filing, the Company is in technical default on all notes outstanding. The Company is unable to predict the outcome of these matters, however, legal action taken by the Company’s lenders could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future. In order to execute the Company’s long-term growth strategy, which may include selected acquisitions of businesses or facilities that may bolster the Company’s CBD oil extraction business or real estate for the cultivation of hemp, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.

 

The Company’s financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2016, the Company had a net loss of approximately $17.7 million, negative cash flow from operations of $3.6 million and negative working capital of $37 million. The Company will need to raise capital in order to fund its operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement a business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

On July 24, 2015, the Company entered into an Agreement of Purchase and Sale of Membership Interest with East West Secured Development, LLC to purchase 100% of the membership interest of EWSD I, LLC which has entered into an agreement with Southwest Farms, Inc. to purchase certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (the “Farm”). The Farm is expected to yield revenue and profits for the Company in future years, through farming hemp, extracting CBD oil and controlling the full production cycle to ensure consistent quality.

 

26

 

 

With an eye focused on the future - and ultimately anticipated FDA approval of hemp and CBD oil production and sales in the United States - we are honing our focus to controlling our supply chain initially through our production on the Farm in Pueblo, Colorado. From “Seed to Sale” - Notis Global will influence its own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products. We believe this tight control of our supply chain will eventually be mandated by the Federal Government as a condition of legalizing hemp and CBD Oil production, manufacturing and distribution in the United States. We have elected to take action now - and intend to lead our industry by doing so. Our decision to terminate the Whole Hemp Agreement comports with our long-term strategy to maintain tight control of our supply chain.

 

Special Meeting of the Stockholders to Increase Authorized Common Stock

 

On April 15, 2016, at a special meeting of the stockholders of the Company, the stockholders of the Company holding a majority of the total shares of outstanding common stock of the Company voted to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock of the Company from 400,000,000 to 10,000,000,000 (the “Certificate of Amendment”). The Certificate of Amendment was filed with the Nevada Secretary of State and was declared effective on April 18, 2016.

 

Additionally, management is actively seeking additional financing and expects to complete additional financing arrangements in the next few months. The Company expects that these plans will provide it the necessary liquidity to continue operations for the next 12 months.

 

The Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means. However, there is no guarantee that such financing will be available on terms acceptable to the Company, or at all. If the Company is unable to obtain adequate debt or equity financing, it may be forced to slow or reduce the scope of operations and expansion, and its business would be materially affected.

 

It is uncertain whether the Company can obtain financing to fund operating deficits until profitability is achieved or until revenues increase. This need may be adversely impacted by: unavailability of financing, uncertain market conditions, the success of the crop growing season, the demand for CBD oil, the ability of the Company to obtain financing for the equipment and labor needed to cultivate hemp and extract the CBD oil, and adverse operating results. The outcome of these matters cannot be predicted at this time.

 

Off Balance Sheet Transactions

 

We do not have any off-balance sheet credit exposure related to our customers

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements Page
Consolidated Financial Statements:  
   
  Report of Independent Registered Public Accounting Firm 29
     
  Consolidated Balance Sheets as of December 31, 2016 and 2015 31
     
  Consolidated Statements of Operations – Years ended December 31, 2016 and 2015 32
     
  Consolidated Statements of Stockholders’ Deficit - Years ended December 31, 2016 and 2015 33
     
  Consolidated Statements of Cash Flows - Years ended December 31, 2016 and 2015 34
     
  Notes to Consolidated Financial Statements - Years ended December 31, 2016 and 2015 35

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

Opinion on the Financial Statements

 

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

 

Explanatory Paragraph Regarding Going Concern

 

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

 

Basis for Opinion

 

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

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

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

 

/s/ Sadler, Gibb & Associates, LLC  

 

We have served as the Company’s auditor since 2017.

 

Salt Lake City, UT

January 7, 2019

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Audit Committee of the Board of Directors and Shareholders of

Notis Global, Inc.

 

We have audited the accompanying consolidated balance sheet of Notis Global, Inc. and Subsidiaries (the “Company”) as of December 31, 2015, and the related consolidated statements of comprehensive loss, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Notis Global, Inc. and Subsidiaries, as of December 31, 2015, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a significant working capital deficit and an accumulated deficit as of December 31, 2015, and has incurred a significant net loss and negative cash flows from operations for the year ended December 31, 2015. The foregoing matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. These consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

/s/ Marcum LLP  

Marcum llp

Chicago, IL

April 13, 2016, except for Note 12 as to which the date is January 7, 2019

 

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NOTIS GLOBAL, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2016   December 31, 2015 
Assets          
Current assets          
Cash  $23,967   $52,834 
Notes receivable, net of allowances   -    60,000 
Inventory, net   -    68,889 
Capitalized agricultural costs   160,131    - 
Prepaid expenses and other current assets   92,976    155,428 
Current assets – Discontinued operations   2,522    

189,508

 
Total current assets   279,596    526,659 
           
Property and equipment, net   6,712,369    5,640,398 
Deferred Costs   -    76,000 
Deposits and other assets, net of reserve   -    7,487 
Non current assets – Discontinued operations   -    

741,097

 
Total assets  $6,991,965   $6,991,641 
           
Liabilities and Stockholders’ Deficit          
Current liabilities          
Accounts payable  $6,009,827   $2,671,444 
Other accrued expenses   2,187,393    1,475,234 
Accounts payable and other accrued expenses – related parties   727,893    362,648 
Current liabilities – Discontinued operations   1,020,127    2,385,524 
Notes payable, net of debt discount   3,367,478    41,230 
Related party notes payable, net of discount   289,866    - 
Convertible notes payable, net of discount   8,645,442    6,667,523 
Convertible notes payable, directors   105,000    - 
Derivative Liability   15,635,947    19,246,594 
Warrant Liability   14,430    940,000 
Total current liabilities   38,003,403    33,790,197 
           
Notes Payable, less current portion   4,093,272    4,288,631 
Total liabilities   42,096,675    38,078,828 
Commitments and contingencies (Note 14)          
Stockholders’ Deficit          
Preferred stock, $0.001 par value: 10,000,000 authorized; 0 issued and outstanding as of December 31, 2016 and 2015, respectively   -    - 
Common stock, $0.001 par value: 10,000,000,000 authorized, 9,942,223,868 issued and 9,942,163,868 outstanding as of December 31, 2016 and 240,971,727 issued and 240,911,727 outstanding as of December 31, 2015, respectively   9,942,224    240,972 
Additional paid-in capital   46,606,283    42,600,089 
Treasury stock   (1,209,600)   (1,209,600)
Accumulated deficit   (90,443,617)   (72,524,893)
Accumulated other comprehensive loss   -    (193,755)
Total stockholders’ deficit   (35,104,710)   (31,087,187)
Total liabilities and stockholders’ deficit  $6,991,965   $6,991,641 

 

See notes to consolidated financial statements.

 

31

 

 

NOTIS GLOBAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the years ended 
   December 31, 
   2016   2015 
Revenue  $253,835   $4,000 
Service revenue   8,000    - 
           
Operating expenses          
Cost of revenues   463,315    7,354 
General and administrative   9,944,022    15,867,799 
Total operating expenses   10,407,337    15,875,153 
Loss from operations   (10,145,502)   (15,871,153)
           
Other income (expense)          
Interest expense, net   (6,066,598)   (21,320,736)
Change in fair value of derivative liabilities   (33,271,611)   (9,088,003)
Change in fair value of warrant liability   998,764    - 
Gain on sale of interest in subsidiary   630,571    - 
Loss on sale of rights and assets   (32,300)   - 
Gain on debt forgiveness   486,857    - 
Gain on extinguishment of debt   29,646,079    - 
Other expenses   (65,468)   (16,050)
Total other income (expense)   (7,673,706)   (30,424,789)
           

Loss from continuing operations

   (17,819,208)   (46,295,942)
           
Discontinued operations          

Income (loss) from discontinued operations, net of taxes

   87,638    (4,150,758)
           
Income (loss) before provision for taxes   (17,731,570)   (50,446,700)
           
Provision for taxes   -    - 
           
Net loss  $(17,731,570)  $(50,446,700)
           
Loss per share attributable to common stockholders          
Basic and diluted income (loss) per share – continuing operations   (0.01)   (0.66)
Basic and diluted income (loss) per share from discontinued operations   0.00    (0.06)
Basic and diluted income (loss) per share  $(0.01)  $(0.72)
Weighted average shares outstanding          
Basic and diluted   4,364,487,739    69,746,872 
           
Other comprehensive loss          
Net loss   (17,731,570)   (50,446,700)
Realized loss on discontinued operations   (187,154)   - 
Unrealized loss on discontinued operations   -    (85,367)
Comprehensive loss  $(17,918,724)  $(50,532,067)

 

See notes to consolidated financial statements.

 

32

 

 

NOTIS GLOBAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

 

                           Additional       Accumulated Other   Total 
   Preferred Stock   Common Stock   Treasury Stock   Paid-In   Accumulated   Comprehensive   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Deficit 
Balances at December 31, 2014   3,000,000   $3,000    30,496,909   $30,497    (60,000)  $(1,209,600)  $15,315,110   $(22,078,193)  $(108,388)  $(8,047,574)
Sale of common stock   -    -    7,455,669    7,456    -     -     137,044    -    -    144,500 
Stock-based compensation and bonuses   -    -    2,879,791    2,880    -    -    6,053,447    -    -    6,056,327 
Exercise of warrants   -    -    206,480    206    -    -    278,745    -    -    278,951 
Issuance of shares to settle accounts payable   -    -    3,015,671    3,016    -    -    413,712    -    -    416,728 
Conversions of convertible notes payable   -    -    192,625,375    192,625    -    -    15,978,617    -    -    16,171,242 
Issuance of warrants in connection with convertible notes payable   -    -    -    -    -    -    5,151,196    -    -    5,151,196 
Reclassification of warrant liability out of equity   -    -    -    -    -    -    (940,000)   -    -    (940,000)
Exercise of warrants in connection with convertible notes payable   -    -    2,291,832    2,292    -    -    135,218    -    -    137,510 
Warrants issued in connection with Farming agreement   -    -              -    -    76,000    -    -    76,000 
Share cancelation   

(2,000,000

)   

(2,000

)   (3,000,000)   (3,000)   -    -    5,000    -    -    - 
Conversion of preferred stock series A into common stock   

(1,000,000

)   

(1,000

)   

5,000,000

    

5,000

    -    -    (4,000)   -    -    -
Unrealized loss from marketable securities   -    -    -    -    -    -    -    -    (85,367)   (85,367)
Net loss   -    -    -    -    -    -    -    (50,446,700)   -    (50,446,700)
Balances at December 31, 2015   -    -    240,971,727    240,972    (60,000)   (1,209,600)   42,600,089    (72,524,893)   (193,755)   (31,087,187)
Sale of common stock   -    -    851,063    851    -    -    15,149    -    -    16,000 
Stock-based compensation   -    -    28,778,831    28,779    -    -    780,645    -    -    809,424 
Investor contribution   -    -    -    -    -    -    324,754    -    -    324,754 
Issuance of shares to consultants   -    -    144,042,308    144,042    -    -    

(47,252

)   -    -    96,790 
Shares cancelation   -    -    (1,633,652)   (1,634)   -    -    (485,223)   -    -    (486,857)
Conversions of convertible notes payable   -    -    9,529,213,591    9,529,214    -    -    3,418,121   -    -    12,947,335 
Unrealized gain from marketable securities   -    -    -    -    -    -    -    -    193,755    193,755 
Realized loss from marketable securities   -    -    -    -    -    -    -    (187,154)   -    (187,154)
Net income   -    -    -    -    -    -    -    

(17,731,570

)   -    

(17,731,570

)
Balances at December 31, 2016   -   $-    9,942,223,868   $9,942,224    (60,000)  $(1,209,600)  $46,606,283   $

(90,443,617

)  $-   $

(35,104,710

)

 

See notes to consolidated financial statements.

 

33

 

 

NOTIS GLOBAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Years ended December 31, 
   2016   2015 
Cash flows from operating activities          
           
Net income (loss)   (17,819,208)   (46,295,942)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   17,362    196,394 
Provisions and allowances   120,841    - 
Gain on debt forgiveness   (486,857)   - 
Charges from escrow deposits   -    300,400 
Inventory valuation reserve   (5,000)   549,663 
Change in fair value of derivative liability   33,271,611    9,088,003 
Change in fair value of warrant liability   (918,969)   - 
Amortization of debt discount   4,162,769    11,691,883 
Financing costs   581,817    9,201,050 
Gain on extinguishment of debt   (29,646,079)   - 
Stock based compensation   906,214    6,056,327 
Impairment of Goodwill   -    1,260,037 
Deferred tax liability   -    (160,000)
Impairment of Intangible Assets   -    655,103 
Changes in operating assets and liabilities:          
Accounts receivable   -    (21,225)
Inventory   68,889    (38,268)
Capitalized agricultural costs   (160,131)   - 
Deposits in escrow   -    50,076 
Prepaid insurance   46,875    (42,264)
Prepaid expenses and other current assets   15,577    5,580 
Advances for machinery   (310,725)   - 
Deferred costs   76,000    - 
Accounts payable and other accrued expenses   4,024,890    2,644,754 
Other accrued expenses   707,611    - 
Accrued expenses directors   1,786,928    241,410 
Customer deposits   7,486    -
           
Net cash used in operating activities   (3,552,099)   (4,617,019)
           
Changes related to discontinued operations   (17,858)   (5,032,278)
           
Cash flows from investing activities          
Issuance of note receivable   (10,000)   (60,000)
Repayment of note receivable   19,159    - 
Purchase of property and equipment   -    (59,000)
Purchase of real estate   -    (445,000)
Proceeds received for sale of rights and assets   (30,000)   - 
Construction in progress   (617,207)   (624,173)
Net cash provided by (used in) by investing activities   (638,048)   (1,188,173)
           
Cash flows from financing activities          
Proceeds from issuance of notes payable   1,453,599    - 
Payments on notes payable   (509,461)   (215,906)
Payments on related party notes payable   -    (624,888)
Exercise of employee stock options   16,000    144,500 
Proceeds from issuance of convertible notes payable, net of fees   3,166,500    11,335,416 
Proceeds from issuance of convertible notes payable from directors, net   52,500    150,000 
Net cash provided by financing activities   4,179,138    10,789,122 
           
Net increase in cash and cash equivalents   (28,867)   (48,348)
Cash, beginning of year   52,834    101,182 
Cash, end of year  $23,967   $52,834 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for interest  $38,595   $1,151 
Cash paid for income tax  $-   $- 
           
Non- cash investing and financing activities:          
Common stock issued upon debt conversion  $12,947,334   $16,171,242 
Common stock issued to consultants  $-   $416,728 
Account payable assigned to note payable – related party  $292,366   $- 
Account payable assigned to convertible note payable – related party  $50,000   $- 
Account payable assigned to convertible notes payable  $576,250   $- 
Advances on machinery paid directly by lender  $161,401   $- 
Exchange of notes payable and accrued interest to convertible notes  $753,122   $- 
Exchange of convertible notes payable and accrued interest to convertible notes  $5,970,910   $- 
OID – notes payable  $239,496   $- 
OID – convertible notes payable  $157,487   $- 
Convertible notes payable assigned to notes payable  $1,431,401   $- 
Cancellation of notes payable for land  $208,605   $- 
Debt discount additions for convertible debt  $3,615,351   $- 
Exchange of notes payable to related party to convertible notes payable related party  $2,500   $- 
Investor contribution  $324,754   $- 
Unrealized gain on marketable securities  $6,601   $- 
Purchase of land with notes payable  $-   $4,500,000 
Issuance of warrants in connection with convertible debentures  $-   $5,151,196 
Issuance of warrants in connection with Farming agreement  $-   $76,000 

 

See notes to consolidated financial statements.

 

34

 

 

NOTIS GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS

 

Business Description

 

Notis Global, Inc., (formerly Medbox, Inc.) which is incorporated in the state of Nevada (the “Company”), provides specialized services to the hemp and marijuana industry, distributes hemp product processed by contractual partners and through December 31, 2016, owned independently and through affiliates, real property and licenses that it leased and assigned or sublicensed to partner cultivators and operators in return for a percentage of revenues or profits from sales and operations (Note 5). Prior to 2016, through its consulting services, Company worked with clients who sought to enter the medical and cultivation marijuana markets in those states where approved. In 2015, the Company expanded into hemp cultivation with the acquisition of a 320 acre farm in Colorado by the Company’s wholly owned subsidiary, EWSD 1, LLC. The farm was operated by an independent farming partner until the relationship was terminated in May 2016 (Note 3). In addition, through its wholly owned subsidiary, Vaporfection International, Inc. (“VII”), the Company sold a line of vaporizer and accessory products online and through distribution partners. On March 28, 2016, the Company sold the assets of VII and exited the vaporizer and accessory business. As of December 31. 2016, the Company was headquartered in Los Angeles, California. As of the date of filing of this Annual Report, the Company was headquartered in Middletown, New Jersey.

 

Effective January 28, 2016, the Company changed its legal corporate name from Medbox, Inc., to Notis Global, Inc. The name change was effected through a parent/subsidiary short-form merger pursuant to Section 92A.180 of the Nevada Revised Statutes. Notis Global, Inc., the Company’s wholly-owned Nevada subsidiary formed solely for the purpose of the name change, was merged with and into the Company, with Notis Global, Inc. as the surviving entity. The merger had the effect of amending the Company’s Certificate of Incorporation to reflect the new legal name of the Company. There were no other changes to the Company’s Articles of Incorporation. The Company’s Board of Directors approved the merger.

 

Notis Global, Inc. operates the business directly and through the utilization of 7 primary operating subsidiaries, as follows:

 

EWSD I, LLC, a Delaware corporation that owns property in Colorado.
   
Pueblo Agriculture Supply and Equipment, LLC, a Delaware corporation that was established to own extraction equipment
   
Prescription Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (“MDS”), which previously distributed our Medbox product and provided related consulting services.
   
Vaporfection International, Inc., a Florida corporation through which we distributed our medical vaporizing products and accessories. (All the assets of which were sold during the three months ended March 31, 2016). (See Note 6)

 

35

 

 

Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers. This corporation currently owns no real property.
   
MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington. This corporation currently owns no real property. (See Note 5)
   
San Diego Sunrise, LLC, a California corporation to hold San Diego, California dispensary operations. (as of June 30, 2016, the Company has sold its interest in San Diego Sunrise, LLC, see Note 5)

 

During December of 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 12)

 

On March 3, 2014, in order to obtain the license for one of the Company’s clients, the Company registered an affiliated nonprofit corporation Allied Patient Care, Inc., in the State of Oregon. Additionally, on April 21, 2014, the Company registered an affiliated nonprofit corporation Alternative Health Cooperative, Inc. in the State of California. As a result of our sale of the Sunset and Portland dispensaries and related rights and assets, the Company no longer owns the rights to these nonprofit corporations. (Note 5)

 

On April 15, 2016, at a special meeting of the stockholders of the Company, the stockholders of the Company holding a majority of the total shares of outstanding common stock of the Company voted to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock of the Company from 400,000,000 to 10,000,000,000 (the “Certificate of Amendment”). The Certificate of Amendment was filed with the Nevada Secretary of State and was declared effective on April 18, 2016.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

 

The consolidated financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2016, the Company had a net loss from operations of approximately $17.7 million, negative cash flow from operations of $3.5 million and negative working capital of $38 million. During the year ended December 31, 2015, the Company had a net loss of approximately $50.4 million, negative cash flow from operations of $4.6 million and negative working capital of $33.3 million. The Company will need to raise capital in order to fund its operations. On September 22, 2016, the Company received notice of an Event of Default and Acceleration from one of its lenders regarding a Promissory Note issued on March 14, 2016. (See Item 1A. Risk Factors elsewhere in this document). As of the date of this filing, the Company is in technical default on all notes outstanding. The Company is unable to predict the outcome of these matters, however, legal action taken by the Company’s lenders could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Management’s plans include:

 

The Company expects that the acquisition of EWSD I, LLC (“EWSD”) (Note 3), who owns a 320-acre farm in Pueblo, Colorado, will generate recurring revenues for the Company through farming hemp, extracting and selling CBD oil, and collecting fees from production related to extracting CBD oil for other farmers, while controlling the full production cycle to ensure consistent quality. Lastly, management is actively seeking additional financing over the next few months to fund operations.

 

36

 

 

The Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means. However, there is no guarantee that such financing will be available on terms acceptable to the Company, or at all. It is uncertain whether the Company can obtain financing to fund operating deficits until profitability is achieved. This need may be adversely impacted by: unavailability of financing, uncertain market conditions, the success of the crop growing season, the demand for CBD oil, the ability of the Company to obtain financing for the equipment and labor needed to cultivate hemp and extract the CBD oil, and adverse operating results. The outcome of these matters cannot be predicted at this time.

 

On May 24, 2016, the Company received a notice from the OTC Markets Group, Inc. (“OTC Markets”) that the Company’s bid price is below $0.01 and does not meet the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards. If the bid price has not closed at or above $0.01 for ten consecutive trading days by November 20, 2016, the Company will be moved to the OTC Pink marketplace. Additionally, on September 9, 2016, the Company received notice from the OTC that OTC Markets would move the Company’s listing from the OTCQB market to OTC Pink Sheets market, if the Company had not filed a Quarterly Report on Form 10-Q for the period ended June 30, 2016 by September 30, 2016. On or about October 1, 2016, the Company moved to the OTC Pink Sheets market. These actions might also impact the Company’s ability to obtain funding.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Notis Global, Inc. and its wholly owned subsidiaries, as named in Note 1 above. All intercompany transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated 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 and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements as well as the reported expenses during the reporting periods. The Company’s significant estimates and assumptions include accounts receivable and note receivable collectability, inventory reserves, advances on investments, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of capitalized patent costs and useful lives and recoverability of long-lived assets, the derivative liability, and income tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from these estimates.

 

Reclassification

 

The Company has reclassified certain prior fiscal year amounts in the accompanying consolidated financial statements to be consistent with the current fiscal year presentation. See note 12.

 

Discontinued Operations

 

US GAAP requires the results of operations of a component of an equity that either has been disposed of or is classified as held for sale to be reported as discontinued operations in the consolidated financial statements if the sale or disposition represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

 

Concentrations of Credit Risk

 

The Company maintains cash balances at several financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

 

37

 

 

Fair Value of Financial Instruments

 

Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses, notes payable, related party notes payable, customer deposits, provision for customer refunds and short term loans payable approximate their fair value due to the short period to maturity of these instruments.

 

Embedded derivative - The Company’s convertible notes payable include embedded features that require bifurcation due to a reset provision and are accounted for as a separate embedded derivative (see Note 8).

 

As of December 31, 2015, and for new issuances of convertible debentures during the fourth quarter of fiscal 2015, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on a Monte Carlo Simulation model (“MCS”). The MCS model was used to simulate the stock price of the Company from the valuation date through to the maturity date of the related debenture and to better estimate the fair value of the derivative liability due to the complex nature of the convertible debentures and embedded instruments. Management believes that the use of the MCS model compared to the black Scholes model as previously used would provide a better estimate of the fair value of these instruments. Beginning in the fourth quarter of 2015, using the MCS model, the Company valued these embedded derivatives using a “with-and-without method,” where the value of the Convertible Debentures including the embedded derivatives, is defined as the “with”, and the value of the Convertible Debentures excluding the embedded derivatives, is defined as the “without.” This method estimates the value of the embedded derivatives by observing the difference between the value of the Convertible Debentures with the embedded derivatives and the value of the Convertible Debentures without the embedded derivatives. The Company believes the “with-and-without method” results in a measurement that is more representative of the fair value of the embedded derivatives.

 

For each simulation path, the Company used the Geometric Brownian Motion (“GBM”) model to determine future stock prices at the maturity date. The inputs utilized in the application of the GBM model included a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate.

 

For the year ended December 31, 2016, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on an internally calculated adjustment to the MCS valuation determined at December 31, 2016. This adjustment took into consideration the changes in the assumptions, such as market value and expected volatility of the Company’s common stock, and the discount rate used in the December 31, 2015 valuation as compared to December 31, 2016. The Company believes this methodology results in a reasonable fair value of the embedded derivatives for the interim period.

 

For the year ended December 31, 2015, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk free interest rate based on the average yield of a Treasury note and expected volatility of the Company’s common stock all as of the measurement dates, and the various estimated reset exercise prices weighted by probability.

 

Warrants

 

The Company reexamined the determination made as of December 31, 2015 that they did not have sufficient authorized shares available for all of their outstanding warrants to be classified in equity at December 31, 2016, and concluded there still were insufficient authorized shares (Note 8). Therefore, the Company recognized a Warrant liability as of December 31, 2016. The Company estimated the fair value of the warrant liability based on a Black Scholes valuation model. The key assumptions used consist of the price of the Company’s stock, a risk free interest rate based on the average yield of a two or three year Treasury note (based on remaining term of the related warrants), and expected volatility of the Company’s common stock over the remaining life of the warrants.

 

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A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

Level 1 Quoted prices in active markets for identical assets or liabilities.
   
Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
   
Level 3 Significant unobservable inputs that cannot be corroborated by market data.

 

The assets or liabilities’ fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis:

 

 December 31, 2016  Total  

Quoted Prices

in Active

Markets for

Identical

Assets or

Liabilities

(Level 1)

  

Quoted Prices

for Similar

Assets or

Liabilities in

Active

Markets

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
Warrant liability   14,430              14,430 
Derivative liability   15,635,947            15,635,947 
                     
Total liabilities  $15,650,377   $   $   $15,650,377 

 

   Total  

Quoted Prices

in Active

Markets for

Identical

Assets or

Liabilities

(Level 1)

  

Quoted Prices

for Similar

Assets or

Liabilities in

Active

Markets

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
December 31, 2015                    
Marketable securities  $9,410   $5,629   $   $3,781 
Total assets  $9,410   $5,629   $   $3,781 
                     
Warrant liability   940,000              940,000 
Derivative liability   19,246,594            19,246,594 
                     
Total liabilities  $20,186,594   $   $   $20,186,594 

 

39

 

 

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

 

  

For the year ended

December 31, 2015

 
   Total 
January 1, 2015  $3,691,853 
Initial recognition of conversion feature   14,391,066 
Reclassified to/from equity, including conversion   (6,984,328)
Change in fair value of conversion feature   9,088,003 
December 31, 2015   20,186,594 
      
  

For the year ended December 31, 2016

 
   Total 
January 1, 2016   20,186,594 
Initial recognition of conversion feature   

581,817

 
Change in fair value of conversion feature   33,271,611 
Gain on extinguishment of debt   (37,464,075)
Change in fair value of warrant liability   (918,969)
Unrealized loss on marketable securities   

(6,601

)
      
Ending Balance, December 31, 2016  $15,650,377 

  

Revenue Recognition

 

Revenues from Cannabidiol oil product

 

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

 

Cost of Revenue

 

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

 

Inventory

 

Inventory is stated at the lower of cost or market value. Cost is determined on a cost basis that approximates the first-in, first-out (FIFO) method. During the year ended December 31, 2016 the Company recorded an impairment of $32,300 that was recorded to cost of revenues.

 

Capitalized agricultural costs

 

Pre-harvest agricultural costs, including irrigation, fertilization, seeding, laboring, and other ongoing crop and land maintenance activities, are accumulated and capitalized as inventory and cease to be accumulated when the crops reach maturity and is ready to be harvested. All costs incurred subsequent to the crops reaching maturity will be expensed as incurred. The Company has reflected the capitalized agriculture costs as a current asset as the growing cycle of the crops are estimated to be approximately six months.

 

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Basic and Diluted Net Income/Loss Per Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the years ended December 31, 2016 and 2015 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following common stock equivalents at December 31, 2016 and 2015:

 

   December 31, 2016   December 31, 2015 
Warrants   69,757,748    40,870,000 
Convertible notes - related party   10,500,000    - 
Convertible notes   114,808,810,010    6,820,000 
Totals   114,889,067,758    47,690,000 

 

Property and Equipment

 

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

 

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

 

Income Taxes

 

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

 

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

 

Commitments and Contingencies

 

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

 

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

 

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

 

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

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use of either the