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| EX-23.2 - CONSENTS OF EXPERTS AND COUNSEL - Exactus, Inc. | ex23-2.htm |
As filed with the Securities and Exchange Commission on December
31, 2019
Registration
No. 333-
UNITED STATES
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EXACTUS, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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2833
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27-1085858
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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80 NE
4th Avenue, Suite 28
Delray
Beach, FL 33483(804) 205-5036
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(Address, including zip code, and telephone number, including area
code, of registrant’s principal executive
offices)
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Emiliano
Aloi
Chief
Executive Officer
80 NE
4th Avenue, Suite 28
Delray
Beach, FL 33483(561) 455-4822
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies of Communications to:
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Bruce
C. Rosetto, Esq.
Greenberg
Traurig, P.A.
5100
Town Center Circle. Suite 400
Boca
Raton, FL 33486
(561)
955-7625
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Approximate date of commencement of proposed
sale to the public: As soon as practicable after the
effective date of this registration statement.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [X]
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. [ ]
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering. [
]
If this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering. [
]
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer [ ]
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Accelerated filer [
]
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Non-accelerated
filer [X]
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Smaller
reporting company [X]
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Emerging growth
company [ ]
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided to
Section 7(a)(2)(B) of the Securities Act.
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CALCULATION OF REGISTRATION FEE
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Title
of Each Class ofSecurities to be Registered
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Amount
to be
Registered
(1)
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Proposed
Maximum Offering Price Per Share(2)
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Proposed
Maximum Aggregate Offering Price(2)
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Amount
of Registration Fee
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Shares of Common
Stock, par value $0.0001 per share underlying 8% notes and
warrants
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3,119,731
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$0.44
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$1,372,682
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$404.94
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(1)
In accordance with
Rule 416(a) under the Securities Act of 1933, as amended (the
“Securities
Act”), the registrant is also registering hereunder an
indeterminate number of shares that may be issued and resold
resulting from stock splits, stock dividends or similar
transactions.
(2)
The proposed
maximum offering price per share and the proposed maximum aggregate
offering price have been estimated solely for the purpose of
calculating the amount of the registration fee in accordance with
Rule 457(c) under the Securities Act of 1933 on the basis of the
average of the high and low prices of the Common Stock on the OTC
Markets on December 20, 2019, a date within five trading days prior
to the date of the filing of this registration
statement.
The
registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states
that this registration statement shall hereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933 or
until the registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
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The information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell and is not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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PRELIMINARY PROSPECTUS
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SUBJECT TO COMPLETION
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DECEMBER 31, 2019
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EXACTUS,
INC.
3,119,731 Shares of Common Stock
We are
registering an aggregate of 3,119,731 shares of common stock of
Exactus, Inc., consisting of (i) 2,640,000 shares of common stock
issuable upon conversion of principal and interest under our 8%
senior secured convertible notes, (ii) 367,482 shares of common
stock issuable upon exercise of warrants issued to an institutional
investor, and (iii) 112,249 shares of common stock issuable upon
exercise of warrants issued to an advisor, for resale by our
selling stockholders identified in this prospectus. Please see the
section of this prospectus entitled “Selling
Stockholders” for more information.
The
selling stockholders may offer to sell the shares at fixed prices,
at prevailing market prices at the time of sale, at varying prices,
or at negotiated prices, and will pay all brokerage commissions and
discounts attributable to the sale of such shares, if any. The
selling stockholders will receive all of the net proceeds from the
offering of their shares.
The
shares may be sold by the selling stockholders to or through
underwriters or dealers, directly to purchasers or through agents
designated from time to time. For additional information regarding
the methods of sale you should refer to the section of this
prospectus entitled “Plan of
Distribution”.
We are
filing the registration statement of which this prospectus is a
part at this time to fulfill contractual obligations to do so
pursuant to a registration rights agreement, as further described
in this prospectus. We are not selling any shares in this resale
offering and will not receive any of the proceeds from the sale of
the common stock by the selling stockholders.
Our
common stock is presently quoted on the OTCQB under the symbol
“EXDI”. On December 30, 2019, the last reported sale
price for our common stock on the OTCQB was $0.36 per
share.
Our
business and an investment in our securities involve a high degree
of risk. See “Risk Factors” beginning on page 6 of this
prospectus for a discussion of information that you should consider
before investing in our securities. You should read this
prospectus, together with additional information described under
the heading “Where You Can Find More Information,”
carefully before you invest in our securities.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this Prospectus
is
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You
should rely only on the information contained in this prospectus or
in any free writing prospectus that we may specifically authorize
to be delivered or made available to you. We have not authorized
anyone to provide you with any information other than that
contained in this prospectus or in any free writing prospectus we
may authorize to be delivered or made available to you. We take no
responsibility for, and can provide no assurance as to the
reliability of, any other information that others may give you.
This prospectus may only be used where it is legal to offer and
sell our securities. The information in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of our securities. Our
business, financial condition, results of operations and prospects
may have changed since that date. We are not making an offer of
these securities in any jurisdiction where the offer is not
permitted.
-i-
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in this
prospectus and does not contain all of the information you should
consider in making your investment decision. You should read this
summary together with the more detailed information, including our
financial statements and the related notes, contained in this
prospectus. You should carefully consider, among other things, the
matters discussed in “Risk Factors” and
“Management Discussion and Analysis” included
elsewhere in this prospectus before making an investment decision.
You should also read and consider the information in the documents
to which we have referred you in “Where You Can Find
Additional Information.” As used in this prospectus,
“Exactus,” “the Company,” “we,”
“us,” and “our” refer to Exactus, Inc. and
its consolidated subsidiaries, except where the context otherwise
requires.
Exactus, Inc.
Business Overview
We are
a Nevada corporation organized under the name Solid Solar Energy,
Inc in 2008 and renamed Exactus, Inc. in 2016. We began to pursue
opportunities in Cannabidiol, which we refer to as CBD, in
2019.
In
December 2018, we expanded our focus to pursue opportunities in
hemp-derived CBD. This decision was based in part on the passing of
the 2018 Farm Bill, known as the Agriculture Improvement Act of
2018, which will remain in force through 2023. The 2018 Farm Bill
authorized the production of hemp and removed hemp and hemp seeds
from the Drug Enforcement Administration’s, or the
DEA’s, schedule of Controlled Substances. It also directed
the U.S. Department of Agriculture, or the USDA, to issue
regulations and guidance to implement a program to create a
consistent regulatory framework around production of hemp
throughout the United states. On October 31, 2019, the USDA,
Agricultural Marketing Services, issued an interim final rule (with
request for comments). The rule outlines provisions for the USDA to
approve plans submitted by states and Indian tribes. The U.S.
Domestic Hemp Production Program establishes federal regulatory
oversight of the production of hemp in the U.S. The program
authorizes the USDA to approve plans submitted by states and Indian
tribes for the domestic production of hemp and establishes a
federal plan for producers in states or territories that choose not
to administer a state or tribe specific plan, provide the state or
tribe does not ban hemp production.
Prior
to the 2018 Farm Bill, Cannabis sativa L. with delta-9
tetrahydrocannabinol, or THC, levels greater than 0.3% fell within
the definition of “marijuana” under the Controlled
Substances Act, or the CSA, and was therefore a Schedule I
controlled substance unless it fell under a narrow range of
exceptions (e.g., the “mature stalks” of the plant). As
a result, many aspects of domestic production of what is now
defined as hemp was limited to persons registered under the CSA to
do so. Under the Agricultural Act of 2014, which we refer to as the
2014 Farm Bill, State departments of agriculture and institutions
of higher education were permitted to produce hemp as part of a
pilot program for research purposes. The authority for hemp
production provided in the 2014 Farm Bill was extended by the 2018
Farm Bill, which was signed into law on December 20,
2018.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for CBD
end-products to be sold to humans and for animal health, such as
nutraceuticals, supplements and pet and farm products.
Our
principal executive offices are located at 80 NE 4th Avenue, Suite
28 Delray Beach, FL 33483 and our telephone number is (561)
455-4822.
Farming Operations
On
March 11, 2019, we acquired a 50.1% limited liability membership
interest in Exactus One World, LLC, an entity formed on January 25,
2019 and which we refer to as EOW, in order to produce hemp. EOW
holds one year leases, which commenced on March 1, 2019, for
approximately 200 acres of farmland in southwest Oregon for growing
and processing hemp. The leases are renewable on a year-to-year
basis. EOW will farm and process hemp to be manufactured into CBD
and related products, sold or processed as biomass and other
agricultural products. EOW will be responsible for our
initial efforts to pursue agricultural development, including farm
soil preparation, planting, harvesting, transportation and drying.
We are responsible for funding and the minority owners will be
responsible for management, servicing and operating the farm
properties.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop to us. As a
result, we acquired the right to receive 100% of the distributions
of net profit from the 2019 hemp crop. In addition, the members
amended the payment schedule under which farm costs are required to
be made by us.
-1-
Green Goddess Extracts, LLC
On July
31, 2019, we entered into an Asset Purchase Agreement with Green
Goddess Extracts, LLC, a manufacturer and formulator of a premium
line of hemp-derived products sold through distributers and online.
Under the agreement, we acquired assets of Green Goddess consisting
principally of its right and interest in the Green Goddess brand,
inventory, customer list, and intellectual property, including IP
addresses and trademarks. We also entered into an option to acquire
Green Goddess’ vape assets, and entered into an employment
agreement with its founder. In return, we paid Green Goddess
$250,000 in cash and issued 250,000 shares of our common stock.
Prior to the execution of the agreement, Green Goddess was a
contract manufacturer for us. As of the date hereof we owe $166,668
which remains unpaid under the agreement.
Additional
Brands
We have
taken steps to introduce Green GoddessTM brands, LeVor
CollectionTM, Paradise
CBDTM and
ExactusTM,
for selected markets which, as of the date of this prospectus, have
not resulted in material revenues.
Recent Developments
Private Placement of Convertible Notes and Warrants
On
November 27, 2019, we entered into a Securities Purchase Agreement,
referred to as the SPA, with an institutional investor, pursuant to
which it agreed to lend us up to $1,944,444 in three tranches. On
November 27, 2019, we issued to the investor an 8% convertible note
in the principal amount of $833,333 and a warrant to purchase
275,612 shares of our common stock at an exercise price of $0.756,
in exchange for payment by the investor of $750,000. The principal
amount of the note reflects the amount invested, plus a 10%
original issue discount, or OID. We received gross proceeds of
$750,000 in exchange for the initial tranche note and warrant and
$730,0000 net proceeds after the payment of fees and expenses of
the sale.
Pursuant to the
SPA, we expect to issue to the investor a second 8% convertible
note in the principal amount of $277,778 and a warrant to purchase
91,871 shares of our common stock within three business days after
the date of the filing of this registration statement, in exchange
for payment by the investor of the sum of $250,000. The principal
amount of the second tranche note will reflect the amount invested
plus the OID.
Pursuant to the
SPA, subject to fulfillment of certain conditions, we agreed to
issue to the investor a third 8% convertible note in the principal
amount of $833,333 and a warrant to purchase 275,612 shares of our
common stock on the date this registration statement is declared
effective by the SEC, in exchange for payment by the investor of
the sum of $750,000. The principal amount of the third tranche note
will reflect the amount invested plus the OID.
The
notes are fully and unconditionally guaranteed on a senior secured
basis by our direct and indirect subsidiaries. The notes and the
guarantees are secured by a perfected, first priority security
interest in all of our and the guarantors’
assets.
Also on
November 27, 2019, we issued to an advisor a warrant to purchase
84,187 shares of common stock in connection with the private
placement. We agreed to issue
to the advisor a warrant to purchase 28,062 shares of our common
stock upon the closing of the second tranche.
Below
is a summary of the notes and warrants. This summary is not
complete and is subject to, and qualified in its entirety by the
provisions of the notes and warrants, which are filed as exhibits
to the registration statement of which this prospectus forms a
part. We have not completed the second or third tranches, and our
completion of these tranches are subject to conditions of the SPA.
If we do complete the second or third tranche, the terms of the
notes and warrants will be identical to those issued in the first
tranche.
Terms of the Notes
The
principal amount of the notes includes an OID of 10%.
Interest on the
aggregate unconverted and outstanding principal amount is payable
at the interest rate of 8% per annum at our option
either:
●
in cash;
or
●
in shares of our
common stock, at the lesser of (i) the fixed conversion rate of
$0.50 per share of common stock, or (ii) the rate equal to 80% of
the lowest volume weighted average price, or VWAP, during the 10
trading days immediately before the applicable date of the
amortization redemption payment, which we refer to as the
amortization conversion rate, as described below.
-2-
Each
note matures one year after its issuance unless accelerated due to
an event of default or extended by the investor. Each note is
convertible at the option of the investor at any time into shares
of our common stock at the fixed conversion rate of $0.50 per
share. However, the conversion rate is subject to adjustment in the
event of default, redemption and upon the occurrence of certain
events affecting stockholders generally, such as stock splits and
recapitalizations.
Included in the
amount that the investor may convert into common stock is the sum
of:
●
the unpaid and
unconverted principal amount outstanding on the note;
●
100% of the accrued
and unpaid interest on the principal amount of the note to be
converted;
●
100% of the
make-whole amount (as described below) payable in respect of the
principal amount of the note to be converted; and
●
all liquidated
damages, costs of collection and other amounts payable in respect
of the note as applicable.
The
make-whole amount is the amount of interest that would have accrued
with respect to any principal amount that has been converted or
redeemed as if that principal amount was held through the maturity
date of the note.
We must
pay amortization redemption payments equaling one-ninth of the
original principal amount due on each note commencing 90 days after
issuance and continuing during the following eight months. The
investor may at its option accelerate up to six future amortization
redemption payments, in which case the investor may demand the
accelerated amortization amounts be paid in shares of our common
stock at the lesser of:
●
the fixed
conversion rate of $0.50 per share of common stock;
and
●
the amortization
conversion rate, as described above.
In
addition, if we fail to make any amortization redemption payment,
the investor may convert an amount equal to the sum
of:
●
one-ninth of the
original principal amount of the note;
●
100% of all accrued
and unpaid interest on the principal amount of the note that is
subject to the amortization redemption;
●
100% of the
make-whole amount payable in respect of the principal amount of the
note that is subject to the amortization redemption;
and
●
all liquidated
damages payable in respect of the note as of the applicable date of
the amortization redemption payment, into our shares of common
stock at the lower of (i) the fixed conversion rate of $0.50 per
share of common stock and (ii) the amortization conversion
rate.
If we
fail to make a redemption payment, the investor may demand the
amortization amounts be paid in shares of our common stock at the
lesser of fixed conversion rate of $0.50 per share of common stock
or the amortization conversion rate.
In
addition, the investor may at its option send a deferral notice and
demand that amortization amounts be paid in shares of our common
stock at the amortization conversion rate.
We may
redeem at our discretion 110% of the outstanding principal amount
of the notes, plus accrued but unpaid interest, the make-whole
amount, and liquidated damages for cash. In addition, in the event
of a subsequent issuance our common stock or debt, we are subject
to mandatory redemption provisions. We may not issue shares of
common stock to third parties at a price lower than the fixed
conversion rate of $0.50 per share of common stock without the
consent of the investor.
The
investor may not convert notes to the extent that conversion would,
together with its affiliates and attribution parties, cause the
investor to beneficially own a number of common shares which would
exceed 4.99% of our then outstanding common shares following
conversion. The investor may increase its beneficial ownership
limitation up to 9.99%.
-3-
The
notes contain standard and customary events of default, including,
but not limited to, failure to make payments when due, failure to
observe or perform covenants or agreements contained in the notes,
the breach of any material representation or warranty contain
therein, our bankruptcy or insolvency, the suspension of trading of
our common stock, failure to file required reports with the SEC,
and a change of control. If any event of default occurs, subject to
a cure period, the full principal amount, together with interest
(including default interest of 18% per annum) and other amounts
owing in respect thereof to the date of acceleration shall become
immediately due and payable in cash.
Terms of Warrants
The
warrants issued to the investor are exercisable at an exercise
price of $0.756 per share of common stock at any time before the
close of business two years after their issuance, subject to
adjustment in the event of stock dividends, splits, fundamental
transactions, or other changes in our capital structure, and
contain provisions that permit cashless exercise if a registration
statement covering the resale of the shares issuable pursuant to
the warrants is not filed within 180 days of their issuance. The
investor may not exercise warrants to the extent that exercise
would cause it, together with its affiliates and attribution
parties, to beneficially own a number of common shares which would
exceed 4.99% of our then outstanding common shares following
exercise. The investor may increase its beneficial ownership
limitation up to 9.99%.
The
warrants issued to the advisor are exercisable at an exercise price
of $ 0.792 per share of common stock at any time before the close
of business four years after their issuance, subject to adjustment
in the event of stock dividends, splits, fundamental transactions,
or other changes in our capital structure. The advisor may not
exercise warrants to the extent that exercise would cause it,
together with its affiliates and attribution parties, to
beneficially own a number of common shares which would exceed 4.99%
of our then outstanding common shares following exercise. The
advisor may remove this beneficial ownership
limitation.
Shares To Be Registered
We are
seeking to register 3,119,731 shares, which is equal to
approximately 57.14% of the amount that we estimate that we would
be obligated to issue under the notes and warrants, based on
potential interest and other charges. By registering 3,119,731
shares, we are taking into consideration potential adjustments to
the applicable conversion price of the notes. If this number of
shares does not fully cover the number of shares issuable under the
notes and warrants, we are obligated to file subsequent
registration statements to register the remaining securities as
promptly as allowed.
We must
reserve for issuance from our authorized and unissued shares of
common stock at least 300% of the number of shares issuable under
the outstanding notes and warrants issued to the investor. We must
also reserve for issuance from our authorized and unissued shares
of common stock the number of shares issuable upon the exercise of
the warrant issued to the advisor.
At our
option, we can pay interest and amortization payments in the form
of shares at the fixed conversion rate of $0.50 per share of common
stock or at the amortization conversion rate, which varies based on
our volume weighted average price, as described above. In addition,
the investor at its option accelerate up to six future amortization
redemption payments, which payments will be made by our delivery of
shares of common stock at the fixed conversion rate or amortization
conversion rate. As described above, the investor may also demand
our delivery of shares to satisfy our amortization payment
obligations if it sends a deferral notice or if we fail to make an
amortization payment.
If the
investor funds each of the tranche investments in the financing
totaling $1,944,444, after taking into consideration interest
accruing on the notes, the total amount repaid by us in cash or
stock could exceed $2,796,111 (assuming no events of default
occur). If this entire balance is paid by us in stock to satisfy
our amortization payment obligations, based on the amortization
conversion rate as of November 27, 2019, we would have to issue the
selling stockholders a total of 5,263,093 shares in satisfaction of
our obligations under the SPA. The issuance of additional shares
may cause dilution which may, in turn, cause the price of our
common stock to decrease further, both because of the downward
pressure on the stock price that would be caused by a large number
of sales of our shares into the public market by the investor, and
because our existing stockholders may also sell their shares into
the public market based on a belief that the dilutive effect of the
issuances will cause our stock price to further
decrease.
-4-
The
notes and warrants and shares of common stock issuable upon
conversion of principal and interest under the notes and upon
exercise of the warrants were issued and sold, or will be issued
and sold, to the selling stockholders, accredited investors, in
reliance upon the exemption from registration contained in
Regulation D promulgated under the Securities Act of 1933, as
amended.
On the
initial closing date, we entered into a Registration Rights
Agreement with the selling stockholders pursuant to the terms of
the SPA. In the Registration Rights Agreement, we agreed to prepare
and file a registration statement with the SEC covering the resale
of all of the shares of common stock issuable upon conversion of
principal and interest under the notes and exercise of the
warrants, which registration statement we agreed to file no later
than 45 days after the initial closing date. We agreed to use
our reasonable best efforts to cause the registration statement to
go effective as promptly as possible, but in no event later than 90
days after the initial closing date. If all of the securities
cannot be registered on one registration statement, we agreed to
file subsequent registration statements to register the remaining
securities as promptly as allowed. In addition, the Registration
Rights Agreement provides the selling stockholders with piggyback
registration rights. Under certain circumstances, if we fail to
meet our obligations under the Registration Rights Agreement, we
would be required to pay liquidated damages of an amount of cash
equal to 2% of the product of the number of registrable securities
and the closing price as of the
trading day immediately prior to the day of breach
or failure, such payments to be made monthly with a maximum penalty
of 12% until the applicable breach or failure is
cured.
Ceed2Med Agreements
On
January 8, 2019 , we entered into a Master Product Development and
Supply Agreement with Ceed2Med, LLC. Under the agreement, Ceed2Med
agreed to provide us a minimum of 50 and up to 300 kilograms per
month, and up to 2,500 kilograms annually, of CBD rich ingredients
for resale. In addition, Ceed2Med will manufacture for us
tinctures, edibles, capsules, topical solutions and animal health
products. In connection with the agreement, we issued Ceed2Med
67,085,523 shares of our common stock, or approximately 51% percent
of our issued and outstanding shares of common stock on a
fully-diluted basis, on January 8, 2019. As a result, Ceed2Med is
our largest stockholder.
On July
31, 2019, we entered into a Management and Services Agreement with
Ceed2Med under which it will provides us and our subsidiary, EOW,
with project management, farming, and operational services,
including:
●
executive,
sourcing, vendor, product, production and other expertise and
resources;
●
drawings, designs
and specifications for extraction, production and manufacturing
facilities and resources; and
●
brand development
and support services.
In
addition, Ceed2Med has assigned us its agreements and rights to
acquire approximately 200 acres of industrial hemp farmland and
will provide us with business opportunities, know-how, knowledge,
and experience.
In
return, we issued 10,000 shares of Series E 0% Convertible
Preferred Stock to Ceed2Med pursuant to the agreement. Under the
terms of the Series E Preferred, Ceed2Med may only convert such
shares of Series E Preferred into shares of our common stock if our
closing price shall exceed $2.00 per share for 5 consecutive
trading days. Once vested, the shares of Series E Preferred held by
Ceed2Med are intended to either by converted at $1.60 per share of
common stock or optionally redeemed out of the proceeds of future
financings, at the option of Ceed2Med. For more information about
the terms of the Series E Preferred, please see the section
entitled “Description of Securities”.
On
October 23, 2019, we amended the Management and Services Agreement
to extend the termination date to December 31, 2024 and expand the
scope of services to be provided by Ceed2Med.
On
November 14, 2019, we entered into a Supply and Distribution
Agreement with Ceed2Med, pursuant to which Ceed2Med agreed to
purchase a minimum of 10,000 pounds of our 2019 hemp harvest.
During the one-year term of the agreement, we have the option to
purchase the distribution operations of Ceed2Med.
Canntab Agreements
On
November 20, 2019, we entered into the Non-Exclusive Distribution
and Profit Sharing Agreement with Canntab Therapeutics USA
(Florida), Inc. Pursuant to the agreement, which has a term of 2
years and is subject to automatic renewal, we are a non-exclusive
distributor of certain Canntab products throughout the U.S. Canntab
will not grant a third-party the right to promote, sell or deliver
the products within the U.S. during the term of the agreement,
subject to certain exceptions. In addition, we agreed to share
equally with Canntab in the gross profits received from the sale of
their products by us. With respect to Canntab’s sales of
products, we will receive 10% of the gross profits. In connection
with the Canntab Agreement, we also entered into a Supply Agreement
with Canntab, which has a term of 2 years and is subject to
automatic renewal, pursuant to which we agreed to sell hemp
extracts to Canntab.
-5-
Summary of the Offering
|
Resale Shares
|
3,119,731
shares of common stock, consisting of 2,640,000 shares of common
stock underlying our 8% notes issued to the investor, 367,482
shares of common stock underlying warrants issued to the investor,
and 112,249 shares of common stock underlying warrants issued to
the advisor. This amount is equal to approximately 57.14% of the
amount that we estimate that we will be obligated to issue under
the SPA.
|
|
Common Stock Outstanding Before
and After this Offering
|
40,848,558
before this offering and 43,968,289 after this offering(1)
|
|
Risk factors
|
See
“Risk Factors” beginning on page 6 of this prospectus
and the other information included in this prospectus for a
discussion of factors you should carefully consider before
investing in our securities.
|
|
OTCQB trading symbol
|
EXDI
|
The
number of outstanding shares before the offering is based
upon 40,848,558 shares outstanding as of December 18, 2019,
and excludes:
●
Shares underlying
notes and warrants that we have agreed to issue in the third
tranche to the investor and the advisor.
●
10,000 shares of
Series E Preferred Stock held by C2M. The Series E Preferred is
convertible into shares of common shtock only if the closing price
of common ctock in its principal trading market exceeds $2.00 per
share for 5 consecutive trading days, at which time each share of
Series E Preferred Stock is convertible at the holder’s
option, into 625 shares of our common stock at $1.60 per share of
common stock, subject to a beneficial ownership limitation of
4.99%.
●
583,009 shares of
our Series A Preferred Stock convertible into 2,915,045 shares of
common stock.
●
1,650,000 shares of
our Series B-1 Preferred Stock convertible into 206,250 shares of
common stock.
●
7,684,000 shares of
our Series B-2 Preferred Stock convertible into 960,500 shares of
common stock.
●
29 shares of our
Series D Preferred Stock convertible into 725,000 shares of common
stock whereby each share of Series D is convertible into 25,000
shares of common stock.
●
5,671,280 shares of
Common Stock issuable upon exercise of outstanding options issued
under our incentive plans to eligible participants at a weighted
average exercise price of $0.24 per share and which vest over
varying periods.
●
3,370,830 shares of
our common stock issuable upon vesting of restricted stock issued
and outstanding.
(1)
The number of
outstanding shares after the offering includes the 2,640,000 shares
of common stock issuable upon conversion of principal and interest
under the 8% notes and assumes the conversion and sale of the
shares underlying 367,482 shares of common stock underlying the
warrants issued in connection with the 8% notes and to the advisor,
which shares are being offered pursuant to this
prospectus.
RISK FACTORS
Any investment in our common stock involves a high degree of risk.
Investors should carefully consider the risks described below and
all of the information contained in this prospectus before deciding
whether to purchase our common stock. Our business, financial
condition and results of operations could be materially adversely
affected by these risks if any of them actually occur. This
prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a
result of certain factors, including the risks we face as described
below and elsewhere in this prospectus.
Risks Related to Our Company and Our Business
Because we have a limited operating history to evaluate our
company, the likelihood of our success must be considered in light
of the problems, expenses, difficulties, complications and delay
frequently encountered by an early-stage company.
Since
we have a limited operating history in our current business of
hemp-based CBD, it will make it difficult for investors and
securities analysts to evaluate our business and prospects. You
must consider our prospects in light of the risks, expenses and
difficulties we face as an early stage company with a limited
operating history. Investors should evaluate an investment in our
company in light of the uncertainties encountered by early-stage
companies in an intensely competitive industry and in which the
potential hemp-based CBD competition and farming, extraction,
production and manufacturing companies are large well capitalized
companies with resources (financial and otherwise) significantly
greater than the Company’s. There can be no assurance that
our efforts will be successful or that we will be able to become
profitable.
-6-
We have sustained losses in the past and we may sustain losses in
the foreseeable future.
We have
incurred losses from operations in prior periods, including the
nine months ended September 30, 2019 and 2018 and the years ended
December 31, 2018 and 2017. For the nine months ended
September 30, 2019 and 2018, our loss from continuing operations
was $5.8 million and 1.9 million, respectively, and our net loss
was $4.6 million and $3.2 million, respectively. Our accumulated
deficit was $15.7 million at September 30, 2019. Our loss from
continuing operations for the year ended December 31, 2018 was $2.4
million and our net loss was $4.3 million for the year ended
December 31, 2018. Our accumulated deficit was $10.5 million at
December 31, 2018. Our loss from continuing operations for the year
ended December 31, 2017 was $3.1 million and our net loss was $3.9
million for the year ended December 31, 2017. Our accumulated
deficit was $6.2 million at December 31, 2017 representing
activities prior to entering our present business. We expect
to sustain losses in the foreseeable future and may never be
profitable.
Because we expect to need additional capital to fund our growing
operations, we may not be able to obtain sufficient capital and may
be forced to limit the scope of our operations.
We
expect that as our business continues to grow we will need
additional working capital. If adequate additional debt
and/or equity financing is not available on reasonable terms or at
all, we may not be able to continue to expand our business, and we
will have to modify our business plans accordingly. These factors
would have a material and adverse effect on our future operating
results and our financial condition.
If we
reach a point where we are unable to raise needed additional funds
to continue as a going concern, we will be forced to cease our
activities and dissolve the Company. In such an event, we
will need to satisfy various creditors and other claimants,
severance, lease termination and other dissolution-related
obligations.
Our independent auditors have expressed substantial doubt about our
ability to continue as a going concern, which may hinder our
ability to obtain future financing.
The
audit report prepared by our independent registered public
accounting firm relating to our financial statements for the year
ended December 31, 2018 includes an explanatory paragraph
expressing substantial doubt about our ability to continue as a
going concern. Our auditor’s doubts are based on our
recurring losses from operations, negative cash flows from
operating activities and accumulated deficit. Our ability to
continue as a going concern will be determined by our ability to
obtain additional funding in the short term to enable us to fund
our operations. If we are unable to raise additional capital or
secure additional lending in the near future, management expects
that we will need to curtail our operations.
We may not be able to successfully implement our growth strategy on
a timely basis or at all.
Our
future success depends on our ability to implement our growth
strategy of introducing new products and expanding into new markets
and new distribution channels and attracting new consumers to our
brand. Our ability to implement this growth strategy depends, among
other things, on our ability to:
●
establish our
brands and reputation as a well-managed enterprise committed to
delivering premium quality products;
●
enter into
distribution and other strategic arrangements with retailers and
other potential distributors of our products;
●
continue to
effectively compete in specialty channels and respond to
competitive developments;
●
expand and maintain
brand loyalty;
●
develop new
proprietary value-branded products and product line extensions that
appeal to consumers;
●
maintain and, to
the extent necessary, improve our high standards for product
quality, safety and integrity;
●
maintain sources
from suppliers that comply with all federal, state and local laws
for the required supply of quality ingredients to meet our growing
demand;
●
identify and
successfully enter and market our products in new geographic
markets and market segments;
●
maintain compliance
with all federal, state and local laws related to our products;
and
attract,
integrate, retain and motivate qualified personnel. We may not be
able to successfully implement our growth strategy and may need to
change our strategy in order to maintain our growth. If we fail to
implement our growth strategy or if we invest resources in a growth
strategy that ultimately proves unsuccessful, our business,
financial condition and results of operations may be materially
adversely affected.
We may have difficulties managing our anticipated growth, or we may
not grow at all.
If we
succeed in growing our business, such growth could strain our
management team and capital resources. Our ability to manage
operations and control growth will be dependent on our ability to
raise and spend capital to successfully attract, train, motivate,
retain and manage new members of senior management and other key
personnel and continue to update and improve our management and
operational systems, infrastructure and other resources, financial
and management controls, and reporting systems and procedures.
Failure to manage our growth effectively could cause us to
misallocate management or financial resources, and result in
additional expenditures and inefficient use of existing human and
capital resources or we otherwise may be forced to grow at a slower
pace that could impair or eliminate our ability to achieve and
sustain profitability. Such slower than expected growth may require
us to restrict or cease our operations and go out of
business.
-7-
The focus of our business is to produce hemp-based products,
including through farming and manufacturing. We may not be able to
successfully farm, manufacture or sell products and, if we acquire
hemp-based products from third parties, we may fail to realize all
of the anticipated benefits of our business plans and
efforts.
We
acquired our farm interests and commenced hemp-based activities in
2019 in transactions which significantly changed the focus of our
business and operations. We currently own several assets and
although we may seek to commercialize and develop products, alone
or with others, there is no assurance that we will be able to
successfully commercialize or develop products and such
commercialization and development is not a core focus of our
business. There is significant risk involved in connection with our
activities in which we acquire and seek to pursue hemp-based
businesses. We have no prior experience as an operator of
hemp-based businesses. The acquisition of the farm and operations
intended to produce sales and our business model could fail to
produce anticipated benefits, or could have other adverse effects
that we do not currently foresee. Failure to successfully produce
biomass from agricultural crops, or failure of extraction,
production or manufacturing operations may have a material adverse
effect on our business, financial condition and results of
operations.
In
addition, the pursuit of hemp-based businesses, including
acquisition of businesses intended to pursue hemp-based sales, is
subject to a number of risks, including, but not limited to the
following:
●
There is a
significant time lag between investing in farm properties and
harvest, during which time crops of hemp may fail. During that time
lag, in the event of unforeseen occurrence, such as natural or
man-made events that impact crops, material costs are likely to be
incurred that would have a negative effect on our results of
operations, cash flows and financial position;
●
The integration of
a farm-based infrastructure is unpredictable and requires that we
rely on the efforts of others, including the skills and experience
of C2M, our largest stockholder, who is responsible to provide
personnel and oversee farming, extraction, production and
manufacturing, and will be a time consuming and expensive process
which is unpredictable and that may disrupt our operations. If our
integration efforts are not successful, our results of operations
could be harmed. In addition, we may not achieve anticipated
synergies or other benefits from such acquisitions;
●
Integration of
infrastructure, and acquisitions that increase our ability to sell
hemp-based consumer products, is unpredictable and requires that we
rely on the efforts of others, including the skills and experience
of C2M, our largest stockholder, who is responsible to provide
personnel and oversee integration and acquisitions related to
marketing and sales, and will be a time consuming and expensive
process which is unpredictable and that may disrupt our operations.
If our integration efforts are not successful, our results of
operations could be harmed. In addition, we may not achieve
anticipated synergies or other benefits from such acquisitions;
and
●
We are highly
dependent upon C2M for new business opportunities. C2M also
competes with us and will continue to compete with us. C2M may
require payments for business opportunities provided to us in
exchange for its lost opportunities.
Therefore,
there is no assurance that the hemp-based business will be
successful, will occur timely or in a timeframe that is capable of
prediction, or will generate enough revenue to recoup our
investment.
We will be initially reliant exclusively on the assets we acquired
through our relationship with C2M, our largest stockholder. If we
are unable to commercialize or otherwise monetize our assets and
generate revenue and profit through those assets or by other means,
there is a significant risk that our business will
fail.
Our
relationship and ability to rapidly enter into hemp-based
businesses is heavily reliant upon our ability to obtain referrals
from C2M of unique and valuable business opportunities from C2M.
C2M is in the same or equivalent business as us and C2M does not
have a contractual obligation to introduce us to business
opportunities, or a provide us with right of first refusal with
regard to new opportunities. We rely on C2M’s motivations
which principally are derived from their position as a large
stockholder of ours. If this change, or our relationship with C2M
fails to continue, we may not be able to be introduced to new
opportunities and we will have to seek to secure alternative
avenues to make inroads into this industry. If our efforts to
generate revenue from our assets fail, we will have incurred
significant losses on our investment in, our relationship with,
C2M, lost opportunities and lost time. We intend to enter into an
agreement with C2M which will provide for payments over time for
their assistance and support and in order to continue to provide
incentives for C2M to present and negotiate opportunities on our
behalf. We may not seek, and may be unable to acquire, additional
assets and therefore may be wholly reliant on our present assets
for revenue. If we are unable to generate revenue from our current
assets and fail to acquire any additional assets, our business will
likely fail.
-8-
We may not be able to manage our manufacturing and supply chain
effectively, which may adversely affect our results of
operations.
We must
accurately forecast demand for all of our products in order to
ensure that we have enough products available to meet the needs of
our customers. Our forecasts are based on multiple assumptions that
may cause our estimates to be inaccurate and affect our ability to
obtain adequate third-party contract manufacturing capacity in
order to meet the demand for our products, which could prevent us
from meeting increased customer demand and harm our brand and our
business. If we do not accurately align our manufacturing
capabilities with demand, our business, financial condition and
results of operations may be materially adversely
affected.
We
currently rely on a single supplier, which is our largest
stockholder, C2M, for all of our supply of CBD. If our sole source
supplier was to go out of business, we might be unable to find a
replacement for such source in a timely manner, if at all. If a
sole source supplier were to be acquired by a competitor, the
competitor may elect not to sell to us at all. The loss of our
single supplier could cause additional difficulties in finding a
substitute supplier given the strict licensing requirements in this
industry and there are a limited number of suppliers that currently
hold such licenses and comply with the 2014 Farm Bill (as defined
below). If for any reason we were to change any one of our
third-party contract manufacturers, we could face difficulties that
might adversely affect our ability to maintain an adequate supply
of our products, and we would incur costs and expend resources in
the course of making the change. Moreover, we might not be able to
obtain terms as favorable as those received from our current
third-party contract manufacturers, which in turn would increase
our costs.
In the
event that C2M goes out of business, or our relationship with C2M
becomes compromised in some capacity, then C2M may ay elect not to
sell to us in the future, or to discontinue its relationship with
us. Furthermore, as the largest stockholder, C2M has the ability to
exert significant control in matters regarding stockholder
approval. Any inability to secure required supplies and services or
to do so on appropriate terms could have a materially adverse
impact on our business, financial condition, results of operations
or prospects.
In
addition, we must continuously monitor our inventory and product
mix against forecasted demand. If we underestimate demand, we risk
having inadequate supplies. We also face the risk of having too
much inventory on hand that may reach its expiration date and
become unsalable, and we may be forced to rely on markdowns or
promotional sales to dispose of excess or slow-moving inventory. If
we are unable to manage our supply chain effectively, our operating
costs could increase and our profit margins could
decrease.
Reliance on C2M and other Manufacturers.
The
ability of the Company to compete and grow will be dependent on it
having access, at a reasonable cost and in a timely manner, to
skilled labor, equipment, facilities and CBD. No assurances can be
given that the Company will be successful in maintaining its
required supply of skilled labor, equipment, facilities and access
to C2M.
The
Company relies on third parties to supply the materials for and the
functions of extraction, processing and manufacturing, as well
research of the retail private label and customer product
candidates, principally C2M. The Company cannot provide assurance
that access to C2M for supply, expertise, or materials will not be
limited, not be interrupted, not be restricted in certain
geographic regions, or be of satisfactory quality or be delivered
in a timely manner. To this end, we entered into a long term
Management Agreement under which we will formalize our relationship
with C2M. In this regard, we will require continued access to
Current Good Manufacturing Practices (“cGMP”) manufacturer
facilities, testing laboratories, qualified extraction facilities,
processing, manufacturing and related services until we are
fully-funded and can acquire our own capabilities for each of these
functions. If the Company is unable to obtain access to a cGMP
manufacturer, for example, or any of the other supply chain
elements involved in our full-integration plans, the Company may be
restricted from operations which would have a materially adverse
effect on the business and operations of the Company.
We are heavily reliant on a small number of customers and
suppliers.
During
the nine months ended September 30, 2019, three customers
represented 55% of our total net sales of CBD products, and as of
September 30, 2019, four customers represented approximately 89% of
our total accounts receivable. The loss of any of these customers
or their inability to make future payments could significantly
impact our business and results of operation. In addition, we
purchased all of our finished products from one supplier during the
nine months ended September 30, 2019. Our heavy reliance on our
major supplier for the supply of our products could have
significant impact on our business and results of operation in the
event of any shortage of, or delay in, the supply. The loss of this
supplier could significantly impact our business and results of
operation.
-9-
If we fail to manage our existing assets and third party
relationships (such as farmers, extractors, producers,
distributors, shippers and retail distribution clients)
effectively, our revenue and profits could decline, and should we
fail to acquire additional revenues, our growth could be
impeded.
Our
success depends in part on our ability to manage our existing
assets and manage the third party relationships necessary to
effectively manage our assets. Our vendors and providers
are not bound by long-term contracts that ensure us a consistent
access to necessary expertise, which is crucial to our ability to
generate revenues and earnings. The ability to utilize
third-parties and benefit from our assets will depend on various
factors, some of which are beyond our control.
We are reliant on key inputs and changes in their costs could
negatively impact our profitability.
Our
business is dependent on a number of key inputs and their related
costs including raw materials and supplies related to product
development and manufacturing operations. Any significant
interruption or negative change in the availability or economics of
the supply chain for key inputs could materially impact our
business, financial condition, results of operations or prospects.
Some of these inputs may only be available from a single supplier
or a limited group of suppliers. If a sole source supplier was to
go out of business, we might be unable to find a replacement for
such source in a timely manner or at all. If a sole source supplier
were to be acquired by a competitor, that competitor may elect not
to sell to us in the future. Any inability to secure required
supplies and services or to do so on appropriate terms could have a
materially adverse impact on our business, financial condition,
results of operations or prospects.
Increases in the cost of ingredients, labor and other costs could
adversely affect our operating results.
Our
principal products contain hemp-derived CBD oil. Increases in the
cost of ingredients in our products could have a material adverse
effect on our operating results. Significant price increases,
market conditions, weather, acts of God and other disasters could
materially affect our operating results. An increase in our
operating costs could adversely affect our profitability. Factors
such as inflation, increased labor and employee benefit costs and
increased energy costs may adversely affect our operating costs.
Many of the factors affecting costs are beyond our control and we
may not be able to pass along these increased costs to our
customers.
If the ingredients used in our products are contaminated, alleged
to be contaminated or are otherwise rumored to have adverse
effects, our results of operations could be adversely
affected.
We buy
ingredients from C2M. If these materials are alleged or prove to
include contaminants that affect the safety or quality of our
products or are otherwise rumored to have adverse effects, for any
reason, we may sustain the costs of and possible litigation
resulting from a product recall and need to find alternate
ingredients, delay production, or discard or otherwise dispose of
products, which could adversely affect our business, financial
condition and results of operations. In addition, if any of our
competitors experience similar events, our reputation could be
damaged, including as a result of a loss of consumer confidence in
the types of products we sell.
Although we insure
on an economically reasonable basis against product recalls and
product contamination, and carry a cannabis regulatory and
enforcement endorsement under our Directors and Officers insurance
policy, our insurance may not be adequate to cover all liabilities
that we may incur in connection with product liability claims,
including among others, that the products we sell caused injury or
illness, include inadequate instructions for use or include
inadequate warnings concerning possible side effects or
interactions with other substances. For example, punitive damages
are generally not covered by insurance. If we are subject to
substantial product liability claims in the future, we may not be
able to continue to maintain our existing insurance, obtain
comparable insurance at a reasonable cost, if at all, or secure
additional coverage. This could result in future product liability
claims being uninsured. If there is a product liability judgment
against us or a settlement agreement related to a product liability
claim, our business, financial condition and results of operations
may be materially adversely affected. In addition, even if product
liability claims against us are not successful or are not fully
pursued, these claims could be costly and time-consuming and may
require management to spend time defending claims rather than
operating our business.
We may become the subject of litigation and, due to the nature of
our business, may be the target of future legal proceedings that
could have an adverse effect on our business.
In July
2018, we received notice of the expiration and termination of our
license agreement dated January 19, 2016 from Digital Diagnostics,
Inc. (“Digital
Diagnostics”) related to our FibriLyzer and MatriLyzer
technologies. In addition, on December 14, 2018 we received a
letter from KD Innovation, Ltd. (“KDI”) and Dr. Krassen
Dimitrov, our former director, seeking payment for past due
consulting fees from June 2017 through November 2018 pursuant to a
Consulting Agreement dated January 20, 2016. Under the terms of
these agreements, the parties are required to arbitrate claims.
Although we dispute the material allegations made by Digital
Diagnostics and KDI, if such actions were successful, damages could
be awarded against us. In connection with the parties’
disputes, we may seek to have the patents underlying the licenses
declared invalid or unenforceable. The Company may become subject
to similar actions in the future which will be costly and time
consuming to defend, and the outcomes of which are uncertain. On
September 9, 2019 our former director Krassen Dimitrov and his
company KDI commenced a proceeding against us and our wholly-owned
subsidiary Exactus Biosolutions, Inc. before the American
Arbitration association involving the dispute and seeking $750,000
in damages.
-10-
We may seek to internally develop additional hemp-based products,
which would take time and be costly. Moreover, the failure to
successfully develop, or obtain or maintain intellectual property
rights for, such products would lead to the loss of our investments
in such activities.
Part of
our business may include the internal development of products that
we will seek to offer and sell. However, this aspect of our
business would likely require significant capital and would take
time to achieve. Such activities could also distract our management
team from its present business initiatives, which could have a
material and adverse effect on our business. There is also the risk
that our initiatives in this regard would not yield any viable new
products or developments, which would lead to a loss of our
investments in time and resources in such activities.
In
addition, even if we are able to internally develop new products,
in order for those products to be viable and to compete
effectively, we would need to develop and maintain, and we would
heavily rely upon, a proprietary position with respect to such
products. However, there are significant risks associated with any
such efforts and products we may develop principally including the
following:
●
efforts may not
result in success, or may take longer than we expect;
●
we may be subject
to litigation or other proceedings;
●
any patents or
trademarks that are issued to us may not provide meaningful
protection;
●
we may not be able
to develop additional proprietary technologies;
●
other companies may
challenge our efforts or intellectual property rights that are
issued to us;
●
other companies may
have independently developed and/or patented (or may in the future
independently develop and patent) similar or alternative
technologies, or duplicate our technologies; and
●
other companies may
design around technologies we have developed.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
processes of identifying and commercializing new products is
complex and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging trends, our business
could be harmed. We have already and may have to continue to commit
significant resources to commercializing new products before
knowing whether our investments will result in products the market
will accept. Furthermore, we may not execute successfully on
commercializing those products because of errors in product
planning or timing, technical hurdles that we fail to overcome in a
timely fashion, or a lack of appropriate resources. This could
result in competitors providing those solutions before we do and a
reduction in net sales and earnings.
The
success of new products depends on several factors, including
proper new product definition, timely completion, and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify additional new
product opportunities, develop and bring new products to market in
a timely manner, or achieve market acceptance of our products, or
that products and technologies developed by others will not render
our products or technologies obsolete or
noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or expansion
could materially harm our business.
To
date, our revenue growth plans have been derived from projected
sales of our products, not actual sales or historical experience.
Our success and the planned growth and expansion of our business
depends on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
Our
suppliers could fail to fulfill our orders or provide raw materials
to assemble our products, which would disrupt our business,
increase our costs, harm our reputation, and potentially cause us
to lose our market.
We
depend on third party suppliers for materials used for our
products, such as bottles, caps, vapes, batteries and labels. These
suppliers could fail to produce products to our specifications or
in a workmanlike manner and may not deliver the material or
products on a timely basis. Our suppliers may also have to obtain
inventories of the necessary materials and tools for production.
Any change in our suppliers’ approach to resolving production
issues could disrupt our ability to fulfill orders and could also
disrupt our business due to delays in finding new suppliers,
providing specifications and testing initial production. Such
disruptions in our business and/or delays in fulfilling orders
could harm our reputation and could potentially cause us to lose
our market.
-11-
The Company’s ultimate success will be dependent in part on
our ability to successfully grow, develop, produce and market a
portfolio of hemp products and market acceptance of our planned
products.
We are
an agribusiness and grow our product outdoors, and there are risks
associated with the production of our product relating to such
things as weather, soil deterioration, and infestation that could
affect our supplies and inventory. In addition, market acceptance
by and demand for our planned products from consumers will also be
key factors in our ability to succeed. If we are unable to develop
and market our portfolio of existing and planned products or if
they are not accepted by consumers, our business, results of
operations and financial condition could be seriously
harmed.
Although we carry
products liability insurance, a successful products liability claim
brought against us that is in excess of our insurance coverage
limits could have a material adverse effect on our business and
results of operations.
Any damage to our reputation or our brands may materially adversely
affect our business, financial condition and results of
operations.
Maintaining,
developing and expanding our reputation with our customers and our
suppliers is critical to our success. Our brand may suffer if our
marketing plans or product initiatives are not successful. The
importance of our brand may decrease if competitors offer more
products similar to the products that we manufacture. Further, our
brands may be negatively impacted due to real or perceived quality
issues or if consumers perceive us as being untruthful in our
marketing and advertising, even if such perceptions are not
accurate. Product contamination, the failure to maintain high
standards for product quality, safety and integrity, including raw
materials and ingredients obtained from suppliers, or allegations
of product quality issues, mislabeling or contamination, even if
untrue or caused by our third-party contract manufacturing partners
or raw material suppliers, may reduce demand for our products or
cause production and delivery disruptions. However, we may be
unable to detect or prevent product and/or ingredient quality
issues, mislabeling or contamination, particularly in instances of
fraud or attempts to cover up or obscure deviations from our
guidelines and procedures. If any of our products become unfit for
consumption, cause injury or are mislabeled, we may have to engage
in a product recall and/or be subject to liability. Damage to our
reputation or our brands or loss of consumer confidence in our
products for any of these or other reasons could result in
decreased demand for our products and our business, financial
condition and results of operations may be materially adversely
affected. In addition, if any of our competitors experience similar
events, our reputation could be damaged, including as a result of a
loss of consumer confidence in the types of products we
sell.
Further, our
corporate reputation is susceptible to damage by actions or
statements made by current or former employees, competitors,
vendors, adversaries in legal proceedings and government
regulators, as well as members of the investment community and the
media. There is a risk that negative information about our company,
even if based on false rumor or misunderstanding, could adversely
affect our business, results of operations, and financial
condition. In particular, damage to our reputation could be
difficult and time-consuming to repair, could make potential or
existing retail customers reluctant to select us for new
engagements, resulting in a loss of business, and could adversely
affect our recruitment and retention efforts.
Our business depends, in part, on the sufficiency and effectiveness
of our marketing and trade promotion programs and
incentives.
Due to
the competitive nature of our industry, we must effectively and
efficiently promote and market our products through advertisements
as well as through trade promotions and incentives to sustain and
improve our competitive position in our market. Marketing
investments may be costly. In addition, we may, from time to time,
change our marketing strategies and spending, including the timing
or nature of our trade promotions and incentives. We may also
change our marketing strategies and spending in response to actions
by our customers, competitors and other companies that manufacture
and/or distribute pet health and wellness products. The sufficiency
and effectiveness of our marketing and trade promotions and
incentives are important to our ability to retain and improve our
market share and margins. If our marketing and trade promotions and
incentives are not successful or if we fail to implement sufficient
and effective marketing and trade promotions and incentives or
adequately respond to changes in industry marketing strategies, our
business, financial condition and results of operations may be
adversely affected.
If we
are unable to enter into such arrangements on favorable terms, are
unable to achieve the desired results under these arrangements and
programs, are unable to maintain these relationships, fail to
generate sufficient traffic or generate sufficient revenue from
purchases pursuant to these arrangements and programs, or properly
manage the actions of these providers, our ability to generate
revenue and our ability to attract and retain our customers may be
impacted, negatively affecting our business and results of
operations. In addition, if Facebook restricts our ability to use
such arrangements and programs or takes limits or restricts access
to its platform by us or our applications as a result of
advertisements or actions taken by third-party advertising or
marketing providers, it could have a material adverse effect on our
business or results of operations.
-12-
A significant product defect or product recall could materially and
adversely affect our brand image, causing a decline in our sales
and profitability, and could reduce or deplete our financial
resources.
A
significant product defect could materially harm our brand image
and could force us to conduct a product recall. This could damage
our relationships with our customers and reduce end-user
loyalty. A product recall
would be particularly harmful to us because we have limited
financial and administrative resources to effectively manage a
product recall and it would detract management’s attention
from implementing our core business strategies. As a result, a
significant product defect or product recall could cause a decline
in our sales and profitability and could reduce or deplete our
financial resources.
We may be subject to product liability claims or regulatory action
if our products are alleged to have caused significant loss or
injury.
We may
be subject to product liability claims, regulatory action and
litigation if our products are alleged to have caused loss or
injury or failed to include adequate instructions for use or failed
to include adequate warnings concerning possible side effects or
interactions with other substances. Previously unknown adverse
reactions resulting from use and consumption of CBD products alone
or in combination with other medications or substances could also
occur. In addition, the sale of any ingested product involves a
risk of injury due to tampering by unauthorized third parties or
product contamination. Our products may also be subject to product
recalls, including voluntary recalls or withdrawals, if they are
alleged to pose a risk of injury or illness, or if they are alleged
to have been mislabeled, misbranded or adulterated or to otherwise
be in violation of governmental regulations. We may in the future
have to recall, certain of our products as a result of potential
contamination and quality assurance concerns. A product liability
claim or regulatory action against us could result in increased
costs and could adversely affect our reputation and goodwill with
our patients and consumers generally. There can be no assurance
that we will be able to maintain product liability insurance on
acceptable terms or with adequate coverage against potential
liabilities. Such insurance is expensive and may not be available
in the future on acceptable terms, or at all. The inability to
obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could
result in us becoming subject to significant liabilities that are
uninsured and also could adversely affect our commercial
arrangements with third parties.
If product liability lawsuits are successfully brought against us,
we will incur substantial liabilities.
We face
an inherent risk of product liability. For example, we may be sued
if any product we sell allegedly causes injury or is found to be
otherwise unsuitable during product testing, manufacturing,
marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing, defects in design, a
failure to warn of dangers inherent in the product, negligence,
strict liability and a breach of warranties. Claims could also be
asserted under state consumer protection acts. If we cannot
successfully defend ourselves against product liability claims, we
may incur substantial liabilities or be required to limit sales of
our products. Even successful defense would require significant
financial and management resources. Regardless of the merits or
eventual outcome, liability claims may result in:
●
decreased demand
for our products;
●
injury to our
reputation;
●
costs to defend the
related litigation;
●
a diversion of
management's time and our resources;
●
substantial
monetary awards to users of our products;
●
product recalls or
withdrawals;
●
loss of revenue;
and\a decline in our stock price.
In
addition, while we continue to take what we believe are appropriate
precautions, we may be unable to avoid significant liability if any
product liability lawsuit is brought against us.
Our acquisitions may be time consuming, complex and costly, which
could adversely affect our operating results.
Acquisitions are
critical to our business plan, and are often time consuming,
complex and costly to consummate. We may elect to not pursue any
additional acquisitions while we focus our efforts on our existing
assets. We may utilize many different transaction structures in our
acquisitions and the terms of such acquisition agreements tend to
be heavily negotiated. As a result, we expect to incur significant
operating expenses and will likely be required to raise capital
during the negotiations even if the acquisition is ultimately not
consummated, if we determine to acquire additional patents or other
assets. Even if we are able to acquire particular assets, there is
no guarantee that we will generate sufficient revenue related to
those assets to offset the acquisition costs. While we will seek to
conduct confirmatory due diligence on the assets we are considering
for acquisition, because we are operating in a new and uncertain
industry we place less emphasis on due diligence and we may acquire
assets from a seller for whom we do not have complete analysis of
their history or business operations, for example, if we view the
acquisition to be important strategically, the seller may not have
proper title or ownership to those assets, or otherwise provides us
with flawed ownership rights, including invalid or unenforceable
assets. In those cases, we may be required to spend significant
resources to defend our interest in the assets and, if we are not
successful, our acquisition may be worthless, in which case we
could lose part or all of our investment in the
assets.
-13-
We may
also identify assets that cost more than we are prepared to spend
with our own capital resources. We may incur significant costs to
organize and negotiate a structured acquisition that does not
ultimately result in an acquisition of any assets or, if
consummated, proves to be unprofitable for us. Acquisitions
involving issuance of our securities could be dilutive to existing
stockholders and could be at prices lower than those prices
reflected in the trading markets. These higher costs could
adversely affect our operating results and, if we incur losses, the
value of our securities will decline.
In
addition, we may acquire assets that are in the early stages of
adoption. Demand for some of these assets will likely be untested
and may be subject to fluctuation based upon the rate at which our
customers or associates adopt our products or utilize our materials
in their products and services. As a result, there can be no
assurance as to whether assets we acquire or develop will have
value that can be realized through sales or other
activities.
If we make acquisitions, it could divert management’s
attention, cause ownership dilution to our stockholders and be
difficult to integrate.
Following our
acquisition of Exactus One
World in March 2019, we have grown rapidly and we
expect to continue to evaluate and consider future acquisitions.
Acquisitions generally involve significant risks, including
difficulties in the assimilation of the assets, services and
technologies we acquire or industry overlay on which the assets are
applicable, diversion of management's attention from other business
concerns, overvaluation of the acquired assets, and the acceptance
of the acquired assets and/or businesses. Acquisitions
may not be successful, which can have a number of adverse effects
upon us including adverse financial effects and may seriously
disrupt our management’s time. The integration of acquired
assets may place a significant burden on management and our
internal resources. The diversion of management attention and any
difficulties encountered in the integration process could harm our
business.
We face risks associated with strategic acquisitions.
As an
important part of our business strategy, we have strategically
acquired several businesses, and plan to continue strategic
acquisitions, some of which may be material. These acquisitions may
involve a number of financial, accounting, managerial, operational,
legal, compliance and other risks and challenges, including the
following, any of which could adversely affect our results of
operations:
●
Any acquired
business could under-perform relative to our expectations and the
price that we paid for it, or not perform in accordance with our
anticipated timetable;
●
We may incur or
assume significant debt in connection with our
acquisitions;
●
Acquisitions could
cause our results of operations to differ from our own or the
investment community’s expectations in any given period, or
over the long term; and
●
Acquisitions could
create demands on our management that we may be unable to
effectively address, or for which we may incur additional
costs.
●
Additionally,
following any business acquisition, we could experience difficulty
in integrating personnel, operations, financial and other systems,
and in retaining key employees and customers.
We may
record goodwill and other intangible assets on our consolidated
balance sheet in connection with our acquisitions. If we are not
able to realize the value of these assets, we may be required to
incur charges relating to the impairment of these assets, which
could materially impact our results of operations.
If we fail to retain our key personnel, we may not be able to
achieve our anticipated level of growth and our business could
suffer.
Our
future depends, in part, on our ability to attract and retain key
personnel and the continued contributions of our executive
officers, each of whom may be difficult to replace. In particular,
Emiliano Aloi, President and CEO, is important to the management of
our business and operations and the development of our strategic
direction. The loss of the services of any such individual and the
process to replace any key personnel would involve significant time
and expense and may significantly delay or prevent the achievement
of our business objectives.
We depend on the knowledge and skills of our senior management and
other key employees, and if we are unable to retain and motivate
them or recruit additional qualified personnel, our business may
suffer.
We have
benefited substantially from the leadership and performance of our
senior management, as well as other key employees. Our success will
depend on our ability to retain our current management and key
employees, and to attract and retain qualified personnel in the
future, and we cannot guarantee that we will be able to retain our
personnel or attract new, qualified personnel. In addition, we do
not maintain any “key person” life insurance policies.
The loss of the services of members of our senior management or key
employees could prevent or delay the implementation and completion
of our strategic objectives, or divert management’s attention
to seeking qualified replacements.
-14-
We will be required to attract and retain top quality talent to
compete in the marketplace.
We
believe our future growth and success will depend in part on our
ability to attract and retain highly skilled managerial, product
development, sales and marketing, and finance personnel. There can
be no assurance of success in attracting and retaining such
personnel. Shortages in qualified personnel could limit our ability
to increase sales of existing products and services and launch new
product and service offerings.
If we fail to retain key personnel and hire, train and retain
qualified employees, we may not be able to compete effectively,
which could result in reduced revenue or increased
costs.
Our
success is highly dependent on the continued services of key
management and technical personnel. Our management and other
employees may voluntarily terminate their employment at any time
upon short notice. The loss of the services of any member of the
senior management team or any of the managerial or technical staff
or members of our Advisory Board on which we principally rely for
expertise on our CBD segment may significantly delay or prevent the
achievement of product development, our growth strategies and other
business objectives. Our future success will also depend on our
ability to identify, recruit and retain additional qualified
technical and managerial personnel. We operate in several
geographic locations where labor markets are particularly
competitive, and where demand for personnel with these skills is
extremely high and is likely to remain high. As a result,
competition for qualified personnel is intense, particularly in the
areas of general management, finance, engineering and science. The
process of hiring suitably qualified personnel is often lengthy and
expensive, and may become more expensive in the future. If we are
unable to hire and retain a sufficient number of qualified
employees, our ability to conduct and expand our business could be
seriously reduced.
Risks Related to Ownership of Our Common Stock.
The price of our common stock has been highly volatile due to
several factors that will continue to affect the price of our
stock.
Our
common stock has traded as low as $0.048 and as high as $8.00
between January 1, 2017 and December 31, 2018 (on a split-adjusted
basis). The reason for the volatility in our stock is not well
understood and the volatility may continue. Some of the factors we
believe that have contributed to our common stock volatility and
which may be applicable in future periods, include:
●
uncertainty
surrounding our rights to development since notice of termination
was received from Digital Diagnostics, Inc.
●
inability to secure
funding or partners for our development of the FibriLyzer and
MatriLyzer;
●
entry into new
business ventures;
●
asset acquisitions
or dispositions;
●
commencement of
litigation;
●
small amounts of
our stock available for trading, expiration of any lockup
agreements and terms of any leak-out rights with respect
thereto;
●
obligations to and
filing of registration statements registering the sale of new or
outstanding shares of our common stock;
●
options and
derivatives availability or unavailability;
●
short selling and
potential “short and distort” campaigns and other short
attacks involving our stock;
●
small public float
of our outstanding common stock;
●
expiration of Rule
144 holding periods with respect to our outstanding common
stock;
●
fluctuations in our
operating results;
●
changes in the
capital markets and ability for the Company to raise
capital;
●
legal developments
and public awareness with respect to hemp-based and/or CBD business
plans, generally, and involving the Company;
●
confusion with
Companies engaged in the business of marijuana, and the legal and
regulatory concerns that our business is related to the marijuana
business;
●
general economic
conditions;
●
and legal and
regulatory environment.
We cannot guarantee the continued existence of an active
established public trading market for our shares.
Our
shares are currently quoted on the OTCQB tier of the
over-the-counter market operated by OTC Markets Group, Inc. Trading
in stock quoted on the OTCQB is often thin and characterized by
wide fluctuations in trading prices, due to many factors that may
have little to do with our operations or business prospects. This
volatility could depress the market price of our shares for reasons
unrelated to operating performance. Accordingly, OTCQB may provide
less liquidity for holders of our shares than a national securities
exchange such as the Nasdaq Stock Market. There is no assurance
that we can successfully maintain an active established trading
market for our shares.
-15-
Market
prices for our shares may also be influenced by a number of other
factors, including:
●
the issuance of new
equity securities pursuant to a public or private
offering;
●
changes in interest
rates;
●
competitive
developments, including announcements by competitors of new
products or services or significant contracts, acquisitions,
strategic partnerships, joint ventures or capital
commitments;
●
variations in
quarterly operating results;
●
change in financial
estimates by securities analysts;
●
the depth and
liquidity of the market for our shares;
●
investor
perceptions of Exactus and its industry generally; and
●
general economic
and other national conditions.
Our shares of common stock are thinly traded and, as a result,
stockholders may be unable to sell at or near ask prices, or at
all, if they need to sell shares to raise money or otherwise desire
to liquidate their shares.
Our
common stock has been “thinly-traded,” meaning that the
number of persons interested in purchasing our common stock at or
near ask prices at any given time may be relatively small or
non-existent. We believe this situation is attributable
to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company
such as ours or purchase or recommend the purchase of our shares
until such time as we become more seasoned and
viable. In addition, we believe that due to the limited
number of shares of our common stock outstanding, an options market
has not been established for our common stock, limiting the ability
of market participants to hedge or otherwise undertake trading
strategies available for larger companies with broader stockholder
bases which prevents institutions and others from acquiring or
trading in our securities. Consequently, there may be periods of
several days or more when trading activity in our shares is minimal
or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share
price. We cannot give stockholders any assurance that a
broader or more active public trading market for our common shares
will develop or be sustained, or that current trading levels will
be sustained.
There may not be sufficient liquidity in the market for our
securities in order for investors to sell their shares. The market
price of our comment stock may be volatile.
The
market price of our common stock will likely be highly volatile, as
is the stock market in general. Some of the factors that may
materially affect the market price of our common stock are beyond
our control, such as conditions or trends in the industry in which
we operate or sales of our common stock. This situation is
attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts,
stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company
such as ours or purchase or recommend the purchase of our shares
until such time as we became more seasoned and viable.
As a
consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as
compared to a mature issuer which has a large and steady volume of
trading activity that will generally support continuous sales
without an adverse effect on share price. It is possible that a
broader or more active public trading market for our common stock
will not develop or be sustained, or that trading levels will not
continue. These factors may materially adversely affect the market
price of our common stock, regardless of our performance. In
addition, the public stock markets have experienced extreme price
and trading volume volatility. This volatility has significantly
affected the market prices of securities of many companies for
reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely
affect the market price of our common stock.
A registration of a significant amount of our outstanding
restricted stock may have a negative effect on the trading price of
our stock.
We are registering
for resale 3,119,731 shares of common stock that are issuable upon
the conversion of principal and interest under our notes and
exercise of our warrants. At December 18, 2019, our stockholders
held 40,848,558 shares of restricted stock, issued and outstanding.
If we were to file a registration statement including all of these
shares, and the registration is allowed by the SEC, these shares
would be freely tradable upon the effectiveness of that
registration statement. If investors holding a significant number
of freely tradable shares decide to sell them in a short period of
time following the effectiveness of this or future registration
statements, such sales could contribute to significant downward
pressure on the price of our stock.
-16-
We can sell additional shares of common stock without consulting
stockholders and without offering shares to existing stockholders,
which would result in dilution of existing stockholders’
interests in the Company and could depress our stock
price.
Our
Articles of Incorporation authorize 650,000,000 shares of common
stock, of which 6,233,524 were issued and outstanding as of
December 31, 2018 and 40,024,389 were issued and outstanding on
September 30, 2019. Moreover, our Board of Directors is authorized
to issue additional shares of our common stock and preferred stock.
Although our Board of Directors intends to utilize its reasonable
business judgment to fulfill its fiduciary obligations to our then
existing stockholders in connection with any future issuance of our
capital stock, the future issuance of additional shares of our
common stock or preferred stock convertible into common stock would
cause immediate, and potentially substantial, dilution to our
existing stockholders, which could also have a material effect on
the market value of the shares.
We do not intend to pay any cash dividends in the foreseeable
future and, therefore, any return on your investment in our capital
stock must come from increases in the fair market value and trading
price of the capital stock.
We have
not paid any cash dividends on our common stock and do not intend
to pay cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, for
reinvestment in the development and expansion of our business. Any
credit agreements, which we may enter into with institutional
lenders, may restrict our ability to pay dividends. Whether we pay
cash dividends in the future will be at the discretion of our board
of directors and will be dependent upon our financial condition,
results of operations, capital requirements and any other factors
that the board of directors decides is relevant. Therefore, any
return on your investment in our capital stock must come from
increases in the fair market value and trading price of the capital
stock.
We may issue additional equity shares to fund our operational
requirements, which would dilute share ownership. Such sales of
additional equity securities may adversely affect the market price
of our common stock and your rights in the company may be
reduced.
The
company’s continued viability depends on its ability to raise
capital. We expect to continue to incur drug development and
selling, general and administrative costs. Changes in economic,
regulatory or competitive conditions may lead to cost increases.
Management may determine that it is in the best interest of the
company to develop new services or products. In any such case
additional financing is required for the company to meet its
operational requirements. We may choose to raise additional capital
due to market conditions or strategic considerations even if we
believe we have sufficient funds for our current or future
operating plans. The sale or the proposed sale of substantial
amounts of our common stock in the public markets may adversely
affect the market price of our common stock. Also, any new
securities issued may have greater rights, preferences or
privileges than our existing common stock. Our stockholders may
experience substantial dilution upon such issuances and a reduction
in the price that they are able to obtain upon sale of their
shares. There can be no assurances that the company will be able to
obtain such financing on terms acceptable to the company and at
times required by the company, if at all. In such event, the
company may be required to materially alter its business plan or
curtail all or a part of its operational plans as detailed under in
Requirements for Additional Capital in Management’s
Discussion and Analysis in this prospectus.
We may issue preferred stock whose terms could adversely affect the
voting power or value of our common stock.
Our
certificate of incorporation authorizes us to issue, without the
approval of our stockholders, one or more classes or series of
preferred stock having such designations, preferences, limitations
and relative rights, including preferences over our common stock
with respect to dividends and distributions, as our board of
directors may determine. The terms of one or more classes or series
of preferred stock could adversely impact the voting power or value
of our common stock. For example, we might grant holders of
preferred stock the right to elect some number of our directors in
all events or on the happening of specified events, or the right to
veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences we might grant to
holders of preferred stock could affect the value of the common
stock.
-17-
Our common stock may be considered a “penny stock” and
may be difficult to sell.
The
Commission has adopted regulations which generally define
“penny stock” to be an equity security that has a
market price of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to specific exemptions.
Historically, the price of our common stock has fluctuated greatly.
If, the market price of the common stock is less than $5.00 per
share and the common stock does not fall within any exemption, it
therefore may be designated as a “penny stock”
according to SEC rules. The “penny stock” rules impose
additional sales practice requirements on broker-dealers who sell
securities to persons other than established customers and
accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the
purchase of securities and have received the purchaser’s
written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a
disclosure schedule prescribed by the SEC relating to the penny
stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in
decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to
other securities.
Because we will be subject to “penny stock” rules, the
level of trading activity in our stock may be reduced.
Broker-dealer
practices in connection with transactions in “penny
stocks” are regulated by penny stock rules adopted by the
Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than
securities registered on some national securities exchanges). The
penny stock rules require a broker-dealer to deliver to its
customers a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in
the penny stock market prior to carrying out a transaction in a
penny stock not otherwise exempt from the rules. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and, if the
broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer’s presumed control
over the market, and monthly account statements showing the market
value of each penny stock held in the customer’s account. In
addition, broker-dealers who sell these securities to persons other
than established customers and “accredited investors”
must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the
purchaser’s written agreement to the
transaction.
It may be difficult to predict our financial performance because
our quarterly operating results may fluctuate.
Our
revenues, operating results and valuations of certain assets and
liabilities may vary significantly from quarter to quarter due to a
variety of factors, many of which are beyond our control. You
should not rely on period-to-period comparisons of our results of
operations as an indication of our future performance. Our results
of operations may fall below the expectations of market analysts
and our own forecasts. If this happens, the market price
of our common stock may fall significantly. The factors that may
affect our quarterly operating results include the
following:
●
fluctuations in
results of our operations and capital raising efforts;
●
the timing and
amount of expenses incurred to establish a hemp-based
operation;
●
the impact of our
anticipated need for personnel and expected substantial increase in
headcount;
●
worsening economic
conditions which cause revenues or profits attributable to sales of
products or services to decline;
●
changes in the
regulatory environment, including regulation of hemp-based products
or CBD by the FDA or comparable state regulatory agencies or
agricultural authorities
●
the timing and
amount of expenses associated with farming, extraction, production,
manufacturing and selling;
●
Any changes we make
in our Critical Accounting Estimates described in the
Management’s Discussion and Analysis of Financial Condition
and Results of Operations sections of our periodic
reports;
●
the adoption of new
accounting pronouncements, or new interpretations of existing
accounting pronouncements, that impact the manner in which we
account for, measure or disclose our results of operations,
financial position or other financial measures; and
●
costs related to
acquisitions of technologies or businesses.
-18-
Our operating results, including net sales, gross margin and net
income (loss), as well as our stock price have varied in the past,
and our future operating results will continue to be subject to
quarterly and annual fluctuations based upon numerous factors. Our
stock price will continue to be subject to daily variations as
well. Our future operating results and stock price may not follow
any past trends or meet our guidance and expectations.
Our net
sales and operating results, net income (loss) and operating
expenses, and our stock price have varied in the past and may vary
significantly from quarter to quarter and from year to year in the
future. We believe a number of factors, many of which are outside
of our control, could cause these variations and make them
difficult to predict, including:
●
fluctuations in
demand for our products or downturns in the industries that we
serve;
●
the ability of our
suppliers, both internal and external, to produce and deliver
products including sole or limited source components, in a timely
manner, in the quantity, quality and prices desired;
●
the timing of
receipt of bookings and the timing of and our ability to ultimately
convert bookings to net sales;
●
rescheduling of
shipments or cancellation of orders by our customers;
●
fluctuations in our
product mix;
●
the ability of our
customers' other suppliers to provide sufficient material to
support our customers' products;
●
currency
fluctuations and stability, in particular the U.S. dollar as
compared to, other currencies;
●
introductions of
new products and product enhancements by our competitors, entry of
new competitors into our markets, pricing pressures and other
competitive factors;
●
our ability to
develop, introduce, manufacture and ship new and enhanced products
in a timely manner without defects;
●
our ability to
manage our manufacturing capacity across our diverse product lines
and that of our suppliers, including our ability to successfully
expand our manufacturing capacity in various locations around the
world;
●
our ability to
successfully and fully integrate acquisitions, into our operations
and management;
●
our ability to
successfully internally transfer products as part of our
integration efforts;
●
our reliance on
contract manufacturing;
●
our customers'
ability to manage their susceptibility to adverse economic
conditions;
●
the rate of market
acceptance of our new products;
●
the ability of our
customers to pay for our products;
●
expenses associated
with acquisition-related activities;
●
access to
applicable credit markets by us and our customers;
●
our ability to
control expenses;
●
potential excess
and/or obsolescence of our inventory;
●
impairment of
goodwill, intangible assets and other long-lived
assets;
●
our ability to meet
our expectations and forecasts and those of public market analysts
and investors;’
●
our ability and the
ability of our contractual counterparts to comply with the terms of
our contracts;
●
damage to our
reputation as a result of coverage in social media, Internet blogs
or other media outlets;
●
managing our
internal and third party sales representatives and distributors,
including compliance with all applicable laws;
●
costs, expenses and
damages arising from litigation;
●
individual
employees intentionally or negligently failing to comply with our
internal controls; and
●
distraction of
management related to acquisition, integration or divestment
activities.
Our
expenses for any given quarter are typically based on expected
sales and if sales are below expectations in any given quarter, the
adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust spending quickly enough to
compensate for the shortfall. We also base our inventory levels on
our forecasted product mix for the quarter. If the actual product
mix varies significantly from our forecast, we may not be able to
fill some orders during that quarter, which would result in delays
in the shipment of our products. Accordingly, variations in timing
of sales, particularly for our higher priced, higher margin
products, can cause significant fluctuations in quarterly operating
results. The foregoing description is not reflective of periods
prior to December 31, 2018 before our entry into our current
business segment and will be of minimal importance for our ramp up
phase commencing in the first quarter of 2019, but will be of
increasing significance as we book new sales orders for hemp-based
products.
Due to
these and other factors, such as varying product mix,
quarter-to-quarter and year-to-year comparisons of our historical
operating results may not be meaningful. You should not rely on our
results for any quarter or year as an indication of our future
performance. Our operating results in future quarters and years may
be below public market analysts' or investors' expectations, which
would likely cause the price of our stock to fall. In addition,
over the past several years, U.S. and global equity markets have
experienced significant price and volume fluctuations that have
affected the stock prices of many companies involved in the
cannabis industry and are expected to affect the hemp-based
industry as well, both within and outside our industry. There has
not always been a direct correlation between this volatility and
the performance of particular companies subject to these stock
price fluctuations. These factors, as well as general economic and
political conditions, may have a material adverse effect on the
market price of our stock in the future.
-19-
Our largest outside stockholder can exert significant control over
our business and affairs and may have actual or potential interests
that may depart from those of our other stockholders.
Our
largest outside stockholder, C2M, owns a substantial percentage of
our outstanding voting capital. The interests of such
persons may differ from the interests of other stockholders. There
can be no assurance C2M or other significant stockholders will, in
future matters submitted for stockholder approval, vote in favor of
such matters, even if such matters are recommended for approval by
management or are in the best interests of stockholders generally.
As a result, such persons will have the ability to vote their
significant holdings in favor (or not in favor) of proposals
presented to our stockholders for approval, including proposals
to:
●
elect or defeat the
election of our directors;
●
amend or prevent
amendment of our articles of incorporation or bylaws;
●
effect or prevent a
merger, sale of assets or other corporate transaction;
and
●
control the outcome
of any other matter submitted to the stockholders for
vote.
In
addition, such persons’ stock ownership may discourage a
potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium
over our stock price. C2M could also utilize their significant
ownership interest to seek to influence management and decisions of
the Company.
We could fail in future financing efforts if we fail to receive
stockholder approval when needed.
In the
event our uplisting is successful, we will be required under the
NASDAQ rules to obtain stockholder approval for any issuance of
additional equity securities that would comprise more than 20% of
the total shares of our common stock outstanding before the
issuance of such securities sold at a discount to the market value
in an offering that is not deemed to be a “public
offering” by NASDAQ. Funding of our operations and
acquisitions of assets may require issuance of additional equity
securities that would comprise more than 20% of the total shares of
our common stock outstanding, but we might not be successful in
obtaining the required stockholder approval for such an
issuance. If we are unable to obtain financing due to
stockholder approval difficulties, such failure may have a material
adverse effect on our ability to continue operations. Certain other
corporate actions require stockholder approval under the NASDAQ
listing rules, and the failure to obtain approval for these actions
could have a material adverse effect on us.
Our common stock, if listed on The NASDAQ Capital Market, may be
delisted if we fail to comply with continued listing
standards.
We
intend to seek to uplist our common stock to The NASDAQ Capital
Market and have submitted an application that is under review for
uplisting from the OTC Markets OTCQB Venture Market where it is
currently traded. We do not currently meet all of the requirements
for our listing to be accepted. Once listed on The NASDAQ Capital
Market if we fail to meet any of the continued listing standards of
The NASDAQ Capital Market, our common stock could be delisted from
The NASDAQ Capital Market. These continued listing
standards include specifically enumerated criteria, such
as:
●
a $1.00 minimum
closing bid price;
●
stockholders’
equity of $2.5 million;
●
500,000 shares of
publicly-held common stock with a market value of at least $1
million;
●
300 round-lot
stockholders; and
●
compliance with
NASDAQ’s corporate governance requirements, as well as
additional or more stringent criteria that may be applied in the
exercise of NASDAQ’s discretionary authority.
We may
not be able to meet the initial listing standards to uplist to The
NASDAQ Capital Market, in which case our common stock will continue
to trade on the OTC Venture or other market. Uplisting requires
satisfaction of a number or quantitative and qualitative criteria,
several of which we do not presently meet.
If we
fail to comply with NASDAQ’s continued listing standards, we
may be delisted and our common stock will trade, if at all, only on
the over-the-counter market, such as the OTCQB Venture or OTCQX
market, and then only if one or more registered broker-dealer
makers comply with quotation requirements. In addition,
delisting or failing to uplist our common stock could depress our
stock price, substantially limit liquidity of our common stock and
materially adversely affect our ability to raise capital on terms
acceptable to us, or at all.
-20-
We are subject to the periodic reporting requirements of the
Exchange Act, which will require us to incur audit fees and legal
fees in connection with the preparation of such reports. These
additional costs will reduce or might eliminate our
profitability.
We are
required to file periodic reports with the SEC pursuant to the
Exchange Act and the rules and regulations promulgated thereunder.
To comply with these requirements, our independent registered
auditors will have to review our quarterly financial statements and
audit our annual financial statements. Moreover, our legal counsel
will have to review and assist in the preparation of such reports.
The costs charged by these professionals for such services cannot
be accurately predicted at this time, because factors such as the
number and type of transactions that we engage in and the
complexity of our reports cannot be determined at this time and
will have a major effect on the amount of time to be spent by our
auditors and attorneys. However, the incurrence of such costs will
obviously be an expense to our operations and thus have a negative
effect on our ability to meet our overhead requirements and earn a
profit. We may be exposed to potential risks resulting from new
requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
If we cannot provide reliable financial reports or prevent fraud,
our business and operating results could be harmed, investors could
lose confidence in our reported financial information, the trading
price of our Common Stock, if a market ever develops, could drop
significantly, or we could become subject to Commission enforcement
proceedings.
We face evolving regulation of corporate governance and public
disclosure that may result in additional expenses and continuing
uncertainty.
Changing laws,
regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, SEC
regulations and NASDAQ Stock Market LLC (the national securities
exchange where we intend to seek to list our common stock) rules
are creating uncertainty for public companies. We are presently
evaluating and monitoring developments with respect to new and
proposed rules and cannot predict or estimate the amount of the
additional costs we may incur or the timing of these costs. For
example, compliance with the internal control requirements of
Section 404 of the Sarbanes-Oxley Act has to date required the
commitment of significant resources to document and test the
adequacy of our internal control over financial reporting. These
new or changed laws, regulations and standards are subject to
varying interpretations, in many cases due to their lack of
specificity, and, as a result, their application in practice may
evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We are
committed to maintaining high standards of corporate governance and
public disclosure. As a result, we intend to invest the resources
necessary to comply with evolving laws, regulations and standards,
and this investment may result in increased general and
administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance
activities. If our efforts to comply with new or changed laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to
practice or otherwise, or our actions, business, performance or
results of operations departs from our plans or those depicted in
our SEC filings, authorities or plaintiffs may initiate legal
proceedings against us, which could be costly and time-consuming,
and our reputation and business may be harmed.
If we fail to maintain an effective system of internal controls
over financial reporting, we may not be able to accurately report
our financial results or prevent fraud and our business may be
harmed and our stock price may be adversely impacted.
Effective internal
controls over financial reporting are necessary for us to provide
reliable financial reports and to effectively prevent fraud. Any
inability to provide reliable financial reports or to prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires
management to evaluate and assess the effectiveness of our internal
control over financial reporting. In order to continue to comply
with the requirements of the Sarbanes-Oxley Act, we are required to
continuously evaluate and, where appropriate, enhance our policies,
procedures and internal controls. If we fail to maintain
the adequacy of our internal controls over financial reporting, we
could be subject to litigation or regulatory scrutiny and investors
could lose confidence in the accuracy and completeness of our
financial reports. We cannot assure you that in the
future we will be able to fully comply with the requirements of the
Sarbanes-Oxley Act or that management will conclude that our
internal control over financial reporting is
effective. If we fail to fully comply with the
requirements of the Sarbanes-Oxley Act, our business may be harmed
and our stock price may decline.
Our
assessment, testing and evaluation of the design and operating
effectiveness of our internal control over financial reporting
resulted in our conclusion that, as of December 31, 2017 and
December 31, 2018, our internal control over financial reporting
was not effective, as a result of: (1) we lacked a sufficient
number of employees to properly segregate duties and provide
adequate review of the preparation of the financial statements and
(2) we lacked sufficient independent directors on our Board of
Directors to maintain Audit and other committees consistent with
proper corporate governance standards. In the first quarter of
2019, we expanded our Board to include three independent directors.
We can provide no assurance as to conclusions of management with
respect to the effectiveness of our internal control over financial
reporting in the future.
-21-
Because we are a “smaller reporting company,” we will
not be required to comply with certain disclosure requirements that
are applicable to other public companies and we cannot be certain
if the reduced disclosure requirements applicable to smaller
reporting companies will make our common stock less attractive to
investors.
We are
a “smaller reporting company,” as defined in Item
10(f)(1) of Regulation S-K. As a smaller reporting company we are
eligible for exemptions from various reporting requirements
applicable to other public companies that are not smaller reporting
companies, including, but not limited to:
●
Reduced disclosure
obligations regarding executive compensation in our periodic
reports, proxy statements and registration statements.
●
Not being required
to comply with the auditor attestation requirements of Section
404(b) of the Sarbanes-Oxley Act of 2002. and
●
Reduced disclosure
obligations for our annual and quarterly reports, proxy statements
and registration statements.
We will continue to incur increased costs as a result of operating
as a public company, and our management will be required to devote
substantial time to new compliance initiatives.
As a
public company, we incur significant legal, accounting and other
expenses that we did not incur as a private company. In addition,
the Sarbanes-Oxley Act of 2002 and rules subsequently implemented
by the SEC, impose various requirements on public companies,
including establishment and maintenance of effective disclosure and
financial controls and corporate governance practices. Our
management and other personnel devote a substantial amount of time
to these compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly,
particularly after we are no longer a smaller reporting company.
For example, we expect that these rules and regulations may make it
more difficult and more expensive for us to obtain director and
officer liability insurance.
Pursuant to Section
404, we will be required to furnish a report by our management on
our internal control over financial reporting, including an
attestation report on internal control over financial reporting
issued by our independent registered public accounting firm. To
achieve compliance with Section 404 within the prescribed period,
we will be engaged in a process to document and evaluate our
internal control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants and
adopt a detailed work plan to assess and document the adequacy of
internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing
that controls are functioning as documented and implement a
continuous reporting and improvement process for internal control
over financial reporting. Despite our efforts, there is a risk that
neither we nor our independent registered public accounting firm
will be able to conclude within the prescribed timeframe that our
internal control over financial reporting is effective as required
by Section 404. This could result in an adverse reaction in the
financial markets due to a loss of confidence in the reliability of
our financial statements.
Short sellers of our stock may be manipulative and may drive down
the market price of our common stock.
Short
selling is the practice of selling securities that the seller does
not own but rather has borrowed or intends to borrow from a third
party with the intention of buying identical securities at a later
date to return to the lender. A short seller hopes to profit from a
decline in the value of the securities between the sale of the
borrowed securities and the purchase of the replacement shares, as
the short seller expects to pay less in that purchase than it
received in the sale. As it is therefore in the short
seller’s interest for the price of the stock to decline, some
short sellers publish, or arrange for the publication of, opinions
or characterizations regarding the relevant issuer, its business
prospects and similar matters calculated to or which may create
negative market momentum, which may permit them to obtain profits
for themselves as a result of selling the stock short. Issuers
whose securities have historically had limited trading volumes
and/or have been susceptible to relatively high volatility levels
can be particularly vulnerable to such short seller attacks. The
publication of any such commentary regarding us in the future may
bring about a temporary, or possibly long term, decline in the
market price of our common stock. In the past, the publication of
commentary regarding us by a disclosed short seller has been
associated with the selling of shares of our common stock in the
market on a large scale, resulting in a precipitous decline in the
market price per share of our common stock. No assurances can be
made that similar declines in the market price of our common stock
will not occur in the future, in connection with such commentary by
short sellers or otherwise.
Financial Industry Regulatory Authority (FINRA) sales practice
requirements may also limit your ability to buy and sell our stock,
which could depress our share price.
FINRA
rules require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending
speculative low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax
status, investment objectives and other information. Under
interpretations of these rules, FINRA believes that there is a high
probability that speculative low-priced securities will not be
suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers
buy our common stock, which may limit your ability to buy and sell
our stock and have an adverse effect on the market for our shares,
depressing our share price.
-22-
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers of our
common stock may be restricted under the securities or securities
regulations laws promulgated by various states and foreign
jurisdictions, commonly referred to as "blue sky" laws. Absent
compliance with such individual state laws, our common stock may
not be traded in such jurisdictions. Because the securities held by
many of our stockholders have not been registered for resale under
the blue sky laws of any state, the holders of such shares and
persons who desire to purchase them should be aware that there may
be significant state blue sky law restrictions upon the ability of
investors to sell the securities and of purchasers to purchase the
securities. These restrictions may prohibit the secondary trading
of our common stock. Investors should consider the secondary market
for our securities to be a limited one.
“Anti-Takeover” provisions in our Articles of
Incorporation and Bylaws may cause a third party to be discouraged
from making a takeover offer that could be beneficial to our
stockholders.
Certain
provisions of our Articles of Incorporation, By-Laws, and the
anti-takeover provisions of the Nevada Revised Statutes, could
delay or prevent a third party from acquiring us or replacing
members of our Board of Directors, or make more costly any attempt
to acquire control of the Company, even if the acquisition or the
Board designees would be beneficial to our stockholders. These
factors could also reduce the price that certain investors might be
willing to pay for shares of the common stock and result in the
market price being lower than it would be without these
provisions.
In
addition, large stockholders may seek to influence our Board of
Directors and stockholders by acquiring positions in the Company to
force consideration of proposals that may be less desirable than
other outcomes. The effect of such influences on our Company or our
corporate governance could reduce the value of our monetization
activities and have an adverse effect on the value of our assets.
The effect of Anti-Takeover provisions could impact the ability of
prospective stockholders to obtain influence in the Company or
representation on the Board of Directors or acquire a significant
ownership position and such result may have an adverse effect on
the Company and the value of its securities.
Regulatory Risks Related to Our Business
FDA regulation could negatively affect the hemp industry, which
would directly affect our financial condition.
The
U.S. Food and Drug Administration ("FDA") may seek expanded
regulation of hemp under the Food, Drug and Cosmetics Act of 1938.
Additionally, the FDA may issue rules and regulations, including
certified good manufacturing practices, or cGMPs, related to the
growth, cultivation, harvesting and processing of hemp. Clinical
trials may be needed to verify efficacy and safety. It is also
possible that the FDA would require that facilities where hemp is
grown register with the FDA and comply with certain federally
prescribed regulations. In the event that some or all of these
regulations are imposed, we do not know what the impact would be on
the hemp industry, including what costs, requirements and possible
prohibitions may be enforced. If we or our partners are unable to
comply with the regulations or registration as prescribed by the
FDA, we and or our partners (including C2M) may be unable to
continue to operate their and our business in its current or
planned form or at all.
Changes in the Law and Development Programs
The
2018 Farm Bill declassified industrial hemp as a Schedule I
substance, shifted regulatory authority from the Drug Enforcement
Administration to the Department of Agriculture, and provided
autonomy for states to regulate the industry. The 2018 Farm Bill
did not change the Food and Drug Administration’s oversight
authority over CBD products. The 2018 Farm Bill defined industrial
hemp as a variety of cannabis containing an amount equal to or
lower than 0.3% tetra-hydrocannabinol (THC), and allowed farmers to
grow and sell hemp under state regulation. According to the
National Conference of State Legislatures, 41 states have set up
cultivation and production programs to regulate the production of
hemp.
For the
first time since 1937, industrial hemp has been decriminalized at
the federal level and can be grown legally in the United States,
but on a limited basis. A landmark provision passed in the
Agricultural Act of 2014 had previously classified hemp as distinct
from its genetic cousin, marijuana. Marijuana cannabis remains
illegal under federal law, and therefore, strict enforcement of
federal laws regarding cannabis will likely affect the perception
of the lawfulness of our activity for a continuing period of time,
which could result in our inability and the inability of our
customers to execute their respective business plans.
Although we believe
the foregoing will be applicable to business other than hemp-based
CBD businesses, there is risk that confusion or uncertainty
surrounding our products with regulated cannabis could occur on the
state or federal level and impact us. We may have difficulty with
establishing banking relationships, working with investment banks
and brokers who would be willing to offer and sell our securities
or accept deposits from stockholders, and auditors willing to
certify our financial statements if we are confused with businesses
that are in the cannabis business. Any of these additional factors,
should they occur, could also affect our business, prospects,
assets or results of operation could have a material adverse effect
on the business, prospects, results of operations or financial
condition of the Company.
-23-
We and our manufacturers and suppliers are subject to extensive
governmental regulation and may be subject to enforcement if we are
not in compliance with applicable requirements.
We, our
manufacturers, and suppliers are subject to a broad range of
federal, state and local laws and regulations governing, among
other things, the testing, development, manufacture, distribution,
marketing and post-market reporting of foods, including those that
contain CBD. These include laws administered by the FDA, the U.S.
Federal Trade Commission (“FTC”), the U.S.
Department of Agriculture (“USDA”), and other
federal, state and local regulatory authorities.
Failure
by us or our third-party contract manufacturers and suppliers to
comply with applicable laws and regulations or to obtain and
maintain necessary permits, licenses and registrations relating to
our or our partners’ operations could subject us to
administrative and civil penalties, including fines, injunctions,
recalls or seizures, warning letters, restrictions on the marketing
or manufacturing of our products, or refusals to permit the import
or export of products, as well as potential criminal sanctions,
which could result in increased operating costs resulting in a
material effect on our operating results and business.
The markets for businesses in the CBD and hemp extracts
industries are competitive and evolving.
In
particular, the Company will face strong competition from both
existing and emerging companies that offer similar products to the
Company. Some of the Company’s current and potential
competitors may have longer operating histories, greater financial,
marketing and other resources and larger customer bases. Given the
rapid changes affecting the global, national and regional economies
generally and the CBD industry, in particular, the Company may not
be able to create and maintain a competitive advantage in the
marketplace. The Company’s success will depend on its ability
to keep pace with any changes in such markets, especially in light
of legal and regulatory changes. The Company’s success will
depend on its ability to respond to, among other things, changes in
the economy, market conditions and competitive pressures. Any
failure to anticipate or respond adequately to such changes could
have a material adverse effect on the Company’s financial
condition, operating results, liquidity, cash flow and operational
performance.
We are subject to the risk of potential changes to state laws
pertaining to industrial hemp.
As of
the date hereof, approximately forty-seven states authorized
industrial hemp programs pursuant to the Farm Bill. Continued
development of the industrial hemp industry will be dependent upon
new legislative authorization of industrial hemp at the state
level, and further amendment or supplementation of legislation at
the federal level. Any number of events or occurrences could slow
or halt progress all together in this space. While progress within
the industrial hemp industry is currently encouraging, growth is
not assured. While there appears to be ample public support for
favorable legislative action, numerous factors may impact or
negatively affect the legislative process(es) within the various
states where the Company has business interests. Any one of these
factors could slow or halt use of industrial hemp, which could
negatively impact the business up to possibly causing the Company
to discontinue operations as a whole.
Our product candidates are not approved by the FDA or other
regulatory authority, and we face risks of unforeseen medical
problems, and up to a complete ban on the sale of our product
candidates.
The
efficacy and safety of pharmaceutical products is established
through a process of clinical testing under FDA oversight. Our
products have not gone through this process because we believe that
the topical products we sell are not subject to this process.
However, if an individual were to use one of our products in an
improper manner, we cannot predict the potential medical harm to
that individual. If such an event were to occur, the FDA or similar
regulatory agency might impose a complete ban on the sale or use of
our products.
There are numerous costs associated with numerous laws and
regulations.
The
manufacture, labeling and distribution of the Company products will
be regulated by various federal, state and local agencies. These
governmental authorities may commence regulatory or legal
proceedings, which could restrict the permissible scope of the
Company’s product claims or the ability to sell products in
the future. The FDA may regulate the Company’s products to
ensure that the products are not adulterated or misbranded. The
Company is subject to regulation by the federal government and
other state and local agencies as a result of its CBD products. The
shifting compliance environment and the need to build and maintain
robust systems to comply with different compliance in multiple
jurisdictions increases the possibility that the Company may
violate one or more of the requirements. If the Company’s
operations are found to be in violation of any of such laws or any
other governmental regulations that apply to the Company, it may be
subject to penalties, including, without limitation, civil and
criminal penalties, damages, fines, the curtailment or
restructuring of the Company’s operations, any of which could
adversely affect the ability to operate the Company’s
business and its financial results. Failure to comply with FDA
requirements may result in, among other things, injunctions,
product withdrawals, recalls, product seizures, fines and criminal
prosecutions. The Company’s advertising will be subject to
regulation by the Federal Trade Commission (“FTC”) under the Federal
Trade Commission Act. In recent years, the FTC has initiated
numerous investigations of dietary and nutrition supplement
products and companies. Additionally, some states also permit
advertising and labeling laws to be enforced by private attorney
generals, who may seek relief for consumers, seek class-action
certifications, seek class-wide damages and product recalls of
products sold by the Company. Any actions against the Company by
governmental authorities or private litigants could have a material
adverse effect on the Company’s business, financial condition
and results of operations.
-24-
Risks Related to Information Technology and Intellectual
Property
We are subject to cyber-security risks, including those related to
customer, employee, vendor or other company data and including in
connection with integration of acquired businesses and
operations.
We
currently do not utilize automated technology or software to
maintain important records necessary to the successful performance
of our business. We are evaluating various selling, inventory and
contact management software tools, such as Shopify, in order to
begin to adopt processes to track inventory, generate sales orders
and invoices, promote leads and sales and support customer
interaction such as customer service and warranty claims. Without
these tools we operate at a significant disadvantage to our
competitors who have implemented more sophisticate systems than
us.
We use
information technologies to securely manage certain operations and
various business functions. We rely on various technologies, some
of which are managed by third parties, to process, transmit and
store electronic information, and to manage or support a variety of
business processes and activities, including reporting on our
business and interacting with customers, vendors and employees. In
addition, we collect and store certain data, including proprietary
business information, and may have access to confidential or
personal information that is subject to privacy and security laws,
regulations and customer-imposed controls. Our systems are subject
to repeated attempts by third parties to access information or to
disrupt our systems. Despite our security design and controls, and
those of our third-party providers, we may become subject to system
damage, disruptions or shutdowns due to any number of causes,
including cyber-attacks, breaches, employee error or malfeasance,
power outages, computer viruses, telecommunication or utility
failures, systems failures, service providers, natural disasters or
other catastrophic events. It is possible for such vulnerabilities
to remain undetected for an extended period. We may face other
challenges and risks as we upgrade and standardize our information
technology systems as part of our integration of acquired
businesses and operations. We do not have contingency plans in
place to prevent or mitigate the impact of these events, and these
events could result in operational disruptions or the
misappropriation of sensitive data, and depending on their nature
and scope, could lead to the compromise of confidential
information, improper use of our systems and networks, manipulation
and destruction of data, defective products, production downtimes
and operational disruptions and exposure to liability. Such
disruptions or misappropriations and the resulting repercussions,
including reputational damage and legal claims or proceedings, may
adversely affect our results of operations, cash flows and
financial condition, and the trading price of our common
stock.
Our intellectual property rights may be inadequate to protect our
business.
Our
failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material
adverse effect on our business, results of operations and financial
condition.
We also
rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. To protect
our trade secrets and other proprietary information, we require
employees, consultants, advisors and collaborators to enter into
confidentiality agreements. We cannot assure you that these
agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of
any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information. If we are
unable to maintain the proprietary nature of our technologies, we
could be materially adversely affected.
We rely
on our trademarks, trade names, and brand names to distinguish our
products from the products of our competitors, and have registered
or applied to register many of these trademarks. We cannot assure
you that our trademark applications will be approved. Third parties
may also oppose our trademark applications, or otherwise challenge
our use of the trademarks. In the event that our trademarks are
successfully challenged, we could be forced to rebrand our
products, which could result in loss of brand recognition, and
could require us to devote resources advertising and marketing new
brands. Further, we cannot assure you that competitors will not
infringe our trademarks, or that we will have adequate resources to
enforce our trademarks.
If third parties claim that we infringe upon their intellectual
property rights, our business and results of operations could be
adversely affected.
We face
the risk of claims that we have infringed third parties’
intellectual property rights. Any claims of intellectual property
infringement, even those without merit, could be expensive and time
consuming to defend; could require us to cease selling the products
that incorporate the challenged intellectual property, could
require us to redesign, reengineer, or rebrand the product, if
feasible, could divert management’s attention and resources,
or could require us to enter into royalty or licensing agreements
in order to obtain the right to use a third party’s
intellectual property.
Any
royalty or licensing agreements, if required, may not be available
to us on acceptable terms or at all. A successful claim of
infringement against us could result in our being required to pay
significant damages, enter into costly license or royalty
agreements, or stop the sale of certain products, any of which
could have a negative impact on our business, financial condition,
results of operations and our future prospects.
-25-
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition, and our results of
operations.
We may
be unable to obtain intellectual property rights to effectively
protect our branding, products, and other intangible assets. Our
ability to compete effectively may be affected by the nature and
breadth of our intellectual property rights. While we intend to
defend against any threats to our intellectual property rights,
there can be no assurance that any such actions will adequately
protect our interests. If we are unable to secure intellectual
property rights to effectively protect our branding, products, and
other intangible assets, our revenue and earnings, financial
condition, or results of operations could be adversely
affected.
We also
rely on non-disclosure and non-competition agreements to protect
portions of our intellectual property portfolio. There can be no
assurance that these agreements will not be breached, that we will
have adequate remedies for any breach, that third parties will not
otherwise gain access to our trade secrets or proprietary
knowledge, or that third parties will not independently develop
competitive products with similar intellectual
property.
A failure of one or more key information technology systems,
networks or processes may materially adversely affect our ability
to conduct our business.
The
efficient operation of our business will depend on our information
technology systems. We rely on our information technology systems
to effectively manage our sales and marketing, accounting and
financial and legal and compliance functions, engineering and
product development tasks, research and development data,
communications, supply chain, order entry and fulfillment and other
business processes. We also rely on third parties and virtualized
infrastructure to operate and support our information technology
systems. The failure of our information technology systems, or
those of our third-party service providers, to perform as we
anticipate could disrupt our business and could result in
transaction errors, processing inefficiencies and the loss of sales
and customers, causing our business and results of operations to
suffer.
In
addition, our information technology systems may be vulnerable to
damage or interruption from circumstances beyond our control,
including fire, natural disasters, power outages, systems failures,
security breaches, cyber-attacks and computer viruses. The failure
of our information technology systems to perform as a result of any
of these factors or our failure to effectively restore our systems
or implement new systems could disrupt our entire operation and
could result in decreased sales, increased overhead costs, excess
inventory and product shortages and a loss of important
information.
Further, it is
critically important for us to maintain the confidentiality and
integrity of our information technology systems. To the extent that
we have information in our databases that our customers consider
confidential or sensitive, any unauthorized disclosure of, or
access to, such information due to human error, breach of our
systems through cybercrime, a leak of confidential information due
to employee misconduct or similar events could result in a
violation of applicable data protection and privacy laws and
regulations, legal and financial exposure, damage to our
reputation, a loss of confidence of our customers, suppliers and
manufacturers and lost sales. Actual or suspected cyber-attacks may
cause us to incur substantial costs, including costs to
investigate, deploy additional personnel and protection
technologies, train employees and engage third-party experts and
consultants. We have taken steps to protect the security of our
systems. Despite the implementation of these security measures, our
systems may still be vulnerable to physical break-ins computer
viruses, programming errors, attacks by third parties or similar
disruptive problems. If any of these risks materialize, our
reputation and our ability to conduct our business may be
materially adversely affected.
We rely heavily on third-party commerce platforms to conduct our
businesses. If one of those platforms is compromised, our business,
financial condition and results of operations could be
harmed.
We
intend to rely upon third-party commerce platforms, including
Shopify. We also rely on e-mail service providers, bandwidth
providers, Internet service providers and mobile networks to
deliver e-mail and “push” communications to customers
and to allow customers to access our website.
Any
damage to, or failure of, our systems or the systems of our
third-party commerce platform providers could result in
interruptions to the availability or functionality of our website
and mobile applications. As a result, we could lose customer data
and miss order fulfillment deadlines, which could result in
decreased sales, increased overhead costs, excess inventory and
product shortages. If for any reason our arrangements with our
third-party commerce platform providers are terminated or
interrupted, such termination or interruption could adversely
affect our business, financial condition, and results of
operations. We exercise little control over these providers, which
increases our vulnerability to problems with the services they
provide. We could experience additional expense in arranging for
new facilities, technology, services and support. In addition, the
failure of our third-party commerce platform providers to meet our
capacity requirements could result in interruption in the
availability or functionality of our website and mobile
applications.
-26-
Failure to comply with federal, state and foreign laws and
regulations relating to privacy, data protection and consumer
protection, or the expansion of current or the enactment of new
laws or regulations relating to privacy, data protection and
consumer protection, could adversely affect our business and our
financial condition.
We may
collect, store, process, and use personal information and other
customer data, and we rely in part on third parties that are not
directly under our control to manage certain of these operations
and to collect, store, process and use payment information. Due to
the volume and sensitivity of the personal information and data we
and these third parties manage and expect to manage in the future,
as well as the nature of our customer base, the security features
of our information systems are critical. A variety of federal,
state and foreign laws and regulations govern the collection, use,
retention, sharing and security of this information. Laws and
regulations relating to privacy, data protection and consumer
protection are evolving and subject to potentially differing
interpretations. These requirements may not be harmonized, may be
interpreted and applied in a manner that is inconsistent from one
jurisdiction to another or may conflict with other rules or our
practices. As a result, our practices may not have complied or may
not comply in the future with all such laws, regulations,
requirements and obligations.
We
expect that new industry standards, laws and regulations will
continue to be proposed regarding privacy, data protection and
information security in many jurisdictions. We cannot yet determine
the impact such future laws, regulations and standards may have on
our business. Complying with these evolving obligations is costly.
For instance, expanding definitions and interpretations of what
constitutes “personal data” (or the equivalent) within
the United States and elsewhere may increase our compliance costs
and legal liability. A significant data breach or any failure, or
perceived failure, by us to comply with any federal, state or
foreign privacy or consumer protection-related laws, regulations or
other principles or orders to which we may be subject or other
legal obligations relating to privacy or consumer protection could
adversely affect our reputation, brand and business, and may result
in claims, investigations, proceedings or actions against us by
governmental entities or others or other penalties or liabilities
or require us to change our operations and/or cease using certain
data sets. Depending on the nature of the information compromised,
we may also have obligations to notify users, law enforcement or
payment companies about the incident and may need to provide some
form of remedy, such as refunds, for the individuals affected by
the incident.
We are subject to risks related to online payment
methods.
We
accept payments using a variety of methods, including credit card
and debit card. As we offer new payment options to customers, we
may be subject to additional regulations, compliance requirements
and fraud. For certain payment methods, including credit and debit
cards, we pay interchange and other fees, which may increase over
time and raise our operating costs and lower profitability. We are
also subject to payment card association operating rules and
certification requirements, including the Payment Card Industry
Data Security Standard and rules governing electronic funds
transfers, which could change or be reinterpreted to make it
difficult or impossible for us to comply. As our business changes,
we may also be subject to different rules under existing standards,
which may require new assessments that involve costs above what we
currently pay for compliance. If we fail to comply with the rules
or requirements of any provider of a payment method we accept, if
the volume of fraud in our transactions limits or may, among other
things, be subject to fines or higher transaction fees and may
lose, or face restrictions placed upon, our ability to accept
credit card and debit card payments from customers or facilitate
other types of online payments. If any of these events were to
occur, our business, financial condition and operating results
could be materially adversely affected. We occasionally receive
orders placed with fraudulent credit card data. We may suffer
losses as a result of orders placed with fraudulent credit card
data even if the associated financial institution approved payment
of the orders. Under current credit card practices, we may be
liable for fraudulent credit card transactions. If we are unable to
detect or control credit card fraud, our liability for these
transactions could harm our business, financial condition and
results of operations.
Significant merchandise returns or refunds could harm our
business.
We
allow our customers to return products or offer refunds, subject to
our return and refunds policy. If merchandise returns or refunds
are significant or higher than anticipated and forecasted, our
business, financial condition, and results of operations could be
adversely affected. Further, we modify our policies relating to
returns or refunds from time to time, and may do so in the future,
which may result in customer dissatisfaction and harm to our
reputation or brand, or an increase in the number of product
returns or the amount of refunds we make.
Risks Related to the Private Placements under the SPA
Future sales of shares of our common stock or the perception in the
public markets that these sales may occur, may depress our stock
price.
The
market price of our common stock could decline significantly as a
result of sales of a large number of shares of our common stock in
the market. In addition, if our significant stockholders sell a
large number of shares, or if we issue a large number of shares,
the market price of our common stock could decline. Any issuance of
additional common stock, or common stock equivalents by us would
result in dilution to our existing stockholders. Such issuances
could be made at a price that reflects a discount to the
then-current trading price of our common stock. Moreover, the
perception in the public market that stockholders may sell shares
of our stock or that we may issue additional shares of common stock
could depress the market for our shares and make it more difficult
for us to sell equity securities at any time in the future if at
all.
-27-
The selling stockholders may sell their shares of common stock in
the open market, which may cause our stock price to
decline.
The
selling stockholders may sell the shares of common stock being
registered in this offering in the public market. That means that
up to 3,119,731 shares of common stock, the number of shares being
registered in this offering, may be sold in the public market. Such
sales will likely cause our stock price to decline.
The
perceived risk of dilution may cause our stockholders to sell their
shares, which may cause a decline in the price of our common stock.
Moreover, the perceived risk of dilution and the resulting downward
pressure on our stock price could encourage investors to engage in
short sales of our common stock. By increasing the number of shares
offered for sale, material amounts of short selling could further
contribute to progressive price declines in our common stock,
although the selling stockholders have agreed to refrain from any
short sales during the time the note is outstanding.
We are registering 3,119,731 common shares to be issued upon the
conversion of a note and warrants for resale by the selling
stockholders. The sale of such shares could depress the market
price of our common stock.
As of
the date of this prospectus, we have issued to the investor a note
with principal amount of $833,333 and a warrant to purchase 275,612
shares of our common stock, and a warrant to the advisor to
purchase 84,187 shares of our common stock. Upon filing the
registration statement on which this prospectus forms a part, we
have agreed to issue to the investor a note with a principal amount
of $277,778 and a warrant to purchase 91,871 shares of our common
stock, and a warrant to the advisor to purchase 28,062 shares of
our common stock. In all, we are registering for resale 3,119,731
common shares to be issued upon the conversion of the principal and
interest under the notes and exercise of the warrants.
If we
pay the principal, interest, and amortization redemption premium
due to the investor in shares of our common stock to satisfy our
obligations, based on the fixed conversion rate of $0.50 per share,
we would have to issue to the investor 2,640,000 shares in
satisfaction of our obligations. Moreover, if the rate equal to 80%
of the lowest volume weighted average price during the 10 trading
days immediately before the date of the amortization payment falls
below the fixed conversion rate, we would be able to satisfy our
amortization and interest payment obligations based on that lower
conversion rate. As a result of this lower price, we would issue
more shares to the investor, which would have a further dilutive
effect on our shares and could depress the market price of our
common stock.
The
sale of any of these shares into the public market by the investor
could depress the market price of our common stock. In addition,
the terms upon which we will be able to obtain additional equity
capital may be adversely affected in the event of downward market
pressure, since the investor would likely convert if we were able
to obtain any needed capital on terms more favorable to us than the
conversion terms provided by the note. Further, any sales in the
public market of any shares of common stock issued upon conversion
or hedging or arbitrage trading activity that develops due to the
potential conversion of principal and interest under our note could
adversely affect prevailing market prices of our common
stock.
We are registering less than the full amount of shares
to be issued
upon the conversions of notes and warrants pursuant to the SPA. The
future registration of those shares could depress the market price
of our common stock.
We are
only currently registering shares that cover the amounts issuable
under the first and second tranche notes and warrants to the
investor and our warrant to the advisor. If the investor completes
the third tranche of note and warrant issuances to the investor and
warrant issuances to the advisor the outstanding aggregate
principal amount under the notes issued to the investor would equal
$1,944,444 and the outstanding warrants issued to the investor
would be exercisable into 643,094 shares of our common stock. In
addition, the potential payment of our amortization and interest
payment obligations using shares of our common stock would result
in the additional issuances of shares. The notes and warrants would
have the same terms as those issued in the first and second
tranche.
The selling stockholders may elect to enforce certain provisions of
the Registration Rights Agreement that would require us to pay
certain liquidated damages and affect our
profitability.
We have
entered into an Registration Rights Agreement with the selling
stockholders. If we cannot meet certain obligations under these
agreements, the Selling Stockholders have the right to collect
partial liquidated damages equal to 2.0% multiplied by (i) the
number of Registrable Securities and (ii) the Closing Sale Price or
Closing Bid Price as of the trading day immediately prior to the
Event Date. These liquidated damages are payable at the time of
breach and each thirty day thereafter that the breach is not cured,
with a maximum of 12% until cured. Any such payment would reduce
the cash available for us to conduct our operations, causing us to
slow our growth or seek additional financing that may not be
advantageous to our business.
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 at any time, or a substantial portion
of our total outstanding shares of preferred stock may be converted
to common stock and sold into the market at any time. Some of these
shares are owned by the management of the Company, and we believe
that such holders have no current intention to either convert their
preferred stock into common stock or to sell a significant number
of shares of their common stock into the market. If all of the
major stockholders were to decide to sell large amounts of stock
over a short period of time such sales could cause the market price
of our common stock to drop significantly, even if our business is
performing well.
Pursuant
to the terms of the notes and related agreements, all of our
assets, including our intellectual property, are subject to
security interests and if we default on our obligations under the
notes, we may suffer adverse consequences.
We
pledged all of our assets, including our intellectual property, as
collateral in connection with our issuances of the notes. If we
default on our obligations under the notes, the investor may have
the right to foreclose upon and sell, or otherwise transfer, the
collateral subject to their security interests or their superior
claim. In such event, we may be forced to sell our investments to
raise funds to repay our outstanding borrowings in order to avoid
foreclosure and these forced sales may be at times and at prices we
would not consider advantageous. In addition, if the investor
exercises its right to sell the assets pledged, such sales may be
completed at distressed sale prices, thereby diminishing or
potentially eliminating the amount of cash available to us after
repayment of the amounts outstanding under the notes.
-28-
SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
registration statement contains “forward-looking
statements” within the meaning of Section 27A of the
Securities Act, and Section 21E of the Exchange Act. These
forward-looking statements are generally identified by such words
or phrases as “we expect,” “we believe,”
“would be,” “will allow,” “expects
to,” “will continue,” “is
anticipated,” “estimate,” “project”
or similar expressions. While we provide forward-looking statements
to assist in the understanding of our anticipated future financial
performance, we caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date that we
make them. Forward-looking statements are based on current
expectations and assumptions that are subject to significant risks
and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Except as
otherwise required by law, we undertake no obligation to publicly
release any updates to forward-looking statements to reflect events
after the date of this quarterly report on Form 10-Q, including
unforeseen events. Specifically, this quarterly report contains
forward-looking statements regarding, among other
items:
●
our ability to
establish principal sources of CBD supply;
●
our ability to
develop wholesale and retail sales channels for CBD
end-product;
●
our ability to
satisfy expected demand for our products;
●
our ability to
obtain the personnel necessary for growth;
●
our expectations
regarding our business strategies, including our ability to
implement our strategy and goals with respect to our acquisition of
Exactus One World, LLC (“EOW”), including our
ability to develop industrial hemp and manufacture CBD
products;
●
our intended use of
liquidity;
●
our expectations
regarding future capital expenditures;
●
our expectations
with respect to pending or threatened litigation; and
●
our ability to
adopt regulatory compliant practices.
●
our ability to
predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors that could have a material adverse
effect on our operations and results of our business include, but
are not limited to:
●
our history of
operating losses and lack of revenues to date;
●
our limited cash
resources and our ability to obtain additional funding necessary to
develop our products and maintain liquidity;
●
the success of our
clinical trials through all phases of clinical
development;
●
the need to obtain
regulatory approval of our products and any delays in regulatory
reviews or product testing;
●
market acceptance
of, and our ability to commercialize, our products;
●
competition from
existing products or new products that may emerge;
●
changes in
technology;
●
our ability and
third parties’ abilities to protect intellectual property
rights;
●
potential product
liability claims;
●
our ability to
maintain liquidity and adequately support future
growth;
●
changes in, and our
ability to comply with, laws or regulations applicable to the life
sciences or healthcare industries;
●
our ability to
attract and retain key personnel to manage our business
effectively; and
●
other risks and
uncertainties described from time to time, in our filings made with
the SEC.]
-29-
These
forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We
wish to caution readers that certain important factors may have
affected and could in the future affect our actual results and
could cause actual results to differ significantly from those
expressed in any forward-looking statement. The most important
factors that could prevent us from achieving our goals, and cause
the assumptions underlying forward-looking statements and the
actual results to differ materially from those expressed in or
implied by those forward-looking statements include, but are not
limited to, the following:
●
our history of
operating losses and lack of revenues to date;
●
our limited cash
resources and our ability to obtain additional funding necessary to
develop our products and maintain liquidity;
●
the success of our
clinical trials through all phases of clinical
development;
●
the need to obtain
regulatory approval of our products and any delays in regulatory
reviews or product testing;
●
market acceptance
of, and our ability to commercialize, our products;
●
competition from
existing products or new products that may emerge;
●
changes in
technology;
●
our dependence on
the development and commercialization of our primary product,
FibriLyzer, to generate revenues in the future;
●
our dependence on
and our ability to maintain the Licensing Agreement;
●
our ability and
third parties’ abilities to protect intellectual property
rights;
●
potential product
liability claims;
●
our ability to
maintain liquidity and adequately support future
growth;
●
changes in, and our
ability to comply with, laws or regulations applicable to the life
sciences or healthcare industries;
●
our ability to
attract and retain key personnel to manage our business
effectively; and
●
other risks and
uncertainties described from time to time, in our filings made with
the SEC.
USE OF PROCEEDS
We will
not receive any proceeds from the resale of our common shares by
the selling stockholders, except for amounts received if warrants
are exercised for cash. We cannot predict when or if the notes will
be converted or the warrants exercised, and it is possible that the
notes and warrants may expire and never be converted or exercised.
Any proceeds received by us from the exercise of the warrants will
be used for general corporate purposes, which may include working
capital, capital expenditures, and research and development
expenses.
The
selling stockholders will determine at what price they may sell the
Securities offered by this prospectus, and such sales may be made
at fixed prices, prevailing market prices at the time of the sale,
varying prices determined at the time of sale, or negotiated
prices.
Our
common stock is listed on the OTCQB under the symbol
“EXDI” and has been trading since July 1, 2015. No
established public trading market existed for our common stock
prior to July 1, 2015. The closing price of our common stock on the
OTCQB on December 20, 2019 was $0.4498 per share. As of December
18, 2019, we had 40,848,558 shares of our common stock outstanding.
As of December 18, 2019, we had 148 active record holders of our
common stock.
-30-
General
In
December 2018, the Company expanded its focus to pursue
opportunities in Cannabidiol (“CBD”). This decision was
based in part on the passing of The Hemp Farming Act of 2018. The
Act was signed into law during December 2018 and removes hemp
(cannabis with less than 0.3% THC) from the Schedule I controlled
substances list. Following passage, CBD derived from industrial
hemp became legal in the US under federal law and in all 50 states,
opening the door to develop and sell hemp-based CBD products
nationwide. The Company’s goal is to rapidly establish one or
more principal sources of supply and to develop wholesale and
retail sales channels for CBD end-products to be sold to humans and
for animal health, such as nutraceuticals, supplements and pet and
farm products. The Company intends to follow regulatorily compliant
pathways by adopting practices established by the FDA for
CBD.
On
January 8, 2019 we entered into a Master Product Development and
Supply Agreement (the “Development Agreement”) with
Ceed2Med, LLC (“C2M”). C2M has provided the Company
access to expertise, resources, skills and experience suitable for
producing products with active phyto-cannabinoid (CBD) rich
ingredients including isolates, distillates, water soluble, and
proprietary formulations. Under the Development Agreement, we have
been allotted a minimum of 50 and up to 300 kilograms per month,
and up to 2,500 kilograms annually, of active phyto-cannabinoid
(CBD) rich ingredients for resale. We expect to be able to offer
tinctures, edibles, capsules, topical solutions and animal health
products manufactured for us by C2M to satisfy demand for branded
and white-label products that we intend to offer to sell in the
future. The founders of C2M established their first CBD business in
2014. C2M will also be responsible for overseeing all farming and
manufacturing activities of the Company.
Whereas, in
consideration for the Development Agreement, C2M was issued
8,385,691 shares of our Common Stock on January 8, 2019.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock to founders of
C2M, with exercise price of $0.32 per share. As a result, C2M was
our largest shareholder holding (inclusive of the vested options
held by its founders) approximately 51% of our outstanding Common
Stock on the date of the Development Agreement. These options were
granted to two owners and a co-founder of C2M.C2M will provide
personnel necessary for our growth. Utilizing C2M employees and
facilities, the Company has been able to rapidly access resources
and opportunities in the hemp-derived CBD industry. Emiliano Aloi
of C2M became a member of our Advisory Board in January 2019 and
was appointed President of the Company on March 11,
2019.
On
March 11, 2019, with the assistance of C2M and assignment of
rights, we acquired a 50.1% limited liability membership interest
in Exactus One World, LLC, (“EOW”), an Oregon limited
liability company, newly formed on January 25, 2019, in order to
produce industrial hemp for our own use. EOW has leases starting on
March 1, 2019 for approximately 200 acres of farmland in southwest
Oregon for growing and processing industrial hemp, with a lease
term of one year. The leases are renewable on a year-to-year basis.
We acquired the 50.1% limited liability membership interest
pursuant to a subscription agreement (the “Subscription
Agreement”) and a Membership Interest Purchase Agreement (the
“Purchase Agreement”). EOW will farm and process
industrial hemp to be manufactured into cannabidiol (CBD) and
related products. EOW will be responsible for the
Company’s initial efforts to pursue agricultural development,
including farm soil preparation, planting, harvesting,
transportation and drying. We will be responsible for funding
and the minority owners will be responsible for management,
servicing and operating the farm properties.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop underway to
the Company. As a result, the Company acquired the right to receive
100% of the distributions of net profit from the 2019 hemp crop on
approximately 225 acres of farmland currently growing in Oregon. In
addition, the members amended the payment schedule under which farm
costs are required to be made by the Company. As consideration for
the amendment, the Company agreed to issue 1,223,320 shares of its
common stock, par value $0.0001 per share, to the minority members
of EOW.
On
July 31, 2019, we finalized and entered into a Management and
Services Agreement in order to provide us project management and
various other benefits associated with the farming rights,
operations and opportunities with C2M, including assignment by C2M
of C2M’s agreements and rights to acquire approximately 200
acres of hemp farming. Under the terms of the MSA, C2M agreed to
provide further access to the opportunities and know-how of C2M,
consented to the appointment of Emiliano Aloi, a seasoned hemp
veteran previously an advisor and currently our President, and to
provide to us and EOW additional services consisting of, among
other things:
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●
right of participation for further investment and
business opportunities in order to rapidly expand our business and
operations in hemp-derived CBD;
●
executive, sourcing, vendor, product, production
and other expertise and resources;
●
appointment of Aloi to the position of
President;
●
introductions to farming and other
financing;
●
designs for international
“Hemp-Café” store design and franchise
opportunities including plans, drawings, approvals and
authorizations, leads and contacts;
●
access to leasing of prime real estate in Delray
Beach Florida with an option to purchase, and the continuing
assistance of the founder of C2M in connection with management,
design, and promotion of the project;
●
drawings, designs and specifications for
extraction, production and manufacturing facilities and
resources;
●
brand development and support
services.
We
finalized the compensation arrangements for C2M as contemplated in
connection with the March 2019 transactions and the additional
agreements with C2M under the MSA following tax, accounting and
legal review including the treatment of the issuance of preferred
stock in connection with the transactions. On July 31, 2019, we
granted 10,000 Series E Preferred in connection with the Management
and Services Agreement (the “MSA”) with C2M, our
largest shareholder. In October 2019, we entered into an amendment
to the MSA (the “MSA Amendment”). The MSA Amendment
extended the termination date of the MSA to December 31, 2024 and
expanded the scope of services to be provided by C2M to
us. The MSA Amendment was approved by a majority of the
disinterested directors of the Company.
Results of Operations
Three and Nine months ended September 30, 2019 and
2018:
Net
Revenues The Company is principally engaged in the business
production and selling of products made from industrial hemp.
During the three and nine months ended September 30, 2019, we
generated total revenues of $60,153 and $215,816, respectively,
from the sale of CBD products, including revenues from a related
party of $12,140 and $52,659 for the three and nine months ended
September 30, 2019. We did not have comparable revenues during the
three and nine months ended September 30, 2018.
Cost of
Sales The primary components of cost of sales include the
cost of the CBD product and shipping fees. For the three and nine
months ended September 30, 2019, the Company’s cost of sales
amounted to $100,418 and $216,205, respectively which represents
purchase of CBD products from C2M. C2M is a majority stockholder of
the Company. We did not have comparable cost of sales during the
three and nine months ended September 30, 2018.
Operating Expenses
For the
three months ended September 30, 2019, we incurred $2,062,677 in
operating expenses as compared to $425,927 for the three months
ended September 30, 2018, an increase of $1,636,750 or 384%. For
the nine months ended September 30, 2019, we incurred $5,803,458 in
operating expenses as compared to $1,851,525 for the nine months
ended September 30, 2018, an increase of $3,951,933 or 213%. The
increase in operating expenses consisted of the
following:
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General and
administrative expenses increased by $1,087,961, or 360%,
from $301,859 for the three months ended September 30, 2018 to
$1,389,820 for the three months ended September 30, 2019, primarily
due to increase in marketing and advertising expenses of
approximately $365,000, increase in amortization of intangible
asset and depreciation expenses of approximately $284,000, increase
compensation of $159,000 due to severance fee paid to our former
CEO and additional hiring of new employees, increase lease expense
of $121,000 related to our commercial lease, and increase in other
related general administrative expenses related of approximately
$159,000 primarily due to travel expenses and increase in
operations.
General
and administrative expenses increased by $1,445,721, or 100%, from
$1,446,867 for the nine months ended September 30, 2018 to
$2,892,588 for the nine months ended September 30, 2019, primarily
due to increase in marketing and advertising expenses of
approximately $638,000, increase in amortization of intangible
asset and depreciation expenses of approximately $595,000, increase
lease expense of $174,000 related to our commercial lease and
increase in other general administrative expenses of approximately
$227,000 primarily due to travel expenses and increase in
operations offset by a decrease in compensation of $189,000 due to
a decrease in contractual bonuses and stock options given to
management.
Professional and
consulting fees increased by $613,789, or 1,251%, from
$49,068 for the three months ended September 30, 2018 to $662,857
for the three months ended September 30, 2019, due to increase in
hiring of consultants for business development and investor
relations services, increase in accounting fees and legal fees
related to our public company filings, and increase stock based
consulting fees related with the grant of stock options and stocks
issued to consultants and C2M.
Professional and
consulting fees increased by $2,694,237, or 1,500%, from $179,658
for the nine months ended September 30, 2018 to $2,873,895 for the
nine months ended September 30, 2019 due to increased stock based
consulting fees related with the grant of stock options and
warrants, issuance of stocks to consultants and C2M, increase in
hiring of consultant for business development and investor
relations services, and increase in accounting fees and legal fees
related to our public company filings.
Research and
development decreased by $65,000, or 87%, from $75,000 for
the three months ended September 30, 2018 to $10,000 for the three
months ended September 30, 2019. Research and development decreased
by $188,025 or 84%, from $225,000 for the nine months ended
September 30, 2018 to $36,975 for the nine months ended September
30, 2019, as the Company delays projects until additional funds are
raised.
Other Expenses, net
Derivative
loss decreased by $818,355 for the three months ended
September 30, 2019 as compared to the three months ended September
30, 2018, and derivative loss increased by $937,524, or 181%, from
$(517,205) for the nine months ended September 30, 2018 to
$(1,454,729) for the nine months ended September 30, 2019, due to
the issuance of new convertible notes in 2019 and adjustments to
fair value.
Gain on stock
settlement of debt increased by $3,004,629, or 100%, from $0
for the nine months ended September 30, 2018 to $3,004,629 for the
nine months ended September 30, 2019 due to the conversion of notes
and interest into common and preferred shares during the nine
months ended September 30, 2019. We did not have comparable gains
or losses during the three months ended September 30, 2018 or
September 30, 2019, respectively.
Interest
expense decreased by $125,059, or 98%, from $127,164 for the
three months ended September 30, 2018 to $2,105 for the three
months ended September 30, 2019, and decreased by $11,434, or 3%,
from $382,971 for the nine months ended September 30, 2018 to
$371,537 for the nine months ended September 30, 2019. The decrease
in interest expense is primarily related to the decrease in
principal amounts of the notes due to the conversion of the notes
payable into shares and repayment of notes during the nine months
ended September 30, 2019.
Year Ended December 31, 2018 Compared to Year Ended December 31,
2017:
General and
administrative expenses increased by $713,298, or 59%, from
$1,219,309 for the year ended December 31, 2017 to $1,932,607 for
the year ended December 31, 2018, largely due to contractual
bonuses and stock options given to management to retain executive
staff.
The
Company entered into new employment agreements with our Chief
Executive Officer, our Executive Vice
President, and our Chief Financial Officer effective December 1,
2018. Under these agreements, the executives agreed to terminate
predecessor employment agreements and agreed to release the Company
from any and all obligations under the predecessor agreement for
any amounts that could have been due or owing, including, without
limitation, compensation, bonuses and other payments. On February
21, 2019, the Company executed a termination agreement and mutual
release with the Chief Business Officer. The agreement contains mutual releases between the
parties. As a result of these agreements, the Company recognized
$1,355,372 in debt forgiveness which was recorded under additional
paid in capital.
Professional
fees decreased by $295,903, or
59%, from $499,522 for the year ended December 31, 2017 to $203,619
for the year ended December 31, 2018, due to decreased legal
services.
Research
and development decreased by
$56,706, or 16%, from $356,076 for the year ended December 31, 2017
to $300,000 for the year ended December 31, 2018, as the Company
delays projects until additional funds are
raised.
Impairment
loss decreased by $1,050,000,
or 100%, from $1,050,000 for the year ended December 31, 2017 to $0
for the year ended December 31, 2018, due to impairment of the
Company’s license and prepaid clinical trial due to cash
constraints to manufacture materials needed for
trial.
Derivative
loss increased by $161,494, or
24%, from $667,200 for the year ended December 31, 2017 to $828,694
for the year ended December 31, 2018, due to the issuance of new
convertible notes in 2018 and adjustments to fair
value.
Loss
on stock settlement increased
by $607,929, or 100%, from $0 for the year ended December 31, 2017
to $607,929 for the year ended December 31, 2018, due to
issuing
shares to settle accounts payable balances and conversion of
convertible notes and interest.
Interest
expense increased by $395,902,
or 577%, from $68,568 for the year ended December 31, 2017 to
$464,470 for the year ended December 31, 2018, due to the issuance
of new convertible notes in 2018, and the amortization of discounts
related to convertible notes.
As
a result of the foregoing, we generated a loss from operations of
$2,436,226 for the year ended December 31, 2018 as compared to an
operating loss of $3,124,907 for the year ended December 31, 2017,
a change of $688,681.
As
a result of the foregoing, we generated a net loss of $4,337,319
for the year ended December 31, 2018 as compared to a net loss of
$3,860,675 for the year ended December 31, 2017, a change of
$476,644.
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Net Loss
As a
result of the foregoing, we generated a net loss from operations of
$2,108,047 for the three months ended September 30, 2019 as
compared to a net loss from operations of $1,595,271 for the three
months ended September 30, 2018 and net loss from operations of
$4,625,484 for the nine months ended September 30, 2019 as compared
to a net loss from operations of $3,228,827 for the nine months
ended September 30, 2018, as a result of the discussion
above.
As a
result of the foregoing, we generated a net loss available to
stockholders of $1,934,367 or $(0.05) per common share –
basic and diluted, for the three months ended September 30, 2019 as
compared to a net loss of $1,595,271 or $(0.33) per common share
– basic and diluted, for the three months ended September 30,
2018, as a result of the discussion above.
As a
result of the foregoing, we generated a net loss available to
stockholders of $5,168,306 or $(0.16) per common share –
basic and diluted, for the nine months ended September 30, 2019 as
compared to a net loss of $3,228,827 or $(0.69) per common share
– basic and diluted, for the nine months ended September 30,
2018, as a result of the discussion above.
Liquidity and Capital Resources
Since
our inception in 2008, we have generated losses from operations. As
of September 30, 2019, our accumulated deficit was
$15,706,198. As of September 30, 2019, we had $5,686 of
cash. Accordingly, we will need to obtain further funding through
public or private equity offerings, debt financing, collaboration
arrangements or other sources. The issuance of any additional
shares of Common Stock, preferred stock or convertible securities
could be substantially dilutive to our shareholders. In addition,
adequate additional funding may not be available to us on
acceptable terms, or at all. If we are unable to raise capital, we
will be forced to delay, reduce or eliminate our research and
development programs and may not be able to continue as a going
concern.
The
Company has principal outstanding balance of $100,000 from
convertible notes as of September 30, 2019. The convertible notes
bear interest at a rate of 5% per annum and will mature on February
1, 2023 (see Note 8).
Nine Months ended September 30, 2019
and 2018
Net
cash used in operating activities for the nine months ended
September 30, 2019 was $5,027,674, due to our net loss of
$4,625,484, offset by non-cash charges related to convertible loan
notes derivative loss of $1,454,729, amortization of debt discounts
of $339,806, amortization of intangible assets of $558,024,
amortization prepaid stock-based expenses of $110,416, depreciation
expense of $36,720, deferred rent of $42,279 and stock-based
compensation of $2,376,050 offset by $3,004,629 for a debt
settlement gain. Net changes in assets and liabilities totaled of
$2,324,992, which is primarily attributable to increases in total
accounts receivable of $137,692, inventory of $2,298,919, prepaid
expenses and other current assets of $94,758, and total accounts
payable and accrued expenses of $261,613.
Net
cash used in operating activities for the nine months ended
September 30, 2018 was $407,924. We recorded a net loss for the
nine-month period of $3,228,827. Increases in accounts payable and
accrued expenses increased cash by $857,630. Other items in uses of
funds from operations included non-cash charges of stock-based
compensation, derivative gain, amortization of debt discount and
debt issuance costs, and loss on debt settlement in stock which
collectively totaled $1,939,179.
Net
cash used in investing activity for the nine months ended September
30, 2019 was $2,053,703. We paid cash for the purchase of
membership interest in subsidiary for $1,467,500 in connection with
a Purchase Agreement and purchase of equipment for $586,203 as
compared to none during the prior period.
Net
cash provided by financing activities for the nine months ended
September 30, 2019 was $7,085,103, due to proceeds from sale of our
Common Stock of $7,012,046, net proceeds from the issuance of notes
payable and convertible notes $221,129, advance from related party
of $231,035 offset by note repayments of $218,572 and repayment on
related party advances of $160,535. Net cash provided by
financing activities for the nine months ended September 30, 2018
was $248,000 due to proceeds from our issuance of shares of Series
D Preferred Stock of $50,000, the issuance of promissory notes, and
convertible loan notes $223,000 offset by convertible loan payments
of $25,000.
Year ended December 31, 2018 and
2017
Net
cash used in operating activities for the year ended December 31,
2018 was $465,755, due to our net loss of $4,337,319, offset by
non-cash charges related to convertible loan notes derivative
expense of $828,694, amortization of debt discounts of $405,173,
$607,929 for a debt settlement loss, stock-based compensation of
$227,394, $526,000 for stock payments, and warrant expense of
$138,679. Changes in assets and liabilities totaled a gain of
$1,137,695, which primarily consisted of an increase in accrued
expenses of $905,946 and increase in account payable of
$188,378.
Net
cash used in operating activities for the year ended December 31,
2017 was $1,234,921. We recorded a net loss of $3,860,675 for the
period. Other items in uses of funds from operations included
non-cash charges related to convertible loan notes derivative
expense of $667,200 and interest expense of $52,795, $78,315 for a
debt settlement loss and impairment of assets of $1,050,000.
Changes in assets and liabilities totaled a gain of $777,444, which
primarily consisted of an increase in accrued expenses of $523,757
and increase in account payable of $210,241.
Net
cash provided by financing activities for the year ended December
31, 2018 was $306,500 due to $178,100 in proceeds from convertible
loan notes, $103,400 in proceeds from the issuance of a note
payables, $50,000 of net proceeds from sale of Series D Preferred
Stock and the repayment of $25,000 of principle on convertible
notes.
Net
cash provided by financing activities for the year ended December
31, 2017 was $340,800 due to $267,800 in proceeds from convertible
loan notes, $48,000 in proceeds from the issuance of a note
payables, and $25,000 proceeds from sale of Series B-2 Preferred
Stock.
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Going Concern
The
audit report prepared by our independent registered public
accounting firm relating to our financial statements for the year
ended December 31, 2018 includes an explanatory paragraph
expressing substantial doubt about our ability to continue as a
going concern. We have concluded that the circumstances described
above continue to raise substantial doubt about our ability to
continue as a going concern as of September 30,
2019.
Off-Balance Sheet Arrangements
As of
September 30, 2019, we had no material off-balance sheet
arrangements.
In the
normal course of business, we may be confronted with issues or
events that may result in a contingent liability. These generally
relate to lawsuits, claims or the actions of various regulatory
agencies. We consult with counsel and other appropriate experts to
assess the claim. If, in our opinion, we have incurred a probable
loss as set forth by accounting principles generally accepted in
the United States, an estimate is made of the loss and the
appropriate accounting entries are reflected in our financial
statements. After consultation with legal counsel, we do not
anticipate that liabilities arising out of currently pending or
threatened lawsuits and claims will have a material adverse effect
on our financial position, results of operations or cash
flows.
Critical Accounting Estimates and New Accounting
Pronouncements
Critical Accounting Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported
amounts and related disclosures in the financial statements.
Management considers an accounting estimate to be critical if it
requires assumptions to be made that were uncertain at the time the
estimate was made, and changes in the estimate or different
estimates that could have been selected could have a material
impact on our results of operations or financial
condition.
Application of Significant Accounting Policies
Section
107 of the JOBS Act provides that an emerging growth company can
take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards. In other words, an emerging growth
company can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies.
We have elected to take advantage of the benefits of this extended
transition period. Our financial statements may, therefore, not be
comparable to those of companies that comply with such new or
revised accounting standards.
-35-
Recent Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The Company is currently
evaluating the impact of this standard.
In June
2016, the FASB issued ASU 2017-13, Financial Instruments-Credit
Losses. The standard requires a financial asset (including trade
receivables) measured at amortized cost basis to be presented at
the net amount expected to be collected. Thus, the income statement
will reflect the measurement of credit losses for newly-recognized
financial assets as well as the expected increases or decreases of
expected credit losses that have taken place during the period.
This standard will be effective for the calendar year ending
December 31, 2020. The Company is currently in the process of
evaluating the impact of adoption of this ASU on its consolidated
financial statements.
In July
2017, the FASB issued ASU No. 2017-11, which amends the FASB
Accounting Standards Codification. Part I of ASU No.
2017-11, Accounting for Certain Financial Instruments with
Down Round Features, changes the classification analysis of certain
equity-linked financial instruments (or embedded features) with
down round features. The guidance is effective for reporting
periods beginning after December 15, 2018 and interim periods
within those fiscal years. Early adoption is permitted. The
adoption of this guidance had no impact on the Company’s
condensed consolidated financial statements.
We have
reviewed the FASB issued ASU accounting pronouncements and
interpretations thereof that have effectiveness dates during the
periods reported and in future periods. The Company has carefully
considered the new pronouncements that alter previous generally
accepted accounting principles and does not believe that any new or
modified principles will have a material impact on the
corporation’s reported financial position or operations in
the near term. The applicability of any standard is subject to the
formal review of our financial management and certain standards are
under consideration.
-36-
BUSINESS
We are
a Nevada corporation organized under the name Solid Solar Energy,
Inc in 2008 and renamed Exactus, Inc. in 2016. We began to pursue
opportunities in Cannabidiol, which we refer to as CBD, in
2019.
In
December 2018, we expanded our focus to pursue opportunities in
hemp-derived CBD. This decision was based in part on the passing of
the 2018 Farm Bill, known as the Agriculture Improvement Act of
2018, which will remain in force through 2023. The 2018 Farm Bill
authorized the production of hemp and removed hemp and hemp seeds
from the Drug Enforcement Administration’s, or the
DEA’s, schedule of Controlled Substances. It also directed
the U.S. Department of Agriculture, or the USDA, to issue
regulations and guidance to implement a program to create a
consistent regulatory framework around production of hemp
throughout the United states. On October 31, 2019, the USDA,
Agricultural Marketing Services, issued an interim final rule (with
request for comments). The rule outlines provisions for the USDA to
approve plans submitted by states and Indian tribes. The U.S.
Domestic Hemp Production Program establishes federal regulatory
oversight of the production of hemp in the U.S. The program
authorizes the USDA to approve plans submitted by states and Indian
tribes for the domestic production of hemp and establishes a
federal plan for producers in states or territories that choose not
to administer a state or tribe specific plan, provide the state or
tribe does not ban hemp production.
Prior
to the 2018 Farm Bill, Cannabis sativa L. with delta-9
tetrahydrocannabinol, or THC, levels greater than 0.3% fell within
the definition of “marijuana” under the Controlled
Substances Act, or the CSA, and was therefore a Schedule I
controlled substance unless it fell under a narrow range of
exceptions (e.g., the “mature stalks” of the plant). As
a result, many aspects of domestic production of what is now
defined as hemp was limited to persons registered under the CSA to
do so. Under the Agricultural Act of 2014, which we refer to as the
2014 Farm Bill, State departments of agriculture and institutions
of higher education were permitted to produce hemp as part of a
pilot program for research purposes. The authority for hemp
production provided in the 2014 Farm Bill was extended by the 2018
Farm Bill, which was signed into law on December 20,
2018.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for CBD
end-products to be sold to humans and for animal health, such as
nutraceuticals, supplements and pet and farm products.
We
expect to realize revenue through our efforts, if successful, to
sell wholesale and retail finished products to third parties.
However, as we are in a start-up phase in a new business venture in
a rapidly evolving industry, many of our costs and challenges are
new and unknown. In order to fund our activities, we will need to
raise additional capital either through the issuance of equity
and/or the issuance of debt. In the event we are unsuccessful in
raising sufficient additional capital to fund our efforts, we may
need to curtail, abandon or delay our plans to enter into this
segment.
Our
principal executive offices are located at 80 NE 4th Avenue, Suite
28 Delray Beach, FL 33483 and our telephone number is (561)
455-4822.
On
March 11, 2019, we acquired a 50.1% limited liability membership
interest in Exactus One World, LLC, an entity formed on January 25,
2019 and which we refer to as EOW, in order to produce hemp. EOW
holds one year leases, which commenced on March 1, 2019, for
approximately 200 acres of farmland in southwest Oregon for growing
and processing hemp. The leases are renewable on a year-to-year
basis. EOW will farm and process hemp to be manufactured into CBD
and related products, sold or processed as biomass and other
agricultural products. EOW will be responsible for our
initial efforts to pursue agricultural development, including farm
soil preparation, planting, harvesting, transportation and drying.
We are responsible for funding and the minority owners will be
responsible for management, servicing and operating the farm
properties.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop to us. As a
result, we acquired the right to receive 100% of the distributions
of net profit from the 2019 hemp crop. In addition, the members
amended the payment schedule under which farm costs are required to
be made by us.
Green Goddess Extracts, LLC
On July
31, 2019, we entered into an Asset Purchase Agreement with Green
Goddess Extracts, LLC, a manufacturer and formulator of a premium
line of hemp-derived products sold through distributers and online.
Under the agreement, we acquired assets of Green Goddess consisting
principally of its right and interest in the Green Goddess brand,
inventory, customer list, and intellectual property, including IP
addresses and trademarks. We also entered into an option to acquire
Green Goddess’ vape assets, and entered into an employment
agreement with its founder. In return, we paid Green Goddess
$250,000 in cash and issued 250,000 shares of our common stock.
Prior to the execution of the agreement, Green Goddess was a
contract manufacturer for us. As of the date hereof we owe $166,668
which remains unpaid under the agreement.
Additional
Brands
We have
taken steps to introduce Green GoddessTM brands, LeVor
CollectionTM, Paradise CBDTM and ExactusTM, for selected markets
which, as of the date of this prospectus, have not resulted in
material revenues.
Industrial Hemp
We
seek to take advantage of an emerging worldwide trend to utilize
the production of industrial hemp in consumer products. Hemp is
being used today in cosmetics, nutritional supplements, and animal
feed, where we also intend to focus our efforts. The market for
hemp-derived products is expected to increase substantially over
the next five years, and we are endeavoring to prepare the Company
to be positioned as a significant player in the industry. According
to industryreports, CBD is expected to conservatively generate
sales of $16 billion by 2025. In one survey, nearly 7% (of 2,500
respondents) reported using CBD as a supplement in January 2019,
with retail sales of CBD consumer products in 2018 estimated as
being only between $600 million and $2 billion.
According
to the report, cannabis’ therapeutic potential is
attributable to the valuable overlap between phyto-cannabinoids
(i.e. plant-derived cannabinoids) and the endogenous cannabinoid
system in humans, termed a “therapeutic handshake”.
Clinical trial results to date demonstrate few adverse effects from
oral CBD doses of up to 1,500 mg/day or up to 30 mg IV. The
scientific understanding of CBD’s clinical effects is based
mostly on studies in specific indications, like epilepsy. GW
Pharma’s Epidiolex (a highly potent, pure formulation of CBD)
was approved by the FDA in 2018 for the treatment of seizures
associated with Lennox-Gastaut syndrome and Dravet syndrome, and
other companies have clinical trials underway in seizure
disorders.
Healthcare
CBD
products appear to be gaining traction with independent pharmacies.
The industry, including the Company, has also been approached by
several large chain pharmacies with inquiries concerning sourcing,
quality, accountability and volume. According to the report,
pharmacies likely find the high-margin profile of CBD attractive,
similar to over-the-counter drugs. We believe pharmacies will
appreciate our “seed-to-consumer” approach and our cGMP
manufacturing focus and our planned QR Code traceability and
reporting.
Currently,
CBD products are not a covered benefit, or an extra benefit, under
managed care, insurance, Medicare, Medicaid or any state programs.
This will likely continue to be the case for the intermediate term.
Legal issues and confusion concerning legality, lack of FDA
regulation and availability as an OTC medication will likely
continue for an indefinite period impeding adoption and payor
acceptance.
Competition
We
believe a multitude (hundreds) of companies, large and small,
including mom and pops, have launched or intend to launch retail
brands and white label products containing CBD. Many of these are
offering CBD and are dependent upon third parties to provide raw
material inventory for sale. We believe this makes many of the
participants in the industry vulnerable to shortages, quality
issues, reliability and pricing variability. While we also intend
to pursue retail and white label strategies, we believe our
relationship with C2M may provide supply chain efficiencies that
will put us among the few companies that maintain a competitive
pricing and supply advantage, poised for revenue growth during 2019
and beyond, and that our farming initiative will also provide us a
competitive advantage by reducing our reliance on third
parties.
The
CBD-based consumer product industry is highly fragmented with
numerous companies, many of which are under-capitalized. There are
also large, well-funded companies that currently do not offer
hemp-based consumer products including large agribusiness companies
such as Cargill and Tyson Foods, but may do so in the future and
become significant competitors.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for
end-products, such as nutraceuticals, supplements and pet and farm
products. We intend to follow regulatorily compliant pathways by
adopting practices established by the FDA for CBD and to pursue FDA
approval for our activities upon adoption of federal regulations,
including conducting independent clinical and non-clinical
trials.
Companies such as CV Sciences, Inc. (OTCQB:CVSI)
in the US and recent acquisitions by Canadian cannabis producers
reflect the growing acceptance of CBD products as a lynchpin for
growth. Transactions such as Tilray, Inc.3 (NASDAQ:TLRY-Manitoba Harvest $419 million
February 2019), cbdMD Inc. (NYSE:YCBD - Cure Based Development LLC December
2018), and Aurora Cannabis, Inc. (OTCQB:ACBFF–Agropro UAB
EUR6.5 million)5 reflect the growing interest and M&A activity
in the industry among our competition and increasing
consolidation.
Non-CBD
Competition. We do not intend
to offer and do not compete with companies that offer cannabis
products containing high levels of psychoactive THC. Although legal
in some states, and in Canada, we do not intend to enter into this
market. We may offer our industrial-hemp based products in
dispensaries, but will not compete with any medical or recreational
marijuana sellers for high THC content sales due to legal and
regulatory restrictions and uncertainty in the United States.
Because of regulatory challenges facing marijuana companies in the
United States, the vast majority of the companies focused on THC
are Canadian and foreign, although several have begun to pursue
domestic activities in states that permit marijuana sales. Federal
law does not generally recognize marijuana (or hemp that exceeds
0.3% THC) as lawful, although that may change in the future.
Because of these factors, our competitors that have focused
exclusively on CBD are limited.
-37-
Retail
Competition. Many of our
competitors are private companies and as a result, little or no
reliable information is available. Of the publicly reporting
companies, we believe many of the CBD companies are principally
focused on high THC content
marijuana.
Retail Strategy
Our
focus will include establishing wholesale and retail distribution
by developing our own brands, selling white label branded products
to others and making acquisitions of existing businesses engaged in
marketing or sales, in both online and retail channels. We may
supply to wholesalers, retailers, and distribution centers as we
seek to launch our retail strategy. We intend to initially focus on
developing products to reach medical and health communities to be
sold or promoted by or through medical professionals such as
internists, dermatologists, osteopaths, chiropractors, pharmacists,
and other holistic or natural products purveyors, but will not be
limited to such efforts. We intend to focus on higher margin
opportunities utilizing online sales and sales in stores, offices
or pharmacies.
Source and Availability of Raw Materials
C2M
has historically sourced raw materials from well-established and
well-recognized hemp growers in the United States. C2M also
maintains ownership positions in several farms. We have established
access to C2M for their raw material supply, and continue to
explore and develop other options to ensure that we can meet the
expected demand for bulk hemp products well into the future.
Accordingly, we are heavily reliant upon the continued success of
C2M and our ability to maintain good relations with C2M in order to
have a source of raw materials and opportunities to pursue our
plans in the future. C2M is a recently formed privately-owned
limited liability company and as a result limited information about
C2M is available.
Environmental Matters
Compliance
with federal, state and local requirements regulating the discharge
of materials into the environment, or otherwise relating to the
protection of the environment, have not had, nor are they expected
to have, any direct material effect on our capital expenditures,
earnings or competitive position, however such factors could
indirectly affect us, and could affect C2M, as well as participants
in the supply chain for our products, and our business, operations,
vendors or suppliers.
Point of Care Diagnostics
As
previously reported under “Business” in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2017,
the second segment of our business is the development of point of
care diagnostic devices. We have since February 2016 been
developing devices for measuring proteolytic enzymes in the blood,
known as the FibriLyzer and collagenase levels in the blood, known
as the MatriLyzer. We are considering seeking to obtain and
evaluate technology that could also be useful in laboratory and
field testing for CBD and THC levels, useful in the manufacture of
CBD products. We believe our diagnostic business has been severely
hampered by a shortage of capital for development and as a result
our licenses for the underlying technology FibriLyzer and
MatriLyzer technology have been threatened and may be discontinued.
We have received notice of termination of certain of our licenses
for non-payment of fees. For the past 9 months, we have been
engaged in discussions with third-parties regardingfunding and a
possible third-party merger candidate to develop our diagnostic
business. Accordingly, we have determined to continue to look for
third-parties to partner with and/or buyers to invest in or acquire
this business segment. If successful, we could sell or license our
rights to third parties with substantially greater resources than
us. We also may be required to terminate this segment and may not
realize any benefit from our prior investment in developing this
business.
Employees
As of December 27,
2019, we have 10 employees, all of which are full
time.
Properties
We entered into three
farm leases, which we entered into through our majority-owned
subsidiary, EOW. Two of the leases are located in Cave Junction,
Oregon and the third lease is located in Glendale, Oregon. EOW will
farm and process industrial hemp on the farm leases, which hemp
will be manufactured into cannabidiol (CBD) and related
products.
We have leased a
small office in Delray Beach Florida to establish operations in
close vicinity to our partner C2M, and it is anticipated that
corporate functions will move to this location and staff will be
hired as required to meet our growth. If additional or alternative
space is needed in the future, we believe such space will be
available on commercially reasonable terms as
necessary.
LEGAL PROCEEDINGS
On September
25, 2019, Jonathan Gilbert, a former director, filed and served a
complaint against us in the U.S. District Court - Eastern District
of New York. The complaint alleges that Mr. Gilbert is entitled to
retain certain cancelled equity awards and seeks specific
performance and damages. We have filed a notice of removal and
intend to vigorously defend the allegations as it believes the
claims are without merit.
From
time to time, we may become involved in legal proceedings arising
in the ordinary course of business. We are unable to predict the
outcome of any such matters or the ultimate legal and financial
liability, and at this time cannot reasonably estimate the possible
loss or range of loss and accordingly have not accrued a related
liability.
-38-
SELLING STOCKHOLDERS
The
shares of common stock being offered for resale by the selling
stockholders pursuant to the registration statement of which this
prospectus forms a part are the shares of common stock issuable to
the selling stockholders pursuant to the terms of the notes and
upon exercise of the warrants. For additional information regarding
the issuance of those notes and warrants, the section of this
prospectus entitled “Private Placement of Convertible Notes
and Warrants”. We are registering the shares of common stock
in order to permit the selling stockholders to offer the shares for
resale from time to time. Except for the ownership of the notes and
the warrants issued pursuant to the SPA, the selling stockholders
have not had any material relationship with us within the past
three years.
The table below
lists the selling stockholders and other information regarding the
beneficial ownership of shares of common stock by the selling
stockholders. The first column lists the number of shares of common
stock beneficially owned by the selling stockholders, based on its
ownership of the notes and warrants, as of the filing of the
registration statement on which this prospectus forms a part,
assuming conversion of principal and interest under all notes at
the conversion price in effect as of the trading day immediately
preceding the date the registration statement is initially filed
with the SEC and exercise of warrants that are held by the selling
stockholders on that date. This amount includes shares beneficially
owned as a result of the issuance of notes and warrants in the
first and second tranche pursuant to the SPA. The second column
lists the shares of common stock being offered by this prospectus
by the selling stockholders. The third column lists the shares of
common stock held by each selling stockholders after completion of
this offering, and assumes full conversion of principal and
interest under the notes and the full exercise of the warrants held
by the selling stockholders and that the selling stockholders
subsequently sell all of the shares covered by this prospectus. The
fourth column lists the percentage ownership held by the selling
stockholders after completion of this offering to the extent such
percentage exceeds 1% of the total number of shares of common stock
outstanding at that time. The information presented regarding the
selling stockholders is based, in part, on information the selling
stockholders provided to us in writing specifically for use in this
prospectus. The selling stockholders may sell all, some or none of
their shares in this offering. See “Plan of
Distribution.”
In
addition to the assumptions described above, beneficial ownership
is determined in accordance with the rules of the SEC and generally
includes voting or investment power over securities. To our
knowledge, unless otherwise indicated, the selling stockholders
named in the table below has sole voting and investment power with
respect to its shares of common stock. Percentage of beneficial
ownership is based on 40,848,558 shares of our common stock
outstanding as of December 18, 2019.
|
|
|
Number
of Shares of Common Stock Owned Prior to Offering
|
Percentage
of Shares of Common Stock Owned Prior to Offering
|
Shares
of Common Stock Underlying Notes Offered Hereby
|
Shares
of Common Stock Underlying Warrants Offered Hereby
|
Number
of Shares of Common Stock Owned After Offering(1)
|
Percentage
of Shares of Common Stock Owned After Offering (to the extent
greater than 1%)(1)
|
|
Selling
Stockholders
|
3i, LP (2)
140 Broadway, Floor
38, New York, NY
|
3,007,482(3)
|
4.99%(3)
|
2,640,000
|
367,482
|
0
|
0%
|
|
Alliance Global
Partners (4)
590 Madison Avenue,
36th Floor, New York, NY 10022, 212-624-2060
|
112,249(5)
|
*
|
0
|
112,249
|
0
|
0%
|
*
Less than
1%.
(1)
Assumes all shares
to be sold in this offering are sold.
(2)
Voting and
investment power over the shares is held by 3i Management LLC.
Maier Tarlow is the Manager of 3i Management
LLC.
(3)
This amount includes
3,007,482 common shares issuable upon the conversion of principal
and interest under the notes, which are currently convertible, and
the exercise of the warrants, which are currently exercisable. The
notes and the warrants, pursuant to their terms, may not be
converted or exercised to the extent that conversion or exercise
would cause the holder, together with its affiliates and
attribution parties, to beneficially own a number of common shares
which would exceed 4.99% of our then outstanding common shares
following conversion or exercise, excluding for purposes of such
determination common shares issuable upon the conversion of
principal under the notes which has not been converted or exercise
of the warrants which has not been exercised.
(4)
Voting and
investment power over the shares held by Alliance Global Partners
is exercised by its managing director, Thomas J.
Higgins.
(5)
This amount
includes 112,249 common shares issuable upon the exercise of
warrants, which are currently exercisable. The warrants, pursuant
to their terms, may not be exercised to the extent that exercise
would cause the holder, together with its affiliates and
attribution parties, to beneficially own a number of common shares
which would exceed 4.99% of our then outstanding common shares
following exercise, excluding for purposes of such determination
common shares issuable upon the exercise of warrants which have not
been exercised. The advisor may remove this beneficial ownership
limitation.
-39-
DIRECTORS, EXECUTIVE
OFFICERS, AND CORPORATE GOVERNANCE
Director
Information
The
Board of Directors of the Company is currently comprised of five
members. The following biographical information discloses each
director’s age, business experience and other directorships
held during the past five years. It also includes the experiences,
qualifications, attributes and skills that led to the conclusion
that the individual should serve as a director for the
Company.
Bobby Yampolsky,
42, is the founder ECJ Luxe, a
family-owned luxury shopping destination that specializes in an
array of ultra-exclusive items including everything from high end
time pieces, jewelry and diamonds, to exotic cars and yachts. The
Yampolsky family established the business as East Coast Jewelry in
1986 and Bobby opened the West Palm Beach, Florida location in
1996. East Coast Jewelry evolved into ECJ Luxe in 2015 and has
expanded to multiple locations throughout southern Florida. Mr.
Yampolsky owns and operates multiple other businesses, including
restaurant, nightclub, yacht and exotic car sales, and real estate
investments. In addition, Mr. Yampolsky is the Co-Founder and CEO
of Ceed2Med, LLC, a hemp and hemp-derivative supply sourcing,
production, distribution, and development company that secures
production of industrial hemp biomass and raw ingredients that
invests in developing supply chain partners and distribution
channels worldwide. Ceed2Med is heavily invested in the hemp
industry and is currently the largest shareholder of Exactus Inc.
as well as substantial shareholder in Hemptown Organics
Corp.
The Board nominated Mr. Yampolsky to serve as director of the Board
because of his executive and management experience and
understanding of the CBD business.
Kevin J. Esval, age
55,
was appointed to the Board of
Directors of the Company on January 9, 2019. He has served as
Executive Managing Director and CCO of VelocityHealth Securities
since founding the company in 2000. Mr. Esval has significant
industry and investment banking experienced in most sectors of
health care including specialty pharmaceuticals & generics,
health care services, health care IT, diagnostics, biotechnology,
and other sectors. With his extensive transactional and financing
experience serving as a valuable resource, Mr. Esval takes an
active role with all clients. Additionally, through his prior
operating experience as an executive in growth oriented health care
companies and active roles on boards of directors, Mr. Esval has
developed a keen understanding of the challenges faced by middle
market and growth companies. Mr. Esval has negotiated, structured,
and executed various types of transactions including mergers,
acquisitions, divestitures, and licensings; corporate and
transactional financings, including equity, mezzanine and debt
financings.
Previously,
Mr. Esval served as a divisional SVP and COO for UnitedHealth Group
(NYSE: UNH), one of the largest health care services companies in
the world with annual revenues exceeding $200 billion. As one of
the original startup executives of his division, Mr. Esval was
instrumental in taking it from $0 to $400 million as of his
departure. His career in health care began with a venture-backed
startup Complete Health Services, Inc. This firm was one of Inc.
Magazine’s “Fastest Growing Private Companies” in
1994. During this period, Mr. Esval was this company’s top
sales executive, and managed the startup of two new
divisions.
Additionally,
Mr. Esval spent 5 years in sales, financial analysis, and trading
roles at several financial derivatives companies, including Chicago
based Rosenthal-Collins Group and R. J. O’Brien. During this
period, his roles included working on the floor of the Chicago
Board of Trade (CBOT) and the Chicago Mercantile Exchange
(CME).
Mr.
Esval has served on the Board of Directors of multiple health care
companies, and currently serves on the Board of Directors on
several specialty pharmaceutical companies.
Mr.
Esval received his BA degree from Furman University while on a
football scholarship. Additionally, he studied internationally in
Lausanne, Switzerland. Mr. Esval is a dual citizen of the USA and
the Republic of Ireland.
Mr.
Esval holds Series 24, 7 & 63 Licenses.
The
Board nominated Mr. Esval to serve as director of the Board because
of his executive and management experience, and in particular his
extensive experience with middle market and growth
companies.
Jeffrey Thompson,
age 54, was appointed to the Board of Directors of the
Company on January 9, 2019. Mr. Thompson founded Red Cat
Propware Inc., a provider of cloud-based analytics, storage, and
services for drone aircraft, in 2016 and is currently its CEO and
sole Director. In December 1999 he founded Towerstream Corp.
Towerstream Corp. became a publicly traded company on the NASDAQ in
June 2007, when Mr. Thompson was president, chief executive officer
and a director. In 1994, Mr. Thompson founded EdgeNet Inc., a
privately held Internet service provider (which was sold to Citadel
Broadcasting Corporation in 1997) and became eFortress through
1999. Mr. Thompson holds a B.S. degree from the University of
Massachusetts.
The Board nominated Mr. Thompson to serve as a director
because of his extensive senior management and operational
experience, and in particular his experience as the Chief Executive
Officer of a NASDAQ traded company.
-40-
Kenneth E.
Puzder, age
53, was appointed to the Board of Directors of the
Company on January 9, 2019 and as our CFO on July 10, 2019. Mr.
Puzder previously served as Chief Financial Officer of C2M. In
addition, from December of 2014 to the present, he has served as
the co-founder, Managing Member, and CFO of the Lukens Group, LLC,
a behavioral therapy firm that focuses on a variety of behavioral
struggles including alcoholism, drug abuse, depression and anxiety
with aspecial emphasis on PTSD. Previously, from January of 2007 to
December of 2017, Mr. Puzder was president of his own consulting
firm, Kenneth E. Puzder Consulting. As a seasoned financial
executive, Mr. Puzder specialized in debtor side representations in
financial leadership, mergers and acquisitions, restructuring and
turnaround, and personal and partnership tax returns. From July of
2003 through December of 2006, he served in various positions with
the Arby’s Restaurant Group (“ARG”) family of
companies, including as Chief Financial Officer of AFA Service
Corporation (a sister company to ARG), VP for Accounting and
Finance or Arby’s Restaurant Group, Inc., and Regional
Controller or RTM, Inc. (a subsidiary of ARG). From August of 2000
through April of 2003, Mr. Puzder was with Panera Bread Company.
From January of 1999 through August of 2000, he served as Vice
President and Secretary of the Linder Funds, a series of mutual
funds. Prior to serving that position, from March of 1998 through
August of 2000, he was Financial Operations Principal and Assistant
Secretary of Lindner Asset Management, the asset management firm
for the Linder Funds. From February of 1996 until March of 1998, he
was an audit manager with KPMG Peat Marwick, LLP, a Big 4
accounting firm. From June of 1990 through February of 1996, Mr.
Puzder was with Mills Group, Inc., serving as its Chief Financial
Officer and Treasurer of Mills Group, Inc. from July 1991 to
February 1996.
Mr.
Puzder holds a B.S. in Accounting from the University of Missouri,
St. Louis and is a Certified Public Accountant in the state of
Missouri.
The
Board nominated Mr. Puzder to serve as a director of the Board
because of his expensive senior management and operational
experience, and in particular his accounting and audit
experience.
John Price, age 50, was appointed to the Board of Directors
of the Company on February 7, 2019. Mr. Price previously served as
Chief Financial Officer, Treasurer and Secretary of SCWorx Corp., a
publicly-traded provider of data normalization, application
interoperability and big data analytics within the healthcare
provider market. Mr. Price was the CFO of SCWorx Corp. (f/k/a
Alliance MMA, Inc.) since August 2016. Previously, Mr. Price was
Chief Financial Officer of MusclePharm Corporation, a
publicly-traded nutritional supplement company. Prior to joining
MusclePharm in 2013, Mr. Price served as Vice President of Finance
– North America at Opera Software, a Norwegian public company
focused on digital advertising. From 2011 to 2013, he served as
Vice President of Finance and Corporate Controller of GCT
Semiconductor. From 2004 to 2011, Mr. Price served in various roles
at Tessera Technologies, including VP of Finance & Corporate
Controller. Prior to Tessera Technologies, Mr. Price served various
roles at Ernst &Young LLP. Mr. Price served nearly three years
in the San Jose, California office and nearly five years in the
Pittsburgh, Pennsylvania office of Ernst & Young. Mr. Price has
been a certified public accountant (currently inactive) since 2000
and attended Pennsylvania State University, where he earned a
Bachelor’s of Science Degree in
Accounting.
The
Board nominated Mr. Price to serve as a director of the Board
because of his past experience as a Chief Financial Officer and
other financial oversight positions at public
companies.
-41-
Executive Officers Who Are Not Directors
The
following provides certain biographical information with respect to
each executive officer of the Company who is not a
director.
Emiliano Aloi, age
45, was appointed President on March 11, 2019 and has served as a
member of our Advisory Board since January 9, 2019. Prior to
joining Exactus Inc., Mr. Aloi co-founded Ceed2Med, LLC
(“C2M”) in 2014 a global sourcing and distribution
platform for industrial hemp and industrial hemp-derived products.
From January, 2017 to November, 2017, Mr. Aloi served as Vice
President and Director of Strategic Development for GenCanna
Global, Inc., where he initiated a go-to-strategy, recruited the
commercial leadership team, developed compliance, executed product
launches, and advanced manufacturing in European markets. In 2016
Mr. Aloi achieved the first country-wide agricultural permit for
flower cultivation in Uruguay. In addition, Mr. Aloi co-sponsored
research programs for Stevia and Aloe Vera extraction methods from
2012 to 2013 and participated in the insertion of Chia as a novel
crop in Paraguay in 2011 in a program later merged into Cargill.
Mr. Aloi also co-developed the agricultural solid biofuels program
for Camargo Correas Cement company, a Loma Negra subsidiary from
2011 to 2009.
Andrew L. Johnson,
age 33, was appointed Chief Strategy Officer on March 11, 2019 and
has been working with the company since January 2019 in an investor
relations role. From November 2014 to November 2018, he served as
Director of Investor Relations at ChromaDex Corp. (NASDAQ:CDXC), an
integrated, global nutraceutical company devoted to improving the
way people age. While at the company Mr. Johnson was instrumental
in establishing an investor relations platform including, but not
limited, to composing and disseminating corporate messaging, press
releases, quarterly earnings, conference call transcripts,
shareholder update letters, and marketing materials. Prior to
joining ChromaDex, he held the role of Director of Outreach at
Alliance Advisors, a third-party investor relations consulting firm
from April 2014 to July 2014, where Mr. Johnson worked with various
C-level management teams of small and micro-cap companies to
increase investor awareness through the facilitation and attendance
of non-deal roadshows, investment conferences, group meetings, and
one-on-one meetings with institutional investors. From September
2011 to January 2013 he worked at Sidoti & Company, an
institutional equity research firm, where sat on the sales desk.
During his time the firm, he built relationships, presented
investment ideas, and provided equity research, including corporate
access to over 750 small and mid-cap companies. Mr. Johnson has
over 10 years of experience communicating with investors and has
held the Series 3, 7, and 63 licenses in the past. He has a
Bachelor of Arts degree in Social Sciences from Washington State
University.
No Family Relationships
There
are no family relationships between any directors and executive
officers.
Code of Ethics
On
January 9, 2019, our board of directors adopted a Code of Business
Conduct and Ethics applicable to all directors, executive officers,
and employees of the Company.
Audit Committee
On
February 7, 2019, John Price was appointed to the Board of
Directors of the Company. Mr. Price was also appointed to serve as
the Chairman of our newly-designated Audit
Committee.
-42-
EXECUTIVE
COMPENSATION
Our
former CEO, Philip J. Young resigned on August 15, 2019 and our
former CFO Kelley Wendt resigned on April 30, 2019. They were
serving under two-year employment agreements adopted January 11,
2019. Mr. Young’s annual salary was $150,000 and Ms.
Wendt’s annual salary was $120,000 per
annum.
Our Chief Executive
Officer, Emiliano Aloi, has signed an offer letter and will receive
an annual base salary of $150,000. He will also be eligible to
participate in our benefit plans. Mr. Aloi will also receive an
equity award, which will be determined and approved by the Board.
The offer letter has no set term and may be terminated by Mr. Aloi
or us on two weeks written notice.
Our
Chief Financial Officer, Ken Puzder, has signed an offer letter and
will receive an annual base salary of $120,000. He will also be
eligible to participate in our benefit plans. Mr. Puzder will also
receive an equity award, which will be determined and approved by
the Board. The offer letter has no set term and may be terminated
by Mr. Puzder or us on two weeks written notice.
Andrew
Johnson, our Chief Strategy Officer, is serving under a two-year
employment agreement adopted March 11, 2019 at an annual salary of
$110,000. In addition, he will be entitled to an annual cash
bonus, in an amount as determined by the board of directors, if the
Company meets or exceeds criteria adopted by the Compensation
Committee of the Board of Directors. He shall also be eligible
for grants of awards under stock option or other equity incentive
plans of the Company as the Company’s Compensation
Committee.
With
regard to our full-time executive officers, the goal of the salary
component of our compensation policy is provide reasonable
compensation for their full-time service within the constraints
faced by a rapidly developing business with significant cash needs
for its planned expansion. Option grants for our full-time
executive officers are currently under review by the compensation
committee. The goal of our anticipated option grants to these
executives will be to provide an appropriate mixture of short term
and long term incentives to increase shareholder
value.
Kevin Esval, Jeffrey Thompson, and Ken Puzder,
each directors, have each been awarded 250,000 10 year
options under the 2019 Equity Incentive Plan, exercisable at $0.20
per share and vesting 1/24 on the date of award and 1/24 on the
first day of each calendar month thereafter until fully vested. The
goal of these grants, with their vesting gradually over the course
of two years, is to provide a blend of short and long term
incentives to contribute toward the growth of the company’s
value.
In
connection with his appointment on February 10, 2019 to the Board
of Directors and as our Executive Chairman, Jonathan Gilbert was
granted options to purchase 1,000,000 shares of our common stock at
an exercise price of $0.01 per share, exercisable for ten years.
Mr. Gilbert’s stock options vest as follows:
|
Date Installment Becomes Exercisable
|
Number
of Common Shares
|
|
2/11/2019
|
250,000
|
|
Upon
the raise of > $2.5m new equity capital
|
250,000
|
|
Upon
the filing of a Nasdaq listing application
|
250,000
|
|
Upon
realizing ≥ $150,000 monthly gross revenue from
operations
|
250,000
|
With
regard to Mr. Gilbert, the goal of the options grant and vesting
schedule is to incentivize the achievement of certain key company
objectives. Mr. Gilbert resigned from the board on July 1,
2019.
In
connection with his appointment to the Board Directors and Chair of
the Audit Committee, John Price was granted immediately vested
options to purchase 250,000 shares of our common stock at a price
of $0.20 per share, exercisable for ten years.
On
June 24, 2019, Vladislav Yampolsky was appointed to our board of
directors and is currently serving as our interim executive
chairman. Mr. Yampolsky’s compensation will be discussed in
an amendment to the registration statement to which this prospectus
forms a part.
The
following table sets forth certain information about the
compensation paid or accrued to the persons who served as our Chief
Executive Officer and our two highest-paid executive officers
during the last two completed fiscal years whose total compensation
exceeded $100,000 for that year (the “named executive
officers”).
-43-
Summary Compensation Table
|
|
Year
|
Salary
|
Bonus
|
Option Awards)
|
All Other Compensation
|
Total
|
|
|
|
|
|
|
|
|
|
Philip
J. Young
|
2018
|
$165,417
|
$--
|
$20,025-
|
$--
|
$185,442
|
|
Former President and Chief Executive Officer
|
2017
|
$222,500
|
$--
|
$--
|
$--
|
$222,500
|
|
|
|
|
|
|
|
|
|
James
R. Erickson, Ph.D.
|
2018
|
$75,000
|
$--
|
$89,000
|
$--
|
$164,000
|
|
Former Chief Business Officer
|
2017
|
$62,500
|
$--
|
$--
|
$--
|
$62,500
|
|
|
|
|
|
|
|
|
|
Timothy
Ryan
|
2018
|
$157,500
|
$--
|
$20,025
|
$--
|
$177,525
|
|
Former Executive Vice President
|
2017
|
$90,000
|
$--
|
$--
|
$--
|
$90,000
|
|
|
|
|
|
|
|
|
|
Kelley
Wendt
|
2018
|
$178,000
|
$--
|
$20,025
|
$--
|
$198,025
|
|
Former Chief Financial Officer
|
2017
|
$38,563
|
$--
|
$--
|
$--
|
$38,563
|
Narrative Disclosure to the Summary Compensation Table
Mr.
Young’s 2018 salary included 11 shares of Series D preferred
stock, $15,417 in cash, and accrued salary of $12,500. Mr. Young
resigned in August, 2019.
Mr.
Erickson’s 2018 salary consisted of 6 shares of Series D
preferred stock. Mr. Erickson resigned in February,
2019.
Mr.
Ryan’s 2018 salary included 11 shares of Series D preferred
stock, $10,000 in cash, and accrued salary of $10,000. Mr. Ryan
resigned in March, 2019.
Ms.
Wendt’s 2018 salary included 12 shares of Series D preferred
stock, $18,000 in cash, and accrued salary of $10,000. Ms Wendt
resigned in April, 2019.
Employment Agreements and Change in Control
Arrangements
On
January 11, 2019, we entered into new employment agreement with our
CEO, Philp J. Young, and our CFO Kelley Wendt. Under their new
Employment Agreements, Mr. Young and Ms. Wendt each agreed to a
service period of two (2) years, subject to renewal. Mr.
Young’s annual salary was $150,000 per annum and Ms.
Wendt’s annual salary was $120,000 per
annum.
On
August 15, 2019, Philip J. Young, agreed to resign as our Chief
Executive Officer and Chairman, effective July 31, 2019 and
entered into a Confidential Severance, Settlement and
Non-Disparagement Agreement and General Release. Under the terms of
the Severance Agreement the Company agreed to pay Mr. Young 50% of
his base salary ($75,000) payable over a 6-month period in exchange
for ongoing consulting and transition assistance. In addition, Mr.
Young will receive payment consisting of 2 weeks of vacation, and
continuation of health benefits, and reimbursement for documented
expenses. In addition, all unvested options and share awards will
be cancelled. Pursuant to the Severance Agreement, Mr. Young also
agreed to the terms of a 6-month lock-up under which he may not
sell, transfer, assign, or otherwise dispose of more than 15% of
the average daily volume of our common stock per week, subject to
certain exclusions. In addition, we repaid a $21,000 loan made to
us by Mr. Young, plus $1,769 in accrued interest pursuant to the
Severance Agreement. Mr. Young also provided a general waiver and
release of claims against the Company and is subject to certain
restrictive covenants, including confidentiality,
non-disparagement, non-solicitation, and
non-competition.
On
April 30, 2019 Ms. Wendt agreed to resign as Chief Financial
Officer.
Our Chief Executive
Officer, Emiliano Aloi, has signed an offer letter and will receive
an annual base salary of $150,000. He will also be eligible to
participate in our benefit plans. Mr. Aloi will also receive an
equity award, which will be determined and approved by the Board.
The offer letter has no set term and may be terminated by Mr. Aloi
or us on two weeks written notice.
Our
Chief Financial Officer, Ken Puzder, has signed an offer letter and
will receive an annual base salary of $120,000. He will also be
eligible to participate in the Company’s benefit plans. Mr.
Puzder will also receive an equity award, which will be determined
and approved by the Board. The Offer Letter has no set term and may
be terminated by Mr. Puzder or the Company on two weeks written
notice.
Andrew
Johnson, our Chief Strategy Officer, is serving under a two-year
employment agreement adopted March 11, 2019 at an annual salary of
$110,000. In addition, he will be entitled to an annual cash
bonus, in an amount as determined by the board of directors, if the
Company meets or exceeds criteria adopted by the Compensation
Committee of the Board of Directors. He shall also be eligible
for grants of awards under stock option or other equity incentive
plans of the Company as the Company’s Compensation
Committee.
Generally, our
executives shall be entitled to an annual cash bonus in an
amount as determined by the board of directors, if the Company
meets or exceeds criteria adopted by the Compensation Committee of
the Board of Directors. The executives shall also be eligible
for grants of awards under stock option or other equity incentive
plans of the Company as the Company’s Compensation Committee
or, in the absence thereof, the Company’s Board of Directors
may from time to time determine and shall be entitled to
participate in all benefits plans the Company provides to its
senior executives. The Company shall reimburse the
executives for all reasonable expenses incurred in the course of
employment. In the event employment is terminated
without Cause or by the executives with Good Reason (as such terms
are defined in the Employment Agreements), the Executives shall be
entitled to receive severance benefits equal to the lesser of 50%
of their base salaries or the amount of salary unpaid for the
remaining term then in effect, continued coverage under the
Company’s benefit plans and payment of their pro-rated earned
annual bonus, provided certain conditions are met. The executives
are subject to a one (1) year non-competition and non-solicitation
provision.
Employment arrangements for our current CEO and
President, Emiliano Aloi, and our current CFO, Ken Puzder will be
discussed in an amendment to the registration statement to which
this prospectus forms a part.
-44-
Equity
Awards At Year End End Table
The
following table sets forth certain information regarding all
outstanding equity awards held by our named executive officers as
of December 31, 2018.
|
|
|
|
Equity
Incentive
|
|
|
|
|
|
|
Plan
Awards:
|
|
|
|
|
Number
of
|
Number
of
|
Number
of
|
|
|
|
|
Securities
|
Securities
|
Securities
|
|
|
|
|
Underlying
|
Underlying
|
Underlying
|
|
|
|
|
Unexercised
|
Unexercised
|
Unexercised
|
Option
|
Option
|
|
|
Options
(#)
|
Options
(#)
|
Unearned
|
Exercise
|
Expiration
|
|
Name
|
Exercisable
|
Unexercisable
|
Options
(#)
|
Price
($)
|
Date
|
|
Philip J. Young,*
former officer
|
28,125(1)
|
-
|
-
|
0.712
|
9/4/2023
|
|
James R. Erickson,
Ph. D.,* former officer
|
83,333(2)
|
-
|
41,667
|
0.712
|
2/21/2020
|
|
Timothy Ryan*,
former officer
|
28,125(3)
|
-
|
-
|
0.712
|
3/11/2020
|
|
Kelley Wendt,*
former officer
|
28,125(4)
|
-
|
-
|
0.712
|
9/4/2023
|
(1)
Seventy-eight
percent of the shares vested immediately at grant date, with the
balance vesting on December 1, 2018.
(2)
Sixty-one percent
of the shares vested immediately at grant date, with the balance
vesting in equal monthly installments thereafter over the next
twenty-eight years, subject to continued service with us. The
option expiration date has been updated to reflect Mr.
Erickson’s resignation on February 21, 2019.
(3)
Seventy-eight
percent of the shares vested immediately at grant
date, with the balance vesting on December 1, 2018. The option
expiration date has been updated to reflect Mr. Ryan’s
resignation effective March 11, 2019.
(4)
Sixty-one percent
of the shares vested immediately at grant date, with the balance
vesting on December 1, 2018.
*Each of these officers resigned from their positions in
2019.
All of
the stock options held by our named executive officers listed in
the table above were granted under and subject to the terms of our
2018 Plan, the terms of which are described below under “2018
Stock Option Plan”.
Option Exercises and Stock Vested
Our
named executive officers did not exercise any stock option awards
during the year ended December 31, 2018.
2018 Stock Option Plan
In
September 2018, the Company’s stockholders approved the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
provides for the issuance of incentive awards in the form of
non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards, and restricted stock unit awards.
The awards may be granted by the Company’s Board of Directors
to its employees, directors and officers and to consultants,
agents, advisors and independent contractors who provide services
to the Company or to a subsidiary of the Company. The exercise
price for stock options must not be less than the fair market value
of the underlying shares on the date of grant. The incentive awards
shall either be fully vested and exercisable from the date of grant
or shall vest and become exercisable in such installments as the
Board or Compensation Committee may specify. Stock options expire
no later than ten years from the date of grant. The aggregate
number of shares of Common Stock which may be issued pursuant to
the Plan is 1,187,500. Unless sooner terminated, the Plan
shall terminate in 10 years.
-45-
2019 Equity Incentive Plan
On
January 11, 2019, our shareholders approved the Exactus, Inc. 2019
Equity Incentive Plan (the “Plan”). The purpose of the
Plan is to provide a means for the Company to continue to attract,
motivate and retain management, key employees, consultants and
other independent contractors, and to provide these individuals
with greater incentive for their service to the Company by linking
their interests in the Company’s success with those of the
Company and its shareholders. The Plan is limited such that the
maximum number of shares of Common Stock that may be delivered
pursuant to awards granted under the Plan may not exceed fifteen
percent (15%) of the total of: (a) the issued and outstanding
shares of our Common Stock, and (b) all shares common stock
issuable upon conversion or exercise of any of our outstanding
securities which are convertible or exercisable into shares of
Common Stock under the terms thereof.
As of December 31, 2018, the Company had reserved
shares of its common stock for future issuance and reflects
the effect of the 1 for 8 Reverse Stock Split in January 2019
as follows:
|
|
Shares Reserved
|
|
Stock options
outstanding
|
959,375
|
|
Available for
future grants under the 2018 Plan
|
228,125
|
|
Warrants
outstanding
|
644,083
|
|
Total shares
reserved
|
1,861,583
|
Compensation of Directors Table
The
following table shows the compensation paid during the year ended
December 31, 2018 to our non-employee directors, other than Mr.
Young and Mr. Ryan, whose 2018 compensation is set forth above
under “Executive Compensation.”
|
|
Fees
Earned
|
|
|
|
|
|
or
Paid in
|
Option
|
All
Other
|
|
|
Name
|
Cash
($)
|
Awards
($)
|
Compensation
($)
|
Total
($)
|
|
Jonathan R. Gilbert
(1)
|
-
|
-
|
-
|
-
|
|
John
Price
|
-
|
-
|
-
|
-
|
|
Kevin J.
Esval
|
-
|
-
|
-
|
-
|
|
Jeffrey
Thompson
|
-
|
-
|
-
|
-
|
|
Kenneth E.
Puzder
|
-
|
-
|
-
|
-
|
We did
not pay any compensation to our directors for their service as
directors during 2018. The non-employee directors named above were
all appointed in 2019. Their compensation arrangements made in 2019
are discussed above.
(1)
Mr. Gilbert
resigned from the board on July 1, 2019.
-46-
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth information as of December 18, 2019,
regarding the number of shares of our common stock beneficially
owned by each director, each executive officer and by all directors
and executive officers as a group. Beneficial ownership includes
shares, if any, held in the name of the spouse, minor children or
other relatives of the director or executive officer living in such
person’s home, as well as shares, if any, held in the name of
another person under an arrangement whereby the director or
executive officer can vest title in himself at once or at some
future time. Unless otherwise noted, each shareholder’s
address is 80 NE 4th Avenue,
Suite 28, Delray Beach, FL 33483, and each shareholder has sole
voting power and investment power with respect to securities shown
in the table below.
|
Title of class
|
Name and address of beneficial owner
|
Amount and Nature of Beneficial Ownership
|
Percent of Class
(1)
|
|
|
|
||||
|
Named Executive Officers & Directors:
|
|
|||
|
Common Stock
|
Philip Young*
|
1,111,625(2)
|
2.72%%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
Emiliano Aloi
|
250,000(3)
|
*%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
Kelley Wendt*
|
403,125(4)
|
*%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
Andrew Johnson
|
28,125(5)
|
*%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
John Price
|
250,000(6)
|
*%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
Kevin Esval
|
477,500(7)
|
1.17%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
Jeffrey Thompson
|
31,250(8)
|
*%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common Stock
|
Kenneth E. Puzder
|
31,250(8)
|
*%
|
|
|
80 NE 4th Avenue, Suite 28
|
|
|||
|
Delray Beach, FL 33483
|
|
|||
|
Common
Stock
|
Bobby
Yampolsky
80 NE
4th Avenue, Suite 28
Delray
Beach, FL 33483
|
8,781,523(9)
|
21.42%
|
|
|
Common
Stock
|
James
R. Erickson
80 NE
4th Avenue, Suite 28
Delray
Beach, FL 33483
|
861,111(10)
|
2.06%
|
|
|
|
||||
|
Common Stock Total of All Current Directors and Executive
Officers:
|
10,710,759
|
26.22%
|
|
|
* Less
than 1%
(1)
Based on 40,848,558
shares of our common stock outstanding as ofDecember 18,
2019.
(2)
Includes (i)
1,062,500 shares of Common Stock, (ii) 21,000 shares of common
stock issuable upon the conversion of shares of Series B-2, (iii)
28,125 vested stock options to purchase Common Stock exercisable at
$0.089 per share and (iv) 275,000 shares of Common Stock issuable
upon the conversion of shares of Series D.
(3)
Includes 250,000
vested stock options to purchase Common Stock exercisable at $0.32
per share.
(4)
Includes (i)75,000
shares issuable upon conversion of shares of Series B-1, (ii)
28,125 vested options to purchase Common Stock, and (iii) 300,000
shares issuable upon conversion of shares of Series D.
(5)
Includes (i) 12,500
vested stock options to purchase Common Stock exercisable at $0.32
per share and (ii) 15,625 vested stock options to purchase Common
Stock exercisable at $0.96 per share.
(6)
Includes 250,0000
vested stock options to purchase Common Stock exercisable at $0.20
per share.
(7)
Includes (i) 250
shares of common stock, (ii) 237,500 shares of common stock held by
Velocity Health Capital over which Mr. Esval has sole voting power
and investment power, (iii) 187,500 shares of common stock held by
Donegal Bio Ventures, over which Mr. Esval has sole voting power
and investment power, (iv) 21,000 shares issuable upon conversion
of shares of Series B-2 held by Velocity Health Capital over which
Mr. Esval has sole voting power and investment power, and (v)
vested options to purchase 31,250 shares of common stock
exercisable at $0.20 per share.
(8)
Includes 31,250
vested stock options to purchase Common Stock exercisable at $0.20
per share.
(9)
Includes (1)
7,635,690
shares owned by
Ceed2Med, LLC over which Mr. Yampolsky has the right to vote and
dispose, and (2) 145,833 stock options that are exercisable within
60 days at $0.32 per share. Excludes 10,000 shares of Series E
Preferred Stock, which are convertible into 6,250,000 shares of our
common stock when the price of our common stock exceeds
$2.00 per share for 5 consecutive trading days.
(10)
Includes
861,111 stock options that are exercisable
within 60 days.
*These
persons are no longer serving in their previous positions with the
Company.
-47-
The
following table sets forth information, as of December 18, 2019,
regarding the number of shares of our common stock beneficially
owned by all persons known by us, other than those set forth in the
table above, who own five percent or more of our outstanding shares
of common stock.
|
Title of
class
|
Name and
address of beneficial owner
|
Amount and Nature
of Beneficial Ownership
|
Percent of Class (1)
|
|
Common Stock
|
Ceed2Med, LLC(2)
995 NE 4th
Ave.
Delray Beach, FL
33483
|
6,435,691
|
15.76%
|
|
Common
Stock
|
3i,
LP (3)
140
Broadway, Floor 38
New
York, NY
|
3,007,482(4)
|
7.36%
|
(1)
Based
on
40,848,558 shares of our common stock outstanding as of December
18, 2019.
(2)
Vladislav
Yampolsky is the
Manager of Ceed2Med, LLC, and, in that capacity, has the ability to
make voting and investment decisions with regard to its shares of
common stock.
(3)
Voting and
investment power over the shares is held by 3i Management LLC.
Maier Tarlow is the Manager of 3i Management
LLC.
(4)
This amount includes
3,007,482 common shares issuable upon the conversion of principal
and interest under the notes, which are currently convertible, and
the exercise of the warrants, which are currently exercisable. The
notes and the warrants, pursuant to their terms, may not be
converted or exercised to the extent that conversion or exercise
would cause the holder, together with its affiliates and
attribution parties, to beneficially own a number of common shares
which would exceed 4.99% of our then outstanding common shares
following conversion or exercise, excluding for purposes of such
determination common shares issuable upon the conversion of
principal under the notes which has not been converted or exercise
of the warrants which has not been exercised.
-48-
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We have
entered into agreements in 2019 with Ceed2Med, LLC, our largest
stockholder. For more information about these agreements please see
“Business Overview – Ceed2Med Agreements”
above.
We are
party to an arbitration proceeding commenced September 2019 in San
Francisco, California currently pending before the American
Arbitration Association in New York, New York. The proceeding was
brought by the our former director, Dr. Krassen Dimitrov. The
complaint generally alleges that we and our subsidiary Exactus
Biosolutions, Inc. breached an alleged consulting agreement with
Dr. Dimitrov and owe unpaid consulting fees, plus interest. Dr.
Dimitrov also licensed certain technology to Exactus Biosolutions,
Inc. The Company is conducting an investigation into matters
concerning the licenses and payments previously made, and disputes
that any amounts are due and the existence of any contract. The
Company intends vigorously to defend such action. The Company
believes that there exist grounds to assert various counter-claims
and third-party claims against Dr. Dimitrov and his affiliated
companies for return of amounts previously paid. For the years
ended December 31, 2018 and 2017, $300,000 was recognized in
Research and Development expenses for consulting provided by Dr.
Dimitrov. As of December 31, 2018 and 2017, $575,000 and $275,000
was included in accounts payable, respectively. During the year
ended December 31, 2018 and 2017, $0 and $125,000, respectively was
paid.
On June
28, 2017, we issued to two of our executive officers a promissory
note in the principal amount up to $100,000, which amount may be
drawn upon by the Company as bridge financing for general working
capital purposes. The promissory note accrues interest at a rate of
8.0% per annum and matures on the earlier of (i) one (1) year from
the date of the promissory note, and (ii) the closing the sale of
our securities in a single transaction or a series of related
transactions from which at least $500,000 of gross proceeds are
raised.
On July
5, 2018, we issued our officer 15 shares of Series D Preferred
shares in exchange for the forgiveness of $200,000 worth of accrued
debt owed to the officer by the us.
On
January 8, 2019, we entered into a Master Product Development and
Supply Agreement with Ceed2Med. At September 30, 2019, accounts
payable to Ceed2Med related to purchase of finish products amounted
to $8,342. Ceed2Med is our largest stockholder.
On
March 29, 2019, we retired a note payable owing to our former
officer in the amount of $30,616. To retire the note, we issued the
officer shares of common stock valued at $0.20 per share, for a
total of 153,080 shares issued to retire the debt.
On
March 1, 2019, we, through our majority-owned subsidiary, EOW,
entered into a farm lease agreement for a lease term of one year.
The lease premise is located in Cave Junction, Oregon and consists
of approximately 100 acres. The lease requires us to pay 5% of the
net income realized by us from the operation of the lease farm.
Accordingly, we recognized $0 Right-of-use asset and lease
liabilities on this farm lease as we have not determined when it
will generate net income from this lease. The lease shall continue
in effect from year to year except for at least a 30-day written
notice of termination.
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Glendale, Oregon and consists
of approximately 100 acres. The lease requires the Company to pay
$120,000 per year, whereby $50,000 was payable upon execution and
$70,000 shall be payable prior to planting for agricultural use or
related purposes. The lease shall continue in effect from year to
year except for at least a 30-day written notice of
termination.
On
April 30, 2019, we through our majority-owned subsidiary, EOW,
entered into a farm lease agreement for a lease term of one year.
The lease premise is located in Cave Junction, Oregon and consists
of approximately 38 acres. The lease requires the Company to pay
$76,000 per year, whereby $38,000 was payable upon execution and
$38,000 shall be payable on September 15, 2019 and 2% of the net
income realized by us from the operation of the lease farm. The
lease shall continue in effect from year to year for five years
except for at least a 30-day written notice of termination. We have
paid the initial payment of $26,000 and the remaining $12,000 was
paid directly to the landlord by an affiliated company who is
renting the portion of the lease property from us. The affiliated
company is owned by two managing members of EOW. EOW is in the
process of arranging a sub-lease agreement with the affiliated
company.
On July 9, 2019, the Company entered into a
Commercial Lease Agreement with Skybar Holdings, LLC, a Florida
limited liability company. Pursuant to the lease, the Company will
rent the entire first floor (consisting of approximately 4,000
square feet) of a property located in Delray Beach, Florida. The
Company plans to develop the premises to create a hemp-oriented
health and wellness retail venue, including education, clothing and
cosmetics, and explore franchise opportunities. The initial term of
the lease is 5 years commencing August 1, 2019, with two 5-year
extension options. The lease includes a right of first refusal in
favor of the Company to lease any space that becomes available on
the 2nd and 3rd floor of the premises and a right of first refusal
to purchase the premises. Pursuant to the lease, the Company will
pay rent equal to $40,000 per month in advance in addition to all
applicable Florida sales and/or federal taxes and security deposit
of $40,000. Effective one year from the lease commencement date and
each year thereafter, the rent shall increase at least three
percent (3%) per year. The lessor of the premises is a limited
liability company owned or controlled by Bobby Yampolsky, a
member of the Board and the founder, manager and controlling member
of Ceed2Med, the Company’s largest
stockholder.
On July 31, 2019, we granted 10,000 Series E
Preferred in connection with a Management and Services Agreement
with Ceed2Med, our largest stockholder. We valued the 10,000
Series E Preferred shares which is equivalent into 6,250,000 common
shares at a fair value of $0.54 per common share or $3,375,000
based on the sales of common stock on recent private placements on
the dates of grant.
On September 13, 2019, we issued 2,00,000 shares of our common
stock to officers and directors of the Company.
During
the nine months ended September 30, 2019, we reimbursed a managing
member of EOW and an affiliated company which is owned by two
managing members of EOW, for operating expenses paid on behalf of
EOW for the following:
●
$400,000 worth of hemp seeds
●
$50,000 lease payment related to a lease agreement
●
$100,000 for irrigation cost
During
October 2019, we entered into two short-term promissory notes for a
total of $85,000 with an officer and an investor.
We
recognized revenues from a related party customer of $12,140 and
$52,659 during the three and nine months ended September 30, 2018.
As of September 30, 2019, accounts receivable from a related party
customer amounted to $52,659. The customer is an affiliated company
which is substantially owned by a managing member of
EOW.
From
time to time, our subsidiary, EOW, receives advances from an
affiliated company which is owned by a managing member of EOW for
working capital purposes. The advances are non-interest bearing and
are payable on demand. The affiliated company provided advances to
the Company for working capital purposes for a total of $231,035
and we repaid $160,535 of these advances. Additionally, the related
party directly paid $35,000 of lease deposits related to a farm
lease.
Some of
the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
Director Independence
Kevin Esval, Jeffrey Thompson and John Price meet
the definition of “independent” director under SEC
rules and the rules and regulations promulgated by
NASDAQ.
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DESCRIPTION OF
SECURITIES
The
following description of our capital stock summarizes the material
terms and provisions of our common stock and preferred stock. This
summary does not purport to be complete in all respects. This
description is subject to and qualified entirely by the terms of
our Amended and Restated Articles, which we refer to as our
Articles, copies of which have been filed with the SEC and are also
available upon request from us.
This
prospectus relates to the offer and sale by the selling
stockholders of up to an aggregate of 3,119,731 shares of our
common stock that are issuable pursuant to the terms of certain
convertible notes and warrants issued to the holders of the
convertible notes. Please see the section “Private Placement
of Convertible Notes and Warrants” for further information
about the convertible notes and warrants.
Authorized Capital Stock
Our
authorized capital stock consists of 650 million shares of
common stock, par value $0.0001 per share, and 50 million
shares of preferred stock, par value $0.0001 per share. As of
December 18, 2019, there were 40,848,558 shares of common stock
outstanding.
Common Stock
Dividend Rights. We may pay dividends
as declared from time to time by our board of directors out of
funds that are legally available, subject to certain restrictions
imposed by state and federal laws.
Voting Rights. Each share of common
stock is entitled to one vote per share. Directors will be elected
by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the
election of directors. Except as otherwise required in our Amended
and Restated Articles of Incorporation, Bylaws or by Nevada law,
any other action to be determined by a vote of shares at any
meeting of the stockholder will be authorized if the number of
votes cast in favor of the action exceeds the number of votes cast
in opposition. The holders of a majority of the voting power
present in person or by proxy (regardless of whether the proxy has
authority to vote on all matters) constitutes a quorum at a meeting
of stockholders for the transaction of any business.
Preemptive Rights. No holder of our
common stock has any preemptive right to subscribe for any shares
of our capital stock issued in the future.
Liquidation Rights. In the event of our
liquidation, dissolution or winding up, the remaining assets of our
company, after payment or provision for payment of our debts and
liabilities and distributions or provisions for distributions to
holders of our Series B-2 Preferred Stock and any other preferred
stock that may be issued and outstanding having preference over our
common stock, would be distributed to the holders of our common
stock, and Series B-1 Preferred Stock on a pro-rata
basis.
Calls and Assessments. All common stock
outstanding is fully paid and non-assessable.
Common Stock Warrants
On
October 15, 2018, we issued 435,750 warrants with an exercise price
of $0.32 post-split per share and exercisable for two years to a
Series B-2 Holder.
On November 27,
2019, we issued warrants to purchase 275,612 shares of common stock
to an investor at an exercise price of $0.756 per share of common
stock, and warrants to purchase 84,187 shares of common stock to an
advisor at an exercise price of $0.8316 per share of common stock.
For more information, please see the section of this prospectus
entitled “Private Placement of Convertible Notes and
Warrants”. We expect to issue warrants to purchase
91,870 shares of common stock to an investor at an exercise price
of $0.756 per share of common stock and warrants to purchase 20,062
shares of common stock to an advisor at an exercise price of
$0.8316 per share of common stock with the filing of the
registration statement upon which this prospectus forms a
part.
Preferred Stock
Pursuant to our
certificate of incorporation, our board of directors has the
authority, without further action by the stockholders, to issue up
to 50,000,000 shares of preferred stock, in one or more series. Our
board shall determine the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares
constituting any series or the designation of any series. The
issuance of preferred stock could adversely affect the voting
power, conversion or other rights of holders of common stock.
Preferred stock could be issued quickly with terms calculated to
delay or prevent a change in control of the Company or make removal
of management more difficult. Additionally, the issuance of
preferred stock may have the effect of decreasing the market price
of our common stock.
Series
A – The rights, privileges and
preferences of the Series A Preferred Stock are set forth in the
Certificate of Designation filed with the Nevada Secretary of State
on January 14, 2019. Set forth below is a summary of the material
rights, preferences and privileges of our Series A Preferred Stock.
The following summary of the material rights, preferences and
privileges of our Series A Preferred Stock does not purport to be
complete and may not contain all of the information that is
important to you.
General.
The Certificate of Designation for Series A Preferred Stock
designates 1,000,000 shares of Series A Preferred Stock. As of
December 18, 2019, there were 583,009 shares of A Preferred Stock
issued and outstanding.
Ranking.
Except as set forth in the Certificate of Designation for Series A
Preferred Stock, with respect to dividends, distributions and
payments upon the liquidation, dissolution and winding up of the
Company, the Series A Preferred Stock will rank senior to all
shares of capital stock of the Company.
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Dividends.
Holders of Series A Preferred Stock are eligible to receive
dividends if and when declared by our board of directors, in its
sole and absolute discretion, out of funds legally available for
that purpose.
Liquidation.
In the event of any dissolution, liquidation or winding up of the
Company, the holders of Series A Preferred Stock will be entitled
to participate in any distribution out of the assets of the Company
on an equal basis per share with the holders of our common stock.
For the purposes of such distribution, the holders of Series A
Preferred Stock will be treated as if all shares of Series A
Preferred Stock had been converted to common stock immediately
prior to the distribution.
Conversion
Rights. Each share of Series A Preferred Stock is
convertible into shares of common stock, par value $0.0001 per
share equal to the Stated Value of $1.00, divided by $0.20, and
subject to a conversion rate of 0.125 post-split shares (1
pre-split shares) for 1 share basis, subject to beneficial
ownership limitations. To exercise optional conversion rights, a
holder of Series A Preferred Stock must make a written demand to us
and surrender the shares of Series A Preferred Stock to be
converted. We will not issue fractional shares of common stock. We
will issue to such holder a number of shares rounded up to the
nearest whole number of shares of common stock.
Voting
Rights. The holders of Series A Preferred Stock are entitled
to vote on an “as converted” basis on all matters
submitted to a vote of holders our common stock, including the
election of directors, and all other matters as required by
law.
Preemptive
Rights. Holders of Series A Preferred Stock do not have
preemptive rights.
Series
B-1 - The rights, privileges and preferences of the
Series B-1 Preferred Stock are set forth in the Certificate of
Designation filed with the Nevada Secretary of State on February
26, 2016. Set forth below is a summary of the material rights,
preferences and privileges of our Series B-1 Preferred Stock. The
following summary of the material rights, preferences and
privileges of our Series B-1 Preferred Stock does not purport to be
complete and may not contain all of the information that is
important to you.
General.
The Certificate of Designation for Series B-1 Preferred Stock
designates 32,000,000 shares of Series B-1 Preferred Stock. As of
December 18, 2019, there were 1,650,000 shares of Series B-1
Preferred Stock issued and outstanding.
Ranking.
Except as set forth in the Certificate of Designation for Series
B-1 Preferred Stock, with respect to rights on liquidation, winding
up and dissolution, the Series B-1 Preferred Stock will rank pari
passu to the common stock and any previously issued capital stock
of the Company.
Dividends.
Holders of Series B-1 Preferred Stock are entitled to receive
dividends if and when declared by our board of directors, in its
sole and absolute discretion, out of funds legally available for
that purpose.
Liquidation.
In the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the Series B-1 Preferred
Stock will be (i) junior to Series B-2 Preferred Stock, (ii) junior
to all future issuances of preferred stock other than those which,
by their respective terms, rank pari passu with or junior to the
Series B-1 Preferred Stock and (iii) pari passu with the common
stock. In any such distribution, holders of Series B-1 Preferred
Stock will be treated as if all shares of Series B-1 Preferred
Stock had been converted to common stock immediately prior to the
distribution.
Conversion
Rights. Each share of Series B-1 Preferred Stock is
convertible into one share of common stock at the option of the
holder, at any time and without the payment of additional
consideration. To exercise optional conversion rights, a holder of
Series B-1 Preferred Stock must make a written demand to us and
surrender the shares of Series B-1 Preferred Stock to be converted.
We will not issue fractional shares of common stock or pay cash
upon the conversion of shares of Series B-1 Preferred Stock. We
will issue to such holder a number of shares rounded up to the
nearest whole number of shares of common stock.
Voting
Rights. The holders of Series B-1 Preferred Stock are
entitled to vote on an “as converted” basis on all
matters submitted to a vote of holders our common stock, including
the election of directors, and all other matters as required by
law. The holders of Series B-1 Preferred Stock must vote together
with our common stock as a single class, except to the extent that
voting as a separate class or series is required by law. There is
no right to cumulative voting in the election of
directors.
Preemptive
Rights. Holders of Series B-1 Preferred Stock do not have
preemptive rights.
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Series
B-2 - The rights, privileges and preferences of the
Series B-2 Preferred Stock are set forth in the Certificate of
Designation filed with the Nevada Secretary of State on February
27, 2016. Set forth below is a summary of the material rights,
preferences and privileges of our Series B-2 Preferred Stock. The
following summary of the material rights, preferences and
privileges of our Series B-2 Preferred Stock does not purport to be
complete and may not contain all of the information that is
important to you.
General.
The Certificate of Designation for Series B-2 Preferred Stock
designates 10,000,000 shares of Series B-2 Preferred Stock. The
stated value of the Series B-2 Preferred Stock is $0.25 per share.
As of December 18, 2019, there were 7,684,000 shares of Series B-2
Preferred Stock issued and outstanding.
Ranking.
With respect to rights on liquidation, winding up and dissolution,
the Series B-2 Preferred Stock will rank senior to the common stock
and all previously issued capital stock of the
Company.
Dividends.
Holders of Series B-2 Preferred Stock have no dividend rights
except as may be declared by our Board of Directors in its sole and
absolute discretion out of funds legally available for that
purpose.
Liquidation.
In the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the Series B-2 Preferred
Stock will be senior to our common stock, Series B-1 Preferred
Stock. In such event, holders of Series B-2 Preferred Stock shall
be entitled, after provision for our debts and other liabilities,
to be paid in cash in full, before any distribution is made on any
previously authorized class of capital stock, an amount of $0.25
per share. If the net assets of the Company distributable among the
holders of all outstanding Series B-2 Preferred Stock are
insufficient to pay in full all holders of Series B-2 Preferred
Stock, then the entire net assets of the Company remaining after
the provision for the payment of our debts and other liabilities
will be distributed among the holders of Series B-2 Preferred Stock
ratably in proportion to the full preferential amount to which they
would otherwise be entitled to be paid for their Series B-2
Preferred Stock.
Conversion
Rights. Each share of Series B-2 Preferred Stock is
convertible into one share of common stock at the option of the
holder, at any time and without the payment of additional
consideration. To exercise optional conversion rights, a holder of
Series B-2 Preferred Stock must make a written demand to us and
surrender the shares of Series B-2 Preferred Stock to be converted.
We will not issue fractional shares of common stock or pay cash
upon the conversion of shares of Series B-2 Preferred Stock. We
will issue to such holder a number of shares rounded up to the
nearest whole number of shares of common stock.
Voting
Rights. The holders of Series B-2 Preferred Stock are
entitled to vote on an “as converted” basis on all
matters submitted to a vote of holders our common stock, including
the election of directors, and all other matters as required by
law. The holders of Series B-2 Preferred Stock must vote together
with our common stock as a single class, except to the extent that
voting as a separate class or series is required by law. There is
no right to cumulative voting in the election of
directors.
Preemptive
Rights. Holders of Series B-2 Preferred Stock do not have
preemptive rights.
Series
D – The rights, privileges and preferences of the
Series D Preferred Stock are set forth in the Certificate of
Designation filed with the Nevada Secretary of State on March 28,
2018. Set forth below is a summary of the material rights,
preferences and privileges of our Series D Preferred Stock. The
following summary of the material rights, preferences and
privileges of our Series D Preferred Stock does not purport to be
complete and may not contain all of the information that is
important to you.
General.
The Certificate of Designation for Series D Preferred Stock
designates 200 shares of Series D Preferred Stock. As of December
18, 2019, there were 29 shares of Series D Preferred Stock issued
and outstanding.
Ranking.
With respect to rights on liquidation, winding up and dissolution,
the Series D Preferred Stock will pari passu with the Series B-2
Preferred Stock and rank senior to the common stock and all
previously issued capital stock of the Company.
Dividends.
Holders of Series D Preferred Stock have no dividend rights except
as may be declared by our board of directors in its sole and
absolute discretion out of funds legally available for that
purpose.
Liquidation.
In the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the Series D Preferred
Stock will be entitled to payment pari passu with the Series B-2
Preferred Stock and be senior to our common stock, Series B-1
Preferred Stock. In such event, holders of Series D Preferred Stock
shall be entitled, after provision for our debts and other
liabilities, to be paid in cash in full, before any distribution is
made on any previously authorized class of capital stock, an amount
of $10,000 per share. If the net assets of the Company is
insufficient to pay in full all holders of the Series D Preferred
Stock and Series B-2 Preferred Stock, then the entire net assets of
the Company remaining after the provision for the payment of our
debts and other liabilities will be distributed among the holders
of Series D Preferred Stock and Series B-2 Preferred Stock ratably
in proportion to the full preferential amount to which they would
otherwise be entitled to be paid for their Series D Preferred Stock
and Series B-2 Preferred Stock, as applicable.
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Conversion
Rights. Each share of Series D Preferred Stock is
convertible into 200,000 shares of common stock at the option of
the holder. To exercise optional conversion rights, a holder of
Series D Preferred Stock must make a written demand to us and
surrender the shares of Series D Preferred Stock to be converted.
We will not issue fractional shares of common stock upon the
conversion of shares of Series D Preferred Stock. We will issue to
such holder a number of shares rounded up to the nearest whole
number of shares of common stock.
Voting
Rights. The holders of Series D Preferred Stock are entitled
to vote on an “as converted” basis on all matters
submitted to a vote of holders our common stock, including the
election of directors, and all other matters as required by law.
The holders of Series D Preferred Stock must vote with all other
classes and series of common stock as a single class on all actions
to be taken by holders of the Company’s common stock, except
to the extent that voting as a separate class or series is required
by law. There is no right to cumulative voting in the election of
directors.
Preemptive
Rights. Holders of Series D Preferred Stock do not have
preemptive rights.
Series E
– The rights, privileges and preferences of the Series E
Preferred Stock are set forth in the Certificate of Designation
filed with the Nevada Secretary of State on November 12, 2019. Set
forth below is a summary of the material rights, preferences and
privileges of our Series E Preferred Stock. The following summary
of the material rights, preferences and privileges of our Series E
Preferred Stock does not purport to be complete and may not contain
all of the information that is important to you.
General.
The Certificate of Designation for Series E Preferred Stock
designates 10,000 shares of Series E Preferred Stock. The stated
value of the Series E Preferred Stock is $1,000 per share. As of
December 18, 2019, there were 10,000 shares of Series E Preferred
Stock issued and outstanding.
Ranking.
With respect to rights on liquidation, winding up and dissolution,
the Series E Preferred Stock will rank senior to the common stock
and all previously issued capital stock of the
Company.
Dividends.
Holders of Series E Preferred Stock have no dividend rights except
as may be declared by our Board of Directors in its sole and
absolute discretion out of funds legally available for that
purpose.
Liquidation.
The holders of Series E Preferred Stock have a liquidation
preference equal to par value.]In the event of any dissolution,
liquidation or winding up of the Company, whether voluntary or
involuntary, the Series E Preferred Stock will be senior to any
other class or series of our capital stock. In such event, holders
of Series E Preferred Stock shall be entitled, after provision for
our debts and other liabilities, to be paid in cash in full, before
any distribution is made on any previously authorized class of
capital stock, an amount of the par value per share. If the net
assets of the Company distributable among the holders of all
outstanding Series E Preferred Stock are insufficient to pay in
full all holders of Series E Preferred Stock, then the entire net
assets of the Company remaining after the provision for the payment
of our debts and other liabilities will be distributed among the
holders of Series E Preferred Stock ratably in proportion to the
full preferential amount to which they would otherwise be entitled
to be paid for their Series E Preferred Stock.
Conversion
Rights. Each share of Series E Preferred Stock is
convertible into 625 shares of common stock at the option if the
closing price of our common stock on the principal trading market
exceeds $2.00 per share for 5 consecutive trading days. To exercise
optional conversion rights, a holder of Series E Preferred Stock
must make a written demand to us and surrender the shares of Series
E Preferred Stock to be converted. We will not issue fractional
shares of common stock or pay cash upon the conversion of shares of
Series E Preferred Stock. We will issue to such holder a number of
shares rounded up to the nearest whole number of shares of common
stock.
Voting
Rights. The holders of the Series E Preferred Stock shall be
entitled to vote on an as converted basis on all matters submitted
to holders of our common, subject to applicable beneficial
ownership limitations. The holders of Series E Preferred Stock are
entitled to vote on an “as converted” basis on all
matters submitted to a vote of holders our common stock, including
the election of directors, and all other matters as required by
law. The holders of Series E Preferred Stock must vote together
with our common stock as a single class, except to the extent that
voting as a separate class or series is required by law. There is
no right to cumulative voting in the election of
directors.
Preemptive
Rights. Holders of Series E Preferred Stock do not have
preemptive rights.
Anti-Takeover Effects of Provisions of our Amended and Restated
Articles of Incorporation and our Amended and Restated
Bylaws
Our
amended and restated articles of incorporation and bylaws, as they
will be in effect upon completion of this offering, contain
provisions that may delay, defer or discourage another party from
acquiring control of us. We expect that these provisions, which are
summarized below, will discourage coercive takeover practices or
inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first
negotiate with our board of directors, which we believe may result
in an improvement of the terms of any such acquisition in favor of
our stockholders. However, they also give our board of directors
the power to discourage acquisitions that some stockholders may
favor.
-53-
Issuance of Additional Shares
Our
board of directors may issue additional authorized shares of our
preferred stock from time to time in one or more classes or series,
and our board of directors has the authority to determine the terms
of any such classes or series of preferred stock, such as voting
rights, conversion rates and liquidation preferences. As a result
of the ability to fix voting rights for a series of preferred
stock, our board of directors has the power, to the extent
consistent with its fiduciary duty, to issue a series of preferred
stock to persons friendly to management in order to attempt to
block a merger or other transaction by which a third party seeks
control, and thereby assist the incumbent board of directors and
management to retain their respective positions.
Special Meetings of Stockholders
Our
bylaws provide that special meetings of the stockholders may be
called only by the directors or by any officer instructed by the
directors to call the special meeting.
Board Vacancies
Our bylaws provide that
any vacancy occurring on our board of directors may be filled by a
majority of directors then in office, even if less than a quorum.
These provisions may discourage, delay, or prevent a third party
from voting to remove incumbent directors and simultaneously
gaining control of our board of directors by filling the
vacancies created by that removal with its own
nominees.
No Cumulative Voting
Our
amended and restated articles of incorporation do not provide for
cumulative voting in the election of directors. Our bylaws provide
that directors will be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors.
Anti-Takeover Effects of Nevada Law
The
State of Nevada, where we are incorporated, has enacted statutes
that could prohibit or delay mergers or other takeover or change in
control attempts and, accordingly, may discourage attempts to
acquire us even though such a transaction may offer our
stockholders the opportunity to sell their shares of common stock
at a price above the prevailing market price. We have not opted out
of these statutes.
Business Combinations
The
“business combination” provisions of Sections 78.411 to
78.444, inclusive, of the Nevada Revised Statutes, or the
“NRS”, generally prohibit a publicly traded Nevada
corporation with at least 200 stockholders of record from engaging
in various “combination” transactions with any
interested stockholder for a period of four years after the date of
the transaction in which the person became an interested
stockholder, unless the transaction is approved by the board of
directors before such person became an interested stockholder or
the combination is approved by the board of directors and
thereafter is approved at a meeting of the stockholders by the
affirmative vote of stockholders representing at least 60% (for a
combination within two years after becoming an interested
stockholder) or a majority (for combinations between two and four
years thereafter) of the outstanding voting power held by
disinterested stockholders. Alternatively, a corporation may engage
in a combination with an interested stockholder more than two years
after becoming an interested stockholder if:
●
the consideration
to be paid to the holders of the corporation’s stock, other
than the interested stockholder, is at least equal to the highest
of: (a) the highest price per share paid by the interested
stockholder within the two years immediately preceding the date of
the announcement of the combination or in the transaction in which
it became an interested stockholder, whichever is higher, plus
interest compounded annually, (b) the market value per share
of common stock on the date of announcement of the combination and
the date the interested stockholder acquired the shares, whichever
is higher, or (c) for holders of preferred stock, the highest
liquidation value of the preferred stock, if it is higher;
and
●
the interested
stockholder has not become the owner of any additional voting
shares since the date of becoming an interested stockholder except
by certain permitted transactions.
-54-
A
“combination” is generally defined to include
(i) mergers or consolidations with the “interested
stockholder” or an affiliate or associate of the interested
stockholder, (ii) any sale, lease exchange, mortgage, pledge,
transfer or other disposition of assets of the corporation, in one
transaction or a series of transactions, to or with the interested
stockholder or an affiliate or associate of the interested
stockholder: (a) having an aggregate market value equal to 5%
or more of the aggregate market value of the assets of the
corporation, (b) having an aggregate market value equal to 5%
or more of the aggregate market value of all outstanding shares of
the corporation, or (c) representing more than 10% of the
earning power or net income (determined on a consolidated basis) of
the corporation, (iii) any issuance or transfer of securities
to the interested stockholder or an affiliate or associate of the
interested stockholder, in one transaction or a series of
transactions, having an aggregate market value equal to 5% or more
of the aggregate market value of all of the outstanding voting
shares of the corporation (other than under the exercise of
warrants or rights to purchase shares offered, or a dividend or
distribution made pro rata to all stockholders of the corporation),
(iv) adoption of a plan or proposal for liquidation or
dissolution of the corporation with the interested stockholder or
an affiliate or associate of the interested stockholder and (v)
certain other transactions having the effect of increasing the
proportionate share of voting securities beneficially owned by the
interested stockholder or an affiliate or associate of the
interested stockholder.
In
general, an “interested stockholder” means any person
who (i) beneficially owns, directly or indirectly, 10% or more of
the voting power of the outstanding voting shares of a corporation,
or (ii) is an affiliate or associate of the corporation that
beneficially owned, within two years prior to the date in question,
10% or more of the voting power of the then-outstanding shares of
the corporation.
Control Share Acquisitions
The
“control share” provisions of Sections 78.378 to
78.3793, inclusive, of the NRS apply to “issuing
corporations” that are Nevada corporations doing business,
directly or through an affiliate, in Nevada, and having least 200
stockholders of record, including at least 100 of whom have
addresses in Nevada appearing on the stock ledger of the
corporation. The control share statute prohibits an acquirer, under
certain circumstances, from voting its “control shares”
of an issuing corporation’s stock after crossing certain
ownership threshold percentages, unless the acquirer obtains
approval of the issuing corporation’s disinterested
stockholders or unless the issuing corporation amends its articles
of incorporation or bylaws within ten days of the acquisition to
provide that the “control share” statute does not apply
to the corporation or to the types of existing or future
stockholders. The statute specifies three thresholds: one-fifth or
more but less than one-third, one-third but less than a majority,
and a majority or more, of the outstanding voting power of a
corporation. Generally, once an acquirer crosses one of the
foregoing thresholds, those shares acquired in an acquisition or
offer to acquire in an acquisition and acquired within 90 days
immediately preceding the date that the acquirer crosses one of the
thresholds, become “control shares” and such control
shares are deprived of the right to vote until disinterested
stockholders restore the right. In addition, the corporation, if
provided in its articles of incorporation or bylaws, may cause the
redemption of all of the control shares at the average price paid
for such shares if the stockholders do not accord the control
shares full voting rights. If control shares are accorded full
voting rights and the acquiring person has acquired a majority or
more of all voting power, all other stockholders who did not vote
in favor of authorizing voting rights to the control shares are
entitled to demand payment for the fair value of their shares in
accordance with statutory procedures established for
dissenters’ rights.
-55-
PLAN OF
DISTRIBUTION
The
selling stockholders and any of their pledgees, donees, assignees
and successors-in-interest may, from time to time, sell any or all
of their shares of common stock being offered under this prospectus
on any stock exchange, market or trading facility on which shares
of our common stock are traded or in private transactions. These
sales may be at fixed or negotiated prices. The selling
stockholders may use any one or more of the following methods when
disposing of shares:
●
ordinary brokerage transactions and transactions
in which the broker-dealer solicits purchasers;
●
block trades in which the broker-dealer will
attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the
transaction;
●
purchases by a broker-dealer as principal and
resales by the broker-dealer for its account;
●
an exchange distribution in accordance with the
rules of the applicable exchange;
●
privately
negotiated transactions;
●
to cover short sales made after the date that the
registration statement of which this prospectus is a part is
declared effective by the SEC;
●
broker-dealers may agree with the selling
stockholder to sell a specified number of such shares at a
stipulated price per share;
●
a combination of any of these methods of sale;
and
●
any other method permitted pursuant to applicable
law.
The
shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling
stockholders have the sole and absolute discretion not to accept
any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular
time.
The
selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling
stockholder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares.
Broker-dealers
engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the
purchaser) in amounts to be negotiated, which commissions as to a
particular broker or dealer may be in excess of customary
commissions to the extent permitted by applicable law.
If
sales of shares offered under this prospectus are made to
broker-dealers as principals, we would be required to file a
post-effective amendment to the registration statement of which
this prospectus is a part. In the post-effective amendment, we
would be required to disclose the names of any participating
broker-dealers and the compensation arrangements relating to such
sales.
The
selling stockholders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be
deemed to be “underwriters” within the meaning of the
Securities Act in connection with these sales. Commissions received
by these broker-dealers or agents and any profit on the resale of
the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any
broker-dealers or agents that are deemed to be underwriters may not
sell shares offered under this prospectus unless and until we set
forth the names of the underwriters and the material details of
their underwriting arrangements in a supplement to this prospectus
or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which
this prospectus is a part.
The
selling stockholders and any other persons participating in the
sale or distribution of the shares offered under this prospectus
will be subject to applicable provisions of the Exchange Act, and
the rules and regulations under that act, including Regulation M.
These provisions may restrict activities of, and limit the timing
of purchases and sales of any of the shares by, the selling
stockholders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with
respect to those securities for a specified period of time prior to
the commencement of such distributions, subject to specified
exceptions or exemptions. All of these limitations may affect the
marketability of the shares.
-56-
If
any of the shares of common stock offered for sale pursuant to this
prospectus are transferred other than pursuant to a sale under this
prospectus, then subsequent stockholders could not use this
prospectus until a post-effective amendment or prospectus
supplement is filed, naming such holders. We offer no assurance as
to whether any of the selling stockholders will sell all or any
portion of the shares offered under this prospectus.
We have
agreed to pay all fees and expenses we incur incident to the
registration of the shares being offered under this prospectus.
However, each selling stockholder and purchaser is responsible for
paying any discounts, commissions and similar selling expenses they
incur.
We and
the selling stockholders have agreed to indemnify one another
against certain losses, damages and liabilities arising in
connection with this prospectus, including liabilities under the
Securities Act.
Listing
Our
common shares are listed on the OTCQB Venture Market under the
symbol “EXDI”.
Transfer Agent and Registrar
The
transfer agent and registrar for our common shares is Corporate
Stock Transfer.
INTERESTS
OF NAMED EXPERTS AND
COUNSEL
The
validity of the securities offered by this prospectus will be
passed upon for us by Greenberg Traurig,
P.A.
EXPERTS
The
consolidated financial statements of Exactus, Inc. for the years
ended December 31, 2018 and December 31, 2017 included in the
registration statement upon which this prospectus forms a part have
been audited by RBSM LLP, an independent registered public
accounting firm, as stated in their report appearing elsewhere in
the registration statement upon which this prospectus forms a part.
Such consolidated financial statements have been included in
reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND
ADDITIONAL INFORMATION
We have
filed a registration statement on Form S-1 with the SEC covering
the common shares that the selling stockholders is offering by this
prospectus. This prospectus does not include all of the information
contained in the registration statement. You should refer to the
registration statement and its exhibits for additional
information.
We file
annual, quarterly and other periodic reports, proxy statements and
other information with the SEC. You can read our SEC filings,
including this registration statement, over the Internet at the
SEC’s website at www.sec.gov.
Our
Internet address is www.exactusinc.com. There we make available
free of charge, on or through the investors section of our website,
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material
with the SEC. The information found on our website is not part of
this prospectus and investors should not rely on any such
information in deciding whether to invest.
-57-
Exactus,
Inc.
Index to Financial
Statements
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2019 and December
31, 2018
|
F-2
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended September 30, 2019 and 2018
|
F-3
|
|
Condensed
Consolidated Statements of Changes in the Stockholders’
Deficit
|
F-4
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2019 and 2018
|
F-6
|
|
Notes to Unaudited
Condensed Consolidated Financial Statements
|
F-7
|
|
|
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
F-33
|
|
Consolidated
Balance Sheets as of December 31, 2018 and 2017
|
F-34
|
|
Consolidated
Statements of Operations for the year ended December 31, 2018 and
2017
|
F-35
|
|
Consolidated
Statements of Stockholders' Deficit for the year ended December 31,
2018 and 2017
|
F-36
|
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2018 and
2017
|
F-37
|
|
Notes to the
Consolidated Financial Statements
|
F-38
|
F-1
Exactus, Inc. and
Subsidiaries
Condensed Consolidated Balance Sheets
|
|
September 30,
|
December 31,
|
|
|
2019
|
2018
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
Current Assets:
|
|
|
|
Cash
and cash equivalents
|
$5,686
|
$1,960
|
|
Accounts
receivable, net
|
75,626
|
-
|
|
Accounts
receivable - related party
|
52,659
|
-
|
|
Inventory
|
2,332,890
|
-
|
|
Prepaid
expenses and other current assets
|
166,149
|
12,330
|
|
Prepaid
expenses and other current assets - related party -
current
|
622,159
|
-
|
|
Total current assets
|
3,255,169
|
14,290
|
|
|
|
|
|
Other Assets:
|
|
|
|
Deposits
|
40,000
|
-
|
|
Prepaid
expenses and other current assets - related party –
long-term
|
2,648,864
|
-
|
|
Property
and equipment, net
|
549,483
|
-
|
|
Intangible
assets, net
|
2,668,005
|
-
|
|
Operating
lease right-of-use assets, net
|
2,287,682
|
-
|
|
Total other assets
|
8,194,034
|
-
|
|
|
|
|
|
TOTAL ASSETS
|
$11,449,203
|
$14,290
|
|
|
|
|
|
LIABILITIES AND EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
Accounts
payable
|
$1,131,883
|
$923,429
|
|
Accounts
payable - related party
|
8,342
|
-
|
|
Accrued
expenses
|
81,693
|
46,875
|
|
Note
payable - related parties
|
6,500
|
51,400
|
|
Subscription
payable
|
282,500
|
-
|
|
Convertible
notes, net of discounts
|
-
|
491,788
|
|
Derivative
liability
|
-
|
1,742,000
|
|
Settlement
payable
|
-
|
17,000
|
|
Interest
payable
|
8,148
|
66,300
|
|
Due
to related party
|
105,500
|
-
|
|
Operating
lease liabilities, current portion
|
427,888
|
-
|
|
Total current liabilities
|
2,052,454
|
3,338,792
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
Convertible
notes payable
|
100,000
|
100,000
|
|
Operating
lease liabilities, long-term portion
|
1,902,073
|
-
|
|
Total long term liabilities
|
2,002,073
|
100,000
|
|
|
|
|
|
TOTAL LIABILITIES
|
4,054,527
|
3,438,792
|
|
|
|
|
|
Commitment and contingencies (see Note 10)
|
|
|
|
|
|
|
|
Equity (Deficit):
|
|
|
|
Exactus, Inc. Stockholders's Equity (Deficit)
|
|
|
|
Preferred
stock: 50,000,000 authorized; $0.0001 par value, 5,266,466
undesignated shares
|
|
|
|
issued
and outstanding
|
-
|
-
|
|
Preferred
stock Series A: 1,000,000 designated; $0.0001 par
value,
|
|
|
|
583,009
and none shares issued and outstanding, respectively
|
58
|
-
|
|
Preferred
stock Series B-1: 32,000,000 designated; $0.0001 par
value,
|
|
|
|
1,800,000,and
2,800,000 shares issued and outstanding, respectively
|
180
|
280
|
|
Preferred
stock Series B-2: 10,000,000 designated; $0.0001 par
value,
|
|
|
|
7,684,000
and 8,684,000 shares issued and outstanding,
respectively
|
768
|
868
|
|
Preferred
stock Series C: 1,733,334 designated; $0.0001 par
value,
|
|
|
|
none
and 1,733,334 shares issued and outstanding,
respectively
|
-
|
173
|
|
Preferred
stock Series D: 200 designated; $0.0001 par value, 29 and
45
|
|
|
|
shares
issued and outstanding, respectively
|
-
|
1
|
|
Preferred
stock Series E: 10,000 designated; $0.0001 par value, 10,000 and
none
|
|
|
|
shares
issued and outstanding, respectively
|
1
|
-
|
|
Common
stock: 650,000,000 shares authorized; $0.0001 par
value,
|
|
|
|
40,024,389
and 6,233,524 shares issued and outstanding,
respectively
|
4,002
|
623
|
|
Common
stock to be issued (596,249 and none shares to be issued,
respectively)
|
60
|
-
|
|
Additional
paid-in capital
|
23,457,433
|
7,111,445
|
|
Accumulated
deficit
|
(15,706,198)
|
(10,537,892)
|
|
Total
Exactus Inc. Stockholders' Equity (Deficit)
|
7,756,304
|
(3,424,502)
|
|
|
|
|
|
Non-controlling
interest in subsidiary
|
(361,628)
|
-
|
|
|
|
|
|
Total Equity (Deficit)
|
7,394,676
|
(3,424,502)
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY (DEFICIT)
|
$11,449,203
|
$14,290
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
|
F-2
Exactus, Inc. and
Subsidiaries
Condensed Consolidated Statements of Operations
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
revenues
|
$48,013
|
$-
|
$163,157
|
$-
|
|
Net
revenues - related party
|
12,140
|
-
|
52,659
|
-
|
|
|
|
|
|
|
|
Total
net revenues
|
60,153
|
-
|
215,816
|
-
|
|
|
|
|
|
|
|
Cost
of sales - related party
|
100,418
|
-
|
216,205
|
-
|
|
|
|
|
|
|
|
Gross
profit
|
(40,265)
|
-
|
(389)
|
-
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
General
and administration
|
1,389,820
|
301,859
|
2,892,588
|
1,446,867
|
|
Professional
and consulting
|
662,857
|
49,068
|
2,873,895
|
179,658
|
|
Research
and development
|
10,000
|
75,000
|
36,975
|
225,000
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
2,062,677
|
425,927
|
5,803,458
|
1,851,525
|
|
|
|
|
|
|
|
Loss
from Operations
|
(2,102,942)
|
(425,927)
|
(5,803,847)
|
(1,851,525)
|
|
|
|
|
|
|
|
Other
Income (expenses):
|
|
|
|
|
|
Derivative
loss
|
-
|
(818,355)
|
(1,454,729)
|
(517,205)
|
|
Loss
on stock settlement
|
-
|
(223,825)
|
-
|
(477,126)
|
|
|
|
|
|
|
|
(Loss)
gain on settlement of debt, net
|
(3,000)
|
-
|
3,004,629
|
-
|
|
Interest
expense
|
(2,105)
|
(127,164)
|
(371,537)
|
(382,971)
|
|
|
|
|
|
|
|
Total
Other Expenses, net
|
(5,105)
|
(1,169,344)
|
1,178,363
|
(1,377,302)
|
|
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
(2,108,047)
|
(1,595,271)
|
(4,625,484)
|
(3,228,827)
|
|
Provision
for income taxes
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Net
Loss
|
(2,108,047)
|
(1,595,271)
|
(4,625,484)
|
(3,228,827)
|
|
|
|
|
|
|
|
Net
Loss attributable to non-controlling interest
|
173,680
|
-
|
361,628
|
-
|
|
|
|
|
|
|
|
Net
Loss Attributable to Exactus, Inc.
|
(1,934,367)
|
(1,595,271)
|
(4,263,856)
|
(3,228,827)
|
|
|
|
|
|
|
|
Deemed
dividend on Preferred Stock
|
-
|
-
|
(904,450)
|
-
|
|
|
|
|
|
|
|
Net
Loss available to Exactus, Inc. common stockholders
|
$(1,934,367)
|
$(1,595,271)
|
$(5,168,306)
|
$(3,228,827)
|
|
|
|
|
|
|
|
Net
Loss per Common Share - Basic and Diluted
|
$(0.05)
|
$(0.33)
|
$(0.15)
|
$(0.69)
|
|
Net
Loss attributable to non-controlling interest per Common Share -
Basic and Diluted
|
$(0.00)
|
$-
|
$(0.01)
|
$-
|
|
Net
Loss available to Exactus, Inc. common stockholders per Common
Share - Basic and Diluted
|
$(0.05)
|
$(0.33)
|
$(0.16)
|
$(0.69)
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
Basic
and Diluted
|
38,951,338
|
4,812,449
|
31,173,513
|
4,647,290
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
|
F-3
Exactus, Inc. and
Subsidiaries
Condensed Consolidated Statements of Equity (Deficit)
For the Nine Months Ended September 30, 2019 and 2018
(Unaudited)
|
|
Preferred Stock- Series A
|
Preferred Stock- Series B-1
|
Preferred Stock- Series B-2
|
Preferred Stock- Series C
|
Preferred Stock- Series D
|
Preferred Stock- Series E
|
Common Stock
|
Common Stock - Unissued
|
Additional
Paid in
|
Accumulated
|
Non-controlling
|
|
||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Total
|
|
Balance, December 31, 2018
|
-
|
$-
|
2,800,000
|
$280
|
8,684,000
|
$868
|
1,733,334
|
$173
|
45
|
$1
|
-
|
$-
|
6,233,524
|
$623
|
-
|
$-
|
$7,111,445
|
$(10,537,892)
|
$-
|
$(3,424,502)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
849,360
|
84
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
849,276
|
-
|
-
|
849,360
|
|
Preferred
stock issued for private placement
|
55,090
|
6
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
55,084
|
-
|
-
|
55,090
|
|
Common stock
issued for private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
15,382,090
|
1,538
|
-
|
-
|
3,308,115
|
-
|
-
|
3,309,653
|
|
Common Stock
issued for Master Supply
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
8,385,691
|
839
|
-
|
-
|
(839)
|
-
|
-
|
-
|
|
Common stock
issued for debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
203,080
|
20
|
-
|
-
|
40,596
|
-
|
-
|
40,616
|
|
Common stock
issued for purchase of membership interest in
subsidiary
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
937,500
|
94
|
-
|
-
|
989,906
|
-
|
-
|
990,000
|
|
Conversion of
Series A Preferred Stock to Common Stock
|
(296,441)
|
(30)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,482,205
|
148
|
-
|
-
|
(118)
|
-
|
-
|
-
|
|
Conversion of
Series B-1 Preferred Stock to Common Stock
|
-
|
-
|
(400,000)
|
(40)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
5
|
-
|
-
|
35
|
-
|
-
|
-
|
|
Conversion of
Series B-2 Preferred Stock to Common Stock
|
-
|
-
|
-
|
-
|
(1,000,000)
|
(100)
|
-
|
-
|
-
|
-
|
-
|
-
|
125,000
|
13
|
-
|
-
|
87
|
-
|
-
|
-
|
|
Conversion of
Series D Prefered Stock to Common Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4)
|
(1)
|
-
|
-
|
100,000
|
10
|
-
|
-
|
(9)
|
-
|
-
|
-
|
|
Common stock
issued upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
250,000
|
25
|
-
|
-
|
195,975
|
-
|
-
|
196,000
|
|
Stock warrants
granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,114,062
|
-
|
-
|
1,114,062
|
|
Stock options
granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
891,799
|
-
|
-
|
891,799
|
|
Deemed
dividend on Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
904,450
|
(904,450)
|
-
|
-
|
|
Net Loss for
the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(1,374,263)
|
(35,604)
|
(1,409,867)
|
|
Balance, March 31, 2019
|
608,009
|
60
|
2,400,000
|
240
|
7,684,000
|
768
|
1,733,334
|
173
|
41
|
-
|
-
|
-
|
33,149,090
|
3,315
|
-
|
-
|
15,459,864 #
|
(12,816,605)
|
(35,604)
|
2,612,211
|
|
Common stock
issued and unissued for private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,282,175
|
128
|
2,606,958
|
261
|
2,168,796
|
-
|
-
|
2,169,185
|
|
Common stock
unissued for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
20,000
|
2
|
19,498
|
-
|
-
|
19,500
|
|
Common stock
unissued for purchase of membership interest in
subsidiary
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
503,298
|
50
|
449,950
|
-
|
-
|
450,000
|
|
Stock options
granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
58,279
|
-
|
-
|
58,279
|
|
Net Loss for
the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(955,226)
|
(152,344)
|
(1,107,570)
|
|
Balance, June 30, 2019
|
608,009
|
60
|
2,400,000
|
240
|
7,684,000
|
768
|
1,733,334
|
173
|
41
|
-
|
-
|
-
|
34,431,265
|
3,443
|
3,130,256
|
313
|
18,156,387
|
(13,771,831)
|
(187,948)
|
4,201,605
|
|
Common stock
and preferred stock cancelled per Surrender and Release
Agreement
|
|
|
|
-
|
-
|
-
|
(1,733,334)
|
(173)
|
-
|
-
|
-
|
-
|
(180,000)
|
(18)
|
-
|
-
|
191
|
-
|
-
|
-
|
|
Preferred
stock issued pursuant to Management and Services
Agreement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10,000
|
1
|
-
|
-
|
-
|
-
|
3,374,999
|
-
|
-
|
3,375,000
|
|
Conversion of
Series A Prefered Stock to Common Stock
|
(25,000)
|
(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
125,000
|
13
|
(11)
|
-
|
-
|
-
|
|
Conversion of
Series B-1 Prefered Stock to Common Stock
|
-
|
-
|
(600,000)
|
(60)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
75,000
|
7
|
-
|
-
|
53
|
-
|
-
|
-
|
|
Conversion of
Series D Prefered Stock to Common Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(12)
|
-
|
-
|
-
|
300,000
|
30
|
-
|
-
|
(30)
|
-
|
-
|
-
|
|
Common stock
issued and unissued for private placement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,237,868
|
224
|
271,249
|
27
|
1,532,957
|
-
|
-
|
1,533,208
|
|
Common stock
issued for prepaid services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
5
|
-
|
-
|
30,495
|
-
|
-
|
30,500
|
|
Common stock
unissued for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
80,000
|
8
|
57,248
|
-
|
-
|
57,256
|
|
Common stock
unissued for pursuant to Asset Purchase
Agreement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
100,000
|
10
|
86,865
|
-
|
-
|
86,875
|
|
Stock options
granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
218,279
|
-
|
-
|
218,279
|
|
Common stock
issued for unissued common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,110,256
|
311
|
(3,110,256)
|
(311)
|
-
|
-
|
-
|
-
|
|
Net Loss for
the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(1,934,367)
|
(173,680)
|
(2,108,047)
|
|
Balance, September 30, 2019
|
583,009
|
$58
|
1,800,000
|
$180
|
7,684,000
|
$768
|
-
|
$-
|
29
|
$-
|
10,000
|
$1
|
40,024,389
|
$4,002
|
596,249
|
$60
|
$23,457,433
|
$(15,706,198)
|
$(361,628)
|
$7,394,676
|
F-4
|
|
Preferred Stock- Series A
|
Preferred Stock- Series B-1
|
Preferred Stock- Series B-2
|
Preferred Stock- Series C
|
Preferred Stock- Series D
|
Preferred Stock- Series E
|
Common Stock
|
Paid in
|
Accumulated
|
Non-controlling
|
|
|||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
-
|
$-
|
2,800,000
|
$280
|
8,684,000
|
$868
|
1,733,334
|
$173
|
-
|
$-
|
-
|
$-
|
4,383,983
|
$439
|
$3,983,171
|
$(6,200,573)
|
$-
|
$(2,215,642)
|
|
Common stock
issued for debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
214,834
|
21
|
343,714
|
-
|
-
|
343,735
|
|
Series D
preferred stock issued for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
-
|
-
|
-
|
-
|
50,000
|
-
|
-
|
50,000
|
|
Series D
preferred stock issued for debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
40
|
1
|
-
|
-
|
-
|
-
|
499,999
|
-
|
-
|
500,000
|
|
Net Loss for
the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,073,846)
|
-
|
(1,073,846)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
-
|
-
|
2,800,000
|
280
|
8,684,000
|
868
|
1,733,334
|
173
|
45
|
1
|
-
|
-
|
4,598,817
|
460
|
4,876,884
|
(7,274,419)
|
-
|
(2,395,753)
|
|
Common stock
issued upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
22,727
|
2
|
19,998
|
-
|
-
|
20,000
|
|
Series D
preferred stock issued for debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net Loss for
the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(559,710)
|
-
|
(559,710)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018
|
-
|
-
|
2,800,000
|
280
|
8,684,000
|
868
|
1,733,334
|
173
|
45
|
1
|
-
|
-
|
4,621,544
|
462
|
4,896,882
|
(7,834,129)
|
-
|
(2,935,463)
|
|
Common stock
issued upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
350,417
|
35
|
297,765
|
-
|
-
|
297,800
|
|
Stock options
granted for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
99,835
|
-
|
-
|
99,835
|
|
Net Loss for
the period
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,595,271)
|
-
|
(1,595,271)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
-
|
$-
|
2,800,000
|
$280
|
8,684,000
|
$868
|
1,733,334
|
$173
|
45
|
$1
|
-
|
$-
|
4,971,961
|
$497
|
$5,294,482
|
$(9,429,400)
|
$-
|
$(4,133,099)
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
|
F-5
Exactus, Inc. and
Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
2018
|
|
|
(Unaudited)
|
(Unaudited)
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(4,625,484)
|
$(3,228,827)
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
Depreciation
|
36,720
|
-
|
|
Derivative
loss
|
1,454,729
|
517,205
|
|
Stock-based
compensation
|
2,376,050
|
599,835
|
|
Bad
debt expense
|
9,407
|
-
|
|
Amortization
of prepaid stock-based expenses
|
110,416
|
-
|
|
Amortization
of discount and debt issuance costs for convertible
notes
|
339,806
|
345,013
|
|
Amortization
of intangible assets
|
558,024
|
-
|
|
Deferred
rent
|
42,279
|
-
|
|
(Gain)
loss on settlement of debt
|
(3,004,629)
|
477,126
|
|
Changes
in operating assets and liabilities:
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Accounts
receivable
|
(85,033)
|
-
|
|
Accounts
receivable - related party
|
(52,659)
|
-
|
|
Inventory
|
(2,298,919)
|
-
|
|
Prepaid
expenses and other current assets
|
(94,758)
|
(334)
|
|
Deposit
|
(40,000)
|
-
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
Accounts
payable
|
208,453
|
112,699
|
|
Accounts
payable - related party
|
8,342
|
-
|
|
Accrued
expenses
|
44,818
|
744,931
|
|
Settlement
payable
|
(20,000)
|
(3,000)
|
|
Interest
payable
|
4,764
|
27,428
|
|
Net Cash Used In Operating Activities
|
(5,027,674)
|
(407,924)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Purchase
of membership interest in subsidiary
|
(1,467,500)
|
-
|
|
Purchase
of property and equipment
|
(586,203)
|
-
|
|
Net Cash Used in Investing Activities
|
(2,053,703)
|
-
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Proceeds
from sale of Series D preferred stock
|
-
|
50,000
|
|
Advances
from related party
|
231,035
|
-
|
|
Repayments
on related party advances
|
(160,535)
|
-
|
|
Proceeds
from sale of Common Stock
|
7,012,046
|
-
|
|
Payments
of principal on notes payable
|
(32,129)
|
-
|
|
Proceeds
from issuance of notes payable
|
14,229
|
101,900
|
|
Payments
of principal on convertible notes
|
(186,443)
|
(25,000)
|
|
Proceeds
from issuance of convertible notes, net of issuance
cost
|
206,900
|
121,100
|
|
Net Cash Provided By Financing Activities
|
7,085,103
|
248,000
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
3,726
|
(159,924)
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
1,960
|
161,215
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$5,686
|
$1,291
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
Cash
paid for interest
|
$26,977
|
$-
|
|
Cash
paid for taxes
|
$-
|
$-
|
|
|
|
|
|
Non-Cash investing and financing activities:
|
|
|
|
Proceeds
from sale of Series D preferred stock paid directly to settle
amounts
|
|
|
|
due
to officers and directors
|
$-
|
$500,000
|
|
Proceeds
from sale of Series A preferred stock paid directly to settle
debts
|
$55,090
|
$-
|
|
Convertible
notes and interest payable settled by Series A preferred stock
issued
|
$849,360
|
$-
|
|
Note
payable, accrued expense and interest payable settled by common
stock issued
|
$40,616
|
$-
|
|
Convertible
notes settled by common stock issued
|
$196,000
|
$34,120
|
|
Accounts
payable settled by common stock issued
|
$-
|
$85,934
|
|
Common
stock issued for purchase of membership interest in
subsidiary
|
$1,440,000
|
$-
|
|
Common
stock and preferred stock issued for prepaid services
|
$3,405,500
|
$-
|
|
Common
stock issued pursuant to asset purchase agreement
|
$70,000
|
$-
|
|
Increase
in intangible assets for subscription payable
|
$1,866,029
|
$-
|
|
Increase
in inventory for subscription payable
|
$33,971
|
$-
|
|
Initial
benefical conversion feature and debt discount on convertible
notes
|
$206,910
|
$151,000
|
|
Initial
derivative liability on convertible notes
|
$-
|
$282,000
|
|
Preferred
deemed dividend
|
$904,450
|
$-
|
|
Operating
lease right-of-use assets and operating lease
liabilities
|
|
|
|
recorded
upon adoption of ASC 842
|
$2,431,362
|
$-
|
|
Reduction
of operating lease right-of-use asset and operating lease
liabillities
|
$143,680
|
$-
|
|
Prepaid
expenses directly paid by a related party
|
$35,000
|
$-
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
|
F-6
NOTE 1 - NATURE OF
ORGANIZATION
Organization and Business Description
Exactus, Inc. (the
“Company”) was incorporated on January 18, 2008 as an
alternative energy research and development company. During much of
its history the Company had designed solar monitoring and charging
systems which were discontinued in 2016 to focus on developing
point-of-care diagnostic devices. The Company has recently added to
the scope of its activities efforts to produce, market and sell
products made from industrial hemp containing cannabidiol
(“CBD”).
On January 8, 2019
the Company began pursuing hemp-derived CBD as a new business
segment after passage of the Agriculture Improvement Act of 2018,
also known as the 2018 Farm Bill. The 2018 Farm Bill declassified
industrial hemp as a Schedule I substance, shifted regulatory
authority from the Drug Enforcement Administration to the
Department of Agriculture, and provided autonomy for states to
regulate the industry. The 2018 Farm Bill did not change the Food
and Drug Administration’s oversight authority over CBD
products. The 2018 Farm Bill defined industrial hemp as a variety
of cannabis containing an amount equal to or lower than 0.3%
tetra-hydrocannabinol (THC) and allowed farmers to grow and sell
hemp under state regulation. Industry reports indicate that 41
states have set up cultivation and production programs to regulate
the production of hemp.
Following passage
of the 2018 Farm Bill, the Company entered into a Master Product
Development and Supply Agreement (the “Development
Agreement”) with Ceed2Med, LLC (“C2M”). Under the
Master Agreement, C2M agreed to provide to the Company up to 2,500
kilograms of products (isolate or distillate) for manufacture into
consumer products such as tinctures, edibles, capsules, topical
solutions and animal health products. The Company believes
manufacturing, testing and quality akin to pharmaceutical products
is important when distributing hemp-based products. The
Company’s products originate from farms at which the Company
(or C2M) oversee all stages of plant growth and are manufactured
under contract arrangements with third-parties.
The Company
identified the rapidly growing hemp-based CBD market as a valuable
target for a new company focus. On January 8, 2019, the Company
entered into the Master Product Development and Supply Agreement
with C2M. In consideration for the Development Agreement (see Note
11), C2M was issued 8,385,691 shares of our Common Stock.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock, with exercise
price of $0.32 per share to three C2M founders. As a result, C2M
became the Company’s largest shareholder holding (inclusive
of the vested options held by its founders) approximately 51% of
the Company’s outstanding Common Stock as of the date of the
Development Agreement which has subsequently been reduced to
approximately 22% as of September 30, 2019. Consequently, such
transaction resulted in a change of control whereby, C2M obtained
majority control through its Common Stock ownership (See Note 11).
In connection with this agreement, the Company received access to
expertise, resources, skills and experience suitable for production
of CBD rich ingredients including isolates, distillates, water
soluble, and proprietary formulations. Under the Development
Agreement, the Company was allotted a minimum of 50 and up to 300
kilograms per month, and up to 2,500 kilograms annually, of CBD
rich ingredients for resale and placed a $1 million purchase order
for products. The Company currently offers products such as
tinctures, edibles, capsules, topical solutions and animal health
products manufactured for the Company as branded and white-label
products.
On March 11, 2019,
with the assistance of C2M and assignment of rights, the Company
acquired a 50.1% limited liability membership interest in Exactus
One World, LLC (“EOW”), an Oregon limited liability
company formed on January 25, 2019, in order to farm industrial
hemp for its own use. Prior to the acquisition, EOW had no
operating activities. The Company acquired its 50.1% limited
liability membership interest pursuant to a Subscription Agreement
and a Membership Interest Purchase Agreement (See Note 3).
Following the events described above, the Company entered into the
business of production and selling of industrial hemp grown for its
own use and for sale to third-parties.
On January 11,
2019, the Board of Directors of the Company approved a reverse
stock split of the Company’s Common Stock at a ratio of
1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in this
Report and in the accompanying condensed consolidated financial
statements are retroactively restated for the effect of the Reverse
Stock Split.
NOTE
2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and principles of consolidation
The Company’s
unaudited condensed consolidated financial statements include the
financial statements of its 50.1% subsidiary, EOW and 51%
subsidiary, Paradise Medlife. All significant intercompany accounts
and transactions have been eliminated in
consolidation.
The accompanying
interim unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules and
regulations of the United States Securities and Exchange Commission
for interim financial information, which includes consolidated
unaudited interim financial statements and present the consolidated
unaudited interim financial statements of the Company and its
majority-owned subsidiaries as of September 30, 2019. All
intercompany transactions and balances have been eliminated. In the
opinion of management, all adjustments necessary to present fairly
our financial position, results of operations, stockholders’
equity (deficit) and cash flows as of September 30, 2019 and 2018,
and for the periods then ended, have been made. Those adjustments
consist of normal and recurring adjustments. Certain information
and note disclosures normally included in our annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The unaudited
condensed consolidated financial statements should be read in
conjunction with the audited financial statements as of and for the
year ended December 31, 2018 and footnotes thereto included in the
Company’s Report on Form 10K filed with the SEC on March 29,
2019. The results of operations for the three and nine months ended
September 30, 2019 are not necessarily indicative of the results to
be expected for the full year.
Going
concern
These unaudited
condensed consolidated financial statements are presented on the
basis that the Company will continue as a going concern. The going
concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. As reflected in
the accompanying unaudited condensed consolidated financial
statements, the Company had a net loss attributable to Exactus Inc.
common shareholders of $5,168,306 for the nine months ended
September 30, 2019. The net cash used in operating activities
was $5,027,674 for the nine months ended September 30, 2019.
Additionally, the Company had an accumulated deficit of $15,706,198
at September 30, 2019. These factors raise substantial doubt about
the Company’s ability to continue as a going concern for a
period of twelve months from the issuance date of this report.
Management cannot provide assurance that the Company will
ultimately achieve profitable operations or become cash flow
positive, or raise additional debt and/or equity capital. The
Company is seeking to raise capital through additional debt and/or
equity financings to fund its operations in the future. Although
the Company has historically raised capital from sales of common
and preferred shares and from the issuance of convertible
promissory notes, there is no assurance that it will be able to
continue to do so. If the Company is unable to raise additional
capital or secure additional lending in the near future, management
expects that the Company will need to curtail its operations. These
unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Over the last
several months the Company and its advisors have been evaluating
numerous opportunities and relationships to increase shareholder
value. The Company expects to realize revenue through its efforts,
if successful, to sell wholesale and retail products to third
parties. However, as the Company is in a start-up phase, in a new
business venture, in a rapidly evolving industry, many of its costs
and challenges are new and unknown. In order to fund the
Company’s activities, the Company will need to raise
additional capital either through the issuance of equity and/or the
issuance of debt. During the nine months ended September 30, 2019,
the Company received proceeds from the sale of the Company’s
Common Stock of approximately $7.0 million.
Use of Estimates
The Company
prepares its unaudited condensed consolidated financial statements
in conformity with GAAP which requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. In preparing the
unaudited condensed consolidated financial statements, management
is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
consolidated balance sheet, and revenues and expenses for the
period then ended. Actual results may differ significantly from
those estimates. Significant estimates made by management include,
but are not limited to the fair value of derivative liabilities,
useful life of property and equipment, fair value of right of use
assets, assumptions used in assessing impairment of long-term,
contingent liabilities, and fair value of non-cash equity
transactions.
F-7
Fair Value Measurements
The Company adopted
the provisions of Accounting Standard Codification
(“ASC”) Topic 820, “Fair Value Measurements and
Disclosures”, which defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value, and expands disclosure of fair value
measurements. The guidance prioritizes the inputs used in measuring
fair value and establishes a three-tier value hierarchy that
distinguishes among the following:
|
●
|
Level
1—Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access.
|
|
●
|
Level
2—Valuations based on quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
models for which all significant inputs are observable, either
directly or indirectly.
|
|
●
|
Level
3—Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
|
The Company
measures certain financial instruments at fair value on a recurring
basis. Assets and liabilities measured at fair value on a recurring
basis are as follows at September 30, 2019 and December 31,
2018:
|
|
At
September 30, 2019
|
At
December 31, 2018
|
||||
|
Description
|
Level
1
|
Level
2
|
Level
3
|
Level
1
|
Level
2
|
Level
3
|
|
Derivative
liabilities
|
—
|
—
|
$-
|
—
|
—
|
$1,742,000
|
A roll forward of
the level 3 valuation financial instruments is as
follows:
|
|
For the Nine Months
Ended September 30, 2019
|
|
Balance at
beginning of period
|
$1,742,000
|
|
Initial fair value
of derivative liabilities as debt discount
|
206,910
|
|
Initial fair value
of derivative liabilities as derivative expense
|
361,090
|
|
Gain on
extinguishment of debt
|
(3,206,000)
|
|
Change in fair
value included in derivative loss
|
896,000
|
|
Balance at end of
period
|
$-
|
As of September 30,
2019, the Company has no assets that are re-measured at fair
value.
Cash and Cash Equivalents
We consider all
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. The carrying value of
those investments approximates their fair market value due to their
short maturity and liquidity. Cash and cash equivalents include
cash on hand and amounts on deposit with financial institutions,
which amounts may at times exceed federally insured limits. We have
not experienced any losses on such accounts and we do not believe
we are exposed to any significant credit risk. The Company had $0
cash balances in excess of FDIC insured limits at September 30,
2019 and December 31, 2018, respectively. Cash and cash equivalents
were $5,686 and $1,960 at September 30, 2019 and December 31, 2018,
respectively.
Accounts
receivable and allowance for doubtful accounts
The Company has a
policy of providing on allowance for doubtful accounts based on its
best estimate of the amount of probable credit losses in its
existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance
is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be
in doubt. Account balances deemed to be uncollectible
are charged to bad debt expense and included in the allowance after
all means of collection have been exhausted and the potential for
recovery is considered remote. As of September 30, 2019 and
December 31, 2018, allowance for doubtful accounts amounted $9,407
and $0, respectively. Bad debt expense amounted $9,407 and $0
during the nine months ended September 30, 2019 and 2018,
respectively.
F-8
Prepaid Expenses and Other Current Assets
Total prepaid
expenses and other current assets of $166,149 and $12,330 at
September 30, 2019 and December 31, 2018, respectively. Prepaid
expenses to C2M who is a related party, amounted to $622,159
– current portion and $2,648,864 – long-term portion at
September 30, 2019 (see Note 10). Prepaid expenses consist
primarily of costs paid for future services which will occur within
a year. Prepaid expenses may include prepayments in cash and equity
instruments for an operating lease, consulting, and insurance fees
which are being amortized over the terms of their respective
agreements.
Inventory
The Company values
inventory, consisting of raw materials, growing plants and finished
goods, at the lower of cost or net realizable value. Cost is
determined on the first-in and first-out (“FIFO”)
method. The Company reduces inventory for the diminution of value,
resulting from product obsolescence, damage or other issues
affecting marketability, equal to the difference between the cost
of the inventory and its estimated net realizable value. Factors
utilized in the determination of the estimated net realizable value
include (i) estimates of future demand, and (ii) competitive
pricing pressures. In accordance
with ASC 905,
“Agriculture”,
costs of growing hemp are accumulated until the time of harvest and
are reported at the lower of cost or net realizable
value.
Property and Equipment
Property and
equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
ranging from 3 to 10 years. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are
capitalized. When assets are retired, or disposed of, the cost
and accumulated depreciation are removed, and any resulting gains
or losses are included in the consolidated statement of
operations.
Impairment of long-lived assets
In accordance with
ASC Topic 360, the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable, or at
least annually. The Company recognizes an impairment loss when the
sum of expected undiscounted future cash flows is less than the
carrying amount of the asset. The amount of impairment is measured
as the difference between the asset’s estimated fair value
and its book value.
Derivatives and Hedging- Contracts in Entity’s Own
Equity
In accordance with
the provisions of ASC 815 “Derivatives and Hedging” the embedded
conversion features in the convertible notes (see Note 9) are not
considered to be indexed to the Company’s stock. As a result,
these are required to be accounted for as derivative financial
liabilities and have been recognized as liabilities on the
accompanying consolidated balance sheets. The fair value of the
derivative financial liabilities is determined using a binomial
model with Monte Carlo simulation and is affected by changes in
inputs to that model including the Company’s stock price,
expected stock price volatility, the expected term, and the
risk-free interest rate. The derivative financial liabilities are
subject to re-measurement at each balance sheet date and any
changes in fair value is recognized as a component in other income
(expenses).
Revenue Recognition
On January 1, 2018,
the Company adopted ASC Topic 606 and the related amendments
Revenue from Contracts with Customers, which requires revenue to be
recognized in a manner that depicts the transfer of goods or
services to customers in amounts that reflect the consideration to
which the entity expects to be entitled in exchange for those goods
or services. The Company recognizes revenue by applying the
following steps:
Step 1: Identify
the contract(s) with a customer.
Step 2: Identify
the performance obligations in the contract.
Step 3: Determine
the transaction price.
Step 4: Allocate
the transaction price to the performance obligations in the
contract.
Step 5: Recognize
revenue when (or as) the entity satisfies a performance
obligation.
The Company’s
performance obligations are satisfied at the point in time when
products are shipped or delivered to the customer, which is when
the customer has title and the significant risks and rewards of
ownership. Therefore, the Company’s contracts have a
single performance obligation (shipment of product). The
Company primarily receives fixed consideration for sales of
product.
F-9
Cost of Sales
The primary
components of cost of sales include the cost of the product and
shipping fees.
Research and Development Expenses
The Company follow
ASC 730-10, “Research and
Development,” and expenses research and development
costs when incurred. Accordingly, third-party research
and development costs, including designing, prototyping and testing
of product, are expensed when the contracted work has been
performed or milestone results have been achieved. Indirect costs
are allocated based on percentage usage related to the research and
development. Research and development costs of
$36,975 and $225,000 were incurred for the nine months ended
September 30, 2019 and 2018, respectively, and $10,000 and $75,000
were incurred for the three months ended September 30, 2019 and
2018, respectively, and are included in operating expenses on the
accompanying unaudited condensed consolidated statements of
operations.
Stock-Based Compensation
Stock-based
compensation is accounted for based on the requirements of the
Share-Based Payment Topic of ASC 718 which requires recognition in
the financial statements of the cost of employee and director
services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the
services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee
and director services received in exchange for an award based on
the grant-date fair value of the award.
Through March 31,
2018, pursuant to ASC 505-50 - Equity-Based Payments to
Non-Employees, all share-based payments to non-employees, including
grants of stock options, were recognized in the consolidated
financial statements as compensation expense over the service
period of the consulting arrangement or until performance
conditions are expected to be met. Using a Black Scholes valuation
model, the Company periodically reassessed the fair value of
non-employee options until service conditions are met, which
generally aligns with the vesting period of the options, and the
Company adjusts the expense recognized in the consolidated
financial statements accordingly. In June 2018, the FASB issued ASU
No. 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting, which simplifies several aspects of the accounting for
nonemployee share-based payment transactions by expanding the scope
of the stock-based compensation guidance in ASC 718 to include
share-based payment transactions for acquiring goods and services
from non-employees. ASU No. 2018-07 is effective for annual periods
beginning after December 15, 2018, including interim periods within
those annual periods. Early adoption is permitted, but entities may
not adopt prior to adopting the new revenue recognition guidance in
ASC 606. The Company adoption did not have any material impact on
its consolidated financial statements.
The expense is
recognized over the vesting period of the award. Until the
measurement date is reached, the total amount of compensation
expense remains uncertain. The Company records compensation expense
based on the fair value of the award at the reporting date. The
awards to consultants and other third-parties are then revalued, or
the total compensation is recalculated, based on the then current
fair value, at each subsequent reporting date.
Related Parties
We follow ASC
850, “Related Party
Disclosures,” for the identification of related
parties and disclosure of related party transactions.
F-10
Earnings per Share
We compute basic
and diluted earnings per share amounts in accordance with ASC Topic
260, “Earnings per
Share”. Basic earnings per share is computed by
dividing net income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the
reporting period. Diluted earnings per share reflects the potential
dilution that could occur if preferred stock converted to Common
Stock and warrants are exercised. Preferred stock and
warrants are excluded from the diluted earnings per share
calculation if their effect is anti-dilutive. As of September
30, 2018, the Company had 4,488,472 potential shares and warrants
that were excluded from our calculation of diluted earnings per
share because their effect would have been anti-dilutive. For the
nine months ended September 30, 2019, the following potentially
dilutive shares were excluded from the computation of diluted
earnings per shares because their impact was
anti-dilutive:
|
|
September
30,2019
|
|
Common Stock
equivalents:
|
|
|
Stock
warrants
|
1,154,500
|
|
Stock
options
|
5,642,708
|
|
Convertible notes
payable
|
250,000
|
|
Convertible
Preferred Stock
|
11,075,545
|
|
Total
|
18,122,753
|
Income Taxes
The Company
accounts for income taxes pursuant to the provision of ASC 740-10,
“Accounting for Income Taxes” (“ASC
740-10”), which requires, among other things, an asset and
liability approach to calculating deferred income taxes. The asset
and liability approach require the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. A valuation allowance is provided
to offset any net deferred tax assets for which management believes
it is more likely than not that the net deferred asset will not be
realized.
The Company
follows the provision of ASC 740-10 related to Accounting for
Uncertain Income Tax Positions. When tax returns are filed, there
may be uncertainty about the merits of positions taken or the
amount of the position that would be ultimately sustained. In
accordance with the guidance of ASC 740-10, the benefit of a tax
position is recognized in the financial statements in the period
during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated
with other positions.
Tax positions that
meet the more likely than not recognition threshold are measured at
the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefit associated with tax positions
taken that exceed the amount measured as described above should be
reflected as a liability for uncertain tax benefits in the
accompanying balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon
examination. The Company believes its tax positions are all more
likely than not to be upheld upon examination. As such, the Company
has not recorded a liability for uncertain tax
benefits.
The Company has
adopted ASC 740-10-25, “Definition of Settlement”,
which provides guidance on how an entity should determine whether a
tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits and provides that a tax
position can be effectively settled upon the completion and
examination by a taxing authority without being legally
extinguished. For tax positions considered effectively settled, an
entity would recognize the full amount of tax benefit, even if the
tax position is not considered more likely than not to be sustained
based solely on the basis of its technical merits and the statute
of limitations remains open. The federal and state
income tax returns of the Company are subject to examination by the
IRS and state taxing authorities, generally for three years after
they are filed.
Non-controlling interests in consolidated financial
statements
In December 2007,
the FASB issued ASC 810-10-65, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51” (“SFAS No. 160”). This
ASC clarifies that a non-controlling (minority) interest in
subsidiaries is an ownership interest in the entity that should be
reported as equity in the consolidated financial statements. It
also requires consolidated net income to include the amounts
attributable to both the parent and non-controlling interest, with
disclosure on the face of the consolidated income statement of the
amounts attributed to the parent and to the non-controlling
interest. In accordance with ASC 810-10-45-21, those losses
attributable to the parent and the non-controlling interest in
subsidiaries may exceed their interests in the subsidiary’s
equity. The excess and any further losses attributable to the
parent and the non-controlling interest shall be attributed to
those interests even if that attribution results in a deficit
non-controlling interest balance. On March 11, 2019, the Company
acquired a 50.1% limited liability membership interest in EOW,
pursuant to a Subscription Agreement and a Membership Interest
Purchase Agreement (see Note 3) and has the right to appoint a
manager of the limited liability company. Additionally, on July 5,
2019, the Company acquired a 51% limited liability membership
interest in Paradise Medlife (see Note 3).
F-11
Leases
In February 2016,
the Financial Accounting Standards Board (“FASB”)
issued ASU 2016-02, Leases
(Topic 842). The updated guidance requires lessees to recognize
lease assets and lease liabilities for most operating leases. In
addition, the updated guidance requires that lessors separate lease
and non-lease components in a contract in accordance with the new
revenue guidance in ASC 606. The updated guidance is effective for
interim and annual periods beginning after December 15,
2018.
On January 1, 2019,
the Company adopted ASU No. 2016-02, applying the package of
practical expedients to leases that commenced before the effective
date whereby the Company elected to not reassess the following: (i)
whether any expired or existing contracts contain leases and; (ii)
initial direct costs for any existing leases. For contracts entered
into on or after the effective date, at the inception of a contract
the Company assessed whether the contract is, or contains, a lease.
The Company’s assessment is based on: (1) whether the
contract involves the use of a distinct identified asset, (2)
whether we obtain the right to substantially all the economic
benefit from the use of the asset throughout the period, and (3)
whether it has the right to direct the use of the asset. The
Company will allocate the consideration in the contract to each
lease component based on its relative stand-alone price to
determine the lease payments.
Operating lease ROU
assets represents the right to use the leased asset for the lease
term and operating lease liabilities are recognized based on the
present value of future minimum lease payments over the lease term
at commencement date. As most leases do not provide an implicit
rate, the Company use an incremental borrowing rate based on the
information available at the adoption date in determining the
present value of future payments. Lease expense for minimum lease
payments is amortized on a straight-line basis over the lease term
and is included in general and administrative expenses in the
condensed consolidated statements of operations.
Recent Accounting Pronouncements
In January 2017,
the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The Company is currently
evaluating the impact of this standard.
In July 2017, the
FASB issued ASU No. 2017-11, which amends the FASB Accounting
Standards Codification. Part I of ASU No. 2017-11, Accounting
for Certain Financial Instruments with Down Round Features, changes
the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. The
guidance is effective for reporting periods beginning after
December 15, 2018 and interim periods within those fiscal years.
Early adoption is permitted. The Company adopted ASU 2017-11 on
January 1, 2019. The adoption of this guidance had no impact on the
Company’s condensed consolidated financial
statements.
We have reviewed
the FASB issued ASU accounting pronouncements and interpretations
thereof that have effectiveness dates during the periods reported
and in future periods. We have carefully considered the new
pronouncements that alter previous generally accepted accounting
principles and do not believe that any new or modified principles
will have a material impact on the Company’s reported
financial position or operations in the near term. The
applicability of any standard is subject to the formal review of
the Company’s financial management.
NOTE
3 – ACQUISITION OF
ASSETS AND OWNERSHIP
Exactus One World
On March 11, 2019,
the Company acquired a 50.1% limited liability membership interest
in Exactus One World, LLC, an Oregon limited liability company,
formed on January 25, 2019 which since inception, had no
operations.
F-12
The Company
acquired 50.1% limited liability membership interest pursuant to a
Subscription Agreement (the “Subscription Agreement”)
and a Membership Interest Purchase Agreement (the “Purchase
Agreement”). Under the terms of the Subscription Agreement,
the Company acquired a 30% interest in EOW, and an additional 20.1%
was acquired from existing members pursuant to the terms of the
Purchase Agreement. The existing members are considered third
parties. The Company has the right to appoint a Manager of the
limited liability company and has appointed its President. Under
the Operating Agreement for EOW, as amended, the Company has the
right to appoint, and remove and replace, if desired, one of three
managers of EOW, with each manager having the full rights to
control the business and affairs of EOW. The Company appointed its
President, Emiliano Aloi, as its Manager of EOW.
Under the term of
the Subscription Agreement, the Company acquired 30% of membership
interest in EOW in consideration for cash of $2,700,000 payable as
follows:
|
●
|
$400,000 paid
previously for purchase of Hemp Seeds;
|
|
●
|
$100,000 upon
execution of the LLC Operating Agreement;
|
|
●
|
$500,000 on or
before April 1, 2019;
|
|
●
|
$500,000 on or
before May 1, 2019;
|
|
●
|
$300,000 on or
before August 1, 2019;
|
|
●
|
$450,000 on or
before September 1, 2019 and,
|
|
●
|
$450,000 on or
before October 1, 2019
|
The acquisition of
the 30% membership interest is deemed to be an investment in and
capital contribution to EOW and shall be eliminated upon
consolidation. The Company paid a total of approximately $2,344,000
between April 2019 and September 2019.
Under the term of
the Purchase Agreement, the Company acquired 20.1% of EOW from
existing members for aggregate consideration of $2,940,000
consisting of cash payments of $1,000,000, 937,500 shares of the
Company’s Common Stock, and $450,000 worth of shares of
Common Stock on June 14, 2019. Pursuant to the terms of the
Purchase Agreement, the Company issued 937,500 shares of its Common
Stock valued at $990,000, or $1.056 per share, the fair value of
the Company’s Common Stock based on the quoted trading price
on the date of the Purchase Agreement. No goodwill was recorded
since the Purchase Agreement was accounted for as an asset
purchase.
The consideration
shall be paid to the sellers as follows:
|
●
|
$300,000 cash and
937,500 shares of the Company’s Common Stock to the sellers
upon execution, which was paid during the nine months ended
September 30, 2019;
|
|
●
|
$700,000 on April
20, 2019 which was paid on April 18, 2019;
|
|
●
|
On June 10, 2019,
the Company was required to issue and issued the sellers an
additional $450,000 of shares of Common Stock of the Company
based upon the 20 day volume weighted average price per share on
the date of issue which was equivalent to $0.89 per share or
503,298 shares of the Company’s Common Stock and was issued
in August 2019; and
|
|
●
|
$500,000 on
September 1, 2019.
|
At September 30,
2019, the Company has an outstanding balance of $32,500 to the
existing members which is included in subscription payable in the
unaudited condensed consolidated balance sheets.
Pursuant to ASU
2017-01 and ASC 805, the Company analyzed the operations of EOW and
the related agreements to determine if the Company acquired a
business or acquired assets. Based on this analysis, it was
determined that the Company acquired assets, primarily consisting
of the value of two farm leases for approximately 200 acres of
farmland in southwest Oregon for growing and processing industrial
hemp, with lease terms of one year, and a license to operate such
farms. The leases are renewable on a year-to-year basis at the
option of the Company. Accordingly, the transaction was not
considered a business.
The relative fair
value of the assets acquired were based on management’s
estimates of the fair values on March 11, 2019. Based upon the
purchase price allocation, the following table summarizes the
estimated relative fair value of the assets acquired at the date of
acquisition:
|
Intangible asset
– Hemp farming license
|
$10,000
|
|
Intangible assets
– farm leases
|
2,930,000
|
|
Total assets
acquired at fair value
|
2,940,000
|
|
Total purchase
consideration
|
$2,940,000
|
Additionally, the
Company recorded the acquisition of 50.1% of membership interest in
EOW under the FASB issued ASC 810-10-65, “Non-controlling
Interests in Consolidated Financial Statements, an amendment of
Accounting Research Bulletin No. 51” (“SFAS No.
160”). As of September 30, 2019, the Company recorded a
non-controlling interest balance of $(361,628) in connection with
the majority-owned subsidiary, EOW as reflected in the accompanying
unaudited condensed consolidated balance sheet and losses
attributable to non-controlling interest of $173,680 and $361,628
during the three and nine months ended September 30, 2019,
respectively, as reflected in the accompanying unaudited condensed
consolidated statements of operations.
F-13
Paradise Medlife, LLC
On July 5, 2019, the Company entered into an
Operating Agreement (the “Operating Agreement”) with
Paradise Medlife, LLC and Paradise CBD, LLC. Paradise Medlife is a
Florida Limited Liability Company, organized on April 12, 2019 with
no operations since inception. The Company shall contribute capital
of $50,000 in the form of CBD products in exchange for 51%
ownership of Paradise Medlife. Consequently, Paradise Medlife
became a majority owned subsidiary of the
Company. To date, Paradise Medlife has no
operations. At September 30, 2019, the Company has not yet
contributed the capital of $50,000. The Company anticipates to
contribute the capital in the form of CBD products during the
fourth quarter of calendar year 2019.
Green Goddess Extracts, LLC
On July 31, 2019
the Company entered into an Asset Purchase Agreement (the
“Green Goddess Purchase Agreement”) with Green Goddess
Extracts, LLC (“Green Goddess”), a Florida contract
manufacturer and formulator of hemp and vape products. Under the
Green Goddess Purchase Agreement, the Company acquired the assets
of Green Goddess consisting principally of its right and interest
in the Green Goddess brand, inventory, customer list, intellectual
property including IP addresses and trademarks entered into an
option to acquire the seller’s vape assets, and entered into
an employment agreement with the founder (the
“Founder”) of Green Goddess. Green Goddess manufactures
and distributes a premium line of hemp-derived products sold
through distributors and online. Green Goddess has been a contract
manufacturer for C2M and the Company.
Under the terms of
the Green Goddess Purchase Agreement the Company agreed to issue
250,000 shares of the Company’s Common Stock and pay $250,000
cash for the acquisition to be paid in six installments. The first
installment of $41,667 shall be due within 90 days of the closing
and the five additional installments shall be paid starting on
October 12, 2019 and continuing on the first day of each following
month. The shares vest 1/24 on the closing date and an additional
1/24 vests on the first day of each month thereafter provided that
the Company and the Executive under the Employment Agreement
discussed below are neither in breach of this Green Goddess
Purchase Agreement or the Employment Agreement. In addition, the
Company entered into an agreement under which the Company may
become obligated to issue up to an additional $250,000 of Common
Stock (the “Additional Stock Consideration”) based upon
the volume weighted average price per share (“VWAP”)
for the 20 days prior to issuance, in the event that sales of
products utilizing seller’s flavored products exceed $500,000
monthly for a three month average period. The Additional Stock
Consideration shall vest 1/24 on the signature or execution date of
this Green Goddess Purchase Agreement and an additional 1/24 vests
on the first day of each month thereafter provided that the Company
and the Executive under the Employment Agreement discussed below
are neither in breach of this Green Goddess Purchase Agreement or
the Employment Agreement.
Additionally, on
July 1, 2019, the Company entered into an Executive Employment
Agreement (the “Employment Agreement”) with Alejandro
De La Espriella (the “Executive”) who is the managing
member of Green Goddess Extracts, LLC. The term of the Employment
Agreement shall be for two years and shall be automatically renewed
for successive one-year periods unless either party provides a
written notice of non-renewal. The Company agrees to pay the
Executive an initial base salary of $120,000 per year subject to
annual adjustments determined by the board of directors of the
Company and such Executive shall also be eligible for annual bonus,
performance bonus and equity awards as defined in the Employment
Agreement.
Pursuant to ASU
2017-01 and ASC 805, the Company analyzed the operations of Green
Goddess and the related agreements to determine if the Company
acquired a business or acquired assets. The gross assets include
the intellectual property (the related trademark, brand, and IP
addresses are determined to be a single intangible asset), the
inventory, customer list, non-compete/non-solicitation and the
excess of the consideration transferred over the fair value of the
net assets acquired. The Company concluded that substantially all
of the fair values of the gross assets acquired is not concentrated
in a single identifiable asset or group of similar identifiable
assets.
The set has outputs
through the continuation of revenues, and the Company considered
the criteria in paragraph 805-10-55-5E to determine whether the set
includes both inputs and a substantive process that together
significantly contribute to the ability to create outputs. The set
is not a business because: 1) It does not include an
organized workforce that could meet the criteria in paragraph
805-10-55-5E (a) through (b), 2) There are no acquired processes
that could meet the criteria in paragraph 805-10-55-5E(c) through
(d), and 3) It does not include both an input and a substantive
process. Accordingly, the transaction was not considered a
business.
F-14
Additionally, in
accordance with ASC 805-10, the 250,000 shares of common stock and
the Additional Stock Consideration are tied to continued employment
of the Company and as such are recognized as compensation expenses
in the post combination period under Share-Based Payment Topic of
ASC 718 which requires recognition in the financial statements of
the cost of employee and services received in exchange for an award
of equity instruments over the period the employee is required to
perform the services in exchange for the award (presumptively, the
vesting period). The ASC also requires measurement of the cost of
employee and services received in exchange for an award based on
the grant-date fair value of the award (see Note 10).
The relative fair
value of the assets acquired were based on management’s
estimates of the fair values on July 31, 2019. Based upon the
purchase price allocation, the following table summarizes the
estimated relative fair value of the assets acquired at the date of
acquisition:
|
Intangible asset
– trademark
|
$3,500
|
|
Intangible assets
– customer list
|
102,000
|
|
Intangible assets -
brand
|
110,529
|
|
Inventory
|
33,971
|
|
Total assets
acquired at fair value
|
250,000
|
|
Total purchase
consideration
|
$250,000
|
Levor, LLC
On September 30,
2019 the Company entered into an Asset Purchase Agreement (the
“Levor Purchase Agreement”) with Levor, LLC
(“Levor”) and the sole owner and manager of Levor (the
“Seller”). Under the Levor Purchase Agreement, the
Company acquired the asset of Levor consisting principally of its
rights and interest in the cosmetic brand collection, “Levor
Collection”, which is an all-virtual brand that offers
cannabinoid-infused cosmetic products. Under the terms of the Levor
Purchase Agreement, the Company agreed to issue 100,000 shares of
the Company’s Common Stock at closing. In addition, the
Company entered into an agreement under which the Company may
become obligated to issue additional shares of the Company’s
common stock to be earned and payable to the Seller on the 12-month
anniversary of the closing date which value is equivalent to 35% of
the total annual net revenue of the Levor brand divided by the then
closing bid price of the common stock on the 12-month anniversary
(the Earn-out Consideration”). The Seller of Levor has been
an employee of the Company since July 24, 2019.
Pursuant to ASU
2017-01 and ASC 805, the Company analyzed the operations of Levor
and the related agreements to determine if the Company acquired a
business or acquired assets. Based on this analysis, it was
determined that the Company acquired assets, primarily consisting
of the its rights and interest in the cosmetic brand collection,
“Levor Collection”. The Company concluded
that substantially all of the fair values of the gross assets
acquired is concentrated in a single identifiable asset or group of
similar identifiable assets. Accordingly, the transaction
was not considered a business.
Pursuant to the
terms of the Levor Purchase Agreement, the Company granted 100,000
shares of its Common Stock valued at $70,000, or $0.70 per share,
the fair value of the Company’s Common Stock based
on the sale of common stock in the
recent private placement.
Additionally, in
accordance with ASC 805-10, the Earn-out Consideration is deemed as
contingent payment to an employee and the Company determined that
the arrangement is compensatory in nature and as such are
recognized as compensation expenses in the post combination period
under Share-Based Payment Topic of ASC 718 which requires
recognition in the financial statements of the cost of employee and
services received in exchange for an award of equity instruments
over the period the employee is required to perform the services in
exchange for the award (presumptively, the vesting period). The ASC
also requires measurement of the cost of employee and services
received in exchange for an award based on the grant-date fair
value of the award.
The relative fair
value of the assets acquired were based on management’s
estimates of the fair values on September 30, 2019. Based upon the
purchase price allocation, the following table summarizes the
estimated relative fair value of the assets acquired at the date of
acquisition:
|
Intangible asset
– brand
|
$70,000
|
|
Total assets
acquired at fair value
|
70,000
|
|
Total purchase
consideration
|
$70,000
|
F-15
NOTE
4 – INVENTORY
Inventory consisted
of the following:
|
|
September
30,
2019
|
December
31,
2018
|
|
|
(Unaudited)
|
|
|
Finished
goods
|
$836,739
|
$-
|
|
Raw
materials
|
1,496,151
|
-
|
|
|
$2,332,890
|
$-
|
The Company did not
record any allowance or inventory write-off related to the
inventory as of September 30, 2019.
NOTE
5 – PROPERTY AND
EQUIPMENT
Property and
equipment consisted of the following:
|
|
Estimated
life
|
As
of September 30,2019
|
As
ofDecember 31,2018
|
|
|
|
(Unaudited)
|
|
|
Greenhouse
|
10
years
|
$34,465
|
$-
|
|
Fencing and
storage
|
5
years
|
44,543
|
-
|
|
Irrigation
|
5
years
|
387,975
|
-
|
|
Office and computer
equipment
|
3
years
|
40,834
|
-
|
|
Farming
Equipment
|
5
years
|
56,500
|
-
|
|
Leasehold
improvement
|
5
years
|
21,886
|
-
|
|
Less: Accumulated
depreciation
|
|
(36,720)
|
-
|
|
|
$549,483
|
$-
|
|
Depreciation
expense amounted to $24,869 and $36,720 for the three and nine
months ended September 30, 2019, respectively. There was no
depreciation expense during the three and nine months ended
September 30, 2018.
NOTE
6 – INTANGIBLE
ASSET
At September 30,
2019 and December 31, 2018, intangible asset consisted of the
following:
|
|
Useful
life
|
September 30,
2019
|
December 31,
2018
|
|
Farm leases -
EOW
|
3 year
|
$2,930,000
|
$-
|
|
Hemp operating
license - EOW
|
1 year
|
10,000
|
-
|
|
Trademark –
Green Goddess
|
3 year
|
3,500
|
-
|
|
Customer list
– Green Goddess
|
3 year
|
102,000
|
-
|
|
Brand – Green
Goddess
|
3 year
|
110,529
|
|
|
Brand -
Levor
|
3 year
|
70,000
|
-
|
|
|
3,226,029
|
-
|
|
|
Less: accumulated
amortization
|
|
(558,024)
|
-
|
|
|
$2,668,005
|
$-
|
|
For the three and
nine months ended September 30, 2019, amortization of intangible
assets amounted to $258,669 and $558,024, respectively.
Amortization of intangible assets attributable to future periods is
as follows:
|
Year ending
December 31:
|
Amount
|
|
2019
(remainder)
|
$270,506
|
|
2020
|
1,074,091
|
|
2021
|
1,072,008
|
|
2022
|
251,400
|
|
|
$2,668,005
|
F-16
NOTE
7 - OPERATING LEASE
RIGHT-OF-USE ASSETS AND OPERATING LEASE
LIABILITIES
On March 1, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Cave Junction, Oregon and consists of
approximately 100 acres. The lease requires the Company to pay 5%
of the net income realized by the Company from the operation of the
lease farm. Accordingly, the Company recognized $0 Right-of-use
asset (“ROU”) and lease liabilities on this farm lease
as the Company has not determined when it will generate net income
from this lease. The lease shall continue in effect from year to
year except for at least a 30-day written notice of termination.
The Company has not paid any lease under this agreement for the
nine months ended September 30, 2019.
On March 1, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Glendale, Oregon and consists of
approximately 100 acres. The lease requires the Company to pay
$120,000 per year, whereby $50,000 was payable upon execution and
$70,000 shall be payable prior to planting for agricultural use or
related purposes. The lease shall continue in effect from year to
year except for at least a 30-day written notice of termination.
The Company has recognized lease expense of $30,000 and $70,000 for
the three and nine months ended September 30, 2019,
respectively.
On April 30, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Cave Junction, Oregon and consists of
approximately 38 acres. The lease requires the Company to pay
$76,000 per year, whereby $38,000 was payable upon execution and
$38,000 shall be payable on September 15, 2019 and 2% of the net
income realized by the Company from the operation of the leased
farm. The lease shall continue in effect from year to year for five
years except for at least a 30-day written notice of termination.
The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company. The Company recognized lease
expense of $21,667 for the nine months ended September 30, 2019 and
recorded $4,333 as prepaid expense to be amortized over the term of
this lease.
On July 9, 2019, the Company entered into a
Commercial Lease Agreement (the “Lease”) with Skybar
Holdings, LLC, a Florida limited liability company. Pursuant to the
Lease, the Company will rent the entire first floor (consisting of
approximately 4,000 square feet) of a property located in Delray
Beach, Florida (the “Premises”). The Company plans to
develop the Premises to create a hemp-oriented health and wellness
retail venue, including education, clothing and cosmetics, and
explore franchise opportunities. The initial term of the Lease is 5
years commencing August 1, 2019, with two 5-year extension options.
The Lease includes a right of first refusal in favor of the Company
to lease any space that becomes available on the 2nd and 3rd floor
of the Premises and a right of first refusal to purchase the
Premises. Pursuant to the Lease, the Company will pay rent equal to
$40,000 per month in advance in addition to all applicable Florida
sales and/or federal taxes and security deposit of $40,000.
Effective one year from the lease commencement date and each year
thereafter, the rent shall increase at least three percent (3%) per
year. The lessor of the Premises is a limited liability company
owned or controlled by Vladislav (Bobby) Yampolsky, a member
of the Board and the founder, manager and controlling member
of C2M, the Company’s largest
stockholder.
In adopting ASC
Topic 842, Leases (Topic 842), the Company has elected the
‘package of practical expedients’, which permit it not
to reassess under the new standard its prior conclusions about
lease identification, lease classification and initial direct
costs. In addition, the Company elected not to apply ASC Topic 842
to arrangements with lease terms of 12 month or less. The Company
is reasonably certain that it will exercise its option to extend
the three farm leases for a period of three years and the Company
used 5 years lease term for the commercial lease.
On January 1, 2019,
upon adoption of ASC Topic 842, the Company recorded right-of-use
assets $2,431,362 and total lease liabilities of $2,431,362 based
on an incremental borrowing rate of 10%. The Company recorded lease
expense of $104,210 and $143,680 for the three and nine months
ended September 30, 2019, respectively. There were no lease expense
during the prior periods.
ROU is summarized
below:
|
|
September
30, 2019
|
|
Farm lease
ROU
|
$506,506
|
|
Commercial lease
ROU
|
1,924,856
|
|
Less accumulated
amortization
|
(143,680)
|
|
Balance of ROU
asset as of September 30, 2019
|
$2,287,682
|
F-17
Operating lease
liability related to the ROU asset is summarized
below:
|
|
September
30, 2019
|
|
Farm
lease
|
$506,506
|
|
Commercial lease
ROU
|
1,924,856
|
|
Total lease
liability
|
2,431,362
|
|
Reduction of lease
liability
|
(101,401)
|
|
Total
|
2,329,961
|
|
Less: current
portion
|
(427,888)
|
|
Long term portion
of lease liability as of September 30, 2019
|
$1,902,073
|
Minimum lease
payments under non-cancelable operating lease at September 30, 2019
are as follows:
|
Year ended December
31, 2019
|
$296,000
|
|
Year ended December
31, 2020
|
682,000
|
|
Year ended December
31, 2021
|
696,580
|
|
Year ended December
31, 2022
|
535,597
|
|
Year ended December
31, 2023
|
531,065
|
|
Year ended December
31, 2024
|
315,142
|
|
Total
|
3,056,384
|
|
Less: undiscounted
payments during the nine months ended September 30,
2019
|
(141,670)
|
|
Total undiscounted
future minimum lease payments due as of September 30,
2019
|
2,914,714
|
|
Imputed
interest
|
(584,753)
|
|
Total operating
lease liability
|
$2,329,961
|
NOTE
8 - NOTES PAYABLE –
RELATED PARTIES
On June 28, 2017,
the Company issued promissory notes to two of the Company’s
then executive officers. The promissory notes accrue interest at a
rate of 8.0% per annum and matures on the earlier of (i) one (1)
year from the date of the promissory note, and (ii) the closing the
sale of the Company’s securities in a single transaction or a
series of related transactions from which at least $500,000 of
gross proceeds are raised. During the nine months ended September
30, 2019, the Company had borrowed $14,229 under the promissory
notes. Between February 2019 and March 2019, the Company paid
$11,129 under the promissory notes. Additionally, in March 2019,
the Company issued 153,080 shares of its Common Stock to a former
executive officer upon the conversion of $27,000 of principal
amount and accrued interest of $3,267 under a promissory note. In
August 2019, the Company repaid principal amount of $21,000 and
accrued interest of $1,769. During the nine months ended September
30, 2019 and 2018, the Company recognized $1,346 and $2,657,
respectively, of interest expense. As of September 30, 2019 and
December 31, 2018, the notes had accrued interest balances of $490
and $5,928, respectively. As of September 30, 2019 and December 31,
2018, the principal balance under the notes was $6,500 and $51,400,
respectively.
F-18
NOTE
9 - CONVERTIBLE NOTES
PAYABLE
The Company’s
convertible notes consist of the following as of September 30, 2019
and December 31, 2018:
|
|
2019
(Unaudited)
|
2018
|
|
Convertible note in
the amount of $110,000 dated, August 14, 2017, accruing interest at
an annual rate of 8%, matured on August 14, 2018, and convertible
into Common Stock of the Company at a conversion price equal to the
lesser of (i) $2.00 and (ii) 60% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $87,000
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. On December 18, 2017, the Company
further amended the Note to (i) increase the aggregate principal
amount of the Note to $115,000 and (ii) extend the date by which
the Company is required to cause the Registration Statement to
become effective to January 4, 2018. On January 4, 2018, the
Company further amended the Note to (i) increase the aggregate
principal amount of the Note to $125,000 and (ii) extend the date
by which the Company is required to cause the Registration
Statement to become effective to February 1, 2018. In March 2018,
the Company paid $25,000 towards principal of the Note. On May 7,
2018, the Company further amended the Note to (i) increase the
aggregate principal amount of the Note to $121,481 and (ii) extend
the date by which the Company is required to cause the Registration
Statement to become effective to May 31, 2018. On June 11,
2018, the holder of the Note converted $10,000 of the principal of
the Note into 22,727 shares of Common Stock. On July 13, 2018, the
holder of the note converted $10,500 of the principal of the Note
to 116,667 shares of Common Stock. On August 30, 2018, the holder
of the Note converted $10,500 of the principal of the Note to
218,750 shares of Common Stock. On November 13, 2018, the Company
further amended the Note to (i) increase the aggregate principal
amount of the Note by $10,000 and (ii) extend the date by which the
Company is required to cause the Registration Statement to become
effective to December 13, 2018. The Company determined that the
conversion feature embedded in the Note required bifurcation and
presentation as a liability.
|
$-
|
$101,481
|
|
|
|
|
|
Convertible note in
the amount of $27,500 dated, September 27, 2017, accruing interest
at an annual rate of 8%, matured on September 27, 2018, and
convertible into Common Stock of the Company at a conversion price
equal to the lesser of (i) $2.00 and (ii) 60% of the average of the
three lowest trading prices of the Company’s Common Stock
during the twenty-day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $21,750
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. On May 7, 2018, the Company
further amended the Note to increase the aggregate principal amount
of the Note to $4,125. On November 13, 2018, the Company
amended the Note to (i) increase the aggregate principal amount of
the Note by $5,000 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
December 13, 2018.
|
-
|
36,625
|
|
Convertible note in
the amount of $65,000 dated, December 21, 2017, accruing interest
at an annual rate of 12%, matured on December 21, 2018, and
convertible into Common Stock of the Company at a conversion price
equal to the lesser of (i) closing sale price of the Common Stock
on the principal market on the trading day immediately preceding
the closing date and (ii) 60% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $62,400
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. On March 28, 2018, the Company
amended the Note to (i) increase the aggregate principal amount of
the Note to $71,500 and (ii) adjust the conversion price to the
lesser of (i) closing sale price of the Common Stock on the
principal market on the trading day immediately preceding the
closing date and (ii) 51% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-five day trading period prior to the conversion. On November
11, 2018, the holder of the note converted $5,325 of the principal
of the Note to 187,500 shares of Common Stock. On December 18,
2018, the holder of the Note converted $4,850 of the principal of
the Note to 100,000 shares of Common Stock. The Company determined
that the conversion feature embedded in the Note required
bifurcation and presentation as a liability.
|
-
|
89,588
|
|
|
|
|
|
Convertible note in
the amount of $125,000 dated, December 26, 2017, accruing interest
at an annual rate of 12%, matured on September 26, 2018, and
convertible into Common Stock of the Company at a conversion price
equal to the lesser of (i) the lowest trading price of the
Company's Common Stock during the twenty-five-day trading period
prior to the issue date of the Note and (ii) 50% of the average of
the three lowest trading prices of the Company’s Common Stock
during the twenty-five day trading period prior to the conversion
(the “Note”). The Company received net proceeds of
$112,250 from the issuance of the Note, after deducting an original
issue discount and debt issuance costs. On July 11, 2018, the
holder of the note elected to convert interest of $3,120 into
15,000 shares of Common Stock. On November 28, 2018, the holder of
the Note converted $2,000 of the interest of the Note to 25,000
shares of Common Stock. The Company determined that the conversion
feature embedded in the Note required bifurcation and presentation
as a liability.
|
-
|
125,000
|
F-19
|
|
|
|
|
Convertible note in
the amount of $58,500 dated, March 16, 2018, accruing interest at
an annual rate of 9%, matures on December 16, 2018, and convertible
into Common Stock of the Company at a conversion price equal to the
lesser of (i) $2.00 and (ii) 51% of the average of the three lowest
trading prices of the Company’s Common Stock during the
twenty-five day trading period prior to the conversion (the
“Note”). The Company received net proceeds of $41,050
from the issuance of the Note, after deducting an original issue
discount and debt issuance costs. The Company determined that the
conversion feature embedded in the Note required bifurcation and
presentation as a liability.
|
-
|
58,500
|
|
Convertible note in
the amount of $60,000 dated, June 29, 2018, accruing interest at an
annual rate of 12%, maturing on June 29, 2019, and convertible into
Common Stock of the Company at a conversion price equal to 50% of
the average of the three lowest trading prices of the
Company’s Common Stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $51,900 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
In December 2018, the Company agreed to increase the principal
balance of note by $30,000 in relation to the assignment of the
Note by the holder to another third party. The Company determined
that the conversion feature embedded in the Note required
bifurcation and presentation as a liability.
|
-
|
55,881
|
|
Convertible note in
the aggregate amount of $30,000 dated, July 3, 2018, accruing
interest at an annual rate of 12%, maturing on July 3, 2019, and
convertible into Common Stock of the Company at a conversion price
equal to 50% of the average of the three lowest trading prices of
the Company’s Common Stock during the twenty-day trading
period prior to the conversion (the “Notes”). The
Company received net proceeds of $28,000 from the issuance of the
Note, after deducting an original issue discount and debt issuance
costs. The Company determined that the conversion feature embedded
in the Note required bifurcation and presentation as a liability.
During the year ended December 31, 2018, the Company recorded an
initial derivative liability of $68,000, resulting in initial
derivative expense of $40,000, and an initial debt discount of
$28,000 to be amortized into interest expense through the maturity
of the Note.
|
-
|
14,120
|
|
|
|
|
|
|
|
Convertible notes
in the aggregate amount of $70,500 dated October 23, 2018 ($35,250)
and October 26, 2018 ($35,250), accruing interest at an annual rate
of 12%, maturing in one year, and convertible into Common Stock of
the Company at a conversion price equal to the lesser of i) the
closing sale price of the Company's Common Stock on closing date
and ii) 60% of the lowest trading price of the Company’s
Common Stock during the twenty-day trading period prior to the
conversion (the “Note”). The Company received net
proceeds of $57,000 from the issuance of the Note, after deducting
an original issue discount and debt issuance costs. The Company
determined that the conversion features embedded in the Notes
required bifurcation and presentation as liabilities. During the
year ended December 31, 2018, the Company recorded initial
derivative liabilities of $187,000, resulting in initial derivative
expense of $127,000, and initial debt discounts of $60,000 to be
amortized into interest expense through the maturity of the
Note.
|
-
|
10,593
|
|
|
|
|
|
|
|
Convertible Notes
in the aggregate amount of $100,000, issued on March 22, 2018. The
Notes bear interest at a rate of 5% per annum and will mature on
February 1, 2023. If a qualified financing from which at least $5
million of gross proceeds are raised occurs prior to the maturity
date, then the outstanding principal balance of the notes, together
with all accrued and unpaid interest thereon, shall be
automatically converted into a number of shares of the
Company’s Common Stock at $0.40 per Share. The Notes offers
registration rights wherein the Company agrees that within 45 days
of a Qualified Offering, prior to the Maturity Date, the Company
shall file a registration statement with the SEC registering for
resale of the shares of Company’s Common Stock into which the
Notes are convertible.
|
100,000
|
100,000
|
|
|
|
|
|
|
|
Convertible Notes
in the amount of $229,890, issued on January 11, 2019 which
features an original issue discount of 10%. The Note bears interest
at a rate of 8% per year, and is due 12 months from the date of
issue. Beginning on the 170th day after issue, the Note is
convertible to our Common Stock at price equal to the lesser of
$2.00 ($0.25 pre-split) per share, or the variable conversion
price. The variable conversion price is defined as 60% of the
average of our 3 lowest trading prices in the 20 trading days prior
to the conversion.
|
-
|
-
|
|
|
Carrying Amount of
Convertible Debt
|
$100,000
|
$591,788
|
|
Less: Current
Portion
|
-
|
491,788
|
|
Convertible Notes,
Long Term
|
$100,000
|
$100,000
|
F-20
The following is a
summary of the carrying amounts of convertible notes as of
September 30, 2019 and December 31, 2018:
|
|
2019
|
2018
|
|
|
(Unaudited)
|
|
|
Principal
Amount
|
$100,000
|
$701,694
|
|
Less unamortized
debt discount and debt issuance costs
|
-
|
(109,906)
|
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$100,000
|
$591,788
|
In connection with
the issuance of notes during the nine months ended September 30,
2019, on the initial measurement date of the notes, the fair values
of the embedded conversion option of $568,000 was recorded as
derivative liabilities of which $361,090 was charged to current
period operations as initial derivative expense and $206,910 was
recorded as a debt discount which was amortized into interest
expense over the term of the note. The Company recognized gain on
extinguishment of debt due to repayment and conversions of notes
into shares of common and preferred stock of $3,007,629 and change
in fair value of derivative liabilities of $896,000 during the nine
months ended September 30, 2019. The Company determined that the
conversion options embedded in the Notes require liability
presentation at fair value. Each of these instruments provide the
holder with the right to convert into Common Stock at a fixed
discount market, with certain notes subject to a cap on the
conversion price. These clauses cause uncertainty as to the number
of shares issuable upon conversion of convertible debt and
accordingly require liability presentation on the balance sheet in
accordance with US GAAP. For the nine months ended September 30,
2019 and 2018, the Company measured the fair value of the embedded
derivatives using a binomial model and Monte Carlo simulations, and
the following assumptions:
|
|
2019
|
2018
|
|
Expected
Volatility
|
376.76% to
567.11%
|
85.79% to
204.8%
|
|
Expected
Term
|
0.25 to 1.0
Years
|
0.25 to 1.0
Years
|
|
Risk Free
Rate
|
2.41% to
2.54%
|
1.73% to
1.93%
|
|
Dividend
Rate
|
0.00%
|
0.00
|
During the nine
months ended September 30, 2019, the Company issued an aggregate of
849,360 Series A preferred stock to various note holders and also
sold an aggregate of 55,090 shares of preferred stock for $55,090
which were used to repay and convert a total of $842,791 of
principal amount (includes penalty fees of $149,313, included in
derivative expenses) during the nine months ended September 30,
2019 and accrued interest of $61,569 pursuant to the Exchange
Agreements (the “Exchange Agreements”) (see Note 10).
During the nine months ended September 30, 2019, the Company issued
250,000 shares of Common Stock to a note holder upon the conversion
of $4,000 of accrued interest. In March 2019, the Company paid off
the principal notes of $186,443 (includes penalty fees of $48,337,
included in derivative expenses) during the nine months ended
September 30, 2019 and accrued interest of $20,467. During the nine
months ended September 30, 2019, the Company recorded a gain on
settlement of debt of $3,007,629 in connection with the exchange
and repayments of various convertible notes.
During the three
months ended September 30, 2019 and 2018, the Company recognized
$1,260 and $12,534, respectively, of interest expense. During the
nine months ended September 30, 2019 and 2018, the Company
recognized $27,040 and $30,418, respectively, of interest
expense.
During the three
months ended September 30, 2019 and 2018, the Company amortized
debt discount of $0 and $112,325, respectively, of interest
expense. During the nine months ended September 30, 2019 and 2018,
the Company amortized debt discount of $339,806 and $345,013,
respectively, of interest expense.
As of September 30,
2019 and December 31, 2018, the notes had accrued interest balances
of $7,658 and $60,372, respectively.
NOTE
10 - STOCKHOLDERS’
EQUITY (DEFICIT)
On January 11,
2019, the Board of Directors of the Company approved a reverse
stock split of the Company’s Common Stock at a ratio of
1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in the
accompanying consolidated financial statements are retroactively
restated for the effect of the Reverse Stock Split.
F-21
In January 2019,
the Company approved the 2019 Equity Incentive Plan (the
“2019 Plan”) which provides for the issuance of
incentive awards in the form of non-qualified and incentive stock
options, stock appreciation rights, restricted stock awards and
restricted stock unit awards. The 2019 Plan provides for a share
limit equal to 15% of the total of the number of the issued and
outstanding shares of the Company’s Common Stock and all
shares of Common Stock issuable upon conversion or exercise of any
outstanding securities of the Company.
Approval of Director Compensation Plan
On
September 13, 2019, the Board established a new Director
Compensation Plan (the “Director Plan”) to be
administered under the 2019 Plan applicable to each
non-employee/non-executive director, which Director Plan replaces
the prior compensation arrangements previously applicable to
non-employee/non-executive directors. The material terms of the
Director Plan are set forth below:
|
Timing
|
Amount
|
Vesting
|
|
Initial
appointment
(non-employee/non-executive
directors)
|
$100,000
of the Company’s Common Stock issued on and priced at fair
market value of the Common Stock on the last calendar date prior to
appointment.
|
1/24th vests
upon date of grant and 1/24th vests on the first calendar date of
each calendar month following appointment until fully vested as
long as continuing as a director.
|
|
Directors
continuing after initial appointment
(non-employee/non-executive
directors)
|
$25,000
of Common Stock issued annually on the first day of September and
priced at fair market value of the Common Stock as of the calendar
date prior to the issuance for each continuing director that has
served a minimum of 9 consecutive months as of the first day of
September each year.
|
1/24th
vests upon date of grant and 1/24th vests on the first
calendar date of each calendar month following appointment until
fully vested as long as continuing as a director.
|
During the nine
months ended September 30, 2019, the Company has not granted any
stock awards under the Director Plan.1
Preferred Stock
The Company’s
authorized preferred stock consists of 50,000,000 shares with a par
value of $0.0001.
Series A
- On February 17, 2016, the
Board of Directors voted to designate a class of preferred stock
entitled Series A Preferred Stock, consisting of up to five million
(5,000,000) shares, par value $0.0001 per
share.
On December 21,
2018, we filed a Certificate of Cancellation of our previously
filed Certificate of Designation of Preferences, Rights and
Limitations of Series A Preferred Stock in order to designate
1,000,000 shares as a new Series of Preferred Stock for issuance to
former Holders of our Notes under the Exchange Agreements (see Note
9), and filed a new Certificate of Designation of Preferences,
Rights and Limitations of Series A Convertible Preferred Stock (the
“Series A Preferred Certificate of
Designation”).
Pursuant to the
Series A Preferred Certificate of Designation, the Company issued
shares of Series A Preferred. Each share of Series A Preferred has
a stated value of $1.00 per share. In the event of a
liquidation, dissolution or winding up of the Company, each share
of Series A Preferred Stock will be entitled to a payment as set
forth in the Certificate of Designation. The Series A Preferred is
convertible into such number of shares of the Company’s
Common Stock, par value $0.0001 per share equal to the Stated Value
of $1.00, divided by $0.20, subject to adjustment in the event of
stock split, stock dividends, and recapitalization or
otherwise. Pursuant to the Exchange Agreements each
holder of Notes shall be issued Series A Preferred in the amount of
the purchase price paid for such Notes by the buyer under the
Exchange Agreement, including any penalty, interest and premium
payments. Each share of Series A Preferred entitles the holder to
vote on all matters voted on by holders of Common Stock as a single
class. With respect to any such vote, each share of Series A
Preferred entitles the holder to cast such number of votes equal to
the number of shares of Common Stock such share of Series A
Preferred is convertible into at such time, but not in excess of
the conversion limitations set forth in the Series A Preferred
Certificate of Designation. The Series A Preferred will be entitled
to dividends to the extent declared by the Company.
During the nine
months ended September 30, 2019, the Company issued an aggregate of
849,360 shares of Series A Preferred Stock to various note holders
and also sold an aggregate of 55,090 shares of Series A preferred
stock for $55,090 in a private placement, which was used to repay
and convert a total of $842,791 of principal amount (includes
penalty fees of $149,313 during the nine months ended September 30,
2019) and accrued interest of $61,569 pursuant to Exchange
Agreements. Accordingly, the Company recognized a deemed dividend
of $904,450 during the nine months ended September 30, 2019 in
connection with the issuance of these Series A Preferred
Stock.
F-22
During the nine
months ended September 30, 2019, the Company converted 321,441
Series A Preferred Stock into 1,607,205 shares of Common
Stock. In connection with this transaction, there were 125,000
shares of Common Stock to be issued as of September 30, 2019. There
are 583,009 and 0 shares of Series A Preferred Stock outstanding as
of September 30, 2019 and December 31, 2018,
respectively.
Series B-1
- On February 29, 2016, the Company’s Board of Directors
voted to designate a class of preferred stock entitled Series B-1
Convertible Preferred Stock (“Series B-1 Preferred
Stock”), consisting of up to 32,000,000 shares, par value
$0.0001 per share. With respect to rights on
liquidation, winding up and dissolution, the Series B-1 Preferred
Stock ranks pari passu to the class of Common Stock.
Shares of Series B-1 Preferred Stock have no dividend rights except
as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-1 Preferred Stock are convertible, at the option of the
holder, into shares of Common Stock at a conversion rate of 0.125
shares for 1 share basis. Holders of Series B-1 Preferred Stock
have the right to vote as-if-converted to Common Stock on all
matters submitted to a vote of holders of the Company’s
Common Stock. On February 29, 2016, the Company issued 30,000,000
shares of Series B-1 Preferred Stock, of which 2,800,000 remain
outstanding as of December 31, 2018 and 2017.
During the nine
months ended September 30, 2019, the Company converted 1,000,000
Series B-1 Preferred Stock into 125,000 shares of Common
Stock. There are 1,800,000 and 2,800,000 shares of
Series B-1 preferred stock outstanding, which are convertible into
225,000 and 350,000 shares of common stock, as of September 30,
2019 and December 31, 2018, respectively.
Series B-2
- On February 17, 2016, the Company’s Board of Directors
voted to designate a class of preferred stock entitled Series B-2
Convertible Preferred Stock (“Series B-2 Preferred
Stock”), consisting of up to 10,000,000 shares, par value
$0.0001 per share, with a stated value of $0.25 per
share. With respect to rights on liquidation, winding up
and dissolution, holders of Series B-2 Preferred Stock will be paid
in cash in full, before any distribution is made to any holder of
common or other classes of capital stock, an amount of $0.25 per
share. Shares of Series B-2 Preferred Stock have no dividend rights
except as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-2 Preferred Stock are convertible, at the option of the
holder, into shares of Common Stock at a conversion rate of 0.125
shares for 1 share basis. Holders of Series B-2
Preferred Stock have the right to vote as-if-converted to Common
Stock on all matters submitted to a vote of the holders of the
Company’s Common Stock. For so long as any shares of Series
B-2 Preferred Stock are issued and outstanding, the
Corporation shall not issue any notes, bonds, debentures, shares of
preferred stock, or any other securities that are convertible to
Common Stock unless such conversion rights are at a fixed ratio or
a fixed monetary price (Note 9). On February 29, 2016, the Company
issued 2,084,000 shares of Series B-2 Preferred Stock.
During the nine
months ended September 30, 2019, the Company converted 1,000,000
Series B-2 Preferred Stock into 125,000 shares of Common
Stock. There are 7,684,000 and 8,684,000 shares of
Series B-1 preferred stock outstanding as of September 30, 2019 and
December 31, 2018, respectively.
Series C -
On June 30, 2016, the Company’s Board of Directors approved a
Certificate of Designation authorizing 1,733,334 shares of new
Series C Preferred Stock, par value $0.0001 per
share. The Series C Preferred Stock ranks equally with
the Company’s Common Stock with respect to liquidation rights
and is convertible to Common Stock at a conversion rate of 0.125
shares for 1 share basis. The conversion rights of
holders of the Series C Preferred Stock are limited such that no
holder may convert any shares of preferred stock to the extent that
such holder, immediately following the conversion, would own in
excess of 4.99% of the Company’s issued and outstanding
shares of common stock. This limitation may be increased
to 9.99% upon 61 days written notice by a holder of the Series C
Preferred Stock to the Company.
Due
to the Company had been unable to proceed with the clinical trials
and research, on July 31, 2019, the Company entered into a
Surrender and Mutual Release Agreement (the “Cancellation
Agreement”) to terminate the agreements and to cancel all
issued and outstanding shares of Series C Preferred. Accordingly,
the Company cancelled 1,733,334 shares of Series C Preferred Stock
which was recorded at par value.
As of September 30,
2019 and December 31, 2018, there were 0 and 1,733,334 shares of
Series C Preferred Stock issued and outstanding,
respectively.
Series D -
On March 1, 2018, the Company’s Board of Directors voted to
designate a class of preferred stock entitled Series D Convertible
Preferred Stock consisting of up to 200 shares, par value $0.0001
per share, to offer for sale to certain accredited investors,
including affiliates of the Company, with a maximum offering amount
of $2,200,000. Pursuant to the terms of the Series D Subscription
Agreement, immediately following the consummation of an offering of
the Company’s Common Stock for which the gross proceeds of
the offering exceed $5,000,000, each share of Series D
automatically converts into 25,000 shares of Common Stock. Upon the
liquidation, dissolution or winding up of the Company, each holder
of Series D Convertible Preferred Stock shall be entitled to
receive, for each share of Series D Convertible Preferred Stock
held, $10,000 per share payable pari passu with the Company’s
Series B-2 Convertible Preferred Stock. Shares of
Series D Preferred Stock have no dividend rights except as may be
declared by the Board in its sole and absolute discretion, out of
funds legally available for that purpose. Holders of Series D
Preferred Stock have the right to vote as-if-converted to Common
Stock on all matters submitted to a vote of holders of the
Company’s Common Stock. At no time may shares of Series D
Convertible Preferred Stock be converted if such conversion would
cause the holder to hold in excess of 4.99% of our issued and
outstanding Common Stock, subject to an increase in such limitation
up to 9.99% of the issued and outstanding Common Stock on 61
days’ written notice to the Company.
F-23
During the nine
months ended September 30, 2019, the Company converted 16 shares of
Series D Preferred Stock into 400,000 shares of Common
Stock. There are 29 and 45 shares of Series D preferred
stock outstanding as of September 30, 2019 and December 31, 2018,
respectively.
Series E -
On August 1, 2019 the Company issued
10,000 shares of newly designated Series E 0% Convertible Preferred
Stock, par value $0.0001 per share (the “Series E
Preferred”) to C2M pursuant to the MSA. Under the terms of
the Series E Preferred, C2M may only convert such shares of Series
E Preferred into shares of the Company’s Common Stock, if the
closing price of Common Stock on the principal trading market,
shall exceed $2.00 per share for 5 consecutive trading days. Once
vested, the shares of Series E Preferred held by C2M are intended
to either be converted at $1.60 per share of Common Stock or
optionally redeemed out of the proceeds of future financings, at
the option of C2M.
Each
share of Series E Preferred is convertible into 625 shares of the
Company’s Common Stock and have a stated value of $1,000 per
share. The conversion ratio is subject to adjustment in the event
of stock splits, stock dividends, combination of shares and similar
recapitalization transactions. The Company is prohibited from
effecting conversions of the Series E Preferred to the extent that,
as a result of such conversion, the holder beneficially owns more
than 4.99% (which may be increased to 9.99% upon 61 days’
written notice), in the aggregate, of the issued and outstanding
shares of Common Stock calculated immediately after giving effect
to the issuance of shares of Common Stock upon the conversion of
the Series E Preferred. Holders of the Series E Preferred shall be
entitled to vote on all matters submitted to shareholders and shall
be entitled to the number of votes equal to the number of shares of
Common Stock into which the shares of Series E Preferred Stock are
convertible, subject to applicable beneficial ownership
limitations. The Series E Preferred Stock provides a liquidation
preference equal to par value.
The
Series E Preferred has a no mandatory redemption rights however, in
the event that we raise $5,000,000 from a capital raising
transaction involving any equity or equity-linked financing during
any fiscal quarter in an amount which would cause the
Company’s cash or cash equivalents to exceed $5,000,000 (a
“Fundamental Transaction”), the Company is required
from the proceeds of such offering, to offer C2M a right to redeem
Series E Preferred then outstanding as follows:
(A)
0% percent of the net proceeds of the Fundamental Transaction,
after deduction of the amount of net proceeds required to leave the
Company (together with our existing cash on hand immediately prior
to the completion of the Fundamental Transaction) with cash on hand
of $5,000,000; plus
(B)
10% percent of the next $5,000,000 of net proceeds of the
Fundamental Transaction; plus
(C)
100% of the net proceeds of the Fundamental Transaction thereafter
(until the Series E Preferred is redeemed in full).
The shares of Series E Preferred are convertible
into Common Stock, once vested, at a price of $1.60 per share. The
Company is not obligated to file a registration statement with
respect to the shares of Common Stock into which Series E Preferred
shares may be converted. The Company believes that the occurrence
of the Fundamental Transaction is considered a conditional event
and as a result the instrument does not meet the definition of
mandatorily redeemable financial instrument based from ASC
480-10-25, “Distinguishing Liabilities from
Equity”.
This financial instrument was assessed at each reporting period to
determine whether circumstances have changed such that the
instrument met the definition of a mandatorily redeemable
instrument (that is, the event is no longer conditional). If the
event has occurred, the condition is resolved, or the event has
become certain to occur, the financial instrument will be
reclassified as a liability.
On July 31, 2019, the Company granted 10,000
Series E Preferred in connection with a Management and Services
Agreement (the “MSA”) with C2M, the Company’s
largest shareholder (see Note 11). The Company valued the
10,000 Series E Preferred shares which is equivalent into 6,250,000
common shares at a fair value of $0.54 per common share or
$3,375,000 based on the sales of common stock on recent private
placements on the dates of grant. During the nine months ended
September 30, 2019, the Company recorded stock-based compensation
of $103,977 and prepaid expense – related party of $3,271,023
to be amortize over the term of the MSA.
As of September 30,
2019 and December 31, 2018, there were 10,000 and 0 shares of
Series E Preferred Stock issued and outstanding,
respectively.
Common Stock
The Company’s
authorized Common Stock consists of 650,000,000 shares with a par
value of $0.0001 per share.
F-24
Sale of Common Stock for private placement
During the nine
months ended September 30, 2019, the Company sold an aggregate of
21,780,340 shares of Common Stock for total proceeds of $7,012,046.
In connection with this transaction, there were 271,249 shares of
Common Stock to be issued as of September 30, 2019.
Common Stock issued for Development Agreement
In consideration
for the Development Agreement (see Note 11), C2M was issued
8,385,691 shares of our Common Stock on January 8, 2019.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock, with exercise
price of $0.32 per share to certain C2M founders. As a result, C2M
became the Company’s largest shareholder holding (inclusive
of the vested options held by its founders) approximately 51% of
the Company’s outstanding Common Stock as of the date of the
Development Agreement. Consequently, such transaction resulted in a
change of control whereby, C2M obtained majority control through
its Common Stock ownership (See Note 11). Therefore, the Company
accounted for the 8,385,691 shares of Common Stock under ASC
845-10-S99 “Transfer of Nonmonetary Assets by Promoters or
Shareholders” whereby the transfer of nonmonetary assets to a
company by its promoters or shareholders in exchange for stock
prior to or at the time of the company's initial public offering
normally should be recorded at the transferors' historical cost
basis determined under GAAP. The Company determined that the value
of the Development Agreement is $0 and recording it in a step-up
basis would not be appropriate since C2M is considered a promoter,
majority shareholder and also a related party having an ownership
interest of 51% in the Company on the execution date of the
Development Agreement. Accordingly, the Company recorded the
issuance of 8,385,691 shares of Common Stock at par value. The
750,000 options were valued on the grant date at approximately
$0.13 per option for a total of $96,000 using a Black-Scholes
option pricing model with the following assumptions: stock price of
$0.13 per share (based on the quoted trading price on the dates of
grants), volatility of 296%, expected term of 10 year, and a risk
free interest rate of 2.74%. During the nine months ended September
30, 2019, the Company recorded stock-based compensation of
$96,000.
Common Stock issued for settlement of debt
During the nine
months ended September 30, 2019, the Company issued 250,000 shares
of Common Stock to note holders upon the conversion of $4,000 of
accrued interest. The fair value of shares on conversion was
$196,000 having a derivative value on date of conversion of $18,000
and the balance of $178,000 was recorded as loss on settlement of
debt. Additionally, in March 2019, the Company issued an aggregate
of 203,080 shares of Common Stock to a noteholder upon the
conversion of $27,000 of principal amount, accrued interest of
$3,267 and $10,349 of accrued expenses.
Common Stock for membership interest in subsidiary
On March 11, 2019,
with the assistance of C2M and assignment of rights, under the term
of the Purchase Agreement, the Company acquired additional 20.1%
from existing members in consideration for payment of 937,500
shares of Common Stock (see Note 3). The 937,500 shares of
Common Stock were valued at the fair value of $1.056 per common
share or $990,000 based on the quoted trading price on the date of
grant. Additionally, on June 10, 2019, the Company was required to
issue the existing members an additional $450,000 of shares of
Common Stock of the Company based upon the 20 day volume weighted
average price per share on the date of issue which was equivalent
to $0.89 per share or 503,298 shares of the Company’s Common
Stock and was issued in August 2019. In connection with this
transaction, there were 503,298 shares of Common Stock to be issued
as of September 30, 2019.
Common Stock for services
In April 2019, the
Company entered into a consulting agreement for investor relations
services. The consultant shall receive compensation of 50,000
shares of the Company’s Common Stock and shall vest over one
year with 4,174 common stock to vest on the date of this agreement
and 4,166 common shares on the first day of each month thereafter.
During the nine months ended September 30, 2019, the Company
granted 50,000 shares of Common Stock and valued the shares of
Common Stock at the fair value of $1.55 per common share or $77,500
based on the quoted trading price on the date of grant. The Company
recorded stock-based compensation of $38,756 during the nine months
ended September 30, 2019. In connection with this transaction,
there were 50,000 shares of Common Stock to be issued as of
September 30, 2019.
F-25
In May 2019, the
Company entered into a 6-month consulting agreement for investor
relations services. The consultant shall receive compensation of
10,000 shares of the Company’s Common Stock per month or a
total of 60,000 shares of Common Stock. During the nine months
ended September 30, 2019, the Company granted 50,000 shares of
Common Stock and valued the shares of Common Stock at the average
fair value of $0.76 per common share or $38,000 based on the sales
of common stock on recent private placements on the dates of
grants. The Company recorded stock-based compensation of $38,000
during the nine months ended September 30, 2019. In connection with
this transaction, there were 50,000 shares of Common Stock to be
issued as of September 30, 2019.
In August 2019, the
Company entered into a 180-day Media Advertising Agreement for
strategic advertising services. The Consultant shall receive
compensation of 50,000 shares of the Company’s Common Stock.
During the nine months ended September 30, 2019, the Company issued
50,000 shares of Common Stock and valued the shares of Common Stock
at the fair value of $0.61 per common share or $30,500 based on the
sales of common stock on recent private placements on the dates of
grants. During the nine months ended September 30, 2019, the
Company recorded stock-based compensation of $6,439 and prepaid
expense of $24,061 to be amortized over the term of this
agreement.
Common Stock in connection with Asset Purchase
Agreements
On July 31, 2019,
under the terms of the Green Goddess Purchase Agreement the Company
agreed to issue 250,000 shares of the Company’s Common Stock
to the Founder (see Note 3). In accordance with ASC 805-10, the
250,000 shares of common stock and the Additional Stock
Consideration are tied to continued employment of the Company and
as such are recognized as compensation expenses in the post
combination period under Share-Based Payment Topic of ASC 718 which
requires recognition in the financial statements of the cost of
employee and services received in exchange for an award of equity
instruments over the period the employee is required to perform the
services in exchange for the award (presumptively, the vesting
period). During the nine months ended September 30, 2019, the
Company recorded stock-based compensation of $16,875 in connection
with this agreement.
On September 30,
2019, pursuant to the terms of an asset purchase agreement with
Levor, LLC, the Company granted 100,000 shares of its Common Stock
valued at $70,000, or $0.70 per share, the fair value of the
Company’s Common Stock based on
the sale of common stock in the recent private placement (see Note
3).
Common Stock grants under the 2019 Plan
On September 13, 2019, the board of directors (the
“Board”) of the Company appointed Vladislav
“Bobby” Yampolsky to serve as its Interim Executive
Chairman. Prior to his appointment, Mr. Yampolsky served as a
member of the Board. In addition, the Board also appointed the
Company’s current President, Emiliano Aloi, to serve as the
Company’s Interim Chief Executive Officer. The appointments
were made following the departure of the Company’s Chairman
and CEO in August 2019. Vladislav (Bobby) Yampolsky is the
founder, manager and controlling member of C2M, the
Company’s largest stockholder.
On
September 13, 2019, the Board delegated authority to the Chairman
of the Board and/or the CEO to issue restricted stock and options
under the 2019 Equity Incentive Plan (the “2019 Plan”)
to non-executive employees and consultants. The aggregate
number of shares of common stock of the Company, par value $0.0001
(“Common Stock”), issuable under delegated authority
may not exceed 500,000 shares, and no individual award may exceed
100,000 shares, provided, further, that the minimum exercise price
of awards made shall be the fair market value of the Common Stock
determined in accordance with the 2019 Plan.
On
September 13, 2019, the Board approved additional awards to
officers, directors and consultants under the 2019 Plan as
follows:
|
Name
|
Amount of Grant
|
Vesting Period
|
Vesting Commencement Date
|
|
Bobby
Yampolsky - Director
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests
October 1, 2019.
|
|
Emiliano
Aloi - CEO
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests on the first
day of calendar month following:
(A) the date that
the 2019 Exactus One World agriculture total yield is at least
400,000 pounds of total biomass for production and held for sale or
processing (including top flower harvest) and (B) the date that the
Company has reported at least $5 million of revenue on a
consolidated basis.
|
|
Consultant
– Legal and consulting services
|
100,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests
October 1, 2019.
|
|
Consultant
– consulting services
|
1,000,000
shares of restricted Common Stock.
|
1/48th
per month.
|
Vests on the first
day of calendar month following:
(A) the date that
the 2019 Exactus One World agriculture total yield is at least
400,000 pounds of total biomass for production and held for sale or
processing (including top flower harvest) and (B) the date that the
Company has reported at least $5 million of revenue on a
consolidated basis.
|
F-26
The Company valued
the shares of Common Stock at the average fair value of $0.70 per
common share or $2,170,000 based on the sales of common stock on
recent private placements on the dates of grants. The Company shall start recognizing stock-based
compensation related to these common stock grants pursuant to the
related vesting terms. As of September 30, 2019, these
restricted stock awards have not been issued.
Cancellation of Common Stock
On July 31, 2019,
the Company entered into a Surrender and Mutual Release Agreement
(the “Cancellation Agreement”) to terminate the
agreements and to cancel all issued and outstanding shares of
Series C Preferred and 180,000 shares of Common Stock, and all
warrants issued under these arrangements. Accordingly, the Company cancelled 180,000 shares
of Common Stock which was recorded at par
value.
Common Stock Warrants
A summary of the
Company’s outstanding stock warrants as of September 30, 2019
and changes during the period ended are presented
below:
|
|
Number of
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Balance at December
31, 2018
|
644,083
|
$1.77
|
1.38
|
|
Granted
|
718,750
|
0.20
|
5.00
|
|
Cancelled
|
—
|
—
|
—
|
|
Exercised
|
—
|
—
|
—
|
|
Forfeited
|
(208,333)
|
4.80
|
—
|
|
Balance at
September 30, 2019
|
1,154,500
|
$0.25
|
3.18
|
|
|
|
|
|
|
Warrants
exercisable at September 30, 2019
|
1,154,500
|
$0.25
|
3.18
|
|
|
|
|
|
|
Weighted average
fair value of warrants granted during the period
|
|
$1.55
|
|
As of September 30,
2019, aggregate intrinsic value in connection with exercisable
warrants amounted to $455,690.
On March 21, 2019,
the Company issued 718,750 warrants to purchase shares of the
Company’s Common Stock in connection with a consulting
agreement in exchange for corporate development and advisory
services. The warrants have a term of 5 years from the date of
grant and are exercisable at an exercise price of $0.20. The
718,750 warrants were valued on the grant date at approximately
$1.55 per warrant for a total of $1,114,062 using a Black-Scholes
option pricing model with the following assumptions: stock price of
$1.55 per share (based on the quoted trading price on the dates of
grants), volatility of 602%, expected term of 5 year, and a risk
free interest rate of 2.35%. During the nine months ended September
30, 2019, the Company recorded stock-based compensation of
$1,114,062.
Common Stock Options
Stock Option Plan
In September 2018,
the Company’s stockholders approved the 2018 Equity Incentive
Plan (the “2018 Plan”). The 2018 Plan provides for the
issuance of incentive awards in the form of non-qualified and
incentive stock options, stock appreciation rights, restricted
stock awards, and restricted stock unit awards. The awards may be
granted by the Company’s Board of Directors to its employees,
directors and officers and to consultants, agents, advisors and
independent contractors who provide services to the Company or to a
subsidiary of the Company. The exercise price for stock options
must not be less than the fair market value of the underlying
shares on the date of grant. The incentive awards shall either be
fully vested and exercisable from the date of grant or shall vest
and become exercisable in such installments as the Board or
Compensation Committee may specify. Stock options expire no later
than ten years from the date of grant. The aggregate number of
shares of Common Stock which may be issued pursuant to the Plan is
9,500,000. Unless sooner terminated, the Plan shall terminate in 10
years.
F-27
Stock option
activity for the nine months ended September 30, 2019 is summarized
as follows:
|
|
Number of
Options
|
Weighted Average
ExercisePrice
|
Weighted Average
Remaining Contractual Life(Years)
|
|
Balance at December
31, 2018
|
959,375
|
0.41
|
8.79
|
|
Granted
|
4,725,000
|
0.21
|
8.53
|
|
Forfeited
|
(41,667)
|
0.71
|
0.40
|
|
Balance at
September 30, 2019
|
5,642,708
|
0.24
|
7.85
|
|
Options exercisable
at September 30, 2019
|
4,270,316
|
$0.27
|
7.38
|
Weighted average
fair value of options granted during the period $0.54
As of September 30,
2019, aggregate intrinsic value in connection with exercisable
options amounted to $1,351,584. As of September 30, 2019, 1,372,392
outstanding options are unvested and there was $396,142
unrecognized compensation expense in connection with unvested stock
options.
Between January
2019 and March 2019, the Company granted 3,975,000 options to
purchase shares of the Company’s Common Stock to various
members of the Board of Directors of the company and consultants
with vesting terms pursuant to their respective sock option
agreements. The options have a term of 10 years from the date of
grant and was exercisable at an exercise price ranging from $0.01
to $0.96. The Company recognized $1,168,357 of compensation expense
relates to the vesting of stock options for the nine months ended
September 30, 2019. These amounts are included in general and
administrative expenses on the accompanying statement of
operations.
In February 2019
and April 2019, the Company granted an aggregate of 750,000 options
to purchase shares of the Company’s Common Stock to an
investor in connection with the sale of Common Stock. The options
have a 9-month term from the date of grant and was exercisable at
an exercise price of $0.50 per share. The fair value of the options
granted amounted to $0.92 per option or $688,674.
The Company
estimates the fair value of stock options using the Black-Scholes
valuation model. Compensation expense related to stock options
granted is measured at the grant date based on the estimated fair
value of the award and is recognized on a straight-line basis over
the requisite service period. The assumptions used in the
Black-Scholes model for the options granted during the nine months
ended September 30, 2019 are presented below:
|
Risk-free interest
rate
|
2.43
– 2.95%
|
|
Expected
volatility
|
293
– 296%
|
|
Expected term (in
years)
|
10
|
|
Expected dividend
yield
|
0%
|
NOTE
11 - COMMITMENTS AND
CONTINGENCIES
Legal Matters
In the ordinary
course of business, the Company enters into agreements with third
parties that include indemnification provisions which, in its
judgment, are normal and customary for companies in the
Company’s industry sector. These agreements are typically
with business partners, clinical sites, and suppliers. Pursuant to
these agreements, the Company generally agrees to indemnify, hold
harmless, and reimburse indemnified parties for losses suffered or
incurred by the indemnified parties with respect to the
Company’s product candidates, use of such product candidates,
or other actions taken or omitted by us. The maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company
has not incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is
minimal. Accordingly, the Company has no liabilities recorded for
these provisions as of September 30, 2019 and December 31,
2018.
In July 2018 we
received notice of the expiration and termination of a license
agreement dated January 19, 2016 acquired through the Share
Exchange by our subsidiary Exactus BioSolutions, Inc that the
Company recognized as an intangible asset from Digital Diagnostics,
Inc. (“Digital Diagnostics”) related to our FibriLyzer
and MatriLyzer technologies. In addition, on December 14,
2018 we received a letter from KD Innovation, Ltd.
(“KDI”) and Dr. Krassen Dimitrov, our former director
seeking payment for alleged past due consulting fees from June 2017
through November 2018 pursuant to a Consulting Agreement dated
January 20, 2016. On January 23, 2019, Digital Diagnostics,
made a demand for compensation against the Company in connection
with an alleged breach of a License Agreement. Under the terms of
these agreements, the parties are required to arbitrate
claims. Although we dispute the material allegations made by
Digital Diagnostics and KDI, if such actions were successful
damages could be awarded against us.
On December 14,
2018, the Company received a termination and demand notice from KD
Innovation, Ltd, an entity 100% owned by a former Board member, in
connection with a consulting agreement KDI entered into with the
Company’s subsidiary, Exactus Biosolutions, Inc., on or about
January 20, 2016. No lawsuit has been filed; however, in the event
a lawsuit is filed, the Company intends to vigorously contest the
matter.
F-28
On September
25, 2019, Jonathan Gilbert, a former director, filed and served a
complaint against the Company in the courts of Nassau County, New
York. The complaint alleges that Mr. Gilbert is entitled to retain
certain cancelled equity awards and seeks specific performance and
damages. The Company has filed a notice of removal and intends to
vigorously defend the allegations as it believes the claims are
without merit.
Leases
On March 1, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Cave Junction, Oregon and consist of
approximately 100 acres. The lease requires the Company to pay 5%
of the net income realized by the Company from the operation of the
lease farm. The lease shall continue in effect from year to year
except for at least a 30-day written notice of termination (see
Note 7).
On March 1, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Glendale, Oregon and consist of approximately
100 acres. The lease requires the Company to pay $120,000 per year,
whereby $50,000 was payable upon execution and $70,000 shall be
payable prior to planting for agricultural use or related purposes.
The lease shall continue in effect from year to year except for at
least a 30-day written notice of termination (see Note
7).
On April 30, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Cave Junction, Oregon and consists of
approximately 38 acres. The lease requires the Company to pay
$76,000 per year, whereby $38,000 was payable upon execution and
$38,000 shall be payable on September 15, 2019 and 2% of the net
income realized by the Company from the operation of the lease
farm. The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company. The lease shall continue in
effect from year to year for five years except for at least a
30-day written notice of termination (see Note 7).
On July 9, 2019,
the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to forty
thousand dollars per month in advance in addition to all applicable
Florida sales and/or federal taxes. Effective one year from the
lease commencement date and each year thereafter, the rent shall
increase at least three percent (3%) per year. The lessor of the
Premises is a limited liability company owned or controlled
by Vladislav (Bobby) Yampolsky, a member of the Board and the
founder, manager and controlling member of C2M, the
Company’s largest stockholder.
Master Product Development and Supply Agreement
On January 8, 2019
we entered into a Master Product Development and Supply Agreement
(the “Development Agreement”) with Ceed2Med, LLC
(“C2M”). C2M has provided the Company access to
expertise, resources, skills and experience suitable for producing
products with active phyto-cannabinoid (CBD) rich ingredients
including isolates, distillates, water soluble, and proprietary
formulations. Under the Development Agreement, we have been
allotted a minimum of 50 and up to 300 kilograms per month, and up
to 2,500 kilograms annually, of active phyto-cannabinoid (CBD) rich
ingredients for resale. We expect to be able to offer tinctures,
edibles, capsules, topical solutions and animal health products
manufactured for us by C2M to satisfy demand for branded and
white-label products that we intend to offer to sell in the future.
The founders of C2M established their first CBD business in 2014.
C2M will also be responsible for overseeing all farming and
manufacturing activities of the Company.
Whereas, in
consideration for the Development Agreement, C2M was issued
8,385,691 shares of our Common Stock on January 8, 2019.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock to founders of
C2M, with exercise price of $0.32 per share (see Note 10). As a
result, C2M was our largest shareholder holding (inclusive of the
vested options) approximately 51% of our outstanding Common Stock
on the date of the Development Agreement.
C2M will provide
personnel necessary for our growth. Utilizing C2M employees and
facilities, the Company has been able to rapidly access resources
and opportunities in the hemp-derived CBD industry. Emiliano Aloi
of C2M became a member of our Advisory Board in January 2019 and
was appointed President of the Company on March 11,
2019.
F-29
Management and Services Agreement
As previously disclosed, on March 11, 2019, the
Company acquired, through our majority-owned subsidiary, EOW, from
the Company’s largest shareholder, C2M, certain rights to a
50.1% limited liability membership interest in certain farm leases
and operations in Oregon in order to enter into the business of
hemp farming for the 2019 grow season. During May 2019, the Company
appointed Emiliano Aloi, the President of the Company, to the
additional position of co-manager of EOW. The Company currently is
farming approximately 200 acres of hemp for harvest and production
during 2019.
On
July 31, 2019, the Company finalized and entered into a Management
and Services Agreement in order to provide the Company project
management and various other benefits associated with the farming
rights, operations and opportunities with C2M, including assignment
by C2M of C2M’s agreements and rights to acquire
approximately 200 acres of hemp farming. Under the terms of the
MSA, C2M agreed to provide further access to the opportunities and
know-how of C2M, consented to the appointment of Emiliano Aloi, a
seasoned hemp veteran previously an advisor and currently the
Company’s President, and to provide the Company and EOW
additional services consisting of, among other things:
●
right
of participation for further investment and business opportunities
in order to rapidly expand our business and operations in
hemp-derived CBD;
●
executive,
sourcing, vendor, product, production and other expertise and
resources;
●
appointment
of Aloi to the position of President;
●
introductions
to farming and other financing;
●
designs
for international “Hemp-Café” store design and
franchise opportunities including plans, drawings, approvals and
authorizations, leads and contacts;
●
access
to leasing of prime real estate in Delray Beach Florida with an
option to purchase, and the continuing assistance of the founder of
C2M in connection with management, design, and promotion of the
project;
●
drawings,
designs and specifications for extraction, production and
manufacturing facilities and resources;
●
brand
development and support services.
The
Company finalized the compensation arrangements for C2M as
contemplated in connection with the March 2019 transactions and the
additional agreements with C2M under the MSA following tax,
accounting and legal review including the treatment of the issuance
of preferred stock in connection with the transactions. While the
assignment initially contemplated a $9 million payment from the
Company to C2M, the parties agreed to payment in a new class of
preferred stock, convertible above market. As a further condition
to payment of the consideration, the value of the 50.1% interest in
EOW was required to be not less than $25 million, with a
third-party valuation and fairness opinion from a third-party prior
to payment. On April 29, 2019, the Company received an independent
fairness opinion from Scalar, LLC (“Scalar Report”)
that concluded the transaction, including the consideration to be
paid consisting of $10 million of Series E Preferred (see Note 10),
was fair from a financial point of view. The Scalar Report
estimated the enterprise value, taking account of the 2019 harvest,
to be between $55 and $74 million, based upon certain assumptions
relied upon in connection with preparation of the Scalar Report.
The term of the MSA commenced on the date of this
agreement.
In
October 2019, the Company entered into an amendment to the MSA (the
“MSA Amendment”). The MSA Amendment extended the
termination date of the MSA to December 31, 2024 and expanded the
scope of services to be provided by C2M to the
Company. Included in the scope of services was to negotiate
with the minority owners of EOW, an amendment to the Operating
Agreement of EOW for the distribution and allocation to provide for
up to 100% (from 50.1%) of the results of operations of the 2019
harvest or yield resulting from all plants germinated during the
calendar year December 31, 2019 (see Note 14).
NOTE
12 - RELATED PARTY
CONSIDERATIONS
Some of the
officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On November 20,
2017, Dr. Dimitrov, former director of the Company, provided a
notice to the Company stating that he was resigning from the Board,
effective immediately. Dr. Dimitrov indicated that his resignation
from the Board was based on the deteriorating relationship between
the Company and Digital Diagnostics over the non-payment of fees
owed by the Company pursuant to the licensing agreement between the
Company and Digital Diagnostics (See Note 11). There was no change
during the nine months ended September 30, 2019.
F-30
For the years ended
December 31, 2018 and 2017, $300,000 was recognized in Research and
Development expenses for consulting provided by Dr. Dimitrov. As of
December 31, 2018 and 2017, $575,000 and $275,000 was included in
accounts payable, respectively. During the year ended December 31,
2018 and 2017, $0 and $125,000, respectively was paid. There was no
change during the nine months ended September 30,
2019.
On June 28, 2017,
the Company issued promissory notes to two of the Company’s
then executive officers and directors. The promissory note accrues
interest at a rate of 8.0% per annum and matures on the earlier of
(i) one (1) year from the date of the promissory note, and (ii) the
closing the sale of the Company’s securities in a single
transaction or a series of related transactions from which at least
$500,000 of gross proceeds are raised (See Note 9).
On January 8, 2019,
the Company entered into a Master Product Development and Supply
Agreement with C2M (see Note 11). At September 30, 2019, accounts
payable to C2M related to purchase of finish products amounted to
$8,342. During the nine months ended September 30, 2019, the
Company purchased finished products from C2M totaling approximately
$1,025,567. During the nine months ended September 30, 2019, cost
of sales of $216,205 represents the purchase of CBD products from
C2M. C2M is a majority stockholder of the Company.
On April 30, 2019,
the Company, through its majority-owned subsidiary, EOW, entered
into a farm lease agreement for a lease term of one year. The lease
premise is located in Cave Junction, Oregon and consists of
approximately 38 acres. The lease requires the Company to pay
$76,000 per year, whereby $38,000 was payable upon execution and
$38,000 shall be payable on September 15, 2019 and 2% of the net
income realized by the Company from the operation of the lease
farm. The lease shall continue in effect from year to year for five
years except for at least a 30-day written notice of termination.
The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company.
On July 31, 2019, the Company granted 10,000
Series E Preferred in connection with a Management and Services
Agreement (the “MSA”) with C2M, the Company’s
largest shareholder (see Note 11). The Company valued the
10,000 Series E Preferred shares which is equivalent into 6,250,000
common shares at a fair value of $0.54 per common share or
$3,375,000 based on the sales of common stock on recent private
placements on the dates of grant. During the nine months ended
September 30, 2019, the Company recorded stock-based compensation
of $103,977 and prepaid expense – related party of $3,271,023
to be amortize over the term of the MSA.
During the nine
months ended September 30, 2019, the Company reimbursed a managing
member of EOW and an affiliated company which is owned by two
managing members of EOW, for operating expenses paid on behalf of
EOW for the following:
●
$400,000 worth of
hemp seeds
●
$50,000
lease payment related to a lease agreement (see Note
11)
●
$100,000 for
irrigation cost
The Company
recognized revenues from a related party customer of $12,140 and
$52,659 during the three and nine months ended September 30, 2018.
As of September 30, 2019, accounts receivable from a related party
customer amounted to $52,659. The customer is an affiliated company
which is substantially owned by a managing member of
EOW.
From time to time,
the Company’s subsidiary, EOW, receives advances from an
affiliated company which is owned by a managing member of EOW for
working capital purposes. The advances are non-interest bearing and
are payable on demand. The affiliated company provided advances to
the Company for working capital purposes for a total of $231,035
and the Company repaid $160,535 of these advances. Additionally,
the related party directly paid $35,000 of lease deposits related
to a farm lease. As of September 30, 2019, due to related party
amounted to $105,500.
Note
13 – CONCENTRATION OF REVENUE AND SUPPLIER
During the nine
months ended September 30, 2019, total sale of CBD products to
three customers represented approximately 55% (14%, 24% - related
party, and 17%) of the Company’s net sales. There were no
revenues generated during the nine months ended September 30,
2018.
As of September 30,
2019 total accounts receivable from four customers represented
approximately 89% (11%, 13%, 38% - related party, and 27%) of total
accounts receivable as compared to none as of December 31,
2018.
During the nine
months ended September 30, 2019, the Company purchased finished
products from C2M (see Note 11) totaling approximately $1,025,567
(100% of the purchases).
F-31
NOTE 14 - SUBSEQUENT EVENTS
In accordance with
authoritative guidance, the Company has evaluated any events or
transactions occurring after September 30, 2019, the balance sheet
date, through the date of filing of this report and note that there
have been no such events or transactions that would require
recognition or disclosure in the consolidated financial statements
as of and for the quarter ended September 30, 2019, except as
disclosed below.
Sale of Common Stock
Subsequent to the
reporting period, and up through November 7, 2019, the Company
accepted shareholder subscriptions in the total amount of $18,334
in exchange for issuance of 36,667shares of Common Stock in an
offering exempt under Rule 506 of Regulation D.
Amendment to Operating Agreement of Exactus One World,
LLC
On
October 23, 2019, the Amended and Restated Operating Agreement (the
“Operating Agreement”) of EOW was amended (the
“First Amendment”) (see Note 11). Under the terms of
the First Amendment, the minority members of EOW conveyed their
49.9% membership interest and rights to distributions related to
the current 2019 hemp crop underway to the Company. As a result,
the Company acquired the right to receive 100% of the distributions
of net profit from the 2019 hemp crop on approximately 225 acres of
farmland currently growing in Oregon. Since March 2019, the Company
has owned 50.1% of the limited liability membership interests in
EOW. In addition, the members amended the payment schedule under
which farm costs are required to be made by the Company. As
consideration for the amendment, the Company agreed to issue
1,223,320 shares of its common stock, par value $0.0001 per share,
to the minority members of EOW.
Amendment to Management and Services Agreement
On
October 23, 2019, the Company, Ceed2Med, LLC (“C2M”),
Vladislav Yampolsky, Jamie Goldstein, and Emiliano Aloi entered
into the Amendment (the “MSA Amendment”), effective
March 1, 2019, to the Management and Services Agreement previously
entered by the parties (see Note 11). C2M, Vladislav Yampolsky and
Emiliano Aloi are directors or officers of the Company and are
considered affiliates of the Company. The MSA Amendment extended
the termination date of the MSA to December 31, 2024 and expanded
the scope of services to be provided by C2M to the
Company.
Promissory Note
During
October 2019, the Company entered into two short-term promissory
notes (the “Notes”) for an aggregate principal amount
of $94,056 and gross cash proceeds of $85,000 (original issue
discount of $9,056). A note with principal amount of $55,556 was
subscribed by Andrew Young, an officer of the Company. The Notes
become due and payable between October 18, 2019 and December 16,
2019 and bear interest at a rate of twelve (12%) percent per annum
prior to the maturity date, and eighteen (18%) per annum if unpaid
following the maturity date. The Notes are unsecured obligations of
the Company. In addition, the Notes carry a 10% original issue
discount.
The
note with principal amount of $38,500 with a maturity date of
October 18, 2019 is currently in default and the Company intends to
pay-off the note in fourth quarter of fiscal year
2019.
Conversion of Preferred Stock
On October 11,
2019, the Company converted 150,000 Series B-1 Preferred Stock into
18,750 shares of Common Stock.
F-32
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
and Board of Directors of
Exactus,
Inc.
Opinion
on the Financial Statements
We have audited the
accompanying consolidated balance sheets of Exactus, Inc. (the
“Company”), as of December 31, 2018 and 2017, and the
related consolidated statements of operations, stockholders’
(deficit) equity and cash flows for each of the two years in the
period ended December 31, 2018 and the related notes (collectively
referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of
America.
The
Company's Ability to Continue as a Going Concern
The accompanying
consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to
the accompanying consolidated financial statements, the Company has
suffered recurring losses from operations, generated negative cash
flows from operating activities, has an accumulated deficit and has
stated that substantial doubt exists about Company’s ability
to continue as a going concern. Management's evaluation of the
events and conditions and management’s plans in regarding
these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis
for Opinion
These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our
audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an
audit of the Company’s internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our
audits provide a reasonable basis for our
opinion.
|
/s/ RBSM
LLP
|
|
|
We have served as
the Company’s auditor since 2014
New York, New
York
March 29,
2019
|
|
|
|
|
F-33
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Balance Sheets
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
ASSETS
|
|
|
|
Current Assets:
|
|
|
|
Cash
and cash equivalents
|
$1,960
|
$161,215
|
|
Prepaid
expenses
|
12,330
|
11,458
|
|
Total current assets
|
14,290
|
172,673
|
|
|
|
|
|
TOTAL ASSETS
|
$14,290
|
$172,673
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
Accounts
payable
|
$923,429
|
$735,051
|
|
Accrued
expenses
|
46,875
|
582,236
|
|
Note
payable
|
51,400
|
48,000
|
|
Convertible
notes, net of unamortized debt discount
|
491,788
|
57,796
|
|
Derivative
liability
|
1,742,000
|
930,000
|
|
Settlement
payable
|
17,000
|
20,000
|
|
Interest
payable
|
66,300
|
15,232
|
|
Total Current Liabilities
|
3,338,792
|
2,388,315
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
Convertible
notes payable
|
100,000
|
-
|
|
Total Long Term Liabilities
|
100,000
|
-
|
|
|
|
|
|
TOTAL LIABILITIES
|
3,438,792
|
2,388,315
|
|
|
|
|
|
Commitments and contingencies (see note 9)
|
|
|
|
|
|
|
|
Stockholders' Deficit:
|
|
|
|
Preferred
stock: 50,000,000 authorized; $0.0001 par value, 0
shares
|
|
|
|
issued
and outstanding
|
-
|
-
|
|
Preferred
stock Series A: 1,000,000 authorized; $0.0001 par value,
0
|
|
|
|
shares
issued and outstanding
|
-
|
-
|
|
Preferred
stock Series B-1: 32,000,000 authorized; $0.0001 par
value,
|
|
|
|
2,800,000
shares issued and outstanding
|
280
|
280
|
|
Preferred
stock Series B-2: 10,000,000 authorized; $0.0001 par
value,
|
|
|
|
8,684,000
shares issued and outstanding
|
868
|
868
|
|
Preferred
stock Series C: 1,733,334 authorized; $0.0001 par
value,
|
|
|
|
1,733,334
shares issued and outstanding
|
173
|
173
|
|
Preferred
stock Series D: 200 authorized; $0.0001 par value, 45 and
0
|
|
|
|
shares
issued and outstanding, respectively
|
1
|
-
|
|
Common
stock: 650,000,000 shares authorized; $0.0001 par
value,
|
|
|
|
6,233,524
and 4,383,983 shares issued and outstanding,
|
|
|
|
respectively
|
623
|
439
|
|
Additional
paid-in capital
|
7,111,445
|
3,983,171
|
|
Accumulated
deficit
|
(10,537,892)
|
(6,200,573)
|
|
Total Stockholders' Deficit
|
(3,424,502)
|
(2,215,642)
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$14,290
|
$172,673
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-34
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Revenues
|
$-
|
$-
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
General
and administration
|
1,932,607
|
1,219,309
|
|
Professional
|
203,619
|
499,522
|
|
Research
and development
|
300,000
|
356,076
|
|
Impairment
loss
|
-
|
1,050,000
|
|
Total Operating Expenses
|
2,436,226
|
3,124,907
|
|
|
|
|
|
Net Loss from Operations
|
(2,436,226)
|
(3,124,907)
|
|
|
|
|
|
Other Expenses:
|
|
|
|
Derivative
loss
|
(828,694)
|
(667,200)
|
|
Loss
on stock settlement
|
(607,929)
|
-
|
|
Interest
expense
|
(464,470)
|
(68,568)
|
|
Total Other Expenses
|
(1,901,093)
|
(735,768)
|
|
|
|
|
|
Net
loss before income taxes
|
(4,337,319)
|
(3,860,675)
|
|
Provision
for income taxes
|
-
|
-
|
|
|
|
|
|
Net Loss
|
$(4,337,319)
|
$(3,860,675)
|
|
|
|
|
|
Basic and Diluted Loss per Common Share
|
$(0.91)
|
$(0.91)
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding
|
4,764,056
|
4,243,395
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-35
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of Stockholders' Deficit
|
|
Preferred Stock- Series B-1
|
Preferred Stock- Series B-2
|
Preferred Stock- Series C
|
Preferred Stock- Series D
|
Common Stock
|
Additional
Paid
in |
Accumulated
|
|
|||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|
Balance, December 31, 2016
|
2,800,000
|
$280
|
8,584,000
|
$858
|
1,733,334
|
$173
|
-
|
$-
|
4,258,983
|
$426
|
$3,838,244
|
$(2,339,898)
|
$1,500,083
|
|
Issuance
of Series B-2 preferred stock for cash
|
-
|
-
|
100,000
|
10
|
-
|
-
|
-
|
-
|
-
|
-
|
24,990
|
-
|
25,000
|
|
Cancellation
of common stock issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
share-based
payment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(62,500)
|
(6)
|
(44)
|
-
|
(50)
|
|
Common
stock issued for debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
187,500
|
19
|
119,981
|
|
120,000
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,860,675)
|
(3,860,675)
|
|
Balance, December 31, 2017
|
2,800,000
|
280
|
8,684,000
|
868
|
1,733,334
|
173
|
-
|
-
|
4,383,983
|
439
|
3,983,171
|
(6,200,573)
|
(2,215,642)
|
|
Issuance
of Series D preferred stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
45
|
1
|
-
|
-
|
549,999
|
-
|
550,000
|
|
Common
stock issued for debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
214,834
|
21
|
343,714
|
-
|
343,735
|
|
Common
stock issued for services
|
|
|
|
|
|
|
|
|
250,000
|
25
|
17,975
|
|
18,000
|
|
Common
stock issued upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
685,644
|
69
|
400,411
|
-
|
400,480
|
|
Common
stock issued for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
125,000
|
12
|
7,988
|
-
|
8,000
|
|
Common
stock issued for settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
574,063
|
57
|
86,742
|
-
|
86,799
|
|
Warrants
issued to Series B-2 holder
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
138,679
|
-
|
138,679
|
|
Related
party debt forgiveness
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,355,372
|
-
|
1,355,372
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
227,394
|
-
|
227,394
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,337,319)
|
(4,337,319)
|
|
Balance, December 31, 2018
|
2,800,000
|
$280
|
8,684,000
|
$868
|
1,733,334
|
$173
|
45
|
$1
|
6,233,524
|
$623
|
$7,111,445
|
$(10,537,892)
|
$(3,424,502)
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-36
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(4,337,319)
|
$(3,860,675)
|
|
Adjustments
to reconcile net loss to cash used in operations:
|
|
|
|
Derivative
expense
|
828,694
|
667,200
|
|
Officer
and director stock payment
|
500,000
|
-
|
|
Stock
option expense
|
227,394
|
-
|
|
Warrant
expense
|
138,679
|
|
|
Amortization
of discount and debt issuance costs for convertible
notes
|
405,173
|
52,795
|
|
Impairment
|
-
|
1,050,000
|
|
Stock
issued for services
|
26,000
|
|
|
Loss
on debt settlement in stock
|
607,929
|
78,315
|
|
Changes
in operating assets and liabilities:
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Prepaid
expenses
|
(872)
|
8,214
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
Accounts
payable
|
188,378
|
210,241
|
|
Accrued
expenses
|
905,946
|
523,757
|
|
Settlement
payable
|
(3,000)
|
20,000
|
|
Interest
payable
|
47,243
|
15,232
|
|
Net Cash Used In Operating Activities
|
(465,755)
|
(1,234,921)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Net Cash From Investing Activities
|
-
|
-
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Proceeds
from sale of Series B-2 Preferred Stock
|
-
|
25,000
|
|
Proceeds
from sale of Series D Preferred Stock
|
50,000
|
-
|
|
Proceeds
from issuance of notes payable
|
103,400
|
48,000
|
|
Payments
of principal on convertible notes
|
(25,000)
|
-
|
|
Proceeds
from issuance of convertible notes
|
178,100
|
267,800
|
|
Net Cash Provided By Financing Activities
|
306,500
|
340,800
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(159,255)
|
(894,121)
|
|
Cash and cash equivalents at beginning of year
|
161,215
|
1,055,336
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
$1,960
|
$161,215
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
Cash
paid for interest
|
$-
|
$-
|
|
Cash
paid for taxes
|
$-
|
$-
|
|
|
|
|
|
Non-Cash transactions investing and financing
activity:
|
|
|
|
Forgiveness
of debt by officers and directors
|
$1,355,372
|
$-
|
|
Proceeds
from sale of Preferred Series D stock paid directly to settle
amounts
|
|
|
|
due
to officers and directors
|
$500,000
|
$-
|
|
Accounts
payable settled by common stock issued
|
$85,934
|
$41,685
|
|
Convertible
notes settled by common stock
|
$46,295
|
$-
|
|
Initial
benefical conversion feature and debt discount on convertible
notes
|
$236,500
|
$374,700
|
|
Initial
derivative liability on convertible notes
|
$469,000
|
$876,000
|
|
Fair
value of common stock issued on conversion of notes
|
$400,480
|
$-
|
|
Fair
value of common stock issued for settlement of accounts
payable
|
$343,735
|
$120,000
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-37
NOTE 1. BUSINESS DESCRIPTION
Exactus, Inc. (the
“Company”) was incorporated on January 18, 2008, as
“Solid Solar Energy, Inc.” in the State of Nevada as a
for-profit Company. On May 16, 2013, the
Company filed a certificate of amendment to change its name to
“Spiral Energy Tech., Inc.”. On February 29,
2016, the Company acquired all of the issued and outstanding
capital stock of Exactus BioSolutions, Inc. (“Exactus
BioSolutions”) pursuant to a Share Exchange Agreement, dated
February 29, 2016, with Exactus BioSolutions (the “Share
Exchange”). The Company
issued 30 million shares of newly-designated Series B-1 Preferred
Stock to the shareholders of Exactus BioSolutions in the Share
Exchange, representing approximately 87% of voting control of the
Company upon consummation of the Share Exchange. As a result of the
Share Exchange, Exactus BioSolutions became a wholly-owned
subsidiary of Exactus, Inc. Effective March 22, 2016, the Company
changed its corporate name to “Exactus, Inc.” via a
merger with its wholly-owned subsidiary, Exactus Acquisition
Corp.
Following the Share Exchange, the Company became a
life science company that plans to develop and commercialize
Point-of-Care (“POC”) diagnostics for measuring
proteolytic enzymes in the blood based on a proprietary detection
platform (the “New Business”). The Company’s
primary product, the FibriLyzer, will employ a disposable test
“biosensor” strip combined with a portable and easy to
use hand held detection unit that provides a result in less than 30
seconds. The initial markets the Company intend to
pursue for the FibriLyzer are (i) the management of
hyperfibrinolytic states associated with surgery and trauma, (ii)
obstetrics, (iii) acute events such as myocardial infarction and
ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis
and (v) chronic coronary disease management. The Company expects to
follow up the FibriLyzer with similar technology, the MatriLyzer,
to detect collagenase levels in the blood for the detection of the
recurrence of cancer. The Company
intends to file to gain regulatory approval to sell its products in
the United States, Canada and Europe. Management intends
to primarily focus on the development and commercialization of the
FibriLyzer and related technology exclusively licensed by
Exactus.
In
December 2018, the Company expanded its focus to pursue
opportunities in Cannabidiol (“CBD”). This decision was
based in part on the passing of The Hemp Farming Act of 2018. The
Act was signed into law during December 2018 and removes hemp
(cannabis with less than 0.3% THC) from the Schedule I controlled
substances list. Following passage, CBD derived from industrial
hemp became legal in the US under federal law and in all 50 states,
opening the door to develop and sell hemp-based CBD products
nationwide. The Company’s goal is to rapidly establish one or
more principal sources of supply and to develop wholesale and
retail sales channels for CBD end-products to be sold to humans and
for animal health, such as nutraceuticals, supplements and pet and
farm products. The Company intends to follow regulatorily compliant
pathways by adopting practices established by the FDA for
CBD.
Prior
to the Company’s acquisition of Exactus BioSolutions pursuant
to the Share Exchange, its primary business focus was on developing
and commercializing drone technology (the “Former
Business”).
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s common stock for all periods presented in the
accompanying consolidated financial statements are retroactively
restated for the effect of the Reverse Stock Split in accordance
with Staff Accounting Bulletin 4C.
NOTE 2. GOING CONCERN
These consolidated financial statements are presented on the basis
that the Company will continue as a going concern. The going
concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. The Company has
considered ASU 2014-15 in consideration of reporting requirements
of the going concern financial statements.
As
of December 31, 2018, the Company had no products available for
sale. There can be no assurance that the Company’s technology
will be approved for sale or, if approved for sale, be commercially
successful. In addition, The Company operates in an environment of
rapidly changing technology and is dependent upon the continued
services of its current consultants and
subcontractors.
The
Company had a working capital deficit of approximately $3.3 million
as of December 31, 2018 and incurred a net loss of approximately
$4.3 million for the year then ended.
F-38
Management Plans
Over
the last several months the Company and its advisors have been
evaluating numerous opportunities and relationships to increase
shareholder value.
The
Company identified the rapidly growing hemp-based CBD market as a
valuable target for a new company focus. On January 8, 2019, the
Company entered into a Master Product Development and Supply
Agreement with Ceed2Med LLC (“C2M”). C2M owns and
operates cGMP facilities located in the State of Florida and
elsewhere and has the expertise, resources, skills and experience
suitable for CBD rich ingredients including isolates, distillates,
water soluble, and proprietary formulations. Under the Agreement,
the Company has been allotted a minimum of 50 and up to 300
kilograms per month, and up to 2,500 kilograms annually, of CBD
rich ingredients for resale. The Company expects to be able to
offer tinctures, edibles, capsules, topical solutions and animal
health products manufactured for the Company by C2M to satisfy
demand for branded and white-label products that the Company
intends to offer to sell in the future. The Company expects to
begin marketing during the first quarter of
2019.
The
Company expects to realize revenue through our efforts, if
successful, to sell wholesale and retail finished products to third
parties. However, as the Company is in a start-up phase, in a new
business venture, in a rapidly evolving industry, many of our costs
and challenges are new and unknown. In order to fund the
Company’s activities, the Company will need to raise
additional capital either through the issuance of equity and/or the
issuance of debt. In the first quarter of 2019, the Company
accepted subscriptions in a private placement offering of common
stock of approximately $3.0 million.
The
Company will need to obtain further funding through public or
private equity offerings, debt financing, collaboration
arrangements or other sources in order to continue. The issuance of
any additional shares of common stock, preferred stock or
convertible securities could be substantially dilutive to the
Company’s stockholders. In addition, adequate additional
funding may not be available on acceptable terms, or at all. If the
Company is unable to raise capital, it would be forced to delay,
reduce or eliminate research and development programs and may not
be able to continue as a going concern.
NOTE 3. SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation and
Consolidation. The consolidated
financial statements and related disclosures have been prepared
pursuant to the rules and regulations of the SEC. The
financial statements have been prepared using the accrual basis of
accounting in accordance with Generally Accepted Accounting
Principles of the United States (“GAAP”). The
Consolidated financial statements include the accounts of the
Company and Exactus Biosolutions, Inc. All significant intercompany
transactions and balances have been eliminated in
consolidation.
Use of
Estimates. The Company
prepares its financial statements in conformity with GAAP which
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Significant estimates for the years ended December
31, 2018 and 2017 include the fair value of derivative liabilities,
contingent liabilities, and stock-based
payments.
Cash and Cash
Equivalents. The Company consider
all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. The carrying value
of those investments approximates their fair market value due to
their short maturity and liquidity. Cash and cash equivalents
include cash on hand and amounts on deposit with financial
institutions, which amounts may at times exceed federally insured
limits. As of December 31,
2018, the Company had no amounts on deposit
that exceeded federally insured limits.
Stock-Based
Compensation. The Company
recognizes compensation expense for stock-based compensation in
accordance with Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) Topic 718
“Compensation
- Stock
Compensation” and ASC
Topic 505-50 “Equity-Based Payments
to Non-Employees”. For
employee stock-based awards, the Company calculates the fair value
of the award on the date of grant using the Black-Scholes method
for stock options and the quoted price of its common stock for
unrestricted shares; the expense is recognized over the requisite
service period. For non-employee stock-based awards, the Company
calculate the fair value of the award on the date of grant in the
same manner as employee awards.
Share-based
expense related to the vesting of stock options and the grant of
shares for services totaled $235,394 for the year ended December
31, 2018. There was no share-based expense for the year ended
December 31, 2017.
F-39
Research and Development
Expenses. The Company
follow ASC 730-10, “Research and
Development,” and
expenses research and development costs when
incurred. Accordingly, third-party research and
development costs, including designing, prototyping and testing of
product, are expensed when the contracted work has been performed
or milestone results have been achieved. Indirect costs are
allocated based on percentage usage related to the research and
development. Research and development costs of $300,000 and
$356,076 were incurred for the years ended December 31, 2018 and
2017, respectively.
Derivatives and Hedging-
Contracts in Entity’s Own Equity. In accordance with the provisions of ASC 815
“Derivatives and
Hedging” the embedded
conversion features in the convertible notes (Note 5) are not
considered to be indexed to the Company’s stock. As a result,
these are required to be accounted for as derivative financial
liabilities and have been recognized as liabilities on the
accompanying consolidated balance sheets. The fair value of the
derivative financial liabilities are determined using a binomial
model with Monte Carlo simulation and is affected by changes in
inputs to that model including the Company’s stock price,
expected stock price volatility, the expected term, and the
risk-free interest rate. The derivative financial liabilities are
subject to re-measurement at each balance sheet date and any
changes in fair value is recognized as a component in other income
(expenses) (Note 6).
Fair Value
Measurements. The Company
adopted the provisions of ASC Topic 820, “Fair Value
Measurements and Disclosures”, which defines fair value
as used in numerous accounting pronouncements, establishes a
framework for measuring fair value, and expands disclosure of fair
value measurements. The guidance prioritizes the inputs used in
measuring fair value and establishes a three-tier value hierarchy
that distinguishes among the following:
●
Level
1—Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access.
●
Level
2—Valuations based on quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
models for which all significant inputs are observable, either
directly or indirectly.
●
Level
3—Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
Liabilities
are classified based on the lowest level of input that is
significant to the fair value measurements. The Company has not
transferred any liabilities between the classification levels. As
of December 31, 2018 and 2017, the Company has no assets that are
re-measured at fair value, and its liabilities re-measured at fair
value consist of derivative liabilities embedded in convertible
notes, which are measured using Level 3 inputs. See Note
6.
Related
Parties. The Company
follows ASC 850,” Related Party
Disclosures,” for
the identification of related parties and disclosure of related
party transactions.
Income
Taxes. The Company
accounts for income taxes under ASC 740 “Income
Taxes.” Under the asset
and liability method of ASC 740, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under FASB ASC 740, the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period the enactment occurs. 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.
Earnings per
Share. The Company computes
basic and diluted earnings per share amounts in accordance with ASC
Topic 260, “Earnings per
Share.” Basic earnings
per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per share
reflects the potential dilution that could occur if stock options
and other commitments to issue common stock were exercised or
equity awards vest resulting in the issuance of common stock that
could share in the earnings of the Company. For the years
ended December 31, 2018 and 2017, the following potentially
dilutive shares were excluded from the computation of diluted
earnings per shares because their impact was
anti-dilutive:
|
|
2018
|
2017
|
|
Stock
Options
|
959,375
|
-
|
|
Stock
Warrants
|
644,083
|
208,458
|
|
Preferred
Stock
|
2,602,167
|
1,652,167
|
|
Convertible
Debt
|
22,134,849
|
424,479
|
|
Total
|
26,340,474
|
2,285,104
|
F-40
Recently Adopted Accounting Pronouncements
In August 2014, the
FASB issued ASU 2014-15, "Presentation of Financial Statements
– Going Concern (Subtopic 205-40), effective for the annual
period ending after December 15, 2016, and for annual periods and
interim periods thereafter. Early application is permitted. This
standard provides guidance about management’s responsibility
to evaluate whether there is substantial doubt about an
entity’s ability to continue as a going concern and to
provide related footnote disclosures. The guidance is effective for
annual reporting periods ending after December 15, 2016, and
early adoption is permitted. The Company adopted this guidance on
January 1, 2017, with no significant impact the
Company’s consolidate financial position, results of
operations or cash flows.
In March 2016, the FASB issued ASU
2016-09, Improvements to Employee
Share-Based Payment Accounting,
which amends Accounting Standards Codification (“ASC”)
Topic 718, Compensation – Stock Compensation. ASU 2016-09
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years and early adoption is
permitted. The adoption of this guidance did not have a material
impact on the Company's consolidated financial
statements.
In August 2016, the FASB issued ASU
2016-15, Cash Flow Statements,
Classification of Certain Cash Receipts and Cash
Payments, which addresses eight
specific cash flow classification issues with the objective of
reducing diversity in practice. The amendments are effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. The adoption of this guidance did not have a
material impact on the Company's consolidated financial
statements.
In May 2014, the FASB issued ASU No.
2014-09, Revenue from Contracts with
Customers (Topic 606). The ASU
creates a single source of revenue guidance for companies in all
industries. The new standard provides guidance for all revenue
arising from contracts with customers and affects all entities that
enter into contracts to provide goods or services to their
customers, unless the contracts are within the scope of other
accounting standards. It also provides a model for the measurement
and recognition of gains and losses on the sale of certain
nonfinancial assets. This guidance, as amended, must be adopted
using either a full retrospective approach for all periods
presented or a modified retrospective approach and will be
effective for fiscal years beginning after December 15, 2017 with
early adoption permitted. The Company adopted this ASU effective
January 1, 2018 using the modified retrospective method with no
impact on its consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02 (Topic 842). Topic
842 amends a number of aspects of lease accounting, including
requiring lessees to recognize leases with a term greater than one
year as a right-of-use asset and corresponding liability, measured
at the present value of the lease payments. In July 2018, the FASB
issued supplemental adoption guidance and clarification to Topic
842 within ASU 2018-10 “Codification Improvements to Topic
842, Leases” and ASU 2018-11 “Leases (Topic 842):
Targeted Improvements.” The new guidance aims to increase
transparency and comparability among organizations by requiring
lessees to recognize lease assets and lease liabilities on the
balance sheet and requiring disclosure of key information about
leasing arrangements. A modified retrospective application is
required with an option to not restate comparative periods in the
period of adoption. This guidance is effective for the Company on
January 1, 2019 with early adoption permitted. The Company is
currently evaluating the impact of the adoption of this standard on
its consolidated financial statements, which will consist primarily
of a balance sheet gross up of its operating leases to show equal
and offsetting right-of-use assets and lease liabilities. The
Company anticipates using the practical expedients that are
included in the guidance for existing operating leases which allows
a waiver of lease assessment of their respective classification
under the new standard. The Company will adopt the requirements of
the new standard as new arrangements are executed.
On
June 20, 2018, the FASB issued ASU 2018-07,1 which simplifies the
accounting for share-based payments granted to nonemployees for
goods and services. Under the ASU, most of the guidance on such
payments to nonemployees would be aligned with the requirements for
share-based payments granted to employees. Currently, share-based
payment arrangements to nonemployees are accounted for under ASC
718,3 while nonemployee share-based payments issued for goods and
services are accounted for under ASC 505-50. ASC 505-50. Before the
amendment, the major difference for the Company (but not limited
to) was the determination of measurement date which generally is
the date on which the measurement of equity classified share-based
payments becomes fixed. Equity classified share-based payments for
employees was fixed at the time of grant and nonemployee share
based payments. Equity-classified nonemployee share-based payment
awards are no longer measured at the earlier of the date which a
commitment for performance by the counterparty is reached or the
date at which the counterparty’s performance is complete.
They are now measured at the grant date of the award which is the
same as share-based payments for employees. The Company adopt the
requirements of the new rule in the first quarter of
2019.
F-41
In
January 2017, the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The Company is currently
evaluating the impact of this standard.
In
June 2016, the FASB issued ASU 2017-13, Financial
Instruments-Credit Losses. The standard requires a financial asset
(including trade receivables) measured at amortized cost basis to
be presented at the net amount expected to be collected. Thus, the
income statement will reflect the measurement of credit losses for
newly-recognized financial assets as well as the expected increases
or decreases of expected credit losses that have taken place during
the period. This standard will be effective for the calendar year
ending December 31, 2020. The Company is currently in the process
of evaluating the impact of adoption of this ASU on its
consolidated financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, which amends the FASB
Accounting Standards Codification. Part I of ASU No.
2017-11, Accounting for Certain Financial Instruments with
Down Round Features, changes the classification analysis of certain
equity-linked financial instruments (or embedded features) with
down round features. The guidance is effective for reporting
periods beginning after December 15, 2018 and interim periods
within those fiscal years. Early adoption is permitted The Company
is in the process of evaluating the impact of adopting the guidance
on its consolidated financial statements.
NOTE 4. NOTES PAYABLE
On
June 28, 2017, the Company issued to two of the Company’s
executive officers a promissory note in the principal amount up to
$100,000, which amount may be drawn upon by the Company as bridge
financing for general working capital purposes. The promissory note
accrues interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. As of December 31,
2018 and 2017, the Company has drawn $51,400 and $48,000,
respectively, on the promissory notes. During the years ended
December 31, 2018 and 2017, the Company recognized $3,981 and
$1,967, respectively, of interest expense. As of December 31, 2018
and 2017, the notes had accrued interest balances of $5,928 and
$1,967, respectively
F-42
NOTE 5. CONVERTIBLE NOTES
The Company’s
convertible notes consist of the following as of December 31, 2018
and 2017:
|
|
2018
|
2017
|
|
Convertible note in
the amount of $110,000 dated, August
14, 2017, accruing interest at an annual rate of 8%, matured on
August 14, 2018, and convertible into common stock of the Company
at a conversion price equal to the lesser of (i) $2.00 ($0.25
pre-split) and (ii) 60% of the average of the three lowest trading
prices of the Company’s common stock during the twenty-day
trading period prior to the conversion (the “Note”).
The Company received net proceeds of $87,000 from the issuance of
the Note , after deducting an original issue discount and debt
issuance costs. On December 18, 2017, the Company further amended
the Note to (i) increase the aggregate principal amount of the Note
to $115,000 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
January 4, 2018. On January 4, 2018, the Company further amended
the Note to (i) increase the aggregate principal amount of the Note
to $125,000 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
February 1, 2018. In March 2018, the Company paid $25,000 towards
principal of the Note. On May 7, 2018, the Company further amended
the Note to (i) increase the aggregate principal amount of the Note
to $121,481 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
May 31, 2018. On June 11, 2018, the holder of the Note
converted $10,000 of the principal of the Note into 22,727
post-split shares (181,818 pre-split shares) of common stock. On
July 13, 2018, the holder of the note converted $10,500 of the
principal of the Note to 116,667 post-split shares (933,334
pre-split shares) of common stock. On August 30, 2018, the holder
of the Note converted $10,500 of the principal of the Note to
218,750 post-split shares (1,750,000 pre-split shares) of common
stock. On November 13, 2018, the Company further amended the Note
to (i) increase the aggregate principal amount of the Note by
$10,000 and (ii) extend the date by which the Company is required
to cause the Registration Statement to become effective to December
13, 2018. The Company determined that the conversion feature
embedded in the Note required bifurcation and presentation as a
liability. During the year ended December 31, 2017, the Company
recorded an initial derivative liability of $240,000, resulting in
initial derivative expense of $153,000, and an initial debt
discount of $87,000 to be amortized into interest expense through
the maturity of the Note. During the years ended December 31, 2018
and 2017, the Company recognized $68,589 and $41,411, respectively,
of amortization expense. As of December 31, 2018 and 2017, the
notes had principal balances of $101,481 and $115,000,
respectively, and is carried at $101,481 an $46,411, respectively,
net of remaining discounts of $0 and $68,589,
respectively.
|
$
101,481 |
$
46,411 |
|
|
|
|
|
Convertible note in
the amount of $27,500 dated,
September 27, 2017, accruing interest
at an annual rate of 8%, matured on September 27, 2018, and
convertible into common stock of the Company at a conversion price
equal to the lesser of (i) $2.00 ($0.25 pre-split) and (ii) 60% of
the average of the three lowest trading prices of the
Company’s common stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $21,750 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
On May 7, 2018, the Company further amended the Note to increase
the aggregate principal amount of the Note to $4,125. On
November 13, 2018, the Company amended the Note to (i) increase the
aggregate principal amount of the Note by $5,000 and (ii) extend
the date by which the Company is required to cause the Registration
Statement to become effective to December 13, 2018. The Company
determined that the conversion feature embedded in the Note
required bifurcation and presentation as a liability. During the
year ended December 31, 2017, the Company recorded an initial
derivative liability of $46,000, resulting in initial derivative
expense of $24,450, and an initial debt discount of $21,750 to be
amortized into interest expense through the maturity of the Note.
During the years ended December 31, 2018 and 2017, the Company
recognized $20,177 and $7,323, respectively, of amortization
expense. As of December 31, 2018 and 2017, the notes had principal
balances of $36,625 and $27,500, respectively, and is carried at
$36,625 an $7,323, respectively, net of remaining discounts of $0
and $20,177, respectively.
|
36,625 |
7,323 |
F-43
|
Convertible note in
the amount of $65,000 dated,
December 21, 2017, accruing interest
at an annual rate of 12%, matured on December 21, 2018, and
convertible into common stock of the Company at a conversion price
equal to the lesser of (i) closing sale price of the common
stock on the principal market on the trading day immediately
preceding the closing date and (ii) 60% of the average of the three lowest trading prices
of the Company’s common stock during the twenty-day trading
period prior to the conversion (the “Note”). The
Company received net proceeds of $62,400 from the issuance of the
Note, after deducting an original issue discount and debt issuance
costs. On March 28, 2018, the Company amended the Note to (i)
increase the aggregate principal amount of the Note to $71,500 and
(ii) adjust the conversion price to the lesser of (i)
closing sale price of the common stock on the principal market on
the trading day immediately preceding the closing date and (ii) 51% of the average of the three lowest
trading prices of the Company’s common stock during the
twenty-five day trading period prior to the conversion. On November
11, 2018, the holder of the note converted $5,325 of the principal
of the Note to 187,500 post-split shares (1,500,000 pre-split
shares) of common stock. On December 18, 2018, the holder of the
Note converted $4,850 of the principal of the Note to 100,000
post-split shares (800,000 pre-split shares) of common stock. The
Company determined that the conversion feature embedded in the Note
required bifurcation and presentation as a liability. During the
year ended December 31, 2017, the Company recorded an initial
derivative liability of $163,000, resulting in initial derivative
expense of $106,200, and an initial debt discount of $56,800 to be
amortized into interest expense through the maturity of the Note.
During the years ended December 31, 2018 and 2017, the Company
recognized $63,219 and $1,781, respectively, of amortization
expense. As of December 31, 2018 and 2017, the note had principal
balances of $89,588 and $65,000, respectively, and is carried at
$89,588 and $1,781 respectively, net of remaining discounts of $0
and $63,219, respectively.
|
89,588 |
1,781 |
|
|
|
|
|
Convertible note in
the amount of $125,000 dated,
December 26, 2017, accruing interest
at an annual rate of 12%, matured on September 26, 2018, and
convertible into common stock of the Company at a conversion price
equal to the lesser of (i) the lowest trading price of the
Company's common stock during the twenty-five-day trading period
prior to the issue date of the Note and (ii) 50% of the average of
the three lowest trading prices of the Company’s common stock
during the twenty-five day trading period prior to the conversion
(the “Note”). The Company received net proceeds of
$112,250 from the issuance of the Note, after deducting an original
issue discount and debt issuance costs. On July 11, 2018, the
holder of the note elected to convert interest of $3,120 into
15,000 post-split (120,000 pre-split shares) of common stock. On
November 28, 2018, the holder of the Note converted $2,000 of the
interest of the Note to 25,000 post-split shares (200,000 pre-split
shares) of common stock. The Company determined that the conversion
feature embedded in the Note required bifurcation and presentation
as a liability. During the year ended December 31, 2017, the
Company recorded an initial derivative liability of $427,000,
resulting in initial derivative expense of $324,750, and an initial
debt discount of $102,250 to be amortized into interest expense
through the maturity of the Note. During the years ended December
31, 2018 and 2017, the Company recognized $122,719 and $2,281,
respectively, of amortization expense. As of December 31, 2018 and
2017, the Note had a principal balance of $125,000 for both
periods, and is carried at $125,000 and $2,281 respectively, net of
remaining discounts of $0 and $122,719,
respectively.
|
125,000 |
2,281 |
|
|
|
|
|
Convertible note in
the amount of $58,500 dated,
March 16, 2018, accruing interest at
an annual rate of 9%, matures on December 16, 2018, and convertible
into common stock of the Company at a conversion price equal to the
lesser of (i) $2.00 ($0.25 pre-split) and (ii) 51% of the average
of the three lowest trading prices of the Company’s common
stock during the twenty-five day trading period prior to the
conversion (the “Note”). The Company received net
proceeds of $41,050 from the issuance of the Note, after deducting
an original issue discount and debt issuance costs. The Company
determined that the conversion feature embedded in the Note
required bifurcation and presentation as a liability. During the
year ended December 31, 2018, the Company recorded an initial
derivative liability of $94,000, resulting in initial derivative
expense of $46,000, and an initial debt discount of $48,000 to be
amortized into interest expense through the maturity of the Note.
During the year ended December 31, 2018, the Company recognized
$65,450 of amortization expense and as of December 31, 2018, the
note is carried at its face value of $58,500.
|
58,500 |
- |
F-44
|
Convertible note in
the amount of $60,000 dated,
June 29, 2018, accruing interest at an
annual rate of 12%, maturing on June 29, 2019, and convertible into
common stock of the Company at a conversion price equal to 50% of
the average of the three lowest trading prices of the
Company’s common stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $51,900 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
In December 2018, the Company agreed to increase the principal
balance of note by $30,000 in relation to the assignment of the
Note by the holder to another third party. The Company determined
that the conversion feature embedded in the Note required
bifurcation and presentation as a liability. During the year ended
December 31, 2018, the Company recorded an initial derivative
liability of $120,000, resulting in initial derivative expense of
$63,000, and an initial debt discount of $57,000 to be amortized
into interest expense through the maturity of the Note. During the
year ended December 31, 2018, the Company recognized $30,981 of
amortization expense and as of December 31, 2018, the Note had a
principal balance of $90,000, and is carried at $55,881, net of
un-amortized discounts of $34,119.
|
55,881 |
- |
|
|
|
|
|
Convertible note in
the aggregate amount of $30,000
dated, July 3, 2018, accruing
interest and an annual rate of 12%, maturing on July 3, 2019, and
convertible into common stock of the Company at a conversion price
equal to 50% of the average of the three lowest trading prices of
the Company’s common stock during the twenty-day trading
period prior to the conversion (the “Notes”). The
Company received net proceeds of $28,000 from the issuance of the
Note , after deducting an original issue discount and debt issuance
costs. The Company determined that the conversion feature embedded
in the Note required bifurcation and presentation as a liability.
During the year ended December 31, 2018, the Company recorded an
initial derivative liability of $68,000, resulting in initial
derivative expense of $40,000, and an initial debt discount of
$28,000 to be amortized into interest expense through the maturity
of the Note. During the year ended December 31, 2018, the Company
recognized $16,620 of amortization expense. As of December 31,
2018, the Note had a principal balance of $30,000 and the note is
carried at $14,120, net of un-amortized discount of
$15,880.
|
14,120 |
- |
|
|
|
|
|
Convertible notes
in the aggregate amount of $70,500
dated, October 23, 2018
($35,250) and October 26, 2018 ($35,250), accruing interest at an
annual rate of 12%, maturing in one year, and convertible into
common stock of the Company at a conversion price equal to the
lesser of i) the closing sale price of the Company's common stock
on closing date and ii) 60% of the lowest trading price of the
Company’s common stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $57,000 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
The Company determined that the conversion features embedded in the
Notes required bifurcation and presentation as liabilities. During
the year ended December 31, 2018, the Company recorded initial
derivative liabilities of $187,000, resulting in initial derivative
expense of $127,000, and initial debt discounts of $60,000 to be
amortized into interest expense through the maturity of the Note.
During the year ended December 31, 2018, the Company recognized
$15,535 of amortization expense and as of December 31, 2018, the
Note had a principal balance of $70,500 and the notes are carried
at $10,593, net of un amortized discounts of
$59,907.
|
10,593 |
- |
|
|
|
|
|
Convertible
Notes in the aggregate amount of $100,000, issued on March 22,
2018. The Notes bear interest at a rate of 5% per annum and will
mature on February 1, 2023. If a qualified financing from which at
least $5 million of gross proceeds are raised occurs prior to the
maturity date, then the outstanding principal balance of the notes,
together with all accrued and unpaid interest thereon, shall be
automatically converted into a number of shares of the
Company’s common stock at $0.40 ($0.05 pre-split) per Share.
The Notes offers registration rights wherein the Company agrees
that within 45 days of a Qualified Offering, prior to the Maturity
Date, the Company shall file a registration statement with the SEC
registering for resale the shares of Company’s common stock
into which the Notes are convertible. The balance of notes as of
December 31, 2018 totaled $100,000.
|
100,000 |
- |
|
|
|
|
|
Net Carrying Amount
of Convertible Debt
|
$591,788
|
$57,796
|
|
Less: Current
Portion
|
491,788
|
57,796
|
|
Convertible Notes,
Long Term
|
$100,000
|
$0
|
F-45
The following is a
summary of the carrying amounts of convertible notes as of December
31, 2018 and 2017:
|
|
2018
|
2017
|
|
Principal
Amount
|
$701,694
|
$332,500
|
|
Less unamortized
debt discount and debt issuance costs
|
(109,906)
|
(274,704)
|
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$591,788
|
$57,796
|
During
the years ended December 31, 2018 and 2017, the Company recognized
$55,877 and $4,495, respectively, of interest expense for these
convertible notes. As of December 31, 2018 and 2017, the notes had
accrued interest balances of $60,372 and $4,495,
respectively
NOTE 6. DERIVATIVE
LIABILITIES
The Company determined
that the conversion options embedded in the Notes discussed in Note
5 require liability presentation at fair value. Each of these
instruments provide the holder with the right to convert into
common stock at a fixed discount market, with certain notes subject
to a cap on the conversion price. These clauses cause uncertainty
as to the number of shares issuable upon conversion of convertible
debt and accordingly require liability presentation on the balance
sheet in accordance with US GAAP. The fair value of the
described embedded derivative on all debt was valued at $1,742,000
and $930,000 at December 31, 2018 and 2017,
respectively.
For the years ended December 31, 2018 and 2017, the Company
measured the fair value of the embedded derivatives using a
binomial model and Monte Carlo simulations, and the following
assumptions:
|
|
2018
|
2017
|
|
Expected
Volatility
|
85.8% to
455.8%
|
300.9% to
333.9%
|
|
Expected
Term
|
0.25 to 1.0
Years
|
0.25 to 1.0
Years
|
|
Risk Free
Rate
|
1.6% to
2.6%
|
1.2% to
1.5%
|
|
Dividend
Rate
|
0.00%
|
0.00%
|
The Company
recorded change in fair value of the derivative liability on debt
to market resulting in non-cash, non-operating loss of $433,855 and
$54,000 for the year ended December 31, 2018 and 2017,
respectively.
During the year
ended December 31, 2018 and 2017 the Company reclassed the
derivative liability of $90,855 and $0, respectively, to additional
paid in capital on conversion of convertible note.
The following table
provides a summary of derivative activity for years ended December
31, 2018 and 2017:
|
Balance, December
31, 2016
|
$-
|
|
Initial
fair value at note issuances
|
876,000
|
|
Change
in fair value
|
54,000
|
|
Balance, December
31, 2017
|
930,000
|
|
Initial
fair value at note issuances
|
469,000
|
|
On
conversions and repayments
|
(90,855)
|
|
Change
in fair value
|
433,855
|
|
Balance, December
31, 2018
|
$1,742,000
|
|
Net loss for the
year included in earnings relating to the liabilities held at
December 31, 2018
|
$433,855
|
|
Non-cash interest
expenses related to derivative liability
|
$394,839
|
NOTE 7. STOCKHOLDERS’ DEFICT
On January 11,
2019, the Board of Directors of the Company approved a reverse
stock split of the Company’s Common Stock at a ratio of
1-for-8 including shares issuable upon conversion of the
Company’s outstanding convertible securities. All share and
per share values of the Company’s common stock for all
periods presented in the accompanying consolidated financial
statements are retroactively restated for the effect of the Reverse
Stock Split in accordance with Staff Accounting Bulletin
4C.
F-46
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001.
Series
A -
On February 17, 2016, the Board of
Directors voted to designate a class of preferred stock entitled
Series A Preferred Stock, consisting of up to five million
(5,000,000) shares, par value
$0.0001.
On December 21, 2018, we filed a Certificate of Cancellation of our
previously filed Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock in order to designate
1,000,000 shares as a new Series of Preferred Stock for issuance to
former Holders of our Notes under the Exchange Agreements, and
filed a new Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock.
Pursuant
to the Series A Preferred Certificate of Designation, the Company
issued shares of Series A Preferred. Each share of Series A
Preferred has a stated value of $1.00 per share. In the
event of a liquidation, dissolution or winding up of the Company,
each share of Series A Preferred Stock will be entitled to a
payment as set forth in the Certificate of Designation. The Series
A Preferred is convertible into such number of shares of the
Company’s common stock, par value $0.0001 per share equal to
the Stated Value of $8.00 ($1.00 pre-split), divided by $0.20
($0.025 per share pre-split), subject to adjustment in the event of
stock split, stock dividends, and recapitalization or
otherwise. Pursuant to the Exchange Agreements each
holder of Notes shall be issued Series A Preferred in the amount of
the purchase price paid for such Notes by the buyer under the
Exchange Agreement, including any penalty, interest and premium
payments. Each share of Series A Preferred entitles the holder to
vote on all matters voted on by holders of Common Stock as a single
class. With respect to any such vote, each share of Series A
Preferred entitles the holder to cast such number of votes equal to
the number of shares of Common Stock such share of Series A
Preferred is convertible into at such time, but not in excess of
the conversion limitations set forth in the Series A Preferred
Certificate of Designation. The Series A Preferred will be entitled
to dividends to the extent declared by the Company.
There
are no shares of Series A preferred stock outstanding as of
December 31, 2018 and 2017.
Series
B-1 - On February 29, 2016, the
Company’s Board of Directors voted to designate a class of
preferred stock entitled Series B-1 Convertible Preferred Stock
(“Series B-1 Preferred Stock”), consisting of up to
thirty-two million (32,000,000) shares, par value
$0.0001. With respect to rights on liquidation, winding
up and dissolution, the Series B-1 Preferred Stock ranks pari
passu to the class of common stock. Shares of Series B-1
Preferred Stock have no dividend rights except as may be declared
by the Board in its sole and absolute discretion, out of funds
legally available for that purpose. Shares of Series B-1 Preferred
Stock are convertible, at the option of the holder, into shares of
common stock at a conversion rate of 0.125 post-split shares (1
pre-split shares) for 1 share basis. Holders of Series B-1
Preferred Stock have the right to vote as-if-converted to common
stock on all matters submitted to a vote of holders of the
Company’s common stock. On February 29, 2016, the Company
issued 30,000,000 shares of Series B-1 Preferred Stock, of which
2,800,000 remain outstanding as of December 31, 2018 and
2017.
Series
B-2 - Also on February 17,
2016, the Company’s Board of Directors voted to designate a
class of preferred stock entitled Series B-2 Convertible Preferred
Stock (“Series B-2 Preferred Stock”), consisting of up
to six million (6,000,000) shares, par value $0.0001, with a stated
value of $0.25 per share. With respect to rights on
liquidation, winding up and dissolution, holders of Series B-2
Preferred Stock will be paid in cash in full, before any
distribution is made to any holder of common or other classes of
capital stock, an amount of $0.25 per share. Shares of Series B-2
Preferred Stock have no dividend rights except as may be declared
by the Board in its sole and absolute discretion, out of funds
legally available for that purpose. Shares of Series B-2 Preferred
Stock are convertible, at the option of the holder, into shares of
common stock at a conversion rate of 0.125 post-split shares (1
pre-split shares) for 1 share basis. Holders of Series
B-2 Preferred Stock have the right to vote as-if-converted to
common stock on all matters submitted to a vote of the holders of
the Company’s common stock. For so long as any
shares of Series B-2 Preferred Stock are issued and
outstanding, the Corporation shall not issue any notes, bonds,
debentures, shares of preferred stock, or any other securities that
are convertible to common stock unless such conversion rights are
at a fixed ratio or a fixed monetary price (Note 9).
On February 29, 2016, the Company
issued 2,084,000 shares of Series B-2 Preferred
Stock.
On August 1, 2016, the Company closed
a private offering of Series B-2 Preferred Stock. The
Company sold a total of 500,000 shares of Series B-2 Preferred
Stock to accredited investors at an offering price of $0.25 per
share, for an aggregate subscription price of
$125,000. No underwriting discounts or commissions have
been paid in connection with the sale of the Series B-2 Preferred
Stock.
F-47
Effective
October 13, 2016, the Company amended the Certificate of
Designation for its Series B-2 Preferred Stock to increase the
number of shares of the Series B-2 Preferred Stock from 6,000,000
to 10,000,000 shares. There were no other changes to the terms of
the Company’s Series B-2 Preferred Stock.
On
October 27, 2016, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of
6,000,000 shares of Series B-2 Preferred Stock to accredited
investors at an offering price of $0.25 per share, for an aggregate
subscription price of $1,500,000. No underwriting
discounts or commissions have been or will be paid in connection
with the sale of the Series B-2 Preferred Stock.
On
January 26, 2017, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of 100,000
shares of Series B-2 Preferred Stock to accredited investors at an
offering price of $0.25 per share, for an aggregate subscription
price of $25,000. No underwriting discounts or
commissions have been or will be paid in connection with the sale
of the Series B-2 Preferred Stock.
As
of December 31, 2018 and 2017, 8,684,000 shares of Series B-2
Preferred Stock are issued and outstanding.
Series
C - On June 30, 2016, the
Company’s Board of Directors approved a Certificate of
Designation authorizing 1,733,334 shares of new Series C Preferred
Stock, par value $0.0001. The Series C Preferred Stock
ranks equally with the Company’s common stock with respect to
liquidation rights and is convertible to common stock at a
conversion rate of 0.125 post-split shares (1 pre-split shares) for
1 share basis. The conversion rights of holders of the
Series C Preferred Stock are limited such that no holder may
convert any shares of preferred stock to the extent that such
holder, immediately following the conversion, would own in excess
of 4.99% of the Company’s issued and outstanding shares of
common stock. This limitation may be increased to 9.99%
upon 61 days written notice by a holder of the Series C Preferred
Stock to the Company. As of December 31, 2018 and 2017,
1,733,334 shares of Series C Preferred Stock are issued and
outstanding.
Series
D - On March 1, 2018, the
Company’s Board of Directors voted to designate a class of
preferred stock entitled Series D Convertible Preferred Stock
consisting of up to 200 shares, par value $0.0001 to offer for sale
to certain accredited investors, including affiliates of the
Company, with a maximum offering amount of $2,200,000. Pursuant to
the terms of the Series D Subscription Agreement, immediately
following the consummation of an offering of the Company’s
Common Stock for which the gross proceeds of the offering exceed
$5,000,000, each share of Series D automatically converts into
25,000 post-split shares (200,000 pre-split shares) of Common
Stock. Upon the liquidation, dissolution or winding up of the
Company, each holder of Series D Convertible Preferred Stock shall
be entitled to receive, for each share of Series D Convertible
Preferred Stock held, $10,000 per share payable pari passu with the
Company’s Series B-2 Convertible Preferred
Stock. Shares of Series D Preferred Stock have no
dividend rights except as may be declared by the Board in its sole
and absolute discretion, out of funds legally available for that
purpose. Holders of Series D Preferred Stock have the right to vote
as-if-converted to common stock on all matters submitted to a vote
of holders of the Company’s common stock. At no time may
shares of Series D Convertible Preferred Stock be converted if such
conversion would cause the holder to hold in excess of 4.99% of our
issued and outstanding common stock, subject to an increase in such
limitation up to 9.99% of the issued and outstanding common stock
on 61 days’ written notice to the
Company.
On
March 28, 2018, the Company issued 45 shares of Series D Preferred
Stock. The Company received $550,000 in connection with the
Offering including $50,000 in cash for 5 shares of Series D
Preferred Stock and $500,000 in debt re-payment to officers and
directors for 2016 and 2017 bonuses for 40 shares of Series D
Preferred Stock. As of December 31, 2018, 45 shares of Series D
Preferred Stock are issued and outstanding
Common Stock
The
Company’s authorized common stock consists of 650,000,000
shares with a par value of $0.0001.
2017
- Cancellation of common stock issued for share-based
payment - Pursuant to a services
agreement with IRTH Communications, LLC (“IRTH”) in
which IRTH agreed to perform certain investor relations, financial
communications, and strategic consulting services, the Company
issued $100,000 of the Company’s common stock, or 17,730
post-split shares (141,844 pre-split shares), to IRTH on November
18, 2016 in partial consideration for those services. On December
13, 2016, the Company issued an additional 62,500 post-split shares
(500,000 pre-split shares) of common stock to IRTH pursuant to an
addendum to the services agreement and in consideration of certain
additional services, including telemarketing and investor outreach
services, to be provided by IRTH. On February 22, 2017, the Company and IRTH
agreed that IRTH would not provide the additional services
pursuant to
an addendum to a services agreement and the 62,500 post-split shares (500,000
pre-split shares) of common stock issued on December 13, 2016 were
returned to the Company and retired.
F-48
2017 - Common stock issued for the settlement of accounts
payable - On October 19, 2017,
the Company issued 187,500 post-split shares (1,500,000 pre-split
shares) of its common stock, with a fair value of $120,000 to IRTH
to settle $41,685 of outstanding advertising and promotion expenses
and accounted for a debt settlement loss of
$78,315.
2018 - Common stock issued for the settlement of accounts
payable - During the year ended
December 31, 2018, the Company issued 214,834 post-split shares
(1,718,675 pre-split shares) of its common stock with a fair value
of $343,735 to settle $85,934 of accounts payable and balance
$257,801 recorded as loss on stock settlement.
2018 - Common stock issued for the service - During the year ended
December 31, 2018, the Company issued 250,000 post-split shares
(2,000,000 pre-split shares) of its common stock with a fair value
of $18,000 recorded as expenses.
2018 - Common stock upon conversion of convertible debt
- During
the year ended December 31, 2018, the Company issued 685,644
post-split shares (5,485,152 pre-split shares) of common stock upon
the conversion of convertible notes and interest of $46,295. The
fair value of shares on conversion was $400,480 having a derivative
value on date of conversion of $90,855 and balance $263,330 was
recorded as loss on stock settlement.
2018 - Common stock issued for services - During the year ended
December 31, 2018, the Company issued 125,000 post-split shares
(1,000,000 pre-split shares) of common stock, with a fair value of
$8,000 for services rendered.
2018 - Common stock issued for settlement of Preferred B-2
- During
the year ended December 31, 2018, the Company issued 574,063
post-split shares (4,592,500 pre-split shares) of common stock,
with a fair value of $86,798 in settlement with two
holders of our Series B-2 Preferred Stock in exchange for their
agreement to convert their shares of Series B-2 Preferred Stock
into Common Stock, an additional further investment or agreement to
purchase and thereafter restructure certain outstanding notes of
the Company by cancelling such notes in exchange for shares of
newly-designated Series A Preferred Stock of the Company, and
release of any and all claims in connection with their prior
investments.
Common Stock Warrants
On
June 30, 2016, the Company issued warrants to purchase 208,333
post-split (1,666,667 pre-split) common stock shares for a price of
$4.80 post-split ($0.60 pre-split) per share exercisable for three
years to PoC Capital. These warrants have a grant date fair value
of $0.042 post-split ($0.0052 pre-split) per warrant, determined
using the Black-Scholes method based on the following assumptions:
(1) risk free interest rate of 0.71%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of our common stock
of 27.2%; and (4) an expected life of the warrants of 3 years. The
Company recorded a prepaid expense on these warrants of $8,667 in
June 30, 2016 which was impaired during the year ended December 31,
2017 due to cash constraints to manufacture materials needed for
trial.
On October 15, 2018,
the Company issued 435,750 post-split (3,486,000 pre-split)
warrants with an exercise price of $0.32 post-split ($0.04
pre-split) per share and exercisable for two years to a Series B-2
Holder. These warrants have a
grant date fair value of $0.32 post-split ($0.0398 pre-split) per
warrant, determined using the Black-Scholes method based on the
following assumptions: (1) risk free interest rate of 2.54%; (2)
dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 396.30%; and (4) an expected life of
the warrants of 2 years. The Company recorded an expense on these
warrants of $138,679.
There
were 644,083 post-split (5,152,667 pre-split) and 208,333
post-split (1,666,667 pre-split) warrants outstanding at December
31, 2018 and December 31, 2017, respectively
|
Shares Underlying
|
|
|
|
Outstanding
|
Exercise
|
Expiration
|
|
Warrants
|
Price
|
Date
|
|
|
|
|
|
208,333
|
$4.80
|
June
30, 2019
|
|
435,750
|
$0.32
|
October
15, 2020
|
|
644,083
|
|
|
F-49
Stock Option Plan
In
September 2018, the Company’s stockholders approved the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
provides for the issuance of incentive awards in the form of
non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards, and restricted stock unit awards.
The awards may be granted by the Company’s Board of Directors
to its employees, directors and officers and to consultants,
agents, advisors and independent contractors who provide services
to the Company or to a subsidiary of the Company. The exercise
price for stock options must not be less than the fair market value
of the underlying shares on the date of grant. The incentive awards
shall either be fully vested and exercisable from the date of grant
or shall vest and become exercisable in such installments as the
Board or Compensation Committee may specify. Stock options expire
no later than ten years from the date of grant. The aggregate
number of shares of Common Stock which may be issued pursuant to
the Plan is 9,500,000. Unless sooner terminated, the Plan
shall terminate in 10 years.
On September 4, 2018, the Company granted a total
of 209,375 post-split (1,675,000 pre-split) five-year non-qualified
stock options to the Company’s officers exercisable at $0.712
post-split ($0.089 pre-split) per share, of which 138,844
post-split (1,118,750 pre-split) vested immediately, 11,179
post-split (93,750 pre-split) vest monthly in equal increments over
a 16-month period beginning on September 1, 2018, and 57,812
post-split (462,500 pre-split) vest monthly in equal increments
over a 28-month period beginning on September 1, 2018. As part of
new employment agreements with three of the Company’s
officers, 18,750 post-split (150,000 pre-split) of their remaining
unvested options on December 1, 2018 vested
immediately.
On
October 22, 2018, the Company granted 250,000 post-split (2,000,000
pre-split) ten-year non-qualified stock options to a consultant
exercisable at $0.32 post-split ($0.04 pre-split) per share, all of
which vested immediately.
On
December 28, 2018, the Company granted 500,000 post-split
(4,000,000 pre-split) ten-year non-qualified stock options to a
consultant exercisable at $0.32 post-split) ($0.04 pre-split) per
share, all of which vested immediately.
The
Company estimates the fair value of stock options using the
Black-Scholes valuation model. Compensation expense related to
stock options granted is measured at the grant date based on the
estimated fair value of the award and is recognized on a
straight-line basis over the requisite service period. The
assumptions used in the Black-Scholes model for the options granted
during the year ended December 31, 2018 are presented
below:
|
Risk-free interest
rate
|
2.72 – 3.2%
|
|
Expected
volatility
|
343.72 – 412.31%
|
|
Expected term (in
years)
|
5-10
|
|
Expected dividend
yield
|
0%
|
The
risk-free interest rate is based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect at
the time of the grant. Expected volatility is based on the
historical volatility of the Company’s common stock. The
expected term assumption for stock options granted is the
contractual term of the option award. The Company has never
declared or paid dividends on its common stock and has no plans to
do so in the foreseeable future. Forfeitures are recognized as a
reduction of stock-based compensation expense as they
occur.
The
Company recognized $227,394 of compensation expense relate to the
vesting of stock options for the year ended December 31, 2018.
These amounts are included in general and administrative expenses
on the accompanying statement of operations.
Stock option activity for the year ended December
31, 2018 is presented below and reflects the effect of the 1
for 8 Reverse Stock Split in January 2019:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
Weighted
|
Remaining
|
|
|
|
|
Average
|
Contractual
|
Aggregate
|
|
|
|
Exercise
|
Term
|
Intrinsic
|
|
|
Shares
|
Price
|
(Years)
|
Value
|
|
Outstanding at
December 31, 2017
|
-
|
$-
|
-
|
$-
|
|
Granted
|
959,375
|
0.41
|
9.00
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Expired/cancelled
|
-
|
-
|
-
|
-
|
|
Outstanding at
December 31, 2018
|
959,375
|
$0.41
|
8.79
|
$-
|
|
Vested at December
31, 2018
|
917,708
|
$0.39
|
8.98
|
$-
|
F-50
The aggregate intrinsic value of options at
December 31, 2018 is based on the
Company’s closing stock price on that date of $0.16
post-split ($0.02 pre-split) per share. As of December
31, 2018, there was $29,663 of total
unrecognized compensation expense related to unvested stock
options, which the Company expects to recognize over the weighted
average remaining period of 2 years.
As of December 31, 2018, the Company had reserved
shares of its common stock for future issuance and reflects
the effect of the 1 for 8 Reverse Stock Split in January 2019
as follows:
|
|
Shares Reserved
|
|
Stock options
outstanding
|
959,375
|
|
Available for
future grants under the 2018 Plan
|
228,125
|
|
Warrants
outstanding
|
644,083
|
|
Total shares
reserved
|
1,861,583
|
NOTE 8. INCOME TAXES
The Company
accounts for income taxes in accordance with ASC 740 which
prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. ASC 740 also
provides guidance on de-recognition, classification, interest and
penalties, accounting in interim period, disclosure and transition.
There were no unrecognized tax benefits as of December 31, 2018 and
2017.
The following table
summarizes the significant differences between the U.S. Federal
statutory tax rate and the Company’s effective tax rate for
financial statement purposes for the years ended December 31, 2018
and 2017:
|
|
2018
|
2017
|
|
US Federal
Statutory Tax Rate
|
21.00%
|
21.00%
|
|
State
taxes
|
4.35%
|
4.35%
|
|
Change in valuation
allowance
|
(25.35%)
|
(25.34%)
|
|
|
0.00%
|
0.00%
|
The tax effects of
temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 2018 and 2017 are summarized as
follows:
|
|
2018
|
2017
|
|
Deferred Tax
Assets:
|
|
|
|
Net
Operating Loss
|
$2,668,829
|
$1,285,000
|
|
Valuation
Allowance
|
(2,668,829)
|
(1,285,000)
|
|
Net Deferred Tax
Asset
|
$—
|
$—
|
As of December 31,
2018, the Company has available federal net operating loss carry
forward of $10.5 million, the most significant of which expire from
2020 until 2037.
The Company assess
the recoverability of its net operating loss carry forwards and
other deferred tax assets and records a valuation allowance to the
extent recoverability does not satisfy the “more likely than
not” recognition criteria. The Company continues to maintain
the valuation allowance until sufficient positive evidence exists
to support full or partial reversal. As of December 31, 2018, the
Company had a valuation allowance totaling $2.7 million against its
deferred tax assets, net of deferred tax liabilities, due to
insufficient positive evidence, primarily consisting of losses
within the taxing jurisdictions that have tax attributes and
deferred tax assets.
Since the Company
has recently added to the scope of its activities efforts to
produce, market and sell products made from industrial hemp
containing cannabidiol (CBD).The Company and its Management has not
determined as of the statement date how IRC Section 280E will
affect the deduction of Company related expenditures related to
such business, but Management has provided a Full Valuation Reserve
to the Company’s Deferred Tax Assets.
For U.S. purposes,
the Company has not completed its evaluation of net operating loss
carryforwards utilization limitations under Internal Revenue Code,
as amended (the “Code”), Section 382/383, change of
ownership rules. If the Company has had a change in ownership, the
net operating loss carryforwards would be limited as to the amount
that could be utilized each year and could be eliminated, based on
the Code.
The Tax Cuts and
Jobs Act of 2017 was signed into law on December 22, 2017. The law
includes significant changes to the US Corporate income tax system,
including a Federal corporate rate reduction from 35% to 21%,
limitations on the deductibility of interest expense and executive
compensation and the transition of US international taxation from a
worldwide tax system to a territorial tax system. As the Company is
not currently a taxpayer due to ongoing operating losses, the
impact on the financial statements is not material. We have
reflected the lower rates in the calculation above in the December
31, 2018 information.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In
the ordinary course of business, the Company enter into agreements
with third parties that include indemnification provisions which,
in its judgment, are normal and customary for companies in the
Company’s industry sector. These agreements are typically
with business partners, clinical sites, and suppliers. Pursuant to
these agreements, the Company generally agree to indemnify, hold
harmless, and reimburse indemnified parties for losses suffered or
incurred by the indemnified parties with respect to the
Company’s product candidates, use of such product candidates,
or other actions taken or omitted by us. The maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company
has not incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is
minimal. Accordingly, the Company has no liabilities recorded for
these provisions as of December 31, 2018, and 2017.
F-51
Through the Share Exchange, the Company acquired
an exclusive license agreement (the “Licensing
Agreement”) between Exactus BioSolutions and Digital
Diagnostics Inc. (“Digital Diagnostics”) that the
Company recognized as an intangible
asset. Pursuant to the Licensing Agreement,
Digital Diagnostics granted to Exactus BioSolutions an exclusive
license to develop, produce and commercialize certain diagnostic
products, including the FibriLyzer and MatriLyzer, that utilize
certain intellectual property rights owned or licensed by Digital
Diagnostics. The Licensing Agreement provides for Exactus
BioSolutions and Digital Diagnostics to collaborate through the
various steps of the product and device development process,
including the development, regulatory approval and
commercialization stages. Exactus BioSolutions is required to pay
Digital Diagnostics, in cash and/or stock, an initial signing
payment, milestone fees triggered by the first regulatory clearance
or approval of each of the FibriLyzer and the MatriLyzer, and
various sales thresholds, and royalty payments based on the net
sales of the products, calculated on a product-by-product basis. In
2016, the Company paid $50,000 to Digital Diagnostics as part of
the initial signing payment under the Licensing Agreement and
$21,659 in legal expenses. As of December 31, 2016, the Company
accrued an additional $171,033 in licensing fees due to closing a
financing transaction in the fourth quarter of 2016, of which
$75,000 was paid during the first quarter of 2017. The Company
accrued the remaining $30,000 due for the initial signing fee
during the third quarter of 2017. The Company has also accrued
interest, per the Licensing Agreement, of $9,802 for the remaining
balance due as of December 31, 2017. As of December 31, 2017,
$134,802 remained due to Digital Diagnostics. In the
first quarter of 2018, the Company paid the entire balance due to
Digital Diagnostics. No milestones
have been met and no milestone fees have been paid or accrued
through December 31, 2018.
The
License Agreement is effective until such time as neither Digital
Diagnostics nor Exactus Biosolutions has any obligation to the
other under the Licensing Agreement in any country with respect to
any product. The Licensing Agreement may be terminated by the
Company effective upon at least six (6) months written notice if
regulatory approval has been obtained in the U.S. or in the
European Union, or upon at least three (3) months written notice if
regulatory approval has not been obtained in the U.S. or in the
European Union. Either party may terminate the Licensing Agreement
in the event the other party materially breaches the Licensing
Agreement, or becomes insolvent. On July 16, 2018, the Company
received Notice from Digital Diagnostics, Inc. of the
Licensor’s intent to terminate the Licensing Agreement. The
Company disputes the validity of the Notice and maintains that the
Agreement is in full force and effect until January 19, 2019 (the
“Expiration Date”) and that the Company’s
maintains the right to use the license and intellectual property
granted to the Company under the Agreement until the Expiration
Date. The Company has retained counsel to represent the Company
with regard to the enforceability of the Agreement and related
matters arising from the Notice and is in compliance with the
Dispute Resolution and arbitration provisions of the Agreement. On
January 23, 2019, Digital Diagnostics, Inc., made a demand for
compensation against the Company in connection with an alleged
breach of a License Agreement. No lawsuit has been filed; however,
in the event a lawsuit is filed, the Company intends to vigorously
contest the matter.
On
June 30, 2016, in order to conduct a clinical trial for the
FibriLyzer and other studies, the Company entered into a Master
Services Agreement (the “MSA”) with Integrium LLC
(“Integrium”) and PoC Capital, LLC (“PoC
Capital”). Under the MSA, Integrium has agreed to perform
clinical research services in support of the development of POC
diagnostics devices. Integrium is to conduct one or more
studies in compliance with FDA regulations and pursuant to the
Company’s specific service orders. PoC Capital
has agreed to fund up to the first $1,000,000 in study costs and
fees due to Integrium, with all fees in costs in excess of that
amount being the Company’s sole responsibility, in exchange
for 200,000 post-split (1,600,000 pre-split) shares of the
Company’s common stock, 1,733,334 shares of newly designated
Series C Preferred Stock, and 208,333 post-split (1,666,667
pre-split) warrants to purchase the Company’s common stock at
a price of $4.80 post-split ($0.60 pre-split) per share exercisable
for three years. For the year ended December 31, 2016 the Company
had accounted $1,000,000 as prepaid expenses on the balance sheet
which was impaired during the year ended December 31, 2017 due to
cash constraints to manufacture materials needed for
trial.
F-52
On
January 20, 2017, Robert F. Parker (the “petitioner”)
filed a petition in the Supreme Court of the State of New York,
County of New York (the “Court”), naming, among others,
the Company and Ezra Green, a former shareholder, director and
officer of the Company, as respondents. The petition was received
by the Company on February 7, 2017. The
parties reached an agreement on settlement which requires
co-defendant Ezra Green to make an initial payment with subsequent,
additional payments over time. The Company has agreed, in exchange
for the dismissal of all claims with prejudice, to pay up to
$20,000, at $1,000 per month beginning in January 2018 at the
earliest, if co-defendant Ezra Green defaults on his subsequent
payment obligations under the terms of the settlement agreement.
During the year ended December 31, 2018, the Company has paid
$3,000 towards the settlement with a remaining balance due of
$17,000.
On
December 14, 2018, the Company received a termination and demand
notice from KD Innovation, Ltd, an entity 100% owned by a former
Board member, in connection with a consulting agreement KDI entered
into with the Company on or about January 20, 2016. No lawsuit has
been filed; however, in the event a lawsuit is filed, the Company
intends to vigorously contest the matter.
NOTE 10. RELATED PARTY CONSIDERATIONS
Some
of the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. The Company has not formulated a policy for the
resolution of such conflicts.
On November 20, 2017, Dr. Dimitrov provided a
notice dated November 21, 2017 to the Company stating that he was
resigning from the Board, effective immediately. Dr. Dimitrov
indicated that his resignation from the Board was based on the
deteriorating relationship between the Company and Digital
Diagnostics over the non-payment of fees owed by the Company
pursuant to the licensing agreement between the Company and Digital
Diagnostics. Dr. Dimitrov currently serves as the President of
Digital Diagnostics, and the Company has licensed the right to
develop, produce and commercialize certain diagnostic products,
including the FibriLyzer and MatriLyzer, utilizing certain
intellectual property rights owned or licensed by Digital
Diagnostics. Dr. Dimitrov believes that, in light of these
concerns, his role as both a Director of the Company and the
President of Digital Diagnostics creates a conflict of interest and
has decided to focus his time and energy on doing what is best for
the shareholders of Digital Diagnostics. For the year ended
December 31, 2017, the Company accrued $30,000 in licensing fees
expenses to Digital Diagnostics. As of December 31, 2017, $126,032
was included in accounts payable. The Company has also accrued interest at 3% over
the prime rate, per the Licensing Agreement, of $9,802 for the
remaining balance due as of December 31, 2017. The Company paid $126,032 and $75,000 during the
years ended December 31, 2018 and 2017.
For the years ended December 31, 2018 and 2017,
$300,000 was recognized in Research and Development expenses for
consulting provided by Dr. Dimitrov. As of December 31, 2018 and
2017, $575,000 and $275,000 was included in accounts payable,
respectively. During the year ended December 31, 2018 and 2017, $0
and $125,000, respectively was paid.
Effective
December 1, 2018, the Company entered into new employment
agreements with our Chief Executive Officer, our Executive Vice
President, and our Chief Financial Officer. Under these agreements,
the executives agreed to terminate predecessor employment
agreements and agreed to release the Company from any and all
obligations under the predecessor agreement for any amounts that
could have been due or owing, including, without limitation,
compensation, bonuses and other payments. On February 21, 2019, the
Company executed a termination agreement and mutual release with
the Chief Business Officer. The agreement contains mutual releases
between the parties. As a result of these agreements, the Company
recognized $1,355,372 in debt forgiveness which was recorded under
additional paid in capital.
On
June 28, 2017, the Company issued to two of the Company’s
executive officers a promissory note in the principal amount up to
$100,000, which amount may be drawn upon by the Company as bridge
financing for general working capital purposes. The promissory note
accrues interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. See Note
4.
F-53
NOTE
11. SUBSEQUENT EVENTS
In
accordance with authoritative guidance, the Company has evaluated
any events or transactions occurring after December 31, 2018, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the consolidated financial
statements as of and for the year ended December 31, 2018, except
as disclosed below.
On
January 8, 2019 we began pursuing a new business segment and
entered into a Master Product Development and Supply Agreement (the
“Master Agreement”) with Ceed2Med, LLC
(“C2M”), a Florida limited liability company. We
determined to pursue opportunities in hemp based CBD following
passage of the 2018 Farm Bill which was signed into law on December
20, 2018.
On
January 23, 2019, Digital Diagnostics made a demand for
compensation against the Company in connection with an alleged
breach of a License Agreement entered into with the Company on
January 19, 2016 (see Note 9). No lawsuit has been filed; however,
in the event a lawsuit is filed, the Company intends to vigorously
contest the matter.
On
March 11, 2019, we acquired a 50.1% limited liability membership
interest in Exactus One World, LLC (“EOW”), an Oregon
limited liability company, in order to produce industrial hemp for
our own use. EOW leases approximately 200 acres of farm land in
Cave Junction, Oregon for growing and processing industrial
hemp.
EOW
will farm and process industrial hemp to be manufactured into
cannabidiol (CBD) and related products. EOW is a newly-formed
limited liability company that will be responsible for the
Company’s initial efforts to pursue agricultural development,
including farm soil preparation, planting, harvesting,
transportation and drying. In March 2019 we placed an order
for seeds (genetics) for the 2019 grow season. The Company will be
responsible for funding and the minority owners will be responsible
for management, servicing and operating the farm properties. The
EOW introduction and negotiation of the definitive agreements were
provided by C2M who will also be responsible for overseeing all
farming activities and manufacturing. We are currently negotiating
the terms for provision of services by C2M to the Company,
including access to C2M management and personnel, skills and
expertise, access to investments such as EOW and future business
opportunities, and operations and oversight over our farming,
manufacturing and processing operations and compensation
therefore.
Following
the events described above, the Company entered into the business
production and selling of products made from industrial hemp.
Industrial hemp is defined as plants containing less than 0.03%
tetra-hydrocannabinol, the lawful limit of the psychoactive
compound present to be considered industrial hemp. The Company will
own and develop hemp products under its own brand “Hemp
Healthy” and produce products for private label customers.
The Company is presently offering tinctures, edibles, capsules,
topical solutions and animal health products manufactured for us by
C2M during the second quarter of 2019. On March 6, 2019 we placed a
$1 million order for products from C2M.
On March 20, 2019
we entered into agreements to acquire Tierra Healthcare Concepts,
LLC (“Tierra”), a Florida limited liability company,
and CannacareMD, LLC (“Cannacare”), a Florida limited
liability company. Through existing networks of physicians and
websites Tierra and Cannacare intend to assist doctors to educate
consumers about CBD, and to offer our own “Hemp
Healthy” brand hemp products through online stores
(www.buyhempcbd.com).
Following
December 31, 2018, in order to pursue our new business segment, the
Company undertook a number of steps to recapitalize and reorganize
our management structure. These actions included the
following:
1.
Five
new members joined our board of directors. Three of the directors
are considered to be independent directors. The Company established
an Audit, Compensation, Nominating and Governance Committee for the
first time, consisting entirely of independent directors. Each
committee adopted a committee charter meeting the board, committee
and charter requirements for listing on NASDAQ.
2.
The
Company offered and sold approximately $3.0 million of Common Stock
in private placements.
3.
The
Company converted all of our outstanding convertible notes and
issued 829,450 shares of Series A Convertible Preferred
Stock.
4.
The
Company adopted and implemented a 1:8 reverse split of our capital
stock which became effective March 11, 2019.
5.
James
Erickson and Timothy Ryan, directors, resigned. Each of these
former directors waived all outstanding financial and other
obligations of the Company (other than certain rights such as the
right to indemnification).
F-54
Exactus, Inc.
3,119,731 Common Shares
P R O S P E C T U S
[
]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth the estimated costs and expenses,
payable by the Company in connection with the registration and sale
of the shares of common stock being registered.
|
SEC registration
fee
|
303.71
|
|
Accounting fees and
expenses
|
10,000
|
|
Legal fees and
expenses
|
50,000
|
|
Total
|
$60,303.71
|
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitations on Liability and Indemnification of Officers and
Directors
Article
VI of our Amended and Restated Articles of Incorporation provides
that the individual liability of a director or officer of the
Company shall be eliminated to the fullest extent permitted by
Nevada law. Subject to the provisions of Nevada law, Article VII of
our Bylaws provides that a director or officer of the Company shall
not be personally liable to the Company or its stockholders for
damages for any breach of fiduciary duty as a director or officer,
except for damages for breach of fiduciary duty resulting from
(i) acts or omissions which involve intentional misconduct,
fraud or a knowing violation of law, or (ii) the payment of
dividends in violation of Nevada law.
Our
Amended and Restated Articles of Incorporation also provide that
any officer or director shall be indemnified to the fullest extent
permitted by Nevada law against expenses including attorneys’
fees, judgments, fines and amounts paid or to be paid in settlement
which were reasonably incurred in connection with a legal
proceeding to which he or she was a party as a result of such
relationship.
Nevada
Revised Statutes Section 78.7502 empowers a corporation to
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee
or agent of another corporation or enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he or she (a) acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, in the case
of an action other than by or in the right of the corporation, and
with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; or
(b) is not liable under the terms of Nevada Revised Statutes
Section 78.138. Under that section, a director or officer is
not liable to the corporation unless (1) a presumption that the
director or officer acted in good faith, on an informed basis and
with a view to the interest of the corporation is rebutted, (2) it
is proven such person breached their fiduciary duty and (3) such
breach involved intentional misconduct, fraud or a knowing
violation of law. No indemnification may be made in respect of
any claim, issue or matter as to which such person shall have been
adjudged by a court of competent jurisdiction after exhaustion of
all appeals therefrom to be liable to the corporation or for
amounts paid in settlement to the corporation unless and only to
the extent that the court in which such action or suit was brought
or other court of competent jurisdiction determines that in view of
all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court
deems proper.
Any
indemnification described above, unless ordered by a court or
advanced as described below, must be made by the Company only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is
proper under the circumstances. The determination must be made
(i) by the stockholders, (ii) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding, (iii) by
independent legal counsel in a written opinion, if (x) a majority
vote of a quorum of directors who were not parties to the action,
suit or proceeding so orders, or (y) if a quorum consisting of
directors who were not parties to the action, suit or proceeding
cannot be obtained. To the extent that a director, officer,
employee or agent of the Company has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred
to in the previous paragraph, or in defense of any claim, issue or
matter therein, he or she must be indemnified by the Company
against expenses, including attorneys’ fees, actually and
reasonably incurred by him or her in connection with the
defense.
II-1
As
permitted by Nevada Revised Statutes Section 78.751, our Amended
and Restated Articles of Incorporation provide that expenses
incurred by an officer or director in defending a civil or criminal
action, suit or proceeding must be paid by the Company as they are
incurred and in advance of the final disposition of the action,
suit or proceeding, upon receipt of an undertaking by or on behalf
of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is
not entitled to be indemnified by us.
The
indemnification and advancement of expenses authorized in or
ordered by a court as described above, (i) does not exclude
any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under our Amended and
Restated Articles of Incorporation or any by-law, agreement, vote
of stockholders or disinterested directors or otherwise, for either
an action in his or her official capacity or an action in another
capacity while holding such office, except that indemnification,
unless ordered by a court as described above or for advancement of
expenses made as described below, may not be made to or on behalf
of any director or officer if a final adjudication establishes that
his or her acts or omissions involved intentional misconduct, fraud
or a knowing violation of the law and were material to the cause of
action; and (ii) continues for a person who has ceased to be a
director, officer, employee or agent and inures to the benefit of
the heirs, executors and administrators of such a
person.
Our
Board of Directors may cause us to purchase and maintain insurance,
or make other financial arrangements, on behalf of any person who
is or was a director, officer, employee or agent of the Company, or
is or was serving at our request as a director, officer, employee
or agent of another corporation, or partnership, joint venture,
trust or other enterprise for any liability asserted against such
person and liability and expenses and incurred by him or her in any
such capacity, or arising out of his or her status as such, whether
or not we would have the power to indemnify such person against
such liability and expenses.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that in
the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During
the three-year period preceding the date of the filing of this
registration statement, we have sold securities in the transactions
described below without registration under the Securities
Act.
The
notes and warrants described above have not been registered under
the Securities Act and were issued and sold to accredited investors
in reliance upon the exemption from registration contained in
Regulation D promulgated under the Securities Act.
On
October 23, 2019, we issued 1,223,320 shares of our common stock to
the minority members of EOW in exchange for their interest and
rights to distributions related to the current 2019 hemp crop. The
shares of common stock sold and issued as stated in the paragraph
above were offered and sold in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.The shares of common stock sold and issued above
were offered and sold in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
During
October 2019, we entered into two short-term promissory notes for a
total of $85,000 with an officer and an investor. The notes were
sold and issued in reliance on the exemption from registration
afforded by Section 4(a)(2) and Regulation D (Rule 506) under the
Securities Act and corresponding provisions of state securities
laws.
During
the quarter ended September 30, 2019, the Company, relying upon
Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D
promulgated thereunder), issued 666,391 restricted shares of common
stock to 5 accredited investors for total cash consideration of
$417,900. None of the issuances involved a general
solicitation.
On September 13, 2019, we issued 2,000,000 shares
of our common stock to officers and directors of the
Company. The shares were sold and issued in reliance on the
exemption from registration afforded by Section 4(a)(2) and
Regulation D (Rule 506) under the Securities Act and corresponding
provisions of state securities laws.
II-2
On
September 9, 2019, the Company, relying upon Section 3(a)(9) of the
Securities Act, issued 125,000 restricted shares of common stock to
an investor upon conversion of Series A Convertible Preferred
Stock.
On
August 1, 2019, we issued 1,000 shares of Series E Convertible
Preferred Stock to an accredited investor in connection with
a management services agreement. The shares of common stock
sold and issued above were issued to “accredited
investors” as such term is defined in the Securities Act and
were offered and sold in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
From
July 31, 2019 until September 19, 2019, we accepted subscriptions
in the total amount of $951,900 and issued 5,311,640 shares of
common stock, which includes issuances relating to the automatic
conversion of all outstanding shares of Series D convertible
preferred stock into 1,025,000 shares of common stock, at a
conversion price of $0.40 per share, on July 31, 2019. The Series D
Preferred was originally issued in March 2018. The shares of common
stock sold and issued as stated in the paragraph above were issued
to “accredited investors” as such term is defined in
the Securities and were offered and sold in reliance on the
exemption from registration afforded by Section 4(a)(2) and
Regulation D (Rule 506) under the Securities Act and corresponding
provisions of state securities laws.
On July
31, 2019, we issued 250,000 shares of our common stock to seller in
connection with an asset purchase agreement. The shares of common
stock sold and issued above were issued to “accredited
investors” as such term is defined in the Securities Act and
were offered and sold in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
On July
31, 2019, we accepted subscriptions in the total amount of
$1,990,304 and issued an additional 3,413,044 shares of our common
stock. The shares of common stock were issued to
“accredited investors” as such term is defined in the
Securities Act and were offered and sold in reliance on the
exemption from registration afforded by Section 4(a)(2) and
Regulation D (Rule 506) under the Securities Act and corresponding
provisions of state securities laws.
On
April 11, 2019 we accepted additional subscriptions in the total
amount $612,040 and issued an additional 1,282,175 shares of our
common stock. The offer and sale of our Common Stock was made
solely to "accredited investors" as defined in Rule 501 of
Regulation D promulgated under the Securities Act. We engaged in no
general solicitation or advertising with regard to the offering.
The shares were sold and issued in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
On
March 29, 2019 we accepted additional subscriptions in the total
amount $327,016 for an additional 1,113,642 shares of Common Stock.
The offer and sale of these shares was made solely to "Accredited
Investors" as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933 (the “Securities Act”). We
engaged in no general solicitation or advertising with regard to
the offering. The shares were sold and issued in reliance on the
exemption from registration afforded by Section 4(a)(2) and
Regulation D (Rule 506) under the Securities Act and corresponding
provisions of state securities laws.
II-3
On March 29, 2019, we retired a note payable owing
to our former officer in the amount of $30,616. To retire the note,
we issued the officer shares of common stock valued at $0.20 per
share, for a total of 153,080 shares issued to retire the
debt. The shares of common
stock were issued to an “accredited investor” as such
term is defined in the Securities Act and were offered and sold in
reliance on the exemption from registration afforded by Section
4(a)(2) and Regulation D (Rule 506) under the Securities Act and
corresponding provisions of state securities
laws.
On
March 13, 2019, we accepted additional subscriptions in the total
amount $891,000 for an additional 4,140,206 shares of Common Stock.
The offer and sale of these shares was made solely to "Accredited
Investors" as defined in Rule 501 of Regulation D promulgated under
the Securities Act. We engaged in no general solicitation or
advertising with regard to the offering. The
shares were sold and issued in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
On
March 6, 2019, we issued 1,418,939 shares of Common Stock for
$298,200. The offer and sale of these shares was made solely to
"Accredited Investors" as defined in Rule 501 of Regulation D
promulgated under the Securities Act. We engaged in no general
solicitation or advertising with regard to the offering.
The
shares were sold and issued in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
Effective February
28, 2019, we entered into exchange agreements which effectively
retired convertible notes. The additional exchange agreements
retired total note obligations of $118,926 in exchange for 118,926
shares of Series A Preferred. The issuance of Series A Preferred in
exchange for the Notes was made in reliance on the exemption from
registration provide by Rule 3(a)(9) under the Securities
Act.
On
February 28, 2019, we issued 3,139,829 shares of Common Stock for
$679,553. The offer and sale of these shares was made solely to
"Accredited Investors" as defined in Rule 501 of Regulation D
promulgated under the Securities Act. We engaged in no general
solicitation or advertising with regard to the offering.
The
shares were sold and issued in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
On
February 14, 2019 the Company accepted subscriptions for $65,000 in
a private placement offering of the Company’s common stock,
representing 325,000 shares of Common Stock. The offer and sale of
these shares was made solely to "Accredited Investors" as defined
in Rule 501 of Regulation D promulgated under the Securities Act.
We engaged in no general solicitation or advertising with regard to
the offering. The
shares were sold and issued in reliance on the exemption from
registration afforded by Section 4(a)(2) and Regulation D (Rule
506) under the Securities Act and corresponding provisions of state
securities laws.
On
January 24, 2019, we entered into a series of additional exchange
agreements with Holders of Notes. We agreed with the Holders to
exchange all outstanding obligations under the Notes (including
original issue discount, premium that would be due on redemption,
principal, interest, default interest, penalties and costs) for an
amount of stated value of our Series A Preferred equal to the
greater of the amount due under the note if redeemed or the amount
that was required to be paid by the holders to acquire the notes
from the original purchasers thereof, including any premium
payment. On January 24, 2019, we closed on the exchange of the
Notes for shares of our Series A Preferred. Each of the exchanges
was made in reliance upon the exemption from registration provided
by Section 3(a)(9) of the Securities Act.
On
January 24, 2019, we accepted subscriptions for $55,090 of Series A
Preferred. The offer and sale of shares of Series A Preferred was
made solely to accredited investors and without any general
solicitation or advertising. The sales of Series A Preferred to
subscribers was made at a purchase price of $1.00 per share. The
proceeds of the sale of Series A Preferred were primarily used to
retire obligations under Notes. In total, we retired Note
obligations in the amount of $639,218.32 through a combination of
exchanges of Series A Preferred for Notes and use of proceeds from
new Series A Preferred sales. We issued a total of 641,589 shares
of Series A Preferred, with 586,499 shares being issued in exchange
for outstanding Notes, and 55,090 shares being issued for new
subscriptions. The Series A Preferred issuances made January 24,
2019 were in addition to the 46,840 shares of Series A previously
issued in exchange for a $46,840 Note obligation as reported in the
Original Report. The shares were sold and issued in reliance on the
exemption from registration afforded by Section 4(a)(2) and
Regulation D (Rule 506) under the Securities Act and corresponding
provisions of state securities laws.
Simultaneous with
the closing of the exchange described above, a former Holder of
Notes Auctus Fund, LLC, converted $4,000 out of $216,059.21 due and
owing under their Note at a conversion price of $0.002 per share,
and the balance due under the Note was sold to third parties in
arms-length transactions. Following the conversion and sale, the
balance unconverted under the Note was exchanged for Series A
Preferred in total stated amounts equalto the purchase prices paid
for the Note by each purchaser. The issuance to Auctus Fund, LLC
upon conversion was made in reliance upon the exemption from
registration provided by Section 4(a)(2) of the Securities Act and
Rule 506(b) of Regulation D under the Securities Act and the third
party purchases of the balance unconverted under the Note was made
in reliance on the exemption from registration provide by Rule
3(a)(9) under the Securities Act.
II-4
On
January 8, 2019, we issued a total of 8,385,691 shares of common
stock to C2M under the terms of a development agreement. In
addition, pursuant to the Development Agreement and under the terms
of our 2019 Equity Incentive Plan, we issued options to purchase a
total of 750,000 shares of our common stock at a price of $0.32 per
share to the principals of C2M. The
issuance of the shares is intended to be exempt under Section
4(a)(1) of the Securities Act.
On
November 1, 2018, we entered into a
securities purchase agreement with two investors, effective October
23, 2018, pursuant to which we issued and sold the investor two
convertible promissory notes in the aggregate principal amount of
$70,500. The notes were sold in
transactions exempt from registration under section 4(a)(2) of the
Securities Act and Rule 506(b) thereunder as transactions not
involving a public offering. The investors acquired the securities
for investment and without a view to distribution and the Company
reasonably believed the investors were accredited
investors.
On
July 5, 2018, we issued our officer 15 shares of Series D Preferred
shares in exchange for the forgiveness of $200,000 worth of accrued
debt owed to the officer by the us. The securities were sold in
transactions exempt from registration under section 4(a)(2) of the
Securities Act of 1933 and Rule 506(b) thereunder as transactions
not involving a public offering. The investors acquired the
securities for investment and without a view to distribution and
the Company reasonably believed the investors were accredited
investors.
In
March 2018, we offered 70 shares of Series D shares as re-payment
for our outstanding obligations at an effective re-payment price of
$12,500 per share. The shares were sold in transactions exempt from
registration under Section 4(a)(2) of the Securities Act of 1933
and Rule 506(b) thereunder as transactions not involving a public
offering. Each investor acquired the shares for investment and
without a view to distribution and the Company reasonably believed
the investors were accredited investors.
On
March 22, 2018, we entered into two note purchase agreements, under
which we issued an accredited investor two convertible promissory
notes with a total principal amount of $100,000. The notes were
sold in transactions exempt from registration under Section 4(a)(2)
of the Securities Act of 1933 and Rule 506(b) thereunder as
transactions not involving a public offering. Each investor
acquired the notes for investment and without a view to
distribution and we reasonably believed the investors were
accredited investors.
On
March 14, 2018, we issued 630,676 two-year warrants to purchase
shares of our common stock to the holders of our Series B 2
Preferred Stock. The warrants are exercisable at $0.40 per share.
On March 20, 2018, the Company issued warrants to purchase up to
3,435,750 shares of the company’s common stock to a B-2
Holder. The warrants were sold in transactions exempt from
registration under Section 4(a)(2) of the Securities Act and Rule
506(b) thereunder as transactions not involving a public offering.
Each investor acquired the warrants for investment and without a
view to distribution and the Company reasonably believed the
investors were accredited investors.
II-5
On October 19, 2017, we
issued 187,500 shares of our common stock to a service provider in
consideration of certain additional services, including
telemarketing and investor outreach services, to be provided by
service provider. The shares were sold in a private
placement pursuant to an exemption from the registration
requirements of the Securities Act, in reliance on Section 4(a)(2)
and Regulation D.
On
January 26, 2017, we issued 100,000 shares of Series B-2 Preferred
Stock to accredited investors at a price of $0.25 per share, for
cash proceeds of $25,000. No underwriting discounts or commissions
have been or will be paid in connection with this sale of Series
B-2 Preferred Stock. The shares were sold pursuant to an exemption
from the registration requirements of the Securities Act in
reliance on Section 4(a)(2) and Rule 506(b) of Regulation D
thereunder.
On
January 6, 2017, we agree to issued to a service provider, on or
about April 6, 2017, a warrant to purchase the our common stock
equal to four percent of our issued and outstanding capital stock
on a fully-diluted basis for financial advisory and consulting
services. The issuance and sale of the warrant is exempt from
registration under the Securities Act pursuant to Section 4(a)(2)
of the Securities Act and Rule 506(b) of Regulation D promulgated
thereunder. The Company has not engaged in general solicitation or
advertising with regard to the issuance and sale of the warrant,
and has not offered securities to the public in connection with
such issuance and sale.
On
December 13, 2016, we issued an 62,500 shares of common stock to a
service provider in consideration of certain additional services,
including telemarketing and investor outreach services, to be
provided by the service provider. The shares also were sold
pursuant to an exemption from the registration requirements of the
Securities Act in reliance on Section 4(a)(2) and Rule 506(b) of
Regulation D thereunder.
II-6
On
August 14, 2017, the Company issued an aggregate principal amount
of $110,000 of MVF Notes to MVF. In addition, under the Securities
Purchase Agreement, the Company will have the right to issue the
following Additional MVF Notes: (1) an aggregate principal amount
of $27,500 of Additional MVF Notes upon the filing of this
registration statement and (2) an aggregate principal amount of
$27,500 of Additional MVF Notes upon this registration statement
being declared effective by the SEC. The MVF Notes were, or will
be, sold pursuant to an exemption from the registration
requirements of the Securities Act in reliance on Section
4(a)(2).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
The following
exhibits are filed herewith or incorporated by reference
herein.
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Exhibit
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Description
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Share
Exchange Agreement, dated February 29, 2016, by and among Spiral
Energy Tech, Inc., Exactus BioSolutions, Inc. and the stockholders
of Exactus BioSolutions, Inc. signatories thereto (attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 4, 2016 and incorporated herein by
reference).
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|
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Amended
and Restated Articles of Incorporation (attached as Exhibit 3.2 to
the Company’s Registration Statement on Form S-1
(Registration No. 333-183360), filed August 16, 2012 and
incorporated herein by reference).
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Certificate
of Amendment to Amended and Restated Articles of Incorporation
(attached as Exhibit 3.1 to Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 333-183360, filed December
19, 2013 and incorporated herein by reference).
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Bylaws
(attached as Exhibit 3.3 to the Company’s Registration
Statement on Form S-1 (Registration No. 333-183360), filed August
16, 2012 and incorporated herein by reference).
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Articles
of Merger, dated March 10, 2016, between Exactus Acquisition Corp.
and Spiral Energy Tech, Inc. (attached as Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed March 28, 2016 and
incorporated herein by reference)
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Certificate
of Designation for Series A Preferred Stock (attached as Exhibit
3.2 to the Company’s Current Report on Form 8-K filed January
14, 2019 and incorporated herein by reference)
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Certificate
of Designation for Series B-1 Preferred Stock (attached as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed March
4, 2016 and incorporated herein by reference)
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Certificate
of Designation for Series B-2 Preferred Stock (attached as Exhibit
3.2 to the Company’s Amendment to the Current Report on Form
8-K/A filed February 17, 2016 and incorporated herein by
reference)
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Amendment
to Certificate of Designation After Issuance of Class or Series
(attached as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed November 1, 2016 and incorporated herein by
reference).
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Certificate
of Amendment to Articles of Incorporation (attached as Exhibit 3.1
to the Company’s Current Report on Form 8-K filed October 12,
2018 and incorporated herein by reference)
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Certificate
of Designation for Series D Preferred Stock (attached as Exhibit
3.11 to the Company’s Annual Report on 10-K filed March 29,
2019)
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Form of
Certificate of Designation of Preferences, Rights and Limitations
of 0% Series E Convertible Preferred Stock (attached as Exhibit 3.1
to the Company’s Current Report on Form 8-K filed August 1,
2019 and incorporated herein by reference)
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4.1
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Form of
Common Stock Certificate**
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Warrant
to Purchase Common Stock of Exactus, Inc., dated June 30, 2016
(attached as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed July 7, 2016 and incorporated herein by
reference)
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Form of
8% Convertible Promissory Note (attached as Exhibit 10.2 to the
Current Report on Form 8-K filed December 4, 2019 and incorporated
by reference herein).
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Form of
Warrant (attached as Exhibit 10.3 to the Current Report on Form 8-K
filed December 4, 2019 and incorporated by reference
herein).
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Warrant
to Purchase Common Stock, issued on November 27, 2019 (attached as
Exhibit 10.7 to the Current Report on Form 8-K filed December 4,
2019 and incorporated by reference herein)
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Form of
12% Promissory Note (attached as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed October 24, 2019
and incorporated herein by reference)
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Warrant
to Purchase Common Stock, issued November 27, 2019 (attached as
Exhibit 10.7 to the Company’s Current Report on Form 8-K
filed December 4, 2019 and incorporated herein by
reference)
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II-7
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5.1
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Opinion
of Greenberg Traurig, P.A.**
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Form of
Subscription Agreement for Series B-2 Preferred Stock (attached as
Exhibit 10.2 to the Company’s Amendment to the Current Report
on Form 8-K/A filed February 17, 2016 and incorporated herein by
reference)
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2018
Equity Incentive Plan (attached as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed September 5, 2018
and incorporated herein by reference)
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2019
Equity Incentive Plan (attached as Exhibit 10.7 to the
Company’s Amended Current Report on Form 8-K/A filed January
22, 2019 and incorporated herein by reference)
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Master
Product Development and Supply Agreement with Ceed2Med, LLC dated
January 8, 2019 (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed January 14, 2019 and incorporated
herein by reference)
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Form of
Subscription Agreement for Common Stock (attached as Exhibit 10.2
to the Company’s Current Report on Form 8-K filed January 14,
2019 and incorporated herein by reference)
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Form of
Exchange Agreement for Series A Preferred Stock (attached as
Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed January 14, 2019 and incorporated herein by
reference)
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Form of
2019 Incentive Plan Non-Qualified Option Award Certificate
(attached as Exhibit 10.8 to the Company’s Current Report on
Form 8-K filed January 14, 2019 and incorporated herein by
reference)
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Form of
Subscription Agreement for Series A Preferred Stock (attached as
Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed January 29, 2019 and incorporated herein by
reference)
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Form of
Subscription Agreement for Common Stock (attached as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed February
21, 2019 and incorporated herein by reference)
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Termination
an Mutual Release Agreement with James R. Erickson (attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed February 22, 2019 and incorporated herein by
reference)
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Securities
Purchase Agreement for 8% Notes, dated November 27, 2019 (attached
as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed December 4, 2019 and incorporated herein by
reference)
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Subsidiary
Guarantee, executed by Exactus, Inc. and its subsidiaries named
therein, dated November 27, 2019 (attached as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed December 4, 2019
and incorporated herein by reference)
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Security
Agreement, dated November 27, 2019 (attached as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed December 4, 2019
and incorporated herein by reference)
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Intellectual
Property Security Agreement, dated November 27, 2019 (attached as
Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed December 4, 2019 and incorporated herein by
reference)
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Registration
Rights Agreement, dated November 27, 2019 (attached as Exhibit 10.8
to the Company’s Current Report on Form 8-K filed December 4,
2019 and incorporated herein by reference)
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Green
Goddess Extracts Purchase Agreement (attached as Exhibit 10.1 to
the Current Report on Form 8-K filed August 1, 2019 and
incorporated herein by reference)
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Management
and Services Agreement (attached as Exhibit 10.2 to the Current
Report on Form 8-K filed August 1, 2019 and incorporated herein by
reference)
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Commercial
Lease Agreement, dated July 9, 2019, by and between Skybar
Holdings, LLC and the Company (attached as Exhibit 10.1 to the
Current Report on Form 8-K filed July 15, 2019 and incorporated
herein by reference)
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II-8
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First
Amendment to Operating Agreement of Exactus One World, LLC, dated
October 23, 2019 (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed October 24, 2019 and incorporated
herein by reference)
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Amendment
to Management and Services Agreement, dated October 23, 2019
(attached as Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed October 24, 2019 and incorporated herein by
reference)
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Severance
Agreement, by and between the Company and Philip J. Young, dated
August 15, 2019 (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed August 21, 2019 and incorporated
herein by reference)
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Subscription
Agreement with Exactus One World, LLC (attached as Exhibit 10.1 to
the Quarterly Report on Form 10-Q filed May 31, 2019 and
incorporated herein by reference)
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|
|
Membership
Purchase Agreement (attached as Exhibit 10.2 to the Quarterly
Report on Form 10-Q filed May 31, 2019 and incorporated herein by
reference)
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Operating
Agreement for Exactus One World, LLC (attached as Exhibit 10.3 to
the Quarterly Report on Form 10-Q filed May 31, 2019 and
incorporated herein by reference)
|
|
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Unanimous
Written Consent of the Managers of Exactus One World, LLC (attached
as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed May 31,
2019 and incorporated herein by reference)
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|
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Lease
for Premises in Delray Beach, Florida (attached as Exhibit 10.4 to
the Company’s Current Report on Form 8-K filed March 11, 2019
and incorporated herein by reference)
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|
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Employment
Agreement with Andrew Johnson (attached as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed March 11, 2019 and
incorporated herein by reference)
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First
Amendment to Employment Agreement with Philip Young (attached as
Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed March 11, 2019 and incorporated herein by
reference)
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First
Amendment to Employment Agreement with Kelley Wendt (attached as
Exhibit 10.7 to the Company’s Current Report on Form 8-K
filed March 11, 2019 and incorporated herein by
reference)
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Separation
Agreement and Consulting Agreement with Timothy Ryan (attached as
Exhibit 10.8 to the Company’s Current Report on Form 8-K
filed March 11, 2019 and incorporated herein by
reference)
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|
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Non-Exclusive
Distribution and Profit Sharing Agreement by and between the
Company and Canntab Therapeutics USA (Florida), Inc., dated
November 20, 2019 (attached as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed November 20, 2019 and incorporated
herein by reference)
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Supply
Agreement by and between the Company and Canntab Therapeutics USA
(Florida), Inc., dated November 20, 2019 (attached as Exhibit 10.3
to the Company’s Current Report on Form 8-K filed November
20, 2019 and incorporated herein by reference)
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Registration
Rights Agreement, dated November 27, 2019 (attached as Exhibit 10.8
to the Company’s Current Report on Form 8-K filed December 4,
2019 and incorporated herein by reference)
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Supply
and Distribution Agreement by and between the Company and Ceed2Med,
LLC, dated November 14, 2019 (attached as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed November 20, 2019
and incorporated herein by reference)
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21.1
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Subsidiary
List (attached as Exhibit 21.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2016 and
incorporated herein by reference)
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23.1
|
Consent
of Greenberg Traurig, P.A. (included in Exhibit 5.1)**
|
|
Consent
of RBSM LLP*
|
|
|
24.1
|
Power
of Attorney
|
|
101.INS*
|
XBRL
Instance Document
|
|
101.SCH*
|
XBRL
Schema Document
|
|
101.CAL*
|
XBRL
Calculation Linkbase Document
|
|
101.DEF*
|
XBRL
Definition Linkbase Document
|
|
101.LAB*
|
XBRL
Labels Linkbase Document
|
|
101.PRE*
|
XBRL
Presentation Linkbase Document
|
+
Indicates
management compensatory plan, contract or arrangement.
*
Filed
herewith.
**
To be filed by
amendment.
(b)
Financial
Statement Schedules. Schedules not listed above have been omitted
because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes
thereto.
II-9
ITEM 17. UNDERTAKINGS
(a)
The undersigned
registrant hereby undertakes:
(1) to
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) to
include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a
20 percent change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement; and
(iii)
to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided,
however, that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply
if the registration statement is on Form S-1, Form S-3, Form SF-3
or Form F-3 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
reports filed with or furnished to the SEC by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that
are incorporated by reference in this registration
statement;
(2) that,
for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide
offering thereof.
(3) to
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) That,
for the purpose of determining liability of the registrant under
the Securities Act to any purchaser:
(i)
each prospectus filed by the registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the
registration statement; and
(ii)
each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance
on Rule 430B relating to an offering made pursuant to Rule
415(a)(l)(i), (vii), or (x) for the purpose of providing the
information required by Section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided
in Rule 430B, for liability purposes of the issuer and any person
that is at that date an underwriter, such date shall be deemed to
be a new effective date of the registration statement relating to
the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such effective
date.
II-10
(5) That,
for the purpose of determining liability of the registrant under
the Securities Act to any purchaser in the initial distribution of
the securities, the undersigned registrant undertakes that in a
primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer
or sell such securities to such purchaser:
(i) any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
(ii) any
free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) the
portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv) any
other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
(6) That:
(i) for
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective; and
(ii) for
the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(8) Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-11
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, on December 31,
2019.
|
|
Exactus, Inc.
By:
/s/ Emiliano
Aloi
Emiliano
Aloi
Chief
Executive Officer
|
KNOW
ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Emiliano Aloi and Ken
Puzder, with full authority to act without the others, his true and
lawful attorney-in-fact and agent with full power of substitution
and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this
registration statement, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the SEC,
granting unto said attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated:
|
Signature
|
Title
|
Date
|
|
/s/ Emiliano
Aloi
|
Principal
Executive Officer
|
December
31, 2019
|
|
/s/ Ken Puzder
|
Principal
Financial Officer, Principal Accounting Officer, and
Director
|
December
31, 2019
|
|
/s/ Bobby
Yampolsky
|
Director,
Interim Chairman
|
December
31, 2019
|
|
/s/ John Price
|
Director
|
December
31, 2019
|
|
/s/ Kevin J.
Esval
|
Director
|
December
31, 2019
|
|
/s/ Jeffrey
Thompson
|
Director
|
December
31, 2019
|
II-12