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EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Exactus, Inc.ex32-2.htm
EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Exactus, Inc.ex32-1.htm
EX-31 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Exactus, Inc.ex31-2.htm
EX-31 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Exactus, Inc.ex31-1.htm
EX-10.38 - MATERIAL CONTRACTS - Exactus, Inc.ex10-38.htm
EX-10 - MATERIAL CONTRACTS - Exactus, Inc.ex10-37.htm
EX-10.36 - MATERIAL CONTRACTS - Exactus, Inc.ex10-36.htm
 

 
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2019
 
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to ________
.
Commission File Number: 001-38190
 
Exactus, Inc
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction
of incorporation or organization)
 
 
27-1085858
(I.R.S. Employer
Identification No.)
 
80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483
(Address of principal executive offices) (Zip code)
 
(800) 881-9352
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common stock, par value of $0.0001
(Title of class)
 
I Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes    No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter on June 30, 2019, was $26,922,402 (1)Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 45,522,275 as of May 22, 2020.
 
 
(1) Based on a closing sale price of $0.95 per share on June 30, 2019. Excludes 10,639,120 shares of the registrant’s common stock held by executive officers, directors and stockholders that the registrant has concluded were affiliates at June 30, 2019.
 

 
 
 
 
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EXPLANATORY NOTE
 
On March 17, 2020, Exactus, Inc. (the “Company”) filed a Current Report on Form 8-K, and is filing this Annual Report on Form 10-K (the “Annual Report”), in reliance on the Order of the Securities and Exchange Commission (the “SEC”), dated March 4, 2020, as updated March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934 modifying exemptions from the reporting and proxy delivery requirements for public companies (Release No. 34-22465).
 
As a result of “stay at home” orders and other restrictions imposed as a result of the COVID-19 pandemic, certain Company officers and management as well as professional staff and consultants have been hindered and delayed in conducting all of the work required to prepare the financial statements for the Annual Report. This has, in turn, impacted the Company’s ability to complete its audit and file this Annual Report by its original due date, March 30, 2020.
 
PART I
 
 
Item 1. Business
 
Business Overview
 
We are a Nevada corporation organized under the name Solid Solar Energy, Inc in 2008 and renamed Exactus, Inc. in 2016. We began to pursue opportunities in Cannabidiol, which we refer to as CBD, in 2019.
 
In December 2018, we expanded our focus to pursue opportunities in hemp-derived CBD. This decision was based in part on the passing of the 2018 Farm Bill, known as the Agriculture Improvement Act of 2018, which will remain in force through 2023. The 2018 Farm Bill authorized the production of hemp and removed hemp and hemp seeds from the Drug Enforcement Administration’s, or the DEA’s, schedule of Controlled Substances. It also directed the U.S. Department of Agriculture, or the USDA, to issue regulations and guidance to implement a program to create a consistent regulatory framework around production of hemp throughout the United states. On October 31, 2019, the USDA, Agricultural Marketing Services, issued an interim final rule (with request for comments). The rule outlines provisions for the USDA to approve plans submitted by states and Indian tribes. The U.S. Domestic Hemp Production Program establishes federal regulatory oversight of the production of hemp in the U.S. The program authorizes the USDA to approve plans submitted by states and Indian tribes for the domestic production of hemp and establishes a federal plan for producers in states or territories that choose not to administer a state or tribe specific plan, provide the state or tribe does not ban hemp production.
 
Prior to the 2018 Farm Bill, Cannabis sativa L. with delta-9 tetrahydrocannabinol, or THC, levels greater than 0.3% fell within the definition of “marijuana” under the Controlled Substances Act, or the CSA, and was therefore a Schedule I controlled substance unless it fell under a narrow range of exceptions (e.g., the “mature stalks” of the plant). As a result, many aspects of domestic production of what is now defined as hemp was limited to persons registered under the CSA to do so. Under the Agricultural Act of 2014, which we refer to as the 2014 Farm Bill, State departments of agriculture and institutions of higher education were permitted to produce hemp as part of a pilot program for research purposes. The authority for hemp production provided in the 2014 Farm Bill was extended by the 2018 Farm Bill, which was signed into law on December 20, 2018.
 
Our goal is to rapidly establish one or more principal sources of supply and to develop wholesale and retail sales channels for CBD end-products to be sold to humans and for animal health, such as nutraceuticals, supplements and pet and farm products.
 
Our principal executive offices are located at 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 and our telephone number is (800) 881-9352.
 
Farming Operations
 
On March 11, 2019, we acquired a 50.1% limited liability membership interest in Exactus One World, LLC, an entity formed on January 25, 2019 and which we refer to as EOW, in order to produce hemp. EOW holds one-year leases, which commenced on March 1, 2019, for approximately 200 acres of farmland in southwest Oregon for growing and processing hemp. The leases are renewable on a year-to-year basis. EOW will farm and process hemp to be manufactured into CBD and related products, sold or processed as biomass and other agricultural products.  EOW will be responsible for our initial efforts to pursue agricultural development, including farm soil preparation, planting, harvesting, transportation and drying. We have been responsible for funding and the minority owners will be responsible for management, servicing and operating the farm properties.
 
 
 
On October 23, 2019, we amended the Amended and Restated Operating Agreement of EOW. Under the terms of the amendment, the minority members of EOW conveyed their 49.9% membership interest and rights to distributions related to the current 2019 hemp crop to us. As a result, we acquired the right to receive 100% of the distributions of net profit from the 2019 hemp crop. In addition, the members amended the payment schedule under which farm costs are required to be made by us.
 
Due to declining market prices for industrial hemp and a shortage of available capital, we do not currently intend to farm hemp on the Oregon properties in 2020. Our current plan is to sub-lease the properties for the 2020 growing season to another farmer, although no subleases have been made at this time.
 
Green Goddess Extracts, LLC
 
On July 31, 2019, we entered into an Asset Purchase Agreement with Green Goddess Extracts, LLC (“Green Goddess”) and an Executive Employment Agreement with its founder.  Under the agreement, we agreed to acquire the business and assets of Green Goddess relating to the manufacture, marketing and sale of CBD products, including the right to manufacture, warehouse and ship products under the Green Goddess brand, existing, inventory, ingredients and materials, customer lists, websites, intellectual property and trademarks. We also entered into an option to acquire Green Goddess’ vape assets.  Under the terms of the Asset Purchase Agreement we agreed to issue 250,000 shares of our restricted Common Stock and pay $250,000 cash for the acquisition. The shares vest at a rate of 1/24 per month until fully vested. We have issued 62,500 shares under the Agreement to date, and have not made any payments toward the cash component of the purchase price. We are currently in default under the Asset Purchase Agreement however, there are no penalty, interest or charges from the default pursuant to the Asset Purchase Agreement.
 
The Company, Green Goddess Extracts and the founder have each asserted various claims against the other for breach of contract although no proceedings have been commenced.  Currently, the Company has suspended efforts to market and sell CBD products under the Green Goddess brand and Green Goddess has suspended delivery of the Company’s inventory due to the disputes which involve, among other things, the amounts that were due and owing Green Goddess from C2M for orders placed prior to the asset purchase, the nature and going concern value of the assets purchased by the Company and representations concerning the operation of the business and performance by the founder under the employment agreement.  There can be no assurance the parties will resolve their differences or that the prior agreements will not be terminated. The product with a cost of $837,153 currently held inventory has been written down to a value of $0 due to the age and questionable salability of the product.
 
Additional Brands
 
We have taken steps to introduce Green GoddessTM brands, LeVor CollectionTM, Paradise CBDTM and ExactusTM, for selected markets which, to date, have not resulted in material revenues.
 
Industrial Hemp
 
We seek to take advantage of an emerging worldwide trend to utilize the production of industrial hemp in consumer products. Hemp is being used today in cosmetics, nutritional supplements, and animal feed, where we also intend to focus our efforts. The market for hemp-derived products is expected to increase substantially over the next five years, and we are endeavoring to prepare the Company to be positioned as a significant player in the industry. According to industry reports, CBD is expected to conservatively generate sales of $16 billion by 2025. In one survey, nearly 7% (of 2,500 respondents) reported using CBD as a supplement in January 2019, with retail sales of CBD consumer products in 2018 estimated as being only between $600 million and $2 billion.
 
According to the report, cannabis’ therapeutic potential is attributable to the valuable overlap between phyto-cannabinoids (i.e. plant-derived cannabinoids) and the endogenous cannabinoid system in humans, termed a “therapeutic handshake”. Clinical trial results to date demonstrate few adverse effects from oral CBD doses of up to 1,500 mg/day or up to 30 mg IV. The scientific understanding of CBD’s clinical effects is based mostly on studies in specific indications, like epilepsy. GW Pharma’s Epidiolex (a highly potent, pure formulation of CBD) was approved by the FDA in 2018 for the treatment of seizures associated with Lennox-Gastaut syndrome and Dravet syndrome, and other companies have clinical trials underway in seizure disorders.
 
 
 
Healthcare
 
CBD products appear to be gaining traction with independent pharmacies. The industry, including the Company, has also been approached by several large chain pharmacies with inquiries concerning sourcing, quality, accountability and volume. According to the report, pharmacies likely find the high-margin profile of CBD attractive, similar to over-the-counter drugs. We believe pharmacies will appreciate our “seed-to-consumer” approach and our cGMP manufacturing focus and our planned QR Code traceability and reporting.
 
Currently, CBD products are not a covered benefit, or an extra benefit, under managed care, insurance, Medicare, Medicaid or any state programs. This will likely continue to be the case for the intermediate term. Legal issues and confusion concerning legality, lack of FDA regulation and availability as an OTC medication will likely continue for an indefinite period impeding adoption and payor acceptance.
 
Competition
 
We believe a multitude (hundreds) of companies, large and small, including mom and pops, have launched or intend to launch retail brands and white label products containing CBD. Many of these are offering CBD and are dependent upon third parties to provide raw material inventory for sale. We believe this makes many of the participants in the industry vulnerable to shortages, quality issues, reliability and pricing variability. Our management team’s extensive experience and industry relationships may allow us to build an efficient supply chain that will put us among the few companies that maintain a competitive pricing and supply advantage, poised for revenue growth during 2020 and beyond.
 
The CBD-based consumer product industry is highly fragmented with numerous companies, many of which are under-capitalized. There are also large, well-funded companies that currently do not offer hemp-based consumer products including large agribusiness companies such as Cargill and Tyson Foods, but may do so in the future and become significant competitors.
 
Our goal is to rapidly establish one or more principal sources of supply and to develop wholesale and retail sales channels for end-products, such as nutraceuticals, supplements and pet and farm products. We intend to follow regulatorily compliant pathways by adopting practices established by the FDA for CBD and to pursue FDA approval for our activities upon adoption of federal regulations, including conducting independent clinical and non-clinical trials.
 
Companies such as CV Sciences, Inc. (OTCQB:CVSI) in the US and recent acquisitions by Canadian cannabis producers reflect the growing acceptance of CBD products as a lynchpin for growth. Transactions such as Tilray, Inc. (NASDAQ:TLRY-Manitoba Harvest $419 million February 2019), cbdMD Inc. (NYSE:YCBD - Cure Based Development LLC December 2018), and Aurora Cannabis, Inc. (OTCQB:ACBFF–Agropro UAB EUR6.5 million) reflect the growing interest and M&A activity in the industry among our competition and increasing consolidation.
 
Non-CBD Competition. We do not intend to offer and do not compete with companies that offer cannabis products containing high levels of psychoactive THC. Although legal in some states, and in Canada, we do not intend to enter into this market. We may offer our industrial-hemp based products in dispensaries, but will not compete with any medical or recreational marijuana sellers for high THC content sales due to legal and regulatory restrictions and uncertainty in the United States. Because of regulatory challenges facing marijuana companies in the United States, the vast majority of the companies focused on THC are Canadian and foreign, although several have begun to pursue domestic activities in states that permit marijuana sales. Federal law does not generally recognize marijuana (or hemp that exceeds 0.3% THC) as lawful, although that may change in the future. Because of these factors, our competitors that have focused exclusively on CBD are limited.
 
Retail Competition. Many of our competitors are private companies and as a result, little or no reliable information is available. Of the publicly reporting companies, we believe many of the CBD companies are principally focused on high THC content marijuana. 
 
 
 
Retail Strategy
 
Our focus will include establishing wholesale and retail distribution by developing our own brands, selling white label branded products to others and making acquisitions of existing businesses engaged in marketing or sales, in both online and retail channels. We may supply to wholesalers, retailers, and distribution centers as we seek to launch our retail strategy. We intend to initially focus on developing products to reach medical and health communities to be sold or promoted by or through medical professionals such as internists, dermatologists, osteopaths, chiropractors, pharmacists, and other holistic or natural products purveyors, but will not be limited to such efforts. We intend to focus on higher margin opportunities utilizing online sales and sales in stores, offices or pharmacies.
 
Environmental Matters
 
Compliance with federal, state and local requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had, nor are they expected to have, any direct material effect on our capital expenditures, earnings or competitive position, however such factors could indirectly affect us as well as participants in the supply chain for our products, and our business, operations, vendors or suppliers.
 
Point of Care Diagnostics
 
As previously reported under “Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 the second segment of our business is the development of point of care diagnostic devices. We have since February 2016 been developing devices for measuring proteolytic enzymes in the blood, known as the FibriLyzer and collagenase levels in the blood, known as the MatriLyzer. We believe our diagnostic business has been severely hampered by a shortage of capital for development and as a result our licenses for the underlying technology FibriLyzer and MatriLyzer technology have been threatened and may be discontinued. We have received notice of termination of certain of our licenses for non-payment of fees. For the past 9 months, we have been engaged in discussions with third-parties regarding funding and a possible third-party merger candidate to develop our diagnostic business. Accordingly, we have determined to continue to look for third-parties to partner with and/or buyers to invest in or acquire this business segment. If successful, we could sell or license our rights to third parties with substantially greater resources than us. We also may be required to terminate this segment and may not realize any benefit from our prior investment in developing this business.
 
Recent Developments
 
Private Placement of Convertible Notes and Warrants
 
On November 27, 2019, we entered into a Securities Purchase Agreement, referred to as the SPA, with an institutional investor, pursuant to which it agreed to lend us up to $1,944,444 in three tranches. On November 27, 2019, we issued to the investor an 8% convertible note in the principal amount of $833,333 and a warrant to purchase 275,612 shares of our common stock at an exercise price of $0.756, in exchange for payment by the investor of $750,000. The principal amount of the note reflects the amount invested, plus a 10% original issue discount, or OID. We received gross proceeds of $750,000 in exchange for the initial tranche note and warrant and $730,000 net proceeds after the payment of fees and expenses of the sale.
 
Pursuant to the SPA, a second tranche of funding from the investor is available in the form of a second 8% convertible note in the principal amount of $277,778 and a warrant to purchase 91,871 shares of our common stock. This additional financing is available within three business days after the date of the filing of a registration statement covering the shares issuable upon conversion of the notes and the warrants, in exchange for payment by the investor of the sum of $250,000. The principal amount of the second tranche note will reflect the amount invested plus the OID.
 
 
 
Pursuant to the SPA, subject to fulfillment of certain conditions, a third tranche of funding is available from the investor in the form of an 8% convertible note in the principal amount of $833,333 and a warrant to purchase 275,612 shares of our common stock on the date the registration statement is declared effective by the SEC, in exchange for payment by the investor of the sum of $750,000. The principal amount of the third tranche note will reflect the amount invested plus the OID.
 
The notes are fully and unconditionally guaranteed on a senior secured basis by our direct and indirect subsidiaries. The notes and the guarantees are secured by a perfected, first priority security interest in all of our and the guarantors’ assets.
 
Also on November 27, 2019, we issued to an advisor a warrant to purchase 84,187 shares of common stock in connection with the private placement. We agreed to issue to the advisor a warrant to purchase 28,062 shares of our common stock upon the closing of the second tranche.
 
Below is a summary of the notes and warrants. This summary is not complete and is subject to, and qualified in its entirety by the provisions of the notes and warrants, which are filed as exhibits hereto. We have not completed the second or third tranches, and our completion of these tranches are subject to conditions of the SPA. If we do complete the second or third tranche, the terms of the notes and warrants will be identical to those issued in the first tranche.
 
At this time, we are delinquent in our payments under the initial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. We intend to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding.
 
At this time, we are delinquent in our payments under the initial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. We intend to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding. On May 20, 2020, we entered into a Forbearance Agreement with the investor (the “Holder”) regarding the initial convertible note. Under the Forbearance Agreement, the investor has agreed to forebear from exercising any default-related rights and remedies subject to the following conditions and material terms:
 
We must pay the Holder $60,000 in cash on or before July 1, 2020. Additional monthly payments required under the Amortization Schedule for the note shall continue to be due on or before the first day of each calendar month thereafter, commencing with the $110,000 payment originally due April 1, 2020 now being due on or before August 1, 2020, and the subsequent monthly payments listed on the Amortization Schedule to be paid monthly in the sequence listed. Interest shall continue to accrue on the principal balance of the Note at the rate(s) stated therein, with all additional accrued interest resulting from this extension of payment deadlines to be paid as part of the last monthly payment.
 
The payments that are in arrears from February, April and May can be paid in whole or in part at any time at the sole election of the Holder in shares of common stock at the Amortization Conversion Price (defined as 80% of the lowest volume weighted average price, or VWAP, during the 10 trading days immediately before the applicable date of the amortization redemption payment).
 
Unless or until a default under the Forbearance Agreement occurs, the fixed conversion price under the note will remain $0.50 per share, and the note shall continue to bear interest at the non-default rate of 8% per annum.
 
Unless or until a default under the Forbearance Agreement occurs, the contractual limit on issuances of shares to issue shares of common stock or options to employees, officers, directors. consultants, advisors or contractors will be increased from 5% to 10% or our issued an outstanding common stock.
 
We have issued the Holder 500,000 shares of our common stock in consideration for the forbearance.
 
Terms of the Notes
 
The principal amount of the notes includes an OID of 10%.
 
Interest on the aggregate unconverted and outstanding principal amount is payable at the interest rate of 8% per annum at our option either:
 
in cash; or
 
in shares of our common stock, at the lesser of (i) the fixed conversion rate of $0.50 per share of common stock, or (ii) the rate equal to 80% of the lowest volume weighted average price, or VWAP, during the 10 trading days immediately before the applicable date of the amortization redemption payment, which we refer to as the amortization conversion rate, as described below.
 
Each note matures one year after its issuance unless accelerated due to an event of default or extended by the investor. Each note is convertible at the option of the investor at any time into shares of our common stock at the fixed conversion rate of $0.50 per share. However, the conversion rate is subject to adjustment in the event of default, redemption and upon the occurrence of certain events affecting stockholders generally, such as stock splits and recapitalizations.
 
Included in the amount that the investor may convert into common stock is the sum of:
 
the unpaid and unconverted principal amount outstanding on the note;
 
100% of the accrued and unpaid interest on the principal amount of the note to be converted;
 
100% of the make-whole amount (as described below) payable in respect of the principal amount of the note to be converted; and
 
all liquidated damages, costs of collection and other amounts payable in respect of the note as applicable.
 
 
 
The make-whole amount is the amount of interest that would have accrued with respect to any principal amount that has been converted or redeemed as if that principal amount was held through the maturity date of the note.
 
We must pay amortization redemption payments equaling one-ninth of the original principal amount due on each note commencing 90 days after issuance and continuing during the following eight months. The investor may at its option accelerate up to six future amortization redemption payments, in which case the investor may demand the accelerated amortization amounts be paid in shares of our common stock at the lesser of:
 
the fixed conversion rate of $0.50 per share of common stock; and
 
the amortization conversion rate, as described above.
 
In addition, if we fail to make any amortization redemption payment, the investor may convert an amount equal to the sum of:
 
one-ninth of the original principal amount of the note;
 
100% of all accrued and unpaid interest on the principal amount of the note that is subject to the amortization redemption;
 
100% of the make-whole amount payable in respect of the principal amount of the note that is subject to the amortization redemption; and
 
all liquidated damages payable in respect of the note as of the applicable date of the amortization redemption payment, into our shares of common stock at the lower of (i) the fixed conversion rate of $0.50 per share of common stock and (ii) the amortization conversion rate.
 
If we fail to make a redemption payment, the investor may demand the amortization amounts be paid in shares of our common stock at the lesser of fixed conversion rate of $0.50 per share of common stock or the amortization conversion rate. For the purposes of estimating the number of common stock shares issuable upon conversion of principal and interest under our 8% senior secured convertible notes, we have assumed an amortization conversion rate of $0.4208, calculated as of November 26, 2019.
 
In addition, the investor may at its option send a deferral notice and demand that amortization amounts be paid in shares of our common stock at the amortization conversion rate.
 
We may redeem at our discretion 110% of the outstanding principal amount of the notes, plus accrued but unpaid interest, the make-whole amount, and liquidated damages for cash. In addition, in the event of a subsequent issuance our common stock or debt, we are subject to mandatory redemption provisions. We may not issue shares of common stock to third parties at a price lower than the fixed conversion rate of $0.50 per share of common stock without the consent of the investor.
 
The investor may not convert notes to the extent that conversion would, together with its affiliates and attribution parties, cause the investor to beneficially own a number of common shares which would exceed 4.99% of our then outstanding common shares following conversion. The investor may increase its beneficial ownership limitation up to 9.99%.
 
The notes contain standard and customary events of default, including, but not limited to, failure to make payments when due, failure to observe or perform covenants or agreements contained in the notes, the breach of any material representation or warranty contain therein, our bankruptcy or insolvency, the suspension of trading of our common stock, failure to file required reports with the SEC, and a change of control. If any event of default occurs, subject to a cure period, the full principal amount, together with interest (including default interest of 18% per annum) and other amounts owing in respect thereof to the date of acceleration shall become immediately due and payable in cash.
 
 
 
Terms of Warrants
 
The warrants issued to the investor are exercisable at an exercise price of $0.756 per share of common stock at any time before the close of business two years after their issuance, subject to adjustment in the event of stock dividends, splits, fundamental transactions, or other changes in our capital structure, and contain provisions that permit cashless exercise if a registration statement covering the resale of the shares issuable pursuant to the warrants is not filed within 180 days of their issuance. The investor may not exercise warrants to the extent that exercise would cause it, together with its affiliates and attribution parties, to beneficially own a number of common shares which would exceed 4.99% of our then outstanding common shares following exercise. The investor may increase its beneficial ownership limitation up to 9.99%.
 
The warrants issued to the advisor are exercisable at an exercise price of $ 0.792 per share of common stock at any time before the close of business four years after their issuance, subject to adjustment in the event of stock dividends, splits, fundamental transactions, or other changes in our capital structure. The advisor may not exercise warrants to the extent that exercise would cause it, together with its affiliates and attribution parties, to beneficially own a number of common shares which would exceed 4.99% of our then outstanding common shares following exercise. The advisor may remove this beneficial ownership limitation.
 
Ceed2Med Agreements
 
On January 8, 2019, we entered into a Master Product Development and Supply Agreement with Ceed2Med, LLC. Under the agreement, C2M agreed to provide us a minimum of 50 and up to 300 kilograms per month, and up to 2,500 kilograms annually, of CBD rich ingredients for resale. In addition, C2M will manufacture for us tinctures, edibles, capsules, topical solutions and animal health products. In connection with the agreement, we issued C2M 8,385,691 shares of our common stock, or approximately 51% percent of our issued and outstanding shares of common stock on a fully-diluted basis, on January 8, 2019. As a result, C2M is our largest stockholder.
 
On July 31, 2019, we entered into a Management and Services Agreement with C2M under which it will provides us and our subsidiary, EOW, with project management, farming, and operational services, including:
 
executive, sourcing, vendor, product, production and other expertise and resources;
 
drawings, designs and specifications for extraction, production and manufacturing facilities and resources; and
 
brand development and support services.
 
In addition, C2M has assigned us its agreements and rights to acquire approximately 200 acres of industrial hemp farmland and will provide us with business opportunities, know-how, knowledge, and experience.
 
In return, we issued 10,000 shares of Series E 0% Convertible Preferred Stock to C2M pursuant to the agreement. Under the terms of the Series E Preferred, C2M may only convert such shares of Series E Preferred into shares of our common stock if our closing price shall exceed $2.00 per share for 5 consecutive trading days. Once vested, the shares of Series E Preferred held by C2M are intended to either be converted at $1.60 per share of common stock or optionally redeemed out of the proceeds of future financings, at the option of C2M. For more information about the terms of the Series E Preferred, please see the section entitled “Description of Securities”.
 
On October 23, 2019, we amended the Management and Services Agreement to extend the termination date to December 31, 2024 and expand the scope of services to be provided by C2M. Included in the scope of services was to negotiate with the minority owners of EOW, an amendment to the Operating Agreement of EOW for the distribution and allocation to provide for up to 100% (from 50.1%) of the results of operations of the 2019 harvest or yield resulting from all plants germinated during the calendar year December 31, 2019
 
On November 14, 2019, we entered into a Supply and Distribution Agreement with C2M, pursuant to which C2M agreed to purchase a minimum of 10,000 pounds of our 2019 hemp flower harvest. During the one-year term of the agreement, we have the option to purchase the distribution operations of C2M.
 
 
 
Canntab Agreements
 
On November 20, 2019, we entered into the Non-Exclusive Distribution and Profit Sharing Agreement with Canntab Therapeutics USA (Florida), Inc. Pursuant to the agreement, which has a term of 2 years and is subject to automatic renewal We are a non-exclusive distributor of certain Canntab products throughout the U.S. Canntab will not grant a third-party the right to promote, sell or deliver the products within the U.S. during the term of the agreement, subject to certain exceptions. In addition, we agreed to share equally with Canntab in the gross profits received from the sale of their products by us. With respect to Canntab’s sales of products, we will receive 10% of the gross profits. In connection with the Canntab Agreement, we also entered into a Supply Agreement with Canntab, which has a term of 2 years and is subject to automatic renewal, pursuant to which we agreed to sell hemp extracts to Canntab. Due to a need for additional warehouse space and disruptions caused by the Covid-19 pandemic, we have not distributed Canntab products to date.
 
Hemptown USA Agreement
 
On February 4, 2020, we entered into a Supply and Distribution Agreement with HTO Holdings Inc (dba “Hemptown, USA”), enabling the Company to purchase and sell Hemptown’s Cannabigerol (CBG) and Cannabidiol (CBD) products, including top flower, biomass and extracts (crude, isolates, distillates, and water soluble). Ceed2Med, LLC, the Company’s largest shareholder, is also a significant investor in Hemptown USA and is party to a distribution agreement with the Company. The Interim Chief Executive Officer will work to develope plans to coordinate the Company’s efforts to introduce CBG and to expand its efforts to sell CBD products. On March 28, 2020, we amended the Supply and Distribution Agreement Pursuant to the amendment, we agreed to also (i) aid Hemptown’s management with product compliance requirements, (ii) participate in discussions related to Hemptown’s 2020 farming, harvesting and processing plans as well as joint supply scenarios, (iii) interact with Hemptown’s ingredient and manufacturing divisions to facilitate development of documents for selected SKUs to service the white label market, and (iv) aid Hemptown’s CEO in overseeing the entire supply chain to establish best practices in quality and compliance and lower costs. In addition, Hemptown agrees to pay the Company $3,500 a month in consulting fees.
 
Item 1A. Risk Factors
 
Risks Related to Our Company and Our Business
 
Because we have a limited operating history to evaluate our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delay frequently encountered by an early-stage company.
 
Since we have a limited operating history in our current business of hemp-based CBD, it will make it difficult for investors and securities analysts to evaluate our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company with a limited operating history. Investors should evaluate an investment in our company in light of the uncertainties encountered by early-stage companies in an intensely competitive industry and in which the potential hemp-based CBD competition and farming, extraction, production and manufacturing companies are large well capitalized companies with resources (financial and otherwise) significantly greater than the Company’s. There can be no assurance that our efforts will be successful or that we will be able to become profitable.
 
We have sustained losses in the past and we may sustain losses in the foreseeable future.
 
We have incurred losses from operations in prior periods, including the years ended December 31, 2019 and 2018.  Our loss from operations for the year ended December 31, 2019 was $10,878,442 and our net loss was $10,224,506 for the year ended December 31, 2019. Our accumulated deficit was $21,129,379 at December 31, 2019. Our loss from operations for the year ended December 31, 2018 was $2,436,226 and our net loss was $4,337,319 for the year ended December 31, 2018.  Our accumulated deficit was $10,537,892 at December 31, 2018. We expect to sustain losses in the foreseeable future and may never be profitable.
 
 
 
 
Because we expect to need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
 
We expect that as our business continues to grow, we will need additional working capital.  If adequate additional debt and/or equity financing is not available on reasonable terms or at all, we may not be able to continue to expand our business, and we will have to modify our business plans accordingly. These factors would have a material and adverse effect on our future operating results and our financial condition.
 
If we reach a point where we are unable to raise needed additional funds to continue as a going concern, we will be forced to cease our activities and dissolve the Company.  In such an event, we will need to satisfy various creditors and other claimants, severance, lease termination and other dissolution-related obligations.
 
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
 
The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2019 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our auditor’s doubts are based on our recurring losses from operations, negative cash flows from operating activities and accumulated deficit. Our ability to continue as a going concern will be determined by our ability to obtain additional funding in the short term to enable us to fund our operations. If we are unable to raise additional capital or secure additional lending in the near future, management expects that we will need to curtail our operations.
 
We may not be able to successfully implement our growth strategy on a timely basis or at all.
 
Our future success depends on our ability to implement our growth strategy of introducing new products and expanding into new markets and new distribution channels and attracting new consumers to our brand. Our ability to implement this growth strategy depends, among other things, on our ability to:
 
establish our brands and reputation as a well-managed enterprise committed to delivering premium quality products;
 
enter into distribution and other strategic arrangements with retailers and other potential distributors of our products;
 
continue to effectively compete in specialty channels and respond to competitive developments;
 
expand and maintain brand loyalty;
 
develop new proprietary value-branded products and product line extensions that appeal to consumers;
 
maintain and, to the extent necessary, improve our high standards for product quality, safety and integrity;
 
maintain sources from suppliers that comply with all federal, state and local laws for the required supply of quality ingredients to meet our growing demand;
 
identify and successfully enter and market our products in new geographic markets and market segments;
 
maintain compliance with all federal, state and local laws related to our products; and
 
attract, integrate, retain and motivate qualified personnel. We may not be able to successfully implement our growth strategy and may need to change our strategy in order to maintain our growth. If we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful, our business, financial condition and results of operations may be materially adversely affected.
 
 
 
We may have difficulties managing our anticipated growth, or we may not grow at all.
 
If we succeed in growing our business, such growth could strain our management team and capital resources. Our ability to manage operations and control growth will be dependent on our ability to raise and spend capital to successfully attract, train, motivate, retain and manage new members of senior management and other key personnel and continue to update and improve our management and operational systems, infrastructure and other resources, financial and management controls, and reporting systems and procedures. Failure to manage our growth effectively could cause us to misallocate management or financial resources, and result in additional expenditures and inefficient use of existing human and capital resources or we otherwise may be forced to grow at a slower pace that could impair or eliminate our ability to achieve and sustain profitability. Such slower than expected growth may require us to restrict or cease our operations and go out of business.
 
The focus of our business is to produce hemp-based products, including through farming and manufacturing. We may not be able to successfully farm, manufacture or sell products and, if we acquire hemp-based products from third parties, we may fail to realize all of the anticipated benefits of our business plans and efforts.
 
We acquired our farm interests and commenced hemp-based activities in 2019 in transactions which significantly changed the focus of our business and operations. We currently own several assets and although we may seek to commercialize and develop products, alone or with others, there is no assurance that we will be able to successfully commercialize or develop products and such commercialization and development is not a core focus of our business. There is significant risk involved in connection with our activities in which we acquire and seek to pursue hemp-based businesses. We have no prior experience as an operator of hemp-based businesses. The acquisition of the farm and operations intended to produce sales and our business model could fail to produce anticipated benefits, or could have other adverse effects that we do not currently foresee. Failure to successfully produce biomass from agricultural crops, or failure of extraction, production or manufacturing operations may have a material adverse effect on our business, financial condition and results of operations.
 
In addition, the pursuit of hemp-based businesses, including acquisition of businesses intended to pursue hemp-based sales, is subject to a number of risks, including, but not limited to the following:
 
There is a significant time lag between investing in farm properties and harvest, during which time crops of hemp may fail. During that time lag, in the event of unforeseen occurrence, such as natural or man-made events that impact crops, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and financial position;
 
The integration of a farm-based infrastructure is unpredictable and requires that we rely on the efforts of others, including the skills and experience of our farm partner, who are responsible for providing personnel and overseeing farming, extraction, production and manufacturing. This will be a time consuming and expensive process which is unpredictable and that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisitions;
 
Integration of infrastructure, and acquisitions that increase our ability to sell hemp-based consumer products, is unpredictable and requires that our management oversee integration and acquisitions related to marketing and sales. This will be a time consuming and expensive process which is unpredictable and that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisitions; and
 
Our largest stockholder, C2M, also competes with us and will continue to compete with us. C2M may require payments for business opportunities provided to us in exchange for its lost opportunities.
 
Therefore, there is no assurance that the hemp-based business will be successful, will occur timely or in a timeframe that is capable of prediction, or will generate enough revenue to recoup our investment.
 
 
-10-
 
We may not be able to manage our manufacturing and supply chain effectively, which may adversely affect our results of operations.
 
We must accurately forecast demand for all of our products in order to ensure that we have enough products available to meet the needs of our customers. Our forecasts are based on multiple assumptions that may cause our estimates to be inaccurate and affect our ability to obtain adequate third-party contract manufacturing capacity in order to meet the demand for our products, which could prevent us from meeting increased customer demand and harm our brand and our business. If we do not accurately align our manufacturing capabilities with demand, our business, financial condition and results of operations may be materially adversely affected.
 
During 2019, we relied upon a single supplier, which is our largest stockholder, C2M, for all of our supply of CBD. During 2020, we intend to manufacture some of our own products and to engage 2-3 additional suppliers. We will remain, however, dependent on a small number of suppliers for our products. If any of our limited number of suppliers were to go out of business, we might be unable to find a replacement for such sources in a timely manner, if at all. If a supplier were to be acquired by a competitor, the competitor may elect not to sell to us at all. The loss of a supplier could cause additional difficulties in finding a substitute supplier given the strict licensing requirements in this industry and there are a limited number of suppliers that currently hold such licenses and comply with the 2014 Farm Bill (as defined below). If for any reason we were to change any one of our third-party contract manufacturers, we could face difficulties that might adversely affect our ability to maintain an adequate supply of our products, and we would incur costs and expend resources in the course of making the change. Moreover, we might not be able to obtain terms as favorable as those received from our current third-party contract manufacturers, which in turn would increase our costs.
 
As the largest stockholder, C2M has the ability to exert significant control in matters regarding stockholder approval. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on our business, financial condition, results of operations or prospects.
 
In addition, we must continuously monitor our inventory and product mix against forecasted demand. If we underestimate demand, we risk having inadequate supplies. We also face the risk of having too much inventory on hand that may reach its expiration date and become unsalable, and we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory. If we are unable to manage our supply chain effectively, our operating costs could increase, and our profit margins could decrease.
 
 
-11-
 
 
Reliance on other Manufacturers.
 
The ability of the Company to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, facilities and CBD. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, facilities.
 
The Company relies on third parties to supply the materials for and the functions of extraction, processing and manufacturing, as well research of the retail private label and customer product candidates. The Company cannot provide assurance that access to other manufacturers for supply, expertise, or materials will not be limited, not be interrupted, not be restricted in certain geographic regions, or be of satisfactory quality or be delivered in a timely manner. In this regard, we will require continued access to Current Good Manufacturing Practices (“cGMP”) manufacturer facilities, testing laboratories, qualified extraction facilities, processing, manufacturing and related services until we are fully-funded and can acquire our own capabilities for each of these functions. If the Company is unable to obtain access to a cGMP manufacturer, for example, or any of the other supply chain elements involved in our full-integration plans, the Company may be restricted from operations which would have a materially adverse effect on the business and operations of the Company.
 
We are heavily reliant on a small number of customers and suppliers.
 
During the year ended December 31, 2019, three customers represented 58% of our total net sales of CBD products, and as of December 31, 2019, four customers represented approximately 82% of our total accounts receivable. The loss of any of these customers or their inability to make future payments could significantly impact our business and results of operation. In addition, we purchased all of our finished products from one supplier, C2M, during the year ended December 31, 2019. Our heavy reliance on our major supplier for the supply of our products could have significant impact on our business and results of operation in the event of any shortage of, or delay in, the supply. The loss of this supplier could significantly impact our business and results of operation.
 
If we fail to manage our existing assets and third party relationships (such as farmers, extractors, producers, distributors, shippers and retail distribution clients) effectively, our revenue and profits could decline, and should we fail to acquire additional revenues, our growth could be impeded.
 
Our success depends in part on our ability to manage our existing assets and manage the third-party relationships necessary to effectively manage our assets.  Our vendors and providers are not bound by long-term contracts that ensure us a consistent access to necessary expertise, which is crucial to our ability to generate revenues and earnings. The ability to utilize third-parties and benefit from our assets will depend on various factors, some of which are beyond our control.
 
 
 
 
-12-
 
We are reliant on key inputs and changes in their costs could negatively impact our profitability.
 
Our business is dependent on a number of key inputs and their related costs including raw materials and supplies related to product development and manufacturing operations. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business, financial condition, results of operations or prospects. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, we might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to us in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on our business, financial condition, results of operations or prospects.
 
Increases in the cost of ingredients, labor and other costs could adversely affect our operating results.
 
Our principal products contain hemp-derived CBD oil. Increases in the cost of ingredients in our products could have a material adverse effect on our operating results. Significant price increases, market conditions, weather, acts of God and other disasters could materially affect our operating results. An increase in our operating costs could adversely affect our profitability. Factors such as inflation, increased labor and employee benefit costs and increased energy costs may adversely affect our operating costs. Many of the factors affecting costs are beyond our control and we may not be able to pass along these increased costs to our customers.
 
If the ingredients used in our products are contaminated, alleged to be contaminated or are otherwise rumored to have adverse effects, our results of operations could be adversely affected.
 
We buy ingredients from other manufacturers. If these materials are alleged or prove to include contaminants that affect the safety or quality of our products or are otherwise rumored to have adverse effects, for any reason, we may sustain the costs of and possible litigation resulting from a product recall and need to find alternate ingredients, delay production, or discard or otherwise dispose of products, which could adversely affect our business, financial condition and results of operations. In addition, if any of our competitors experience similar events, our reputation could be damaged, including as a result of a loss of consumer confidence in the types of products we sell.
 
Although we insure on an economically reasonable basis against product recalls and product contamination, and carry a cannabis regulatory and enforcement endorsement under our Directors and Officers insurance policy, our insurance may not be adequate to cover all liabilities that we may incur in connection with product liability claims, including among others, that the products we sell caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. For example, punitive damages are generally not covered by insurance. If we are subject to substantial product liability claims in the future, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage. This could result in future product liability claims being uninsured. If there is a product liability judgment against us or a settlement agreement related to a product liability claim, our business, financial condition and results of operations may be materially adversely affected. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could be costly and time-consuming and may require management to spend time defending claims rather than operating our business.
 
 
 
 
-13-
 
We may become the subject of litigation and, due to the nature of our business, may be the target of future legal proceedings that could have an adverse effect on our business.
 
On September 9, 2019, Dr. Krassen Dimitrov, a former director, commenced an arbitration proceeding against the Company and its wholly-owned subsidiary Exactus Biosolutions, Inc. before the American Arbitration Association.  The complaint alleges breach of a consulting agreement for services by Dr. Dimitrov during 2017-2019, among other claims, and seeks $750,000 in damages.  The Company has filed an answer denying the claims and asserting numerous counterclaims against Dr. Dimitrov and his affiliated entities, KD Innovation Ltd., and Digital Diagnostics, Inc. An arbitrator has been appointed in the matter and on May 1, 2020 issued a procedural order suspending further proceedings.
 
On February 26, 2020 a complaint was filed in the Circuit Court, Palm Beach County, Florida on behalf of five former employees of the Company.  The case is entitled Ryan Borcherds and Miriam Martinez vs. Exactus, Inc..  The complaint alleges the Company failed to pay wages and compensation to 2 employees under the Fair Labor Standards Act, breach of contract and violation of various Florida statutes, including allegations on behalf of other similarly situated persons.  The complaint seeks approximately $82,000 in unpaid wages as well as special damages, liquidated damages, interest and attorney’s fees.
 
The Company may become subject to similar actions in the future which will be costly and time consuming to defend, and the outcomes of which are uncertain.
 
We may seek to internally develop additional hemp-based products, which would take time and be costly. Moreover, the failure to successfully develop, or obtain or maintain intellectual property rights for, such products would lead to the loss of our investments in such activities.
 
Part of our business may include the internal development of products that we will seek to offer and sell. However, this aspect of our business would likely require significant capital and would take time to achieve. Such activities could also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new products or developments, which would lead to a loss of our investments in time and resources in such activities.
 
In addition, even if we are able to internally develop new products, in order for those products to be viable and to compete effectively, we would need to develop and maintain, and we would heavily rely upon, a proprietary position with respect to such products. However, there are significant risks associated with any such efforts and products we may develop principally including the following:
 
efforts may not result in success, or may take longer than we expect;
 
we may be subject to litigation or other proceedings;
 
any patents or trademarks that are issued to us may not provide meaningful protection;
 
we may not be able to develop additional proprietary technologies;
 
other companies may challenge our efforts or intellectual property rights that are issued to us;
 
other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies; and
 
other companies may design around technologies we have developed.
 
 
 
-14-
 
If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.
 
Our future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products and related services to our customers. The processes of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging trends, our business could be harmed. We have already and may have to continue to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.
 
The success of new products depends on several factors, including proper new product definition, timely completion, and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify additional new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
 
Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business.
 
To date, our revenue growth plans have been derived from projected sales of our products, not actual sales or historical experience. Our success and the planned growth and expansion of our business depends on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
 
Our suppliers could fail to fulfill our orders or provide raw materials to assemble our products, which would disrupt our business, increase our costs, harm our reputation, and potentially cause us to lose our market.
 
We depend on third party suppliers for materials used for our products, such as bottles, caps, vapes, batteries and labels. These suppliers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the material or products on a timely basis. Our suppliers may also have to obtain inventories of the necessary materials and tools for production. Any change in our suppliers’ approach to resolving production issues could disrupt our ability to fulfill orders and could also disrupt our business due to delays in finding new suppliers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders could harm our reputation and could potentially cause us to lose our market.
 
The Company’s ultimate success will be dependent in part on our ability to successfully grow, develop, produce and market a portfolio of hemp products and market acceptance of our planned products.
 
We are an agribusiness and grow our product outdoors, and there are risks associated with the production of our product relating to such things as weather, soil deterioration, and infestation that could affect our supplies and inventory. In addition, market acceptance by and demand for our planned products from consumers will also be key factors in our ability to succeed. If we are unable to develop and market our portfolio of existing and planned products or if they are not accepted by consumers, our business, results of operations and financial condition could be seriously harmed. We do not currently carry products liability insurance. As a result, a successful product liability claim brought against us would have a material adverse effect on our business and results of operations.
 
 
 
-15-
 
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.
 
 
 
-16-
 
A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.
 
A significant product defect could materially harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers and reduce end-user loyalty. A product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and profitability and could reduce or deplete our financial resources.
 
We may be subject to product liability claims or regulatory action if our products are alleged to have caused significant loss or injury.
 
We may be subject to product liability claims, regulatory action and litigation if our products are alleged to have caused loss or injury or failed to include adequate instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. Previously unknown adverse reactions resulting from use and consumption of CBD products alone or in combination with other medications or substances could also occur. In addition, the sale of any ingested product involves a risk of injury due to tampering by unauthorized third parties or product contamination. Our products may also be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of injury or illness, or if they are alleged to have been mislabeled, misbranded or adulterated or to otherwise be in violation of governmental regulations. We may in the future have to recall, certain of our products as a result of potential contamination and quality assurance concerns. A product liability claim or regulatory action against us could result in increased costs and could adversely affect our reputation and goodwill with our patients and consumers generally. We do not currently carry products liability insurance. As a result, a successful product liability claim brought against us would have a material adverse effect on our business and results of operations. Although we are seeking to acquire product liability insurance, there can be no assurance that we will be able to obtain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.
 
If product liability lawsuits are successfully brought against us, we will incur substantial liabilities.
 
We face an inherent risk of product liability. For example, we may be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit sales of our products. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
 
decreased demand for our products;
 
injury to our reputation;
 
costs to defend the related litigation;
 
a diversion of management's time and our resources;
 
substantial monetary awards to users of our products;
 
product recalls or withdrawals;
 
loss of revenue; and or a decline in our stock price.
 
In addition, while we continue to take what we believe are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.
 
 
 
-17-
 
Our acquisitions may be time consuming, complex and costly, which could adversely affect our operating results.
 
Acquisitions are critical to our business plan, and are often time consuming, complex and costly to consummate. We may elect to not pursue any additional acquisitions while we focus our efforts on our existing assets. We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur significant operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is ultimately not consummated, if we determine to acquire additional patents or other assets. Even if we are able to acquire particular assets, there is no guarantee that we will generate sufficient revenue related to those assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the assets we are considering for acquisition, because we are operating in a new and uncertain industry we place less emphasis on due diligence and we may acquire assets from a seller for whom we do not have complete analysis of their history or business operations, for example, if we view the acquisition to be important strategically, the seller may not have proper title or ownership to those assets, or otherwise provides us with flawed ownership rights, including invalid or unenforceable assets. In those cases, we may be required to spend significant resources to defend our interest in the assets and, if we are not successful, our acquisition may be worthless, in which case we could lose part or all of our investment in the assets.
 
We may also identify assets that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any assets or, if consummated, proves to be unprofitable for us. Acquisitions involving issuance of our securities could be dilutive to existing stockholders and could be at prices lower than those prices reflected in the trading markets. These higher costs could adversely affect our operating results and, if we incur losses, the value of our securities will decline.
 
In addition, we may acquire assets that are in the early stages of adoption. Demand for some of these assets will likely be untested and may be subject to fluctuation based upon the rate at which our customers or associates adopt our products or utilize our materials in their products and services. As a result, there can be no assurance as to whether assets we acquire or develop will have value that can be realized through sales or other activities.
 
If we make acquisitions, it could divert management’s attention, cause ownership dilution to our stockholders and be difficult to integrate.
 
Following our acquisition of Exactus One World in March 2019, we have grown rapidly and we expect to continue to evaluate and consider future acquisitions. Acquisitions generally involve significant risks, including difficulties in the assimilation of the assets, services and technologies we acquire or industry overlay on which the assets are applicable, diversion of management's attention from other business concerns, overvaluation of the acquired assets, and the acceptance of the acquired assets and/or businesses.  Acquisitions may not be successful, which can have a number of adverse effects upon us including adverse financial effects and may seriously disrupt our management’s time. The integration of acquired assets may place a significant burden on management and our internal resources. The diversion of management attention and any difficulties encountered in the integration process could harm our business.
 
 
 
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We face risks associated with strategic acquisitions.
 
As an important part of our business strategy, we have strategically acquired several businesses, and plan to continue strategic acquisitions, some of which may be material. These acquisitions may involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations:
 
Any acquired business could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;
 
We may incur or assume significant debt in connection with our acquisitions;
 
Acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long term; and
 
Acquisitions could create demands on our management that we may be unable to effectively address, or for which we may incur additional costs.
 
Additionally, following any business acquisition, we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers.
 
We may record goodwill and other intangible assets on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.
 
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
 
Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, Emiliano Aloi, our interim CEO, is important to the management of our business and operations and the development of our strategic direction. The loss of the services of any such individual and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
 
We depend on the knowledge and skills of our senior management and other key employees, and if we are unable to retain and motivate them or recruit additional qualified personnel, our business may suffer.
 
We have benefited substantially from the leadership and performance of our senior management, as well as other key employees. Our success will depend on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future, and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. In addition, we do not maintain any “key person” life insurance policies. The loss of the services of members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements.
 
We will be required to attract and retain top quality talent to compete in the marketplace.
 
We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings.
 
 
 
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If we fail to retain key personnel and hire, train and retain qualified employees, we may not be able to compete effectively, which could result in reduced revenue or increased costs.
 
Our success is highly dependent on the continued services of key management and technical personnel. Our management and other employees may voluntarily terminate their employment at any time upon short notice. The loss of the services of any member of the senior management team or any of the managerial or technical staff or members of our Advisory Board on which we principally rely for expertise on our CBD segment may significantly delay or prevent the achievement of product development, our growth strategies and other business objectives. Our future success will also depend on our ability to identify, recruit and retain additional qualified technical and managerial personnel. We operate in several geographic locations where labor markets are particularly competitive, and where demand for personnel with these skills is extremely high and is likely to remain high. As a result, competition for qualified personnel is intense, particularly in the areas of general management, finance, engineering and science. The process of hiring suitably qualified personnel is often lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.
 
War, terrorism, other acts of violence or natural or manmade disasters such as a global pandemic may affect the markets in which the Company operates, the Company's customers, the Company's delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial condition.
 
The Company's business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of disease (including the recent outbreak of the coronavirus commonly referred to as "COVID- 19"). Such events may cause customers to suspend their decisions on using the Company's products and services, make it impossible to attend or sponsor trade shows or other conferences in which our products and services are presented to distributors, customers and potential customers, for our customers to visit our farms, extraction facilities, manufacturing locations or other physical locations, cause restrictions, postponements and cancellations of events that attract large crowds and public gatherings such as trade shows at which we have historically presented our products, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere with purchases of goods or services, commitments to develop new brands and white label products, or agriculture and farming. Furthermore, our agriculture and farming depends on the availability of labor which in turn is dependent upon the ability of agricultural/farm workers to travel, sometimes from foreign countries, and the ability of third parties to contract with us for services on which we depend. The inability or delays in preparing farms for future crops starting in 2020, and planting, harvesting, drying, trimming, warehousing and transportation disruptions in 2020 and later could result from events such as COVID-19. These events also pose significant risks to the Company's personnel and to physical facilities, transportation and operations, which could materially adversely affect the Company's financial results.
 
Any significant disruption to communications and travel, including travel restrictions and other potential protective quarantine measures against COVID-19 by governmental agencies, may increase the difficulty and could make it impossible for the Company to deliver goods services to its customers. Travel restrictions and protective measures against COVID-19 could cause the Company to incur additional unexpected labor costs and expenses or could restrain the Company's ability to retain the highly skilled personnel the Company needs for its operations. The extent to which COVID-19 impacts the Company's business, sales and results of operations will depend on future developments, which are highly uncertain and cannot be predicted.
 
We believe the novel coronavirus (COVID-19) has negatively affected our corporate operations necessary to prepare and maintain accurate accounting and reporting, and could continue to do so in the foreseeable future. The coronavirus has resulted in restrictions, postponements and cancelations and the impact, extent and duration of the government imposed restrictions on travel and public gatherings as well as the overall effect of the COVID-19 virus is currently unknown.
 
The ongoing circumstances resulting from the COVID-19 virus outbreak magnify the challenges faced from our continuing efforts to introduce and sell our products in a challenging environment and could have an impact on our business and financial results.
 
 
 
 
Risks Related to Ownership of Our Common Stock.
 
The price of our common stock has been highly volatile due to several factors that will continue to affect the price of our stock.
 
Our common stock has traded as low as $0.08 and as high as $4.00 between January 1, 2019 and December 31, 2019. The reason for the volatility in our stock is not well understood and the volatility may continue. Some of the factors we believe that have contributed to our common stock volatility and which may be applicable in future periods, include:
 
uncertainty surrounding our rights to development since notice of termination was received from Digital Diagnostics, Inc.
 
inability to secure funding or partners for our development of the FibriLyzer and MatriLyzer;
 
entry into new business ventures;
 
asset acquisitions or dispositions;
 
commencement of litigation;
 
small amounts of our stock available for trading, expiration of any lockup agreements and terms of any leak-out rights with respect thereto;
 
obligations to and filing of registration statements registering the sale of new or outstanding shares of our common stock;
 
options and derivatives availability or unavailability;
 
short selling and potential “short and distort” campaigns and other short attacks involving our stock;
 
small public float of our outstanding common stock;
 
expiration of Rule 144 holding periods with respect to our outstanding common stock;
 
fluctuations in our operating results;
 
 
 
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changes in the capital markets and ability for the Company to raise capital;
 
legal developments and public awareness with respect to hemp-based and/or CBD business plans, generally, and involving the Company;
 
confusion with Companies engaged in the business of marijuana, and the legal and regulatory concerns that our business is related to the marijuana business;
 
general economic conditions;
 
and legal and regulatory environment.
 
We cannot guarantee the continued existence of an active established public trading market for our shares.
 
Our shares are currently quoted on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our shares for reasons unrelated to operating performance. Accordingly, OTCQB may provide less liquidity for holders of our shares than a national securities exchange such as the Nasdaq Stock Market. There is no assurance that we can successfully maintain an active established trading market for our shares.
 
Market prices for our shares may also be influenced by a number of other factors, including:
 
the issuance of new equity securities pursuant to a public or private offering;
 
changes in interest rates;
 
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
variations in quarterly operating results;
 
change in financial estimates by securities analysts;
 
the depth and liquidity of the market for our shares;
 
investor perceptions of Exactus and its industry generally; and
 
general economic and other national conditions.
 
 
 
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Our shares of common stock are thinly traded and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise desire to liquidate their shares.
 
Our common stock has been “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent.  We believe this situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable.  In addition, we believe that due to the limited number of shares of our common stock outstanding, an options market has not been established for our common stock, limiting the ability of market participants to hedge or otherwise undertake trading strategies available for larger companies with broader stockholder bases which prevents institutions and others from acquiring or trading in our securities. Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.  We cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.
 
There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our common stock may be volatile.
 
The market price of our common stock will likely be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as conditions or trends in the industry in which we operate or sales of our common stock. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
 
As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a mature issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. It is possible that a broader or more active public trading market for our common stock will not develop or be sustained, or that trading levels will not continue. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
 
We can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in the Company and could depress our stock price.
 
Our Articles of Incorporation authorize 650,000,000 shares of common stock, of which 6,233,524 were issued and outstanding as of December 31, 2018 and a total of 44,483,905 were issued and outstanding and to be issued on December 31, 2019. Moreover, our Board of Directors is authorized to issue additional shares of our common stock and preferred stock. Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares.
 
 
 
 
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We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock.
 
We have not paid any cash dividends on our common stock and do not intend to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant. Therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock.
 
We may issue additional equity shares to fund our operational requirements, which would dilute share ownership. Such sales of additional equity securities may adversely affect the market price of our common stock and your rights in the company may be reduced.
 
The company’s continued viability depends on its ability to raise capital. We expect to continue to incur product development and selling, general and administrative costs. Changes in economic, regulatory or competitive conditions may lead to cost increases. Management may determine that it is in the best interest of the company to develop new services or products. In any such case additional financing is required for the company to meet its operational requirements. We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. The sale or the proposed sale of substantial amounts of our common stock in the public markets may adversely affect the market price of our common stock. Also, any new securities issued may have greater rights, preferences or privileges than our existing common stock. Our stockholders may experience substantial dilution upon such issuances and a reduction in the price that they are able to obtain upon sale of their shares. There can be no assurances that the company will be able to obtain such financing on terms acceptable to the company and at times required by the company, if at all. In such event, the company may be required to materially alter its business plan or curtail all or a part of its operational plans.
 
We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
 
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock with respect to dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might grant to holders of preferred stock could affect the value of the common stock.
 
 
 
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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;
 
 
 
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changes in the regulatory environment, including regulation of hemp-based products or CBD by the FDA or comparable state regulatory agencies or agricultural authorities
 
the timing and amount of expenses associated with farming, extraction, production, manufacturing and selling;
 
Any changes we make in our Critical Accounting Estimates described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our periodic reports;
 
the adoption of new accounting pronouncements, or new interpretations of existing accounting pronouncements, that impact the manner in which we account for, measure or disclose our results of operations, financial position or other financial measures; and
 
costs related to acquisitions of technologies or businesses.
 
Our operating results, including net sales, gross margin and net income (loss), as well as our stock price have varied in the past, and our future operating results will continue to be subject to quarterly and annual fluctuations based upon numerous factors. Our stock price will continue to be subject to daily variations as well. Our future operating results and stock price may not follow any past trends or meet our guidance and expectations.
 
Our net sales and operating results, net income (loss) and operating expenses, and our stock price have varied in the past and may vary significantly from quarter to quarter and from year to year in the future. We believe a number of factors, many of which are outside of our control, could cause these variations and make them difficult to predict, including:
 
fluctuations in demand for our products or downturns in the industries that we serve;
 
the ability of our suppliers, both internal and external, to produce and deliver products including sole or limited source components, in a timely manner, in the quantity, quality and prices desired;
 
the timing of receipt of bookings and the timing of and our ability to ultimately convert bookings to net sales;
 
rescheduling of shipments or cancellation of orders by our customers;
 
fluctuations in our product mix;
 
the ability of our customers' other suppliers to provide sufficient material to support our customers' products;
 
currency fluctuations and stability, in particular the U.S. dollar as compared to, other currencies;
 
introductions of new products and product enhancements by our competitors, entry of new competitors into our markets, pricing pressures and other competitive factors;
 
our ability to develop, introduce, manufacture and ship new and enhanced products in a timely manner without defects;
 
our ability to manage our manufacturing capacity across our diverse product lines and that of our suppliers, including our ability to successfully expand our manufacturing capacity in various locations around the world;
 
our ability to successfully and fully integrate acquisitions, into our operations and management;
 
 
 
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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.
 
 
 
 
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Due to these and other factors, such as varying product mix, quarter-to-quarter and year-to-year comparisons of our historical operating results may not be meaningful. You should not rely on our results for any quarter or year as an indication of our future performance. Our operating results in future quarters and years may be below public market analysts' or investors' expectations, which would likely cause the price of our stock to fall. In addition, over the past several years, U.S. and global equity markets have experienced significant price and volume fluctuations that have affected the stock prices of many companies involved in the cannabis industry and are expected to affect the hemp-based industry as well, both within and outside our industry. There has not always been a direct correlation between this volatility and the performance of particular companies subject to these stock price fluctuations. These factors, as well as general economic and political conditions, may have a material adverse effect on the market price of our stock in the future.
 
Our largest outside stockholder can exert significant control over our business and affairs and may have actual or potential interests that may depart from those of our other stockholders.
 
Our largest outside stockholder, C2M, owns a substantial percentage of our outstanding voting capital.  The interests of such persons may differ from the interests of other stockholders. There can be no assurance C2M or other significant stockholders will, in future matters submitted for stockholder approval, vote in favor of such matters, even if such matters are recommended for approval by management or are in the best interests of stockholders generally. As a result, such persons will have the ability to vote their significant holdings in favor (or not in favor) of proposals presented to our stockholders for approval, including proposals to:
 
elect or defeat the election of our directors;
 
amend or prevent amendment of our articles of incorporation or bylaws;
 
effect or prevent a merger, sale of assets or other corporate transaction; and
 
control the outcome of any other matter submitted to the stockholders for vote.
 
In addition, such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price. C2M could also utilize their significant ownership interest to seek to influence management and decisions of the Company.
 
We are subject to the periodic reporting requirements of the Exchange Act, which will require us to incur audit fees and legal fees in connection with the preparation of such reports. These additional costs will reduce or might eliminate our profitability.
 
We are required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. To comply with these requirements, our independent registered auditors will have to review our quarterly financial statements and audit our annual financial statements. Moreover, our legal counsel will have to review and assist in the preparation of such reports. The costs charged by these professionals for such services cannot be accurately predicted at this time, because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and will have a major effect on the amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs will obviously be an expense to our operations and thus have a negative effect on our ability to meet our overhead requirements and earn a profit. We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, the trading price of our Common Stock, if a market ever develops, could drop significantly, or we could become subject to Commission enforcement proceedings.
 
 
 
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If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.
 
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls.  If we fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports.  We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective.  If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.
 
Our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2019 and December 31, 2018, our internal control over financial reporting was not effective, as a result of: (1) we lacked a sufficient number of employees to properly segregate duties and provide adequate review of the preparation of the financial statements and (2) we lacked sufficient independent directors on our Board of Directors to maintain Audit and other committees consistent with proper corporate governance standards. In the first quarter of 2019, we expanded our Board to include three independent directors. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control over financial reporting in the future.
 
Because we are a “smaller reporting company,” we will not be required to comply with certain disclosure requirements that are applicable to other public companies and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors.
 
We are a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. As a smaller reporting company, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not smaller reporting companies, including, but not limited to:
 
Reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements.
 
Not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. and
 
Reduced disclosure obligations for our annual and quarterly reports, proxy statements and registration statements.
 
We will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
 
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC, impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly after we are no longer a smaller reporting company. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
 
 
 
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Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
 
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
 
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short. Issuers whose securities have historically had limited trading volumes and/or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller attacks. The publication of any such commentary regarding us in the future may bring about a temporary, or possibly long term, decline in the market price of our common stock. In the past, the publication of commentary regarding us by a disclosed short seller has been associated with the selling of shares of our common stock in the market on a large scale, resulting in a precipitous decline in the market price per share of our common stock. No assurances can be made that similar declines in the market price of our common stock will not occur in the future, in connection with such commentary by short sellers or otherwise.
 
Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit your ability to buy and sell our stock, which could depress our share price.
 
FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares, depressing our share price.
 
Transfers of our securities may be restricted by virtue of state securities “blue sky” laws, which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
 
Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as "blue sky" laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities held by many of our stockholders have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.
 
 
 
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“Anti-Takeover” provisions in our Articles of Incorporation and Bylaws may cause a third party to be discouraged from making a takeover offer that could be beneficial to our stockholders.
 
Certain provisions of our Articles of Incorporation, By-Laws, and the anti-takeover provisions of the Nevada Revised Statutes, could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, or make more costly any attempt to acquire control of the Company, even if the acquisition or the Board designees would be beneficial to our stockholders. These factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price being lower than it would be without these provisions.
 
In addition, large stockholders may seek to influence our Board of Directors and stockholders by acquiring positions in the Company to force consideration of proposals that may be less desirable than other outcomes. The effect of such influences on our Company or our corporate governance could reduce the value of our monetization activities and have an adverse effect on the value of our assets. The effect of Anti-Takeover provisions could impact the ability of prospective stockholders to obtain influence in the Company or representation on the Board of Directors or acquire a significant ownership position and such result may have an adverse effect on the Company and the value of its securities.
 
Regulatory Risks Related to Our Business
 
FDA regulation could negatively affect the hemp industry, which would directly affect our financial condition.
 
The U.S. Food and Drug Administration ("FDA") may seek expanded regulation of hemp under the Food, Drug and Cosmetics Act of 1938. Additionally, the FDA may issue rules and regulations, including certified good manufacturing practices, or cGMPs, related to the growth, cultivation, harvesting and processing of hemp. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where hemp is grown register with the FDA and comply with certain federally prescribed regulations. In the event that some or all of these regulations are imposed, we do not know what the impact would be on the hemp industry, including what costs, requirements and possible prohibitions may be enforced. If we or our manufacturing partners are unable to comply with the regulations or registration as prescribed by the FDA, we or our manufacturing partners may be unable to continue to operate their and our business in its current or planned form or at all.
 
Changes in the Law and Development Programs
 
The 2018 Farm Bill declassified industrial hemp as a Schedule I substance, shifted regulatory authority from the Drug Enforcement Administration to the Department of Agriculture, and provided autonomy for states to regulate the industry. The 2018 Farm Bill did not change the Food and Drug Administration’s oversight authority over CBD products. The 2018 Farm Bill defined industrial hemp as a variety of cannabis containing an amount equal to or lower than 0.3% tetra-hydrocannabinol (THC), and allowed farmers to grow and sell hemp under state regulation. According to the National Conference of State Legislatures, 41 states have set up cultivation and production programs to regulate the production of hemp.
 
For the first time since 1937, industrial hemp has been decriminalized at the federal level and can be grown legally in the United States, but on a limited basis. A landmark provision passed in the Agricultural Act of 2014 had previously classified hemp as distinct from its genetic cousin, marijuana. Marijuana cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis will likely affect the perception of the lawfulness of our activity for a continuing period of time, which could result in our inability and the inability of our customers to execute their respective business plans.
 
Although we believe the foregoing will be applicable to business other than hemp-based CBD businesses, there is risk that confusion or uncertainty surrounding our products with regulated cannabis could occur on the state or federal level and impact us. We may have difficulty with establishing banking relationships, working with investment banks and brokers who would be willing to offer and sell our securities or accept deposits from stockholders, and auditors willing to certify our financial statements if we are confused with businesses that are in the cannabis business. Any of these additional factors, should they occur, could also affect our business, prospects, assets or results of operation could have a material adverse effect on the business, prospects, results of operations or financial condition of the Company.
 
 
 
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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.
 
 
 
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There are numerous costs associated with numerous laws and regulations.
 
The manufacture, labeling and distribution of the Company products will be regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of the Company’s product claims or the ability to sell products in the future. The FDA may regulate the Company’s products to ensure that the products are not adulterated or misbranded. The Company is subject to regulation by the federal government and other state and local agencies as a result of its CBD products. The shifting compliance environment and the need to build and maintain robust systems to comply with different compliance in multiple jurisdictions increases the possibility that the Company may violate one or more of the requirements. If the Company’s operations are found to be in violation of any of such laws or any other governmental regulations that apply to the Company, it may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of the Company’s operations, any of which could adversely affect the ability to operate the Company’s business and its financial results. Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. The Company’s advertising will be subject to regulation by the Federal Trade Commission (“FTC”) under the Federal Trade Commission Act. In recent years, the FTC has initiated numerous investigations of dietary and nutrition supplement products and companies. Additionally, some states also permit advertising and labeling laws to be enforced by private attorney generals, who may seek relief for consumers, seek class-action certifications, seek class-wide damages and product recalls of products sold by the Company. Any actions against the Company by governmental authorities or private litigants could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
Risks Related to Information Technology and Intellectual Property
 
We are subject to cyber-security risks, including those related to customer, employee, vendor or other company data and including in connection with integration of acquired businesses and operations.
 
We currently do not utilize automated technology or software to maintain important records necessary to the successful performance of our business. We are evaluating various selling, inventory and contact management software tools, such as Shopify, in order to begin to adopt processes to track inventory, generate sales orders and invoices, promote leads and sales and support customer interaction such as customer service and warranty claims. Without these tools we operate at a significant disadvantage to our competitors who have implemented more sophisticate systems than us.
 
We use information technologies to securely manage certain operations and various business functions. We rely on various technologies, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including reporting on our business and interacting with customers, vendors and employees. In addition, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and controls, and those of our third-party providers, we may become subject to system damage, disruptions or shutdowns due to any number of causes, including cyber-attacks, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period. We may face other challenges and risks as we upgrade and standardize our information technology systems as part of our integration of acquired businesses and operations. We do not have contingency plans in place to prevent or mitigate the impact of these events, and these events could result in operational disruptions or the misappropriation of sensitive data, and depending on their nature and scope, could lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions and exposure to liability. Such disruptions or misappropriations and the resulting repercussions, including reputational damage and legal claims or proceedings, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our common stock.
 
 
 
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Our intellectual property rights may be inadequate to protect our business.
 
Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.
 
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.
 
We rely on our trademarks, trade names, and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
 
If third parties claim that we infringe upon their intellectual property rights, our business and results of operations could be adversely affected.
 
We face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, could be expensive and time consuming to defend; could require us to cease selling the products that incorporate the challenged intellectual property, could require us to redesign, reengineer, or rebrand the product, if feasible, could divert management’s attention and resources, or could require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
 
Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative impact on our business, financial condition, results of operations and our future prospects.
 
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition, and our results of operations.
 
We may be unable to obtain intellectual property rights to effectively protect our branding, products, and other intangible assets. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our branding, products, and other intangible assets, our revenue and earnings, financial condition, or results of operations could be adversely affected.
 
We also rely on non-disclosure and non-competition agreements to protect portions of our intellectual property portfolio. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop competitive products with similar intellectual property.
 
 
 
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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.
 
 
 
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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.
 
 
 
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Significant merchandise returns or refunds could harm our business.
 
We allow our customers to return products or offer refunds, subject to our return and refunds policy. If merchandise returns or refunds are significant or higher than anticipated and forecasted, our business, financial condition, and results of operations could be adversely affected. Further, we modify our policies relating to returns or refunds from time to time, and may do so in the future, which may result in customer dissatisfaction and harm to our reputation or brand, or an increase in the number of product returns or the amount of refunds we make.
 
Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties
 
We entered into three farm leases, which we entered into through our majority-owned subsidiary, EOW. Two of the leases are located in Cave Junction, Oregon and the third lease is located in Glendale, Oregon. EOW has farmed and processed industrial hemp on the farm leases, which hemp will be manufactured into cannabidiol (CBD) and related products. Due to declining market prices for industrial hemp and a shortage of available capital, we do not currently intend to farm hemp on the Oregon properties in 2020. Our current plan is to sub-lease the properties for the 2020 growing season to another farmer, although no subleases have been made at this time.
 
We have leased a small office in Delray Beach Florida to establish operations in close vicinity to our partner C2M, and it is anticipated that corporate functions will move to this location and staff will be hired as required to meet our growth. If additional or alternative space is needed in the future, we believe such space will be available on commercially reasonable terms as necessary. In December 2019, the Company and landlord agreed to extend the lease for another 6-month term from January 2020 to June 2020 with the same terms in the original lease agreement.
 
On July 9, 2019, we entered into a Commercial Lease Agreement with Skybar Holdings, LLC, a Florida limited liability company. Pursuant to the lease, we planned to lease the entire first floor (consisting of approximately 4,000 square feet) of a property located in Delray Beach, Florida. We planned to develop the premises to create a hemp-oriented health and wellness retail venue, including education, clothing and cosmetics, and to explore franchise opportunities. We have determined not to move forward with the project at this time and will pursue a cancellation of the lease.
 
Item 3. Legal Proceedings
 
On January 10, 2020, the Company and Jonathan Gilbert, a former director, entered into a Settlement Agreement and stipulation of dismissal of certain pending litigation in New York.   Under the agreement Mr. Gilbert retained 375,000 shares of common stock previously awarded and all other awards and obligations to Mr. Gilbert were cancelled and the Company and Mr. Gilbert exchanged mutual releases.
 
On September 9, 2019, Dr. Krassen Dimitrov, a former director, commenced an arbitration proceeding against the Company and its wholly-owned subsidiary Exactus Biosolutions, Inc. before the American Arbitration Association.  The complaint alleges breach of a consulting agreement for services by Dr. Dimitrov during 2017-2019 among other claims, and seeks $750,000 in damages.  The Company has filed an answer denying the claims and asserting numerous counterclaims against Dr. Dimitrov and his affiliated entities, KD Innovation Ltd., and Digital Diagnostics, Inc.  An arbitrator has been appointed in the matter and on May 1, 2020 issued a procedural order suspending further proceedings.
 
On February 26, 2020 a complaint was filed in the Circuit Court, Palm Beach County, Florida on behalf of five former employees of the Company.  The case is entitled Ryan Borcherds and Miriam Martinez vs. Exactus, Inc..  The complaint alleges the Company failed to pay wages and compensation to 2 employees under the Fair Labor Standards Act, breach of contract and violation of various Florida statutes, including allegations on behalf of other similarly situated persons.  The complaint seeks approximately $82,000 in unpaid wages as well as special damages, liquidated damages, interest and attorney’s fees.

 

 
 
 
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From time to time, we may become involved in legal proceedings arising in the ordinary course of business. We are unable to predict the outcome of any such matters or the ultimate legal and financial liability, and at this time cannot reasonably estimate the possible loss or range of loss and accordingly have not accrued a related liability.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our Common Stock is quoted on the OTCQB over-the-counter market under the symbol “EXDI.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. On May 13, 2020 the closing bid price on the OTC Markets for our Common Stock was $0.1894.
 
Penny Stock
 
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
 
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.
 
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
 
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
 
 
 
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Holders of Our Common Stock
 
As of May 22, 2020, we had 45,522,275 shares of our common stock issued and outstanding, and approximately 157 shareholders of record.
 
Dividends
 
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
 
1. we would not be able to pay our debts as they become due in the usual course of business, or;
2. our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
 
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.
 
Item 6. Selected Financial Data
 
A smaller reporting company is not required to provide the information required by this Item.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
 
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
 
General
 
In December 2018, the Company expanded its focus to pursue opportunities in Cannabidiol (“CBD”). This decision was based in part on the passing of The Hemp Farming Act of 2018. The Act was signed into law during December 2018 and removes hemp (cannabis with less than 0.3% THC) from the Schedule I controlled substances list. Following passage, CBD derived from industrial hemp became legal in the US under federal law and in all 50 states, opening the door to develop and sell hemp-based CBD products nationwide. The Company’s goal is to rapidly establish one or more principal sources of supply and to develop wholesale and retail sales channels for CBD end-products to be sold to humans and for animal health, such as nutraceuticals, supplements and pet and farm products. The Company intends to follow regulatorily compliant pathways by adopting practices established by the FDA for CBD. 
 
On January 8, 2019 we entered into a Master Product Development and Supply Agreement (the “Development Agreement”) with Ceed2Med, LLC (“C2M”). C2M has provided the Company access to expertise, resources, skills and experience suitable for producing products with active phyto-cannabinoid (CBD) rich ingredients including isolates, distillates, water soluble, and proprietary formulations. Under the Development Agreement, we have been allotted a minimum of 50 and up to 300 kilograms per month, and up to 2,500 kilograms annually, of active phyto-cannabinoid (CBD) rich ingredients for resale. We expect to be able to offer tinctures, edibles, capsules, topical solutions and animal health products manufactured for us by C2M to satisfy demand for branded and white-label products that we intend to offer to sell in the future. The founders of C2M established their first CBD business in 2014. C2M will also be responsible for overseeing all farming and manufacturing activities of the Company.
 
 
 
-38-
 
 
Whereas, in consideration for the Development Agreement, C2M was issued 8,385,691 shares of our Common Stock on January 8, 2019. Additionally, the Company granted immediately vested 10-year options to purchase 750,000 shares of Common Stock to founders of C2M, with exercise price of $0.32 per share. As a result, C2M was our largest shareholder holding (inclusive of the vested options held by its founders) approximately 51% of our outstanding Common Stock on the date of the Development Agreement. These options were granted to two owners and a co-founder of C2M.C2M will provide personnel necessary for our growth. Utilizing C2M employees and facilities, the Company has been able to rapidly access resources and opportunities in the hemp-derived CBD industry. Emiliano Aloi of C2M became a member of our Advisory Board in January 2019 and was appointed President of the Company on March 11, 2019.
 
On March 11, 2019, with the assistance of C2M and assignment of rights, we acquired a 50.1% limited liability membership interest in Exactus One World, LLC, (“EOW”), an Oregon limited liability company, newly formed on January 25, 2019, in order to produce industrial hemp for our own use. EOW has leases starting on March 1, 2019 for approximately 200 acres of farmland in southwest Oregon for growing and processing industrial hemp, with a lease term of one year. The leases are renewable on a year-to-year basis. We acquired the 50.1% limited liability membership interest pursuant to a subscription agreement (the “Subscription Agreement”) and a Membership Interest Purchase Agreement (the “Purchase Agreement”). EOW will farm and process industrial hemp to be manufactured into cannabidiol (CBD) and related products.  EOW will be responsible for the Company’s initial efforts to pursue agricultural development, including farm soil preparation, planting, harvesting, transportation and drying.  We will be responsible for funding and the minority owners will be responsible for management, servicing and operating the farm properties.
 
On October 23, 2019, we amended the Amended and Restated Operating Agreement of EOW. Under the terms of the amendment, the minority members of EOW conveyed their 49.9% membership interest and rights to distributions related to the current 2019 hemp crop underway to the Company. As a result, the Company acquired the right to receive 100% of the distributions of net profit from the 2019 hemp crop on approximately 226 acres of farmland currently growing in Oregon. In addition, the members amended the payment schedule under which farm costs are required to be made by the Company. As consideration for the amendment, the Company agreed to issue 1,223,320 shares of its common stock, par value $0.0001 per share, to the minority members of EOW.
 
On July 31, 2019, we finalized and entered into a Management and Services Agreement in order to provide us project management and various other benefits associated with the farming rights, operations and opportunities with C2M, including assignment by C2M of C2M’s agreements and rights to acquire approximately 200 acres of hemp farming. Under the terms of the MSA, C2M agreed to provide further access to the opportunities and know-how of C2M, consented to the appointment of Emiliano Aloi, a seasoned hemp veteran previously an advisor and currently our Interim Chief Executive Officer, and to provide to us and EOW additional services consisting of, among other things:
 
right of participation for further investment and business opportunities in order to rapidly expand our business and operations in hemp-derived CBD;
 
executive, sourcing, vendor, product, production and other expertise and resources;
 
appointment of Aloi to the position of President;
 
introductions to farming and other financing;
 
drawings, designs and specifications for extraction, production and manufacturing facilities and resources; and
 
brand development and support services.
 
 
 
-39-
 
 
We finalized the compensation arrangements for C2M as contemplated in connection with the March 2019 transactions and the additional agreements with C2M under the MSA following tax, accounting and legal review including the treatment of the issuance of preferred stock in connection with the transactions. On July 31, 2019, we granted 10,000 Series E Preferred in connection with the Management and Services Agreement (the “MSA”) with C2M, our largest shareholder. In October 2019, we entered into an amendment to the MSA (the “MSA Amendment”). The MSA Amendment extended the termination date of the MSA to December 31, 2024 and expanded the scope of services to be provided by C2M to us. The MSA Amendment was approved by a majority of the disinterested directors of the Company.
 
Results of Operations
 
Year ended December 31, 2019 and 2018:
 
Net Revenues The Company is principally engaged in the business production and selling of products made from industrial hemp. During the year ended December 31, 2019, we generated total revenues of $345,680 from the sale of CBD products, including revenues of $162,446 from a related party, C2M, who is a majority stockholder of the Company, for the year ended December 31, 2019. We did not have comparable revenues during the year ended December 31, 2018.
 
Cost of Sales The primary components of cost of sales include the cost of the CBD product. For the year ended December 31, 2019, the Company’s cost of sales amounted to $2,046,134 which primarily represents purchase of CBD products from C2M and cost of hemp crop sold to C2M for a total of $106,752, an inventory reserve of $723,391, inventory write-off of CBD products of $837,153 and indirect cost such as utilities, farm lease expenses, and depreciation expenses on farming equipment related to production and harvesting period of $171,788. We reduced inventory by $723,391 which is equal to the difference between the cost of the inventory and its estimated net realizable value. Additionally, CBD products under the Green Goddess brand with a cost of $837,153 has been written down to a value of $0 due to the age and questionable salability of the product. We did not have comparable cost of sales during the year ended December 31, 2018.
 
Operating Expenses
 
For the year ended December 31, 2019, we incurred $9,177,988 in operating expenses as compared to $2,436,226 for the year ended December 31, 2018, an increase of $6,741,762 or 277%. The increase in operating expenses consisted of the following:
 
General and administrative expenses increased by $1,357,627, or 71%, from $1,914,571 for the year ended December 31, 2018 to $3,272,198 for the year ended December 31, 2019, increase in amortization of intangible asset and depreciation expenses of approximately $866,000, increase lease expense related to our commercial lease and rent expense of approximately $247,000, increase in impairment expense related to our intangible assets and inventory of $250,000, and increase in other general administrative expenses of approximately $172,000 primarily due to travel expenses and increase in operations, offset by decrease in compensation including employee benefits of approximately $177,000 due to a decrease in contractual bonuses and stock options given to management.
 
Selling and marketing expenses increased by $930,260, or 5,158%, from $18,036 for the year ended December 31, 2018 to $948,296 for the year ended December 31, 2019 primarily due to increase in marketing and advertising expenses due to promotions, endorser’s fee, trade shows, samples, product awareness and salaries of our sales and marketing staff.
 
Professional and consulting fees increased by $4,731,775, or 2,324%, from $203,619 for the year ended December 31, 2018 to $4,935,394 for the year ended December 31, 2019 due to increased stock based consulting fees related with the grant of stock options and warrants, issuance of stocks to consultants and C2M, increase in hiring of consultant for business development and investor relations services, and increase in accounting fees and legal fees related to our public company filings.
 
Research and development decreased by $277,900 or 93%, from $300,000 for the year ended December 31, 2018 to $22,100 for the year ended December 31, 2019, as the Company delayed projects until additional funds are raised.
 
Other Expenses, net
 
Derivative loss increased by $1,042,889 or 126%, from $(828,694) for the year ended December 31, 2018 to $(1,871,583) for the year ended December 31, 2019, due to the issuance of new convertible notes in 2019 and adjustments to fair value.
 
 
 
-40-
 
Loss on stock settlement decreased by $607,929, or 100%, from $607,929 for the year ended December 31, 2018 to $0 for the year ended December 31, 2019, due to issuing shares to settle accounts payable balances and conversion of convertible notes and interest in year 2018. We did not have comparable gains or losses during the year ended December 31, 2019.
 
Gain on stock settlement of debt increased by $3,004,630, or 100%, from $0 for the year ended December 31, 2018 to $3,004,630 for the year ended December 31, 2019 due to the conversion of notes and interest into common and preferred shares during the year ended December 31, 2019. We did not have comparable gains or losses during the year ended December 31, 2018.
 
Interest expense increased by $14,641, or 3%, from $464,470 for the year ended December 31, 2018 to $479,111 for the year ended December 31, 2019. The increase in interest expense is primarily related to increase in amortization of debt discount and debt issuance cost related to our convertible note payable issued in year 2019.
 
Net Loss
 
As a result of the foregoing, we generated a net loss of $10,224,506 for the year ended December 31, 2019 as compared to a net loss of $4,337,319 for the year ended December 31, 2018, as a result of the discussion above.
 
As a result of the foregoing, we generated a net loss available to stockholders of $10,591,487 or $(0.31) per common share – basic and diluted, for the year ended December 31, 2019 as compared to a net loss of $4,337,319 or $(0.91) per common share – basic and diluted, for the year ended December 31, 2018, as a result of the discussion above.
 
Liquidity and Capital Resources
 
Since our inception in 2008, we have generated losses from operations. As of December 31, 2019, our accumulated deficit was $21,129,379.  As of December 31, 2019, we had $18,405 of cash and working capital deficit of $1,761,309. Accordingly, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources. The issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to delay, reduce or eliminate our research and development programs and may not be able to continue as a going concern.
 
The Company has various principal outstanding balance for a total of $933,333 from convertible notes as of December 31, 2019. The convertible notes bear interest at a rate of ranging from 5% to 8% per annum and will mature from November 26, 2020 and February 1, 2023.
 
Net cash used in operating activities for the year ended December 31, 2019 was $5,746,290, due to our net loss of $10,224,506, offset by non-cash charges related to convertible loan notes derivative loss of $1,871,583 , amortization of debt discounts and debt issuance cost of $425,712, amortization of intangible assets of $828,526, amortization prepaid stock-based expenses of $285,494,depreciation expense of $63,770, deferred rent of $85,699, bad debt expense of $32,577, impairment expense of $1,087,346, inventory reserve of $723,391 and stock-based compensation of $3,774,640 offset by $3,004,630 for a debt settlement gain. Net changes in operating assets and liabilities totaled of $(1,695,892), which is primarily attributable to increases in total accounts receivable of $107,162, inventory of $2,864,383, prepaid expenses and other current assets of $140,765, deposit of $80,000 and total accounts payable and accrued expenses of $1,294,625, and unearned revenues of $215,000.
 
Net cash used in operating activities for the year ended December 31, 2018 was $465,755, due to our net loss of $4,337,319, offset by non-cash charges related to convertible loan notes derivative expense of $828,694, amortization of debt discounts of $405,173, $607,929 for a debt settlement loss, stock-based compensation of $892,073. Changes in operating assets and liabilities totaled a gain of $1,137,695, which primarily consisted of an increase in accrued expenses of $905,946 and increase in account payable of $188,378.
 
 
 
-41-
 
Net cash used in investing activity for the year ended December 31, 2019 was $2,041,203. We paid cash for the purchase of membership interest in subsidiary for $1,500,000 in connection with a Purchase Agreement and purchase of equipment for $541,203 as compared to none during the year ended December 31, 2018.
  
Net cash provided by financing activities for the year ended December 31, 2019 was $7,803,938, due to proceeds from sale of our Common Stock of $7,215,380, net proceeds from the issuance of notes payable and convertible notes $962,001, advance from related party of $242,500 offset by total note repayments of $245,943 and repayment on related party advances of $370,000.  
 
Net cash provided by financing activities for the year ended December 31, 2018 was $306,500 due to $178,100 in proceeds from convertible loan notes, $103,400 in proceeds from the issuance of a note payables, $50,000 of net proceeds from sale of Series D Preferred Stock and the repayment of $25,000 of principal on convertible notes.
 
The Company had principal outstanding balance of $100,000 from convertible notes as of December 31, 2019. The convertible notes bear interest at a rate of 5% per annum and will mature on February 1, 2023. If a qualified financing from which at least $5 million of gross proceeds occurs prior to the maturity date, then the outstanding principal balance of the notes, together with all accrued and unpaid interest thereon, shall be automatically converted into common stock at $0.40 per Share. We believe this threshold has been met, and conversion of the note is pending
 
In addition, the Company had a principal balance of $833,333.33 under senior secured convertible promissory notes issued to an institutional investor under the Securities Purchase Agreement dated November 27, 2019. These notes bear interest at a rate of 8% and mature one year after their issuance. These notes are issued at 10% original issue discount and include 1/3 warrant coverage as additional consideration to the lender. All warrants are exercisable at $0.756 per share. The notes are convertible at a price of $0.50 per share. Additional debt financing on the same terms is available under the Securities Purchase Agreement, with: (1) an additional purchase of $277,778 in notes and associated warrants expected to occur on the third business day after the date of the filing of a registration statement on Form S-1 for the shares issuable upon conversion of the notes as required under a Registration Rights Agreement; and (2) an additional purchase of $833,333.33 in notes and associated warrants upon effectiveness of the registration statement. At this time, we are delinquent in our payments under the initial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. We intend to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding.
 
Going Concern
  
The audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2019 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. We have concluded that the circumstances described above continue to raise substantial doubt about our ability to continue as a going concern as of December 31, 2019. 
 
Off-Balance Sheet Arrangements
 
As of December 31, 2019, we had no material off-balance sheet arrangements.
 
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our financial position, results of operations or cash flows.
  
 
 
 
-42-
 
Critical Accounting Estimates and New Accounting Pronouncements
 
Critical Accounting Estimates
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
 
Application of Significant Accounting Policies
 
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards.
  
Recent Accounting Pronouncements
 
In January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the calendar year ending December 31, 2020. The amendments require a prospective approach to adoption and early adoption is permitted for interim or annual goodwill impairment tests. The Company is currently evaluating the impact of this standard.
 
We have reviewed the FASB issued ASU accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We have carefully considered the new pronouncements that alter previous generally accepted accounting principles and do not believe that any new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management.
 
Recent Accounting Updates Not Yet Effective
 
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this guidance.
 
 
-43-
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
A smaller reporting company is not required to provide the information required by this Item.
 
Item 8. Financial Statements and Supplementary Data
 
Index to Financial Statements Required by Article 8 of Regulation S-X:
 
Audited Financial Statements:
 
 
 
 
 
-44-
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of
Exactus, Inc. and Subsidiaries
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of Exactus, Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
 
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has recurring losses from operations, limited cash flow, and an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ RBSM LLP
 
 
We have served as the Company’s auditor since 2014.
 
Henderson, NV
May 22, 2020
 
 
 
 
Exactus, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
  December 31, 
 
 
2019 
 
 
2018 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 $18,405 
 $1,960 
Accounts receivable, net
  55,725 
  - 
Accounts receivable - related party
  18,860 
  - 
Inventory, net
  1,337,809 
  - 
Prepaid expenses and other current assets
  248,776 
  12,330 
Prepaid expenses and other current assets - related party - current
  622,160 
  - 
Due from related parties
  127,500 
  - 
Total current assets
  2,429,235 
  14,290 
 
    
    
Other Assets:
    
    
   Deposits
  80,000 
  - 
   Prepaid expenses and other current assets - related party - long-term
  2,492,045 
  - 
   Property and equipment, net
  477,433 
  - 
   Intangible assets, net
  2,147,311 
  - 
   Operating lease right-of-use assets, net
  2,173,253 
  - 
Total other assets
  7,370,042 
  - 
 
    
    
TOTAL ASSETS
 $9,799,277 
 $14,290 
 
    
    
LIABILITIES AND EQUITY (DEFICIT)
    
    
 
    
    
Current Liabilities:
    
    
Accounts payable
 $1,442,409 
 $923,429 
Accounts payable - related parties
  454,511 
  - 
Accrued expenses
  358,010 
  46,875 
Unearned revenue - related party
  215,000 
  - 
Note payable - related parties
  55,556 
  51,400 
Subscription payable
  250,000 
  - 
Convertible notes, net of discounts
  85,906 
  491,788 
Derivative liability
  880,410 
  1,742,000 
Settlement payable
  - 
  17,000 
Interest payable
  16,677 
  66,300 
Operating lease liabilities, current portion
  432,065 
  - 
Total current liabilities
  4,190,544 
  3,338,792 
 
    
    
Long Term Liabilities:
    
    
Convertible notes payable
  100,000 
  100,000 
Operating lease liabilities, long-term portion
  1,826,887 
  - 
Total long-term liabilities
  1,926,887 
  100,000 
 
    
    
TOTAL LIABILITIES
  6,117,431 
  3,438,792 
 
    
    
Commitment and contingencies (see Note 11)
    
    
 
    
    
Equity (Deficit):
    
    
Exactus, Inc. Stockholders' Equity (Deficit)
    
    
Preferred stock: 50,000,000 shares authorized; $0.0001 par value, 5,266,466 undesignated shares  
issued and outstanding
  - 
  - 
 
Preferred stock Series A: 1,000,000 shares designated; $0.0001 par value,
 
    
353,109 shares issued and outstanding
  35 
  - 
 
Preferred stock Series B-1: 32,000,000 shares designated; $0.0001 par value,
 
    
1,650,000, and 2,800,000 shares issued and outstanding, respectively
  165 
  280 
 
Preferred stock Series B-2: 10,000,000 shares designated; $0.0001 par value,
 
    
7,516,000 and 8,684,000 shares issued and outstanding, respectively
  752 
  868 
 
Preferred stock Series C: 1,733,334 shares designated; $0.0001 par value,
 
    
none and 1,733,334 shares issued and outstanding, respectively
  - 
  173 
 
Preferred stock Series D: 200 shares designated; $0.0001 par value, 18 and 45
 
    
shares issued and outstanding, respectively
  - 
  1 
 
Preferred stock Series E: 10,000 shares 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,
    
    
43,819,325 and 6,233,524 shares issued and outstanding, respectively
  4,382 
  623 
Common stock to be issued (664,580 and none shares to be issued, respectively)
  66 
  - 
Additional paid-in capital
  25,343,293 
  7,111,445 
Accumulated deficit
  (21,129,379)
  (10,537,892)
Total Exactus Inc. Stockholders' Equity (Deficit)
  4,219,315 
  (3,424,502)
 
    
    
Non-controlling interest in subsidiary
  (537,469)
  - 
 
    
    
Total Stockholders' Equity (Deficit)
  3,681,846 
  (3,424,502)
 
    
    
TOTAL LIABILITIES AND EQUITY (DEFICIT)
 $9,799,277 
 $14,290 
 
 
 
 
Exactus, Inc. and Subsidiaries
Consolidated Statements of Operations
 
 
 
Years Ended December 31,
 
 
 
 2019
 
 
 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 $183,234 
 $- 
Net revenues - related party
  162,446 
  - 
 
    
    
Total net revenues
  345,680 
  - 
 
    
    
Cost of sales
  1,939, 382 
  - 
Cost of sales - related party
  106,752 
  - 
 
    
    
Total cost of sales
  2,046,134 
  - 
 
    
    
Gross loss
  (1,700,454)
  - 
 
    
    
Operating Expenses:
    
    
General and administration
  3,272,198 
  1,914,571 
Selling and marketing expenses
  948,296 
  18,036 
Professional and consulting
  4,935,394 
  203,619 
Research and development
  22,100 
  300,000 
 
    
    
Total Operating Expenses
  9,177,988 
  2,436,226 
 
    
    
Loss from Operations
  (10,878,442)
  (2,436,226)
 
    
    
Other Income (expenses):
    
    
Derivative loss
  (1,871,583)
  (828,694)
Loss on stock settlement
  - 
  (607,929)
Gain on settlement of debt, net
  3,004,630 
  - 
Interest expense
  (479,111)
  (464,470)
 
    
    
Total Other Income (Expenses), net
  653,936 
  (1,901,093)
 
    
    
Loss Before Provision for Income Taxes
  (10,224,506)
  (4,337,319)
Provision for income taxes
  - 
  - 
 
    
    
Net Loss
  (10,224,506)
  (4,337,319)
 
    
    
Net Loss attributable to non-controlling interest
  537,469 
  - 
 
    
    
Net Loss Attributable to Exactus, Inc.
  (9,687,037)
  (4,337,319)
 
    
    
Deemed dividend on Preferred Stock
  (904,450)
  - 
 
    
    
Net Loss available to Exactus, Inc. common stockholders
 $(10,591,487)
 $(4,337,319)
 
    
    
Net Loss per Common Share - Basic and Diluted
 $(0.30)
 $(0.91)
Net Loss attributable to non-controlling interest per Common Share - Basic and Diluted
 $(0.02)
 $- 
Net Loss available to Exactus, Inc. common stockholders per Common Share - Basic and Diluted
 $(0.31)
 $(0.91)
 
    
    
Weighted Average Number of Common Shares Outstanding:
    
    
   Basic and Diluted
  33,899,585 
  4,764,056 

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
Exactus, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2019 and 2018
 
 
 
Preferred Stock-
Series A
 
 
Preferred Stock-
Series B-1
 
 
Preferred Stock-
Series B-2
 
 
Preferred Stock-
Series C
 
 
Preferred Stock-
Series D
 
 
Preferred Stock-
Series E
 
  Common Stock      
 
Common Stock -
Unissued
 
 
Paid in
 
 
Accumulated
 
 
 Non-controlling
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
 Deficit
 
 
 Interest
 
 
 Total
 
Balance, December 31, 2017
  - 
 $- 
  2,800,000 
 $280 
  8,684,000 
 $868 
  1,733,334 
 $173 
  - 
 $- 
  - 
 $- 
  4,383,983 
 $439 
  - 
 $- 
 $3,983,171 
 $(6,200,573)
 $- 
 $(2,215,642)
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
Issuance of Series D preferred stock for cash
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  45 
  1 
    
    
  - 
  - 
    
    
  549,999 
  - 
  - 
  550,000 
Common stock issued for debt settlement
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  214,834 
  21 
    
    
  343,714 
  - 
  - 
  343,735 
Common stock issued upon convesion of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
convertible debt
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  685,644 
  69 
    
    
  400,411 
  - 
  - 
  400,480 
Common stock issued for services
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  375,000 
  37 
    
    
  25,963 
  - 
  - 
  26,000 
Common stock issued for settlement
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  574,063 
  57 
    
    
  86,742 
  - 
  - 
  86,799 
Warrants issued to Series B-2 holders
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  - 
  - 
    
    
  138,679 
  - 
  - 
  138,679 
Related party debt forgiveness
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  - 
  - 
    
    
  1,355,372 
  - 
  - 
  1,355,372 
Stock-based compensation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  - 
  - 
    
    
  227,394 
  - 
  - 
  227,394 
Net Loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
    
  - 
  - 
    
    
  - 
  (4,337,319)
  - 
  (4,337,319)
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
Balance, December 31, 2018
  - 
  - 
  2,800,000 
  280 
  8,684,000 
  868 
  1,733,334 
  173 
  45 
  1 
  - 
  - 
  6,233,524 
  623 
  - 
  - 
  7,111,445 
  (10,537,892)
  - 
  (3,424,502)
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
Preferred stock issued upon convesion of convertible debt
  849,360 
  84 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  849,276 
  - 
  - 
  849,360 
Preferred stock issued for private placement
  55,090 
  6 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  55,084 
  - 
  - 
  55,090 
Preferred stock issued pursuant to Management and Services Agreement
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  10,000 
  1 
  - 
  - 
  - 
  - 
  3,374,999 
  - 
  - 
  3,375,000 
Conversion of Series A Preferred Stock to Common Stock
  (551,341)
  (55)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  2,756,705 
  276 
  - 
  - 
  (221)
  - 
  - 
  - 
Conversion of Series B-1 Preferred Stock to Common Stock
  - 
  - 
  (1,150,000)
  (115)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  143,750 
  14 
  - 
  - 
  101 
  - 
  - 
  - 
Conversion of Series B-2 Preferred Stock to Common Stock
  - 
  - 
  - 
  - 
  (1,168,000)
  (116)
  - 
  - 
  - 
  - 
  - 
  - 
  146,000 
  15 
  - 
  - 
  101 
  - 
  - 
  - 
Conversion of Series D Prefered Stock to Common Stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (27)
  (1)
  - 
  - 
  675,000 
  68 
  - 
  -