UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10

GENERAL FORM FOR REGISTRATION OF SECURITIES 

PURSUANT TO SECTION 12(b) OR (g) OF 

THE SECURITIES EXCHANGE ACT OF 1934

 

ITEM 9 LABS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   98-0665018
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1709 East Bethany Home Road, Phoenix, AZ 85016

(Address of principal executive offices) (Zip Code)

 

(877) 826-4868

(Registrant’s telephone number, including area code)  

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

 

             
   

Title of each class
to be so registered

     

Name of each exchange on which 
each class is to be registered

       
             
           

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

 

Common Stock, par value $0.0001

(Title of class)  

 

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.  

 

EXPLANATORY NOTE

 

Item 9 Labs Corp. is filing this General Form for Registration of Securities on Form 10, which we refer to as the Registration Statement, to register its common stock, par value $0.0001 per share, pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Unless otherwise mentioned or unless the context requires otherwise, when used in this Registration Statement, the terms "Item 9" "Company," "we," "us," and "our" refer to Item 9 Labs Corp.

 

The Registration Statement, as amended, will become effective automatically by lapse of time 60 days from the date of the filing pursuant to Section 12(g)(1) of the Exchange Act, or earlier if accelerated at the request of the Company. As of the effective date we will be subject to the requirements of Regulation 13(a) under the Exchange Act and will be required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and we will be required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g) of the Exchange Act.

 

     

 

This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.

FORWARD LOOKING STATEMENTS

There are statements in this registration statement that are not historical facts. These “forward-looking statements” can be identified by use of terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. Although management believes that the assumptions underlying the forward-looking statements included in this Registration Statement are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data, and other information, and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this Registration Statement will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.

 

TABLE OF CONTENTS

 

    Description Page
       
Item 1.   Business 3
       
Item 1A.   Risk Factors 9
       
Item 2.   Financial Information 19
       
Item 3.   Properties 26
       
Item 4.   Security Ownership of Certain Beneficial Owners and Management 26
       
Item 5.   Directors and Executive Officers 28
       
Item 6.   Executive Compensation 31
       
Item 7.   Certain Relationships and Related Transactions, and Director Independence 34
       
Item 8.   Legal Proceedings 34
       
Item 9.   Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters 35
       
Item 10.   Recent Sales of Unregistered Securities 36
       
Item 11.   Description of Registrant’s Securities to be Registered 37
       
Item 12.   Indemnification of Officers and Directors 38
       
Item 13.   Financial Statements and Supplementary Data F-1 - F-29
       
Item 14.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
       
Item 15.   Exhibits 39
       
SIGNATURES 39
       
EXHIBIT INDEX 40

 

This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.

     

 

Item 1. Business

Corporate history

 

Item 9 Labs Corp. (“Item 9 Labs” or the “Company”), was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp. On October 26, 2012, the Company changed its name to Airware Labs Corp. On April 2, 2018, the Company changed its name to Item 9 Labs Corp. to better reflect its business following the acquisition of BSSD, as discussed below.

 

On March 20, 2018, the Company closed on an Agreement and Plan of Exchange to acquire all of the membership interests of BSSD Group, LLC (“BSSD”), an Arizona limited liability company formed on May 2, 2017, in exchange for newly issued restricted shares of the Company’s common stock (the “Shares”), which represent approximately 75% of the issued and outstanding shares of the Company’s common stock on a fully-diluted basis. The 40,355,771 shares were distributed pro-rata to the BSSD members.

Effective October 18, 2018, the Company completed a 1-for-20 reverse split of its issued and outstanding common stock.

On November 26, 2018, the company’s wholly owned subsidiary AZ DP Holdings, LLC (“AZ DP”) closed on an asset acquisition of the majority of the assets of Arizona DP Consulting, LLC, a consulting firm specializing in obtaining marijuana dispensary permits and cannabis related business plans. The purchase price was $1,500,000 in cash and 3,000,000 shares of restricted common stock having an aggregate value of $7,500,000 or $2.50 per share based on current market price of the Company shares at time asset purchase agreement was executed.

 

Our principal offices are located at 1709 E Bethany Home Rd., Phoenix, AZ 85016. Our registered agent for service of process in Delaware is located at 108 West 13 th St., Wilmington, DE 19801, and our registered agent is Business Filings Incorporated. Our fiscal year end is September 30.

 

All references to “we,” “us,” “our,” “Item 9,” “Item 9 Labs,” or similar terms used in this Registration Statement refer to Item 9 Labs Corp.

 

Corporate Structure

 

The following chart illustrates, as of the date of this Registration Statement, the Company's wholly-owned subsidiaries, including their respective jurisdictions of incorporation and percentage of voting securities of each that are beneficially owned, controlled or directed by the Company.

 

 

 

Overview

Item 9 Labs creates comfortable cannabis health solutions for the modern consumer. The Company is bringing best of industry practices to markets from coast to coast through cultivation and production, distinctive retail environments, licensing services, and diverse product suites catering to different medical cannabis demographics. Item 9 Labs is headquartered in Phoenix, Arizona, with medical cannabis operations in multiple U.S. markets.

Item 9 Labs’ asset portfolio includes Dispensary Permits, Dispensary Templates, and Strive Life. These assets provide services specific to different stakeholder groups. Dispensary Permits is the Company’s consulting firm specializing in strategic license application and compliance. Dispensary Templates, a subdivision of the firm, is a technology platform with an extensive digital library of licensing and business planning resources. Strive Life is a turnkey dispensary model for the retail sector, elevating the patient experience with consistent and superior service, high-end design, and precision-tested products. It is currently being implemented in Arizona and North Dakota.

In addition, Item 9 Labs is advancing the industry with its dynamic product suites. The Company has created complementary brands Item 9 Labs and Strive Wellness to channel consumer diversity. Propriety delivery platforms include the Apollo Vape and Pod system, as well as a pioneering intra-nasal device. The Company has received multiple accolades for its medical-grade flower and concentrates.

Item 9 Labs anticipates it will be managing cultivation, processing, distribution, and dispensary operations in up to ten U.S. markets by the end of 2019. Current facilities include distribution and processing operations Strive Wellness of Ohio and Strive Wellness of Nevada, as well as dispensary Strive Life North Dakota.

  3  

 

Mission and Vision

The Company is leading a new era of wellness by creating comfortable health solutions for modern consumers through the development of innovative products and proprietary delivery platforms.

Item 9 Labs will facilitate national expansion by combining our award winning manufacturing brand and product offerings with the strategic licensing and consulting brand of Dispensary Permits, in conjunction with the luxury retail and distribution brand of Strive Life.

This powerful combination provides national scalability and produces the highest quality marijuana, product knowledge, and experience of top professionals to consumers and patients.

Cannabis Verticals

To date, Item 9 Labs has proven models for the following cannabis verticals:

-  Cultivation: Growing of award winning, high-grade boutique cannabis.

-  Production: Producing a wide variety of Marijuana Products. Each facility product line is developed in compliance with the local rules and regulations.

-  Dispensary: Medically focused retail dispensary facility.

-  Distribution: Providing Sales, Marketing and Distribution support to other cultivators, processors and potential to integrate patient delivery in the coming months.

 

Company Assets  

 

A company asset of Item 9 Labs, Dispensary Permits is one of the most established marijuana business consultancies in the United States. Dispensary Permits offers expert advice in obtaining cultivation, dispensing, processing, and transporting permits in the Cannabis industry, with a proven track record in successfully obtaining marijuana business permits for clientele in over 13 different states. Visit www.dispensarypermits.com for more information.

 

 

 

Dispensary Templates, a division of Dispensary Permits, is an extensive template library and resource to help those navigating the application process without a consultant to obtain a marijuana business license or to build upon their existing marijuana business. Think LegalZoom for the Marijuana Industry – Dispensary Templates’ online store offers template products that guide customers through the application process to cultivation, processing and dispensary operations. Visit www.dispensarytemplates.com to view all tools and resources.

 

Strive Life, the company’s “franchise style” dispensary model, aims to elevate any marijuana market by offering the documents and systems necessary for launching a successful dispensary. The model includes a Project Plan, Welcome Kit, Brand Guidelines, Interior Concept, and Policy and Procedures for the facility. The Strive vision is to implement best industry practices from across the United States to offer optimal medical services and support through the dispensing and sale of medical marijuana.

 

  4  

 

Products and Facilities .

 

The Company is focused on the development of technology and products that administer high-quality medical marijuana through novel and proprietary delivery devices including an intra-nasal delivery system to deliver significant health benefits. The Company is headquartered in Phoenix, Arizona where it owns and operates 50 acres.

 

Currently, Item 9 is utilizing five acres and intends to implement the remaining 45 acres in accordance with its three-year strategic plan. The property includes a 10,000 square foot, state-of-the-art indoor manufacturing facility with 10,000 square feet of additional capacity which received approval to operate on June 4, 2019 . The additional capacity will include a commercial kitchen for infused co-branded products. As part of its growth strategy, the Company is in the process of opening additional cultivation and extraction locations with Nevada underway.

 

 

 

Item 9 Labs produces premium cannabis and cannabis related products in a rapidly growing market. We currently offer more than 300 products that we group in the following categories: flower; concentrates; distillates; and hardware. Our product offerings will continue to grow as we develop new products to meet the needs of the end-users. We make our products available to consumers through licensed dispensaries in Arizona. In just over 13 months from our first product delivery, Item 9 Labs products are now carried in more than 40 dispensaries throughout the state of Arizona. The following is a summary of the Company’s Product Line:

 

 

 

 

  5  

 

Strategy of our Brands

 

Item 9 Labs Concepts

 

Marijuana Growing & Processing

 

 

 

Product offerings include over 70 medical marijuana strains, shatter, crumble, THCA, Delta 8 THC, distillate and live resin terp sauce. Item 9 operates 50 acres, one of the largest properties in the U.S. zoned to grow and cultivate the medical marijuana flower. Most recently, on June 4, 2019, the Company passed inspections to operate custom 10,000 square-foot construction and will begin production immediately. The facility now totals 20,000 square-feet consisting of 8 flower rooms, just over 1,000 square-feet of nursery space, an extraction laboratory, and an infusion kitchen for increased manufacturing capabilities. The Company’s products can be found in over 50 dispensaries in Arizona.

 

Strive Concepts

 

Strive is a branded medical marijuana “franchise- style” solution with a proven concept operating dispensaries in multiple states including Illinois, Delaware and Pennsylvania. The advance model offers the documents and systems necessary for launching a successful dispensary. The model includes a project plan, welcome kit, brand guidelines, interior concept, & policy and procedures for the facility.

 

 

 

Combined brands

 

Currently, we have two brands, both brands encompass our corporate vision and uphold our 5 core competencies which include: Care, Compliance, Customers, Community, and Culture. To achieve optimal balance between brands, Item 9 Labs was designed to be minimalistic with defined lines and shapes while Strive Concepts, was designed with the cannabis mother plant in mind, the brand colors are derived from the cannabis plant, the imagery includes other plant such as Aspen leaves and succulents and many interior textures derived from the “Franchise Style” Dispensary Model.

 

Growth Objectives and National Expansion Plans for 2019-2020

 

Our mission is to provide good times and good health for cannabis consumers in legal medical cannabis markets across the United States. We strive to elevate any market we enter through the development of high caliber, precision tested, cannabis products designed with consistency and adaptability in mind. We will accomplish this through the acquisition of numerous medical marijuana business licenses located all throughout the United States, from the East Coast to the West Coast. Our goal is to hold 10 – 12 licenses by the end of 2019, including through the provision of management services over JV’s for outstanding license applications. Other plans for 2019 include:


- Expansion underway on another 10,000 sq. ft. facility (will include a commercial kitchen)
- Pursue potential acquisition opportunities in legalized cannabis markets

- Application Strategy for 2019:

- Replicate Nevada expansion in other key states through management services joint ventures
- Purchase Licenses: 30+ existing markets
- Each deal will be vetted individually to ensure its in line with our mission, vision and capital structure.

 

Employees and Independent Contractors

 

As of March 31, 2019, we had sixty one full time employees, including our executive officers, one full-time consultant, and two part-time employees. We plan to hire additional employees and engage consultants on an as-needed basis. Our employees are not represented by any unions and we consider our relationship with our employees to be good. We also have relationships with several independent contractors who provide services on a regular basis to us.

 

  6  

 

Research and Development

 

Going forward, we intend to increase our spending and resources for research and development. Allocation of research and development funds may be dependent on the perceived likelihood of legalization or a significant change in the treatment of cannabis in a given geographic market. Funds may also be used for both product and market development in the hemp and cannabis industries. Given the emergent nature of these industries, we recognize the needs of today may not be the needs of the future and some capital investment will be necessary to meet changing demands.

 

Intellectual Property

 

We generally rely upon copyright, trademark and trade secret laws to protect and maintain our proprietary rights for our technology, brands, and products.  We currently hold several trademarks including various goods and services of “Item 9 Labs” (serial numbers 87940264, 87940227, 87940254 and 87940239) and Strive Life (88/144,717), as well as several domains, including but not limited to, arizonadispensarypermits.com, dispernsarytemplates.com, and wegrowstore.com.

 

We maintain a policy requiring our employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements and to control access to software, documentation and other proprietary information. 

 

Notwithstanding the steps we have taken to protect our intellectual property rights, third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop products and models that are substantially equivalent or superior to our products and services.

 

Competition

 

We compete in markets where cannabis has been legalized and regulated, which includes various states within the United States. We expect that the quantity and composition of our competitive environment will continue to evolve as the industry matures. Additionally, increased competition is possible to the extent that new states and geographies enter the marketplace as a result of continued enactment of regulatory and legislative changes that de-criminalize and regulate cannabis products. We believe that by diligently establishing and expanding our brands, product offerings and services in new and existing locations, we will become established in the industry. Additionally, we expect that establishing our product offerings in new and existing locations are factors that mitigate the risk associated with operating in a developing competitive environment. Additionally, the contemporaneous growth of the industry as a whole will result in new customers entering the marketplace, thereby further mitigating the impact of competition on our operations and results.

 

In our opinion, we are currently competing with Cannabis cultivators, manufacturers, and retailers in our local jurisdictions as well as international enterprises as set forth below, among many others. Many of our competitors are substantially larger than us and have significantly greater name recognition, sales and marketing, financial, technical, customer support and other resources. These competitors also may have more established distribution channels and stronger relationships with local, long distance and Internet service providers. These competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products. 

 

These competitors may enter our existing or future markets with products that may be less expensive, that may provide higher performance or additional features or that may be introduced more quickly than our products.

 

With respect to our operations, including consulting services, we may face competition with any one of the following:

 

Harvest Health & Recreation Inc. (CNSX: HARV, OTCQX: HTHHF), an Arizona based vertically integrated cannabis company with as many as 60 licensees across 12 states, 525 employees, and planned expansion for the future. 
Curaleaf Hldgs Inc. (OTCQ: CURLF ), a Massachusetts based fully integrated life science company with a presence in 12 states, operating 43 dispensaries, 12 cultivation sites and 11 processing sites. 
Green Thumb Industries, Inc. (CSE: GTII, OTCQX:GTBIF), a vertically integrated cannabis operator with presence in twelve state markets and also provides management services and solutions to state licensed cultivators and dispensaries. 
American Cannabis Company, Inc. (OTCQB:AMMJ), a Denver based company that provides advisory and consulting services specific to this industry, designs industry specific products and facilities, and manages a strategic group partnership that offers both exclusive and nonexclusive customer products.   

 

We do not expect to face competition with respect to our branded apparel, however, other corporations may sell apparel that incorporates other logos or trademarks associated with the cannabis industry.

 

We believe that we compete favorably with our competitors on the basis of these factors. However, if we are unable to compete successfully against our current and future competitors, it will be difficult to acquire and retain customers, and we may experience revenue declines, thereby resulting in reduced operating margins, loss of market share and diminished value in our services. 

 

  7  

 

Government Regulation of Cannabis

 

Cannabis is currently a Schedule I controlled substance under the Controlled Substances Act (21 U.S.C. § 811) (“CSA”) and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “DOJ”) defines Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the CSA, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine, even though these persons are in compliance with state law.

 

In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. The new administration under President Trump has indicated that he will strongly enforce the federal laws applicable to cannabis. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not currently directly harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement policies of the federal government ( see  Risk Factors).

 

The Company and our licensed products will also be subject to a number of other federal, state and local laws, rules and regulations. We anticipate that our vendors and us will be required to manufacture our products in accordance with the Good Manufacturing Practices guidelines and will be subject to regulations relating to employee safety, working conditions, protection of the environment, and other items. The current administration has indicated that it will closely scrutinize the cannabis industry, in particular, recreational marijuana. Changes in laws, rules and regulations or the recall of any product by a regulatory authority, could have a material adverse effect on our business and financial condition.

 

The United States federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule. Currently, cannabis and CBD ( 0.3 percent THC or more)  are classified as Schedule I drugs, which are viewed as highly addictive and having no medical value and is illegal to distribute and use. The United States Federal Drug Administration has not approved the sale of marijuana or CBD ( 0.3 percent THC or more)  for any medical application. Doctors may not prescribe cannabis or CBD ( 0.3 percent THC or more)  for medical use under federal law, however they can recommend its use under the First Amendment. In 2010, the United States Veterans Affairs Department clarified that veterans using medicinal cannabis or CBD ( 0.3 percent THC or more)  will not be denied services or other medications that are denied to those using illegal drugs. 

 

Currently, thirty-three states and the District of Columbia have laws legalizing marijuana and CBD in some form. In November 2016, California, Massachusetts, Maine and Nevada all passed measures legalizing recreational marijuana. California’s Prop. 64 measure allows adults 21 and older to possess up to one ounce of marijuana and grow up to six plants in their homes. Other tax and licensing provisions of the law didn’t take effect until January 2018.

 

These noted state laws, both proposed and enacted, are in direct conflict with the federal Controlled Substances Act, which makes cannabis use and possession illegal on a national level. However, on August 29, 2013, the U.S. Department of Justice issued a memorandum providing that where states and local governments enact laws authorizing cannabis-related use, and implement strong and effective regulatory and enforcement systems, the federal government will rely upon states and local enforcement agencies to address cannabis activity through the enforcement of their own state and local narcotics laws. The memorandum further stated that the U.S Justice Department’s limited investigative and prosecutorial resources will be focused on eight priorities to prevent unintended consequences of the state laws, including distribution of cannabis to minors, preventing the distribution of cannabis from states where it is legal to states where it is not, and preventing money laundering, violence and impaired driving.

 

On December 11, 2014, the U.S. Department of Justice issued another memorandum with regard to its position and enforcement protocol with regard to Indian Country, stating that the eight priorities in the previous federal memo would guide the United States Attorneys' cannabis enforcement efforts in Indian Country. On December 16, 2014, as a component of the federal spending bill, the Obama administration enacted regulations that prohibit the Department of Justice from using funds to prosecute state-based legal medical cannabis programs.

 

On January 4, 2018, The Department of Justice lead by Jeff Sessions issued a memo on federal marijuana enforcement policy announcing a return to the rule of law and the rescission of previous guidance documents. Since the passage of the Controlled Substances Act (CSA) in 1970, Congress has generally prohibited the cultivation, distribution, and possession of marijuana. 

 

  8  

 

However, on January 18, 2019, the new Attorney General, William Barr, stated in front of the Senate Judiciary Committee that he doesn't plan on using federal resources to "go after" companies if they are complying with state law. That would be a reversal from the approach taken by his predecessor, former Attorney General Jeff Sessions, who vowed to pursue federal violations more aggressively. According to Erik Altieri, executive director of the National Organization for the Reform of Marijuana Laws (NORML), Barr's stance is a good sign for advocates but it remains to be seen if his actions will follow through on his pledge. Our business could end and investors could lose their total investment in the company if there is no reversal in Sessions’ approach.

 

On June 20, 2019, the United States House of Representatives passed a historic bipartisan amendment to the fiscal year 2020 Commerce-Justice-Science spending bill. By a vote of 267-165, the House approved the Blumenauer-McClintock-Norton Amendment which would protect state-legal cannabis programs from interference by the United States Department of Justice (DOJ). The amendment is named after the three individuals who submitted it for consideration: Representative Earl Bluemenauer, a Democrat from Oregon, Tom McClintock, a Republican from California, and Eleanor Norton, a delegate from Washington D.C.

 

Currently, the spending bill does provide protection for state-legal medical cannabis programs from DOJ interference – but this amendment would protect both medical and recreational cannabis programs that are legal at the state level. The amendment would prohibit the DOJ from using funds to prevent any American state, territory, and Washington D.C. from approving and implementing laws authorizing marijuana use, distribution, possession, and cultivation. What remains uncertain is whether the current Republican-controlled Senate will support the amendment. Further, if the amendment makes it into the final spending bill approved by Congress, it will only remain in effect for one year. If the amendment does not garner approval from the Senate, then the DOJ will maintain the right to use its funding to prevent the approval and implementation of laws regarding recreational cannabis use at the state level, which could affect our business, and could impact our investors’ investment in the Company.

 

 

  9  

 

Item 1A. Risk Factors.

 

Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Registration Statement on Form 10 and in other documents that we file with the SEC, in evaluating our company and our business. Investing in our securities involves a high degree of risk. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.

 

Risks Related to Our Company and Our Business

 

We are a develo p ment stage company with a limited operating h istory on which to evaluate our business or base an investment decision.

 

Our business prospects are difficult to predict because of our relatively li m ited operating history and early stage of develop m ent. At this ti m e, we are a develop m ent stage co m pany. We have generated limited revenues to date. We are currently in a phase of growth and expansion for all business operations and intend to continue this growth w ith revenues from the proceeds of future financings. I n particular, we have not proven that w e can execute on our proposed business plan in the cannabis industry in a manner that enables us to be profitable and m eet custo m er require m ents, develop intellectual property to enhance our operations, develop and m aintain relationships with strategic partners to extract value from our operations, raise sufficient capital in the private m arkets, or respond effectively to co m petitive pressures. I f we are unable to acco m plish these goals, our business is unlikely to succeed and you should consider our prospects in light of these risks, challenges and uncertainties.

 

We compete for market share with other companies, including other licensed entities in the United States, some of which have longer operating histories and more financial resources and experience than we have.

 

We face, and we expect to continue to face, intense competition from licensed cannabis operators, both public and private, and other potential competitors, some of which have longer operating histories and more financial resources and experience than we have. In addition, it is possible that the medical cannabis industry will undergo consolidation, creating larger companies with financial resources, capabilities and product offerings that are superior ours by virtue of size alone. As a result of this competition, we may be unable to maintain our operations or develop them as currently proposed, on terms we consider acceptable, or at all.

 

There are currently hundreds of applications for cannabis licenses being processed across a number of states. The number of licenses granted and the number of ultimately authorized by each state could have an adverse impact on our ability to compete for market share in the medical cannabis and recreational/adult use cannabis industry. We expect to face additional competition from new market entrants that are granted licenses or existing license holders that are not yet active in the industry in the states in which we currently operate or plan to operate. If a significant number of new licenses are granted in any given market which we participate in, we may experience increased competition for market share and may experience downward price pressure on our medical cannabis products as new entrants increase production.

 

If the number of users of cannabis for medical and/or recreational purposes increases, the demand for products will increase. This could result in the competition in the cannabis industry becoming more intense as current and future competitors begin to offer an increasing number of diversified cannabis products. Conversely, if there is a contraction in the medical market for cannabis, resulting from the legalization of adult-use cannabis or otherwise, competition for market share may increase.

 

We face i n tense competition which could pro h ibit u s from developing a customer b ase and generating revenue.

 

The industries within which we plan to co m pete are highly co m petitive with companies that have greater capital resources, facilities and greater diversity of operations. More established co m panies with m uch greater financial resources which do not currently co m pete with us m ay be able to easily adapt their existing operations to our lines of business. Due to this co m petition, there is no assurance that we w ill not encounter difficulties in obtaining revenues and m arket share or in the positioning of our products or that co m petition in the industry will not lead to reduced prices for our products. O ur co m petitors m a y also introduce new strains, use competitive, organic techniques or novel application that could also increase co m petition , decrease de m and for our business, and render our methods and craft products obsolete.

 

  10  

 

If we f ail to raise additio n al capital, our ability to implement our business model and strategy could be compromised.

 

We have li m ited capital resources. To date, our operations have been funded by and through our operations, private placements of our securities, and financing from our financing partners. We expect to require substantial additional capital in the near future in order to execute our businesses as planned, to develop and expand our operations, expand our brand in the marketplace, and to establish the targeted levels of production. We m ay not be able to obtain additional financing on ter m s acceptable to us, or at all. E v en if we obtain financing for our near term operations, we expect that we will require additional capital beyond the near ter m . I f we are unable to raise capital when needed, our business, financial condition and results of operations would be m aterially adversely affected, and we could be forced to reduce or discontinue our operations.

 

If we need ad d itional capital to fund our growing o p eratio n s, we may not be a b le to obtain sufficient capital and may be f orced to limit the scope of o u r operations.

 

I f adequate additional financing is not available on reasonable ter m s, we m ay not be able to expand our business operations and we would have to m odify our business plans accordingly. There is no assurance that additional financing will be available to us.

 

I n connection with our growth strategies, we m ay experience increased capital needs and accordingly, we m a y not have sufficient capital to fund our future operations without additional capital invest m ents. Our capital needs will depend on nu m erous factors, including: (i) our profitability; (ii) the release of co m petitive products by our co m petition; (iii) the level of our invest m ent in marketing and branding our products; and (iv) the a m ount of our capital expenditures. We cannot assure you that w e will be able to obtain capital in the future to m eet our needs.

 

I n recent years, the securities m arkets in the United States have experienced a high level of price and volu m e volatility, and the m arket price of securities of m any co m panies have experienced w ide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such co m panies. For these reasons, our securities can also be expected to be subject to volatility resulting from purely m arket forces over which we will have no control. I f we need additional funding we will, m ost likely, seek such funding in the United S tates and the m arket fluctuations effect on our stock price could li m it our ability to obtain equity financing.

 

I f we cannot obtain additional funding, we m ay be required to: (i) li m it our expansion; (ii) li m it our m arketing efforts; and (iii) decrease or eli m inate capital expenditures. Such reductions could m aterially adversely affect our business and our ability to co m pete .

 

E v en if we do find a source of additional capital, we may not be able to negotiate ter m s and conditions for receiving the additional capital that are favorable to us. Any future capital invest m ents could dilute or otherwise m aterially and adversely affect the holdin g s or rights of our existing shareholders. I n addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock shares. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on ter m s favorable to us.

 

The f ailure to h ire additional employees could harm our business.

 

Our future success also depends upon our continuing ability to attract and retain highly qualified personnel. Expa n sion of our business and the m anage m ent and operation will require additional m anagers, officers, directors and e m ployees with industry experience, and our success will be highly dependent on our ability to attract and retain skilled m anag e ment personnel and other e m ployees. There can be no assurance that we will be able to attract or retain hi g hly qualified personnel. C o m petition for honest, diligent and skilled personnel in our industry is significant. This co m petition m ay m ake it m ore difficult and expensive to attract, hire and retain qualifyed m anagers and e m ployees.

 

I f we are una b le to deliver consistent, h igh quality products at sufficient vol u mes, our relatio n ship w ith o u r customers may suffer and our o p erating res u lts will be adversely affected.

 

Our customers will expect us to be able to consistently deliver our products at sufficient volu m es, while m eeting the establishedd quality standards desired to maintain their loyalty to our brands. I f we are unable to consistently deliver, our relationship with these customers could be adversely affected, which could have a negative i m pact on our operating results.

 

  11  

 

Fail u re to effectively manage growth of intern a l operations and business may strain our financial resources.

 

We intend to significantly expand the scope of our business operations in the near ter m . Our growth rate m ay place a significant strain on our financial resources for a nu m ber of reasons, including, but not li m ited to, the following:

 

The need for continued develop m ent of our financial reporting and infor m ation m anag e m ent syste m s;
The need to m anage strategic relationships and agree m ents with m anufacturers, suppliers, custo m ers and partners; and
Difficulties in hiring and retaining skilled m anag e m ent, technical and other personnel necessary to support and m anage our business.

 

Additionally, our strategy envisions a period of rapid growth that m ay i m pose a significant burden on our ad m inistrative and operational resourc es. Our ability to effectively m anage growth will require us to substantially expand the capabilities of our ad m inistrative and operational resources and to attract, train, m anage and retain qualified m anag e m ent and other personnel. Our failure to successfully m anage growth could result in our sales not increasing com m ensurately with capital invest m ents. Our inability to successfully m anage growth could m aterially adversely affect our business.

 

If we are una b le to continually in n ovate and i n crease efficiencies, o u r ability to attract n ew customers may be adversely affected.

 

I n the area of innovation, we m ust be able to develop new management strategies, strains, techniques, products and creative branding that appeal to our custo m ers. This depends, in part, on the technological and creative skills of our personnel and on our ability to protect our intellectual property rights. We m a y not be successful in the develop m ent, introduction, and marketing and sourcing that satisfy custo m er needs, achieve market acceptance or generate satisfactory financial returns.

 

Global economic con d itions may adversely affect our industry, b usi n ess and result of operations.

 

Disruptions in the global credit and financial m arkets could result in di m inished liquidity and credit availability, a decline in consu m er confidence, a decline in econo m ic growth, an increased une m ploy ment rate, and uncertainty about econo m ic stability. These econo m ic uncertainties can affect businesses such as ours in a nu m ber of ways, m a king it difficult to accurately forecast and plan our future business activities. Such conditions can lead consu m ers to postpone spending, which can cause our vendors, suppliers, distributors and retailers to cancel, decrease or delay orders w ith us. We are unable to predict the likelihood of the occurrence, duration or severity of such disruptions in the credit and financial m arkets and adverse global econo m ic conditions and such econo m ic conditions could m aterially and adversely affect our business and the results of operations.

 

Our b u siness d epends substa n tially on the conti n uing efforts of our management team and our business may be severely d isru p ted if we lose their services.

 

Our current and future success depends substantially on the continued services of our management team , Bryce Skalla, Sara Gullickson, and Jeffrey Rassas. Each brings a unique blend of skill and experience that is essential to the success of our business. We do not m aintain key m an life insurance for our management team at this time. I f our management team is unable or unwilling to continue in their present positions, we m a y not be able to replace them readily, if at all. Therefore, our business m ay be severely disrupted, and we m ay incur additional expenses to recruit and retain new management.

 

Litigation may ad v ersely af f ect o u r business, financial condition and results of operations.

 

From ti m e to ti m e in the nor m al course of our business operations, we m ay beco m e sub j ect to litigation that m ay result in liability m aterial to our financial state m ents as a whole or m ay negatively affect our operating results if changes to our business operation are required. The cost to defend such litigation m ay be significant and m ay require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect custo m er perception of our business, regardless of whether the allegations are valid or whether we are ulti m ately found liable. As a result, litigation m ay adversely affect our business, financial condition and results of operations.

 

Confide n tiality agreements with employees and others may n o t a d equately prevent disclosure of our trade secrets and ot h er proprietary i n f ormatio n .

 

Our success depends upon the skills, knowledge and experience of our technical personnel, our consultants and advisors as well as our licensors and contractors. Because we operate in a highly co m petitive field, we will rely significantly on trade secrets to protect our proprietary techniques and processes. However, trade secrets are difficult to protect. We plan to enter into confidentiality and intellectual property assign m ent agree m ents with our corporate partners, e m ployees, consultants, outside scientific collaborators, developers and other advisors. These agree m ents generally require that the receiving party keep confidential and not disclose to third parties confidential infor m ation developed by us during the course of the receiving party’s relationship with us. These agree m ents also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property. H owever, these agree m ents m a y be breached and m ay not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by co m petitors, in which case we would not be able to prevent the use of such trade secrets by our co m petitors. The enforce m ent of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and ti m e consu m ing and the outco m e would be unpredictable. I n addition, courts outside the United S tates m a y be less willing to protect trade secrets. The failure to obtain or m aintain m eaningful trade secret protection could adversely affect our co m petitive position.

 

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Risks Related to Cannabis Industry

 

Cannabis remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable or even prohibit such operations.

 

We operate both directly and indirectly in the cannabis industry, which is dependent on state laws and regulations pertaining to such industry; however, under federal law, cannabis remains illegal.

 

The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.

 

Currently, 33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow the use of medical cannabis and 10 states and the District of Columbia have legalized cannabis for “adult use” or recreational use. State and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.

 

In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA (see “Business—Government and Industry Regulation—The Cole Memo”) [see further discussion below]. In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines (the “FinCEN Guidelines”) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations (see “Business—Government and Industry Regulation—FinCEN”).

 

In 2014, the United States House of Representatives passed an amendment (the “Rohrabacher-Farr Amendment”) to the Commerce, Justice, Science, and Related Agencies Appropriations Bill, which funds the United States Department of Justice (the “DOJ”). The Rohrabacher-Farr Amendment prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. In August 2016, a 9 th  Circuit federal appeals court ruled in United States v. McIntosh  that the Rohrabacher-Farr Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.

 

Although these developments have been met with a certain amount of optimism in the cannabis industry, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted. In addition, the Rohrabacher-Farr Amendment, being an amendment to an appropriations bill that must be renewed annually, has not been renewed beyond December 7, 2018. Furthermore, the ruling in  United States v. McIntosh  is only applicable in the 9 th  Circuit, which does include California, Hawaii and Arizona, where we currently primarily operate. The Trump administration could change this policy and decide to strongly enforce the federal laws applicable to cannabis. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. Because we intend to grow, harvest, distribute or sell cannabis directly, we may be irreparably harmed by a change in enforcement policies of the federal government.

 

  13  

 

Approach to the Enforcement of Cannabis Laws is Subject to Change

 

Given the conflicting opinions between state legislatures and the federal government regarding cannabis, investments in United States cannabis businesses are subject to varying legislation and regulation. The Cole Memorandum (the “Cole Memo”), issued in 2013 by former Deputy Attorney General of the United States James M. Cole, served as the response to these inconsistencies, and recognized that notwithstanding the classification of cannabis as a controlled substance at the United States federal level, several states have enacted laws relating to cannabis for medical purposes.

 

The Cole Memo outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. Particularly, the Cole Memo noted that in those jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented robust and effective regulatory and enforcement mechanisms to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice did not provide specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memo standard.

 

Considering the limited investigative and prosecutorial resources at hand, the Cole Memo concluded that the Department of Justice should only be focused on addressing the most serious cannabis related threats. Consequently, states where cannabis had been legalized were not branded as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memo had merit; however, he disagreed that the Cole Memo had been successfully implemented. On January 4, 2018, Attorney General Sessions issued the Sessions Memorandum, which effectively rescinded the Cole Memo. The Sessions Memorandum withdrew previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well-established principles governing federal prosecution already in place. Those principles are included in Chapter 9.27.000 of the United States Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.

 

With the issuance of the Sessions Memorandum, federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. The Sessions Memorandum gave no direction to federal prosecutors as to the priority they should ascribe to such cannabis activities. Therefore, it is ultimately uncertain how active federal prosecutors will be with respect to such activities. Furthermore, the Sessions Memorandum did not how federal prosecutors should treat medical cannabis. At present, medical cannabis is protected against enforcement by United States Congressional legislation through the Leahy Amendment to H.R.1625 – a vehicle for the Consolidated Appropriations Act of 2018 which similarly averts federal prosecutors from applying federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress’ restoration of such funding. Given the ambiguity of the Sessions Memorandum, there can be no guarantee that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.

 

Such potential proceedings could impose significant restrictions upon the Company, thereby diverting the attention of key executives. In addition, such proceedings could materially adversely affect the Company business, revenues, operating results, and financial condition as well as the Company’s reputation and prospects, even if such proceedings were concluded successfully in the Resulting Issuer’s favor. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company, or the seizure of the corporate assets.

 

As the possession and use of cannabis is illegal under the CSA, we may be deemed to be engaging in illegal activities through the growth and sales of our products in the future. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.

 

Under Federal law, specifically the CSA, the possession, use, cultivation, and transfer of cannabis is illegal. Our business directly involves the possession, use, cultivation, manufacturing and/or transfer of cannabis and derivative therefrom. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis and related products, may seek to bring an action or actions against us and or the businesses who are integral to our supply chain, including, but not limited, to a claim of aiding and abetting another’s criminal activities.  The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.

 

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However, on January 18, 2019, the new Attorney General, William Barr, stated in front of the Senate Judiciary Committee that he doesn't plan on using federal resources to "go after" companies if they are complying with state law. That would be a reversal from the approach taken by his predecessor, former Attorney General Jeff Sessions, who vowed to pursue federal violations more aggressively. According to Erik Altieri, executive director of the National Organization for the Reform of Marijuana Laws (NORML), Barr's stance is a good sign for advocates but it remains to be seen if his actions will follow through on his pledge. Our business could end and investors could lose their total investment in the company if there is no reversal in Sessions’ approach.

 

On June 20, 2019, the United States House of Representatives passed a historic bipartisan amendment to the fiscal year 2020 Commerce-Justice-Science spending bill. By a vote of 267-165, the House approved the Blumenauer-McClintock-Norton Amendment which would protect state-legal cannabis programs from interference by the United States Department of Justice (DOJ). The amendment is named after the the three individuals who submitted it for consideration: Representative Earl Bluemenauer, a Democrat from Oregon, Tom McClintock, a Republican from California, and Eleanor Norton, a delegate from Washington D.C.

 

Currently, the spending bill does provide protection for state-legal medical cannabis programs from DOJ interference – but this amendment would protect both medical and recreational cannabis programs that are legal at the state level. The amendment would prohibit the DOJ from using funds to prevent any American state, territory, and Washington D.C. from approving and implementing laws authorizing marijuana use, distribution, possession, and cultivation. What remains uncertain is whether the current Republican-controlled Senate will support the amendment. Further, if the amendment makes it into the final spending bill approved by Congress, it will only remain in effect for one year. If the amendment does not garner approval from the Senate, then the DOJ will maintain the right to use its funding to prevent the approval and implementation of laws regarding recreational cannabis use at the state level, which could affect our business, and could impact our investors’ investment in our Company.

 

Our business is primarily dependent on state laws pertaining to the cannabis industry.

 

Currently, thirty-three states and the District of Columbia currently have laws legalizing marijuana and CBD in some form. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area. Further, progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Further legalization attempts at the state level that creates bad public policy could slow or stop further development of the cannabis industry. Any one of these or other factors could slow or halt use of cannabis, which would negatively impact our business model.

 

The medical and recreational use cannabis industry presents substantial risks and uncertainty.

 

We plan to be engaged directly in business related to licensed medical cannabis industry in the State of Arizona and medical and recreational in Nevada, among other states. The relatively new development of the medical and recreational use cannabis industry presents numerous and material risks. Many of those risks are not inherent in other developing or mature industries. Many of the risks are unknown and the consequences to our business are speculative. The risks range from the uncertainty as to how the laws and regulations will be applied, to the potential catastrophic collapse of the medical and recreational use cannabis industry nationally or in the states we operate in that might result from changes in laws or the enforcement of existing laws, for example, to the failure of individual businesses that might result from the volatile market conditions that sometimes accompany the development of new markets and industries. Included in the risks is the potential that regulatory authorities could conclude that we provide products and/or engage in other activities that are illegal under the applicable state laws despite the company’s intentions and efforts to not engage in any illegal activities. Such numerous and material risks, the diversity of those risks, and the uncertainty associated with those risks, will likely cause an investment in the Company to be highly speculative and significantly more risky than other similar investments.

 

We may be unable to secure a local and/or State license to conduct our business, which could lead to a loss in your investment.

 

Businesses that wish to conduct commercial cannabis operations, either for medicinal or adult-use cannabis, are required to obtain the pertinent municipal and State licenses, dependent on the state. License applications for new operations in each state maintain stringent requirements and are highly competitive; as such, there are no guarantees of license issuance for a license. Failure to secure and maintain a license for our operations would prevent us from legally conducting any commercial cannabis operations in the jurisdictions in which we operate, and thus an investment in our Company carries a great amount of risk.

 

Our business may be negatively impacted by environmental factors, including unfavorable weather patterns and pesticide contamination.

 

Cannabis cultivation is an extensive, complicated, and delicate process, and a successful harvest is reliant on a myriad factors including, but not limited to,: lighting, fertilization, technique, sunlight, temperature, and proper application of pesticides. Variance in any one of these factors may result in a tainted or destroyed harvest that will be unfit for distribution. Further, pesticide contamination may prompt recall and public-safety alerts, and any contamination detected may also result in product removal from retail dispensaries.

 

  15  

 

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

 

On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed cannabis businesses. A memorandum issued by the Justice Department to federal prosecutors reiterated guidance previously given, this time to the financial industry that banks can do business with legal marijuana businesses and “may not” be prosecuted. The Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued guidelines to banks noting that it is possible to provide financial services to state-licensed cannabis businesses and still be in compliance with federal anti-money laundering laws. The guidance, however, falls short of the explicit legal authorization that banking industry officials had requested the government provide, and, to date, it is not clear if any banks have relied on the guidance to take on legal cannabis companies as clients. The aforementioned policy can be changed, including in connection with the recent change in presidential administration, and any policy reversal and or retraction could result in legal cannabis businesses losing access to the banking industry.

 

Because the use, sale and distribution of cannabis remains illegal under federal law, most banks will not accept deposits from or provide other bank services to businesses involved with cannabis, and the banks that do provide banking services to companies related to the cannabis industry do not advertise their position and require greater oversight of the depositor relationship. The limited ability to open bank accounts may make it difficult for us to operate.

 

Although we currently have a bank account, our ability to open additional bank accounts or maintain our current accounts is subject to change. In the future may be difficult or impossible to deposit cannabis related funds and other amounts owed to the Company which may make it difficult for us to do business under the current business plans.

 

Our insurance coverage may be inadequate to cover all significant risk exposures.

 

Our business will be exposed to liabilities that are unique to the industry we operate in. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition and results of operations. Further, we do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

 

Additionally, we may have a more difficult time acquiring insurance that is otherwise readily available, such as property insurance, workers compensation, general liability, and directors and officers insurance, and may become more expensive because we may be deemed to participate either directly or indirectly in the cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to them. If we are forced to go without such insurances, it may affect our decision business, may inhibit our growth, and may expose us to additional risk and financial liabilities.

 

Risks Associated with Our Capital Stock 

 

Because we will become a reporting company under the Exchange Act by means other than a traditional underwritten initial public offering, we may not be able to attract the attention of research analysts at major brokerage firms.

  

Because we will not become a reporting company by conducting an underwritten initial public offering, or IPO, of our common stock, and because we will not be listed on a national securities exchange, security analysts of brokerage firms may not provide coverage of our company. In addition, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we were to become a public reporting company by means of an IPO because they may be less familiar with our company as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development. 

 

  16  

 

Our common stock may become subject to the SEC's penny stock rules, which may make it difficult for broker-dealers to complete customer transactions and could adversely affect trading activity in our securities. 

  

The SEC 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, subject to specific exemptions. The market price of our common stock may be less than $5.00 per share for some period of time and therefore would be a "penny stock" according to SEC rules, unless we are listed on a national securities exchange. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:

 

  make a special written suitability determination for the purchaser; 
  receive the purchaser's prior written agreement to the transaction; 
  provide the purchaser with risk disclosure documents which identify certain risks associated with investing in "penny stocks" and which describe the market for these "penny stocks" as well as a purchaser's legal remedies; and 
  obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a "penny stock" can be completed. 

 

If required to comply with these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. 

 

The market price of our common stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance.    

 

Our stock price may experience substantial volatility as a result of a number of factors, including:

 

  sales or potential sales of substantial amounts of our common stock;
  the success of competitive products or technologies; 
  announcements about us or about our competitors, including new product introductions and commercial results; 
  the recruitment or departure of key personnel; 
  developments concerning our licensors or manufacturers; 
  litigation and other developments; 
  actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; 
  variations in our financial results or those of companies that are perceived to be similar to us; and 
  general economic, industry and market conditions. 

 

Many of these factors are beyond our control. The stock markets in general, and the market for cannabis companies in particular, have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors could reduce the market price of our common stock, regardless of our actual operating performance. 

 

We have never paid and do not intend to pay cash dividends. 

   

We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business.

 

Our executive officers and directors, and affiliate shareholders, have the ability to control all matters submitted to stockholders for approval. 

 

Our executive officers, directors, and affiliate shareholders hold collectively 46,635,119 shares of our outstanding common stock or 73.61% of the total vote, and as such, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act collectively, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. 

 

  17  

 

Provisions under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management.

 

In addition to our corporate charter and our bylaws, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.

 

We will incur increased costs as a result of operating as a public reporting company, and our management will be required to devote substantial time to new compliance initiatives. 

 

As a public reporting company, we will 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, have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to 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. 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.

 

We currently have outstanding, and we may, in the future issue instruments which are convertible into shares of common stock, which will result in additional dilution to you. 

  

We currently have an outstanding instrument which is convertible into shares of common stock, and we may need to issue similar instruments in the future. In the event that these convertible instruments are converted into shares of common stock outstanding stock, or that we make additional issuances of other convertible or exchangeable securities, you could experience additional dilution. Furthermore, we cannot assure you that we will be able to issue shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors or the then current market price.

 

 

  18  

 

Item 2. Financial Information .

 

The discussion of our financial condition and operating results should be read together with our accompanying audited consolidated financial statements included in this Registration Statement.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and interim unaudited condensed consolidated financial statements and notes to such financial statements included elsewhere in this Form 10. The following discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Item 1A. Risk Factors” and other sections in this Form 10.

 

Overview

 

Item 9 Labs produces premium cannabis and cannabis related products in a rapidly growing market. We currently offer more than 300 products that we group in the following categories: flower; concentrates; distillates; and hardware. Our product offerings will continue to grow as we develop new products to meet the needs of the end-users. We make our products available to consumers through licensed dispensaries in Arizona. In just over a year from our first product delivery, Item 9 Labs’ products are now carried in more than 40 dispensaries throughout the state of Arizona.

We believe our past and future success is dependent upon our ongoing ability to understand the needs and desires of the consumers; and we develop and offer products that meet their needs.

The objective of Item 9 Labs is to leverage our assets (tangible and intangible) to fuel the growth of our share of the Arizona cannabis market, as well as expand the geographical reach of our products into markets outside of Arizona, with the ultimate goal of providing comfortable cannabis health solutions to a larger population in a manner that will create value for our shareholders.

We will expand into other markets through various methods, and will utilize strategic partnerships as necessary to provide the synergies to assist in our growth. As part of this expansion plan, we acquired land in Pahrump, Nevada to build our second production facility. Through partnerships, we obtained cultivation, production and distribution licenses in the state of Nevada. Additionally, we have plans to expand to an additional 6-8 markets by December 2019.

 

Results of Operations

 

For the Three Month Period Ended March 31, 2019, as Compared to the Comparable Prior Period Ended March 31, 2018

 

    March 31, 2019   March 31, 2018
         
Revenues, net   $ 1,130,270     $ 281,358  
Cost of services     528,938       202,138  
Gross profit     601,332       79,220  
                 
Operating expenses     1,413,281       106,813  
                 
Loss from operations     (811,949 )     (27,593 )
                 
Other income     24,766       (500 )
                 
Noncontrolling interest     12,307       —    
Income tax expense     (114,686 )     —    
                 
Net Income (Loss)   $ (889,562 )   $ (28,093 )

 

 

Revenue

 

Revenue for the three months ended March 31, 2019 was $1,130,270, an increase of $848,912 or 302% compared to revenue of $281,358 for the three months ended March 31, 2018. This increase was primarily due to an overall increase in monthly sales as production and demand for our products grew. Additionally, $148,934 of the increase in revenues was attributable to the acquisition of Arizona DP Consulting, LLC in November 2018.

 

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Cost of Services

 

Costs of services for the three months ended March 31, 2019 was $528,938 and consists primarily of labor, materials, supplies and utilities. Costs of services as a percentage of revenues was 47% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 of 72% as certain costs, predominantly labor and materials, reduced per unit of production as operating efficiencies were gained.

 

Gross Profit

 

Gross profit for the three months ended March 31, 2019 was $601,332 compared to $79,220 for the three months ended March 31, 2018. Gross margin for the three months ended March 31, 2019 was 53% compared to 28% for the three months ended March 31, 2018. The increase was due to the continued improvement in the operating capacity of the Company’s cultivation and processing facilities.

 

Operating Expenses

 

Total operating expenses for the three months ended March 31, 2019 were $1,413,281 compared to $106,813 for the three months ended March 31, 2018, an increase of $1,306,468. Operating expenses as a percentage of gross profit increased from 135% to 235% for the periods compared. $891,335 of the operating expenses for the period ended March 31, 2019 were for corporate expenses, not directly related to generating revenue, but instead utilized for assembling the workforce and resources to manage the expansion plans we have in place. Management believes this ratio will decrease for current and future operations as the expectation is that revenues will grow at a much faster rate than operating expenses.

 

For the Six Month Period Ended March 31, 2019, as Compared to the Comparable Prior Period Ended March 31, 2018

 

    March 31, 2019   March 31, 2018
         
Revenues, net   $ 2,085,884     $ 505,682  
Cost of services     1,005,156       309,763  
Gross profit     1,080,728       195,919  
                 
Operating expenses     1,967,930       139,400  
                 
Loss from operations     (887,202 )     56,519  
                 
Other income     46,222       (500 )
                 
Noncontrolling interest     60,190       —    
Income tax expense     (207,399 )     —    
                 
Net Income (Loss)   $ (988,189 )   $ 56,019  

 

 

Revenue

 

Revenue for the six months ended March 31, 2019 was $2,085,884, an increase of $1,580,202 or 312% compared to revenue of $505,682 for the six months ended March 31, 2018. This increase was primarily due to an overall increase in monthly sales as production and demand for our products grew. Additionally, $148,934 of the increase in revenues was attributable to the acquisition of Arizona DP Consulting, LLC in November 2018.

 

Cost of Services

 

Costs of services for the six months ended March 31, 2019 was $1,005,156 and consists primarily of labor, materials, supplies and utilities. Costs of services as a percentage of revenues was 48% for the six months ended March 31, 2019 compared to the six months ended March 31, 2018 of 61% as certain costs, predominantly labor and materials, reduced per unit of production as operating efficiencies were gained.

 

Gross Profit

 

Gross profit for the six months ended March 31, 2019 was $1,080,728 compared to $195,919 for the six months ended March 31, 2018. Gross margin for the six months ended March 31, 2019 was 52% compared to 39% for the six months ended March 31, 2018. The increase was due to the continued improvement in the operating capacity of the Company’s cultivation and processing facilities.

 

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Operating Expenses

 

Total operating expenses for the six months ended March 31, 2019 were $2,192,930 compared to $139,400 for the six months ended March 31, 2018, an increase of $2,053,530. Operating expenses as a percentage of gross profit increased from 71% to 182% for the periods compared. $1,541,847 of the operating expenses for the six months ended March 31, 2019 were for corporate expenses, not directly related to generating revenue, but instead utilized for assembling the workforce and resources to manage the expansion plans we have in place. Management believes this ratio will decrease for current and future operations as the expectation is that revenues will grow at a much faster rate than operating expenses.

 

For the Fiscal Year Ended September 30, 2018 as Compared to annualized results for the Period from May 2, 2017 (Inception) September 30, 2017

 

   

Year Ended

September 30, 2018

 

For the Period from May 2, 2017 (Inception) through September 30, 2017

(ANNUALIZED)

         
Revenues, net   $ 1,401,858     $ 256,904  
Cost of services     1,018,109       117,615  
Gross profit     383,749       139,290  
                 
Operating expenses     1,037,567       578,068  
                 
Loss from operations     (653,818 )     (438,778 )
                 
Other income     27,869       —    
                 
Income from disc Ops     21,280       —    
Income tax expense     (88,826 )     —    
                 
Net loss   $ (604,669 )   $ (438,778 )

 

 

Revenues

 

Total Revenues for the year ended September 30, 2018 were $1,401,858 compared to the annualized revenue for the period ended September 30, 2017 of $256,904, an increase of $1,144,954 or 446%. This increase was primarily due to an overall increase in monthly sales as production and demand for our products grew.

 

Costs of Services

 

Costs of services consist primarily of labor, materials, supplies and utilities. Costs of services as a percentage of revenues was 73% for the year ended September 30, 2018 compared to the annualized figure for the period ended September 30, 2017 of 46% as certain costs, predominantly labor and materials increased at a higher rate to ramp up production. Management believes these costs will increase at a much lower rate than revenues and production in future periods, which will lead to higher profit margins than these historical figures illustrate.

 

Gross Profit

 

Gross profit for the year ended September 30, 2018 was $383,749 compared to $139,290 for the year ended September 30, 2017. The increase was due to the ramp up in operations and continued improvement in the operating capacity of the Company’s cultivation and processing facilities.

 

Operating Expenses

 

Total operating expenses for the year ended September 30, 2018 were $1,037,567 compared to $578,068 for the annualized figures for the period ending September 30, 2017, an increase of $459,499. Operating expenses as a percentage of gross profit decreased from 415% to 270% for the periods compared. Management believes this ratio will continue to decrease for current operations as the expectation is that revenues will continue to grow at a much higher rate than operating expenses.

 

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, acquisitions, debt service, and for general corporate purposes. Our primary source of liquidity is funds generated by financing activities and from private placements. Our ability to fund our operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control.

 

As of March 31, 2019, the Company had $2,902,057 of cash and working capital of $4,183,050 (current assets minus current liabilities), compared with $1,674,266 of cash and $2,279,334 of working capital as of September 30, 2018. The increase of $1,903,716 in our working capital was primarily due to a $1,227,791 increase in cash largely resulting from cash received through a private placement. This was offset by a $340,900 increase in accounts receivable, a $468,268 increase in deferred costs and a capital outlay of $896,408 for construction projects. The Company is an early stage growth company. It is generating cash from sales and is investing its capital reserves in current operations and new acquisitions that will generate additional earnings in the long term. The Company expects that its cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet its capital requirements and operational needs for the next 12 months.

 

Cash Flows

 

The following table summarizes the sources and uses of cash for each of the periods presented:

 

                       

Period from Inception

(May 2, 2017)

    Three Months Ended   Six Months Ended   Year Ended   through
    March 31,   March 31,   September 30,   September 30,
    2019   2018   2019   2018   2018   2017
Net cash used in operating activities   $ (876,088 )   $ (91,091 )   $ (1,690,804 )   $ (56,555 )   $ (972,263 )   $ (177,782 )
Net cash used in investing activities     (976,247 )     (20,900 )     (2,481,408 )     (46,651 )     (362,881 )     —    
Net cash provided by financing activities     2,250,003       1,090,000       5,400,003       1,090,000       2,995,550       191,642  
                                                 
Net increase (decrease) in cash and cash equivalents   $ 397,668     $ 978,009     $ 1,227,791     $ 986,794     $ 1,660,406     $ 13,860  

 

Operating Activities

 

During the three months ended March 31, 2019, operating activities used $876,088 of cash, primarily resulting from a net loss of $901,869 and a decrease in cash due to changes in operating assets and liabilities. Cash used by changes in operating assets and liabilities was primarily due to an increase in accounts payable of $52,213, offset by increases of $163,980 in accounts receivable, deferred costs of $132,557 and prepaid expenses of $137,667.

 

During the three months ended March 31, 2018, operating activities used $91,091 of cash, primarily resulting from a net loss of $28,093 and net cash used by changes in our operating assets and liabilities of $74,275. Cash used by changes in operating assets and liabilities was primarily due to an increase in accounts receivable of $63,053, and a decrease in accounts payable of $37,476.

 

During the six months ended March 31, 2019, operating activities used $1,690,804 of cash, primarily resulting from a net loss of $1,273,379, and a decrease in cash due to changes in operating assets and liabilities. Cash used by changes in operating assets and liabilities was primarily due to increases of $340,900 in accounts receivable, deferred costs of $468,268 and prepaid expenses of $139,037.

 

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During the six months ended March 31, 2018, operating activities used $56,555 of cash, primarily resulting from net income of $56,498 and net cash used by changes in our operating assets and liabilities of $136,921. Cash used by changes in operating assets and liabilities was primarily due to an increase in deferred costs of $125,926, and an increase in accounts payable of $34,223.

 

During the year ended September 30, 2018, operating activities used $972,263 of cash, primarily resulting from a net loss of $604,669 and net cash used in operating assets and liabilities of $402,870. Cash used by changes in operating assets and liabilities was primarily due to an increase in accounts payable of $57,660, accrued payroll of $36,733, and accrued income tax of $88,826, offset by an increase in deferred costs of $577,681.

 

During the period ended September 30, 2017, operating activities used $177,782 of cash, primarily resulting from a net loss of $181,522.

 

Investing Activities

 

During the three months ended March 31, 2019, investing activities used $976,247 of cash, consisting primarily of payments totaling $891,247 in purchases of property and equipment, and $200,000 in deposits made on a land acquisition offset by $115,000 in cash received on the receivable for the sale of Airware assets. During the three months ended March 31, 2018, investing activities used $20,900 of cash, consisting primarily of $47,263 in purchases of property and equipment, offset by $26,363 in cash received in the merger.

 

During the six months ended March 31, 2019, investing activities used $2,481,408 of cash, consisting primarily of payments totaling $896,408 in purchases of property and equipment, $1,500,000 used in acquiring the assets of AZ DP Consulting, LLC and $200,000 in deposits made on a land acquisition offset by $115,000 in cash received on the receivable for the sale of Airware assets. During the six months ended March 31, 2018, investing activities used $46,651 of cash, consisting primarily of $73,014 in purchases of property and equipment, offset by $26,363 in cash received in the merger

 

During the year ended September 30, 2018, investing activities used $362,881 of cash, consisting primarily of payments totaling $340,244 in purchases of property and equipment, $200,000 in deposits made on a land acquisition, and $210,000 in extending notes receivable offset by $300,000 in cash received on the sale of Airware assets. During the period ended September 30, 2017, there was no cash investing activity.

 

Financing Activities

 

During the three months ended March 31, 2019, financing activities provided $2,250,003, all of which was proceeds from the sale of common stock. During the three months ended March 31, 2018, financing activities provided $1,090,000 of cash, all of which was proceeds from the sale of common stock.

 

During the six months ended March 31, 2019, financing activities provided $5,400,003, all of which was proceeds from the sale of common stock. During the six months ended March 31, 2018, financing activities provided $1,090,000 of cash, all of which was proceeds from the sale of common stock.

 

During the year ended September 30, 2018, financing activities provided $2,995,550, which included proceeds from the sale of common stock of $1,495,550 and cash proceeds from a note payable of $1,500,000. During the period ended September 30, 2017, financing activities provided $191,642 of cash, all of which was from member contributions.

 

Anticipated Capital Requirements

 

We estimate that our capital requirements to implement our expansion plan over the next 18 months will be approximately $15,000,000 as described in the table below. These estimates may change significantly depending on the nature of our future business activities, expansion rollout, identification of suitable acquisition targets, and our ability to raise capital necessary to conduct the aforementioned activities. We further anticipate incurring additional costs and expenses for accounting, legal, and other miscellaneous fees relating to compliance with SEC requirements and the filing of the registration statement of which this prospectus forms a part.

 

Description  

Estimated

Expenses

Legal, Accounting & Other Registration Expenses   $ 350,000  
Costs Associated with Being a Public Company     240,000  
Trade Shows and Travel     50,000  
Website Development     40,000  
Rent     170,000  
Advertising and Marketing     600,000  
Staffing     2,750,000  
General Working Capital     400,000  
Cash Reserves     1,500,000  
Business Acquisitions     7,000,000  
License Applications     1,900,000  
Total   $ 15,000,000  

 

Given that our cash needs are strongly driven by our growth requirements, we also intend to maintain a cash reserve for other risk contingencies that may arise.

 

We intend to meet our cash requirements for the next 12 months through the use of the cash we have on hand and through business operations, future equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. We currently do not have any other arrangements in place to complete any private placement financings and there is no assurance that we will be successful in completing any such financings on terms that will be acceptable to us.

 

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Off-Balance Sheet Arrangements

 

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies


The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Description of Business and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in this Form 10, describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

 

Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition. Management considers these policies critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s management has reviewed these critical accounting policies and related disclosures.

 

Principles of Consolidation  – The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities in which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated.

 

Use of Estimates  – The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include estimated useful lives of property and equipment, deferred income taxes, accruals and contingencies, goodwill, the fair value of common stock provided as consideration and the estimated fair value of stock options and warrants.

 

Cash  – Cash represents cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit, which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed to any significant credit risk on cash.

 

Fair Value of Financial Instruments  – The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short term to maturity.  The Company’s long-term receivable resulting from the sale of Airware was discounted to its estimated fair value on the date.

 

Revenue  – The majority of the Company’s revenue is associated with a customer contract that represents an obligation to perform services that are delivered at a single point in time.  Any costs incurred prior to the period in which the services are performed to completion are deferred and recognized as cost of services in the period in which the performance obligations are completed. Since the Company’s revenue is generated from one customer contract, the Company does not have material contract assets or liabilities that fall under ASC 606. As of March 31, 2019 and 2018, 90% of the Company’s revenues was generated for performance obligations completed in the State of Arizona.

 

Intangible Assets Subject to Amortization  – Intangible assets include trade name, customer relationships, website, and intellectual property obtained through a business acquisition. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible assets acquired. Intangible assets with finite lives are amortized over their estimated useful life and are reported net of accumulated amortization, separately from goodwill.

 

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Goodwill  – Goodwill represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and intangible assets acquired. Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

 

Income Taxes  – The Company accounts for income taxes under FASB ASC 740,  Income Taxes . Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

The Company files income tax returns in the U.S. federal jurisdiction and the State of Arizona. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. All periods beginning on or after January 1, 2014 are open to examination by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain.

 

Stock-Based Compensation  – The Company follows the guidelines in FASB Codification Topic ASC 718-10 “ Compensation-Stock Compensation ”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values. 

 

Earnings (Loss) Per Share  – Basic earnings per share does not include dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. At March 31, 2019, there were 593,402 shares underlying convertible notes payable, warrants and options.

 

Recently Issued Accounting Pronouncements

 

We do not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our net results of operations, financial position, or cash flows.

 

Seasonality

 

We do not expect our sales to be impacted by seasonal demands for our products and services. Also, due to the fact we use indoor grow space, seasonality should not have any impact on our cultivation operations.

 

  25  

 

 

Item 3. Properties.

 

Currently the Company leases approximately 2,000 square feet of office space in Phoenix, Arizona, at a monthly rent of $3,200. The lease includes all utilities, was effective until May 31, 2019, and is on a month to month basis going forward.

 

The Company owns approximately 50 acres in Southern Arizona that is zoned to grow and cultivate medical marijuana flower. The Company is currently utilizing 5 acres which was acquired in May 2017 which includes a 10,000 square foot, state-of-the-art indoor manufacturing facility with 10,000 square feet of additional capacity which passed inspections to operate June 4, 2019 and will begin production immediately. The facility now totals 20,000 square-feet consisting of 8 flower rooms, just over 1,000 square-feet of nursery space, an extraction laboratory, and an infusion kitchen for increased manufacturing capabilities. On April 20, 2018, the Company entered into an agreement for the purchase of approximately 44 acres of land from an affiliate of a founding member of BSSD, its now wholly owned subsidiary. The purchase price of the property was$3,000,000, payable as follows; (i) $200,000 deposited with escrow agent as an initial earnest money deposit in April 2018, (ii) on or before February 1, 2019, the Company will deposit an additional $800,000 into escrow as additional earnest money deposit and (iii) the balance of the purchase price shall be paid via a promissory note. The earnest money amounts are non-refundable. The Company has negotiated an amendment to this agreement that will spread the $800,000 payment over the course of 4 months through June 30, 2019. As of March 31, 2019, the Company had paid a total of $400,000 which was deposited in escrow, and classified as a long-term asset on the consolidated balance sheet as of March 31, 2019. As of the date of these financial statements, a total of $600,000 has been deposited in escrow.

 

 

Item 4. Security Ownership of Certain Beneficial Owners and Management.

 

T he following tables set forth, as of June 24, 2019, certain information concerning the beneficial ownership of our capital stock by:

 

  each stockholder known by us to own beneficially 5% or more of any class of our outstanding stock; 
  each director; 
  each named executive officer; 
  all of our executive officers and directors as a group; and 
  each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of any class of our outstandin g stock. 

 

As of March 31, 2019, the Company had authorized 2,000,000,000 shares of common stock, par value $0.0001, of which there were 63,098,334 shares of common stock outstanding. As of June 24, 2019, there were 63,358,342 shares of common stock issued and outstanding.

 

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our common stock. Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of June 24, 2019 are considered outstanding and beneficially owned by the person holding the options for the purpose of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as otherwise noted, we believe the persons and entities in this table have sole voting and investing power with respect to all of the shares of our common stock beneficially owned by them, subject to community property laws, where applicable. 

 

  26  

 

Security Ownership of Certain Beneficial Owners & Management

 

Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership Percentage of Beneficial Ownership (1)  
Directors and Officers: (1)      
Bryce Skalla (2)(10) 5,503,878 8.69%  
 
Sara Gullickson (3) 2,305,000 3.64%  
 
Robert Mikkelsen(4) 0 0.00%  
 
Jeffrey Rassas (5) 1,833,349 2.89%  
       
Ronald L. Miller, Jr. (6) 32,501 0.05%  
 
Andrew Bowden (7) 5,200,000 8.21%  
 
Christopher Wolven (8) 259,615 0.41%  
 
All directors and officers as a group (6 people) 15,134,343 23.89%  
       
Beneficial Shareholders greater than 5%      
Stockbridge Enterprises LP (9)      
7377 E Doubletree Ranch Rd Suite 200 4,964,048 7.83%  
Scottsdale, AZ 85258      
Sean Dugan (10) 8,224,712 12.98%  
 
Mark Murro III (10) 6,227,044 9.83%  
 
Andrew Poirier (10) 7,978,045 12.59%  
 
Carlos Curiel (10) 4,106,924 6.48%  
 
       

 

(1) Applicable percentage of ownership is based on 63,358,342 shares of common stock outstanding on June 24, 2019. Percentage ownership is determined based on shares owned together with securities exercisable or convertible into shares of common stock within 60 days of June 24, 2019, for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of June 724, 2019, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Our common stock is our only issued and outstanding class of securities eligible to vote. Unless otherwise stated, all shareholders can be reached at mailing address 1809 E Bethany Home Rd., Phoenix, AZ 85016

(2) Bryce Skalla is the Company’s President and Director. Mr. Skalla’s beneficial ownership consists of 5,003,878 shares of restricted common stock held in his name and 500,000 shares held by a minor.

(3) Sara Gullickson is the Company’s CEO and member of the board of directors, and former President. Ms. Gullickson’s beneficial ownership consists of 2,305,000 shares which were acquired as consideration for the sale and purchase of Dispensary Permits assets on November 26, 2018.

(4) Robert Mikkelsen is the Company’s CFO, Secretary and Treasurer. His beneficial ownership includes 0 shares of restricted common stock.

(5) Jeffrey Rassas is Executive Chairman. The shares are held by Hayjour Family Limited Partnership, an entity controlled by Mr. Rassas, as such Mr. Rassas’ beneficial ownership includes: 1,788,903 shares of restricted common stock and 44,446 shares issuable upon the exercise of stock options which have vested as of the date of this report.

(6) Ronald L. Miller, Jr. is a Director of the Company. Mr. Miller’s beneficial ownership includes 30,000 shares issuable upon exercise of stock options which have vested as of the day of this report and 2,501 total shares purchased in May 2014, some of which were purchased by Windsor Westfield Management, LLC and some by Chickamauga Enterprises, L.P. Both companies are indirectly controlled by Mr. Miller. The remaining 376 shares are held directly by Mr. Miller.

(7) Andrew Bowden is a Director of the Company as of September 11, 2018. Mr. Bowden’s beneficial ownership consists of 200,000 shares purchased via private placement in March 2018 by EBAB, LLC, which is controlled by Mr. Bowden, and 5,000,000 shares purchased by Viridis Group I9 Capital LLC, an entity controlled by Mr. Bowden pursuant to the Purchase Agreement dated October 17, 2018,

(8) Christopher Wolven is Chief Operating Officer and his beneficial ownership consists of 259,615 shares of common stock.

(9) Stockbridge Enterprises LP is an Arizona limited partnership controlled by Mitchell A. Saltz, Chairman and Managing Partner.

(10) Skalla, Dugan, Murro, Poirier and Curiel were members of BSSD. On March 20, 2018, the Company closed on an Agreement and Plan of Exchange to acquire all of the membership interests of BSSD in exchange for newly issued restricted shares of the Company’s common which were distributed pro-rata to the BSSD members.

 

 

  27  

 

Item 5. Directors and Executive Officers.

 

The following table sets forth certain information regarding our current executive officers and directors as of June 24, 2019:

 

Name   Age   Position
Sara Gullickson     35     Chief Executive Officer and Director
Bobby Mikkelsen     38     Chief Financial Officer, Secretary, Treasurer
Bryce Skalla     38     President and Director
Jeffrey Rassas     57     Executive Chairman
Chris Wolven     37     Chief Operating Officer
Ronald L. Miller, Jr.     55     Director
Andrew Bowden     31     Director

 

Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board. All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of Directors. Our Board of Directors appoints officers annually and each executive officer serves at the discretion of our Board of Directors.

 

Except Mr. Miller, as set forth in his biography below, none of the directors held any directorships during the past five years in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such act, or of any company registered as an investment company under the Investment Company Act of 1940.

 

Director and Officer Biographical Information

 

Sara Gullickson

 

Chief Executive Officer of Item 9 Labs Corp, Sara Gullickson is also the Founder and CEO of Dispensary Permits, a nationally recognized cannabis consulting firm that’ assets were acquired by Item 9 Labs on November 26, 2018. Established in 2010, Dispensary Permits has secured dozens of cannabis license wins across 13 competitive state markets. One of the nation’s leading consultants for the industry, Gullickson was named one of Herb Magazine’s Top Ten Cannabis Entrepreneurs and Phoenix Business Journal’s Top Forty Under 40 in 2018.  She has operational and dispensary opening experience from the East to the West Coast. This year, she was approved for provisional medical cannabis cultivation and processing license for Strive Wellness of Nevada, LLC, as part owner, Gullickson will serve as Chief Operating Officer of this new Nevada expansion company.

 

An industry spokesperson, Gullickson headlined the cannabis tracks at the 2017 Real Estate Wealth Expo in Los Angeles and 2018 Real Estate Wealth Expo in Toronto. Gullickson has also presented at MJBizCon, World Medical Cannabis Conference & Expo, Dispensary Next, Cannabis World Congress and Business Expo, MJAC Investorshub International Conference, Women Grow Leadership Summit, and other national business events. Gullickson also assists new states and countries with their government processes, and has advocated for improved medical cannabis policy at Lobby Days in Washington, D.C, and at the Phoenix Capitol. Gullickson has also worked with clients in South America, Europe, and Australasia to develop their hemp and cannabis programs.

 

Gullickson obtained a Bachelor of Arts in Communication from Arizona State University and a Masters in Business Administration, Marketing, from Keller Graduate School.

 

Bobby Mikkelsen

 

Robert E. Mikkelsen is a Certified Public Accountant (CPA) in the State of Arizona and received his Bachelors degree in accounting in 2004 from the Eller College of Business, University of Arizona. After graduating from The Eller College of Business, Mr. Mikkelsen went on to work as an auditor for Henry & Horne, LLP in Arizona. Moving up the ranks quickly to Audit Manager, Mr. Mikkelsen utilized his analytical thinking and problem-solving skills to implement effective and efficient changes to the audit process as well as add value to the clients he served. Mr. Mikkelsen has worked with a client base that is diverse in both size and industry, working with small non-profits, large government agencies, and medium sized business, including those in health care, mental health, and pharmaceutical industries. After 11 years, in January 2016, Mr. Mikkelsen started his own firm, Mikkelsen CPA, LLC which focuses on serving clients in various industries with accounting, tax, and CFO Solutions. Mr. Mikkelsen is a member of the American Institute of Certified Public Accountants.

 

  28  

 

Bryce Skalla

 

As President of Item 9 Labs Corp, Bryce Skalla manages the Company’s day-to-day business operations. Prior to the Airware merger, Mr. Skalla was the co-founder & CEO of Item 9 Labs. As one of the founders and architects of Item 9’s business model, Mr. Skalla was instrumental in establishing Item 9 Labs as one of Arizona’s leading cannabis consulting companies and producers of high quality medical marijuana flower and products over the course of three years. During that period, he designed, developed, and capitalized on strategic opportunities, taking Item 9 from a 1,000 square-foot Caregiver Cultivation warehouse into the highly regulated Arizona Medical Marijuana industry with fifty acres zoned for cultivation.

 

Previously, Mr. Skalla operated a professional consulting firm focused around business solutions, from advertising and marketing services, to business structure and development. Mr. Skalla’s decision to enter the industry followed a diagnosis with a serious medical condition where he received Interferon, the most accepted medical treatment at the time. During this long and arduous treatment, he experienced firsthand the benefits of medical marijuana, which enabled him to successfully complete his medical regimen. Since this life changing experience, Mr. Skalla has dedicated himself to the normalizing and furthering of the education and use of medical cannabis.

 

Mr. Skalla obtained a certification in psychiatric rehabilitation from the Association of Psychiatric Rehabilitation Practitioners in 2008.

 

Jeffrey Rassás

 

Mr. Rassás serves as Executive Chairman of Item 9 Labs Corp. where he previously served as Chief Strategy Officer since April, 2018. Mr. Rassás is charged with guiding the Company’s strategic growth and advising the CEO and management team. Mr. Rassás is a twenty-year veteran of entrepreneurial ventures and business management. He has extensive experience in funding, leading, developing and performing corporate turnarounds for numerous private and public start-up ventures, across a variety of industries. Mr. Rassás served as CEO, President and Chairman of the Board of Airware Labs Corp since December 2012 Mr. Rassás served as CEO and Chairman of the Board of YouChange Holdings Corp, a publicly traded company on the OTC:QB trading symbol ticker YCNG. Mr. Rassás served as CEO of Global Alerts, a holding company for Earth911.com, Amberalert.com and Pets911.com, later merging with YouChange Holdings Corp and acquiring Quest Recycling to form Quest Resource Holdings Corporation now trading on NASDAQ under the ticker symbol, QRHC

 

Prior to these executive-level posts, Mr. Rassás was Co-chairman and CEO of ImproveNet, Inc., which he acquired through a merger in 2002, and later sold to IAC/InterActiveCorp (IACI). In addition, Mr. Rassás served as founder, CEO, and Chairman of the Board of EBIZ Enterprises, a publicly traded Linux solutions provider.

 

Chris Wolven

 

Mr. Wolven was with Fox Restaurant Concepts for over 6 years, where he was the Brand Chef in charge of 5,000 employees and $100M in annual revenues for multiple restaurant concepts nationwide. Wolven comes from a fine-dining background and landed in Culinary Dropout at The Yard (another Fox Concept Restaurant) for its opening year before transitioning over to open The Henry, a two story restaurant, where Fox Concepts corporate office is located. The Henry also houses Fox Restaurant’s new Test Kitchen where chefs of the other 14 restaurants learn and experiment with new recipes in the test kitchen.

 

Ronald L. Miller, Jr. 

 

Mr. Miller has served as Vice President, Chief Financial Officer, and Secretary of THAT’S EATERTAINMENT CORP., or TEC, since December 2015. Mr. Miller has been a principal of a predecessor and current subsidiary of TEC since February 2014 and has served as its Chief Financial Officer since April 2015. Mr. Miller also has served as a director and Chairman of the Audit Committee of Quest Resource Holding Corporation since October 2012. Quest is publicly traded on Nasdaq under the ticker symbol QRHC. Mr. Miller served as a director of one of Quest’s predecessors, Earth911, from July 2010 to October 2012. Mr. Miller served as Chief Executive Officer of Southwest Capital Partners , LLC, an investment banking firm, from September 2009 to March 2015. He served as a Managing Director of CKS Securities LLC, an investment banking firm, from February 2010 to December 2011. Mr. Miller served as Vice Chairman of Miller Capital Markets, LLC, a Scottsdale, Arizona headquartered boutique investment banking firm from May 2009 to August 2009. He served as Chief Executive Officer of Alare Capital Partners, LLC, a Scottsdale-based investment banking and strategic advisory firm, from September 2005 to May 2009. From 2001 to 2005, Mr. Miller served as a Managing Director of The Seidler Companies Incorporated, an investment banking firm and member of the NYSE. Mr. Miller served from 1998 to 2001 as a Senior Vice President and was instrumental in the opening of the Phoenix, Arizona office of Wells Fargo Van Kasper. From 1994 to 1998, Mr. Miller served as Senior Vice President of Imperial Capital, and from 1993 to 1994, was associated with the Corporate Finance Department of Ernst & Young. Mr. Miller began his career in the M&A department of PaineWebber, Inc.

 

  29  

 

Andrew Bowden

 

Andrew Bowden is Co-Founder and CEO of Viridis, dba Bowden Investment Group , a strategic partner of the Company. Andrew Bowden co-founded Rocky Range Investments, a real estate company centered on buying and remodeling luxury condos in Colorado and Arizona, and VIRIDIS Group, with his father Doug Bowden in January of 2013. As a commercial real estate investor and developer, he spearheaded the first net-zero energy multifamily apartment complex in Arizona as well as the first off-grid multifamily home in the United States. He is also co-owner of a Cross Fit gym in Phoenix, Arizona. Additionally, Andrew is an active member of the Suns Charities 88 young professionals group. Andrew received his Bachelor degree from South Dakota State University in Brookings, SD where he also worked as a flight instructor where he instructed students anywhere from their Private pilot license to Certified Flight Instructors Certificate. In his own life Andrew saw first-hand how medical cannabis greatly reduced the side effects his mother experienced as she went through breast cancer treatment.

 

Identification of Significant Employees

 

We have no significant employees other than our officers and directors.

 

Family Relationship

 

We currently do not have any officers or directors of our Company who are related to each other, with the exception of Mr. Wolven who is the son in law of Mr. Rassas.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

(1) had a petition under the Federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

  

(2) has been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

(3) has been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

 

(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

 

(ii) Engaging in any type of business practice; or

 

(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

 

(4) has been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (3)(i) above, or to be associated with persons engaged in any such activity;

 

(5) has been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;

 

(6) has been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

 

(7) has been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

 

(i) Any Federal or State securities or commodities law or regulation; or

 

(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

 

(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

(8) has been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Audit Committee and Audit Committee Financial Expert

 

On June 21, 2019, the Company established an audit committee and adopted its audit committee charter. The Company does have an audit committee financial expert (as defined in Item 407 of Regulation S-K) serving on its Board of Directors. All current members of the Board of Directors have sufficient financial expertise for overseeing financial reporting responsibilities.

 

The Company's audit committee consists of two independent members of the board of directors. The audit committee's duties include, but are not limited to, recommending to the Company's board of directors the engagement of an independent registered public accounting firm to audit the Company's financial statements and to review the Company's accounting and auditing principles. The audit committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times be composed exclusively of directors who are, in the opinion of the Company's board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.

 

Code of Conduct and Ethics

 

On June 21, 2019, the Company's Board of Directors established and adopted a Code of Conduct and Ethics (the "Code") that applies to our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer.

 

 

  30  

 

Item 6. Executive Compensation.

 

Compensation of Officers Summary Compensation Table

 

The following tables set forth certain information about compensation paid, earned or accrued for services by our executive officers in the fiscal years ended September 30, 2018, and September 30, 2017.

 

A summary of cash and other compensation paid in accordance with management consulting contracts for our executives and directors for the most recent two years is as follows:

 

Name and Principal                   Stock Awards   Option Awards   Non-Equity Incentive Plan Compensation   Nonqualified Deferred Compensation Earnings   All other compensation   Total
Position   Title   Year   Salary ($)   Bonus ($)   ($)   ($)   ($)   ($)   ($)   ($)
(a)   (b)   (c)   (d)   (e)   (f)(9)   (g)   (h)   (i)   (j)
Sara Gullickson(1)   CEO and     2018     $ 31,250     $ 0     $ 0     $ 0       0       0       0     $ 31,250  
  Director     2017     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
Robert Mikkelsen(2)   CFO, Secretary     2018     $ 9,998     $ 0     $ 0     $ 0       0       0       0     $ 9,998  
    and Treasurer     2017     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
Bryce Skalla (3)   President and     2018     $ 66,773     $ 0     $ 0     $ 9,054       0       0       0     $ 75,827  
    Director     2017     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
Jeffrey Rassas (4)   Chairman     2018     $ 149,045     $ 0     $ 0     $ 9,054       0       0       0     $ 158,099  
     Former CSO     2017     $ 30,000     $ 0     $ 0     $ 0       0       0       0     $ 30,000  
Chris Wolven(5)   COO     2018     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
          2017     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
Ronald L. Miller Jr.(6)   Director     2018     $ 0     $ 0     $ 0     $ 9,054       0       0       0     $ 9,054  
          2017     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
Andrew Bowden (7)   Director     2018     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
          2017     $ 0     $ 0     $ 0     $ 0       0       0       0     $ 0  
Jessica Smith (8)   Former CFO     2018     $ 57,500     $ 0     $ 0     $ 0       0       0       0     $ 57,500  
          2017     $ 30,000     $ 0     $ 0     $ 0       0       0       0     $ 30,000  

 

 

Notes to Summary Compensation Table:

 

  (1) On November 26, 2018, the Company entered into an Employment Agreement with Gullickson for a term of 3 years at a base salary of $200,000 per year with incentive and performance bonuses. This agreement supersedes and replaces the prior consulting agreement with Ms. Gullickson in which Sara was paid under during the 2018 fiscal year
     
  (2) On October 15, 2018, Mikkelsen accepted the position of CFO with an annual salary of $130,000. Mikkelsen was compensated in 2018 for services provided to the company under a consulting agreement.
     
  (3) On March 26, 2018, Skalla was accepted the position of CEO then moved to the position of President on November 26, 2018. Skalla was also granted $7,500 in stock options on May 8, 2018.
     
  (4) On July 16, 2013, the Company entered into a Severance Agreement (the “Agreement”) with Jeffrey Rassas, the Company’s Chief Executive Officer (“Mr. Rassas”) pursuant to which Mr. Rassas will be entitled to the following severance benefits: (i) the Company shall pay to Mr. Rassas his base salary for a period of 12 months following termination without cause; (ii) Mr. Rassas shall be paid any earned and unpaid bonus due; and, (iii) and all unvested stock-based compensation held by Mr. Rassas shall vest as of the date of termination. The preceding description of the Agreement is a brief summary of its terms and does not purport to be complete, and is qualified in its entirety by reference to the Severance Agreement, a copy of which was filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on July 16, 2013 and is incorporated herein by reference. Rassas was also granted $7,500 in stock options on May 8, 2018.
     
  (5) In January 2019, Wolven accepted the position of COO with an annual salary of $150,000. Wolven’s compensation includes $25,000 in stock options vesting every 90 days
     
  (6) On May 8, 2018, Miller was granted stock options totaling $7,500. Miller received no cash compensation during the fiscal year 2018, though beginning in January 2019 receives $2,000 for service on the board.
     
 

(7)

Bowden received no cash compensation during fiscal year 2018, though beginning in January 2019 receives $2,000 for services on the board.

 

  (8)

On September 20, 2012, the Company entered into an agreement with a company owned by its former CFO for her services as CFO on a contract basis in exchange for a fixed monthly fee; Ms. Smith resigned effective October 15, 2018.

 

  (9)

On May 8, 2018, the Company granted 22,500 stock options to board members. The options are exercisable at $2.40 per share with a ten year term. The options will vest equally over three years unless there is a change of control of the Company. The Company has calculated the estimated fair market value of the options granted using the Black-Scholes Option Pricing model and the following assumptions: stock price at valuation, $2.40, expected term of 10 years, exercise price of $2.40, a risk free interest rate of 1.41%, a dividend yield of 2.99% and a volatility of 34.72%.

 

 

  31  

 

Consulting Agreements, Employment Agreements and Other Arrangements

 

Other than the foregoing as set forth in the Notes to Summary Compensation Table, the Company has no agreement that provides for payment to executive officers at, following, or in connection with the resignation, retirement or other termination, or a change in control of Company or a change in any executive officer's responsibilities following a change in control.

 

Outstanding Equity Awards at Fiscal Year-End

 

The table below summarizes the outstanding equity awards to our executive officers and directors as of March 31, 2019.

 

OPTION AWARDS
Name  

Number of Common Shares Underlying Unexercised Options

(#)

Exercisable

 

Number of Common Shares Underlying Unexercised Options

(#)

Unexercisable

  Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)  

Option Exercise Price

($)

  Option Expiration Date
Sara Gullickson   nil   nil   nil    
Total   nil   nil   nil    
Robert Mikkelsen   nil   nil   nil    
Total   nil   nil   nil    
Bryce Skalla     0       7,500     nil   $ 2.40       5/8/2028  
Total     nil       7,500     nil     —         —    
Jeffrey Rassas     33,334       16,667     nil   $ 6.00       1/25/2023  
      5,556       11,112     nil   $ 2.20       10/4/2023  
      5,556       11,112     nil   $ 5.00       9/5/2024  
      0       7,500     nil   $ 2.40       5/8/2028  
Total     44,446       38,889     nil     —         —    
Chris Wolven     nil       nil     nil     —         —    
Total     nil       nil     nil     —         —    
Ronald L. Miller, Jr.     nil       7,500     nil   $ 2.40       5/8/2028  
Total     nil       7,500     nil     —         —    
Andrew Boden     nil       nil     nil     —         —    
Total     nil       nil     nil     —         —    

 

There are 249,991 total options outstanding as of March 31, 2019

 

Stock Option Plan and other Employee Benefits Plans

 

On June 21, 2019, our board and shareholders voted to approve the 2019 Equity Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares. We have 6,000,000 shares available for issuance under the 2019 Plan.

 

Compensation of Directors

 

As of September 30, 2018, there is no cash compensation paid to directors for their service on our board of directors, however, beginning in January 2019 independent board members receive $2,000 per month for service on the board.

 

Compensation Committee

 

On June 21, 2019, the Company's Board of Directors established a compensation committee of the Board of Directors and adopted a Compensation Committee Charter. The Compensation Committee is made up of three members, two of which are independent members of the Board of Directors, each of whom will serve for a term of one year. The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities related to the Company's compensation structure and compensation, including equity compensation, if any, paid by the Company.

 

  32  

 

Code of Ethics

 

Our Board of Directors adopted a Code of Conduct and Ethics (the "Code") on June 21, 2019, which applies to our officers, directors and employe es. The purpose of the Code is to deter wrongdoing and to promote:

 

  honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
  full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission ("SEC") or NASDAQ, and in other public communications made by the Company;
  compliance with applicable laws and governmental rules and regulations;
  the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and
  accountability for adherence to the Code.

 

A copy of the Code is filed herewith as Exhibit 14.1 and is incorporated herein by reference.

 

 

  33  

 

Item 7. Certain Relationships and Related Transactions, and Director Independence.

 

Director Independence

 

For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

According to the NASDAQ definition, Sara Gullickson, Bryce Skalla and Jeffrey Rassas are not independent directors because each is also an executive officer of the Company. According to the NASDAQ definition, Ronald L. Miller, Jr. and Andrew Bowden are independent directors. All current directors are or may become in the future shareholders of the Company.

 

Related Party Transactions

 

March 20, 2018, the Company issued 40,355,771 post-split shares of common stock to the members of BSSD for their membership interests.

 

The Company has entered into an agreement as of April 20, 2018 for the purchase of land. The land owner is one of the original members of BSSD and a current employee of the Company.

 

The Company has entered into a Loan and Revenue Participation Agreement and Promissory Note with Viridis. The member of Viridis was elected to the Company’s board of directors on December 21, 2018.

 

As discussed in the Description of the Business section of Note 1 and in Note 2 of the financial statement disclosures for the period ended March 31, 2019, the Company is involved in transactions with companies that are owned in whole, or in part by the Company’s CEO, Sara Gullickson.

 

Other than the foregoing, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of the Company’s outstanding shares of its Common Stock, nor any associate or affiliate of such persons or companies, has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed transaction, which has materially affected or will affect the Company.

 

With regard to any future related party transaction, we plan to fully disclose any and all related party transactions in the following manner:

 

  Disclosing such transactions in reports where required;

 

  Disclosing in any and all filings with the SEC, where required;

 

  Obtaining disinterested directors consent; and

 

  Obtaining shareholder consent where required.

 

Review, Approval or Ratification of Transactions with Related Persons

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

Item 8. Legal Proceedings.

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, which may materially affect us.

 

 

  34  

 

Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

 

Market Information

 

Our common stock is currently quoted on the OTC Bulletin Board. Our common stock has been quoted on the OTC Bulletin Board since November 3, 2011 under the symbol “CDYY.OB.” On November 9, 2012, our symbol was changed to “AIRW.OB” to reflect the Company’s name change. On December 21, 2016 we filed a Form 15-12G and down listed to the OTC Pink sheets. On April 27, 2018, the Company’s ticker symbol was changed to “INLB”. Because we are quoted on the OTC Markets , our common stock may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if it were listed on a national securities exchange.

 

The following table sets forth the high and low bid prices for our Common Stock per quarter as reported by the OTC Bulletin Board for the quarterly periods indicated below based on our fiscal year end September 30. Our common stock began trading in 2012. These prices represent quotations between dealers without adjustment for retail mark-up, markdown or commission and may not represent actual transactions.

 

Fiscal Quarter   High   Low
First Quarter (Oct. 1, 2016 – Dec. 31, 2016)   $ 2.00     $ 0.642  
Second Quarter (Jan. 1, 2017 – Mar. 31, 2017)     1.58       0. 79  
Third Quarter (Apr. 1, 2017 – Jun. 30, 2017)     1.40       0.54  
Fourth Quarter (Jul. 1, 2017 – Sept. 30, 2017)     0.70       0.50  

 

First Quarter (Oct. 1, 2017 – Dec. 31, 2017)   $ 3.40     $ 0.252  
Second Quarter (Jan. 1, 2018 – Mar. 31, 2018)     2.80       1.80  
Third Quarter (Apr. 1, 2018 – Jun. 30, 2018)     4.20       2.20  
Fourth Quarter (Jul. 1, 2018 – Sept. 30, 2018)     3.00       1.65  

 

First Quarter (Oct. 1, 2018 – Dec. 31, 2018)   $ 7.00     $ 1.50  
Second Quarter (Jan. 1, 2019 – Mar. 31, 2019)   $ 6.00     $ 3.50  

 

 

Record Holders

 

As of June 24, 2019, there were 63,358,342 common shares issued and outstanding, which were held by 286 stockholders of record.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock nor do we anticipate paying any in the foreseeable future. Furthermore, we expect to retain any future earnings to finance our operations and expansion. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

On June 21, 2019, our shareholders voted to approve the 2019 Equity Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan, the maximum aggregate number of Shares available under the Plan through awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares.. We have 6,000,000 shares available for issuance under the 2019 Plan.

 

 

  35  

 

Item 10. Recent Sales of Unregistered Securities.

 

The following information represents securities sold by the Company within the past three years which were not registered under the Securities Act. Included are sales of reacquired securities, as well as new issues, securities issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities.

 

Date of Transaction Transaction type (e.g. new issuance, cancellation, shares returned to treasury)  Number of Shares Issued (or cancelled) Class of Securities Value of shares issued ($/per share) at Issuance Were the shares issued at a discount to market price at the time of issuance? (Yes/No) Individual/ Entity Shares were issued to (entities must have individual with voting / investment control disclosed). Reason for share issuance (e.g. for cash or debt conversion) OR Nature of Services Provided (if applicable)  
               
  Shares outstanding as of 6/21/19     63,358,342.00          
  Shares issued subsequent to 3/31/19          203,335.00          
               
05/11/19 New            35,000.00 Common  $                 1.50 Yes JLS Ventures LLC Consulting Service
04/26/19 New            33,334.00 Common  $                 1.50 Yes Private Investor Cash
04/26/19 New            33,334.00 Common  $                 1.50 Yes Private Investor Cash
04/11/19 New            35,000.00 Common  $                 1.50 Yes JLS Ventures LLC Consulting Service
04/05/19 New            66,667.00 Common  $                 1.50 Yes Private Investor Cash
               
  Shares outstanding as of 3/31/19     63,155,007.00          
  Shares issued 1/1/19-3/31/19       2,258,342.00          
               
03/29/19 New          133,335.00 Common  $                 1.50 Yes Private Investor Cash
03/29/19 New            33,334.00 Common  $                 1.50 Yes Private Investor Cash
03/11/19 New            35,000.00 Common  $                 1.00 Yes JLS Ventures LLC Consulting Service
03/01/19 New            23,529.00 Common  $                 4.25 No Kyle Jennings Employee Incentive
03/01/19 New            23,529.00 Common  $                 4.25 No RC Giant LLC Consulting Service
01/29/19 New       2,000,000.00 Common  $                 1.00 Yes Viridis Group I9 Capital LLC (Andrew Bowden) Cash
01/07/19 New              9,615.00 Common  $                 2.60 No Christopher Wolven Employee Incentive
               
  Shares outstanding as of 12/31/18     60,896,665.00          
  Shares issued 10/1/18-12/31/18       6,130,000.00          
               
12/17/18 New            15,000.00 Common  $                 6.00 No Axiom Group Consulting Services
12/17/18 New          100,000.00 Common  $                 1.50 Yes Private Investor Cash
11/26/18 New            15,000.00 Common  $                 2.90 No Axium Group Consulting Services
11/26/18 New       3,000,000.00 Common  $                 1.00 Yes Viridis Group I9 Capital LLC Cash
11/26/18 New       3,000,000.00 Common  $                 2.50 No Sara Gullickson Acquisition
               
  Shares outstanding as of 9/30/18     54,766,665.00          
  Shares issued 7/1/18-9/30/18            33,356.00          
               
08/07/18 New            33,356.00 Common  $                 2.50 No Sara Gullickson Consulting Services
               
  Shares outstanding as of 6/30/18     54,733,309.00          
  Shares issued 4/1/18-6/30/18       1,511,600.00          
               
06/26/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New              7,500.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New              2,500.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            20,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            82,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            15,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            35,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            11,600.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            40,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
06/26/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/23/18 New            38,000.00 Common  $                 1.00 Yes Private Investor Cash
05/23/18 New            40,000.00 Common  $                 1.00 Yes Private Investor Cash
05/23/18 New            15,000.00 Common  $                 1.00 Yes Private Investor Cash
05/23/18 New            30,000.00 Common  $                 1.00 Yes Private Investor Cash
05/23/18 New            25,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            15,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            15,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            20,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            15,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            25,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New          200,000.00 Common  $                 1.00 Yes Ebab LLC (Andrew Bowden) Cash
05/17/18 New          100,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New          100,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            25,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            50,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            50,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            20,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            30,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            25,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            20,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
05/17/18 New            10,000.00 Common  $                 1.00 Yes Private Investor Cash
               
  Shares outstanding as of 3/31/18     53,221,709.00          
  Shares issued 10/1/18-3/31/18     45,702,506.00          
               
03/29/18 New       3,710,000.00 Common  $                 0.20 Yes Private Investor Debt Conversion
03/29/18 New       1,150,000.00 Common  $                 0.20 Yes Private Investor Debt Conversion
03/29/18 New            50,000.00 Common  $                 0.20 Yes Private Investor Debt Conversion
03/29/18 New            50,000.00 Common  $                 0.20 Yes Jessica Smith Debt Conversion
03/29/18 New            50,000.00 Common  $                 0.20 Yes Private Investor Debt Conversion
03/29/18 New            50,000.00 Common  $                 0.20 Yes Private Investor Debt Conversion
03/29/18 New            84,334.00 Common  $                 0.20 Yes Stockbridge Enterprises LP Debt Conversion
03/29/18 New       8,474,712.00 Common  $                    -    Yes Bruce Skalla Merger
03/29/18 New       8,474,712.00 Common  $                    -    Yes Mark Murro III Merger
03/29/18 New       8,474,712.00 Common  $                    -    Yes Patrick Sean Dugan Merger
03/29/18 New       8,474,712.00 Common  $                    -    Yes Andrew Poirier Merger
03/29/18 New       6,456,924.00 Common  $                    -    Yes Carlos Curiel Merger
01/31/18 New            50,600.00 Common  $                 0.20 Yes Stockbridge Enterprises LP Debt Conversion
01/31/18 New            50,600.00 Common  $                 0.20 Yes Stockbridge Enterprises LP Debt Conversion
01/31/18 New            50,600.00 Common  $                 0.20 Yes Stockbridge Enterprises LP Debt Conversion
01/31/18 New            50,600.00 Common  $                 0.20 Yes Stockbridge Enterprises LP Debt Conversion
               
  Shares outstanding as of 12/31/17       7,519,203.00          
  Shares issued 10/1/17-12/31/17                        -             
               
  Shares outstanding as of 9/30/17       7,519,203.00          
  Shares issued 7/1/17-9/30/17            15,180.00          
               
09/28/17 New              5,060.00 Common  $                 1.00 Yes Stockbridge Enterprises LP Debt Conversion
09/28/17 New              5,060.00 Common  $                 1.00 Yes Stockbridge Enterprises LP Debt Conversion
09/28/17 New              5,060.00 Common  $                 1.00 Yes Stockbridge Enterprises LP Debt Conversion
               
  Shares outstanding as of 6/30/17       7,504,023.00          
  Shares issued 4/1/17-6/30/17            25,300.00          
               
06/30/17 New            25,300.00 Common  $                 1.00 Yes Stockbridge Enterprises LP Debt Conversion
               
  Shares outstanding as of 3/31/17       7,478,723.00          
  Shares issued 1/1/17-3/31/17            66,166.00          
               
01/31/17 New            55,300.00 Common  $                 1.00 Yes Stockbridge Enterprises LP Debt Conversion
01/31/17 New              5,433.00 Common  $                 1.60 No Private Investor Consulting Services
01/31/17 New              5,433.00 Common  $                 1.60 No Private Investor Consulting Services
               
  Shares outstanding as of 12/31/16       7,412,557.00          
               
  Shares issued 10/1/16-12/31/16                        -             
               
  Shares outstanding as of 9/30/16       7,412,557.00          

 

 

The securities described above issued upon conversion of debt were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933 relying on Section 3(a)(9) of the Securities Act of 1933 as the shares were issued in exchange for debt securities of the Company held by the lender, there was no additional consideration for the exchange, and there was no remuneration for the solicitation of the exchange. The other issuances described above were issued or will be issued pursuant to exemptions from the registration requirements of the Securities Act of 1933 relying on Section 4(a)(2) of the Securities Act of 1933 and/or upon Rule 506(b) of Regulation D promulgated under the Securities Act of 1933 as there was no general solicitation, and the transactions did not involve a public offering.

 

 

  36  

 

Item 11. Description of Registrant’s Securities to be Registered.

 

Common Stock

 

This Form 10 relates to our common stock, $0.0001 par value per share (the “Common Stock”). We are authorized to issue 2,000,000,000 shares of Common Stock. As of March 31, 2019, there were 63,155,007 shares of Common Stock issued and outstanding. As of June 24, 2019 there were 63, 358,342 shares of common stock issued and outstanding.

 

The holders of our Common Stock have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by our board of directors. Holders of Common Stock are also entitled to share ratably in all of our assets available for distribution to holders of Common Stock upon liquidation, dissolution or winding up of the affairs.

  

The holders of shares of our Common Stock do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose and in such event, the holders of the remaining shares will not be able to elect any of our directors. The holders of 50% percent of the outstanding Common Stock constitute a quorum at any meeting of shareholders, and the vote by the holders of a majority of the outstanding shares or a majority of the shareholders at a meeting at which quorum exists are required to effect certain fundamental corporate changes, such as liquidation, merger or amendment of our articles of incorporation.

 

Holders of our Common Stock may resell their shares of Common Stock, pursuant to Rule 144 under the Securities Act (“Rule 144”), one year following the date of acquisition of such securities from the Company until such time that the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. Holders of our Common Stock may resell their shares of Common Stock, pursuant to Rule 144 six months following the date of acquisition of such securities from the Company or an affiliate of the Company after the Company has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, for a period of at least 90 days immediately before such sale, and has filed all required reports under the Exchange Act (other than reports on Form 8-K) during the preceding 12 months (or such shorter period as the Company was required to file such reports). If the condition set forth above relating to the Company having filed all required reports under the Exchange Act is not satisfied, holders of our Common Stock may resell their shares of Common Stock, pursuant to Rule 144, one year following the acquisition of such securities from the Company or an affiliate of the Company.

 

Shares of our Common Stock are registered at the office of the Company and are transferable at such office by the registered holder (or duly authorized attorney) upon surrender of the Common Stock certificate, properly endorsed. No transfer shall be registered unless the Company is satisfied that such transfer will not result in a violation of any applicable federal or state securities laws.

 

Convertible Instruments

 

The following is a description of the material terms of our convertible instruments which remain outstanding as of March 31, 2019:

 

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”) in which Viridis has agreed to loan the Company up to $2.7 million for the expansion of the Company’s Arizona and Nevada properties (see Note 11). As of September 30, 2018, the Company has received $1,500,000 of proceeds from Viridis in the form of a promissory note. The $1,500,000 proceeds were utilized to acquire a 20% ownership in Strive Management, LLC as described in Notes 1 and 8. In exchange for the loan, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from Nevada operations, until the loan is repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan will commence 90 days after the Nevada operation begins earning revenue. Parties acknowledge that the Company is expected to own only 51% of the Nevada operations, and therefore Viridis’ revenue participation is limited to the Company’s interest.

 

The Company has one convertible note payable with principal balances totaling $20,000 which was due in August 2012, are unsecured, carry an interest rate of 8% and are convertible to common stock at $.50 per share.

 

Dividends

 

We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretion of our Board of Directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

Stock Transfer Agent

 

Our transfer agent is Nevada Agency and Transfer Company, Inc., 50 West Liberty Street, Suite 880 Reno Nevada 89501.

 

 

  37  

 

Item 12. Indemnification of Directors and Officers.

 

Our Bylaws provide that to the fullest extent permitted by Delaware law the Company shall indemnify our Directors and officers against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. In general, our officers and directors may be indemnified with respect to actions taken in good faith and in a manner that they reasonably believed to be in the best interest of the Company, and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful.

 

The indemnification provisions in our bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders.  In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.  We believe that the indemnification provisions in our Certificate of Incorporation, as amended, are necessary to attract and retain qualified persons as Directors and officers.

 

The above-described provisions relating to the exclusion of liability and indemnification of directors and officers are sufficiently broad to permit the indemnification of such persons in certain circumstances against liabilities arising under the Securities Act.

 

Regarding indemnification for liabilities arising under the Securities Act, which may be permitted to directors or officers under Delaware law, we are informed that, in the opinion of the SEC, such indemnification is against public policy, as expressed in the Securities Act and is, therefore, unenforceable.

 

We have not entered into any agreements with our directors and executive officers that require us to indemnify these persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that the person is or was a director or officer of our Company or any of our affiliated enterprises.

 

We do not maintain any policy of directors’ and officers’ liability insurance that insures its directors and officers against the cost of defense, settlement or payment of a judgment under any circumstances.

 

 

Item 13. Financial Statements and Supplementary Data.

 

The information required by this item may be found beginning on page F-1 of this Registration Statement and are incorporated herein by reference.

 

 

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

We have had no disagreements with our independent auditors on accounting or financial disclosures.

 

 

  38  

 

Item 15. Financial Statements and Exhibits.

 

(a) Financial Statements

 

Financial Statements:

 

For the Years Ended September 30, 2018 and 2017   Page  
       
Report of Independent Registered Public Accounting Firm   F-1  
Consolidated Balance Sheets as of September 30, 2018 and 2017   F-2  
Consolidated Statements of Operations for the years ended September 30, 2018 and 2017   F-3  
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended September 30, 2018 and 2017   F-4  
Consolidated Statement of Cash Flows for the years ended September 30, 2018 and 2017   F-5  
Notes to Consolidated Financial Statements   F-6  
       
For the Three Months Ended March 31, 2019      
       
Report of Independent Registered Public Accounting Firm   F-16  
Consolidated Balance Sheets at March 31, 2019 (unaudited), and September 30, 2018   F-17  
Consolidated Statement of Operations for the three and six months ended March 31, 2019, and March 31, 2018 (unaudited)   F-18  
Consolidated Statement of Cash Flows for the six months ended March 31, 2019, and March 31, 2018 (unaudited)   F-19  
Notes to Financial Statements (Unaudited) 
  F-20  

 

 

(b) Exhibits.

 

See the Exhibit Index attached hereto which is incorporated by reference.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

June 26, 2019
Item 9 Labs Corp.
     
  By:      /s/ Robert Mikkelson
  Name: Robert Mikkelson
  Title: Chief Financial Officer (Principal Accounting Officer)
       

  39  

 

EXHIBIT INDEX

 

 

Exhibit        
Number   Description of Exhibit    
3.01a   Articles of Incorporation dated June 15, 2010   Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
3.01b   Certificate of Amendment to Articles of Incorporation dated October 22, 2012   Filed with the SEC on November 13, 2012 as part of our Current Report on Form 8-K
3.01c   Certificate of Amendment to Articles of Incorporation dated March 15, 2018   Filed herewith
3.01d   Certificate of Amendment to Articles of Incorporation dated March 19, 2018   Filed herewith
3.01e   Certificate of Amendment to Articles of Incorporation dated April 3, 2018   Filed herewith
3.01f   Certificate of Amendment to Articles of Incorporation dated October  9, 2018   Filed herewith
3.02   Bylaws   Filed with the SEC on May 12, 2011 as part of our Registration Statement on Form S-1/A.
4.1   2019 Equity Incentive Plan   Filed herewith
10.03   Share Exchange Agreement between Crown Dynamics Corp. and Airware Dated March 20, 2012   Filed with the SEC on March 26, 2012 as part of our current report on Form 8-K.
10.04   Agreement and Plan of Exchange   between Item 9 Labs Corp. fka Airware and  BSSD Group, LLC dated March 20, 2018   Filed herewith
10.05   Purchase Agreement between Sidewinder Dairy, Inc. and the Company  dated April 20, 2018   Filed herewith
10.6   Asset Purchase Agreement between Item 9 Labs Corp. and AZ DP Consulting, LLC dated November 26, 2018   Filed herewith
10.7   Loan and Revenue Participation Agreement between Item 9 Labs Corp. and Viridis Group I9 Capital LLC dated September 13, 2018   Filed herewith
10.8   Severance Agreement between Airware Labs Corp and Jeffrey Rassas, effective July 16, 2013   Filed with the SEC on July 19, 2013 as part of our Current Report on Form 8-K.
10.9   Employment Agreement with Sara Gullickson dated November 26, 2018   Filed herewith.
14.1         Code of Ethics         Filed herewith.
21         Subsidiaries       Filed herewith.
             
99.1   Audit Committee Charter   Filed herewith.
99.2   Compensation Committee Charter   Filed herewith.
99.3   Nominations and Governance Committee Charter   Filed herewith.

 

  40  

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and
Stockholders of Item 9 Labs. Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets Item 9 Labs Corp and subsidiary (the Company) as of September 30, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended September 30, 2018 and period from May 2, 2017 (inception) to September 30, 2017, and the related financial statement footnotes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017 and the results of its operations and its cash flows for the year ended September 30, 2018 and the period from May 2, 2017 (inception) to September 30, 2017 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 its 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.

 

 

 

D. Brooks and Associates CPA’s, P.A.

 

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

Palm Beach Gardens, Florida

February 22, 2019

 

 

 

  F- 1  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
CONSOLIDATED BALANCE SHEETS
                 
      September 30,        September 30,   
      2018       2017  
ASSETS                
Current Assets:                
Cash   $ 1,674,266     $ 13,860  
Accounts receivable     97,382       24,799  
Deferred costs     618,718       41,037  
Notes and interest receivable     225,074       —    
Receivable for sale of Airware assets     639,000       —    
Prepaid expenses and other current assets     6,107       —    
Total current assets     3,260,547       79,696  
                 
                 
Property and equipment, net     1,234,042       941,197  
Investment in Health Defense, LLC     100,000       —    
Deposit on land purchase from related party     200,000       —    
Receivable for sale of Airware assets, net of unamortized discount of $50,912     249,088       —    
Total Assets   $ 5,043,677     $ 1,020,893  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities:                
Accounts payable   $ 725,510     $ 52,263  
Accrued payroll     36,733       —    
Accrued compensated absences     17,426       —    
Accrued interest     11,355       —    
Accrued expenses     81,363       —    
Accrued income tax     88,826       —    
Convertible notes payable     20,000       —    
Total current liabilities     981,213       52,263  
                 
Long term debt     1,500,000       —    
                 
Total liabilities     2,481,213       52,263  
                 
Commitments and Contingencies                
                 
Stockholders' Equity:                
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 54,766,642 and 7,519,182 shares issued and outstanding at September 30, 2018 and 2017, respectively     5,477       15,038  
Additional paid-in capital     3,427,230       1,135,114  
Accumulated deficit     (870,243 )     (181,522 )
Total stockholders' equity     2,562,464       968,630  
                 
Total Liabilities and Stockholders' Equity   $ 5,043,677     $ 1,020,893  

 

  F- 2  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
         
              For the Period from   
      Year Ended       May 2, 2017 (Inception) through  
      September 30, 2018       September 30, 2017  
                 
Revenues, net   $ 1,401,858     $ 106,281  
Cost of services     1,018,109       48,657  
Gross profit     383,749       57,624  
                 
Operating expenses                
Professional fees and outside services     360,902       108,147  
Sales and marketing     108,828       —    
Small tools and supplies     22,447       72,073  
Other operating expenses     545,390       58,926  
Total expenses     1,037,567       239,146  
                 
Loss from operations     (653,818 )     (181,522 )
                 
Other income (expense)                
Interest income     34,232       —    
Interest expense     (1,589 )     —    
Total other income, net     32,643       —    
                 
Loss from continuing operations before income tax expense     (621,175 )     (181,522 )
                 
Income tax expense     88,826       —    
                 
Net loss from continuing operations   $ (688,721 )   $ (181,522 )
                 
Income from discontinued operations     21,280       —    
                 
Net loss     (667,441 )     (181,522 )
                 
Basic and diluted net loss per common share   $ (0.02 )   $ (0.02 )
                 
Basic and diluted weighted average common shares outstanding     32,327,738       7,519,182  

 

  F- 3  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED SEPTEMBER 30, 2018 AND PERIOD FROM MAY 2, 2017(INCEPTION) TO SEPTEMBER 30, 2017
                         
    Item 9 Labs Corp Equity    
            Additional           Non
    Common Stock   Paid-in   Accumulated       Controlling
    Shares   Amount   Capital   (Deficit)   Total   Interest
Balance at May 2, 2017 (Inception)     —       $ —       $ —       $ —       $ —       $ —    
Issuance of stock and warrants by predecessor     7,519,182       752       (752 )     —         —         —    
Pre merger contributions of property and equipment     —         —         958,510       —         958,510       —    
Pre merger cash contributions     —         —         191,642       —         191,642       —    
Net loss     —         —         —         (181,522 )     (181,522 )     —    
Balance at September 30, 2017     7,519,182     $ 752     $ 1,149,400     $ (181,522 )   $ 968,630     $ —    
                                                 
Issuance of stock  by predecessor     5,346,733       535       (535 )     —         —         —    
Merger stock issued     40,355,771       4,036       (4,036 )     —         —         —    
Increase in additional paid-in capital from merger     —         —         683,231       —         683,231       —    
Issuance of stock for cash (pre merger)     202,400       20       40,460       —         40,480       —    
Issuance of stock for cash (post merger), net of $16,050 of issuance costs     1,309,200       131       1,454,939       —         1,455,070       —    
Exchange of shares for services     33,356       3       99,997       —         100,000       —    
Stock options issued for services     —         —         3,774       —         3,774       —    
Net income/loss     —         —         —         (688,721 )     (688,721 )     —    
Balance at September 30, 2018     54,766,642     $ 5,477     $ 3,427,230     $ (870,243 )   $ 2,562,464     $ —    

 

  F- 4  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
         
              For the Period from   
      Year Ended       May 2, 2017 (Inception) through  
      September 30, 2018       September 30, 2017  
                 
Operating Activities:                
Net loss   $ (688,721 )   $ (181,522 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     49,786       17,313  
Interest accrued on notes receivable     (15,074 )        
Common stock issued for services     100,000       —    
Stock compensation expense     3,774       —    
Interest accretion from receivable     (19,158 )     —    
Changes in operating assets and liabilities:                
Accounts receivable     (27,782 )     (24,799 )
Deferred costs     (577,681 )     (41,037 )
Prepaid expenses     (6,107 )     —    
Accounts payable     57,660       52,263  
Accrued payroll     36,733       —    
Accrued compensated absences     17,426       —    
Accrued interest     1,200       —    
Accrued expenses     6,855       —    
Accrued income tax     88,826       —    
Net Cash Used in Operating Activities     (972,263 )     (177,782 )
                 
Investing Activities:                
Issuance of notes receivable     (210,000 )     —    
Deposit on land purchase from related party     (200,000 )     —    
Purchases of property and equipment     (340,244 )     —    
Cash received from sale of Airware assets     300,000       —    
Cash received from short-term note receivable     61,000       —    
Cash acquired in merger     26,363       —    
Net Cash Used in Investing Activities     (362,881 )     —    
                 
Financing Activities:                
Proceeds from the sale of common stock, net of issuance costs     1,495,550       —    
Proceeds from the issuance of long term debt     1,500,000       —    
BSSD member contributions     —         191,642  
Net Cash Provided by Financing Activities     2,995,550       191,642  
                 
Net (Decrease)/Increase in Cash     1,660,406       13,860  
                 
Cash - Beginning of Period     13,860       —    
                 
Cash - End of Period   $ 1,674,266     $ 13,860  
                 
Supplemental disclosure of cash flow information:                
Interest paid in cash   $ —       $ —    
Income taxes paid in cash   $ —       $ —    
                 
Supplemental disclosure of non-cash investing and financing activities:                
Interest in Health Defense, LLC received for sale of Airware assets   $ 100,000     $ —    
Receivable for sale of Airware assets, net of discount of $70,070   $ 929,930     $ —    
Member equity issued for property, plant and equipment   $ —       $ 958,510  
                 
Net assets acquired in reverse merger:                
Issuance of common stock for reverse merger   $ 683,231     $ —    
Acccounts receivable     (44,801 )     —    
Property and equipment     (6,150 )     —    
Goodwill     (1,323,780 )     —    
Acccounts payable and accrued expenses     697,863       —    
Convertible notes payable     20,000          
Cash acquired in merger   $ 26,363     $ —    

 

  F- 5  

 

ITEM 9 LABS CORP.

(FORMERLY AIRWARE LABS CORP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation and Organization

Item 9 Labs Corp. (“Item 9 Labs” or the “Company”), formerly Airware Labs Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp, and on April 2, 2018, they were amended again to reflect the name change to Item 9 Labs Corp.

 

On October 18, 2018 the Company effected a 1 for 20 reverse stock split of the Company’s common stock. The par value and number of authorized shares were not adjusted as a result of the reverse stock split. The total number of shares outstanding at the time of the split was adjusted from 1,095,332,835 to 54,766,642. All share information in these financial statements has been retroactively adjusted to reflect the effect of the reverse split.

 

On March 20, 2018, the Company closed on an Agreement and Plan of Exchange (the “Agreement”) to acquire all of the membership interests of BSSD Group, LLC (“BSSD”), an Arizona limited liability company formed on May 2, 2017, in exchange for newly issued restricted shares of the Company’s common stock (the “Shares”), which represent approximately 75% of the issued and outstanding shares of the Company’s common stock on a fully-diluted basis. The 40,355,771 Shares were distributed pro-rata to the BSSD members. As part of the Agreement, the Company agreed to increase its authorized shares of common stock to two billion.

 

For accounting purposes the transaction is being recorded as a reverse recapitalization, with BSSD as the accounting acquirer. Consequently, the historical pre-merger financial statements of BSSD are now those of the Company. The accompanying consolidated financial statements reflect the consolidated operations of the Company from March 20, 2018.

 

Through a licensing agreement, the Company grows medical marijuana and produces cannabis related products at their facility in Pinal County, Arizona on behalf of licensed medical marijuana dispensaries in the state of Arizona. The major assets of the Company, consisting of five acres of land and a cultivation facility, were contributed by the members of BSSD in May 2017 and were recorded at the historical carrying value (original cost less any related accumulated depreciation) of the member as of the contribu tion date.

 

On September 12, 2018, the Company executed a $1,500,000 promissory note (see Note 7) which was used to make a capital contribution into of Strive Management, LLC, a Nevada limited liability company (“Strive Management”). In exchange for the contribution, the Company received a 20% membership interest in Strive Management. The remaining interests are held by three individuals one of which is the Company’s current Chief Executive Officer. Through a management agreement with Strive Wellness of Nevada, LLC, a related party, Strive Management will facilitate the cultivation, processing and distribution of marijuana in Nevada. Strive Wellness of Nevada, LLC has been allocated cultivation, processing and distribution licenses from the State of Nevada. Additionally, the Company will acquire an additional 31% ownership of Strive Management upon the approval from the State of Nevada to operate the cultivation and processing facility.

 

The contribution from the Company was the only transaction that occurred in Strive Management during the year ended September 30, 2018.

  F- 6  

 

Principles of Consolidation

Item 9 Labs consolidates all variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary and all other entities in which it has a controlling voting interest.  An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company periodically makes judgments in determining whether its investees are VIEs and, each reporting period, the Company assesses whether it is the primary beneficiary of any of its VIEs. As of September 30, 2018, the Company is deemed the primary beneficiary of Strive Management because the entity has insufficient equity to finance its activities without additional subordinated support.

 

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities in which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated.

 

Accounting Estimates

 

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include accounting for depreciation and amortization, deferred income taxes, accruals and contingencies, goodwill, the fair value of common stock and the estimated fair value of stock options and warrants.

 

Discontinued Operations

The Company sold the former Airware business of nasal dilator sales on May 3, 2018, see Note 4. The operating results related to this business have been classified as discontinued operations in the financial statements in accordance with Accounting Standards Codification 205-20, Discontinued Operations .

 

Discontinued operations on our statements of operations consist of specifically identified activity as follows:

 

        Period  from
    Year ended   May 2, 2017 (Inception)
    September 30, 2018   to September 30, 2017
Revenues, net   $ 27,836     $ —    
Cost of sales     6,556       —    
Income from discontinued operations   $ 21,280     $ —    

 

There were no liabilities related to discontinued operations as of September 30, 2018 except the $20,000 convertible note payable and related accrued interest of $11,355 and approximately $680,000 of accounts payable and accrued expenses which was retained by the Company in the sale. There were no liabilities related to discontinued operations as of September 30, 2017. Total operating cashflows during the year ended September 30, 2018 derived from discontinued operations approximated $75,000 and there were no cash flows from investing activities.

 

Cash

 

Cash represents cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit, which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed to any significant credit risk on cash.

 

  F- 7  

 

Accounts Receivable

 

Accounts receivable are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the year in which those differences are determined, with an offsetting entry to a valuation allowance for accounts receivable. Management believes all accounts receivable outstanding as of the balance sheet dates are fully collectible, and as such has elected to not record a valuation allowance for these periods.

 

Deferred Costs

 

Deferred costs consist of the costs directly related to the production and cultivation of marijuana crops. Deferred costs are relieved to cost of services as products are delivered to dispensaries.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred.

 

The estimated useful lives of property and equipment are:

 

Cultivation equipment 2-5 years
Office furniture and equipment 5-7 years
Buildings 30 yea rs

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740,  Income Taxes . Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

The Company files income tax returns in the U.S. federal jurisdiction, and the State of Arizona. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. All periods beginning on or after January 1, 2014 are open to examination by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain.

Revenue Recognition

 

On October 1, 207, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments. The Company elected to adopt this guidance using the modified retrospective method. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

 

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

All of the Company’s revenue is associated with a customer contract that represents an obligation to perform services that are delivered at a single point in time.  Any costs incurred prior to the period in which the services are performed to completion are deferred and recognized as cost of services in the period in which the performance obligations are completed. Since the Company’s revenue is generated from one customer contract, the Company does not have material contract assets or liabilities that fall under ASC 606. As of September 30, 2018 and 2017, all revenues were generated for performance obligations completed in the State of Arizona.

 

  F- 8  

 

The Company recognizes revenue as services are rendered. Services are considered complete upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is assured. Per the dispensary contract, the Company is paid 85% of the wholesale market price of the marijuana for the services rendered.

 

The Company’s revenues accounted for under ASC 606, do not require significant estimates or judgments based on the nature of the Company’s revenue stream. The sales price is generally fixed at the point of sale and all consideration from the contract is included in the transaction price. The Company’s contracts do not include multiple performance obligations or variable consideration.

 

Fair Value of Financial Instruments

 

The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short term to maturity.  The Company’s long-term receivable resulting from the sale of Airwares was discounted to its estimated fair value on the date (see Note 4).

Net Loss Per Share

 

Basic earnings per share does not include dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. At September 30, 2018, there were 646,008 shares underlying convertible notes payable, warrants and options.

Stock-Based Compensation

 

The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The fair value is then expensed over the requisite service periods of the award which is generally the vesting period and the related amount is recognized in the consolidated statements of operations. The Company recognizes forfeitures at the time they occur.

 

The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future.

 

 

Note 2 – Reverse Recapitalization

 

The Company accounted for the Agreement with BSSD as a reverse recapitalization, with BSSD being the accounting acquirer. In its determination that BSSD was the accounting acquirer, the Company considered pertinent facts and circumstances, including the following: (i) the BSSD owners received the largest portion of the voting rights of the combined entity; (ii) the management team of the combined entity is primarily comprised of owners or management of BSSD; (iii) the continuing business of the combined entity will be the business of BSSD.

 

  F- 9  

 

 

Note 3 - Property and Equipment, Net

 

The following represents a summary of our property and equipment as of September 30, 2018 and 2017:

 

    2018   2017
Manufacturing Equipment   $ 154,059     $ 115,503  
Construction in progress     233,768       —    
Land and Building     913,314       843,007  
      1,301,141       958,510  
Accumulated Depreciation     (67,099 )     (17,313 )
    $ 1,234,042     $ 941,197  

 

Depreciation expense was $49,786 for the year ended September 30, 2018 and $17,313 for the period ended September 30, 2017.

 

 

Note 4 – Sale of Airware Assets and Investment in Health Defense LLC

 

On May 3, 2018, the Company entered into an intellectual property sales agreement with Health Defense LLC. Pursuant to the terms of the agreement, the Company sold all of the assets related to the former business of the Company, nasal dilator sales.

 

In consideration for entering into the agreement, the Company received: (i) $300,000 in cash at execution, (ii) $700,000 in cash within one year of execution and (iii) an additional $300,000 by December 31, 2019.

 

Due to the long-term nature of the final $300,000, the Company recognized a discount of $70,070 using a discount rate of 21.50%. During the year ended September 30, 2018, the Company recognized $19,158 of interest income related to the accretion of this discount which is included in interest income on the accompanying consolidated statements of operations. As of September 30, 2018, unamortized discount on this long-term receivable was $50,912. As additional consideration, the Company was also given a 10% ownership interest in Health Defense LLC. This ownership is valued at $100,000 and is reflected on the balance sheet as an other long-term asset.

 

 

Note 5 – Notes Receivable

 

On May 11, 2018, the Company entered into a Promissory Note Agreement with borrower in principal amount of $150,000. This is a one year note with 20% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into a unit offering of the borrower at a 15% discount. The note is personally guaranteed by the borrower.

 

On May 15, 2018, the Company entered into a Promissory Note Agreement with borrower in principal amount of $60,000. This is a one year note with 15% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into an interest in a strategic partnership of ownership and operations of a certain dispensary license. The note is personally guaranteed by the borrower.

 

For the year ended September 30, 2018, the Company has accrued $15,074 of interest receivable related to these notes which is included in notes and interest receivables on the accompanying consolidated balance.

 

 

Note 6 – Unsecured Convertible Note Payable

 

In the reverse recapitalization disclosed in Note 2, the Company assumed one unsecured convertible note payable with principal balance totaling $20,000 which was due in August 2012, carry an interest rate of 8% and is convertible to common stock at $.50 per share. As of September 30, 2018, this unsecured convertible note payable is considered in default and has been presented as a current liability on the consolidated balance sheets.

 

 

Note 7 – Long Term Debt

 

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”) in which Viridis has agreed to loan the Company up to $2.7 million for the expansion of the Company’s Arizona and Nevada properties (see Note 11). As of September 30, 2018, the Company has received $1,500,000 of proceeds from Viridis in the form of a promissory note. The $1,500,000 proceeds were utilized to acquire a 20% ownership in Strive Management, LLC as described in Notes 1 and 8. In exchange for the loan, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from Nevada operations, until the loan is repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan will commence 90 days after the Nevada operation begins earning revenue. Parties acknowledge that the Company is expected to own only 51% of the Nevada operations and therefore Viridis’ revenue participation is limited to the Company’s interest.

 

  F- 10  

 

 

Note 8 – Variable Interest Entity

 

As of September 30, 2018, the Company has determined that it holds a variable interest in Strive Management due to the Company being its sole source of capital. Further, the Company has agreed to raise $4,000,000 on Strive Management’s behalf through promissory note agreements that the Company will guarantee. No funds have been raised as of the date of these financial statements. If the funds are not raised, the additional 31% interest due to the Company upon operational approval from the State of Nevada as discussed in Note 1 would be subject to reclamation by the other members of Strive Management. The Company has been determined to be the primary beneficiary of Strive Management has the Company has the power to direct the activities that significantly impact Strive Management’s economic performance and the obligation to absorb losses. Strive Managements financial statements as of September 30, 2018 have been consolidated with the Company. The only transaction that has occurred in Strive Management as of September 30, 2018 is the Company’s $1,500,000 contribution. Upon consolidation, the asset of Strive Management was recorded at its carrying amounts. The effects of consolidating Strive Management resulted in an increase in assets of $1,500,000.

 

 

Note 9 – Income Taxes

 

Income tax provision reflected in the consolidated statements of operations has been computed on the taxable income generated by the company since the reverse merger on March 20, 2018 through September 30, 2018 which consist of the following:

 

 

    2018   2017
Federal   $ 88,826     $ —    
State     —         —    
                 
Income Tax Provision   $ 88,826     $ —    

 

The following table summarizes the effects of the significant differences between the U.S. federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for the year ended September 30, 2018 and period Inception to September 30, 2017:

    2018
Federal   $ 148,808  
State     —    
         
Income Tax Provision   $ 148,808  

 

From Company inception through the date of the merger, March 20, 2018, the Company was a Limited Liability Company, electing to be treated as a partnership for income tax purposes and all of the Company’s income during these periods passed through to the then-members of the Company, and the Company, therefore had no corporate tax obligation to record. The Company’s provision for income tax for 2018 is attributable to the taxable income from March 21, 2018 through September 30, 2018. Had the Company been a Corporation since inception, the income tax provision would consist of the following:

 

    2018   2017
Federal   $ 148,808     $ 8,644  
State     —         —    
                 
Income Tax Provision   $ 148,808     $ 8,644  

 

The Company has net operating loss carryforwards on its Federal and State filings approximating $17.8 million, and $9.5 million respectively. The deferred tax assets relating to the carryforwards has been fully reserved due to the uncertainty of the Company’s ability to utilize the carryforwards.

 

  F- 11  

 

Note 10 - Concentrations

 

For the years ended September 30, 2018 and 2017, 100% of the Company’s revenue was generated from a single customer.

 

 

Note 11 - Commitments and Contingencies

 

The production and possession of marijuana is prohibited by the United States of America, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. The Company does not believe the federal prohibition of these activities will negatively impact the business. As such, the Company has not elected to record a related accrual contingency.

 

The Company is in default on convertible notes payable totaling $20,000 (see Note 6). The Company has attempted to communicate with the note holder to request extension or conversion, but has been unsuccessful in doing so. The full balance on this noteisincluded in current liabilities.

 

On April 20, 2018, the Company entered into an agreement for the purchase of approximately 44 acres of land from an affiliate of a founding member of BSSD. The purchase price of the property is $3,000,000, payable as follows; (i) $200,000 deposited with escrow agent as an initial earnest money deposit, (ii) on or before February 1, 2019, the Company will deposit an additional $800,000 into escrow as additional earnest money deposit and (iii) the balance of the purchase price shall be paid via a promissory note. The earnest money amounts are non-refundable. The Company has negotiated an amendment to this agreement that will spread the $800,000 payment over the course of 4 months. As of the date of these financial statements, only the initial $200,000 has been deposited in escrow which has been classified as a long-term asset on the consolidated balance sheet as of September 30, 2018.

 

On June 26, 2018, the Company entered into a contractor agreement with Sara Gullickson pursuant to which she would provide services to the Company as its President in exchange for $125,000 annually, payable each month, and $100,000 worth of common stock of the Company. She was also eligible for additional bonus share compensation per the agreement. The term of the agreement is a period of one year. Subsequent to September 30, 2018, this contractor agreement was terminated. See Note 12.

 

On June 26, 2018, the Company entered into a contractor agreement with Chase Herschman pursuant to which he will provide services in exchange for $120,000 annually, payable each month; up to $420,000 in common stock options which shall vest upon the occurrence of certain benchmarks as described in the contractor agreement and a commission of 1% of the gross profits of the Company. The term of the agreement is a period of three years.

 

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”). Viridis agreed to make secured loans of up to $2.7 million to the Company which is represented by two separate notes, one for the construction and enhancement of the Company’s Arizona property and one for the Company’s proposed ventures in Nevada. In exchange for the loans, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from each of the Company’s Arizona and Nevada operations, respectively, until the loan is repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control.

 

Under the terms of the Loan and Revenue Participation Agreement, upon a change in control of the Company, Viridis will be entitled to receive 200% of the principal amount of the loans to the Company computed after considering previous revenue participation payments through the date of change of control and 1% of the aggregate sales price or consideration received in the change in control transaction.

 

As of September 30, 2018, the Company received the $1,500,000 and invested the funds in Strive Management (see Notes 7 and 8). The remaining $1,200,000 has been provided by Viridis directly to contractors of the Arizona property from an account owned and controlled by Viridis. The Company will record the $1,200,000 as a long-term debt upon the completion of the Arizona facility expansion, as agreed upon in the terms of the note which is expected to occur in February or March 2019.

 

As part of the agreement to invest in Strive Management, the Company has committed to raise funding of approximately $4,000,000 through promissory notes that the Company will guarantee so that Strive Management can develop the property in Nevada through promissory notes that the Company will guarantee.

 

  F- 12  

 

Note 12– Related Party Transactions

 

As discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their membership interests.

 

As discussed in Note 11, the Company has entered into an agreement as of April 20, 2018 for the purchase of land. The land owner is one of the original members of BSSD and a current employee of the Company.

 

As discussed in Note 13, on May 8, 2018, the Company issued 22,500 options for the purchase of common stock to three board members.

 

As discussed in Notes 7 and 11, the Company has entered into a Loan and Revenue Participation Agreement and Promissory Note with Viridis. The member of Viridis was elected to the Company’s board of directors on December 21, 2018

 

On August 7, 2018, the Company issued our Company president 33,356 shares of common stock valued at $100,000 as required under a contractor agreement (see Note 11).

 

 

Note 13 - Stockholders’ Deficit

 

Common Stock

 

As discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their membership interests.

 

During the year ended September 30, 2018, the Company raised $1,495,550, net of issuance costs of $16,050 via private placement. The selling price was $1 per share for a total of 1,511,600 shares of common stock issued.

 

As discussed in Note 12, the Company entered into a consulting agreement by which we had to issue $100,000 worth of common stock. As of the agreement date, the share price was approximately $3.00, for which the company was obligated to issue 33,356 shares of common stock.

 

Warrants

 

As of September 30, 2018, there are 311,017 warrants for purchase of the Company’s common stock outstanding. The Company had no warrant activity during the year ended September 30, 2018. The following is a detail of the warrant activity during the years ended September 30, 2018 and 2017:

 

    Common Shares   Exercise        
    Issuable Upon   Price of   Date   Expiration
    Exercise of Warrants   Warrants   Issued   Date
Balance of Warrants at May 2, 2017(Inception)     —                        
                             
Warrants issued by predecessor     175,000     $ 2.00     3/31/2015     8/31/2020  
Warrants issued by predecessor     12,606     $ 1.60     12/22/2015     12/22/2018  
Warrants issued by predecessor     100,000     $ 1.00     7/28/2016     7/28/2021  
Warrants issued by predecessor     23,411     $ 1.30     12/22/2016     12/22/2019  
                             
Balance of Warrants at September 30, 2017     311,017                      
                             
Balance of Warrants at September 30, 2018     311,017                      

 

(1) As discussed in Note 2, on March 20, 2018 the Company executed an agreement to acquire all the voting interest in BSSD Group, LLC. As BSSD Group, LLC is the accounting acquirer, all previously outstanding warrants were re-issued under the new company.

  F- 13  

 

Stock Options

On May 8, 2018, the Company granted 22,500 stock options to board members. The options are exercisable at $2.40 per share with a ten year term. The options will vest equally over three years unless there is a change of control of the Company at which time any unvested options vest immediately. As of September 30, 2018, there are 294,991 stock options outstanding.

 

As discussed in Note 2, on March 20, 2018 the Company executed an agreement to acquire all the voting interest in BSSD Group, LLC. As BSSD Group, LLC is the accounting acquirer, all previously outstanding options were re-issued and vested immediately as this was considered a change in control.

 

The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for determining the fair value of the options granted during the year ended September 30, 2018:

 

Expected stock price volatility 34.72%
   
Expected dividend yield 0.00%
   
Risk-free interest rate 2.97%
   
Option life 10 years
   
Stock-based compensation recognized        3,774
   
Unrecognized compensation expense      23,390
to be recognized in future periods  

 

We do not have an extensive history as a public company and our common stock transactions are too infrequent, therefore we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant comparable company that is publicly traded and does business within the industry we operate.

 

The options granted during the year ended September 30, 2018 were determined to have a fair value at date of grant of $2.40. The unrecognized compensation expense of $23,390 will be recognized over a weighted average period of 1.84 years.

 

The following is a summary of stock option activity for the years ended September 30, 2018 and 2017:

 

            Weighted    
    Common Shares     Average    
    Issuable Upon   Weighted   Remaining   Aggregate
    Exercise of Options   Average Exercise Price   Contractual Term in Years   Intrinsic Value
Balance of Options at May 2, 2017(Inception)     —         —         —         —    
                                 
Options issued by predecessor     272,491     $ 5.40       5.16       (1,307,957 )
Exercised     —         —         —         —    
Forfeited/Cancelled     —         —         —         —    
                                 
Balance of Options at September 30, 2017     272,491                       (1,307,957 )
                                 
Options granted     22,500     $ 2.40       9.60       —    
Exercised     —         —         —         —    
Forfeited/Cancelled     —         —         —         —    
                                 
Balance of Options at September 30, 2018     294,991                          
                                 
Exercisable at September 30, 2018     275,616     $ 5.37                  
                                 
Unvested at September 30, 2018     19,375                          

 

All options vested during the year ended September 30, 2018 and remaining unvested at September 30,2018 had a weighted-average grant-date fair value of $2.40.

 

  F- 14  

 

Note 14 - Subsequent Events

 

On October 18, 2018 the Company effected a 1 for 20 reverse stock split of the Company’s common stock. The par value and number of authorized shares were not adjusted as a result of the reverse stock split. The total number of shares outstanding at the time of the split was adjusted from 1,095,332,835 to 54,766,642. All share information in these financial statements has been retroactively adjusted to reflect the effect of the reverse split.

 

On November 26, 2018, the company’s wholly owned subsidiary AZ DP Holdings, LLC (AZDP) performed an asset acquisition of the majority of the assets of Arizona DP Consulting, LLC (AZDPC), a consulting firm specializing in obtaining marijuana dispensary permits and cannabis related business plans. The purchase price was $1,500,000 in cash and 3,000,000 shares of restricted common stock having an aggregate value of $7,5000,000 or $2.50 per share based on current market price of the Company shares at time asset purchase agreement was executed. Pursuant to the agreement, Sara Gullickson transitioned from President to CEO under a 3 year employment agreement and became a member of the board of directors of the company. Additionally, AZDP agreed to hire the employees of AZDPC and lease its existing office space which requires $3,200 of monthly rent through May 2019. This acquisition effectively terminates the contract dated June 26, 2018 described in Note 11. Below is a summary of AZDPC’s revenue, expense and net income for January1, 2018 through August 31, 2018, and January 1, 2017 through December 31, 2017. Assets and liabilities of AZDPC were negligible so presentation was not deemed necessary.

 

    January 1 through    
    August 31, 2018   2017
Revenue   $ 597,856     $ 1,031,705  
Expense     (257,957 )     (638,085 )
                 
Net Income   $ 339,899     $ 393,620  

 

On October 22, 2018 the Company entered into a 6 month services agreement with Axiom Group to provide marketing and data distribution services. As part of the agreement, the Company will pay a sum of $15,000 and issue 15,000 shares of common stock to Axiom Group each month the agreement is in place.

 

Subsequent to year end, the Company raised $5,000,000 via private placement. The selling price was $1.00 per share for a total of 5,000,000 shares of common stock issued subscribed. The cash proceeds will be received over the course of 3 months, with all proceeds being received by January 31, 2019. As of February 16, 2019, $5,000,000 has been received and 5,000,000 shares have been issued.

 

  F- 15  

 

 

 

INDEPENDENT ACCOUNTANT’S REVIEW REPORT

To the Board of Directors and Stockholders
Item 9 Labs Corp.

We have reviewed the condensed consolidated balance sheets of Item 9 Labs Corp. (the “Company”) as of March 31, 2019 and 2018 and the related condensed consolidated statements of operations, stockholders’ equity and cash flows for the six month periods ended March 31, 2019 and 2018, and the related notes to the condensed financial statements. These financial statements are the responsibility of Item 9 Labs Corp.

We conducted our reviews in accordance with the standards of the Public Company Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

 

 

D. Brooks and Associates CPA’s, P.A.
Palm Beach Gardens, Florida
June 24, 2019
 

 

  F- 16  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
UNAUDITED CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
         
         
      March 31,       September 30,  
      2019       2018  
ASSETS                
Current Assets:                
Cash   $ 2,902,057     $ 1,674,266  
Accounts receivable     438,282       97,382  
Deferred costs     1,086,986       618,718  
Notes and interest receivable     244,522       225,074  
Receivable for sale of Airware assets     524,000       639,000  
Prepaid expenses and other current assets     145,144       6,107  
Total current assets     5,340,991       3,260,547  
                 
                 
Property and equipment, net     2,104,049       1,234,042  
Investment in Health Defense, LLC     100,000       100,000  
Deposit on land purchase from related party     400,000       200,000  
Receivable for sale of Airware assets, net of unamortized discount of $25,511 and $50,912, respectively     274,489       249,088  
Intangible assets, net     2,927,500       —    
Goodwill     5,990,000       —    
Total Assets   $ 17,137,029     $ 5,043,677  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities:                
Accounts payable   $ 713,321     $ 725,510  
Accrued payroll     72,000       36,733  
Accrued compensated absences     16,599       17,426  
Accrued interest     11,755       11,355  
Accrued expenses     28,041       81,363  
Accrued income tax     296,225       88,826  
Convertible notes payable     20,000       20,000  
Total current liabilities     1,157,941       981,213  
                 
Long term debt     1,500,000       1,500,000  
                 
Total liabilities     2,657,941       2,481,213  
                 
Commitments and Contingencies                
                 
Stockholders' Equity:                
Common stock, par value $.0001 per share, 2,000,000,000 shares authorized; 63,155,007 and 54,766,665 shares issued and outstanding at March 31, 2019 and September 30, 2018, respectively     6,316       5,477  
Additional paid-in capital     16,616,394       3,427,230  
Accumulated deficit     (2,083,432 )     (870,243 )
Total Item 9 Labs Corp stockholders' equity     14,539,278       2,562,464  
                 
Noncontrolling Interest     (60,190 )     —    
                 
Total Liabilities and Stockholders' Equity   $ 17,137,029     $ 5,043,677  

 

  F- 17  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
                 
                 
   

Three months ended

March 31,

 

Six months ended

March 31,

    2019   2018   2019   2018
                 
Revenues, net   $ 1,130,270     $ 281,358     $ 2,085,884     $ 505,682  
Cost of services     528,938       202,138       1,005,156       309,763  
Gross profit     601,332       79,220       1,080,728       195,919  
                                 
Operating expenses                                
Professional fees and outside services     301,413       10,317       553,797       13,758  
Payroll and employee related expenses     724,761       —         1,040,378       —    
Sales and marketing     55,905       8,579       138,348       12,478  
Other operating expenses     331,202       87,917       460,407       113,164  
Total expenses     1,413,281       106,813       2,192,930       139,400  
                                 
Income (loss) from operations     (811,949 )     (27,593 )     (1,112,202 )     56,519  
                                 
Other income (expense)                                
Interest income     25,577       —         47,833       —    
Interest expense     (811 )     (500 )     (1,611 )     (500 )
Total other income (expense), net     24,766       (500 )     46,222       (500 )
                                 
Income (loss) from continuing operations, before income tax expense     (787,183 )     (28,093 )     (1,065,980 )     56,019  
                                 
Income tax expense     114,686       —         207,399       —    
                                 
Net income (loss) from continuing operations   $ (901,869 )   $ (28,093 )   $ (1,273,379 )   $ 56,019  
                                 
Income from discontinued operations   $ —       $ 479     $ —       $ 479  
                                 
Less: Net loss attributable to noncontrolling interest   $ (12,307 )   $ —       $ (60,190 )   $ —    
                                 
Net income (loss) attributable to Item 9 Labs Corp   $ (889,562 )   $ (27,614 )   $ (1,213,189 )   $ 56,498  
                                 
Basic net income (loss) per common share   $ (0.01 )   $ (0.00 )   $ (0.02 )   $ 0.01  
                                 
Basic weighted average common shares outstanding     62,263,679       13,720,796       59,582,402       10,585,914  
                                 
Basic net income (loss) per common share   $ (0.01 )   $ (0.00 )   $ (0.02 )   $ 0.01  
                                 
Diluted weighted average common shares outstanding     62,263,679       13,720,796       59,582,402       10,715,814  

 

  F- 18  

 

ITEM 9 LABS CORP. AND SUBSIDIARY
(FORMERLY AIRWARE LABS CORP.)
UNAUDITED CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
                 
   

Three months ended

March 31,

 

Six months ended

March 31,

    2019   2018   2019   2018
                 
Cash Flows from Operating Activities:                                
Net income (loss)   $ (901,869 )   $ (28,093 )   $ (1,273,379 )   $ 56,498  
Adjustments to reconcile net income (loss) to net cash used in operating activities:                                
Depreciation and amortization     95,700       11,277       108,900       23,868  
Interest accrued on notes receivable     (9,724 )     —         (19,448 )     —    
Common stock issued for services     135,000       —         165,000       —    
Stock compensation expense     125,000       —         125,000       —    
Interest accretion on receivable for sale of Airware assets     (13,906 )     —         (25,401 )     —    
Changes in operating assets and liabilities:                                
Accounts receivable     (163,980 )     25,349       (340,900 )     4,462  
Deferred costs     (132,557 )     (63,053 )     (468,268 )     (125,926 )
Prepaid expenses and other current assets     (137,667 )     (5,440 )     (139,037 )     (6,840 )
Accounts payable     52,213       (37,476 )     (12,189 )     (34,223 )
Accrued payroll     12,483       —         35,267       —    
Accrued compensated absences     —         —         (826 )     —    
Accrued interest     —         500       400       500  
Accrued expenses     (51,467 )     5,845       (53,322 )     25,106  
Accrued income tax     114,686       —         207,399       —    
Net Cash Used in Operating Activities     (876,088 )     (91,091 )     (1,690,804 )     (56,555 )
                                 
Cash Flows From Investing Activities:                                
Deposit on land purchase from related party     (200,000 )     —         (200,000 )     —    
Purchases of property and equipment     (891,247 )     (47,263 )     (896,408 )     (73,014 )
Cash paid for purchase of AZ DP Counsulting LLC assets     —         —         (1,500,000 )     —    
Cash received on receivable for sale of Airware assets     115,000       —         115,000       —    
Cash acquired in merger     —         26,363       —         26,363  
Net Cash Used in Investing Activities     (976,247 )     (20,900 )     (2,481,408 )     (46,651 )
                                 
Financing Activities:                                
Proceeds from the sale of common stock, net of issuance costs     2,250,003       1,090,000       5,400,003       1,090,000  
Net Cash Provided by Financing Activities     2,250,003       1,090,000       5,400,003       1,090,000  
                                 
Net (Decrease)/Increase in Cash     397,668       978,009       1,227,791       986,794  
                                 
Cash - Beginning of Period     2,504,389       22,645       1,674,266       13,860  
                                 
Cash - End of Period   $ 2,902,057     $ 1,000,654     $ 2,902,057     $ 1,000,654  
                                 
Supplemental disclosure of cash flow information:                                
Interest paid in cash   $ —       $ —       $ —       $ —    
Income taxes paid in cash   $ —       $ —       $ —       $ —    
                                 
Supplemental disclosure of non-cash investing and financing activities:                                
Stock issued for asset acquisition of Arizona DP Consulting, LLC   $ 7,500,000     $ —       $ 7,500,000     $ —    
Member equity issued for property, plant and equipment   $ —       $ 958,510     $ —       $ 958,510  
                                 
Net assets acquired in reverse merger:                                
Issuance of common stock for reverse merger   $ —       $ 683,231     $ —       $ 683,231  
Accounts receivable     —         (44,801 )     —         (44,801 )
Property and equipment     —         (6,150 )     —         (6,150 )
Goodwill     —         (1,323,780 )     —         (1,323,780 )
Accounts payable and accrued expenses     —         697,863       —         697,863  
Convertible notes payable     —         20,000       —         20,000  
Cash acquired in merger   $ —       $ 26,363     $ —       $ 26,363  
                                 
Net assets acquired in acquisition of Arizona DP Consulting, LLC                                
Intangible assets   $ —       $ —       $ 3,010,000     $ —    
Goodwill     —         —         5,990,000       —    
Total purchase consideration   $ —       $ —       $ 9,000,000     $ —    

 

  F- 19  

 

ITEM 9 LABS CORP.

(FORMERLY AIRWARE LABS CORP)

NOTES TO CODENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Description of Business and Summary of Significant Accounting Policies

Description of Business

 

Item 9 Labs Corp. (“Item 9 Labs” or the “Company”), formerly Airware Labs Corp., is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on June 15, 2010 as Crown Dynamics Corp. On October 26, 2012, the Articles of Incorporation were amended to reflect a name change to Airware Labs Corp, and on April 2, 2018, they were amended again to reflect the name change to Item 9 Labs Corp.

 

On October 18, 2018 the Company effected a 1 for 20 reverse stock split of the Company’s common stock. The par value and number of authorized shares were not adjusted as a result of the reverse stock split. The total number of shares outstanding at the time of the split was adjusted from 1,095,332,835 to 54,766,642. All share information in these financial statements has been retroactively adjusted to reflect the effect of the reverse split.

 

On March 20, 2018, the Company closed on an Agreement and Plan of Exchange (the “Agreement”) to acquire all of the membership interests of BSSD Group, LLC (“BSSD”), an Arizona limited liability company formed on May 2, 2017, in exchange for newly issued restricted shares of the Company’s common stock (the “Shares”), which represent approximately 75% of the issued and outstanding shares of the Company’s common stock on a fully-diluted basis. The 40,355,771 Shares were distributed pro-rata to the BSSD members. As part of the Agreement, the Company agreed to increase its authorized shares of common stock to two billion.

 

For accounting purposes the transaction is being recorded as a reverse recapitalization, with BSSD as the accounting acquirer. Consequently, the historical pre-merger financial statements of BSSD are now those of the Company. In its determination that BSSD was the accounting acquirer, the Company considered pertinent facts and circumstances, including the following: (i) the BSSD owners received the largest portion of the voting rights of the combined entity; (ii) the management team of the combined entity is primarily comprised of owners or management of BSSD; (iii) the continuing business of the combined entity will be the business of BSSD. The accompanying consolidated financial statements reflect the consolidated operations of the Company from March 20, 2018.

 

Through a licensing agreement, the Company grows medical marijuana and produces cannabis related products at their facility in Pinal County, Arizona on behalf of licensed medical marijuana dispensaries in the state of Arizona. The major assets of the Company, consisting of five acres of land and a cultivation facility, were contributed by the members of BSSD in May 2017 and were recorded at the historical carrying value (original cost less any related accumulated depreciation) of the member as of the contribution date.

 

On September 12, 2018, the Company executed a $1,500,000 promissory note (see Note 7) which was used to make a capital contribution into Strive Management, LLC, a Nevada limited liability company (“Strive Management”). In exchange for the contribution, the Company received a 20% membership interest in Strive Management. The remaining interests are held by three individuals one of which is the Company’s current Chief Executive Officer. Through a management agreement with Strive Wellness of Nevada, LLC, a related party (the Company CEO is a member of this LLC), Strive Management will facilitate the cultivation, processing and distribution of marijuana in Nevada. Strive Wellness of Nevada, LLC has been allocated cultivation, processing and distribution licenses from the State of Nevada. Additionally, the Company will acquire an additional 31% ownership of Strive Management upon the approval from the State of Nevada to operate the cultivation and processing facility.

 

  F- 20  

 

Principles of Consolidation

Item 9 Labs consolidates all variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary and all other entities in which it has a controlling voting interest.  An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. The Company periodically makes judgments in determining whether its investees are VIEs and, each reporting period, the Company assesses whether it is the primary beneficiary of any of its VIEs. As of March 31, 2019 and September 30, 2018, the Company is deemed the primary beneficiary of Strive Management because the entity has insufficient equity to finance its activities without additional subordinated support. The interests in Strive Management held by non-controlling members has been presented on the statement of operations and statement of stockholders’ equity as non-controlling interest.

 

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities in which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated.

 

The accompanying interim unaudited condensed consolidated financial statements of the Company as of March 31, 2019, and for the period then ended have been prepared under the rules and regulations of the OTC Market Group and interim financial information, which includes condensed consolidated financial statements of the Company and its wholly owned subsidiaries as of March 31, 2019. Accordingly, the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations. It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year ending September 30, 2019.

 

Accounting Estimates

 

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates of the Company include estimated useful lives of property and equipment, deferred income taxes, accruals and contingencies, goodwill, the fair value of common stock provided as consideration and the estimated fair value of stock options and warrants.

 

Discontinued Operations

The Company sold the former Airware business of nasal dilator sales on May 3, 2018, see Note 4. The operating results related to this business have been classified as discontinued operations in the condensed interim consolidated financial statements in accordance with Accounting Standards Codification 205-20, Discontinued Operations for the three and six months ended March 31, 2018. Accounts payable from these discontinued operations in the amount of $535,285 remain on the balance sheet as of March 31, 2019. The activity during the periods presented are insignificant.

  F- 21  

 

Cash

 

Cash represents cash on hand, demand deposits placed with banks and other financial institutions and all highly liquid instruments purchased with a remaining maturity of three months or less as of the purchase date of such investments. The Company maintains cash on deposit, which, can exceed federally insured limits. The Company has not experienced any losses on such accounts nor believes it is exposed to any significant credit risk on cash.

 

Accounts Receivable

 

Accounts receivable are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the year in which those differences are determined, with an offsetting entry to a valuation allowance for accounts receivable. Management believes all accounts receivable outstanding as of the balance sheet dates are fully collectible, and as such has elected to not record a valuation allowance for these periods.

Deferred Costs

 

Deferred costs consist of the costs directly related to the production and cultivation of marijuana crops. Deferred costs are relieved to cost of services as products are delivered to dispensaries.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred.

 

The estimated useful live s of property and equipment are:

 

Cultivation equipment 2-5 years
Buildings 30 years

 

Intangible Assets Subject to Amortization

Intangible assets include trade name, customer relationships, website, and intellectual property obtained through a business acquisition (see Note 2). Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired. Intangible assets with finite lives are amortized over their estimated useful life and reported net of accumulated amortization, separately from goodwill. Amortization is calculation on the straight-line basis using the following estimated useful lives:

 

Trade name 10 years
Customer relationships 5 years
Website and intellect ual property 10 years

 

Generally, the Company utilizes the relief from royalty method to value trade name, the with or without method for valuing the customer relationships, and the discounted cash flow method for valuing website and intellectual property.

 

  F- 22  

 

Goodwill

Goodwill represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and intangible assets acquired. Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740,  Income Taxes . Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

The Company files income tax returns in the U.S. federal jurisdiction, and the State of Arizona. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. All periods beginning on or after January 1, 2014 are open to examination by taxing authorities. The Company believes it has no tax positions for which the ultimate deductibility is highly uncertain.

Revenue Recognition

 

On October 1, 2017, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments. The Company elected to adopt this guidance using the modified retrospective method. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

 

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

The majority of the Company’s revenue is associated with a customer contract that represents an obligation to perform services that are delivered at a single point in time.  Any costs incurred prior to the period in which the services are performed to completion are deferred and recognized as cost of services in the period in which the performance obligations are completed. Since the Company’s revenue is generated from one customer contract, the Company does not have material contract assets or liabilities that fall under ASC 606. As of March 31, 2019 and 2018, 90% of the Company’s revenues were generated for performance obligations completed in the State of Arizona.

 

The Company recognizes revenue as services are rendered. Services are considered complete upon successful delivery of the product to the dispensary as the Company has no further performance obligations at this point in time and collection is assured. Per the dispensary contract, the Company is paid 85% of the wholesale market price of the marijuana for the services rendered.

 

The Company’s revenues accounted for under ASC 606, do not require significant estimates or judgments based on the nature of the Company’s revenue stream. The sales price is generally fixed at the point of sale and all consideration from the contract is included in the transaction price. The Company’s contracts do not include multiple performance obligations or variable consideration.

 

Fair Value of Financial Instruments

 

The carrying value of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short term to maturity.  The Company’s long-term receivable resulting from the sale of Airware was discounted to its estimated fair value on the date (see Note 4).

Net Loss Per Share

 

Basic earnings per share does not include dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. At March 31, 2019, there were 646,008 shares underlying convertible notes payable, warrants and options.

  F- 23  

 

Stock-Based Compensation

 

The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The fair value is then expensed over the requisite service periods of the award which is generally the vesting period and the related amount is recognized in the consolidated statements of operations. The Company recognizes forfeitures at the time they occur.

 

The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future.

 

 

Note 2 – Asset Acquisition

 

On November 26, 2018, the company’s wholly owned subsidiary AZ DP Holdings, LLC (AZDP) performed an asset acquisition of the majority of the assets of Arizona DP Consulting, LLC (AZDPC), a consulting firm specializing in obtaining marijuana dispensary permits and cannabis related business plans. The purchase price was $1,500,000 in cash and 3,000,000 shares of restricted common stock having an aggregate value of $7,500,000 or $2.50 per share based on current market price of the Company shares at time asset purchase agreement was executed. Pursuant to the agreement, Sara Gullickson transitioned from President to CEO under a 3 year employment agreement and became a member of the board of directors of the company. Additionally, AZDP agreed to hire the employees of AZDPC and lease its existing office space which requires $3,200 of monthly rent through May 2019. This acquisition effectively terminates the contract dated June 26, 2018 described in Note 11. Below is a summary of AZDPC’s revenue, expense and net income for January1, 2018 through August 31, 2018, and January 1, 2017 through December 31, 2017. Assets and liabilities of AZDPC were negligible so presentation was not deemed necessary.

 

    (unaudited)    
    January 1 through   (unaudited)
    September 30, 2018   2017
Revenue   $ 744,822     $ 1,084,202  
Expense     (356,169 )     (655,911 )
Net Income   $ 388,653     $ 428,291  

 

In accordance with ASC 805, Business Combinations , the Company accounted for the acquisition of AZDP using the acquisition method of accounting. The purchase price was allocated to specific identifiable intangible assets at their respective fair values at the date of acquisition. As of the date of these financial statements, the allocation has been prepared in draft form. As such, the allocation presented is provisional and subject to change. There were no tangible assets acquired.

 

A summary of assets acquired in the acquisition and their fair values are presented below:

 

 Trade names $120,000
 Customer relationships $290,000
 Website and intellectual property $2,600,000
 Goodwill $5,990,000

 

Identifiable intangible assets consist of the following as of March 31, 2019:

 

    Balance at   Additions from       Balance at
    October 1, 2018   Acquisitions   Amortization   March 31, 2019
Tradename   $ —       $ 120,000     $ (3,000 )   $ 117,000  
Customer Relationship     —         290,000       (14,500 )     275,500  
Templates, website, and other IP     —         2,600,000       (65,000 )     2,535,000  
                                 
Total   $ —       $ 3,010,000     $ (82,500 )   $ 2,927,500  

 

 

The goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations and personnel of the businesses. These synergies include access into new markets.

 

  F- 24  

 

Note 3 - Property and Equipment, Net

 

The following represents a summary of our property and equipment as of March 31, 2019 and September 30, 2018:

 

    March 31, 2019   September 30, 2018
Manufacturing Equipment   $ 172,560     $ 154,059  
Construction in progress     1,111,196       233,768  
Land and Building     913,314       913,314  
      2,197,070       1,301,141  
Accumulated Depreciation     (93,021 )     (67,099 )
    $ 2,104,049     $ 1,234,042  

 

Depreciation expense for the six months ended March 31, 2019 and 2018 was $26,400 and $23,868, respectively, and for the three months ended March 31, 2019 and 2018 was $13,200 and $11,277, respectively.

 

 

Note 4 – Sale of Airware Assets and Investment in Health Defense LLC

 

On May 3, 2018, the Company entered into an intellectual property sales agreement with Health Defense LLC. Pursuant to the terms of the agreement, the Company sold all of the assets related to the former business of the Company, nasal dilator sales.

 

In consideration for entering into the agreement, the Company received: (i) $300,000 in cash at execution, (ii) $700,000 in cash within one year of execution and (iii) an additional $300,000 by December 31, 2019. Due to the long-term nature of the final $300,000, the Company recognized a discount of $70,070 using a discount rate of 21.50%. During the six months ended March 31, 2019 , the Company recognized $25,401 of interest income related to the accretion of this discount which is included in interest income on the accompanying consolidated statements of operations. As of March 31, 2019, unamortized discount on this long-term receivable was $25,511. As of September 30, 2018, unamortized discount on this long-term receivable was $50,912. As additional consideration, the Company was also given a 10% ownership interest in Health Defense LLC. This ownership is valued at $100,000 and is reflected on the balance sheet as an other long-term asset.

 

 

Note 5 – Notes Receivable

 

On May 11, 2018, the Company entered into a Promissory Note Agreement with borrower in principal amount of $150,000. This is a one year note with 20% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into a unit offering of the borrower at a 15% discount. The note is personally guaranteed by the borrower.

 

On May 15, 2018, the Company entered into a Promissory Note Agreement with borrower in principal amount of $60,000. This is a one year note with 15% non-compounded annual interest payable at maturity. It is convertible at the discretion of the Company into an interest in a strategic partnership of ownership and operations of a certain dispensary license. The note is personally guaranteed by the borrower.

 

For the six months ended March 31, 2019 and year ended September 30, 2018, the Company has accrued $34,522 and $15,074, respectively, of interest receivable related to these notes which is included in notes and interest receivables on the accompanying consolidated balance. As of the date of the financial statements, the notes receivable are in default though management believes them to be fully collectible.

 

  F- 25  

 

Note 6 – Unsecured Convertible Note Payable

 

In the reverse recapitalization disclosed in Note 1, the Company assumed one unsecured convertible note payable with principal balance totaling $20,000 which was due in August 2012, carry an interest rate of 8% and is convertible to common stock at $.50 per share. As of March 31, 2019 and September 30, 2018, this unsecured convertible note payable is considered in default and has been presented as a current liability on the consolidated balance sheets.

 

 

Note 7 – Long Term Debt

 

On September 13, 2018, the Company entered into a Loan and Revenue Participation Agreement with Viridis Group I9 Capital LLC (“Viridis”) in which Viridis has agreed to loan the Company up to $2.7 million for the expansion of the Company’s Arizona and Nevada properties (see Note 11). As of September 30, 2018, the Company received $1,500,000 of proceeds from Viridis in the form of a promissory note. The $1,500,000 proceeds were utilized to acquire a 20% ownership in Strive Management, LLC as described in Notes 1 and 8. In exchange for the loan, Viridis will be repaid in the form of waterfall revenue participation schedules. Viridis shall receive 5% of the Company’s gross revenues from the Nevada operations, until the loan is repaid, 2% until repaid 200% of the amount loaned, and 1% of gross revenues in perpetuity or until a change in control. Payments on the loan will commence 90 days after the Nevada operation begins earning revenue. Parties acknowledge that the Company is expected to own only 51% of the Nevada operations and therefore Viridis’ revenue participation is limited to the Company’s interest. The operations in Nevada have not yet ceased as of the date of this filing.

 

 

Note 8 – Variable Interest Entity

 

As of March 31, 2019, the Company has determined that it holds a variable interest in Strive Management due to the Company being its sole source of capital. Further, the Company has agreed to raise $4,000,000 on Strive Management’s behalf through promissory note agreements that the Company will guarantee. No funds have been raised as of the date of these financial statements. If the funds are not raised, the additional 31% interest due to the Company upon operational approval from the State of Nevada as discussed in Note 1 would be subject to reclamation by the other members of Strive Management. The Company has been determined to be the primary beneficiary of Strive Management has the Company has the power to direct the activities that significantly impact Strive Management’s economic performance and the obligation to absorb losses. Strive Managements financial statements as of March 31, 2019 and September 30, 2018 have been consolidated with the Company. Upon consolidation, the asset of Strive Management was recorded at its carrying amounts. As of March 31, 2019, and September 30, 2018 the effects of consolidating Strive Management resulted in an increase in assets of $1,426,808 and $1,500,000, respectively, primarily from cash. For the three and six months ended March 31, 2019, Strive Management incurred a loss of $15,384 and $73,377, respectively.

 

 

Note 9 – Income Taxes

 

Income tax provision reflected in the consolidated statements of operations has been computed on the taxable income generated by the compan y since the reverse merger on March 20, 2018 and for the three and six months ended March 31, 2019 which consist of the following:

 

    Three months ended March 31,   Six months ended March 31,
    2019   2018   2019   2018
Federal   $ 135,281     $ 12,708     $ 240,461     $ 29,239  
State     (20,595 )     1,368       (33,062 )     (8 )
                                 
Income Tax Provision   $ 114,686     $ 14,076     $ 207,399     $ 29,231  

 

The following table summarizes the effects of the significant differences between the U.S. federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for the three and six month periods ended March 31, 2019 and 2018:

 

    Three months ended March 31,   Six months ended March 31,
    2019   2018   2019   2018
U.S. federal statutory rate   $ (88,266 )   $ —       $ (141,693 )   $ —    
Non-deductible items     223,548       —         382,154       —    
                                 
    $ 135,282     $ —       $ 240,461     $ —    

 

From Company inception through date of the merger, March 20, 2018, the Company was a Limited Liability Company, electing to be treated as a partnership for income tax purposes and all of the Company’s income during these periods pass through to the then-members of the Comp any, and the Company, therefore had no corporate tax obligation to record.

 

The Company has net operating loss carryforwards on its Federal and State filings approximating $17.8 million, and $9.5 million respectively. The deferred tax assets relating to the carryforwards has been fully reserved due to the uncertainty of the Company’s ability to utilize the carryforwards.

 

  F- 26  

 

Note 10 - Concentrations

 

For the three and six months ended March 31, 2019 and 2018, 93% and 100%, respectively, of the Company’s revenue was generated from a single customer. All trade accounts receivable at March 31, 2019 and 2018 was due from one customer.

 

 

Note 11 - Commitments and Contingencies

 

The production and possession of marijuana is prohibited by the United States of America, though the state of Arizona allows these activities to be performed at licensed facilities such as BSSD. The Company does not believe the federal prohibition of these activities will negatively impact the business. As such, the Company has not elected to record a related accrual contingency.

 

The Company is in default on convertible notes payable totaling $20,000 (see Note 6). The Company has attempted to communicate with the note holder to request extension or conversion, but has been unsuccessful in doing so. The full balance on this note is included in current liabilities.

 

On April 20, 2018, the Company entered into an agreement for the purchase of approximately 44 acres of land from an affiliate of a founding member of BSSD. The purchase price of the property is $3,000,000, payable as follows; (i) $200,000 deposited with escrow agent as an initial earnest money deposit in April 2018, (ii) on or before February 1, 2019, the Company will deposit an additional $800,000 into escrow as additional earnest money deposit and (iii) the balance of the purchase price shall be paid via a promissory note. The earnest money amounts are non-refundable. The Company has negotiated an amendment to this agreement that will spread the $800,000 payment over the course of 4 months through June 30, 2019. As of March 31, 2019, the Company had paid a total of $400,000 which was deposited in escrow, and classified as a long-term asset on the consolidated balance sheet as of March 31, 2019. As of the date of these financial statements, a total of $600,000 has been deposited in escrow.

 

On June 26, 2018, the Company entered into a contractor agreement with Chase Herschman pursuant to which he will provide services in exchange for $120,000 annually, payable each month; up to $420,000 in common stock options which shall vest upon the occurrence of certain benchmarks as described in the contractor agreement and a commission of 1% of the gross profits of the Company. The term of the agreement is a period of three years.

 

Under the terms of the Loan and Revenue Participation Agreement (see Note 7), upon a change in control of the Company, Viridis will be entitled to receive 200% of the principal amount of the loans to the Company computed after considering previous revenue participation payments through the date of change of control and 1% of the aggregate sales price or consideration received in the change in control transaction.

 

As of September 30, 2018, the Company received the $1,500,000 and invested the funds in Strive Management (see Notes 7 and 8). The remaining $1,200,000 has been provided by Viridis directly to contractors of the Arizona property from an account owned and controlled by Viridis. The Company will record the $1,200,000 as a long-term debt upon the completion and occupancy of the Arizona facility expansion, as agreed upon in the terms of the note which occurred in June 2019.

 

As part of the agreement to invest in Strive Management, the Company has committed to raise funding of approximately $4,000,000 through promissory notes that the Company will guarantee so that Strive Management can develop the property in Nevada through promissory notes that the Company will guarantee.

 

On October 22, 2018 the Company entered into a 6 month services agreement with Axiom Group to provide marketing and data distribution services. As part of the agreement, the Company will pay a sum of $15,000 and issue 15,000 shares of common stock to Axiom Group each month the agreement is in place. This contract was terminated in December 2018.

 

On March 11, 2019 the Company entered into a 6 month services agreement with JLS Ventures to provide marketing and data distribution services. As part of the agreement, the Company will pay a sum of $15,000 and issue 35,000 shares of common stock to JLS Ventures each month the agreement is in place.

 

  F- 27  

 

Note 12– Related Party Transactions

 

As discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their membership interests.

 

As discussed in Note 11, the Company has entered into an agreement as of April 20, 2018 for the purchase of land. The land owner is one of the original members of BSSD and a current employee of the Company.

 

As discussed in Notes 7 and 11, the Company has entered into a Loan and Revenue Participation Agreement and Promissory Note with Viridis. The member of Viridis was elected to the Company’s board of directors on December 21, 2018.

 

As discussed in the Description of the Business section of Note 1 and in Note 2 of the financial statement disclosures, the Company is involved in transactions with companies that are owned in whole, or in part by the Company’s CEO, Sara Gullickson.

 

 

Note 13 - Stockholders’ Deficit

 

Common Stock

 

As discussed in Note 1, on March 20, 2018, the Company issued 40,355,771 shares of common stock to the members of BSSD for their membership interests.

 

During the six months ended March 31, 2019, the Company raised $5,400,003 via private placements. The selling price for 5,000,000 shares was $1 per share and the selling price for 266,669 was $1.50 per share for a total of 5,266,669 shares of common stock issued. Additionally, 88,529 shares with a market value of $165,000 were issued to contractors for services and 33,144 shares with a market value of $125,000 were issued to employees for compensation.

 

Warrants

 

As of March 31, 2019 there are 298,411 warrants for purchase of the Company’s common stock outstanding. The Company issued no new warrants during the six months ended March 31, 2019 and 12,606 warrants expired during that period. Warrants outstanding are as follows:

 

    Common Shares            
    Issuable Upon   Exercise Price of   Date   Expiration
    Exercise of Warrants   Warrants   Issued   Date
                 
Warrants issued by predecessor     175,000     $ 2.00     3/31/2015     8/31/2020  
Warrants issued by predecessor     100,000     $ 1.00     7/28/2016     7/28/2021  
Warrants issued by predecessor     23,411     $ 1.30     12/22/2016     12/22/2019  
                             
Balance of Warrants at March 31, 2019     298,411                      

 

(1) As discussed in Note 2, on March 20, 2018 the Company executed an agreement to acquire all the voting interest in BSSD Group, LLC. As BSSD Group, LLC is the accounting acquirer, all previously outstanding warrants were re-issued under the new company.

  F- 28  

 

Stock Options

On May 8, 2018, the Company granted 22,500 stock options to board members. The options are exercisable at $2.40 per share with a ten year term. The options will vest equally over three years unless there is a change of control of the Company at which time any unvested options vest immediately. As of September 30, 2018, there are 294,991 stock options outstanding.

 

As discussed in Note 2, on March 20, 2018 the Company executed an agreement to acquire all the voting interest in BSSD Group, LLC. As BSSD Group, LLC is the accounting acquirer, all previously outstanding options were re-issued and vested immediately as this was considered a change in control.

 

The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes option-pricing model. There was no option activity in the six months ended March 31, 2019. The following assumptions were used for determining the fair value of the options granted during the year ended September 30, 2018:

 

Expected stock price volatility 34.72%
   
Expected dividend yield 0.00%
   
Risk-free interest rate 2.97%
   
Option life 10 years
   
Stock-based compensation recognized        3,773
   
Unrecognized compensation expense      23,390
to be recognized in future periods  

 

We do not have an extensive history as a public company and our common stock transactions are too infrequent, therefore we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant comparable company that is publicly traded and does business within the industry we operate.

 

The options granted during the year ended September 30, 2018 were determined to have a fair value at date of grant of $2.40. The unrecognized compensation expense of $23,390 will be recognized over a weighted average period of 1.84 years.

 

There was no activity in stock options during the 6 months ended March 31, 2019 and 2018. 294,991 and 272,491 options remain outstanding as of March 31, 2019 and 2018, respectively. 272,491 options were exercisable as of March 31, 2019 and 2018.

 

Note 14 - Subsequent Events

 

Subsequent to March 31, 2019, the Company raised $200,002 via private placement. The selling price was $1.50 per share for a total of 133,335 shares of common stock issued. Subsequent to March 31, 2019, 70,000 shares were issued to a contractor for services performed.

 

 

F-29

Exhibit 3.01c

 

 

 

Exhibit 3.01d

 

 

 

Exhibit 3.01e

 

 

Exhibit 3.01f

 

 

Exhibit 4.1

 

ITEM 9 LABS CORP.

2019 EQUITY INCENTIVE PLAN

 

1.   Purpose of the Plan . The purpose of this Plan is to encourage ownership in Item 9 Labs Corp. (the “Company”) by key personnel whose long-term service the Company considers essential to its continued progress and, thereby, encourage recipients to act in the stockholders’ interest and share in the Company’s success.

 

2.   Definitions . As used herein, the following definitions shall apply:

 

“Act” shall mean the Securities Act of 1933, as amended.

 

“Administrator” shall mean the Board, any Committees, or such delegates as shall be administering the Plan in accordance with Section 4 of the Plan.

 

“Affiliate” shall mean any entity that is directly or indirectly in control of or controlled by the Company, or any entity in which the Company has a significant ownership interest as determined by the Administrator.

 

“Applicable Laws” shall mean the requirements relating to the administration of stock plans under federal and state laws; any stock exchange or quotation system on which the Company has listed or submitted for quotation the Common Stock to the extent provided under the terms of the Company’s agreement with such exchange or quotation system; and, with respect to Awards subject to the laws of any foreign jurisdiction where Awards are, or will be, granted under the Plan, to the laws of such jurisdiction.

 

“Award” shall mean, individually or collectively, a grant under the Plan of an Option or other such Stock Award.

 

“Awardee” shall mean a Service Provider who has been granted an Award under the Plan.

 

“Award Agreement” shall mean an Option Agreement or Stock Award Agreement, which may be in written or electronic format, in such form and with such terms as may be specified by the Administrator, evidencing the terms and conditions of an individual Award. Each Award Agreement is subject to the terms and conditions of the Plan.

 

“Board” shall mean the Board of Directors of the Company.

 

“California Qualification Period” shall mean any period during which the issuance and sale of securities under this Plan require qualification under the California Corporate Securities Law of 1968.

 

“Change in Control” shall mean any of the following, unless the Administrator provides otherwise:

 

(i)  any merger or consolidation in which the Company shall not be the surviving entity (or survives only as a subsidiary of another entity whose stockholders did not own all or substantially all of the Common Stock in substantially the same proportions as immediately before such transaction);

 

(ii)  the sale of all or substantially all of the Company’s assets to any other person or entity (other than a wholly-owned subsidiary of the Company);

 

(iii)  the acquisition of beneficial ownership of a controlling interest (including power to vote) in the outstanding shares of Common Stock by any person or entity (including a “group” as defined by or under Section 13(d)(3) of the Exchange Act);

 

(iv)  the dissolution or liquidation of the Company;

 

(v)  a contested election of Directors, as a result of which or in connection with which the persons who were Directors before such election or their nominees cease to constitute a majority of the Board; or

 

(vi)  any other event specified, at the time an Award is granted or thereafter, by the Board or a Committee.

 

Notwithstanding the foregoing, the term “Change in Control” shall not include any underwritten public offering of Shares registered under the Act.

 

“Code” shall mean the Internal Revenue Code of 1986, as amended.

 

“Committee” shall mean a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

 

“Common Stock” shall mean the common stock of the Company.

 

“Company” shall mean Item 9 Labs Corp., a Delaware corporation, or its successor.

 

“Consultant” shall mean any natural person, other than an Employee or Director, who performs bona fide services for the Company or an Affiliate as a consultant or advisor.

 

“Conversion Award” has the meaning set forth in Section 4(b)(xii) of the Plan.

 

“Director” shall mean a member of the Board.

 

“Disability” shall mean permanent and total disability as defined in Section 22(e)(3) of the Code.

 

“Employee” shall mean an employee of the Company or any Affiliate, and may include an Officer or Director. Within the limitations of Applicable Laws, the Administrator shall have the discretion to determine the effect upon an Award and upon an individual’s status as an Employee in the case of (i) any individual who is classified by the Company or its Affiliate as leased from or otherwise employed by a third party or as intermittent or temporary, even if any such classification is changed retroactively as a result of an audit, litigation or otherwise; (ii) any leave of absence approved by the Company or an Affiliate; (iii) any transfer between locations of employment with the Company or an Affiliate or between the Company and any Affiliate or between any Affiliates; (iv) any change in the Awardee’s status from an employee to a Consultant or Director; and (v) an employee who, at the request of the Company or an Affiliate, becomes employed by any partnership, joint venture, or corporation not meeting the requirements of an Affiliate in which the Company or an Affiliate is a party.

 

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

 

“Fair Market Value” shall mean, unless the Administrator determines otherwise, as of any date, the closing price for such Common Stock as of such date (or if no sales were reported on such date, the closing price on the last preceding day for which a sale was reported), as reported in such source as the Administrator shall determine.

 

“Grant Date” shall mean the date upon which an Award is granted to an Awardee pursuant to this Plan.

 

“Incentive Stock Option” shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

 

“Nonstatutory Stock Option” shall mean an Option not intended to qualify as an Incentive Stock Option.

 

“Officer” shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.

 

“Option” shall mean a right granted under Section 8 of the Plan to purchase a certain number of Shares at such exercise price, at such times, and on such other terms and conditions as are specified in the agreement or other documents evidencing the Award (the “Option Agreement”). Both Options intended to qualify as Incentive Stock Options and Nonstatutory Stock Options may be granted under the Plan.

 

“Participant” shall mean the Awardee or any person (including any estate) to whom an Award has been assigned or transferred as permitted hereunder.

 

“Plan” shall mean this Item 9 Labs Corp. 2019 Equity Incentive Plan.

 

“Qualifying Performance Criteria” shall have the meaning set forth in Section 14(b) of the Plan.

 

“Related Corporation” shall mean any parent or subsidiary (as those terms are defined in Section 424(e) and (f) of the Code) of the Company.

 

“Service Provider” shall mean an Employee, Officer, Director, or Consultant.

 

“Share” shall mean a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.

 

“Stock Award” shall mean an award or issuance of Shares or Stock Units made under Section 11 of the Plan, the grant, issuance, retention, vesting, and transferability of which is subject during specified periods to such conditions (including continued service or performance conditions) and terms as are expressed in the agreement or other documents evidencing the Award (the “Stock Award Agreement”).

 

“Ten-Percent Stockholder” shall mean the owner of stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any Related Corporation).

 

“Termination Date” shall mean the date of a Participant’s Termination of Service, as determined by the Administrator in its sole discretion.

 

“Termination of Service” shall mean ceasing to be a Service Provider. However, for Incentive Stock Option purposes, Termination of Service will occur when the Awardee ceases to be an employee (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company or one of its Related Corporations. The Administrator shall determine whether any corporate transaction, such as a sale or spin-off of a division or business unit, or a joint venture, shall be deemed to result in a Termination of Service.

 

3.   Stock Subject to the Plan .

 

(a)   Aggregate Limit . The maximum aggregate number of Shares available under the Plan through Awards is the lesser of: (i) 6,000,000 shares, increased each anniversary date of the adoption of the plan by 2 percent of the then-outstanding shares, or (b) 10,000,000 shares. The limitations of this Section 3(a) shall be subject to the adjustments provided for in Section 13 of the Plan.

 

(b)   Reduction and Replenishment . Upon payment for Shares pursuant to the exercise of an Award, the number of Shares available for issuance under the Plan shall be reduced only by the number of Shares actually issued in such payment. If any outstanding Award expires or is terminated or canceled without having been exercised or settled in full, or if Shares acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company, the Shares allocable to the terminated portion of such Award or such forfeited or repurchased Shares shall again be available to grant under the Plan. Notwithstanding the foregoing, the aggregate number of shares of Common Stock that may be issued under the Plan upon the exercise of Incentive Stock Options shall not be increased for restricted Shares that are forfeited or repurchased. Notwithstanding anything in the Plan, or any Award Agreement to the contrary, Shares attributable to Awards transferred under any Award transfer program shall not be again available for grant under the Plan. The Shares subject to the Plan may be either Shares reacquired by the Company, including Shares purchased in the open market, or authorized but unissued Shares.

 

4.   Administration of the Plan .

 

(a) Procedure .

 

(i)   Multiple Administrative Bodies . The Plan shall be administered by the Board or one or more Committees, including such delegates as may be appointed under paragraph (a)(iv) of this Section 4.

 

(ii)   Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, Awards to “covered employees” within the meaning of Section 162(m) of the Code or Employees that the Committee determines may be “covered employees” in the future shall be made by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

 

(iii)   Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3 promulgated under the Exchange Act (“Rule 16b-3”), Awards to Officers and Directors shall be made in such a manner to satisfy the requirement for exemption under Rule 16b-3.

 

(iv)   Other Administration . The Board or a Committee may delegate to an authorized Officer or Officers of the Company the power to approve Awards to persons eligible to receive Awards under the Plan who are not (A) subject to Section 16 of the Exchange Act; or (B) at the time of such approval, “covered employees” under Section 162(m) of the Code.

 

(v)   Delegation of Authority for the Day-to-Day Administration of the Plan . Except to the extent prohibited by Applicable Laws, the Administrator may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan. Such delegation may be revoked at any time.

 

(b)   Powers of the Administrator . Subject to the provisions of the Plan and, in the case of a Committee or delegates acting as the Administrator, subject to the specific duties delegated to such Committee or delegates, the Administrator shall have the authority, in its sole discretion:

 

(i)  to select the Service Providers of the Company or its Affiliates to whom Awards are to be granted hereunder;

 

(ii)  to determine the number of shares of Common Stock to be covered by each Award granted hereunder;

 

(iii)  to determine the type of Award to be granted to the selected Service Provider;

 

(iv)  to approve the forms of Award Agreements for use under the Plan;

 

(v)  to determine the terms and conditions, consistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include the exercise or purchase price, the time or times when an Award may be exercised (which may or may not be based on performance criteria), the vesting schedule, any vesting or exercisability acceleration or waiver of forfeiture restrictions, the acceptable forms of consideration, the term, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine and may be established at the time an Award is granted or thereafter;

 

(vi)  to correct administrative errors;

 

(vii)  to construe and interpret the terms of the Plan (including sub-plans and Plan addenda) and Awards granted pursuant to the Plan;

 

(viii)  to adopt rules and procedures relating to the operation and administration of the Plan to accommodate the specific requirements of local laws and procedures. Without limiting the generality of the foregoing, the Administrator is specifically authorized (A) to adopt the rules and procedures regarding the conversion of local currency, withholding procedures, and handling of stock certificates that vary with local requirements; and (B) to adopt sub-plans and Plan addenda as the Administrator deems desirable, to accommodate foreign laws, regulations and practice;

 

(ix)  to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans and Plan addenda;

 

(x)  to modify or amend each Award, including the acceleration of vesting, exercisability, or both; provided, however, that any modification or amendment of an Award is subject to Section 16 of the Plan and may not materially impair any outstanding Award unless agreed to by the Participant;

 

(xi)  to allow Participants to satisfy withholding tax amounts by electing to have the Company withhold from the Shares to be issued pursuant to an Award that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined in such manner and on such date that the Administrator shall determine or, in the absence of provision otherwise, on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may provide;

 

(xii)  to authorize conversion or substitution under the Plan of any or all stock options, stock appreciation rights, or other stock awards held by service providers of an entity acquired by the Company (the “Conversion Awards”). Any conversion or substitution shall be effective as of the close of the merger or acquisition. The Conversion Awards may be Nonstatutory Stock Options or Incentive Stock Options, as determined by the Administrator, with respect to options granted by the acquired entity. Unless otherwise determined by the Administrator at the time of conversion or substitution, all Conversion Awards shall have the same terms and conditions as Awards generally granted by the Company under the Plan;

 

(xiii)  to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

 

(xiv)  to determine whether Awards will be settled in Shares, cash, or in any combination thereof;

 

(xv)  to determine whether to provide for the right to receive dividends or dividend equivalents;

 

(xvi)  to establish a program whereby Service Providers designated by the Administrator can reduce compensation otherwise payable in cash in exchange for Awards under the Plan;

 

(xvii)  to impose such restrictions, conditions, or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under an Award, including (A) restrictions under an insider trading policy, and (B) restrictions as to the use of a specified brokerage firm for such resales or other transfers;

 

(xviii)  to provide, either at the time an Award is granted or by subsequent action, that an Award shall contain as a term thereof, a right, either in tandem with the other rights under the Award or as an alternative thereto, of the Participant to receive, without payment to the Company, a number of Shares, cash, or a combination of both, the amount of which is determined by reference to the value of the Award; and

 

(xix)  to make all other determinations deemed necessary or advisable for administering the Plan and any Award granted hereunder.

 

(c)   Effect of Administrator’s Decision . All decisions, determinations and interpretations by the Administrator regarding the Plan, any rules and regulations under the Plan and the terms and conditions of any Award granted hereunder, shall be final and binding on all Participants. The Administrator shall consider such factors as it deems relevant, in its sole and absolute discretion, to making such decisions, determinations and interpretations, including the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select.

 

5.   Eligibility . Awards may be granted to Service Providers of the Company or any of its Affiliates.

 

6.   Effective Date and Term of the Plan . The Plan shall become effective upon its adoption by the Board. Options and Stock Awards may be granted immediately thereafter; provided, that no Option may be exercised and no Stock Award may be granted under the Plan until it is approved by the stockholders of the Company, in the manner and to the extent required by Applicable Laws, within 12 months after the date of adoption by the Board. The Plan shall continue in effect for a term of ten years from the date of the Plan’s adoption by the Board unless terminated earlier under Section 16 herein.

 

7.   Term of Award . The term of each Award shall be determined by the Administrator and stated in the Award Agreement. In the case of an Option, the term shall be ten years from the Grant Date or such shorter term as may be provided in the Award Agreement.

 

8.   Options . The Administrator may grant an Option or provide for the grant of an Option, from time to time in the discretion of the Administrator or automatically upon the occurrence of specified events, including the achievement of performance goals, and for the satisfaction of an event or condition within the control of the Awardee or within the control of others.

 

(a)   Option Agreement . Each Option Agreement shall contain provisions regarding (i) the number of Shares that may be issued upon exercise of the Option; (ii) the type of Option; (iii) the exercise price of the Shares and the means of payment for the Shares; (iv) the term of the Option; (v) such terms and conditions on the vesting or exercisability of an Option, or both, as may be determined from time to time by the Administrator; (vi) restrictions on the transfer of the Option and forfeiture provisions; and (vii) such further terms and conditions, in each case not inconsistent with this Plan, as may be determined from time to time by the Administrator.

 

(b)   Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

 

(i)  In the case of an Incentive Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the Grant Date. Notwithstanding the foregoing, if any Incentive Stock Option is granted to a Ten-Percent Stockholder, then the exercise price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the Grant Date.

 

(ii)  In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the Grant Date. The per Share exercise price may also vary according to a predetermined formula; provided, that the exercise price never falls below 100% of the Fair Market Value per Share on the Grant Date.

 

(iii)  Reserved.

 

(iv)  Notwithstanding the foregoing, at the Administrator’s discretion, Conversion Awards may be granted in substitution or conversion of options of an acquired entity, with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of such substitution or conversion.

 

(c)   Vesting Period and Exercise Dates . Options granted under this Plan shall vest, be exercisable, or both, at such times and in such installments during the Option’s term as determined by the Administrator. The Administrator shall have the right to make the timing of the ability to exercise any Option granted under this Plan subject to continued service, the passage of time, or such performance requirements as deemed appropriate by the Administrator. At any time after the grant of an Option, the Administrator may reduce or eliminate any restrictions surrounding any Participant’s right to exercise all or part of the Option.

 

(d)   Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment, either through the terms of the Option Agreement or at the time of exercise of an Option. The consideration, determined by the Administrator (or pursuant to authority expressly delegated by the Board, a Committee, or other person), and in the form and amount required by Applicable Laws, shall be actually received before issuing any Shares pursuant to the Plan; which consideration shall have a value, as determined by the Board, not less than the par value of such Shares. Acceptable forms of consideration may include:

 

(i)  cash;

 

(ii)  check or wire transfer;

 

(iii)  subject to any conditions or limitations established by the Administrator, other Shares that have a Fair Market Value on the date of surrender or attestation that does not exceed the aggregate exercise price of the Shares as to which said Option shall be exercised;

 

(iv)  consideration received by the Company under a broker-assisted sale and remittance program acceptable to the Administrator to the extent that this procedure would not violate Section 402 of the Sarbanes-Oxley Act of 2002, as amended;

 

(v)  cashless exercise, subject to any conditions or limitations established by the Administrator;

 

(vi)  such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or

 

(vii)  any combination of the foregoing methods of payment.

 

9.   Incentive Stock Option Limitations .

 

(a)   Eligibility . Only employees (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company or any of its Related Corporations may be granted Incentive Stock Options.

 

(b)   $100,000 Limitation . Notwithstanding the designation “Incentive Stock Option” in an Option Agreement, if the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Awardee during any calendar year (under all plans of the Company and any of its Related Corporations) exceeds $100,000, then the portion of such Options that exceeds $100,000 shall be treated as Nonstatutory Stock Options. An Incentive Stock Option is considered to be first exercisable during a calendar year if the Incentive Stock Option will become exercisable at any time during the year, assuming that any condition on the Awardee’s ability to exercise the Incentive Stock Option related to the performance of services is satisfied. If the Awardee’s ability to exercise the Incentive Stock Option in the year is subject to an acceleration provision, then the Incentive Stock Option is considered first exercisable in the calendar year in which the acceleration provision is triggered. For purposes of this Section 9(b), Incentive Stock Options shall be taken into account in the order in which they were granted. However, because an acceleration provision is not taken into account before its triggering, an Incentive Stock Option that becomes exercisable for the first time during a calendar year by operation of such provision does not affect the application of the $100,000 limitation with respect to any Incentive Stock Option (or portion thereof) exercised before such acceleration. The Fair Market Value of the Shares shall be determined as of the Grant Date.

 

(c)   Leave of Absence . For purposes of Incentive Stock Options, no leave of absence may exceed three months, unless the right to reemployment upon expiration of such leave is provided by statute or contract. If the period of leave exceeds three months and the Awardee’s right to reemployment is not provided by statute or contract, the Awardee’s employment with the Company shall be deemed to terminate on the first day immediately following such three-month period, and any Incentive Stock Option granted to the Awardee shall cease to be treated as an Incentive Stock Option and shall terminate upon the expiration of the three-month period starting on the date the employment relationship is deemed terminated.

 

(d)   Transferability . The Option Agreement must provide that an Incentive Stock Option cannot be transferable by the Awardee otherwise than by will or the laws of descent and distribution, and, during the lifetime of such Awardee, must not be exercisable by any other person. Notwithstanding the foregoing, the Administrator, in its sole discretion, may allow the Awardee to transfer his or her Incentive Stock Option to a trust where under Section 671 of the Code and other Applicable Law, the Awardee is considered the sole beneficial owner of the Option while it is held in the trust. If the terms of an Incentive Stock Option are amended to permit transferability, the Option will be treated for tax purposes as a Nonstatutory Stock Option.

 

(e)   Exercise Price . The per Share exercise price of an Incentive Stock Option shall be determined by the Administrator in accordance with Section 8(b)(i) of the Plan.

 

(f)   Ten-Percent Stockholder . If any Incentive Stock Option is granted to a Ten-Percent Stockholder, then the Option term shall not exceed five years measured from the date of grant of such Option.

 

(g)   Other Terms . Option Agreements evidencing Incentive Stock Options shall contain such other terms and conditions as may be necessary to qualify as Incentive Stock Options, to the extent determined desirable by the Administrator, under the applicable provisions of Section 422 of the Code.

 

10.   Exercise of Option .

 

(a)   Procedure for Exercise; Rights as a Stockholder .

 

(i)  Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the respective Award Agreement.

 

(ii)  An Option shall be deemed exercised when the Company receives (A) written or electronic notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Option; (B) full payment for the Shares with respect to which the related Option is exercised; and (C) with respect to Nonstatutory Stock Options, payment of all applicable withholding taxes.

 

(iii)  Shares issued upon exercise of an Option shall be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Unless provided otherwise by the Administrator or pursuant to this Plan, until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option.

 

(iv)  The Company shall issue (or cause to be issued) such Shares as soon as administratively practicable after the Option is exercised. An Option may not be exercised for a fraction of a Share.

 

(b)   Effect of Termination of Service on Options .

 

(i)   Generally . Unless otherwise provided for by the Administrator, if a Participant ceases to be a Service Provider, other than upon the Participant’s death or Disability, the Participant may exercise his or her Option within such period as is specified in the Award Agreement to the extent that the Option is vested on the Termination Date (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). Notwithstanding the foregoing, upon a Participant’s Termination of Service during any California Qualification Period, other than due to death, Disability, or cause, the Participant may exercise his or her Option (A) at any time on or before the date determined by the Administrator, which date shall be at least 30 days after the Participant’s Termination Date (but in no event later than the expiration of the term of such Option); and (B) only to the extent that the Participant was entitled to exercise such Option on the Termination Date. In the absence of a specified time in the Award Agreement, the vested portion of the Option will remain exercisable for three months following the Participant’s Termination Date. Unless otherwise provided by the Administrator, if on the Termination Date the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will automatically revert to the Plan. If after the Termination of Service the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will automatically terminate, and the Shares covered by such Option will revert to the Plan.

 

(ii)   Disability of Awardee . Unless otherwise provided for by the Administrator, if a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period as is specified in the Award Agreement to the extent the Option is vested on the Termination Date (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). Notwithstanding the foregoing, during any California Qualification Period, upon a Participant’s Termination of Service due to his or her Disability the Participant may exercise his or her Option (A) at any time on or before the date determined by the Administrator, which date shall be at least six months after the Termination Date (but in no event later than the expiration date of the term of his or her Option); and (B) only to the extent that the Participant was entitled to exercise such Option on the Termination Date. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve months following the Participant’s Termination Date. Unless otherwise provided by the Administrator, if at the time of Disability the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will automatically revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will automatically revert to the Plan.

 

(iii)   Death of Awardee . Unless otherwise provided for by the Administrator, if a Participant dies while a Service Provider, the Option may be exercised following the Participant’s death within such period as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the Option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated before the Participant’s death in a form acceptable to the Administrator. Notwithstanding the foregoing, during any California Qualification Period, if the Participant dies before his or her Termination of Service, the Participant’s Option may be exercised by the Participant’s designated beneficiary (A) at any time on or before the date determined by the Administrator, which date shall be at least six months after the date of death (but in no event later than the expiration date of the term of his or her Option); and (B) only to the extent that the Participant was entitled to exercise the Option at the date of death. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person or persons to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve months following Participant’s death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

 

11.   Stock Awards .

 

(a)   Stock Award Agreement . Each Stock Award Agreement shall contain provisions regarding (i) the number of Shares subject to such Stock Award or a formula for determining such number; (ii) the purchase price, if any, of the Shares, and the means of payment for the Shares; (iii) the performance criteria, if any, and level of achievement versus these criteria that shall determine the number of Shares granted, issued, retained, or vested, as applicable; (iv) such terms and conditions on the grant, issuance, vesting, or forfeiture of the Shares, as applicable, as may be determined from time to time by the Administrator; (v) restrictions on the transferability of the Stock Award; and (vi) such further terms and conditions in each case not inconsistent with this Plan as may be determined from time to time by the Administrator.

 

Notwithstanding the foregoing, during any California Qualification Period, the purchase price for restricted Shares shall be determined by the Administrator, but shall not be less than 85% (or 100% in the case of a person who is a Ten-Percent Stockholder on the date of grant of such restricted stock) of the Fair Market Value of a share of Common Stock on the date of grant of such restricted stock.

 

(b)   Restrictions and Performance Criteria . The grant, issuance, retention, and vesting of each Stock Award may be subject to such performance criteria and level of achievement versus these criteria as the Administrator shall determine, which criteria may be based on financial performance, personal performance evaluations, or completion of service by the Awardee. Notwithstanding the foregoing, during any California Qualification Period, restricted stock awarded to anyone other than an Officer, Director, or Consultant of the Company shall vest at a rate of at least 20% per year.

 

Notwithstanding anything to the contrary herein, the performance criteria for any Stock Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be established by the Administrator based on one or more Qualifying Performance Criteria selected by the Administrator and specified in writing.

 

(c)   Forfeiture . Unless otherwise provided for by the Administrator, upon the Awardee’s Termination of Service, the unvested Stock Award and the Shares subject thereto shall be forfeited, provided that to the extent that the Participant purchased any Shares pursuant to such Stock Award, the Company shall have a right to repurchase the unvested portion of such Shares at the original price paid by the Participant, provided that during any California Qualification Period, the Company must exercise such right to repurchase (i) for either cash or cancellation of purchase money indebtedness for such unvested Shares; and (ii) within 90 days of such Termination of Service.

 

(d)   Rights as a Stockholder . Unless otherwise provided by the Administrator, the Participant shall have the rights equivalent to those of a stockholder and shall be a stockholder only after Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) to the Participant. Unless otherwise provided by the Administrator, a Participant holding Stock Units shall be entitled to receive dividend payments as if he or she were an actual stockholder.

 

12.   Other Provisions Applicable to Awards .

 

(a)   Non-Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent and distribution, and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, either at the time of grant or thereafter, such Award shall contain such additional terms and conditions as the Administrator deems appropriate, and any transferee shall be bound by such terms upon acceptance of such transfer. Notwithstanding the foregoing, during any California Qualification Period, an Award may not be transferred in any manner other than by will, by the laws of descent and distribution, or as permitted by Rule 701 of the Securities Act of 1933, as amended, as the Administrator may determine.

 

(b)   Qualifying Performance Criteria . For purposes of this Plan, the term “Qualifying Performance Criteria” shall mean any one or more of the following performance criteria, applied to either the Company as a whole or to a business unit, Affiliate, Related Corporations, or business segment, either individually, alternatively, or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified in the Award by the Committee: (i) cash flow, (ii) earnings (including gross margin, earnings before interest and taxes, earnings before taxes, and net earnings), (iii) earnings per share, (iv) growth in earnings or earnings per share, (v) stock price, (vi) return on equity or average stockholders’ equity, (vii) total stockholder return, (viii) return on capital, (ix) return on assets or net assets, (x) return on investment, (xi) revenue, (xii) income or net income, (xiii) operating income or net operating income, (xiv) operating profit or net operating profit, (xv) operating margin, (xvi) return on operating revenue, (xvii) market share, (xviii) contract awards or backlog, (xix) overhead or other expense reduction, (xx) growth in stockholder value relative to the moving average of the S&P 500 Index or a peer group index, (xxi) credit rating, (xxii) strategic plan development and implementation, (xxiii) improvement in workforce diversity, (xxiv) EBITDA, and (xxv) any other similar criteria.

 

(c)   Certification . Before payment of any compensation under an Award intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee shall certify the extent to which any Qualifying Performance Criteria and any other material terms under such Award have been satisfied (other than in cases where such relate solely to the increase in the value of the Common Stock).

 

(d)   Discretionary Adjustments Pursuant to Section 162(m) . Notwithstanding satisfaction or completion of any Qualifying Performance Criteria, to the extent specified at the time of grant of an Award to “covered employees” within the meaning of Section 162(m) of the Code, the number of Shares, Options or other benefits granted, issued, retained, or vested under an Award on account of satisfaction of such Qualifying Performance Criteria may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine.

 

(e)   Section 409A . Notwithstanding anything in the Plan to the contrary, it is the Company’s intent that all Awards granted under this Plan comply with Section 409A of the Code, and each Award shall be interpreted in a manner consistent with that intention.

 

13.   Adjustments upon Changes in Capitalization, Dissolution, Merger or Asset Sale .

 

(a)   Changes in Capitalization .

 

(i)  The limitations set forth in Section 3, the number and kind of Shares covered by each outstanding Award, and the price per Share (but not the total price) subject to each outstanding Award shall be proportionally adjusted to prevent dilution or enlargement of rights under the Plan for any change in the outstanding Common Stock subject to the Plan, or subject to any Award, resulting from any stock splits, combination or exchange of Shares, consolidation, spin-off or recapitalization of Shares or any capital adjustment or transaction similar to the foregoing or any distribution to holders of Common Stock other than regular cash dividends.

 

(ii)  The Administrator shall make such adjustment in such manner as it deems equitable and appropriate, subject to compliance with Applicable Laws. Any determination, substitution or adjustment made by the Administrator under this Section shall be conclusive and binding on all persons. The conversion of any convertible securities of the Company shall not be treated as a transaction requiring any adjustment under this Section. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Award.

 

(b)   Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable before the effective date of such proposed transaction. The Administrator in its discretion may provide for an Option to be fully vested and exercisable until ten days before such proposed transaction. In addition, the Administrator may provide that any restrictions on any Award shall lapse before the proposed transaction, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Award will terminate immediately before the consummation of such proposed transaction.

 

(c)   Change in Control . If there is a Change in Control of the Company, as determined by the Board or a Committee, the Board or Committee, or board of directors of any surviving entity or acquiring entity may, in its discretion, (i) provide for the assumption, continuation or substitution (including an award to acquire substantially the same type of consideration paid to the stockholders in the transaction in which the Change in Control occurs) of, or adjustment to, all or any part of the Awards; (ii) accelerate the vesting of all or any part of the Options and SARs and terminate any restrictions on all or any part of the Stock Awards or Cash Awards; (iii) provide for the cancellation of all or any part of the Awards for a cash payment to the Participants; and (iv) provide for the cancellation of all or any part of the Awards as of the closing of the Change in Control; provided, that the Participants are notified that they must exercise or redeem their Awards (including, at the discretion of the Board or Committee, any unvested portion of such Award) at or before the closing of the Change in Control.

 

14.   Amendment and Termination of the Plan .

 

(a)   Amendment and Termination . The Administrator may amend, alter, or discontinue the Plan or any Award Agreement, but any such amendment shall be subject to approval of the stockholders of the Company in the manner and to the extent required by Applicable Law.

 

(b)   Effect of Amendment or Termination . No amendment, suspension, or termination of the Plan shall materially impair the rights of any Award, unless agreed otherwise between the Participant and the Administrator. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan before the date of such termination.

 

(c)   Effect of the Plan on Other Arrangements . Neither the adoption of the Plan by the Board or a Committee nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or any Committee to adopt such other incentive arrangements as it or they may deem desirable, including the granting of restricted stock or stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

 

15.   Designation of Beneficiary .

 

(a)  An Awardee may file a written designation of a beneficiary who is to receive the Awardee’s rights pursuant to Awardee’s Award or the Awardee may include his or her Awards in an omnibus beneficiary designation for all benefits under the Plan. To the extent that Awardee has completed a designation of beneficiary such beneficiary designation shall remain in effect with respect to any Award hereunder until changed by the Awardee to the extent enforceable under Applicable Law.

 

(b)  The Awardee may change such designation of beneficiary at any time by written notice. If an Awardee dies and no beneficiary is validly designated under the Plan who is living at the time of such Awardee’s death, the Company shall allow the executor or administrator of the estate of the Awardee to exercise the Award, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may allow the spouse or one or more dependents or relatives of the Awardee to exercise the Award to the extent permissible under Applicable Law.

 

16.   No Right to Awards or to Service . No person shall have any claim or right to be granted an Award and the grant of any Award shall not be construed as giving an Awardee the right to continue in the service of the Company or its Affiliates. Further, the Company and its Affiliates expressly reserve the right, at any time, to dismiss any Service Provider or Awardee at any time without liability or any claim under the Plan, except as provided herein or in any Award Agreement entered into hereunder.

 

17.   Preemptive Rights . No Shares will be issued under the Plan in violation of any preemptive rights held by any stockholder of the Company.

 

18.   Legal Compliance . No Share will be issued pursuant to an Award under the Plan unless the issuance and delivery of such Share, as well as the exercise of such Award, if applicable, will comply with Applicable Laws. Issuance of Shares under the Plan shall be subject to the approval of counsel for the Company with respect to such compliance. Notwithstanding anything in the Plan to the contrary, the Plan is intended to comply with the requirements of Section 409A of the Code and shall be interpreted in a manner consistent with that intention.

 

19.   Inability to Obtain Authority . To the extent the Company is unable to or the Administrator deems that it is not feasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, the Company shall be relieved of any liability with respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

 

20.   Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

 

21.   Notice . Any written notice to the Company required by any provisions of this Plan shall be addressed to the Secretary of the Company and shall be effective when received.

 

22.   Governing Law; Interpretation of Plan and Awards .

 

(a)  This Plan and all determinations made and actions taken pursuant hereto shall be governed by the substantive laws, but not the choice of law rules, of the state of Delaware.

 

(b)  If any provision of the Plan or any Award granted under the Plan is declared to be illegal, invalid, or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid, and enforceable, or otherwise deleted, and the remainder of the terms of the Plan and Award shall not be affected except to the extent necessary to reform or delete such illegal, invalid, or unenforceable provision.

 

(c)  The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of the Plan, nor shall they affect its meaning, construction or effect.

 

(d)  The terms of the Plan and any Award shall inure to the benefit of and be binding upon the parties hereto and their respective permitted heirs, beneficiaries, successors, and assigns.

 

(e)  All questions arising under the Plan or under any Award shall be decided by the Administrator in its total and absolute discretion. If the Participant believes that a decision by the Administrator with respect to such person was arbitrary or capricious, the Participant may request arbitration with respect to such decision. The review by the arbitrator shall be limited to determining whether the Administrator’s decision was arbitrary or capricious. This arbitration shall be the sole and exclusive review permitted of the Administrator’s decision, and the Awardee shall as a condition to the receipt of an Award be deemed to waive explicitly any right to judicial review.

 

23.   Limitation on Liability . The Company and any Affiliate or Related Corporation that is in existence or hereafter comes into existence shall not be liable to a Participant, an Employee, an Awardee, or any other persons as to:

 

(a)   The Non-Issuance of Shares . The non-issuance or sale of Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any shares hereunder; and

 

(b)   Tax Consequences . Any tax consequence expected, but not realized, by any Participant, Employee, Awardee or other person due to the receipt, exercise or settlement of any Option or other Award granted hereunder.

 

24.   Unfunded Plan . Insofar as it provides for Awards, the Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Awardees who are granted Stock Awards under this Plan, any such accounts will be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by Awards, nor shall this Plan be construed as providing for such segregation, nor shall the Company or the Administrator be deemed a trustee of stock or cash to be awarded under the Plan. Any liability of the Company to any Participant with respect to an Award shall be based solely upon any contractual obligations that may be created by the Plan; no such obligation of the Company shall be deemed secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Administrator shall be required to give any security or bond for the performance of any obligation that may be created by this Plan.

 

IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this Plan, effective as of June 21, 2019.

 

     
 

ITEM 9 LABS CORP.

 

     
  By:  
  Sara Gullickson
  Chief Executive Officer

 

Exhibit 10.4

 

AGREEMENT AND PLAN OF EXCHANGE

 

THIS AGREEMENT AND PLAN OF EXCHANGE (this "Agreement" ) is made and entered into as of the 26th day of January 2018 (the “Effective Date” ) by and among Airware Labs Corp, a Delaware limited liability company ( “ALC” ), and Airware Holdings, Inc., a Nevada corporation Arizona ( “AHI” ), on the one hand, and BSSD Group, LLC (formerly known as BSSD Farms, LLC), an Arizona limited liability company ( “BSSD” ), Three Kings Holdings, LLC, an Arizona limited liability company ( “TKH” ), Seventy Six Spirits, LLC, an Arizona limited liability company ( “SSS” ), Bryce Skalla, Mark Murro III, Patrick Sean Dugan, Andrew Poirier and Carlos Curiel, individuals, some of whom are members of TKH or SSS or may have been or are to be members of BSSD upon the Closing of this Agreement (the “Individuals” and collectively with the BSSD Members are the “BSSD Members” ), on the other hand. (Collectively, BSSD, TKH, SSS, the Individuals, ALC and AHI are the “Parties” ).

 

RECITALS

 

A. The BSSD Members together hold all Membership Interests and a 100% participation percentage in BSSD. AHI is a wholly owned subsidiary of ALC.

 

B. The parties have held in depth exploratory talks regarding the acquisition of BSSD by ALC in a business combination transaction pursuant to Section 368.

 

C. The BSSD Members desire to convey all of the Membership Interests in BSSD to ALC (the “BSSD Membership Interests” ).

 

D. For the BSSD Membership Interests, ALC desires to exchange a total of 1,069,407,228 newly issued restricted shares of Common Stock of ALC, fully paid and non-assessable (representing 75% of the issued and outstanding shares of Common Stock of ALC calculated on a fully diluted basis but not including the number of shares of common stock issued in the Capital Raise (as defined below)) (the “ALC Shares” ).

 

E. The Parties desire to complete the exchange of the BSSD Membership Interests for the ALC Shares on the terms and conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

SECTION 1

EXCHANGE OF THE BSSD MEMBERSHIP INTERESTS FOR THE ALC SHARES

 

1.1 The Exchange . On the terms and subject to the conditions of this Agreement, at the Closing referred to in Section 2.1:

 

a. The BSSD Members shall assign, transfer and deliver to ACL, free and clear of any and all liens, mortgages, adverse claims, charges, security interests, encumbrances or other restrictions or limitations whatsoever other than restrictions on transfer as set forth in this Agreement, the BSSD Membership Interests.

 

b. ACL shall issue to the BSSD Members the ALC Shares pro rata to their respective Membership Interests and participation percentage in BSSD.

 

c. The BSSD Membership Interests are not certificated. To effect the transfer of the BSSD Membership Interests from the BSSD Members to ALC, the BSSD Members shall deliver or cause to be delivered to BSSD a written directive to transfer to ALC the BSSD Membership Interests along with executed transfer powers for the BSSD Membership Interests and to enter into the transfer ledger and the books and records of BSSD, registration of transfer of the BSSD Membership Interests into the name of ALC as the registered owner (collectively, the “Transfer Instructions” ) to be effective at the Closing. BSSD shall comply with the Transfer Instructions to deliver the BSSD Membership Interests to ALC by registering the BSSD Membership Interests in the name of ALC (the “Delivery” ).

 

d. The ALC Shares will be certificated. The ALC transfer agent will be notified regarding issuance of the ALC Shares to the BSSD Members and the ALC stock ledger will reflect such issuances with restrictive legends to the BSSD Members.

 

1.2 Related Transactions . The exchange of the BSSD Membership Interests for the ALC Shares as described in Section 1.1 above (the “Exchange” ), is subject to and contingent upon the satisfactory completion (or waiver) of the following transactions:

 

a. Increase in Number of Authorized Shares of Common Stock . Prior to and as a condition of the Closing, ALC will take all corporate action to amend its certificate of incorporation to increase the number of authorized shares of Common Stock to 2,000,000,000 and to change the name of ALC to “Item 9 Labs Corp.” (the “Amended Certificate” ).

 

b. Conversion of Convertible Note . At the Closing, the $506,000 principal amount plus accrued but unpaid interest on the Senior Secured Convertible Note (the “Convertible Note” ) issued to Stockbridge Enterprises, L.P. ( “Stockbridge” ) by AHI will be converted into shares of common stock of ALC.

 

c. Transfer and Retention of IP . With the Closing of this Agreement, ALC and AHI will seek a suitable purchaser for all of the intellectual property and patents held by ALC and AHI for all research and commercial purposes; provided, however , the intellectual property and patents for and in cannabis related and drug infusion products will not be conveyed to any purchaser but will be retained by ALC and AHI for use in the development of CBD and THC nasal delivery solutions and products.

 

d. Private Placement of Securities . ALC will proceed with a $1,000,000 private placement of shares of common stock of ALC with the number of shares issued to be calculated by dividing 1,000,000 by the lesser of (i) $0.05 per share, and (ii) the price equal to 50% of the lowest closing price of ALC common stock on the OTC Markets Pink Sheets for the thirty trading days following the Closing of this Agreement, with the offering to be made under exemptions from registration under both federal and applicable state securities laws (the “Capital Raise” ).

 

e. Resignations and Appointments . Effective at the Closing, Jeffrey Rassas will resign as a CEO of ALC and AHI, and ALC will cause Bryce Skalla to be appointed as a director and CEO of ALC. Jeffrey Rassas and Ron Miller will remain as directors. Jessica Smith will remain CFO.

 

1.3 Section 368 Reorganization . The parties hereto intend that the transactions contemplated by this Agreement shall qualify as a reorganization under Section 368(a)(1)(B) of the Internal Revenue Code (the “Code” ), and each party hereto will take all necessary and appropriate actions in order to accomplish such intent. This Agreement constitutes a “Plan of Reorganization” as required by Treasury Regulation Section 1.368-3(a) and has been duly adopted by each party hereto as such. Notwithstanding the foregoing or anything else to the contrary contained in this Agreement, the parties acknowledge and agree that no party is making any representation or warranty, and no legal or other opinions will be provided, as to the qualification of the Exchange as a reorganization under Section 368 of the Code or as to the effect, if any, that any transaction consummated prior to the Closing Date has or may have on any such reorganization status. The parties acknowledge and agree that each (i) has had the opportunity to obtain independent legal and Tax advice with respect to the transaction contemplated by this Agreement, and (ii) is responsible for paying its own Taxes, including without limitation, any adverse Tax consequences that may result if the transaction contemplated by this Agreement is not determined to qualify as a reorganization under Section 368 of the Code.

 

SECTION 2

CLOSING AND POST CLOSING

 

2.1 Closing . The closing of the exchange of the BSSD Membership Interests and the ALC Shares pursuant to this Agreement (the "Closing" ) shall occur on or about February 28, 2018 at 10:00 a.m. (the "Closing Date" ) and shall occur at the location of the ALC offices, or at such other time and place as shall be mutually agreed to by the Parties.

 

2.2 Closing Deliveries. At the Closing:

 

a. The BSSD Members shall tender and deliver to the BSSD transfer agent the Transfer Instructions for the BSSD Membership Interests and execute transfer powers for assignment and delivery of the BSSD Membership Interests to ALC, and BSSD shall enter the transfer of the BSSD Membership Interests into the name of ALC on the transfer ledger and the books and records of BSSD.

 

b. ALC shall deliver certificates representing the pro rata portion of the ALC Shares each BSSD Member is to receive.

 

c. Documented evidence from ALC reflecting completion of the Amended Certificate.

 

d. Documented evidence from ALC reflecting completion of the Conversion of the Convertible Note.

 

e. Documented Evidence from ALC reflecting satisfaction of the Capital Raise.

 

f. A written certification under section 5.1 from the BSSD Members verifying the satisfaction or waiver of the conditions set forth therein.

 

g. A written certification under section 5.2 from ALC and AHI verifying the satisfaction or waiver of the conditions set forth therein.

 

k. Delivery of the written resignation of Jeffrey Rassas as CEO of ALC and AHI. Written documentation appointing Bryce Skalla as a director and CEO of ALC.

 

2.3 Termination in Absence of Closing.

a. Subject to the provisions of Section 5, if by the close of business on March 31, 2018, the Closing has not occurred, then any Party hereto may thereafter terminate this Agreement by written notice to such effect, to the other Parties hereto, without liability of or to any Party to this Agreement or any representative of such Party unless the reason for Closing having not occurred is (i) such Party’s willful breach of the provisions of this Agreement, or (ii) if all of the conditions to such Party’s obligations set forth in Section 5 have been satisfied or waived in writing by the date scheduled for the Closing pursuant to Section 2.1, the failure of such Party to perform its obligations under Section 2 on such date; provided, however , that any termination pursuant to this Section 2.3 shall not relieve any Party hereto who was responsible for Closing having not occurred as described in clauses (i) or (ii) above of any liability for (x) such Party’s willful breach of the provisions of this Agreement, or (y) if all of the conditions to such Party’s obligations set forth in Section 5 have been satisfied or waived in writing by the date scheduled for the Closing pursuant to Section 2.1, the failure of such Party to perform its obligations under this Section 2 on such date.

b. Notwithstanding the approval hereof by ALC and AHI, this Agreement and the transactions contemplated herein may be terminated and abandoned at any time on or prior to the Closing Date by ALC and AHI if:

(i) any representation or warranty made herein for the benefit of any of ALC or AHI, or any certificate, schedule or document furnished to ALC or AHI pursuant to this Agreement is untrue in any material respect; or

(ii) BSSD or the BSSD Members shall have defaulted in any material respect in the performance of any material obligation under this Agreement.

c. Notwithstanding the approval by the BSSD Members, this Agreement and the transactions contemplated herein may be terminated and abandoned at any time on or prior to the Closing Date by the BSSD Members if:

(i)    any representation or warranty made herein for the benefit of the BSSD Members, or any certificate, schedule or document furnished to the BSSD Members pursuant to this Agreement is untrue in any material respect; or

(ii) any of ALC shall have defaulted in any material respect in the performance of any material obligation under this Agreement.

 

SECTION 3

THE PRE-CLOSING PERIOD

 

3.1 Due Diligence; Access to Information . During the period beginning on the execution of this Agreement and ending on the Closing Date, (the “Due Diligence Period” ), the Parties will each cooperate to provide access for continued review and inspection of all assets of the Parties and all materials, documentation and other information relating to the Parties and all other transactions contemplated by this Agreement and the opportunity to investigate any and all matters which are relevant to the exchange of the BSSD Membership Interests for the ALC Shares and the related transactions (the “Investigation” ). The Parties shall have the right to approve or disapprove any item disclosed by the Investigation, and any Party shall deliver written notice of any disapproved item to the other Parties on or before the end of the Due Diligence Period. In the event any disapproved item cannot or will not be corrected or remedied by the Parties within five (5) days following notification to all Parties of such disapproved item, the Party so affected can (1) waive the cure of such disapproved item and proceed to closing despite the existence of such disapproved items; or (2) terminate this Agreement. In the event that the Party so affected elects to terminate this Agreement, the Parties shall have no further obligations to each other, except as provided for in Paragraph 3.2 or as otherwise provided for in this Agreement.

 

3.2 Confidentiality . The Parties agree that any information or documentation produced by ALC, AHI, BSSD or the BSSD Members under the terms of this Agreement is confidential and shall only be used and/or disclosed in connection with, and relation to the Due Diligence Period may not, and will not, be used or disclosed by the Parties or their respective directors, officers shareholders or affiliates, including their family members to anyone outside of the Agreement and will not be used for any purpose outside of this Agreement (the “Confidential Information” ). Disclosure of the Confidential Information contained therein shall be limited to the Parties’ respective spouses, directors, officers, shareholders, affiliates and other employees who need to know such information and are assisting with the transactions contemplated in this Agreement, their respective counsel and accountants, and other entities acting in connection with this Agreement.

 

3.3 Operations . The Parties shall continue to operate and carry on the business of BSSD in the ordinary course consistent with the practice conducted immediately prior to the Effective Date, and will use commercially reasonable efforts not to take any action inconsistent with this Agreement. Except as contemplated hereby or as may be incidental to or in furtherance of the transactions contemplated hereby or as may have been set forth herein, the Parties shall use commercially reasonable efforts to maintain the present character and quality of the respective businesses, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, clients, customers, joint venture partners, syndication partners, strategic partners and employees.

 

3.4 Costs of Due Diligence . Each of the Parties shall pay its own costs of counsel, preparing disclosure materials for, and reviewing the contents of, any documents to be prepared in connection with this Agreement.

 

SECTION 4

REPRESENTATIONS, WARRANTIES AND COVENANTS

 

4.1 Representations and Warranties of ALC and AHI . As a material inducement to BSSD and the BSSD Members to enter into this Agreement, except as disclosed in the disclosure schedules delivered to BSSD and the BSSD Members by ALC and AHI, ALC and AHI hereby covenant, represent and warrant to BSSD and the BSSD Members that:

 

a. Due Incorporation, Good Standing and Qualification . Each of ALC and its subsidiary AHI is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation with the requisite corporate power and authority to own, operate, and lease its properties and to carry on its business as now being conducted. Neither ALC nor AHI is subject to any material liability by reason of the failure to be duly qualified as a foreign corporation for the transaction of business or to be in good standing under the laws of any jurisdiction. Schedule 4.1(a) hereto sets forth, as of the date of this Agreement, each jurisdiction in which each of ALC and AHI qualified to do business.

 

b. Authorization, Approval and Enforceability . ALC and AHI each have all requisite power and authority to enter into and perform the terms of this Agreement. ALC and AHI are not subject to any restriction under any corporate charter, operating agreement, partnership agreement, trust agreement, agreement, instrument, order, judgment, decree, law, statute or regulation, or any other restriction of any kind or character, which would prevent ALC and AHI, respectively, from entering into this Agreement or consummating the transactions contemplated hereby in accordance with the terms hereof. This Agreement, when executed and delivered by ALC and AHI will constitute a valid and binding obligation of ALC and AHI, respectively, enforceable in accordance with its terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors, rules of law governing specific performance, injunctive relief and other equitable remedies, and public policy.

 

c. Capital Stock . As of the date of this Agreement, ALC has authorized capital stock consisting of 200,000,000 shares of ALC common stock, $0.0001 par value, of which 150,383,643 shares are issued and outstanding. As of such date, 5,449,821 shares of ALC common stock are reserved for issuance upon the exercise of outstanding ALC stock options and 6,220,343 shares of ALC common stock are reserved for issuance upon the exercise of outstanding ALC stock warrants. All of the issued and outstanding shares of capital stock of ALC and AHI have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive rights. As of the date of this Agreement, the outstanding shares of ALC common stock are substantially as set forth in Note 10 to the Unaudited Consolidated Financial Statements for the year ended September 30, 2017.

 

d. Options, Warrants and Rights . Neither ALC nor AHI has any outstanding options, warrants, or other rights to purchase, convert any obligation into, or otherwise acquire any shares of its capital stock, other than as set forth in Schedule 4.1(d) hereto.

 

e. Financial Statements . The Consolidated Balance Sheets of ALC and AHI as of June 30, 2016, and the related Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows of ALC and AHI for the years ended September 30, 2015 and September 30, 2014, and all related schedules and notes to the foregoing, have been reviewed (interim reports) or audited (annual reports) by Semple, Marchal & Cooper, LLP, registered independent public accountants, and the Consolidated Balance Sheets of ALC and AHI as of September 30, 2016 and 2017, and the related Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows of ALC and AHI for the three, six and nine months ended December 31, 2016, March 31, 2017 and June 30, 2017, and all related schedules and notes to the foregoing, have been prepared by ALC without audit. All of the foregoing financial statements have been prepared in accordance with accounting principles generally accepted in the United States ( “GAAP” ), applied on a consistent basis, and fairly present, in all material respects, the financial position, results of operations, and changes in financial position of ALC and AHI as of their respective dates and for the periods indicated. Neither ALC nor AHI has any material liabilities, obligations, or commitments of a type that would be required to be disclosed in a balance sheet prepared in accordance with GAAP, whether related to tax or non-tax matters, accrued or contingent, due or not yet due, liquidated or unliquidated, or otherwise, except as and to the extent disclosed or reflected in the Consolidated Balance Sheet of ALC and AHI as of September 30, 2017 (the “ALC Base Balance Sheet” ), or incurred since the date of the ALC Base Balance Sheet in the ordinary course of business.

 

f. Title to Properties . Each of ALC and AHI has good and marketable title to all of its real and personal assets and properties, including all assets and properties reflected in the ALC Base Balance Sheet, or acquired subsequent to the date of the ALC Base Balance Sheet, except properties disposed of subsequent to that date in the ordinary course of business or properties relating to discontinued operations. Such assets and properties are not subject to any mortgage, pledge, lien, claim, encumbrance, charge, security interest, title retention, or other security arrangement, except for liens for the payment of federal, state, or other taxes, the payment of which is neither delinquent nor subject to penalties, and except for other liens and encumbrances incidental to the conduct of the business of ALC and AHI or the ownership of their assets or properties that were not incurred in connection with the borrowing of money or the obtaining of advances, and that do not in the aggregate materially detract from the value of the assets or properties of ALC and AHI taken as a whole or materially impair the use thereof in the operation of their respective businesses, except in each case as disclosed in the ALC Base Balance Sheet. All leases pursuant to which ALC or AHI leases real or personal property are valid and effective in accordance with their respective terms. Schedule 4.1(f) hereto sets forth, as of the date hereof, a list of all mortgages and real and personal property leases used to conduct the business of ALC or AHI.

 

g. Condition of Assets and Properties . The buildings, equipment, machinery, fixtures, furniture, furnishings, office equipment, and all other tangible personal assets and properties presently used in, or necessary for the operation of, the business of ALC or AHI, do not require any repairs other than normal maintenance and are in good operating condition and in a state of reasonable maintenance and repair.

 

h. Licenses and Permits . Neither ALC nor AHI is subject to any material disability or liability by reason of its failure to possess any license, permit, franchise, certificate, consent, approval, or authorization. Each of ALC and AHI has all licenses, permits, franchises, certificates, consents, approvals, and authorizations of whatever kind and type, governmental or private, necessary for the business conducted by it and the ownership or use of all assets and properties and the premises occupied by it. Schedule 4.1(h) hereto constitutes a true, correct, and complete list of all licenses, permits, franchises, certificates, consents, approvals, and authorizations necessary for the conduct of the business of ALC and AHI.

 

i. Intellectual Property . Each of ALC and AHI owns or holds all of the rights to use all trademarks, trade names, trade secrets, logos, fictitious names, service marks, slogans, patents, and copyrights that are used in or necessary to the operation of its business. Schedule 4.1(i) hereto constitutes, as of the date hereof, a true, complete, and correct list of all of the registered intellectual property and applications therefor owned by or exclusively licensed to ALC or AHI. To the knowledge of ALC and AHI, none of the matters covered by the intellectual property, nor any of the products or services sold or provided by ALC or AHI, nor any of the processes used or the business practices followed by ALC or AHI, infringes or has infringed upon any patent, trademark, trademark right, trade name, trade name right, trade secret, logo, fictitious name, service mark, slogan, or copyright owned by any person or entity (or any application with respect thereto), or constitutes unfair competition. Neither ALC nor AHI is, and following the Closing neither ALC nor AHI will be obligated, except as otherwise provided in this Agreement, to pay any royalty or other payment with respect to any intellectual property. To the knowledge of ALC, no person or entity is producing, providing, selling, or using products or services that would constitute an infringement of any intellectual property of ALC or AHI.

 

j. Litigation . There are no actions, suits, proceedings, or other litigation pending or, to the knowledge of ALC, threatened against ALC or AHI, at law or in equity, or before or by any federal, state, municipal, or other governmental department, commission, board, bureau, agency, or instrumentality that, if determined adversely to ALC or AHI, would individually or in the aggregate have a material adverse effect on the business, assets, properties, or operations, or on the condition, financial or otherwise, of ALC and its subsidiaries, taken as a whole. Neither ALC nor AHI is a party to any decree, order, or arbitration award (or agreement entered into in any administrative, judicial, or arbitration proceeding with any governmental authority) with respect to or affecting any of its assets or properties or the use thereof or the conduct of its business. Neither ALC, nor AHI, nor, to ALC’s knowledge, any officer, director, manager, employee, or agent of ALC or AHI has made any oral or written warranties with respect to the quality or absence of defect of the products or services sold or performed by ALC or AHI that are in force as of the date hereof. There are no material claims pending, anticipated, or, to the knowledge of ALC or AHI, threatened against ALC or AHI with respect to the quality of or absence of defects in such products or services. Neither ALC nor AHI has been required to pay direct, incidental, or consequential damages to any person or entity in connection with any of such products or services at any time during the one-year period preceding the date of this Agreement.

 

k. No Violation . The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not violate or result in a breach by ALC or AHI of, or constitute a default under, or conflict with, or cause any acceleration of any obligation with respect to (i) any provision or restriction of any charter, bylaw, stockholders’ agreement, operating agreement, voting trust, proxy, or other similar agreement of ALC or AHI or known to ALC or AHI; (ii) any loan agreement, indenture, lease, mortgage, or lien of ALC or AHI; (iii) any provision or restriction of any lien, lease agreement, contract, or instrument to which ALC or AHI is a party or by which any of them is bound; or (iv) any order, judgment, award, decree, law, rule, ordinance, or regulation or any other restriction of any kind or character to which any assets or properties of ALC or AHI is subject or by which ALC or AHI is bound. Neither the execution and delivery by ALC and AHI of this Agreement or any of the other agreements contemplated hereby, nor the consummation of the transactions contemplated hereby or thereby, will result in the creation of any lien, claim, right, charge, encumbrance, or security interest of any nature or type whatsoever with respect to any of the stock, assets, or properties of either ALC or AHI.

 

l. Taxes . Except as otherwise set forth on Schedule 4.1(l) hereto, ALC has duly filed in correct form all Tax Returns (as hereinafter defined) relating to the activities of ALC and AHI required or due to be filed (with regard to applicable extensions) on or prior to the date hereof. All such Tax Returns are complete and accurate in all material respects, and ALC has paid or made provision for the payment of all Taxes (as hereinafter defined) that have been incurred or are due or claimed to be due from ALC or AHI by foreign, federal, state, or local taxing authorities for all periods ending on or before the date hereof, other than Taxes or other charges that are not delinquent or are being contested in good faith and have not been finally determined and have been disclosed to BSSD and the BSSD Members. The amounts set up as reserves for Taxes on the books of ALC and AHI are sufficient in the aggregate for the payment of all unpaid Taxes (including any interest or penalties thereon), whether or not disputed, accrued, or applicable. To the knowledge of ALC, no claims for Taxes or assessments are being asserted or threatened against ALC or AHI. ALC has furnished to BSSD and the BSSD Members a copy of all Tax Returns filed for it within the one-year period prior to the date of the Agreement. For purposes of this Agreement, the term “Taxes” shall mean all taxes, charges, fees, levies, or other assessments, including, income, gross receipts, excise, property, sales, transfer, license, payroll, franchise, and withholding taxes, imposed by the United States or any state, local, or foreign government or subdivision or agency thereof, and such term shall include any interest, penalties, or additions to tax attributable to such assessments or to the failure to file any Tax Return; and the term “Tax Return” shall mean any report, return, or other information required to be supplied to a taxing authority or required by a taxing authority to be supplied to any other person.

 

m. Accounts Receivable . Each account receivable of ALC and AHI has arisen from a bona fide transaction in the ordinary course of business, is valid and enforceable, and is fully collectible, subject to no known defenses, setoffs, or counterclaims, except to the extent of the reserve reflected in the books of ALC and AHI or in such other amount that is not material in the aggregate.

 

n. Contracts . Neither ALC nor AHI is a party to (i) any plan or contract providing for bonuses, pensions, options, stock purchases, deferred compensation, retirement payments, or profit sharing (other than profit sharing or bonus arrangements with officers and key personnel of subsidiaries); (ii) any collective bargaining or other contract or agreement with any labor union; (iii) any lease, installment purchase agreement, or other contract with respect to any real or personal property used or proposed to be used in its operations, except, in each case, items included within aggregate amounts disclosed in the ALC Base Balance Sheet, (iv) any employment agreement or other similar arrangement not terminable upon 90 days or less notice without penalty to it; (v) any contract or agreement for the purchase of any commodity, material, fixed asset, or equipment in excess of $50,000; (vi) any contract or agreement creating an obligation of $50,000 or more; (vii) any contract or agreement that by its terms does not terminate or is not terminable without penalty to it within one year after the date hereof; (viii) any loan agreement, indenture, promissory note, conditional sales agreement, or other similar type of arrangement; (ix) any material license agreement; or (x) any contract that may result in a material loss or obligation to it. All contracts, agreements, and other arrangements to which ALC or AHI is a party are valid and enforceable in accordance with their terms; ALC, AHI, and all other parties to each of the foregoing have performed, in all material respects, all obligations required to be performed to date; neither ALC, nor AHI, nor any such other party is in default or in arrears under the terms of any of the foregoing; and no condition exists or event has occurred that, with the giving of notice or lapse of time or both, would constitute a default under any of them.

 

o. Compliance with Law and Other Regulations . Each of ALC and AHI is in compliance in all material respects with all requirements of foreign, federal, state, and local law and all requirements of all governmental bodies and agencies having jurisdiction over it, the conduct of its business, the use of its assets and properties, and all premises occupied by it unless such noncompliance will not have a material adverse effect on ALC and AHI taken as a whole. Without limiting the foregoing, each of ALC and AHI has properly filed all reports, paid all monies, and obtained all licenses, permits, certificates, and authorizations needed or required for the conduct of its business and the use of its assets and properties and the premises occupied by it in connection therewith and is in compliance in all material respects with all conditions, restrictions, and provisions of all of the foregoing. Neither ALC nor AHI has received any notice from any foreign, federal, state, or local authority or any insurance or inspection body that any of its assets, properties, facilities, equipment, or business procedures or practices fails to comply with any applicable law, ordinance, regulation, building, or zoning law, or requirement of any public authority or body. Neither ALC nor AHI is subject to or has been threatened with any material fine, penalty, liability, or disability as the result of its failure to comply with any requirement of foreign, federal, state, or local law or regulation or any requirement of any governmental body or agency having jurisdiction over it, the conduct of its business, the use of its assets and properties, or any premises occupied by it. Without limiting the foregoing, there is no environmental contamination, toxic waste, or other discharge, spill, construction component, structural element, or condition adversely affecting any of the properties owned, leased, or used by ALC or AHI, nor has ALC or AHI received any official notice or citation that any of its assets or properties in any way contravene any federal, state, or local law or regulation relating to environmental, health, or safety matters, including any requirements of the Comprehensive Environmental Response, Compensation, and Liability Act ( “CERCLA” ) or any Occupational Safety and Health Administration ( “OSHA” ) requirements. There has been no (A) storage, treatment, generation, or transportation, or (B) spill, discharge, leak, emission, injection, escape, dumping, or release of any kind into the environment (including into air, water, or ground water) of any materials (including industrial, toxic, or hazardous substances or solid, medical, or hazardous waste) by, or on behalf of, ALC or AHI or from any property owned, leased, or used by ALC or AHI in violation of any applicable foreign, federal, state, or local law, statute, rule, or regulation or the common law or any decree, order, arbitration award, or agreement with or any license or permit from any foreign, federal, state, or local governmental authority except as set forth on Schedule 4.1(o) .

 

p. Employment Matters . The employment of each employee of ALC and AHI is terminable at will without cost to ALC or AHI, as the case may be. All officers and independent contractors of ALC and AHI are paid salaries or other compensation in accordance with the amounts set forth in Schedule 4.1(p) hereto, and Schedule 4.1(p) correctly and accurately sets forth, as of the date hereof, all salaries, expenses, and personal benefits paid to or accrued for all directors, officers, managers, stockholders, independent contractors, agents, or other representatives of ALC and AHI as of the date of this Agreement, all of which are reflected as appropriate in the ALC Base Balance Sheet.

 

q. No Payments to Directors, Officers, Stockholders or Others . Since the date of the ALC Base Balance Sheet, there has not been any purchase or redemption of any shares of ALC Common Stock or any shares of capital stock of AHI or any transfer, distribution, or payment by ALC or its subsidiaries, directly or indirectly, of any assets or properties to any director, officer, or stockholder, other than the payment of compensation for services actually rendered at rates not in excess of the rates prevailing on the date of the ALC Base Balance Sheet.

 

r. No Prohibited Payments . Neither ALC, nor AHI, nor, to the knowledge of ALC or AHI, any officer, director, employee, independent contractor, or agent, acting on behalf of ALC or AHI, has at any time (i) made any contributions to any candidate for political office in violation of applicable law or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation, or ordinance requiring such disclosure; (ii) made any payment to any local, state, federal, or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law; (iii) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which ALC or AHI sells products or renders services or from which ALC or AHI buys products or services for the purpose of influencing such agent or person to buy products or services from or sell products or services to ALC or AHI; or (iv) engaged in any transaction, maintained any bank account, or used any corporate funds, except for transactions, bank accounts, and funds that have been and are reflected in the normally maintained books and records of ALC or AHI.

 

s. Governing Documents and Minute Books . Each of ALC and AHI has previously made available to BSSD and the BSSD Members true and complete copies of the articles of incorporation and bylaws of each of ALC and AHI as currently in effect. The minute books of ALC and AHI contain records that are complete and accurate in all material respects of all meetings and other corporate actions held or taken by the Boards of Directors (or committees of the Boards of Directors) and stockholders of ALC and its subsidiaries, as the case may be, since their incorporation.

 

t. Insurance . Each of ALC and AHI maintains in full force and effect insurance coverage on its assets, properties, premises, operations, and personnel in amounts as are set forth on Schedule 4.1(t) hereto. Each of ALC and AHI has previously made available to BSSD and the BSSD Members true and complete copies of such policies. Schedule 4.1(t) hereto also sets forth, as of the date hereof, a list of all insurance claims made by ALC and AHI during the last three years prior to the date hereof.

 

u. OTC Markets Disclosure Reports . ALC’s report on Form 10-K for the year ended September 30, 2016 and 2017 filed with the OTC Markets Disclosure System and all subsequent reports filed by ALC thereafter do not contain a misstatement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading as of the time the document was filed.

 

v. No Material Adverse Change . Since December 31, 2017, there has not been and there is not threatened (i) any material adverse change in the financial condition, business, properties, assets, or results of operations of ALC and AHI taken as a whole; (ii) any loss or damage (whether or not covered by insurance) to any of the assets or properties of ALC or AHI that materially affects or impairs the ability of ALC and AHI to conduct their businesses taken as a whole; (iii) any event or condition of any character that has materially and adversely affected the business, condition, or prospects (financial or otherwise) of ALC and AHI taken as a whole; or (iv) any mortgage or pledge of any material amount of the assets or properties of ALC or AHI, or any indebtedness incurred by ALC or AHI, other than indebtedness, not material in the aggregate, incurred in the ordinary course of business.

 

w. Accuracy of Statements . Neither any representation or warranty made by ALC or AHI in this Agreement nor any statement, list, certificate, or other information furnished or to be furnished by or on behalf of ALC or AHI to BSSD and the BSSD Members in connection with this Agreement or any of the transactions contemplated hereby contains or will contain an untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of circumstances in which they are made, not misleading.

 

x. Investment Representations .

 

(i) As a condition to the BSSD Members transferring the BSSD Membership Interests to ALC, ALC represents and warrants to the BSSD Members as follows:

 

(1) ALC acknowledges that it has received all materials related to BSSD that it may desire including information necessary to verify the accuracy of the information set forth in this Agreement and any other materials furnished herewith and copies of the most recent financial statements and have answers to all inquiries they may have regarding BSSD its business, operations and finances. ALC has taken all the steps necessary to evaluate the merits and risks of an investment in the BSSD Membership Interests as proposed hereunder and is relying on its own business judgment and decisions in entering into this Agreement and consummating the purchase of the BSSD Membership Interests.

 

(2) ALC is experienced in evaluating and investing in development stage companies such as BSSD and such knowledge and experience in financial and business matters to enable it to evaluate the merits and risks of an investment in the BSSD Membership Interests, to make an informed investment decision with respect thereto, and can afford to bear such risks, including, without limitation, the risks of losing its entire investment in the BSSD Membership Interests.

 

(3) ALC is acquiring the BSSD Membership Interests in the Exchange based solely upon its own independent analysis of BSSD's business experience and operations and historical financial information and acknowledges that no assurances or guarantees can be made.

 

(4) ALC is aware and hereby acknowledges that with regard to the BSSD Membership Interests, it is acquiring “restricted shares” and “control” securities as defined under Rule 144 (which governs the resale of “restricted securities” without registration under the Act and “control” securities from an affiliate in a private sale) and that the BSSD Membership Interests will be transferred to ALC as “restricted shares”. ALC acknowledges that the BSSD Membership Interests have not been registered under the Securities Act of 1933 (the “Act” ), and the BSSD Membership Interests were originally issued to the BSSD Members on the basis of the statutory exemption provided by Section 4(a)(2) of the Act, Regulation D promulgated thereunder, or Rule 144, or any or all, relating to transactions by an issuer not involving any public offering or resales and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed on or submitted to any Federal or state agency or self-regulatory organization where an exemption is being relied upon, and that the BSSD Members’ reliance thereon is based in part upon the representations made by ALC in this Agreement. ALC acknowledges that it has been informed by BSSD, or is otherwise familiar with, the nature of the limitations imposed by the Act (and applicable state securities laws) and the rules and regulations thereunder on the transfer of securities. In particular, ALC agrees that no sale, assignment or transfer of any of the BSSD Membership Interests shall be valid or effective, and BSSD shall not be required to give any effect to such sale, assignment or transfer, unless (A) such sale, assignment or transfer is registered under the Act (and applicable state securities laws), it being understood that the BSSD Membership Interests are not currently registered for sale and that neither BSSD nor the BSSD Members has any obligation or intention to so register the BSSD Membership Interests, except as contemplated hereunder or (B) the BSSD Membership Interests are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Act, it being understood that Rule 144 is not available at the present time for the sale of the BSSD Membership Interests, or (iii) such sale, assignment or transfer is otherwise exempt from registration under the Act (and applicable state securities laws). ALC further understands that an opinion of counsel and other documents may be required to transfer the BSSD Membership Interests.

 

(5) ALC is acquiring the BSSD Membership Interests for investment for its own account and not with the view to, or for resale in connection with, any distribution thereof or the granting of any participation therein, and has no present intention of distributing or selling to others any of such interest or granting participations therein.

 

(6) ALC acknowledge that there is no trading market for the BSSD Membership Interests presently and it is uncertain that any active market for the BSSD Membership Interests will develop in the future, and that ALC may find it impossible to liquidate the investment at a time when it may be desirable to do so, or at any other time.

 

(7) ALC is not purchasing the BSSD Membership Interests because of or following any advertisement, article, notice or other communication published in any newspaper, magazine or internet site or similar media or broadcast over television or radio, or presented at any seminar or meeting.

 

(8) ALC is not relying on the BSSD Members or BSSD with respect to the tax and other economic considerations of an investment in the BSSD Membership Interests.

 

(9) There are no registration rights for the BSSD Membership Interests.

 

(10) ALC acknowledges that the representations, warranties and agreements made by ALC herein shall survive the execution and delivery of this Agreement.

 

(ii) Purchaser Qualifications. ALC has reviewed, understands and satisfies the eligible purchaser requirements under this Agreement as set forth in Rule 501(a) of Regulation D promulgated under the Act at the time it was offered the BSSD Membership Interests, and ALC qualifies under Rule 506(b)(2)(ii) in that it has such knowledge and experience in financial and business matters to enable such person to evaluate the merits and risks of an investment in the BSSD Membership Interests. ALC acknowledges that the BSSD Members have relied on the representations of ALC to form a reasonable belief that ALC satisfies the eligible purchaser requirements set forth herein.

 

4.2 Covenants, Representations and Warranties of BSSD and the BSSD Members . As a material inducement to ALC and AHI to enter into this Agreement, except as disclosed in the disclosure schedules delivered to ALC and AHI by BSSD and the BSSD Members, BSSD and the BSSD Members hereby covenant, represent and warrant to ALC and AHI that:

 

a. Corporate Existence and Qualification . BSSD is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Arizona with authority to do business in the State of Arizona. BSSD has the company power to own, manage, lease and hold its properties and to carry on its business as and where such properties are presently located and such business is presently conducted. BSSD is not subject to any material liability by reason of the failure to be duly qualified as a foreign corporation for the transaction of business or to be in good standing under the laws of any jurisdiction. Schedule 4.2(a) hereto sets forth, as of the date of this Agreement, each jurisdiction in which BSSD is qualified to do business.

 

b. Authorization, Approval and Enforceability . Each of BSSD and the BSSD Members has all requisite power and authority to enter into and perform the terms of this Agreement. BSSD and the BSSD Members are not subject to any restriction under any corporate charter, bylaws, operating agreement, partnership agreement, trust agreement, agreement, instrument, order, judgment, decree, law, statute or regulation, or any other restriction of any kind or character, which would result in the breach of, default of, or conflict with, any other agreement or obligation of BSSD or prevent consummating the transactions contemplated hereby in accordance with the terms hereof. This Agreement, when executed and delivered by BSSD and the BSSD Members will constitute a valid and binding obligation of BSSD and the BSSD Members, respectively, enforceable in accordance with its terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors, rules of law governing specific performance, injunctive relief and other equitable remedies, and public policy.

 

c. Capitalization and Company Records . All Membership Interests and Participation Percentages, Units and rights of BSSD issued and outstanding are held by the BSSD Members. There are no outstanding subscriptions, options, convertible securities, rights (preemptive or otherwise), warrants, calls or agreements relating to any Membership Interest, Units or rights in BSSD. BSSD’s books and records made available to ALC and AHI for review were correct and complete as of the date of such review, no further entries have been made through the date of this Agreement, and such books and records contain an accurate record of all required Manager and Member actions of BSSD and the BSSD Members taken by written consent or at a meeting. All company actions taken by BSSD and the BSSD Members, respectively, have been duly authorized or ratified. All accounts, books, ledgers and official and other records of BSSD and the BSSD Members, respectively, fairly and accurately reflect all of BSSD’s transactions, properties, assets and liabilities.

 

d. Financial Statements . The Balance Sheets of BSSD as of ________________, and the related Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows of BSSD for the years ended _______________, and all related schedules and notes to the foregoing, have been prepared by BSSD without audit. All of the foregoing financial statements have been prepared in accordance with accounting principles generally accepted in the United States ( “GAAP” ), applied on a consistent basis, and fairly present, in all material respects, the financial position, results of operations, and changes in financial position of BSSD as of their respective dates and for the periods indicated. BSSD has no material liabilities, obligations, or commitments of a type that would be required to be disclosed in a balance sheet prepared in accordance with GAAP, whether related to tax or non-tax matters, accrued or contingent, due or not yet due, liquidated or unliquidated, or otherwise, except as and to the extent disclosed or reflected in the Balance Sheet of BSSD as of _______________ (the “BSSD Base Balance Sheet” ), or incurred since the date of the BSSD Base Balance Sheet in the ordinary course of business.

 

e. Title to Properties . BSSD has good and marketable title to all of its real and personal assets and properties, including all assets and properties reflected in the BSSD Base Balance Sheet, or acquired subsequent to the date of the BSSD Base Balance Sheet, except properties disposed of subsequent to that date in the ordinary course of business or properties relating to discontinued operations. Such assets and properties are not subject to any mortgage, pledge, lien, claim, encumbrance, charge, security interest, title retention, or other security arrangement, except for liens for the payment of federal, state, or other taxes, the payment of which is neither delinquent nor subject to penalties, and except for other liens and encumbrances incidental to the conduct of the business of BSSD or the ownership of their assets or properties that were not incurred in connection with the borrowing of money or the obtaining of advances, and that do not in the aggregate materially detract from the value of the assets or properties of BSSD taken as a whole or materially impair the use thereof in the operation of its business, except in each case as disclosed in the BSSD Base Balance Sheet. All leases pursuant to which BSSD leases real or personal property are valid and effective in accordance with their respective terms. Schedule 4.2(e) hereto sets forth, as of the date hereof, a list of all mortgages and real and personal property leases used to conduct the business of BSSD.

 

f. Condition of Assets and Properties . The buildings, equipment, machinery, fixtures, furniture, furnishings, office equipment, and all other tangible personal assets and properties presently used in, or necessary for the operation of, the business of BSSD, do not require any repairs other than normal maintenance and are in good operating condition and in a state of reasonable maintenance and repair.

 

g. Licenses and Permits . BSSD is not subject to any material disability or liability by reason of its failure to possess any license, permit, franchise, certificate, consent, approval, or authorization. BSSD has all licenses, permits, franchises, certificates, consents, approvals, and authorizations of whatever kind and type, governmental or private, necessary for the business conducted by it and the ownership or use of all assets and properties and the premises occupied by it. Schedule 4.2(g) hereto constitutes a true, correct, and complete list of all licenses, permits, franchises, certificates, consents, approvals, and authorizations necessary for the conduct of the business of BSSD.

 

h. Intellectual Property . BSSD owns or holds all of the rights to use all trademarks, trade names, trade secrets, logos, fictitious names, service marks, slogans, patents, and copyrights that are used in or necessary to the operation of its business. Schedule 4.2(h) hereto constitutes, as of the date hereof, a true, complete, and correct list of all of the registered intellectual property and applications therefor owned by or exclusively licensed to BSSD. To the knowledge of BSSD, none of the matters covered by the intellectual property, nor any of the products or services sold or provided by BSSD, nor any of the processes used or the business practices followed by BSSD, infringes or has infringed upon any patent, trademark, trademark right, trade name, trade name right, trade secret, logo, fictitious name, service mark, slogan, or copyright owned by any person or entity (or any application with respect thereto), or constitutes unfair competition. BSSD is, and following the Closing BSSD will not be obligated, except as otherwise provided in this Agreement, to pay any royalty or other payment with respect to any intellectual property. To the knowledge of BSSD, no person or entity is producing, providing, selling, or using products or services that would constitute an infringement of any intellectual property of BSSD.

j. Litigation . There are no actions, suits, proceedings, or other litigation pending or, to the knowledge of BSSD, threatened against BSSD, at law or in equity, or before or by any federal, state, municipal, or other governmental department, commission, board, bureau, agency, or instrumentality that, if determined adversely to BSSD, would individually or in the aggregate have a material adverse effect on the business, assets, properties, or operations, or on the condition, financial or otherwise, of BSSD. BSSD is not a party to any decree, order, or arbitration award (or agreement entered into in any administrative, judicial, or arbitration proceeding with any governmental authority) with respect to or affecting any of its assets or properties or the use thereof or the conduct of its business. Neither BSSD, nor, to BSSD’s or the BSSD Members’ knowledge, any officer, director, manager, employee, or agent of BSSD has made any oral or written warranties with respect to the quality or absence of defect of the products or services sold or performed by BSSD that are in force as of the date hereof. There are no material claims pending, anticipated, or, to the knowledge of BSSD and the BSSD Members, threatened against BSSD with respect to the quality of or absence of defects in such products or services. BSSD has not been required to pay direct, incidental, or consequential damages to any person or entity in connection with any of such products or services at any time during the one-year period preceding the date of this Agreement.

 

k. No Violation . The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not violate or result in a breach by BSSD of, or constitute a default under, or conflict with, or cause any acceleration of any obligation with respect to (i) any provision or restriction of any charter, bylaw, stockholders’ agreement, operating agreement, voting trust, proxy, or other similar agreement of BSSD or known to BSSD; (ii) any loan agreement, indenture, lease, mortgage, or lien of BSSD; (iii) any provision or restriction of any lien, lease agreement, contract, or instrument to which BSSD is a party or by which any of them is bound; or (iv) any order, judgment, award, decree, law, rule, ordinance, or regulation or any other restriction of any kind or character to which any assets or properties of BSSD is subject or by which BSSD is bound. Neither the execution and delivery by BSSD of this Agreement or any of the other agreements contemplated hereby, nor the consummation of the transactions contemplated hereby or thereby, will result in the creation of any lien, claim, right, charge, encumbrance, or security interest of any nature or type whatsoever with respect to any of the stock, assets, or properties of BSSD.

 

l. Taxes . Except as otherwise set forth on Schedule 4.2(l) hereto, BSSD has duly filed in correct form all Tax Returns (as hereinafter defined) relating to the activities of BSSD required or due to be filed (with regard to applicable extensions) on or prior to the date hereof. All such Tax Returns are complete and accurate in all material respects, and BSSD has paid or made provision for the payment of all Taxes (as hereinafter defined) that have been incurred or are due or claimed to be due from BSSD by foreign, federal, state, or local taxing authorities for all periods ending on or before the date hereof, other than Taxes or other charges that are not delinquent or are being contested in good faith and have not been finally determined and have been disclosed to ALC and AHI. The amounts set up as reserves for Taxes on the books of BSSD are sufficient in the aggregate for the payment of all unpaid Taxes (including any interest or penalties thereon), whether or not disputed, accrued, or applicable. To the knowledge of BSSD and the BSSD Members, no claims for Taxes or assessments are being asserted or threatened against BSSD or the BSSD Members. BSSD has furnished to ALC and AHI a copy of all Tax Returns filed for it within the one-year period prior to the date of the Agreement. For purposes of this Agreement, the term “Taxes” shall mean all taxes, charges, fees, levies, or other assessments, including, income, gross receipts, excise, property, sales, transfer, license, payroll, franchise, and withholding taxes, imposed by the United States or any state, local, or foreign government or subdivision or agency thereof, and such term shall include any interest, penalties, or additions to tax attributable to such assessments or to the failure to file any Tax Return; and the term “Tax Return” shall mean any report, return, or other information required to be supplied to a taxing authority or required by a taxing authority to be supplied to any other person.

 

m. Accounts Receivable . Each account receivable of BSSD has arisen from a bona fide transaction in the ordinary course of business, is valid and enforceable, and is fully collectible, subject to no known defenses, setoffs, or counterclaims, except to the extent of the reserve reflected in the books of BSSD or in such other amount that is not material in the aggregate.

 

n. Contracts . BSSD is not a party to (i) any plan or contract providing for bonuses, pensions, options, stock purchases, deferred compensation, retirement payments, or profit sharing (other than profit sharing or bonus arrangements with officers and key personnel of subsidiaries); (ii) any collective bargaining or other contract or agreement with any labor union; (iii) any lease, installment purchase agreement, or other contract with respect to any real or personal property used or proposed to be used in its operations, except, in each case, items included within aggregate amounts disclosed in the BSSD Base Balance Sheet, (iv) any employment agreement or other similar arrangement not terminable upon 90 days or less notice without penalty to it; (v) any contract or agreement for the purchase of any commodity, material, fixed asset, or equipment in excess of $50,000; (vi) any contract or agreement creating an obligation of $50,000 or more; (vii) any contract or agreement that by its terms does not terminate or is not terminable without penalty to it within one year after the date hereof; (viii) any loan agreement, indenture, promissory note, conditional sales agreement, or other similar type of arrangement; (ix) any material license agreement; or (x) any contract that may result in a material loss or obligation to it. All contracts, agreements, and other arrangements to which BSSD is a party are valid and enforceable in accordance with their terms; BSSD and all other parties to each of the foregoing have performed, in all material respects, all obligations required to be performed to date; neither BBBD nor any such other party is in default or in arrears under the terms of any of the foregoing; and no condition exists or event has occurred that, with the giving of notice or lapse of time or both, would constitute a default under any of them.

 

o. Compliance with Law and Other Regulations . BSSD is in compliance in all material respects with all requirements of foreign, federal, state, and local law and all requirements of all governmental bodies and agencies having jurisdiction over it, the conduct of its business, the use of its assets and properties, and all premises occupied by it unless such noncompliance will not have a material adverse effect on BSSD. Without limiting the foregoing, BSSD has properly filed all reports, paid all monies, and obtained all licenses, permits, certificates, and authorizations needed or required for the conduct of its business and the use of its assets and properties and the premises occupied by it in connection therewith and is in compliance in all material respects with all conditions, restrictions, and provisions of all of the foregoing. BSSD has not received any notice from any foreign, federal, state, or local authority or any insurance or inspection body that any of its assets, properties, facilities, equipment, or business procedures or practices fails to comply with any applicable law, ordinance, regulation, building, or zoning law, or requirement of any public authority or body. BSSD is not subject to or has been threatened with any material fine, penalty, liability, or disability as the result of its failure to comply with any requirement of foreign, federal, state, or local law or regulation or any requirement of any governmental body or agency having jurisdiction over it, the conduct of its business, the use of its assets and properties, or any premises occupied by it. Without limiting the foregoing, there is no environmental contamination, toxic waste, or other discharge, spill, construction component, structural element, or condition adversely affecting any of the properties owned, leased, or used by BSSD, nor has BSSD received any official notice or citation that any of its assets or properties in any way contravene any federal, state, or local law or regulation relating to environmental, health, or safety matters, including any requirements of the Comprehensive Environmental Response, Compensation, and Liability Act ( “CERCLA” ) or any Occupational Safety and Health Administration ( “OSHA” ) requirements. There has been no (A) storage, treatment, generation, or transportation, or (B) spill, discharge, leak, emission, injection, escape, dumping, or release of any kind into the environment (including into air, water, or ground water) of any materials (including industrial, toxic, or hazardous substances or solid, medical, or hazardous waste) by, or on behalf of BSSD or from any property owned, leased, or used by BSSD in violation of any applicable foreign, federal, state, or local law, statute, rule, or regulation or the common law or any decree, order, arbitration award, or agreement with or any license or permit from any foreign, federal, state, or local governmental authority except as set forth on Schedule 4.2(o) .

 

p. Employment Matters . The employment of each employee of BSSD is terminable at will without cost to BSSD. All officers and independent contractors of BSSD are paid salaries or other compensation in accordance with the amounts set forth in Schedule 4.2(p) hereto, and Schedule 4.2(p) correctly and accurately sets forth, as of the date hereof, all salaries, expenses, and personal benefits paid to or accrued for all directors, officers, managers, stockholders, independent contractors, agents, or other representatives of BSSD as of the date of this Agreement, all of which are reflected as appropriate in the BSSD Base Balance Sheet.

 

q. No Payments to Managers, Members or Others . Since the date of the BSSD Base Balance Sheet, there has not been any purchase or redemption of any Membership Interests, Participation Percentage, units or rights of BSSD or any transfer, distribution, or payment by BSSD, directly or indirectly, of any assets or properties to any director, officer, manager or member, other than the payment of compensation for services actually rendered at rates not in excess of the rates prevailing on the date of the BSSD Base Balance Sheet.

 

r. No Prohibited Payments . Neither BSSD, nor, to the knowledge of BSSD and the BSSD Members, any manager, officer, member, employee, independent contractor, or agent, acting on behalf of BSSD, has at any time (i) made any contributions to any candidate for political office in violation of applicable law or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation, or ordinance requiring such disclosure; (ii) made any payment to any local, state, federal, or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law; (iii) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which BSSD sells products or renders services or from which BSSD buys products or services for the purpose of influencing such agent or person to buy products or services from or sell products or services to BSSD; or (iv) engaged in any transaction, maintained any bank account, or used any corporate funds, except for transactions, bank accounts, and funds that have been and are reflected in the normally maintained books and records of BSSD.

 

s. Governing Documents and Minute Books . BSSD has previously made available to ALC and AHI true and complete copies of the articles of organization and operating agreement of BSSD as currently in effect. The minute book of BSSD contains records that are complete and accurate in all material respects of all meetings and other corporate actions held or taken by the Board of Managers (or committees of the Board of Managers), managers and members of BSSD since its organization.

 

t. Insurance . BSSD maintains in full force and effect insurance coverage on its assets, properties, premises, operations, and personnel in amounts as are set forth on Schedule 4.2(t) hereto. BSSD has previously made available to ALC and AHI true and complete copies of such policies. Schedule 4.2(t) hereto also sets forth, as of the date hereof, a list of all insurance claims made by BSSD during the last three years prior to the date hereof.

 

u. No Material Adverse Change . Since December 31, 2017, there has not been and there is not threatened (i) any material adverse change in the financial condition, business, properties, assets, or results of operations of BSSD; (ii) any loss or damage (whether or not covered by insurance) to any of the assets or properties of BSSD that materially affects or impairs the ability of BSSD to conduct their businesses taken as a whole; (iii) any event or condition of any character that has materially and adversely affected the business, condition, or prospects (financial or otherwise) of BSSD; or (iv) any mortgage or pledge of any material amount of the assets or properties of BSSD, or any indebtedness incurred by BSSD, other than indebtedness, not material in the aggregate, incurred in the ordinary course of business.

 

v. Accuracy of Statements . Neither any representation or warranty made by BSSD and the BSSD Members in this Agreement nor any statement, list, certificate, or other information furnished or to be furnished by or on behalf of BSSD, the BSSD Members to ALC or AHI in connection with this Agreement or any of the transactions contemplated hereby contains or will contain an untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of circumstances in which they are made, not misleading.

 

w. Investment Representations .

 

(i) As a condition to ALC issuing the ALC Shares to the BSSD Members, the BSSD Members represent and warrant to ALC as follows:

 

(1) the BSSD Members hereby acknowledge that each has received all materials related to ALC and AHI that each may desire including information necessary to verify the accuracy of the information set forth in this Agreement and any other materials furnished herewith and copies of the most recent financial statements and have answers to all inquiries they may have regarding ALC and AHI and their businesses, operations and finances. The BSSD Members have taken all the steps necessary to evaluate the merits and risks of an investment as proposed hereunder and are relying on their own business judgment and decisions in entering into this Agreement and consummating the exchange for the ALC Shares.

 

(2) each of the BSSD Members are experienced in evaluating and investing in companies such as ALC that develop, manufacture and distribute breathing technology solutions and products based upon filtered and non-filtered nasal dilator breathing devices and such knowledge and experience in financial and business matters to enable them individually to evaluate the merits and risks of an investment in the ALC Shares, to make an informed investment decision with respect thereto, and can afford to bear such risks, including, without limitation, the risks of losing their entire investment in the ALC Shares.

 

(3) the BSSD Members are accredited investors in that each of the equity owners of BSSD is an accredited investor as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 (the “Act” ) or otherwise either alone or with his purchaser representative has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of an investment in the ALC Shares and can acquire the ALC Shares pursuant to this Agreement without registration under the Act by virtue of the exemption provided by Section 4(a)(2) of the Act. Each of the BSSD Members shall provide to ALC investor representations letter regarding accredited investor status or other customary representations, warranties and assurances that establish a reasonable basis to believe that such BSSD Member satisfies the criteria set forth above for a private placement of securities.

 

(4) the BSSD Members hereby acknowledge that with regard to the ALC Shares, each is acquiring “restricted shares” as defined under Rule 144 (which governs the resale of “restricted securities” without registration under the Act) and that the ALC Shares will be issued to the BSSD Members as “restricted shares”. The BSSD Members acknowledge that the ALC Shares have not been registered under the Act, and are being issued on the basis of the statutory exemption provided by Section 4(a)(2) of the Act, Regulation D promulgated thereunder, or any or all, relating to transactions by an issuer not involving any public offering and under similar exemptions under applicable state securities laws, that this transaction has not been reviewed by, passed on or submitted to any Federal or state agency or self-regulatory organization where an exemption is being relied upon, and that ALC’s reliance thereon is based in part upon the representations made by the BSSD Members in this Agreement. The BSSD Members acknowledge that each has been informed by ALC, or is otherwise familiar with, the nature of the limitations imposed by the Act (and applicable state securities laws) and the rules and regulations thereunder on the transfer of securities. In particular, the BSSD Members agree that no sale, assignment or transfer of any of the ALC Shares shall be valid or effective, and ALC shall not be required to give any effect to such sale, assignment or transfer, unless (A) such sale, assignment or transfer is registered under the Act (and applicable state securities laws), it being understood that the ALC Shares are not currently registered for sale and that ALC has no obligation or intention to so register the ALC Shares, except as contemplated hereunder or (B) the ALC Shares are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Act, it being understood that Rule 144 is not available at the present time for the sale of the ALC Shares, or (iii) such sale, assignment or transfer is otherwise exempt from the registration under the Act (and applicable state securities laws). The BSSD Members further understand that an opinion of counsel and other documents may be required to transfer the ALC Shares.

 

(5) Each of the BSSD Members is acquiring the ALC Shares for investment for his or its own account and not with the view to, or for resale in connection with, any distribution thereof or the granting of any participation therein, and has no present intention of distributing or selling to others any of such interest or granting participations therein.

 

(6) the BSSD Members acknowledge that there is a limited and illiquid trading market for the ALC Shares presently and it is uncertain that any more active or liquid market for the ALC Shares will develop in the future, and that the BSSD Members may find it impossible to liquidate the investment at a time when it may be desirable to do so, or at any other time.

 

(7) the BSSD Members are not acquiring the ALC Shares because of or following any advertisement, article, notice or other communication published in any newspaper, magazine or internet site or similar media or broadcast over television or radio, or presented at any seminar or meeting.

 

(8) the BSSD Members are entering into this Agreement and exchange for the ALC Shares based solely upon their own independent analysis, respectively, of ALC's business experience and operations and historical financial information and acknowledges that no assurances or guarantees can be made regarding such information. The BSSD Members are not relying on ALC with respect to the tax and other economic considerations of an investment in the ALC Shares.

 

(9) There are no registration rights for the ALC Shares.

 

(10) The issuances of the BSSD Membership Interests to the BSSD Members have not been made in violation of any federal or state securities laws and were issued the BSSD Membership Interests only after disclosure of all material facts regarding BSSD, the business, properties and financial condition of BSSD to all equity owners so that each such equity owner meets all of the qualifications and requirements for such issuances.

 

(11) the BSSD Members acknowledge that the representations, warranties and agreements made by the BSSD Members herein shall survive the execution and delivery of this Agreement.

 

(ii) Purchaser Qualifications. The BSSD Members have reviewed, understand and satisfy the eligible purchaser requirements under this Agreement as set forth in Rule 501(a) of Regulation D promulgated under the Act in that at the time each such person was offered the ALC Shares, and each of the BSSD Members qualifies under Rule 506(b)(2)(ii) in that each such person has such knowledge and experience in financial and business matters to enable such person to evaluate the merits and risks of an investment in the ALC Shares. The BSSD Members each acknowledge that ALC has relied on the representations of the BSSD Members to form a reasonable belief that the BSSD Members each satisfy the eligible purchaser requirements set forth herein.

 

4.3 Duration of Covenants, Representations and Warranties . The Parties hereby represent to each other that all of the representations, warranties and covenants contained in this Agreement and in any documents, certificates or other instruments delivered by or on behalf of the Parties are true now, will be true at the Closing and shall survive the Closing.

 

SECTION 5

CONDITIONS TO OBLIGATIONS OF THE PARTIES

 

5.1 Conditions to Obligations of BSSD and the BSSD Members . The obligations of BSSD and the BSSD Members to consummate the transactions contemplated hereby and to take the other actions required to be taken by BSSD and the BSSD Members at the Closing, respectively, shall not be independent of each other and are subject, at the option of BSSD and the BSSD Members, to the satisfaction or waiver of the following conditions:

a. All representations and warranties of ALC and AHI contained in this Agreement shall be true and correct in all material respects at and as of the Closing, and ALC and AHI shall have performed and satisfied in all material respects all covenants and agreements required by this Agreement to be performed and satisfied by ALC and AHI at or prior to the Closing.

b. As of the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by or on behalf of BSSD or the BSSD Members) shall be pending or threatened before any governmental authority seeking to restrain ALC or AHI or prohibit the Closing or seeking damages against ALC or AHI as a result of the consummation of this Agreement.

c. All proceedings to be taken by ALC and AHI in connection with the transactions contemplated hereby and all documents incident thereto, including deliveries by ALC and AHI at the Closing under Section 2.1, shall be satisfactory in form and substance to BSSD and the BSSD Members, and BSSD and the BSSD Members shall have received all such counterpart originals or certified or other copies of such documents as it or they may reasonably request.

d. No proceeding in which BSSD or the BSSD Members shall be a debtor, defendant or party seeking an order for its own relief or reorganization shall have been brought or be pending by or against BSSD or any of the BSSD Members under any United States or state bankruptcy or insolvency law.

5.2 Conditions to Obligations of ALC and AHI . The obligations of ALC and AHI to consummate the transactions contemplated hereby and to take the other actions required to be taken by ALC and AHI at the Closing are subject, at the option of ALC and AHI, to the satisfaction or waiver of the following conditions:

 

a. All representations and warranties of BSSD and the BSSD Members contained in this Agreement shall be true and correct in all material respects at and as of the Closing, and BSSD and the BSSD Members each shall have performed and satisfied in all material respects all agreements and covenants required by this Agreement to be performed and satisfied by them at or prior to the Closing.

 

b. As of the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by or on behalf of ALC or AHI) shall be pending or threatened before any court or governmental agency seeking to restrain BSSD or any of the BSSD Members or prohibit the Closing or seeking damages against BSSD or any of the BSSD Members or its properties as a result of the consummation of this Agreement.

 

c. All proceedings to be taken by BSSD and the BSSD Members in connection with the transactions contemplated hereby and all documents incident thereto, including deliveries by BSSD and the BSSD Members at the Closing under Section 2.1, shall be satisfactory in form and substance to ALC and AHI, and ALC and AHI shall have received all such counterpart originals or certified or other copies of such documents as it or they may reasonably request.

 

e. No proceeding in which ALC or AHI, respectively, shall be a debtor, defendant or party seeking an order for its own relief or reorganization shall have been brought or be pending by or against ALC or AHI, respectively, under any United States or state bankruptcy or insolvency law.

 

SECTION 6

INDEMNIFICATION; REMEDIES; DISPUTE RESOLUTION

  

6.1 Survival . All representations, warranties, covenants, and obligations in this Agreement shall expire on the second (2nd) anniversary of the Closing Date of this Agreement (the "Survival Period" ). The right to indemnification, payment of Damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Damages, or other remedy based on such representations, warranties, covenants, and obligations.

 

6.2 Indemnification by ALC and AHI . From and after the date of this Agreement until the expiration of the Survival Period, ALC and AHI shall indemnify and hold harmless BSSD and the BSSD Members ( “the BSSD Indemnified Party” ), from and against any Damages arising, directly or indirectly, from or in connection with:

 

a. any misrepresentation or breach of warranty made by ALC or AHI in this Agreement or in any certificate delivered by ALC or AHI pursuant to this Agreement; or

 

b. any breach by ALC or AHI of any covenant or obligation of ALC or AHI in this Agreement required to be performed by ALC or AHI on or prior to the Closing Date.

 

6.3 Indemnification by BSSD and the BSSD Members . From and after the date of this Agreement until the expiration of the Survival Period, BSSD and the BSSD Members shall indemnify and hold harmless ALC and AHI their respective officers, directors, employees and authorized agents (the “ALC Indemnified Parties” ), from and against any Damages arising, directly or indirectly, from or in connection with:

 

a. any misrepresentation or breach of warranty made by BSSD or any of the BSSD Members in this Agreement or in any certificate delivered by BSSD or the BSSD Members pursuant to this Agreement; or

 

b. any breach by BSSD or any of the BSSD Members of any covenant or obligation of BSSD or any of the BSSD Members in this Agreement required to be performed by BSSD or any of the BSSD Members on or prior to the Closing Date.

 

6.4 Limitations on Liability . No BSSD Indemnified Party or ALC Indemnified Party shall be entitled to indemnification pursuant to Section 6.2 or 6.3 , respectively, unless and until the aggregate amount of Damages to all ALC Indemnified Parties or the BSSD Indemnified Party, respectively, with respect to matters under Section 6.5 exceeds $5,000 at which time, ALC Indemnified Parties or the BSSD Indemnified Party, respectively, shall be entitled to indemnification for the total amount of such Damages in excess of $0. In such case the indemnifying Party must receive written notice from the other Party of such claim for indemnification prior to the expiration of the Survival Period.

 

6.5 Determining Damages . Materiality qualifications to the representations and warranties of ALC and AHI or BSSD and the BSSD Members shall not be taken into account in determining the amount of Damages occasioned by a breach of any such representation and warranty for purposes of determining whether the aggregate damage threshold set forth in Section 6.4 has been met.

 

6.6 Dispute Resolution . Pursuant to A.R.S. Section 12-1518, f or any claim or controversy related to or arising out of this Agreement after the Closing, the Parties agree to mediation followed by arbitration to be held in Phoenix, Arizona in accordance with rules of the American Arbitration Association ( “AAA” ). In the event the Parties must resolve a claim or controversy by arbitration, then such arbitration proceeding shall be before a panel of one (1) arbitrator mutually agreeable to the Parties under the then current commercial rules of the AAA. If the Parties cannot agree on an arbitrator within sixty (60) days after a demand for arbitration has been requested in writing by either of them, then arbitration shall proceed before a single arbitrator appointed by the AAA under its then current commercial rules. Such arbitrator shall have experience or knowledge in the field of consumer products and related services and shall be a lawyer who has participated previously in arbitration or dispute resolution proceedings but who has not previously represented any of the Parties. Any arbitration shall consist of not more than three (3) days of hearings all of which shall occur within sixty (60) days after the arbitrator has been selected. Either Party may seek injunctive relief (temporary, preliminary and/or permanent) in a court of law for any breach by either Party of the other's proprietary rights or breach of a Party's non-disclosure obligations as set forth herein. The arbitrator shall have no right to award punitive damages or any equitable relief of any kind. Either Party, before or during any arbitration, may apply to a court having jurisdiction for a temporary restraining order or preliminary injunction where such relief is necessary to protect its interests pending completion of the arbitration proceeding. Neither the Parties nor the arbitrators may disclose the existence or results of any arbitration hereunder without prior written consent of all Parties. No arbitration proceeding or legal action, regardless of its form, relating to or arising out of this Agreement may be commenced by any Party after the expiration of the Survival Period.

 

SECTION 7

GENERAL PROVISIONS

 

7.1 Risk of Loss . Risk of loss to the BSSD Membership Interests prior to the Closing shall remain on the BSSD Members. Risk of loss to the ALC Shares prior to the Closing shall remain on ALC.

 

7.2 Counsel . It is stipulated, agreed and understood that the Parties hereto have mutually agreed and consented to the terms of this Agreement (including the forms of documents set forth in the exhibits). The Parties have been advised and have chosen to be represented by separate legal, financial and tax counsel of their choice and have been given ample time and opportunity to obtain such counsel and review this Agreement and the related transactions with such counsel at their own leisure. Jeffrey R. Perry and Jeffrey R. Perry Law Firm, P.C. have represented only ALC and AHI and have provided no representation, advice or counsel to BSSD, and the BSSD Members or any other party. ALC and AHI have interests that are opposed to those interests of BSSD and the BSSD Members. In the event that BSSD and the BSSD Members have not engaged counsel to advise them regarding this Agreement and the related transactions, it has been recommended to each such party to obtain counsel.

 

7.3 Final Agreement . This Agreement constitutes the final and complete agreement between the Parties concerning the subject matter of this Agreement. This Agreement supersedes all prior agreements, understandings, negotiations and discussions, written or oral, between the Parties with respect thereto. Any modification, revision or amendment of this Agreement shall not be effective unless made in writing and executed by the Parties.

 

7.4 Language and Construction . This Agreement has been negotiated by the Parties. The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent and will be interpreted fairly in accordance with its terms without any strict construction in favor of or against either Party. The captions are for convenience only and shall not control or affect the meaning or construction of the provisions of this Agreement.

 

7.5 Severability . In case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if the invalid, illegal or unenforceable provisions(s) had never been contained herein; provided that such invalid, illegal or unenforceable provisions shall first be curtailed, limited or eliminated to the extent necessary to remove such invalidity, illegality or unenforceability with respect to the applicable law as it shall then be applied.

 

7.6 Waiver . Except as expressly set forth herein, any waiver of, or promise not to enforce, any right under this Agreement shall not be enforceable unless evidenced in writing and signed by the Party against whom enforcement of the waiver is sought. Waiver by a Party of any breach by the other Party shall not operate or be construed as a waiver of any subsequent breach by such Party.

 

7.7 Headings . The headings in this Agreement are for the purpose of convenience only and shall not limit, enlarge or affect any of the covenants, terms, conditions or provisions of this Agreement.

 

7.8 Effect of Recitals . The recitals contained in this Agreement are an integral part of this Agreement.

 

7.9 Notices . All notices, requests, demands and other communications made pursuant to this Agreement shall be in writing and shall be sent by registered or certified mail, return receipt requested, or by commercial courier or by facsimile transmission to the Parties at the addresses or numbers set forth below, or to such other person and place as the Party shall designate by notice to the other Party:

 

BSSD:

BSSD Group, LLC

2033 N. Overfield Road

Casa Grande, AZ 85194

 

 

Three Kings Holdings, LLC

5702 N. 18 th Place

Phoenix, AZ 85016

 

Seventy-Six Spirits, LLC

854 W. Highway 287

Casa Grande, AZ 85194

 

ALC and AHI:

Airware Labs Corp./Airware Holdings, Inc.

7600 E. Redfield Road

Suite 100

Scottsdale, AZ 85258

 

7.10 Assignments . Except as expressly otherwise provided herein, no Party may assign this Agreement or delegate any obligations under this Agreement without obtaining the written consent of each of the other Parties.

 

7.11 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.

 

7.12 Governing Law . This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Arizona without regard to principles of conflicts of law.

 

7.13 Attorneys’ Fees . In the event of any proceeding to enforce this Agreement, the prevailing Party shall be entitled to receive from the losing Party all reasonable costs and expenses, including the reasonable fees of attorneys, accountants and other experts, incurred by the prevailing Party in investigating and prosecuting (or defending) such action, in arbitration, at trial or upon any appeal.

 

7.14 A Party’s Default . If all contingencies herein are satisfied and thereafter any Party fails to close this Agreement and to complete the Exchange as herein provided, within five (5) days following a written demand to so, any other Party may enforce this Agreement by a suit for specific performance, by an action for damages, or any other action available at law or in equity for the recovery of any other relief available to such Party.

 

7.15 Further Assurances . The Parties will make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Agreement and for the better assuring and confirming benefits provided herein.

 

7.16 Time is of the Essence . The Parties acknowledge that time is of the essence.

 

[SIGNATURES ON THE FOLLOWING PAGES]

 

 
 

 

 

IN WITNESS WHEREOF, the Parties have executed this Agreement and Plan of Exchange as of the Effective Date.

 

BSSD: TKH:
   
BSSD Group, LLC Three Kings Holdings, LLC 
   
   
By: _______________________ By: _______________________
   
Name: _____________________ Name: ____________________
   
Title: ______________________ Title: _____________________
   
Bryce Skalla SSS:
   
  Seventy Six Spirits, LLC
   
   
   
By: ______________________ By: ______________________
   
Name: Bryce Skalla Name: ____________________
   
  Title: _____________________
   
   
Mark Murro III Patrick Sean Dugan
   
   
   
   
By: ______________________ By: ______________________
   
Name: Mark Murro III  Name: Patrick Sean Dugan
   
   
Andrew Poirier Carlos Curiel
   
   
   
By: ______________________ By: ______________________
   
Name: Andrew Poirier  Name: Carlos Curiel
   
   
ALC: AHI:
   
Airware Labs Corp. Airware Holdings, Inc.
   
   
   
   
By: _______________________ By: _______________________
   
Name: _____________________ Name: ____________________
   
Title: ______________________ Title: _____________________

Exhibit 10.5

 

  

 

ASSET PURCHASE AGREEMENT

 

 

by and between

 

 

ARIZONA DP CONSULTING LLC,

 

the Individual Member of ARIZONA DP CONSULTING LLC,

 

AZ DP HOLDINGS, LLC

and

ITEM 9 LABS CORP.

Dated: NOVEMBER 26, 2018

 

 
 

TABLE OF CONTENTS

Page

Article I. DEFINITIONS 1
Article II. PURCHASE AND SALE 5
Article III. CLOSING 8
Article IV. REPRESENTATIONS AND WARRANTIES OF SELLER 10
Article V. REPRESENTATIONS AND WARRANTIES OF BUYER 16
Article VI. COVENANTS 20
Article VII. INDEMNIFICATION 23
Article VIII. MISCELLANEOUS 27

 

 
 

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (this " Agreement ") is entered into on November 26, 2018, by and between Arizona DP Consulting LLC, an Arizona limited liability company (" Seller "), Sara Gullickson, an individual and the sole member of the Seller (" Owner "), Item 9 Labs Corp., a Delaware corporation (“ INLB ”), and AZ DP Holdings, LLC, a Nevada limited liability company and wholly-owned subsidiary of INLB (“ Buyer ”). Seller, Buyer, INLB and Owner may collectively be referred to herein as the " Parties " or individually as " Party ".

RECITALS

WHEREAS, this Agreement contemplates, among other things, a transaction in which, subject to the terms and conditions of this Agreement, Buyer will purchase the Seller's Purchased Assets (as defined below), free and clear of any Encumbrances except for Permitted Encumbrances, in return for the Purchase Price (as defined below) (the “ Transaction ”);

WHEREAS , the Seller specializes in helping entrepreneurs obtain cannabis licenses and building cannabis businesses;

WHEREAS , the Seller's Owner deems it advisable and in the best interests of the Seller that the Parties consummate the Transaction, upon the terms and subject to the conditions provided for herein;

NOW, THEREFORE , in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, and intending to be legally bound, the Parties agree as follows.

Article I.
DEFINITIONS

The following terms have the meanings specified or referred to in this Article I:

" Affiliate " of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. The term "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

" Agreement " means this Asset Purchase Agreement.

" Assigned Contracts " has the meaning set forth in Section 2.01(b).

" Assumed Liabilities " has the meaning set forth in Section 2.03.

" Benefit Plan " has the meaning set forth in Section 4.15(a).

" Bill of Sale " has the meaning set forth in Section 3.02(a)(i).

" Books and Records " has the meaning set forth in Section 2.01(f).

" Business " means the cannabis licensing and consulting business as conducted by the Seller as of the Closing Date.

" Business Day " means any day except Saturday, Sunday or any other day on which commercial banks located in the State of Arizona are authorized or required by Law to be closed for business.

" Buyer " means AZ DP Holdings, LLC, a Nevada limited liability company and wholly owned subsidiary of INLB.

Cash Payment ” has the meaning set forth in Section 2.05(a).

" Closing " has the meaning set forth in Section 3.01.

" Closing Date " has the meaning set forth in Section 3.01

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" Code " means the Internal Revenue Code of 1986, as amended.

Common Stock ” means the common stock, par value $0.0001 per share, of INLB.

" Contracts " means all legally binding written contracts, including, but not limited to leases, mortgages, licenses, instruments, notes, commitments, undertakings, indentures and other agreements.

" Direct Claim " has the meaning set forth in Section 7.06(c).

" Disclosure Schedules " means the Disclosure Schedules delivered by the Parties concurrently with the execution and delivery of this Agreement.

" Dollars or $ " means the lawful currency of the United States.

" Employees " means those Persons employed by Seller immediately prior to the Closing.

" Encumbrance " means any lien, pledge, mortgage, deed of trust, security interest, charge, claim, easement, encroachment or other similar encumbrance.

" ERISA " means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.

Exchange Act ” has the meaning set forth in Section 5.08(a).

" Excluded Assets " has the meaning set forth in Section 2.02.

" Governmental Authority " means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.

" Governmental Order " means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

" Indemnified Party " has the meaning set forth in Section 7.05.

" Indemnifying Party " has the meaning set forth in Section 7.05.

“INLB ” means Item 9 Labs Corp., a Delaware corporation.

INLB Shares ” has the meaning set forth in Section 2.05(b).

" Intellectual Property " means any and all of the following in any jurisdiction throughout the world: (i) trademarks, service marks, trade dress, trade names, brands, slogans, logos, internet domain names, and corporate names, all translations, adaptations, derivations, and combinations of the foregoing, and all applications, registrations, and renewals in connection therewith, together with all of the goodwill associated with the foregoing, (ii) copyrights and works of authorship (whether or not copyrightable), and moral rights, and all applications, registrations, and renewals, (iii) computer software (including source code and object code, data, databases and documentation thereof), (iv) trade secrets and other confidential or proprietary information, know-how, processes, formulations, methods and techniques, research and development information, industry analyses, drawings, specifications, designs, plans, proposals, industrial models, technical data, financial and accounting data, business and marketing plans and customer and supplier lists and related information; (v) patents (including all reissues, divisionals, provisionals, continuations and continuations-in-part, re-examinations, renewals, substitutions and extensions thereof), patent applications, and other patent rights and any other Governmental Authority-issued indicia of invention ownership (including inventor's certificates, petty patents and patent utility models); (vi) copies and tangible embodiments of any of the foregoing, in whatever form or medium; and (vii) all other intellectual property and industrial property rights and assets, and all rights, interests and protections that are associated with, similar to, or required for the exercise of, any of the foregoing.

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" Intellectual Property Agreements " means all licenses, sublicenses and other agreements by or through which other Persons grant Seller or Seller grants any other Persons any exclusive or non-exclusive rights or interests in or to any Intellectual Property that is used in connection with the Business.

" Intellectual Property Assets " means all Intellectual Property that is owned by Seller and used in connection with the Business, including the Intellectual Property Registrations set forth on Section 4.11(a) of the Disclosure Schedules.

" Intellectual Property Registrations " means all Intellectual Property Assets that are subject to any issuance, registration, application or other filing by, to or with any Governmental Authority or authorized private registrar in any jurisdiction, including any product or facility registered or required to be registered with the FDA, registered trademarks, domain names, and copyrights, issued and reissued patents and pending applications for any of the foregoing.

" Knowledge of Seller " means the actual knowledge of Sara Gullickson upon reasonable inquiry.

" Law " means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, other requirement or rule of law of any Governmental Authority.

" Losses " means actual out-of-pocket losses, damages, liabilities, costs or expenses, including reasonable attorneys' fees and fees of experts.

" Material Adverse Effect " means any event, occurrence, fact, condition or change that is materially adverse to (a) the Business, results of operations, financial condition or assets of the Seller, taken as a whole, or (b) the ability of Seller to consummate the transactions contemplated hereby; provided, however, that "Material Adverse Effect" shall not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to: (i) general economic or political conditions; (ii) conditions generally affecting the industries in which the Business operates; (iii) any action required or permitted by this Agreement or any action taken (or omitted to be taken) with the written consent of or at the written request of Buyer; (iv) any changes in applicable Laws or accounting rules; (v) the announcement, pendency or completion of the transactions contemplated by this Agreement, including losses or threatened losses of employees, customers, suppliers, distributors or others having relationships with the Seller and the Business; or any matter of which Buyer is aware on the date hereof.

" Material Contracts " has the meaning set forth in Section 4.07(a).

" Ordinary Course of Business " means the usual and customary operation of the Seller consistent with past custom and practice.

" Owner " means Sara Gullickson, as sole member of the Seller.

" Permits " means all permits, licenses, franchises, approvals, authorizations and consents required to be obtained from Governmental Authorities.

" Permitted Encumbrances " means (a) trade accounts payable, provided that such payables are current within the payment terms offered by the vendor and incurred in the Ordinary Course of Business and (b) other imperfections of title or Encumbrances, if any, that have not had, and would not have, a Material Adverse Effect.

" Person " means an individual, corporation, partnership, joint venture, limited liability company, Governmental Authority, unincorporated organization, trust, association or other entity.

  3  

 

" Purchase Price " has the meaning set forth in Section 2.05.

" Purchased Assets " has the meaning set forth in Section 2.01.

" Representative " means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.

" Retained Liabilities " has the meaning set forth in Section 2.04.

" Seller " means Arizona DP Consulting LLC, an Arizona limited liability company.

" Taxes " means all federal, state, local, foreign and other income, gross receipts, sales, use, production, ad valorem, transfer, franchise, registration, profits, license, lease, service, service use, withholding, payroll, employment, unemployment, estimated, excise, severance, environmental, stamp, occupation, premium, property (real or personal), real property gains, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties.

" Tax Return " means any return, declaration, report, claim for refund, information return or statement or other document required to be filed with respect to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

" Third Party Claim " has the meaning set forth in Section 7.06(a).

" Transaction Documents " means this Agreement, the Bill of Sale, Non-Competition Agreement, Lease Agreement, Employment Agreement, and all other agreements, instruments and documents required to be delivered at the Closing.

" Transferred Employees " has the meaning set forth in Section 6.01.

  4  

 

Article II.
PURCHASE AND SALE

2.01 Purchase and Sale of Assets . Subject to the terms and conditions set forth herein, at the Closing, Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase from Seller, free and clear of all Encumbrances, except for Permitted Encumbrances, all of Seller's right, title and interest in, to and under the following assets, properties and rights of Seller, to the extent that such assets, properties and rights exist as of the Closing Date and relate to the Business (collectively, the " Purchased Assets ") including:

(a) all computers and electronics, equipment and office supplies.

(b) all Contracts set forth on Section 2.01(b) of the Disclosure Schedules and the Intellectual Property Agreements set forth on Section 4.11(a) of the Disclosure Schedules (collectively, the " Assigned Contracts ");

(c) all Intellectual Property Assets;

(d) all Permits, but only to the extent transferrable;

(e) all of Seller's rights under warranties, indemnities and all similar rights against third parties to the extent related to any Purchased Assets;

(f) originals, or where not available, copies, of all books and records, including books of account, ledgers and general, financial and accounting records, customer lists, customer purchasing histories, price lists, discount schedules, distribution lists, supplier lists, vendor lists, customer complaints and inquiry files, research and development files, records and data (including all correspondence with any Governmental Authority), sales material and records, strategic plans, internal financial statements and marketing and promotional surveys, material and research, that relate to the Business or the Purchased Assets, other than books and records set forth in Section 2.02(d) (" Books and Records ");

(g) all goodwill associated with any of the Purchased Assets; and

(h) all of the Seller's websites, including the Seller's retail website, domain names, phone and fax numbers, and e-mail addresses listed on Section 2.01(h) of the Disclosure Schedules.

2.02 Excluded Assets . Other than the Purchased Assets subject to Section 2.01, Buyer expressly understands and agrees that it is not purchasing or acquiring, and Seller is not selling or assigning, any other assets or properties of Seller, and all such other assets and properties shall be excluded from the Purchased Assets (the " Excluded Assets "). Excluded Assets include the following assets and properties of the Seller:

(a) all accounts and accounts receivable, bank accounts, bank deposits, cash and cash equivalents, and securities of Seller at Closing;

(b) all real estate owned by the Seller including the related furniture and fixtures;

(c) the personal property of Seller specifically set forth on Section 2.02(c) of the Disclosure Schedules;

(d) the corporate seals, organizational documents, minute books, Tax Returns, books of account or other records having to do with the corporate organization of Seller, all employee-related or employee benefit-related files or records, other than personnel files of Transferred Employees, and any other books and records which Seller is prohibited from disclosing or transferring to Buyer under applicable Law and is required by applicable Law to retain;

  5  

 

(e) all insurance policies of Seller and all rights to applicable claims and proceeds thereunder;

(f) all Benefit Plans and trusts or other assets attributable thereto;

(g) all Tax assets (including duty and Tax refunds and prepayments) of Seller;

(h) all customer deposits, prepaid expenses, credits, advance payments, security, charges, sums and fees;

(i)   all assets, properties and rights used by Seller in its businesses other than the Business;

(j)   the rights which accrue or will accrue to Seller under the Transaction Documents; and

(k) expected returns or refunds of payment to the Seller that will be paid directly to Seller at Closing by such party, or if such expected returns or refunds are received by Buyer, shall be forwarded outright to Seller within five business (5) days after such funds have been received and cleared.

2.03 Assumed Liabilities . Subject to the terms and conditions set forth herein, Buyer shall assume and agree to pay, perform and discharge when due any and all liabilities and obligations of the Seller when due resulting from the operation of the Purchased Assets after the Closing Date (collectively, “ Assumed Liabilities ”). Assumed Liabilities shall include, but are not limited to:

(a) all liabilities and obligations arising under or relating to the Assigned Contracts;

(b) all liabilities and obligations for (i) Taxes relating to the Business, the Purchased Assets or the Assumed Liabilities for any taxable period commencing after the Closing Date. For the sake of clarity, Seller shall be responsible for all Taxes relating to the Business and the Purchased Assets prior to, and including the Closing Date, and Buyer shall be responsible for Taxes resulting from the operation of the Business after the Closing Date;

(c) all liabilities and obligations arising under or relating to the employment of the Transferred Employees after the Closing Date; and

(d) all liabilities and obligations of Seller set forth on Section 2.03(d) of the Disclosure Schedules, which are expressly agreed to be assumed by Buyer; and

(e) all other liabilities and obligations arising out of or relating to Buyer's ownership or operation of the Business and the Purchased Assets after the Closing Date.

2.04 Retained Liabilities . The Parties agree that, except for the Assumed Liabilities, Seller shall retain any and all liabilities or obligations of the Seller resulting from the operation of the Business prior to or as of the Closing Date (" Retained Liabilities "). Retained Liabilities shall include, but are not limited to:

(a) any liabilities or obligations relating to or arising out of the Excluded Assets, and any liabilities or obligations relating to or arising from the operation of the Seller and Business prior to the Closing Date;

(b) any liabilities or obligations for (i) Taxes relating to the Seller or the Seller’s transaction of the Business, the Purchased Assets or the Assumed Liabilities for any taxable period ending on or prior to the Closing Date and (ii) any other Taxes of Seller for any taxable period prior to the Closing Date, including, but not limited to, payroll, income, sales and other taxes;

  6  

 

(c) any liabilities or obligations of Seller relating to or arising out of (i) the employment, or termination of employment, of any Employee prior to the Closing, or (ii) workers' compensation claims of any Employee which relate to events occurring prior to the Closing Date;

(d) any liabilities or obligations of Seller arising or incurred in connection with the negotiation, preparation, investi gation and performance of this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby, including, without limitation, fees and expenses of legal counsel, accountants, consultants, business brokers, advisers and others;

2.05 Purchase Price . The aggregate purchase price payable by Buyer to Seller for the Purchased Assets to be acquired pursuant to the terms of this Agreement shall be Nine Million Dollars ($9,000,000.00) (the " Purchase Price "), plus the assumption of the Assumed Liabilities. The Purchase Price shall be comprised of the following consideration:

(a) One Million Five Hundred Thousand Dollars ($1,500,000.00) (the “ Cash Payment ”), payable by Buyer to Seller, on the Closing Date via wire transfer of immediately available funds to an account designated in writing by Seller to Buyer prior to the Closing; and

(b) Three Million (3,000,000) newly issued restricted shares of Common Stock, par value $0.0001 of INLB, having an aggregate cost basis of Seven Million Five Hundred Thousand Dollars ($7,500,000.00) or $2.50 per share, based upon the current market price of INLB Common Stock (the “ INLB Shares ”). The INLB Shares shall be issued to Seller or its Owner on a tax free exchange basis on the Closing Date.

2.06 Allocation of Purchase Price . The Parties and their respective Affiliates shall report and file all Tax Returns (including, but not limited to Internal Revenue Service Form 85 94) consistent with the allocation set forth on Section 2.06 of the Disclosure Schedules . The Parties agree that this allocation was arrived at by arm's length negotiation between them and that no Party will take a position on any income tax return, before any Governmental Authority, that is inconsistent with such allocation without the prior written consent of the other Parties. The Parties further agree that, to the extent required, each of them will properly prepare and timely file Form 8594 in accordance with Section 2.06 of the Disclosure Schedules and Section 1060 of the Code.

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Article III.
CLOSING

3.01 Closing . The closing of the purchase and sale of the Purchased Assets (the " Closing " ) is taking place simultaneously with the execution of this Agreement by transmittal of fully executed Transaction Documents by electronic means. All transactions contemplated herein to occur on and as of the Closing Date shall be deemed to have occurred simultaneously and to be effective as of the close of Seller’s business on the date of this Agreement (the " Closing Date ").

3.02 Closing Deliverables .

(a) At the Closing, Seller or its Owner (as applicable) shall deliver to Buyer or INLB (as applicable) the following:

(i)   a bill of sale and assignment and assumption agreement in the form of Exhibit A hereto (the " Bill of Sale ") and duly executed by Seller, transferring the Purchased Assets to Buyer;

(ii) a non-competition agreement duly executed by Seller and Owner with respect to Buyer and the Business with a three (3) year term from the Closing Date in the form of Exhibit B hereto (the " Non-Competition Agreement ");

(iii)   the Employment Agreement duly executed by Owner, as described in Section 6.01, and in the form attached hereto as Exhibit C ;

(iv)    the Lease Agreement, duly executed by Seller, as described in Section 6.03, and in the form attached hereto as Exhibit D ;

(v) a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Seller certifying (1) that attached thereto are true and complete copies of all resolutions adopted by the governing body of Seller authorizing the execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby; and (2) the names and signatures of the officers of Seller authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder; and

(vi) such other customary instruments of transfer, assumption, filings or documents, in form and substance reasonably satisfactory to Buyer, as may be required to give effect to this Agreement.

(b) At the Closing, Buyer or INLB (as applicable) shall deliver (or cause to be delivered) to Seller or its Owner (as applicable) the following:

(i)   the Cash Payment, as described in Section 2.05(a);

(ii) a stock certificate evidencing the INLB Shares issued to Seller or its Owner, as described in Section 2.05(b);

(iii)   the Bill of Sale duly executed by Buyer;

(iv) the Non-Competition Agreement duly executed by Buyer;

(v) the Employment Agreement duly executed by INLB;

(vi) the Lease Agreement duly executed by Buyer;

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(vii) a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying (1) that attached thereto are (a) true and complete copies of all resolutions adopted by the governing body of Buyer authorizing the execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby, and (b) a certificate of good standing for Buyer, as certified by the Nevada Secretary of State; and (2) the names and signatures of the officers of Buyer authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder;

(viii)       a certificate of the Secretary or an Assistant Secretary (or equivalent officer) INLB certifying (1) that attached thereto are (a) a true and complete copy of INLB’s certificate of incorporation, together with all amendments to date, as certified by the Delaware Secretary of State, and that such certificate of incorporation, together with all amendments, is in full force and effect on the date hereof, (b) a true and complete copy of INLB’s bylaws, as amended to date, and that such bylaws have not been rescinded, amended or otherwise modified and are in full force and effect on the date hereof, (c) true and complete copies of all resolutions adopted by the governing body of INLB authorizing the execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby, and (d) a certificate of good standing for INLB, as certified by the Delaware Secretary of State; and (2) the names and signatures of the officers of INLB authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder; and

(ix) such other customary instruments of transfer, assumption, filings or documents, in form and substance reasonably satisfactory to Seller, as may be required to give effect to this Agreement.

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Article IV.
REPRESENTATIONS AND WARRANTIES OF SELLER

Except as set forth in the Disclosure Schedules, Seller represents and warrants to Buyer that, to the Knowledge of Seller, the statements contained in this Article IV are true and correct as of the date hereof:

4.01 Organization and Qualification of Seller . Seller is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Arizona, and has all necessary corporate power and authority to carry on the Business as currently conducted. Seller is not licensed or qualified to do business in any other jurisdiction. Seller is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the ownership of the Purchased Assets or the operation of the Business as currently conducted makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect.

 

4.02 Authority of Seller . Seller has all necessary limited liability company power and authority to enter into this Agreement and the other Transaction Documents to which Seller is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Seller of this Agreement and any other Transaction Document to which Seller is a party, the performance by Seller of its obligations hereunder and thereunder and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all requisite limited liability company action on the part of Seller. This Agreement has been duly executed and delivered by Seller, and (assuming due authorization, execution and delivery by Buyer) this Agreement constitutes a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). When each other Transaction Document to which Seller is or will be a party has been duly executed and delivered by Seller (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of Seller enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).

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4.03 No Conflicts; Consents . The execution, delivery and performance by Seller of this Agreement and the other Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) result in a violation or breach of any provision of the articles of organization or operating agreement of Seller; (b) result in a violation or breach of any provision of any Law or Governmental Order applicable to Seller, the Business or the Purchased Assets; or (c) except as set forth in Section 4.03 of the Disclosure Schedules, require the consent, notice or other action by any Person under, conflict with, result in a violation or breach of, constitute a default under or result in the acceleration of any Material Contract, except in the cases of clauses (b) and (c), where the violation, breach, conflict, default, acceleration or failure to give notice would not have a Material Adverse Effect. Except as set forth in Section 4.03 of the Disclosure Schedules, no consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to Seller in connection with the execution and delivery of this Agreement or any of the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby except for such filings and such consents, approvals, Permits, Governmental Orders, declarations, filings or notices which, in the aggregate, would not have a Material Adverse Effect.

4.04 Financial Statements . The copies of the financial statements of Seller that have been provided to Buyer prior to the date hereof (the “ Financial Statements ”) fairly present in all material respects the financial condition of the Business as of the respective dates they were prepared and the results of the operations of the Business for the periods indicated.

4.05 Undisclosed Liabilities . Seller has no liabilities with respect to the Business except (a) those which are adequately reflected in the Financial Statements, and (b) those which have been incurred in the Ordinary Course of Business and which are not, individually or in the aggregate, material in amount since the date of the last Financial Statement.

4.06 Absence of Certain Changes, Events and Conditions . Except as expressly contemplated by this Agreement, or as set forth on Section 4.06 of the Disclosure Schedules, since January 1, 2018, through the Closing Date, Seller has transacted Business in the Ordinary Course of Business in all material respects and there has not been, with respect to the Business, any:

 

(a) event, occurrence or development that has had a Material Adverse Effect;

(b) revocation or other loss of any Permit or Intellectual Property Registration issued by a Governmental Authority;

(c) imposition of any Encumbrance upon any of the Purchased Assets, except for Permitted Encumbrances;

(d) increase in the compensation of any Transferred Employees, other than as provided for in any written agreements or in the Ordinary Course of Business;

(e) any loan to (or forgiveness of any loan to), or entry into any other transaction with, any current or former managers, officers or employees of the Seller;

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(f) adoption of any plan of merger, consolidation, reorganization, liquidation or dissolution or filing of a petition in bankruptcy under any provisions of federal or state bankruptcy Law or consent to the filing of any bankruptcy petition against it under any similar Law;

(g) purchase or other acquisition of any property or asset that constitutes a Purchased Asset in an aggregate amount exceeding $25,000; or

(h) any agreement to do any of the foregoing, or any action or omission that would result in any of the foregoing.

4.07 Material Contracts .

(a) Section 4.07(a) of the Disclosure Schedules lists each of the following Contracts (x) by which any of the Purchased Assets are bound or affected or (y) to which Seller is a party or by which Seller is bound in connection with the Purchased Assets (together with all Intellectual Property Agreements listed in Section 4.11(a) of the Disclosure Schedules, collectively, the " Material Contracts "):

(i)   all Contracts with vendors, suppliers, distributors, sales brokers, consultants, service providers, employees and independent contractors involving aggregate consideration in excess of $25,000;

(ii) all Contracts involving aggregate consideration in excess of $35,000;

(iii)   all Contracts that relate to the sale of any of the Purchased Assets, other than in the Ordinary Course of Business, for consideration in excess of $25,000;

(iv) all Contracts that relate to the acquisition of any business, a material amount of stock or assets of any other Person or any real property (whether by merger, sale of stock, sale of assets or otherwise);

(v) all Contracts between or among the Seller on the one hand and any Affiliate of Seller on the other hand;

(vi) all collective bargaining agreements or Contracts with any labor organization, union or association.

(b) Seller is not in breach of, or default under, any Material Contract, except for such breaches or defaults that would not have a Material Adverse Effect.

4.08 Title to Purchased Assets . Seller has good and valid title to, or a valid leasehold interest in, all the Purchased Assets, free and clear of Encumbrances except for Permitted Encumbrances.

4.09 Sufficiency of Assets . Except as set forth in Section 4.09 of the Disclosure Schedules, the Purchased Assets are sufficient for the continued conduct of the Business after the Closing in substantially the same manner as conducted prior to the Closing and constitute all of the rights, property and assets necessary to conduct the Business as currently conducted.

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4.10 Real Property .

(a) Seller does not lease any material real property used in connection with the Business. As set forth in Section 6.03 of this Agreement, the parties shall enter into a lease agreement for the commercial office space located at 1709 E. Bethany Home Road, Phoenix, Arizona owned by Seller (the “ Real Property ”).

(b) Seller has not received any written notice of existing, pending or threatened (i) condemnation proceedings affecting the Real Property, or (ii) zoning, fire or building code violations or other proceedings, or similar matters which would reasonably be expected to materially and adversely affect the ability to utilize the Real Property as currently operated. Neither the whole nor any material portion of any Real Property has been damaged or destroyed by fire or other casualty.

4.11 Intellectual Property .

(a) Section 4.11(a) of the Disclosure Schedules lists (i) all Intellectual Property Assets, (ii) all Intellectual Property Registrations, and (iii) all Intellectual Property Agreements. Seller owns or has the right to use all Intellectual Property Assets and the Intellectual Property licensed to Seller under the Intellectual Property Agreements, including, but not limited to, formulations for all products and all processes and know-how related to the development of products and processes as conducted by the Seller.

(b) Except as set forth in Section 4.11(b) of the Disclosures Schedules: (i) the transaction of the Business as currently conducted does not infringe, misappropriate, dilute or otherwise violate the Intellectual Property of any Person; and (ii) to Seller’s Knowledge, no Person is infringing, misappropriating or otherwise violating any Intellectual Property Assets.

4.12 Legal Proceedings; Governmental Orders .

(a) Except as set forth in Section 4.12(a) of the Disclosure Schedules, there have not been within the last three (3) calendar years and there are currently no actions, suits, claims, investigations or other legal proceedings pending or, to the Knowledge of Seller, threatened against or by Seller relating to or affecting the Seller, the Business, the Purchased Assets or the Assumed Liabilities.

(b) Except as set forth in Section 4.12(b) of the Disclosure Schedules, there are no outstanding Governmental Orders and no unsatisfied judgments, penalties or awards against or affecting the Seller or the Purchased Assets which would have a Material Adverse Effect.

4.13 Compliance With Laws; Permits .

(a) Except as set forth in Section 4.13(a) of the Disclosure Schedules, Seller is in compliance with all Laws applicable to the conduct of the Business as currently conducted or the ownership and use of the Purchased Assets, except where the failure to be in compliance would not have a Material Adverse Effect.

(b) Section 4.13(b) of the Disclosure Schedules contains a complete and accurate list of all Permits required for Seller to conduct the Business as currently conducted or for the ownership and use of the Purchased Assets, except where the failure to obtain such Permits would not have a Material Adverse Effect.

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4.14 Environmental . Except as would not have a Material Adverse Effect, Seller is currently in compliance with all Laws relating to the environment or worker safety with respect to the Business or the Purchased Assets, and Seller has not received any written notice, report, or information regarding any liabilities (whether accrued, absolute, contingent, unliquidated, or otherwise) or any corrective, investigatory, or remedial obligations arising under such Laws which relate to Seller currently or previously as used by Seller in the operation of the Business.

4.15 Employee Benefit Matters .

(a) Except as set forth in Section 4.15(a) of the Disclosure Schedules there are no material benefit, retirement, employment, consulting, compensation, incentive, bonus, membership interest/stock option, appreciation right, phantom equity, change in control, severance, vacation, paid time off, welfare and fringe-benefit agreement, plan, policy and program in effect and covering one or more Employees, former employees of the Seller, current or former directors of the Seller or the beneficiaries or dependents of any such Persons, and is maintained, sponsored, contributed to, or required to be contributed to by Seller, or under which Seller has any material liability for premiums or benefits (as listed on Section 4.15(a) of the Disclosure Schedules, each, a " Benefit Plan ").

(b) No Benefit Plan: (i) is subject to the minimum funding standards of Section 302 of ERISA or Section 412 of the Code; or (ii) is a "multi-employer plan" (as defined in Section 3(37) of ERISA).

(c) No Benefit Plan provides benefits or coverage in the nature of health, life or disability insurance following retirement or other termination of employment (other than death benefits when termination occurs upon death).

(d) No Benefit Plan exists that could: (i) result in the payment to any Employee, director or consultant of the Seller of any money or other property; or (ii) accelerate the vesting of or provide any additional rights or benefits (including funding of compensation or benefits through a trust or otherwise) to any Employee, director or consultant of the Seller, in each case, as a result of the execution of this Agreement. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby will result in "excess parachute payments" within the meaning of Section 280G(b) of the Code.

4.16 Employment Matters .

(a) Seller is not a party to or bound by any collective bargaining or other agreement with a union or labor organization representing any of the Employees. There has not been, nor, to the Knowledge of Seller, has there been any threat of, any strike, slowdown, work stoppage, lockout, concerted refusal to work overtime or other similar labor activity or dispute affecting Seller or any of the Employees.

(b) Seller is in compliance with all applicable Laws pertaining to employment and employment practices to the extent they relate to the Transferred Employees, except to the extent non-compliance would not result in a Material Adverse Effect.

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4.17 Taxes .

(a) Except as set forth in Section 4.17(a) of the Disclosure Schedules or as would not have a Material Adverse Effect, Seller has filed (taking into account any valid extensions) all Tax Returns with respect to the Seller and Business required to be filed by Seller and has paid all Taxes shown thereon as owing. Seller is not currently the beneficiary of any extension of time within which to file any Tax Return other than extensions of time to file Tax Returns obtained in the Ordinary Course of Business. To Seller’s Knowledge, no issue relating to Taxes has been raised by a taxing authority during any pending audit or examination, and no issue relating to Taxes was raised by a taxing authority in any completed audit or examination, that reasonably can be expected to recur in a later taxable period.

(b) Seller is not a "foreign person" as that term is used in Treasury Regulations Section 1.1445-2.

(c) The representations and warranties set forth in this Section 4.17 are Seller's sole and exclusive representations and warranties regarding Tax matters.

4.18 Brokers . No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or any other Transaction Document based upon arrangements made by or on behalf of Seller.

4.19 No Other Representations and Warranties . Except for the representations and warranties contained in this Article IV (including the related portions of the Disclosure Schedules), neither Seller nor any other Person has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller, including any representation or warranty as to the accuracy or completeness of any information regarding the Seller, Business, and the Purchased Assets furnished or made available to Buyer and its Representatives, or as to the future revenue, profitability or success of the Business, or any representation or warranty arising from statute or otherwise under applicable Laws.

 

4.20 Full Disclosure . No representation or warranty by Seller in this Agreement, and no statement contained in the Disclosure Schedules to this Agreement, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading.

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Article V.
REPRESENTATIONS AND WARRANTIES OF BUYER

Except as set forth in the Disclosure Schedules, Buyer represents and warrants to Seller and its Owner that the statements contained in this Article V are true and correct as of the date hereof:

5.01 Organization of Buyer . Buyer is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Nevada and has all necessary corporate power and authority to carry on its business as currently conducted.

5.02 Authority of Buyer . Buyer has all necessary limited liability company power and authority to enter into this Agreement and the other Transaction Documents to which Buyer is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Buyer of this Agreement and any other Transaction Document to which Buyer is a party, the performance by Buyer of its obligations hereunder and thereunder and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all requisite limited liability company action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer, and (assuming due authorization, execution and delivery by Seller and its Owner) this Agreement constitutes a legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). When each other Transaction Document to which Buyer is or will be a party has been duly executed and delivered by Buyer (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of Buyer enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).

5.03 No Conflicts; Consents . The execution, delivery and performance by Buyer of this Agreement and the other Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) result in a violation or breach of any provision of the articles of organization or operating agreement of Buyer; (b) result in a violation or breach of any provision of any Law or Governmental Order applicable to Buyer; or (c) except as set forth in Section 5.03 of the Disclosure Schedules, require the consent, notice or other action by any Person under, conflict with, result in a violation or breach of, constitute a default under or result in the acceleration of any agreement to which Buyer is a party, except in the cases of clauses (b) and (c), where the violation, breach, conflict, default, acceleration or failure to give notice would not have a material adverse effect on Buyer's ability to consummate the transactions contemplated hereby. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to Buyer in connection with the execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, except as set forth in Section 5.03 of the Disclosure Schedules and such consents, approvals, Permits, Governmental Orders, declarations, filings or notices which would not have a material adverse effect on Buyer's ability to consummate the transactions contemplated hereby and thereby.

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5.04 Brokers . No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or any other Transaction Document based upon arrangements made by or on behalf of Buyer.

5.05 Sufficiency of Funds . Buyer has sufficient cash on hand or other sources of immediately available funds to enable it to make the Cash Payment and consummate the transactions contemplated by this Agreement.

5.06 Solvency . Immediately after giving effect to the transactions contemplated hereby, Buyer shall be solvent and shall: (a) be able to pay its debts as they become due; and (b) have adequate capital to carry on its business.

 

5.07 Legal Proceedings . To Buyer's knowledge, there are no actions, suits, claims, investigations or other legal proceedings pending or threatened against or by Buyer or any Affiliate of Buyer that challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement.

Except as set forth in the Disclosure Schedules, INLB represents and warrants to Seller and its Owner that the statements contained in this Article V are true and correct as of the date hereof:

5.08 Disclosure Reports .

(a) INLB is not, and its common stock is not, currently registered under the Securities Exchange Act of 1934 (the “ Exchange Act ”). INLB is currently listed for trading of its common stock on the OTC Markets Pink sheets and files quarterly, annual and interim reports in compliance with Rule 15c2-11 (a)(5) promulgated under the Exchange Act and the requirements of OTC Markets (the “ OTC Reports ”). The INLB OTC Reports (i) at the time filed, (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) complied in all material respects with the applicable requirements of the securities laws and other applicable laws and (ii) did not, at the time they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such amended or superseded filing) contain any untrue statement of a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each offering or sale of securities by INLB (i) was either registered under the Exchange Act or made pursuant to a valid exemption from registration, (ii) complied in all material respects with the applicable requirements of the securities laws and other applicable laws, except for immaterial late “Blue Sky” filings, including disclosure and broker/dealer registration requirements, and (iii) was made pursuant to offering documents, which did not, at the time of the offering (or, in the case of registration statements, at the effective date thereof) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the offering documents or necessary to make the statements in such documents, in light of the circumstances under which they were made, not misleading.

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(b) All of the financial statements of INLB included in its Annual Report for year ended September 30, 2017 filed with OTC Markets in 2018, and each of its Quarterly Report filings filed with OTC Markets in 2018, including any related notes thereto, have been prepared in accordance with GAAP in all material respects, subject in the case of unaudited financial statements to normal year-end adjustments and the absence of notes, and present fairly in all material respects the consolidated financial position, results of operations and cash flows of INLB and its subsidiaries as of the dates and for the periods indicated therein.

5.09 Capitalization . The authorized capital stock of INLB consists of 2,000,000,000 shares of Common Stock, all with a par value of $0.0001 per shares. As of the Closing Date, there are 59,699,196 shares of Common Stock issued and outstanding (which includes all 5,000,000 shares committed to be issued to Viridis Group I9 Capital LLC). All of the outstanding Common Stock has been duly authorized, validly issued, fully paid and is nonassessable, and was not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of applicable Law, the organizational documents of INLB, any Contract to which INLB is or was a party or otherwise bound, any Law or Governmental Order or any federal or state securities or “Blue Sky” Laws. The issuance and sale of the INLB Shares pursuant to this Agreement will not obligate INLB to issue shares of Common Stock or other securities to any Person (other than Seller and its Owner) and will not result in a right of any holder of INLB’s securities to adjust the exercise, conversion, exchange or reset price under any of such securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the INLB’s capital stock to which INLB is a party or, to the knowledge of INLB, between or among any of the INLB’s stockholders.

5.10 Insurance . INLB and its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which INLB and its subsidiaries are engaged, however, INLB does not currently have directors and officers insurance coverage. INLB has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

5.11 Issuance of INLB Shares; Compliance Matters . The INLB Shares issuable pursuant to this Agreement are duly authorized and, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable, free and clear of all Encumbrances imposed by INLB other than restrictions on transfer provided by applicable Law. No registration under the Exchange Act is required for the offer and sale of the INLB Shares to Seller or its Owner (as applicable) as contemplated by this Agreement. INLB has not, in the twelve (12) months preceding the date hereof, received notice from any trading market on which INLB’s Common Stock is or has been listed or quoted to the effect that INLB is not in compliance with the listing or maintenance requirements of such trading market, with the exception of the quarterly reports for periods ending March 31, 2018 and June 30, 2018, which have been filed with OTC Markets but were filed past the due date. INLB is in compliance with all such listing and maintenance requirements and the consummation of the transactions contemplated by this Agreement do not violate the marketplace rules of any such trading market.

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5.12 Price . INLB has not, and to its knowledge, no Person has, taken, directly or indirectly, any action primarily designed to cause or to result in the stabilization or destabilization of the price of any security of INLB to facilitate the sale or resale of any of the Common Stock.

5.13 Organization of INLB . INLB is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has all necessary corporate power and authority to carry on its business as currently conducted.

5.14 Authority of INLB . INLB has all necessary corporate power and authority to enter into this Agreement and the other Transaction Documents to which INLB is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by INLB of this Agreement and any other Transaction Document to which INLB is a party, the performance by INLB of its obligations hereunder and thereunder and the consummation by INLB of the transactions contemplated hereby and thereby have been duly authorized by all requisite limited liability company action on the part of INLB. This Agreement has been duly executed and delivered by INLB, and (assuming due authorization, execution and delivery by Seller) this Agreement constitutes a legal, valid and binding obligation of INLB enforceable against INLB in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). When each other Transaction Document to which INLB is or will be a party has been duly executed and delivered by INLB (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of INLB enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or similar Laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).

5.15 No Conflicts; Consents . The execution, delivery and performance by INLB of this Agreement and the other Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) result in a violation or breach of any provision of the certificate of incorporation or bylaws of INLB; (b) result in a violation or breach of any provision of any Law or Governmental Order applicable to INLB; or (c) except as set forth in Section 5.15 of the Disclosure Schedules, require the consent, notice or other action by any Person under, conflict with, result in a violation or breach of, constitute a default under or result in the acceleration of any agreement to which INLB is a party, except in the cases of clauses (b) and (c), where the violation, breach, conflict, default, acceleration or failure to give notice would not have a material adverse effect on INLB's ability to consummate the transactions contemplated hereby. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to INLB in connection with the execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, except as set forth in Section 5.15 of the Disclosure Schedules and such consents, approvals, Permits, Governmental Orders, declarations, filings or notices which would not have a material adverse effect on INLB’s ability to consummate the transactions contemplated hereby and thereby.

5.16 Full Disclosure . No representation or warranty by Buyer or INLB in this Agreement and no statement contained in the Disclosure Schedules to this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading.

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Article VI.
COVENANTS

6.01

Transfer of Employees . Simultaneously with the Closing, Seller is terminating the employment of all employees, and will pay all liabilities, relating to the employment of and termination of such employees, if any. At the Closing, Buyer shall offer employment to all of Seller’s former employees (the “ Transferred Employees ”) set forth on Section 6.01 of the Disclosure Schedules. Seller shall use its best efforts to assist in the post-closing employment of the Transferred Employees. No portion of the assets of any Benefit Plan, fund, program or arrangement, written or unwritten, heretofore sponsored or maintained by Seller (and no amount attributable to any such Benefit Plan, fund, program or arrangement) shall be transferred to Buyer, and Buyer shall not be required to continue any such Benefit Plan, fund, program or arrangement after the Closing.

(a) Transferred Employees . At the Closing, Buyer is offering employment to the Transferred Employees at substantially the same pay as received by such Transferred Employees prior to Closing and with rights to participate in all employee benefit and incentive packages offered by Buyer to its employees from time to time.

(b) Employment Agreement. At the Closing, INLB is entering into an employment agreement with Owner, pursuant to which Owner shall serve in the capacity of Chief Executive Officer of INLB (the “ Employment Agreement ”) and shall receive a base salary of $200,000 and a bonus of up to $200,000 per year upon completion of certain performance measurements. The form of Employment Agreement is attached hereto as Exhibit C . Any and all prior consulting agreements entered into prior to Closing between Buyer and Owner shall be terminated effective as of Closing.

6.02 Board and Governance of INLB. In accordance with the written consent of the Board of Directors of INLB (“ INLB Board ”) and/or a majority vote of the INLB shareholders, INLB agrees that Owner shall be appointed to serve as a director on the INLB Board effective as of the Closing.

6.03 Lease Agreement. At the Closing, Seller, as owner of that certain commercial office space located at 1709 E. Bethany Home Road, Phoenix, Arizona 85016, is entering into a lease with Buyer for a minimum term of six (6) months at an initial gross monthly rent of $3,200, inclusive of all furniture and fixtures, in the form attached hereto as Exhibit D (the “ Lease Agreement ”). The Lease Agreement shall be renewable at the option of Buyer on substantially the same terms for additional time periods as agreed upon by the Buyer and Seller.

6.04 Confidentiality. The Parties to this Agreement acknowledge, covenant and agree that each Party and such Party’s Representatives and Affiliates will keep all information relating to the Seller, the Business and the transactions described in this Agreement confidential, and no Party, its Representatives or Affiliates will disclose or allow to be disclosed any confidential information, directly or indirectly, to any third party without the prior written approval of all Parties, except where the information is already generally available to the public through no act of a Party or where a Party is required by any applicable law to disclose confidential information (and then prior notice of such disclosure shall be given to the other Parties).

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6.05 Books and Records .

(a) In order to facilitate the resolution of any claims made against or incurred by Seller prior to the Closing, or for any other reasonable purpose, for a period of three (3) years after the Closing, Buyer shall:

(i)   retain the Books and Records (including personnel files) relating to periods after to the Closing in a manner reasonably consistent with the prior practices of Seller; and

(ii) upon reasonable notice, afford the Seller's Representatives reasonable access (including the right to make, at Seller's expense, photocopies), during normal business hours, to such Books and Records.

(b) In order to facilitate the resolution of any claims made by or against or incurred by Buyer after the Closing, or for any other reasonable purpose, for a period of three (3) years after the Closing, Seller shall:

(i)   retain the books and records (including personnel files) of Seller which relate to the Business and its operations for periods prior to the Closing; and

(ii) upon reasonable notice, afford the Buyer's Representatives reasonable access (including the right to make, at Buyer's expense, photocopies), during normal business hours, to such books and records.

(c) Neither Buyer nor Seller shall be obligated to provide the other party with access to any books or records (including personnel files) pursuant to this Section where such access would violate any Law.

6.06 Public Announcements . Unless otherwise required by applicable Law, no Party shall make any public announcements in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other Parties (which consent shall not be unreasonably withheld or delayed), and the Parties shall cooperate as to the timing and contents of any such announcement.

6.07 Bulk Sales Laws . The Parties hereby waive compliance with the provisions of any bulk sales, bulk transfer or similar Laws of any jurisdiction that may otherwise be applicable with respect to the sale of any or all of the Purchased Assets to Buyer .

 

6.08 Receivables . From and after the Closing, if Buyer or its Affiliate receives or collects any funds relating to any Excluded Assets, Buyer or its Affiliate shall remit any such funds to Seller within ten (10) Business Days after its receipt thereof.

 

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6.09 Transfer Taxes . All transfer, sales, use, registration, value added and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the other Transaction Documents (including unsecured personal property tax to county tax collectors) that are attributable to Seller under state or federal tax Law shall be borne and paid by Seller. Seller shall, at its own expense, file any Tax Return or other document with respect to such Taxes or fees (and Buyer shall cooperate with respect thereto as necessary).

 

6.10 Further Assurances . Following the Closing, each of the Parties hereto shall, and shall cause their respective Affiliates to, execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement and the other Transaction Documents.

 

6.11 Matters Relating to the INLB Shares .

(a) The INLB Shares to be issued to Seller or its Owner pursuant to this Agreement shall not have been registered and shall be characterized as “restricted securities” under applicable federal and state securities laws, and under such laws such shares may be resold without registration under the Exchange Act and state securities laws, only in certain limited circumstances. Each certificate evidencing the INLB Shares to be issued to Seller or its Owner under this Agreement shall bear an appropriate restrictive legend with respect thereto.

(b) INLB hereby agrees to remove the restrictive legend(s) set forth on the certificate representing the INLB Shares and issue a certificate without such restrictive legend(s) to the holder of the applicable certificate upon which it is stamped at such time as (i) such INLB Shares are registered for resale under the Exchange Act, (ii) such INLB Shares are sold or transferred pursuant to Rule 144, and (iii) such INLB Shares are eligible for sale under Rule 144, with the requirement for INLB to be in compliance with the current public information required under Rule 144 as to such securities. Following the earlier of subsections (i), (ii), or (iii) of this Section 6.11(b), INLB shall instruct its transfer agent to remove the restrictive legend(s) from the INLB Shares and shall cause its counsel to issue any legend removal opinion required by the transfer agent, and take any and all such additional steps as may be required to remove any and all then existing restrictive legend(s) from the INLB Shares, at INLB’s expense. In connection with a sale of the INLB Shares in reliance on Rule 144, Seller or its Owner (as applicable) or their broker shall also deliver to INLB a customary broker representation letter, which shall include, as may be appropriate, a certification that such holder is, or is not, an affiliate of INLB (as defined in Rule 144) and a certification as to the length of time the applicable INLB Shares have been held.

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(c) INLB shall file on a timely basis (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by it under the Exchange Act (including the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144), and comply with all applicable securities laws. If INLB is not required to file reports pursuant to the Exchange Act, upon the request of Seller or its Owner, INLB shall make publicly available the information specified in subparagraph (c)(2) of SEC Rule 144 for a period not to exceed three (3) years from the date INLB is no longer required to file reports pursuant to the Exchange Act. INLB shall take such further action (including, without limitation, the filing of current Form 10 information and the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 ) as may be reasonably required from time to time and as may be within the reasonable control of INLB, to enable Seller or its Owner (as applicable) to transfer the INLB Shares without registration under the Exchange Act, pursuant to the exemptions provided by SEC Rule 144 or any similar rule or regulation hereafter adopted by the SEC; such action will be taken as soon as practicable, and in any event so that such transfers by Seller or its Owner (as applicable) may commence no later than two (2) years following the Closing Date. Upon the request of Seller or its Owner (as applicable), INLB will deliver to such party a written statement as to whether it has complied with such requirements and, if not, the specifics thereof. In connection with the sale, transfer or disposition of any of the INLB Shares under SEC Rule 144, provided that Seller or its Owner (as applicable) or their broker shall have delivered to INLB a customary representation letter, INLB agrees promptly to cause its transfer agent to remove the restrictive legend(s) on certificates or book entries representing the INLB Shares sold, transferred or distributed to the transferees and to instruct INLB’s counsel to promptly issue a legal opinion, at INLB’s expense, confirming to the transfer agent the right to have such legend(s) removed, and take any and all such additional steps as may be required to remove any and all then existing restrictive legend(s) from the INLB Shares, at INLB’s expense. In connection with any sale, transfer or other disposition by Seller or its Owner (as applicable) pursuant to SEC Rule 144, INLB shall cooperate with such holder to facilitate the timely preparation and delivery of certificates representing such INLB Shares to be sold and not bearing any Exchange Act legend(s), and enable certificates for such INLB Shares to be for such number of shares and registered in such names as Seller or its Owner (as applicable) may reasonably request.

Article VII.
INDEMNIFICATION

 

7.01 Survival . Subject to the limitations and other provisions of this Agreement, the representations and warranties contained herein shall survive the Closing and shall remain in full force and effect until the date that is eighteen (18) months from the Closing Date; except the representations and warranties set forth in Sections 4.01 (Organization and Qualification of Seller), 4.02 (Authority of Seller), 4.08 (Title to Purchased Assets), 4.14 (Environmental), 4.15 (Employee Benefits), 4.18 (Brokers), 5.01 (Organization and Authority of Buyer), 5.02 (Authority of Buyer), 5.04 (Brokers), 5.08 (Disclosure Reports), 5.09 (Capitalization), 5.10 (Insurance), 5.11 (Issuance of INLB Shares), 5.13 (Organization and Authority of INLB) and 5.14 (Authority of INLB) which shall survive until sixty (60) days following the expiration of the applicable statute of limitations. All covenants and agreements of the Parties contained in this Agreement shall survive the Closing indefinitely or for the period explicitly specified therein. The expiration of any representation, warranty or covenant shall not affect any claim made in accordance with this Agreement prior to the date of such expiration.

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7.02 Indemnification By Seller . Subject to the other terms and conditions of this Article VII, Seller shall indemnify Buyer against, and shall hold Buyer harmless from and defend against, any and all Losses incurred or sustained by, or imposed upon, Buyer based upon, arising out of, with respect to or by reason of:

(a) any inaccuracy in or breach of any of the representations or warranties of Seller contained in this Agreement;

(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Seller pursuant to this Agreement; or

(c) any Excluded Asset or any Retained Liability.

7.03 Indemnification By Buyer . Subject to the other terms and conditions of this Article VII, Buyer shall indemnify Seller and its Owner against, and shall hold Seller and its Owner harmless from and against, any and all Losses incurred or sustained by, or imposed upon, Seller and its Owner based upon, arising out of, with respect to or by reason of:

(a) any inaccuracy in or breach of any of the representations or warranties of Buyer contained in this Agreement;

(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Buyer pursuant to this Agreement; or

(c) any Assumed Liability.

7.04 Indemnification By INLB . Subject to the other terms and conditions of this Article VII, INLB shall indemnify Seller and its Owner against, and shall hold Seller and its Owner harmless from and defend against, any and all Losses incurred or sustained by, or imposed upon, Seller and its Owner based upon, arising out of, with respect to or by reason of:

(a) any inaccuracy in or breach of any of the representations or warranties of INLB contained in this Agreement; or

(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by INLB pursuant to this Agreement.

7.05 Certain Limitations . The party making a claim under this Article VII is referred to as the " Indemnified Party ", and the party against whom such claims are asserted under this Article VII is referred to as the " Indemnifying Party ". The indemnification provided for in Section 7.02 and Section 7.03 shall be subject to the following limitations:

(a) The Indemnifying Party shall not be liable to the Indemnified Party for indemnification under Section 7.02(a) or Section 7.03(a) as the case may be, until the aggregate amount of all Losses in respect of indemnification under Section 7.02(a) or Section 7.03(a) exceed Fifty Thousand Dollars ($50,000) (the " Deductible "), in which event the Indemnifying Party shall only be required to pay or be liable for Losses in excess of the Deductible.

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(b) The aggregate amount of all Losses for which an Indemnifying Party shall be liable pursuant to Section 7.02(a) or Section 7.03(a) as the case may be, shall not exceed the Cash Payment.

(c) Payments by an Indemnifying Party pursuant to Section 7.02 or Section 7.03 in respect of any Loss shall be limited to the amount of any liability or damage that remains after deducting therefrom any insurance proceeds received by the Indemnified Party in respect of any such claim. The Indemnified Party shall use its commercially reasonable efforts to recover under insurance policies for any Losses prior to seeking indemnification under this Agreement.

(d) In no event shall any Indemnifying Party be liable to any Indemnified Party for any punitive damages relating to the breach or alleged breach of this Agreement.

(e) Each Indemnified Party shall take, and cause its Affiliates to take, all reasonable steps to mitigate any Loss upon becoming aware of any event or circumstance that would be reasonably expected to, or does, give rise thereto, including incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Loss.

7.06 Indemnification Procedures.  

(a) Third Party Claims. If any Indemnified Party receives notice of the assertion or commencement of any action, suit, claim or other legal proceeding made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing (a " Third Party Claim ") against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party prompt written notice thereof. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Third Party Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third Party Claim at the Indemnifying Party's expense and by the Indemnifying Party's own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third Party Claim, subject to Section 7.05(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right, at its own cost and expense, to participate in the defense of any Third Party Claim with counsel selected by it subject to the Indemnifying Party's right to control the defense thereof. If the Indemnifying Party elects not to compromise or defend such Third Party Claim or fails to promptly notify the Indemnified Party in writing of its election to defend as provided in this Agreement, the Indemnified Party may, subject to Section 7.05(b), pay, compromise, or defend such Third Party Claim and seek indemnification for any and all Losses based upon, arising from or relating to such Third Party Claim. The Parties shall cooperate with each other in all reasonable respects in connection with the defense of any Third Party Claim, including making available (subject to the provisions of Section 6.04 (Confidentiality)) records relating to such Third Party Claim and furnishing, without expense (other than reimbursement of actual out-of-pocket expenses) to the defending party, management employees of the non-defending party as may be reasonably necessary for the preparation of the defense of such Third Party Claim.

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(b) Settlement of Third Party Claims. Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third Party Claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed), except as provided in this Section 7.05(b). If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party fails to consent to such firm offer within ten (10) days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third Party Claim and in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party fails to consent to such firm offer and also fails to assume defense of such Third Party Claim, the Indemnifying Party may settle the Third Party Claim upon the terms set forth in such firm offer to settle such Third Party Claim. If the Indemnified Party has assumed the defense pursuant to Section 7.05(a), it shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).

(c) Direct Claims. Any claim by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a " Direct Claim ") shall be asserted by the Indemnified Party giving the Indemnifying Party prompt written notice thereof. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) days after its receipt of such notice to respond in writing to such Direct Claim. During such thirty-day (30) period, the Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim. The Indemnified Party shall assist the Indemnifying Party's investigation by giving such information and assistance (including access to the Indemnified Party's premises and personnel and the right to examine and copy any accounts, documents or records) as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty-day (30) period, the Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.

7.07 Tax Treatment of Indemnification Payments . All indemnification payments made under this Agreement shall be treated by the parties as an adjustment to the Purchase Price for Tax purposes, unless otherwise required by Law.

7.08 Exclusive Remedies . The Parties acknowledge and agree that their sole and exclusive remedy with respect to claims for money damages, other than claims arising from intentional misrepresentation or fraud on the part of a Party hereto in connection with the transactions contemplated by this Agreement, for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in this Article VII. Nothing in this Section 7.08 shall limit any Person's right to seek and obtain any equitable relief to which any Person shall be entitled, or to seek any remedy on account of any intentional misrepresentation or fraud by any Party hereto.

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Article VIII.
MISCELLANEOUS

8.01 Expenses . Except as otherwise expressly provided herein, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such costs and expenses, whether or not the Closing shall have occurred.

8.02 Notices . All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient or (d) on the third (3 rd ) day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 8.02):

If to Seller or Owner:

 

 

 

Arizona DP Consulting LLC
Attn: Sara Gullickson

1709 E. Bethany Home Road

Phoenix, Arizona 85016
O: 312-600-5665
C: 612-965-4980 
E-mail: sgullickson@dispensarypermits.com

 

with a copy to:

 

Dickinson Wright

Attn: Scott Crow

150 E. Gay Street, Suite 2400
Columbus, OH 43215

Tel: 614-744-2585

E-Mail: SCrow@dickinson-wright.com

 

 

 

If to Buyer or INLB:

 

Item 9 Labs Corp.

Attn: Bryce Skalla
16211 N Scottsdale Rd Ste A6A-466

Scottsdale, AZ 85254

Tel: 833-867-6337

E-mail: bryce@item9labs.com

 

with a copy to:

 

Horwitz + Armstrong, A Professional Law Corp.

Attn: Jessica Lockett
14 Orchard, Suite 200
Lake Forest, CA 92630

Tel: 949-540-6540
Facsimile: 949-540-6578
E-mail: jlockett@horwitzarmstrong.com

 

8.03 Interpretation . For purposes of this Agreement, (a) the words "include," "includes" and "including" shall be deemed to be followed by the words "without limitation"; and (b) the words "herein," "hereof," "hereby," "hereto" and "hereunder" refer to this Agreement as a whole. Unless the context otherwise requires, references herein: (x) to Articles, Sections, Disclosure Schedules and Exhibits mean the Articles and Sections of, and Disclosure Schedules and Exhibits attached to, this Agreement; (y) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and (z) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted. The Disclosure Schedules and Exhibits referred to herein shall be construed with, and as an integral part of, this Agreement to the same extent as if they were set forth verbatim herein.

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8.04 Headings . The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

8.05 Severability . If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.

8.06 Entire Agreement . This Agreement and the other Transaction Documents constitute the sole and entire agreement of the Parties to this Agreement with respect to the subject matter contained herein and therein, and supersede all prior and contemporaneous representations, warranties, understandings and agreements, both written and oral, with respect to such subject matter. In the event of any inconsistency between the statements in the body of this Agreement and those in the other Transaction Documents, the Exhibits and Disclosure Schedules (other than an exception expressly set forth as such in the Disclosure Schedules), the statements in the body of this Agreement will control.

8.07 Successors and Assigns . This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns. Neither party may assign its rights or obligations hereunder without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed. No assignment shall relieve the assigning party of any of its obligations hereunder.

8.08 No Third Party Beneficiaries . This Agreement is for the sole benefit of the Parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

8.09 Amendment and Modification; Waiver . This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each Party hereto. No waiver by any Party of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the Party so waiving. No waiver by any Party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

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8.10 Governing Law; Arbitration; Submission to Jurisdiction; Waiver of Jury Trial .

(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule, or any other jurisdiction.

(b) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by binding arbitration in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. The arbitration proceedings shall be conducted in Maricopa County, Arizona. The parties to the arbitration shall select an arbitrator from a list provided by the American Arbitration Association that is mutually satisfactory to them. If the parties to the arbitration are unable to agree on an arbitrator, one party shall choose an arbitrator from a list provided by the American Arbitration Association and the other party shall choose an arbitrator from such list. The two arbitrators so selected shall then select a third arbitrator mutually satisfactory to them from the list provided by the American Arbitration Association. The single arbitrator so selected shall hear the dispute and decide it. The award of the arbitrator shall be binding and final on all parties to the arbitration. Any and all legal, accounting and other costs and expenses incurred by the prevailing party shall be borne by the nonprevailing party. Notwithstanding the foregoing, any party may seek equitable relief by court action before or after instituting arbitration, including, without limitation, seeking and obtaining temporary restraining orders, injunctions or other provisional or ancillary remedies, and the initiation and/or maintenance of any such action shall not constitute a waiver of the right to arbitrate any controversy or claim.

(c) The Parties agree that any legal suit, action or proceeding arising out of or based upon this Agreement or the other Transaction Documents shall be instituted in the Federal or State courts of the State of Arizona.

(d) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 8.10(d).

8.11 Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

 

[Signature Page Follows]

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IN WITNESS WHEREOF, the Parties hereto have caused this Asset Purchase Agreement to be executed as of the date first written above by their respective signatories thereunto duly authorized.

 

 

SELLER :

 

ARIZONA DP CONSULTING LLC

 

 

By: __________________________

Name: Sara Gullickson

Title: Member

 

 

BUYER :

 

AZ DP HOLDINGS, LLC

 

 

By: __________________________

Name: Bryce Skalla

Title: Manager

 

 

INLB :

 

ITEM 9 LABS CORP.

 

 

By: __________________________

Name: Bryce Skalla

Title: Chief Executive Officer

 

 

OWNER :

 

 

_____________________________

Sara Gullickson

 

 

 

[Signature Page to Asset Purchase Agreement]

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EXHIBIT A

BILL OF SALE

AND

ASSIGNMENT AND ASSUMPTION AGREEMENT

 

 

This Bill of Sale and Assignment and Assumption Agreement (“Bill of Sale”) is made effective as of November __, 2018, by and between Arizona DP Consulting LLC, an Arizona limited liability company ("Seller"), and AZ DP Holdings, LLC, a Nevada limited liability company ("Buyer").

 

WHEREAS , the Seller and Buyer are parties to that certain Asset Purchase Agreement dated as of the date hereof (the “Agreement”), pursuant to which the Seller will sell, convey, transfer and assign to Buyer all of Seller’s respective right, title and interest in and to the Purchased Assets and Buyer shall assume and agree to pay, perform and discharge the Assumed Liabilities from Seller, as set forth in the Agreement;

 

WHEREAS , unless otherwise defined herein, capitalized terms used in this Bill of Sale shall have the meanings ascribed to them in the Agreement.

 

NOW, THEREFORE, BE IT KNOWN THAT:

 

For good and valuable consideration, the receipt and sufficiency of which are acknowledged:

A. Seller agrees as follows:

1. Seller hereby sells, assigns, transfers and conveys to Buyer forever, all of Seller's right, title and interest in and to the Purchased Assets.

2. The Seller hereby covenants and agrees that it shall, without further consideration, at any time and from time to time after the date hereof, execute and deliver to Buyer such further instruments of sale, conveyance, assignment and transfer, and take such other action, all upon the reasonable request of Buyer, to (i) sell, convey, grant, assign, transfer and deliver all or any portion of the Purchased Assets to Buyer, and (ii) assure and confirm to any other person or entity Buyer’s ownership of the Purchased Assets pursuant to this Bill of Sale.

B. Buyer agrees as follows:

1. Buyer hereby assumes and agrees to pay, perform and discharge when due the Assumed Liabilities.

2. Buyer hereby covenants and agrees that it shall, without further consideration, at any time and from time to time after the date hereof, execute and deliver to Seller such further instruments and documents and take such other action, all upon the reasonable request of Seller, to (i) assume, pay, perform and discharge when due the Assumed Liabilities, and (ii) assure and confirm to any other person or entity Buyer’s assumption of the Assumed Liabilities pursuant to this Bill of Sale.

C. This Bill of Sale and all of its terms shall inure to the benefit of Buyer, Seller and their respective successors and assigns.
D. This Bill of Sale shall be governed by and construed in accordance with the laws of the State of Delaware.
E. This Bill of Sale may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

 

 

[Signature Page to Follow]

 
 

IN WITNESS WHEREOF, the Parties hereto have caused this Bill of Sale to be executed as of the date first written above by their respective signatories thereunto duly authorized.

 

 

 

SELLER BUYER
   
ARIZONA DP CONSULTING LLC AZ DP HOLDINGS, LLC
   
By: _____________________ By: __________________________
Name: Sara Gullickson Name: Bryce Skalla
Title: Member Title: Manager

 

 

 

 
 

EXHIBIT B

NON-COMPETITION AGREEMENT

 

 

 

 

 

 

 

  

 
 

 

NON-COMPETITION AGREEMENT

This NON-COMPETITION AGREEMENT (this “Agreement”), dated as of November 26, 2018 (the “Effective Date”), is entered into by and among Sara Gullickson (the “Non-Competing Party”), and AZ DP Holdings, LLC, a Nevada limited liability company (the “Company”), which is a wholly owned subsidiary of Item 9 Labs Corp., a Delaware corporation. The Company and the Non-Competing Party may sometimes be referred to in this Agreement as the “Parties,” or individually as a “Party.”

 

RECITALS:

 

WHEREAS, the Non-Competing Party is the sole owner of Arizona DP Consulting LLC, an Arizona limited liability company (“ADP”), which is selling certain assets to the Company pursuant to that certain Asset Purchase Agreement, of even date herewith (the “Asset Purchase Agreement”);

 

WHEREAS, the Non-Competing Party has experience in the cannabis licensing and consulting business as conducted by ADP:

 

WHEREAS, the Non-Competing Party has confidential information and know-how imperative to the operation of a business which may compete with the Business and the Purchased Assets (as defined in the Asset Purchase Agreement) that the Company is acquiring pursuant to the Asset Purchase Agreement;

 

WHEREAS, the Asset Purchase Agreement requires the execution of this Agreement providing for the Non-Competing Party to no longer participate in any business which competes with the Business on the terms set forth herein;

 

NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants, and agreements contained herein, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the Parties agree as follows:

 

1. Definitions . In this Agreement, the following terms (in addition to any capitalized terms defined elsewhere in this Agreement) shall have the meanings specified or referred to in this Section 1 and shall be equally applicable to both the singular and plural forms:

 

“Affiliate” shall mean, with respect to any person or entity, (a) any other person or entity that controls, is controlled by, or is under common control with such person or entity, (b) any officer, director, manager, shareholder or member of such person or entity, and (c) any parent, sibling, descendant or spouse of such person or entity or of any of the persons or entities referred to in clauses (a) and (b) or anyone sharing a home with such person or entity or any of the persons or entities referred to in clauses (a) and (b). For purposes of this definition, the term “control” of a person or entity shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies, whether through the ownership of voting securities, by contract or otherwise.

 

“Business” means the cannabis licensing and consulting business as conducted by ADP as of the closing of the Asset Purchase Agreement. The term “Business” shall not include the operations of any businesses by the Non-Competing Party as described in Schedule A or those that may otherwise be pre-approved by the Company.

 

“Competition,” “compete” and any terms with correlative meaning shall mean to: directly or indirectly, own any interest in, manage, control, participate in, invest in, consult with, render services for, operate or in any manner engage in any business that operates in the Business in the Restricted Area.

 

“Restricted Area” shall mean the geographic areas where the Business operated until the closing of the Asset Purchase Agreement, and shall consist of: Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, North Dakota, Ohio, Pennsylvania, Rhode Island and West Virginia.

 

2. Non-Compete Agreement . During the three (3) year period (the “Restricted Period”) commencing on the Effective Date, neither the Non-Competing Party nor any controlled Affiliate of the Non-Competing Party will, directly or indirectly, in any manner, anywhere in the Restricted Area (a) engage directly or indirectly in the Business or any business that competes with the Business, (b) own any interest in, manage, control, participate in (whether as an owner, operator, manager, consultant, officer, director, employee, investor, agent, representative or otherwise) any business that competes with the Business, or (c) consult with or render services for any person or entity that is engaged in the Business or in any activity that competes directly or indirectly with the Business; provided however, that ownership, for passive investment purposes not intended to circumvent this Agreement, of less than 5% of the outstanding stock of any publicly traded corporation, shall not be deemed to be engaging in the Business solely by reason of such ownership.

 

3. Acknowledgment . The Non-Competing Party hereby acknowledges that the enforcement of the provisions of this Agreement may potentially interfere with her ability to pursue business opportunities, including, without limitation, the expansion or development of a business similar to the Business or which shall produce or sell any competing products with that of the Business. The Non-Competing Party recognizes and agrees that the enforcement of this Agreement is necessary to the closing of the Asset Purchase Agreement. The Non-Competing Party hereby acknowledges that she has been advised to consult with an attorney before executing this Agreement and that she has done so.

 

4. Enforcement . Notwithstanding Section 10 of this Agreement (Severability), if at the time of enforcement of Section 2 of this Agreement or any other time, a court, arbitrator, or mediator holds that the restrictions in this Agreement are unreasonable or to any extent invalid or overbroad under circumstances then existing or otherwise, the Parties agree that the covenants herein should be interpreted and enforced to the maximum extent that such court or mediator deems reasonable, valid or enforceable. The Parties hereto agree that money damages would not be an adequate remedy for any breach of this Agreement, and any breach of the terms of Section 2 would result in irreparable injury and damage to the Company for which there would be no adequate remedy at law. Therefore, in the event of a breach or threatened breach of this Agreement, the Company or, as applicable, its successors or assigns, in addition to other rights and remedies existing in their favor, shall be entitled to specific performance and/or immediate injunctive or other equitable relief from a court of competent jurisdiction in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security), without having to prove damages, in addition to any other remedies to which the Company may be entitled at law or in equity. The terms of this Section shall not prevent the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Non-Competing Party.

 

5. Governing Law; Dispute Resolution .

(a) Governing Law . This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of Delaware without giving effect to principles of conflicts of laws.

 

(b) Arbitration . Any dispute, controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by binding arbitration in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. The arbitration proceedings shall be conducted in Maricopa County, Arizona. The parties to the arbitration shall select an arbitrator from a list provided by the American Arbitration Association that is mutually satisfactory to them. If the parties to the arbitration are unable to agree on an arbitrator, one party shall choose an arbitrator from a list provided by the American Arbitration Association and the other party shall choose an arbitrator from such list. The two arbitrators so selected shall then select a third arbitrator mutually satisfactory to them from the list provided by the American Arbitration Association. The single arbitrator so selected shall hear the dispute and decide it. The award of the arbitrator shall be binding and final on all parties to the arbitration. Any and all legal, accounting and other costs and expenses incurred by the prevailing party shall be borne by the nonprevailing party. Notwithstanding the foregoing, any party may seek equitable relief by court action before or after instituting arbitration, including, without limitation, seeking and obtaining temporary restraining orders, injunctions or other provisional or ancillary remedies, and the initiation and/or maintenance of any such action shall not constitute a waiver of the right to arbitrate any controversy or claim. Notwithstanding the foregoing, any party may seek equitable relief by court action before or after instituting arbitration, including, without limitation, seeking and obtaining temporary restraining orders, injunctions or other provisional or ancillary remedies, and the initiation and/or maintenance of any such action shall not constitute a waiver of the right to mediate any controversy or claim.

 

6. Waiver of Jury Trial. Each Party hereby irrevocably and unconditionally waives any right it may have to a trial by jury.

 

7. Notices . Any notices required or permitted to be given hereunder shall be given in writing and shall be delivered (a) in person, (b) by certified mail, postage prepaid, return receipt requested, (c) by electronic mail, or (d) by a commercial overnight courier that guarantees next day delivery and provides a receipt, and such notices shall be addressed as follows, or to such other address as either Party may from time to time specify in writing to the other Party consistent with these notice provisions. All notices shall be effective on the date of delivery to the recipient.

 

If to Company:

 

 

 

Item 9 Labs Corp.

Attn: Bryce Skalla
16211 N Scottsdale Rd Ste A6A-466

Scottsdale, AZ 85254

Tel: 833-867-6337

E-mail: bryce@item9labs.com

 

with a copy to:

 

Horwitz + Armstrong, A Professional Law Corporation
Attn: Jessica M. Lockett
14 Orchard, Suite 200
Lake Forest, CA 92630
E-mail: jlockett@horwitzarmstrong.com

 

If to Non-Competing Party:

 

Sara Gullickson

1709 E. Bethany Home Road

Phoenix, Arizona 85016
O: 312-600-5665
C: 612-965-4980 
E-mail: sgullickson@dispensarypermits.com

 

with a copy to

Dickinson Wright

Attn: Scott Crow

150 E. Gay Street, Suite 2400
Columbus, OH 43215

Tel: 614-744-2585

E-Mail: SCrow@dickinsonwright.com

 

8. Authority. Each of the Parties represents and warrants that she or it, as applicable, is competent to enter into this Agreement and has the full right, power and authority to enter into and perform the obligations under this Agreement, without the need for the consent of any other person or entity (including a spouse, if any, of such Party).

 

9. Successors and Assigns; Amendments . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns. The Non-Competing Party may not assign any of her rights or obligations under this Agreement without the prior written consent of the Company. This Agreement may be amended only by written agreement executed by all Parties to this Agreement.

 

10. Severability . The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability or the other provisions hereof. Further subject to Section 3 and 4 hereof, if any provision of this Agreement, or the application thereof, is invalid or unenforceable, (a) a suitable and equitable provision shall be substitute therefore in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision; and (b) the remainder of this Agreement shall not be affected by such invalidity or unenforceability.

 

11. Waivers . No waiver by any Party of any covenant, term, condition, or agreement contained herein shall be deemed or construed as a waiver of any other covenant, term, condition, or agreement, nor shall a waiver of any breach hereof be deemed to constitute a waiver of any subsequent breach, whether of the same or of a different provision in this Agreement.

 

12. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may be executed with electronic, facsimile, or e-mailed signatures. Such signatures shall be deemed valid for all purposes as if they were signed by hand.

 

13. Headings . The captions and headings contained herein are solely for convenience of reference and shall not affect in any way the meaning or interpretation of this Agreement.

 

14. Entire Agreement . This Agreement, together with the recitals hereto, which are hereby incorporated in and an integral part of this Agreement, represents the entire agreement among the Parties relating to the subject matter hereof, superseding any and all contemporaneous and prior written or oral agreements and understandings with respect hereto (other than, for avoidance of doubt, the Asset Purchase Agreement).

 

[Signature Page To Follow]

 
 

IN WITNESS WHEREOF , the Parties have entered into this Non-Competition Agreement as of the date and year first written above.

 

 

NON-COMPETING PARTY

 

 

______________________________

Sara Gullickson

 

 

 

COMPANY

 

AZ DP HOLDINGS LLC

 

 

________________________

By: Bryce Skalla as Manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

SCHEDULE A

 

SCHEDULE OF NON-COMPETING BUSINESSES OPERATIONS

 

· Strive Wellness of Nevada, LLC
· Strive Management, LLC 
· North Dakota – WE- Mend d/b/a Strive Life Dispensary
· West Hollywood – November 2018: Dispensary 10, LLC
o Sara Gullickson owns 33% ownership
· Nevada (Retail) – December 2019- Strive Wellness of Nevada, LLC 
o Sara Gullickson, Larry Lemons & Donnie Burton control the license if it is awarded.  Local partner collectively has 13% of the facility.
· Ohio – December 2018 Strive Wellness of Ohio, LLC 
o Sara Gullickson, Larry Lemons & Donnie Burton control the license if it is awarded. 
· New Jersey – January 2019 Modern Remedies, LLC 
o Sara Gullickson has 2% ownership and facility will be Strive Model if license is awarded. 
· Michigan, Benton Harbor – February 2019 The Harvest Foundation, LLC
o Sara Gullickson, Larry Lemons & Donnie Burton control the license if it is awarded.

 

 

 
 

EXHIBIT C

EMPLOYMENT AGREEMENT

 

 

 

 

 

 

 

 

 
 

EXECUTIVE EMPLOYMENT AGREEMENT

 

This Employment Agreement (" Agreement ") is effective on November 26, 2018 (the “ Effective Date ”) between Item 9 Labs Corp., a Delaware corporation (" Company ") and Sara Gullickson (" Executive "). The Company and Executive are sometimes referred to herein individually as a “ Party ” and collectively as the “ Parties .”

 

RECITALS:

 

WHEREAS, the Company, by and through its wholly owned subsidiary AZ DP Holdings, LLC (“ AZDP ”), acquired the Purchased Assets of Arizona DP Consulting LLC, an Arizona limited liability company (“ ADP ”), pursuant to that certain Asset Purchase Agreement of even date herewith by and between the Company, AZDP, ADP, and Executive as sole owner of ADP, incorporated herein by reference (the “ Asset Purchase Agreement ”).

 

WHEREAS , any terms not herein defined shall have the same meaning as set forth in the Asset Purchase Agreement.

 

WHEREAS, the Company is a publicly traded corporation engaged in the business of cultivating quality-driven cannabis flower and marijuana products in Arizona and Nevada (the “ Business ”) and following the Closing of the Asset Purchase Agreement, the Company will own and operate the Purchased Assets by and through AZDP.

 

WHEREAS, the Executive is in the business of providing the kinds of services required in the Company’s Business and has extensive experience in operating the business related to the Purchased Assets.

 

WHEREAS , the Company desires that Executive be employed by the Company, and render services to the Company, and Executive is willing to be so employed and to render such services to the Company, all upon the terms and subject to the conditions contained herein.

 

NOW, THEREFORE , in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

AGREEMENT:

 

1.   EMPLOYMENT .  Subject to and upon the terms and conditions contained in this Agreement, the Company hereby agrees to employ Executive and Executive agrees to be employed by the Company, for the period set forth in paragraph 2 hereof, to render to the Company, its affiliates and/or subsidiaries the services described in paragraph 3 hereof.

 

The Executive hereby acknowledges and agrees that upon the Effective Date, any and all existing employment or consulting agreements entered into between Company and Executive are hereby expressly terminated and replaced in entirety by this Agreement.

 

2.   TERM .  Executive’s employment under this Agreement shall commence as of the Effective Date hereof and shall continue for a period of three (3) years unless earlier terminated by the Board of Directors (the “ Board ”) of the Company or by the Executive in accordance with the terms of this Agreement (the “ Employment Term ”).

 

3.   DUTIES .

 

(a) Executive shall serve as the Chief Executive Officer of the Company, reporting directly to the Board and shall be responsible for the management and running of the day-to-day operations of the Company, including, but not limited to, those services set forth in Exhibit A , attached hereto and incorporated herein by reference (the “ Services ”).

 

(b) Executive shall perform all duties and services incidental to the positions held by her. The Board retains the right to change Executive's duties and reporting relationships as may be determined to be in the best interests of the Company; provided, however, that any such change in Executive's duties shall be consistent with Executive's training, experience, and qualifications.

 

(c) Executive shall serve as a member of the Board of the Company during the Employment Term.

 

(d) Executive agrees to abide by all bylaws and policies of the Company promulgated from time to time by the Company and made available to Executive as well as all laws, statutes and regulations in all material respects.

 

4.   BEST EFFORTS .   Executive agrees to devote her full business time and attention, subject to absences for customary vacations and for temporary illness, as well as her best efforts, energies and skill, to faithfully and industriously perform the duties and responsibilities attributable to her position, to the reasonable satisfaction of the Company. In addition, Executive will not engage in any other gainful occupation which requires Executive’s personal attention and/or creates a conflict of interest with job responsibilities under this Agreement without the prior approval of the Board, with the exception that Executive may personally trade in stock, bonds, securities, commodities or real estate investments for her own benefit. Company hereby grants express permission to Executive to continue operating the existing business ventures as set forth in Exhibit B attached hereto and incorporated herein by reference, so long as such obligations do not materially interfere with Executives performance of the Services.

 

5.   COMPENSATION . The Company will pay Executive the following compensation for her services under this Agreement:

 

(a) Base Salary . As compensation for her services and covenants hereunder, the Parties mutually agree that the Company shall pay executive an annual salary of $200,000 USD per annum, payable in accordance with the Company’s normal payroll methods (the “ Base Salary ”). The Base Salary will be reviewed from time to time in accordance with the established procedures of the Company for adjusting salaries for similarly situated executives and may be adjusted upwards in the sole discretion of the Company.

 

(b) Performance Bonus . Executive is eligible to receive a discretionary annual bonus in an amount up to 100% of Executives Base Salary, to be determined in the sole and absolute discretion of the Board, payable in cash, based upon the Company’s operating results and gross sales, or such other performance benchmarks as determined by the Board (“ Performance Bonus ”), with the criteria for eligibility to receive such Performance Bonus to be provided to Executive at the beginning of each year of the Employment Term.

 

(c) Incentive Plan . Executive shall also be eligible to participate in the Company’s annual incentive plan for executives (“ Incentive Bonus ”), if applicable. The criteria for determining the amount of the Incentive Bonus, and the conditions that must be satisfied to entitle Executive to receive the Incentive Bonus for any year during the Employment Term of this Agreement shall be determined by the Board or its compensation committee and provided to Executive at the beginning of such year.

 

6.   EXPENSES .   

 

(a) Reimbursement . Executive shall receive a Company credit card with a limit of at least $10,000 per month in order to directly charge to the Company all business expenses incurred by her which are reasonable and necessary for Executive to perform her duties under this Agreement in accordance with policies established from time to time by the Company.  All charges and expenditures in excess of $500 shall be subject to pre-authorization by Company in accordance with Company policy and procedures.

 

(b) Travel . Where Executive is required to travel for Company, including but not limited to events, conferences and meetings related to the Company, Company shall pay the costs of such travel which shall be pre-approved by the Board prior to incurring any expense.

 

7.   EXECUTIVE BENEFITS .

 

(a) Benefits . During the Employment Term, Executive shall be entitled to participate in all group term insurance, disability insurance, health and medical insurance benefits, life insurance, retirement plans or programs and any other employee benefits as are from time to time generally made available to executive employees of the Company pursuant to the policies of the Company; provided that Executive shall be required to comply with the conditions attendant to coverage by such employee benefit plans (collectively, “ Benefit Plans ”). The Board shall present any offerings for Benefit Plans in writing to Executive when available. The Company may withhold from any benefits payable to Executive under any Benefit Plans all federal, state, local and other taxes and amounts as shall be permitted or required to be withheld pursuant to any applicable law, rule or regulation.

 

(b) Vacation. Executive shall be entitled to four (4) weeks paid vacation per year during the Employment Term. Vacation time shall be taken in accordance with the Company’s policies as may be established from time to time by the Company for its executive staff.

 

(c) Maternity Leave . To the extent that the Company does not have a maternity leave policy in place for executive employees of the Company, Executive shall be entitled to eight (8) weeks of paid maternity leave during the Employment Term.

 

8.   DEATH AND DISABILITY .

 

(a) Death . The Employment Term shall terminate on the date of Executive’s death, in which event the Company shall, within 30 days of the date of death, pay to her estate, Executive’s Base Salary, any unpaid Performance Bonus, Incentive Bonus or any other stock or bonus awards (including any bonus award for a plan year that has ended prior to the time employment terminated where the award was scheduled to be paid after the date employment terminated), reimbursable expenses and benefits owing to Executive through the date of Executive’s death together with any benefits payable under any life insurance program in which Executive is a participant.

 

(b) Disability . The Employment Term shall terminate upon Executive’s Disability. For purposes of this Agreement, “ Disability ” shall mean that Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.  For purposes of determining Executive’s Disability, the Board may rely on a determination by the Social Security Administration that Executive is totally disabled or a determination by the Company’s disability insurance carrier that Executive has satisfied the above definition of Disability.  In case of such termination, Executive shall be entitled to receive the Executive’s Base Salary, any unpaid Performance Bonus, Incentive Bonus or any other stock or bonus awards (including any bonus award for a plan year that has ended prior to the time employment terminated where the award was scheduled to be paid after the date employment terminated), reimbursable expenses and benefits owing to Executive through the date of termination within 30 days of the date of the Company’s determination of Executive’s Disability, together with any benefits payable under any disability insurance program in which Executive is a participant. Except as otherwise contemplated by this Agreement, Executive will not be entitled to any other compensation upon termination of employment pursuant to this subparagraph 8(b).

 

9.   TERMINATION OF EMPLOYMENT .

 

(a) Termination With Cause By Company . The Company may terminate this Agreement at any time during the Employment Term for Cause upon written notice to Executive, upon which termination shall be effective immediately. For purposes of this Agreement, “ Cause” means any one or more of the following:

 

i. the commission of fraud by the Executive against the Company;

 

ii. a material breach by Executive of any provision of this Agreement, including the continued failure of Executive to perform the Services set forth in Section 3(a) of this Agreement, which breach is not cured within thirty (30) days after receipt of written notice from the Company to Executive specifying the breach or, if notice and cure have previously taken place regarding the same or a substantially similar breach, if the breach recurs;

 

iii. Executive’s theft of funds or material property of the Company; or

 

iv. Executive’s conviction of a felony, plea of guilty or nolo contendere to a felony charge or any criminal act involving moral turpitude.

 

(b) Termination Without Cause By Company . The Company may terminate this Agreement at any time during the Employment Term without Cause upon ninety (90) days written notice to Executive.

 

(c) Termination Without Good Reason by Executive . Executive may terminate this Agreement at any time during the Employment Term without Good Reason by providing the Company thirty (30) days’ written notice.

 

(d) Termination With Good Reason By Executive . Executive may terminate this Agreement at any time during the Employment Term with Good Reason upon written notice to Company, upon which termination shall be effective immediately. For purposes of this Agreement “ Good Reason ” means any one or more of the following:

 

i. material breach by the Company of any provision of this Agreement, including without limitation, the Company’s failure to pay Executive any Base Salary, Performance Bonus or vested Incentive Bonus, which such breach is not cured within thirty (30) days after receipt of written notice from Executive to the Company specifying the breach or, if notice and cure have previously taken place regarding the same or a substantially similar breach, if the breach recurs;

 

ii. a requirement by the Company that Executive change her primary work location to a location that is more than thirty–five (35) miles from her then-existing main work location without Executive’s consent to such change;

 

iii. the creation and continuation of a hostile work environment which continues without corrective action being taken by the Company for a period of more than fifteen (15) days following written notice by Executive to the Company identifying the nature and cause of such hostile work environment; or

 

iv. the Company, without Executive’s consent (A) changes Executive’s title or position to a lower title or position, (B) reduces Executive’s current salary and/or benefits, or (C) assigns duties or responsibilities to Executive that are materially inconsistent with her position.

 

(e) Compensation upon Termination .

 

i. In the event that the Company terminates the Executive’s employment hereunder for Cause or the Executive terminates employment hereunder without Good Reason, the Executive shall be entitled to receive the Executive’s Base Salary, any unpaid Performance Bonus, Incentive Bonus or any other vested stock or bonus awards, reimbursable expenses and benefits owing to Executive (collectively, the “ Accrued Amounts ”) through the last day on which Executive is actively employed by the Company under the terms of this Agreement (“ Date of Termination ”). The Accrued Amounts shall be paid when required under applicable law and in any event within thirty (30) business days after the Date of Termination.

 

ii. In the event that the Company terminates the Executive’s employment hereunder without Cause or the Executive terminates employment hereunder with Good Reason, Executive shall be entitled to all Accrued Amounts, which shall be paid when required under applicable law and in any event within thirty (30) business days after the Date of Termination. In addition, the Company shall pay severance to Executive consisting of Executive’s Base Salary, payable in accordance with normal payroll practices of the Company, and benefits under Benefit Plans (including health care as applicable), for a period of twelve (12) months from the Date of Termination (the " Severance Period "). Except as otherwise contemplated by this Agreement, Executive will not be entitled to any other compensation upon termination of this Agreement.

 

iii. The salary, applicable bonuses and fringe benefits to be paid to Executive under Section 9(f)(ii) above during the Severance Period are referred to herein as the " Termination Compensation ." Executive shall not be entitled to any Termination Compensation unless: (1) Executive complies with the surviving restrictive covenants set forth in Section 10 of this Agreement and (2) Executive executes and delivers to Company, on the Date of Termination, a release in form and substance reasonably acceptable to Company and Executive, by which Executive releases Company from any obligations and liabilities of any type whatsoever under this Agreement, except for Company's obligations with respect to the Termination Compensation. For the avoidance of doubt, the release shall not affect (a) Executive’s right to indemnification, if any, for actions taken within the scope of Executive’s employment with the Company or (b) any rights of Executive under the Asset Purchase Agreement. Notwithstanding anything herein, no Termination Compensation shall be paid or otherwise provided to Executive until the applicable revocation period related to the release has fully expired, not later than sixty (60) days from the Date of Termination, and the release becomes fully and finally enforceable. The parties hereto acknowledge that the Termination Compensation to be provided is in consideration for Executive’s release.

 

iv. If Executive terminates this Agreement without Good Reason by providing appropriate notice, the Company, at its election, may (1) require Executive to continue to perform duties hereunder for the full notice period, or (2) terminate Executive's employment at any time during such notice period, provided that any such termination shall not be deemed to be a termination without Cause of Executive's employment by the Company. Unless otherwise provided by Section 9(f), all compensation and benefits paid by Company to Executive under this Agreement shall cease upon the Date of Termination.

 

10.   DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION .

 

(a)   Executive acknowledges that she is prohibited from disclosing any confidential information about the Company, including but not limited to trade secrets, formulas, processes, methods, plans, and financial information, to any party who is not a director, officer or authorized agent of the Company or its subsidiaries and affiliates.  The Company will provide Executive with valuable confidential information belonging to the Company or its subsidiaries or its affiliates above and beyond any confidential information previously received by Executive and will associate Executive with the goodwill of the Company or its subsidiaries or its affiliates above and beyond any prior association of Executive with that goodwill.  In return, Executive promises never to disclose or misuse such confidential information and never to misuse such goodwill. This Section 10(a) shall not apply to the extent that such confidential information of the Company is generally available to and known by the public through no fault of Executive or if Executive is compelled to disclose confidential information by judicial or administrative process or by other requirements of law.

 

(b)   Executive will not, during the Employment Term, directly or indirectly, as an executive, employer, consultant, agent, principal, partner, manager, stockholder, officer, director, or in any other individual or representative capacity, engage in or participate in any other business for her own account or for or on behalf of another person, firm, or corporation that is competitive with, conflicts, or interferes with the Company’s Business or Executive’s performance of duties under this Agreement, except those permitted business obligations of Executive as set forth in Exhibit B hereto or those that may otherwise be pre-approved by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, solely as an investment, securities of any company traded on any national securities exchange if Executive does not, directly or indirectly, own 5% or more of any class of securities of such company.

 

(c)   Executive will not, during the Employment Term and for a period of one (1) year thereafter, directly or indirectly, work in Arizona as an employee, employer, consultant, agent, principal, partner, manager, stockholder, officer, director, or in any other individual or representative capacity for any person or entity who is competitive with the Business of the Company, except for those permitted business obligations of Executive as set forth in Exhibit B hereto or those that may otherwise be pre-approved by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, solely as an investment, securities of any company traded on any national securities exchange if Executive does not, directly or indirectly, own 5% or more of any class of securities of such company. For the avoidance of doubt, Executive is also a party to that certain Non-Competition Agreement of even date herewith in favor of AZDP on the terms set forth therein.

 

(d)   Executive will not, during the Employment Term and for a period of one (1) year thereafter, on her behalf or on behalf of any other business enterprise, directly or indirectly, under any circumstance other than at the direction and for the benefit of the Company, (i) solicit for employment or hire any person employed by the Company or any of its subsidiaries, or (ii) call on, solicit, or take away any person or entity who was a customer of the Company or any of its subsidiaries or affiliates during Executive’s employment with the Company, in either case for a business that is competitive with the Business of the Company.

 

(e)   It is expressly agreed by Executive that the nature and scope of each of the provisions set forth above are reasonable and necessary. If, for any reason, any aspect of the above provisions as it applies to Executive is determined by a court of competent jurisdiction to be unreasonable or unenforceable under applicable law, the provisions shall be modified to the extent required to make the provisions enforceable.  Executive acknowledges and agrees that her services are of unique character and expressly grants to the Company or any subsidiary or affiliate of the Company or any successor of any of them, the right to enforce the above provisions through the use of all remedies available at law or in equity, including, but not limited to, injunctive relief.

 

11.   COMPANY PROPERTY .

 

(a)   Any patents, inventions, discoveries, applications, processes, models or financial statements designed, devised, planned, applied, created, discovered or invented by Executive during the Employment Term, regardless of when reduced to writing or practice, which pertain to any aspect of the Company’s or its subsidiaries’ or affiliates’ Business shall be the sole and absolute property of the Company, and Executive shall promptly report the same to the Company and promptly execute any and all documents that may from time to time be reasonably be requested by the Company to assure the Company the full and complete ownership thereof.

 

(b)   All records, files, lists, including computer generated lists, drawings, documents, equipment and similar items relating to the Company’s Business which Executive shall prepare or receive from the Company shall remain the Company’s sole and exclusive property. Upon termination of this Agreement, Executive shall promptly return to the Company all property of the Company in her possession. Executive further represents that she will not copy or cause to be copied, print out or cause to be printed out any software, documents or other materials originating with or belonging to the Company except as needed to perform the Services under this Agreement. Executive additionally represents that, upon termination of her employment with the Company, she will not retain in her possession any such software, documents or other materials.

 

12.   EQUITABLE RELIEF .   It is mutually understood and agreed that Executive’s services are special, unique, unusual, extraordinary and of an intellectual character giving them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in the event of any breach of this Agreement by Executive, including, but not limited to, the breach of any of the provisions of paragraphs 10 or 11 hereof, the Company shall be entitled to equitable relief by way of injunction or otherwise in addition to any damages which the Company may be entitled to recover.

 

13.   CONSENT TO JURISDICTION AND VENUE; ARBITRATION .    The Executive hereby consents and agrees that the State of Arizona shall have personal jurisdiction and proper venue with respect to any dispute between the Executive and the Company. In any dispute with the Company, the Executive will not raise, and hereby expressly waives, any objection or defense to any such jurisdiction as an inconvenient forum. Executive and the Company agree that all disputes and claims of any nature that Executive may have against the Company including all statutory, contractual, and common law claims (including all employment discrimination claims), and all other disputes and claims of any nature that the Company may have against Executive, shall be settled by binding arbitration in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, as set forth in the Asset Purchase Agreement, Section 8.10.

 

14.   NOTICE .   Any notice, request, demand or other communication permitted or required to be given under this Agreement shall be in writing and shall be given in accordance with the notice provisions set forth in the Asset Purchase Agreement, Section 8.02.

 

15.   INTERPRETATION; HEADINGS .   The parties acknowledge and agree that the terms and provisions of this Agreement have been negotiated, shall be construed fairly as to all parties hereto, and shall not be construed in favor of or against any party. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

 

16.   SUCCESSORS AND ASSIGNS; ASSIGNMENT; INTENDED BENEFICIARIES .   Neither this Agreement, nor any of Executive’s rights, powers, duties or obligations hereunder, may be assigned by Executive. This Agreement shall be binding upon and inure to the benefit of Executive and her heirs and legal representatives and the Company and its successors. Successors of the Company shall include, without limitation, any corporation or corporations acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, purchase, lease or otherwise, and such successor shall thereafter be deemed “the Company” for the purpose hereof.

 

17.   NO WAIVER BY ACTION .   Any waiver or consent from the Company respecting any term or provision of this Agreement or any other aspect of the Executive’s conduct or employment shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of the Company at any time or times to require performance of, or to exercise any of its powers, rights or remedies with respect to, any term or provision of this Agreement or any other aspect of the Executive’s conduct or employment in no manner (except as otherwise expressly provided herein) shall affect the Company’s right at a later time to enforce any such term or provision.

 

18.   COUNTERPARTS; GOVERNING LAW; AMENDMENTS .   This Agreement may be executed in two counterpart copies, each of which may be executed by one of the parties hereto, but all of which, when taken together, shall constitute a single agreement binding upon all of the parties hereto. This Agreement and all other aspects of the Executive’s employment shall be governed by and construed in accordance with the applicable laws pertaining in the State of Delaware (other than those that would defer to the substantive laws of another jurisdiction). Each and every modification and amendment of this Agreement shall be in writing and signed by the parties hereto, and any waiver of, or consent to any departure from, any term or provision of this Agreement shall be in writing and signed by each affected party hereto.  

 

20. Severability.

If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law.

21. ENTIRE AGREEMENT .   The entire understanding and agreement between the Parties has been incorporated into this Agreement, and this Agreement supersedes all other agreements and understandings between Executive and the Company with respect to the relationship of Executive with the Company or its affiliates or subsidiaries.

 

22. EXECUTIVE AcknowledgEment

EXECUTIVE ACKNOWLEDGES THAT EXECUTIVE HAS HAD THE OPPORTUNITY TO CONSULT LEGAL COUNSEL CONCERNING THIS AGREEMENT, THAT EXECUTIVE HAS READ AND UNDERSTANDS THE AGREEMENT, IS FULLY AWARE OF ITS LEGAL EFFECT, AND THAT EXECUTIVE HAS ENTERED INTO IT FREELY BASED ON EXECUTIVE’S OWN JUDGMENT AND NOT ON ANY REPRESENTATIONS OR PROMISES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.

 

 

 

[Signature page follows.]

 
 

 

 

IN WITNESS WHEREOF , the Parties hereto have executed this Executive Employment Agreement as of the date set forth above.

 

  

(“ COMPANY ”) (“ EXECUTIVE ”)
Item 9 Labs Corp.  
   
   
_________________________________ ______________________________
By:  Bryce Skalla By: Sara Gullickson
Its: Chief Executive Officer  

 

 

 
 

 

EXHIBIT A

DESCRIPTION OF EMPLOYMENT SERVICES

 

 

As the Chief Executive Officer (“ CEO ”) of Item 9 Labs Corp. (the “ Company ”), the CEO shall report to the board of directors (the “ Board ”) and is responsible for leading the development and execution of the Company’s long term strategy with a view to creating shareholder value. The CEO’s leadership role also entails being ultimately responsible for all day-to-day management decisions and for implementing the Company’s long and short term plans. The CEO acts as a direct liaison between the Board and management of the Company and communicates to the Board on behalf of management. Specifically, the duties of the CEO shall include:

 

Strategy & Planning

· Drafting / Execution of Short Term Execution of National Expansion Plan
o Submission of Applications (Dispensary Permits.com Team to Execute)– Markets TBD – See 09-20-18 - DP - Our Brands Page - v3- Page 9 for Markets with Opportunities in 2019.
o Selection of Distressed Cannabis Assets for INLB Acquisition, specifically, Licensees: Cultivation, MM Product Lines & Dispensary – Markets TBD (Based on bullet above).

 

Financial Planning & Budgets

· Create Budget with Jeffrey Rassas for Expansion, Acquisition and INLB Operations.
· Assist, as required, in raising additional capital at appropriate valuations to enable the Company to meet sales, growth and market share objectives.

 

 

SEC and OTC Filings

· Assist in the preparation, review, and filing of all interim, quarterly, and annual reports and other filings necessary for OTC and SEC compliance.

 

Investor Relations Management

· Manage and interface with investors for general relations outreach and response, as necessary, and attend local and national conferences to promote the Company generally.

 

Management & Execution

· Ensure Vice President(s) of Southwest, Midwest, East Coast, and Southern Regions for Expansion are executing National Expansion Strategy though Application, Acquisition, and Operations mentioned above.
· Ensure Cultivation, Processing, and Dispensary Department Heads Meet Revenue Milestones & Expansion Milestones
o SOPS
o R&D
o Training
o Sales

 

Company Leadership/Vision

· Employee / Management Staffing Plan
o Build Organizational Chart & Ensure Chart Includes Examples Below:

  Chief Financial Officer

  Chief Operating Officer

  Chief Compliance Officer

  Medical Advisory Board

  Director of Community

  Dispensary / Retail Manager

  Director of Security

  Director of Technology

  Director of Extraction

  Director of Patient Services

  Director of Cultivation

  Human Resources

  Banking Relations

  Real Estate Advisor /Firm for Expansion

  Architect/ Engineer(S)

  Director of Marketing

  Legal / Attorney

  Insurance

  Director of Staffing

· Roles, Responsibilities & Expectations
· Selection, Hiring, Retainment and Termination Policies & Procedures
 
 

 

EXHIBIT B

Pre-existing business obligations of Executive

 

REDACTED FOR CONFIDENTIALITY

 

 

 

 

 

 

 

 

 
 

EXHIBIT D

LEASE AGREEMENT

 

 

 

 

 

 

 

 
 

Arizona Commercial Lease Agreement

 

 

 

 

 

1. Basic P r ovis i ons ("B a sic Pro v isi o ns").

 

1.1 Partie s : This Le as e ( "L e as e " ), dated for refe r ence purposes onl y , November 26, 2018 , is made By and betwe e n ARIZONA DP CONSULTING LLC . ( " Lesso r " ) and ITEM 9 LABS CORP. ("Lessee" ) , (collec t ively the " Parti e s , " or individually a "Par ty " ).

 

1.2 Premise s : T hat c er t ain r eal pr op er t y, inc l udi n g all i m pr o ve me n t s th ere i n o r t o be pr o vi de d by L e ss o r u n der t he t e r ms o f t h i s L ea s e, a nd c o mmonly k nown as DP Office , located in the C o unty of Maricopa , State of Arizona , and gene r a ll y d es c rib e d as (d e scr i be briefly t he natu r e o f t h e p r o perty a n d , if a pp licable, t h e "Pro j e c t" , if the property is located w ithin a Project) A 1700 square foot commercial building located at 1709 E. Bethany Home Road Phoenix, AZ 85016 _ ( "Pre m ise s " ). ( See also Para g ra p h 2)

 

1.3 Term : 0 years and 6 months ( " Original Term" ) com m e n cing December 1, 2018 ( " C o m mencem e nt Dat e " ) a nd e n ding June 1, 2019 ( "Expiration D a te " ) . ( S ee also Para g ra p h 3)

 

1.4 Early P oss e s sion: NA ( "Early Po s sess io n Date " ) (See a l so Par a gr a phs 3.2 and 3.3 ) .

 

1.5 Base Re n t: $3,200 per m o n t h ( " B ase Ren t " ), pay a ble o n the 1 st day of each mon t h c omm encing December 1, 2018

(See also Par a gr a ph 4 )

[ ] If this box i s c h ec k ed, there are provisions i n this Lea s e for t h e B a se Rent to b e a d j u sted.

 

1.6 Base R e n t a n d Other Moni e s Paid Upon Exec u tio n :

(check a pplic a ble b o xes)

 

[ ] Base Ren t : $ 3,200 per month gross, inclusive of all utilities

[ ] Security Deposit: $ 3,200 ( "Security De p osi t " ). (S e e also Paragr ap h 5)

 

[ ] Associa t ion Fee s : $ 0 for the period

 

[ ] Other: $ 0 for

[ ] Total Due Upon Execution of this Lease: $ 6,400 .

 

1.7 Agreed Use: Item 9 offices (See also Para g ra p h 6)

 

1.8 Insuring Party: L e ss o r is t he "Insuring Pa r t y " unl e ss oth e r w i se stat ed h ere i n. ( S ee al so Para g r ap h 8)

 

1.9 Real E st a te B rokers : ( Se e also Parag r a p h 15)

 

(a) R epresent a tio n : T he f o ll o wing real es t a t e br o ke r s ( th e " Br o ke r s " ) a n d brokerage relationships exist in th i s trans a ction: (check a pplic a ble b o xes)

 

[ ] n/a _re p resents Lessor exclusively ( " Les s or ' s Br o k er(s)" );

 

[ ] repre s ents L es s ee e x clus i vely ( " L e ssee's Bro k er(s) " ); or [ ] represen t s b o th L essor and Les s ee ( "D u al A g en c y" ).

 

(b) P a y ment to B roker s : Up o n e x ecution and delive r y of this Le a se by both Parties, Lessor shall pay to the Broker t he f ee ag reed to in their separate w ritten a gree m ent (or if there i s no such a g r ee m ent, the sum of __________ or __________% of the total Base Re n t ) f o r th e br o ker ag e s ervi ce s re n d e r e d by t he B r o ker s.

 

1.10 G uaran t or . The obligations of the L essee under t his L ease a r e to be guar a nteed by n/a ( "Guarantor(s ) " ) . (S e e also Par a gr a ph 3 7)

 

1.11 Attac h men t s . Attac h ed h e reto are the follo w ing, all of w hich c o nstitute a part of th i s Lease:

 

[ ] an Add e n d um c o nsisting of P a rag r aphs _________ throu g h _________:

[ ] a pl o t plan d epic t i ng th e P rem i s e s;

[ ] a current set of the Ru l es a nd Regu l ations; [ ] a Work Letter;

[ ] other (sp e cify): _________________________________________

 

2. Premise s .

 

2.1 Letting . L e s so r her e by lea s es t o Les s ee, a nd L e s s e e he r e b y leas e s fr o m Le s s o r, t he P remi s e s , f o r t he t erm, at t he r e n t al, and u p o n all of t h e term s , coven a nts and c o nditions set for t h in this Le a se. U n l ess oth e rwise pr o vided herein, any statement of size set forth in t his Le a s e, o r that may ha v e b e en u s e d in calculating Ren t , is an approximation wh i ch the Parties agree is re a s o n a ble a n d any pa ym en t s b a s e d t h e re o n are n o t s u b j ect t o r evisi o n w h e t h e r o r n o t t he ac t ual size is more or less. Note: Lessee is advis e d to verify t he a ctual size pri o r to exe c uting this Lease.

 

2.2 Conditio n . L e ss o r shall d eliver t he Pr e mis e s t o Les s ee br oo m cle a n and f r ee o f d eb ris o n t he C o m me n c em e nt Da t e o r t he Early P o s s e s s i o n D ate, wh ic h e ver fi r st oc cu r s ( " S tart D a t e" ), a n d , so l o ng as t he re qui r ed s ervi c e c o n t r a c t s d es c rib e d in P ara gr aph 7.1 ( b) bel o w are o b t ai n ed by L es s ee a n d in e f fe c t within t hirty da y s following the Start Date, warr a n t s t h at the existing electrical, plu m bing, fire sprinkler, ligh t ing, heatin g , v en t i la t ing a n d air c on di t i o ning sys te ms ( " H V A C " ), loading doors, su m p pumps, if an y , and all other s u ch eleme n t s i n th e P remi s e s, ot h e r t h a n t h o se c o ns tr uc te d by Le s s e e, s ha ll be i n g oo d op er ati ng c o ndi t i o n o n said da t e a n d t hat t he s t ruc t ural el e m e n t s o f t he r oo f, be ar ing walls a nd f oun da t i o n o f any bui l din g s o n t he P r em i ses (the "Building") shall be free of ma t erial d e f ec t s. I f a n o n - c o mplia nc e wi t h said war ra n t y ex i s t s a s o f t he Star t Da t e, o r i f o ne o f s u c h sy st ems o r e l e m en t s should malfunc t i o n or fail within the appr o priate warr a n t y period, Less o r shall, a s Lessor's s o le obligation wi t h res p ect to such matter, except a s otherw i se provid e d in th i s L ea s e, p ro mptly after r e c e i pt o f wri tt en n ot ice f r o m L e s s ee se tt i n g f o r t h wi t h s p e ci f ici t y t he na t ure a nd ex te nt o f s u ch n o n-c o mplia n c e , malfu n c t i o n o r failur e , r ec t ify s a me at Le s s o rs ex p e ns e. T he wa r ran t y p er i o ds shall be a s f o l l o ws: (i) 6 m o n t hs as t o t he HVAC s ys t e m s, a n d (ii) 30 days as t o t he remain i ng s y s t e m s and ot her el e m ent s o f t he Bu il d i n g . If Le s s e e d oe s n o t gi v e Le s s o r t he req u ire d n oti ce wi t h i n t he a ppro p riate warr a nty perio d , co rrecti o n o f any s u c h n o n - c o mplia n ce, mal f u n ction or failure shall be the o bliga t i o n o f Le s s e e at L e s s ee ' s s o le c o st a n d e x p e n s e.

 

2.3 C o mplianc e . Le s s o r warr a n t s t hat th e i m pr o v em en t s o n t he P r em i ses c om ply wi t h t he b u il d i ng c od e s , ap p li c a b l e law s, cov en a n t s o r re s tri c t i o ns of rec or d, r e gula t i on s, a n d o rdina n c e s ("Applicable R e qu irem e n t s") t hat w ere in ef f ect at the time that each impr o v e m e nt, o r po rt i on there o f, w a s c o nstructed. Sa i d warr a n t y d o es n o t apply to the u s e to which Les s ee will put the Premises, modifications w h ich may be required by the A meric a ns with Dis a bilities Act or any similar laws a s a result of Lessee's use ( see Paragraph 50), o r to a n y Alterations or Utility Installations (as def i n e d in Par a graph 7 . 3 ( a)) ma d e or to b e ma d e by L e s s e e . NO T E: L e s s e e is r esp o nsib l e f o r de t ermin i ng w he t her o r n o t t he Ap p li c a b l e R e q u ir em e n t s, a nd e s p eci all y th e zo ni n g, ar e ap p ro p r i a t e f o r L e ss e e ' s in te n d ed u s e , an d ackn o wle d g e s t h a t past uses o f th e Pr e mis e s may no l o nger b e all o w e d. I f t he Pr e mises do n o t c o mp l y wi t h said warr a n t y, L e ss o r s ha ll , ex c ept as ot he r w i se pr o vid e d, pr o mp t l y af t er r e ceipt o f wri tt en n ot i c e fr o m Le s s e e s e tti ng fort h w i t h s p e c ifi c it y t he na t u r e an d ex te nt o f su c h n o n -c o mpliance, rec t ify the same a t Le s sor's ex p e n s e . I f Les s ee d o es not give L e ssor w ritten notice of a non - complia n ce with t his wa r ranty with i n 6 months followi n g the Start Date, c o rrec t ion of th a t n o n-c o mpliance shall be the obliga t ion of Les s ee at Les s e e 's s o le c o st and ex p e n s e . I f t he A pplic a ble R e q uire m en t s are h er eaf t er ch a n g ed so as to re q uire dur i ng the term of this Lease the c o nstru c tion of an additi o n to or an alterat i on of the Premises and/or B uilding, the remediation of a ny Ha za rd o us S ubs tan c e , o r t he reinforce m ent or other ph y sical mod i fication of the Unit, P r emises a n d/o r B u il d in g (" C a pi ta l Ex p e n d it ure ") , L e s s o r an d L es se e s hall allocate the c o st of such w o rk a s follo w s:

 

(a) S u bj e ct to Pa r agra p h 2.3 ( c) be l ow, if s u c h Capital Ex p e n ditures a r e re q uir e d as a r e s u lt o f t he s p ecific a nd uni qu e u se o f t he Pr e mis e s by L e ss e e a s c o mpa r ed wi t h u s es by t e n an t s i n g e nera l , L e s s ee s hall be f ully r e sp o nsible f o r t he c o st t he r e o f, p r o vid ed , h ow e v er t hat if su c h Capi ta l E x p e nd it u r e i s r e q u ired dur i ng t he l a st 2 years o f t his Le as e a n d th e c o st t h e re o f e x c e e d s 6 mo n t hs' Ba s e R en t , Le s s e e m a y i n s t e a d t e r mina t e t his L ea s e u nl e ss L e ss o r n ot ifies Le s s e e, in w r iti ng, w i t h i n 1 0 da y s aft er re ce i p t o f Le s s e e ' s t e rmi n atio n n oti ce t h a t L e ss o r has e l ec te d t o pay t he di ffer e n ce b e tw e e n th e ac t ual cost t he r e o f and a n am o u nt e q ual t o 6 m o n t hs' Base R en t . I f Le ss e e e l ec t s t e r mi n a t i o n, Le s s e e s hall immedia t ely c ea s e t he u se o f th e P remi s es whi c h r e q ui r es s u ch Capital Exp e ndit u re an d deliver to Lessor written notice specifying a terminat i on date at le a st 90 days the r eafte r . Such term i nation date shall, h o we v e r, in no e v ent be earlier th a n t h e la s t day that Lessee c o uld legally utilize the Premises with o ut c o m m e n cing such Capital E x p e nd i ture.

 

(b) I f s u ch Capital Exp e ndit u re is n o t the re s ult of the sp e cific a n d un i q ue u se of t h e Pr e mis e s by L e s s ee ( su c h a s , gov e rn m en t ally mandated seis m i c m o difica t i o ns), th en L e ss o r a nd L es s e e shall all o ca t e the o bliga t i o n t o pay f o r such c o s t s pu r su a nt t o t he pr o visi o ns o f Paragraph 7.1 ( d); pr o vi d ed, h o w e ve r , t hat if such Capital Expenditu r e is required d u ring t he last 2 years of this Lease or if Less o r reason a bly determ i nes that it is n o t e c onom i cally feas i ble to pay its sh a re the r e o f, L e ss o r s h all have the opti o n to terminate th i s Le a se upon 90 days prior written n o tice to Les s ee unless Lessee n o tifi e s Le ss or , i n writi ng, w i t h i n 1 0 d ay s after receipt of Less o r's termination n o tice that Les s ee will pay for such Capital Exp e nditure. If Lessor d o es n o t elect to te r minate, and fails to ten d er its share of any s u ch Capi t al E xp e ndi t u r e, L e s s e e may adv a n c e su ch f u n d s a n d d e du ct sam e , wi t h I n te res t , fr o m R e nt u nt il Less o r's s ha r e o f s u c h costs h a ve be e n fully pai d . I f Le s s e e is u nab l e t o finan c e L e ss o r ' s sha r e, o r if t he b alance o f th e R ent due an d pay a ble f o r t he r e mai n der o f t his Lea s e is n o t sufficient to fully reimburse Lessee on an offset b a sis, Lessee shall ha v e the right to term i nate this Le a se u p on 30 days w ritten n o tice to L e ss o r.

 

(c) N ot wi t hs t a n d i ng th e ab o v e , th e pr o visi o ns c o n c ern i ng C api t al E x p e ndi t u r es a r e in t e n d e d t o apply o nly t o n o n-v o lun t ary, u ne x p e cte d , and ne w Applicab l e R e q uir e men t s. I f t he C a pi t al Exp e ndi t u r es a re ins t ead t ri g g e r e d by L e s s e e as a r e s ult o f an ac t ual o r pr o p os ed ch a nge i n u s e , c h an ge i n i n te ns it y o f u se, o r m o dificati o n to the Premi s es t he n, a n d in that ev e nt, Le s s e e shall e i ther: (i) imm e diately cea s e s u ch ch an g ed u se o r int e ns i ty of u s e a nd/or take such other s t e p s as m ay b e n e ce s sary t o elim i na t e th e r e qui r e m ent f o r s u c h Capital Exp e nditure, or (ii) co m p l e t e s uc h C a pi ta l Ex p e n d it ure at i t s ow n ex p e n s e. L e s s e e s h a ll n o t, h o we v er, ha v e any right to terminate this Le a se.

 

2.4 Ac k nowledgements. L e s s e e ackn o wle d g e s t ha t : (a) it has been a dvis e d by L e ss o r and/ o r Br ok ers t o sa t isfy i t self wi t h res p ect t o t he c o ndi t i o n o f the Premises (in c luding but n o t l i mited to the ele c trical, HVAC and fire spr i nkler s y s t ems, s e curity, e n vironmental asp e c t s, a n d c o mpliance with Applicab l e Requirements a nd the A mericans wi t h Dis a bilities Act), and t heir suitability for Lessee's in t ended use, ( b) Lessee h a s m a de s u ch in v es t iga t i o n as it de e ms n e c e ssa r y with referen c e to such matters a nd ass u mes all resp o nsibility the r ef o r a s th e sa m e r e lat e t o it s o cc u p a ncy o f t he Pr em is e s , an d ( c) ne ith er L e s sor , L e s s or' s ag en t s, n o r Bro k ers ha v e made any oral or written rep r e s en t ations or warr a n t ies with respect to said matters other th a n a s set forth in t h i s L ea s e. I n a d di t i o n, L e s s o r ackn o wledges th at : (i) Broke r s ha v e made no representations, p r omises or warr a nties concerning Lessee ' s ability to honor the L e ase or suitability to occupy the Prem i ses, a nd (ii) it is Less o r's s o l e resp o nsibility to investigate the financial capability and / or suitability of all proposed te n a n t s.

 

2.5 Lessee a s P r ior Owner / Occ u pant. The warr a nties m a de by Les s or in P a ragr a ph 2 shall be of no for c e or eff e ct if im m ediately prior to the St ar t Da t e L e s s e e w a s t he o w n er o r oc c up ant o f t he P r e mis e s. I n s u ch ev e n t , L es s ee s hall be r e s p o nsib l e f o r a ny n e c ess a ry c or rec t i v e wor k .

 

3. Term.

 

3.1 Term . T h e C o mm e n c e m ent D a t e, Expira t i o n Da t e and O riginal Te rm o f t his Le a se a re a s s p ecifi e d in Par a gra p h 1.3.

 

3.2 Early P oss e s sion. If Lessee totally or partially o cc u pies the Prem i ses prior to t he Comme n c em e nt D at e, th e o b li g atio n t o pay Bas e R ent sh al l be abated for the period of such early p o s s e s sion. All other terms of this Lease (includ i ng but n o t limited to t he obligations to pay Real Property Taxes and insur a n c e premiu m s and to maintain the Pre m ises) shall, h o we v er, be i n ef f ect during such period. A ny such e a rly p o ssession shall n o t affect the E x piration Date.

 

3.3 Delay In P o ssessi o n. L essor agr e es to u s e its b est co m me r ci a lly reason a ble ef f orts to deliver poss e ssion of t he P remi s es to L e s s e e by t h e Com m e n c e m e nt D ate. I f, d e s pite sa i d effort s , L e s sor is un a ble to d eliver pos s e s sion by s uc h dat e , L e s sor s h a ll not be s u b j e ct to any liability the r efor, n o r shall s u ch failure a f fect the v alidity of this Lease. Les s ee shall n o t, h o w e v e r , b e o b l iga t ed t o pay R en t o r p e rfor m it s ot her o b li g atio ns unt il Less o r d elivers p o s s e s si o n o f th e Prem i s e s a nd a ny p e ri o d o f re nt abat em e nt t h a t L e ss ee w o u l d oth erw i s e ha ve e nj o y e d s hal l run fr o m t he dat e o f d e li very o f p o s s e s si o n a nd c o n t in u e f o r a p eri o d e q ual t o w h a t L es s e e w o uld oth e r w i se ha v e e nj oy ed u n d er th e te rms he re o f, but mi n us an y da y s o f d e la y c a u s ed by th e a c t s o r o m i ssi on s o f L e s s e e. I f p o s s e s si o n is n o t delivered w i thin 60 days after the C o mme n c e ment Date, L e s s ee may, at its option, by n o tice in writing with i n 10 days af t er t he e nd o f s u c h 60 day peri od , can c el t h i s L e as e, i n wh i ch ev e nt t he Parti es s h al l be di sch ar g e d fr o m all o bliga t i o ns h e r eu n d er. I f s u c h wri t t en n ot ice is n o t r e ceiv e d by L e ss o r within sa i d 10 day pe riod , L e s s e e ' s r i ght t o ca n cel sh a l l t e rmi n a t e. I f p o ss e ssi o n o f th e P r em is es i s n o t d e liv er e d wi t h i n 12 0 da y s aft er t he C om m e n c e m ent Da t e, t h i s L e a se s h all t ermina t e u nle s s o t her a gr e e m en t s a re r ea c h e d b e tw e e n L e ss o r an d L e s s ee, in wri t ing.

 

3.4 Lessee Com p liance . Less o r sh a ll n o t be required to deliver p o s s e s s i on of the Premises to Less e e until Less e e c om plies with its obligation to pr o vide ev i d e n c e o f i n s ur a n c e (P a ragr ap h 8.5 ). P e n d i ng d e li v e ry o f s u c h evidence, Less e e shall be required to perform all of its oblig a t i o ns u n d er t his Le ase f r o m a nd af te r the Start Date, including the p a yment of Ren t , n o twithstanding L e s s o r's elec t i o n t o wi t hh o ld p o ss e ssi o n pe ndi n g r e ceipt o f su c h evid e n c e of insur a n c e. F urt h er, if Lessee is required to perform any other c o nditions prior to or c o n c u r rent with the Start Da t e, the Start Date shall occ u r but Le ss or may e l ect to w i thhold p o s s e s sion un t il s u ch c on di t i o ns a r e sa t isf i e d .

 

4. Rent.

 

4.1 Re n t Define d . A l m on e ta ry o b li g atio ns o f L e s s e e t o Less o r u n d er t he t er m s o f this L ea s e ( ex c ept f o r t he S e c urity D ep o s it) are de em e d to be r e nt ( " R ent " ).

 

4.2 P a yme n t . L e s s e e s hall ca u se p a ym e nt o f R e nt t o be r e c eiv e d by L es s o r in law f ul m o n e y o f the U nited States o n o r bef or e t he day o n w hi c h i t i s d ue, without offset or deduc t ion (e x cept a s s p ecifically per m itted in this Le a se ) . Rent for any per i od dur i ng the term h e reof which is for less th a n one f ull calendar m o n t h shall be pr o ra t ed ba s ed u p o n the a ctual n u m b er o f days o f said m o n th . Paym e nt o f Re n t shall be made t o Less o r at i t s addr e ss s t a te d he r e i n o r t o such ot h e r persons or place a s L e ss o r may fr o m time to time designate in wr iting. Accep t ance of a pay m ent which is less than the am o unt then d u e shall n o t be a waiver o f Le s s o r's r i gh t s t o t he bal a n c e o f s uc h R e n t , r eg a rdl e ss o f Le s s o r's e n d or se m ent o f a ny ch eck so s t a t ing. I n t he e v ent t hat an y c h ec k , draf t , or other instrument of pay m ent giv e n b y L e s s ee to L e ss o r is di s h o n or ed f o r any r eas o n, L e s se e a g r e es to pay to L e ss o r t he s um o f $25 in a dditi o n t o a n y La t e Ch a r g e and L e s s o r, at its option, may requ i re all future pay m ents to be m a de by Lessee to be by cash i er ' s check. Payments will be a pplied first to acc r u e d late c har g es and attorneys f ee s , sec o nd t o a c c r u e d in t er e s t , th en t o Base R e nt a n d Op era t ing Ex pe n s e I nc r ea s e, a nd any r emain i ng a m o unt t o any ot her o u t s t andi n g c ha r g e s o r c o s t s.

 

 

5. Security Dep o sit . L e s s e e s hall d e p o sit with L es so r up o n e x ecuti o n he r e o f the S e c ur i t y Dep o sit as s ec uri t y f o r L e s s ee ' s fai t hful p erf o rm an ce o f its obligations under this Le a se. If Les s ee fails to p a y Ren t , or oth e r w ise Defaults u n d e r this Lease, Less o r may u s e, a pply or re t ain all or any p o rtion of said S ecurity Dep o sit for the payment of any amount d u e Less o r or to reimbur s e or c o mpe n sate Less o r for any liability, expense, loss or dama g e w hi c h L e ssor may s uff e r or inc u r by re a son thereo f . If Lessor u s es or a pplies all or any portion of the Security Deposit, Lessee shall within 10 days after written request the r e f or d e posit moni e s wi t h L e s s o r s u ffi c i ent t o r es tor e sa i d Se c urit y D e p o sit t o t he f u ll amount required by this Lease. If the Base Rent incre a s e s dur in g th e t e r m o f t h i s L e as e, L e s s ee shall, upon written req u est from L e ss o r, dep o sit add i tional moneys w i t h L e ss o r so that the total amount of the Security D e posit shall at all t i mes bear the sa m e pr o p ortio n t o t he i nc r ea s ed Bas e Re nt a s th e i n itia l S ecu rit y D ep o sit b or e t o t he i n itia l Bas e Re n t . S h o u l d th e A g r e e d U se be a mended to acc o m modate a ma t erial ch a n g e in t he b us i n e ss o f L e s s ee o r t o acc o mm od a t e a s u bl e ss e e o r a s sig n e e , L e s s o r s hall ha v e th e ri g ht t o incr e a s e th e S e c u r ity Dep o sit to the extent nec e ss a r y , in Le s s o r's re a s on able j u d g m e n t , t o acc o unt for any inc r ea s ed wear and tear that the Premi s es may s uff e r as a result t he r e o f. I f a chan g e in c o n t r o l o f Less e e o ccu r s du r i ng t h i s L e as e a nd follo wi n g s u c h ch a n g e th e fi na n c ia l c on d itio n o f L e s s e e is , i n L e s s or' s r e a s o n a b l e j u d g m en t , si g n i f icantly r e d u c e d, L es s ee s hall d ep o s i t such a dditional monies with L e ssor as shall be suffic i ent to cause the S ecurity Deposit to be at a commerc i ally reas o nable lev e l b a s e d o n s u c h ch a n g e i n fin a nc i al c o ndi t i o n. L e ss o r shall n o t be re q ui r ed t o keep th e S e curi t y D e p o sit se p ara t e fr o m i t s ge n eral acc ou n t s. Wi t hin 14 days af t er t he expiration or termination of this Lease, if L e ss o r e l ects to a pply the Security Dep o sit o nly to u n paid Ren t , and oth e r w i se w i thin 30 da y s after the Prem i ses h a ve b e en vacat e d pu r su a nt to Para g ra p h 7 . 4( c) be low , L e sso r sh al l r e t u r n t h a t p ortio n o f t he Se cu rit y D e p o sit n o t u s ed o r a ppli e d b y Le s s o r. No part o f t he S e c uri t y D e p o s i t sh al l b e c o ns id er e d t o b e h e l d in trust, to b ear in t e r est or to be p r ep a ym e nt for a n y m o nies t o b e p a i d by Le s s e e u n d er t h i s Lea s e.

 

6. Use.

 

6.1 Use . L es s ee s hall u s e a n d o c cu py t he Pr e mis e s o nly f o r t he A gr e ed U s e, or any other legal u s e w hich is reas o nably c omp arable the r e to, a n d for no ot her pu r p os e. L es s e e s hall n o t u s e o r p ermit th e u s e o f t he P r emi s es i n a ma n n e r t hat is un lawful, c r ea t es d a mag e , was t e o r a nuis a n c e, or that distu r bs o c c up a nts o f o r ca u s e s d a m a ge t o n ei g hb o r i ng pr e mis e s o r pr ope r t ies. L e ssor shall n o t u n re a sonably w ithh o ld or delay its c o nsent to any w ritten req u est f o r a modification of t he A g r e e d U s e , s o lo ng a s th e sa m e w il l not im pa i r t he st ru ctu r a l i n tegrit y o f t he im pr ov em e n t s o n t he Pr em is es o r th e me ch a n i cal o r el e c t rical s y s t e m s th e r ei n , a nd/ o r i s n o t sig nifi c a n tl y mor e bu r d e ns om e t o t he Prem is e s . I f Less o r elec t s t o wi t hh ol d c o n s en t , L e s s o r sh al l wi t h i n 7 da y s a ft er s u ch req u e st gi v e w r itt en n ot ifica t i o n o f sa m e, whi c h n ot ice sh all inclu d e an e x plana t i o n o f L e ss o r ' s o bj e c t i o ns t o t he ch a n g e in th e A gr e e d U s e.

 

6.2 H a zar d o u s S u b stan c es .

 

(a) R eportable U ses R equire C o n sen t . T he t e r m " H a z ar d o u s Subs ta nce " as u s e d in t his Lease s hall me a n any pr od uc t , su b s t a n c e , o r was t e wh o se pr e s e n c e, u s e , m a nuf a c t u r e, di s p o s a l, t ransp o r t a t i o n, o r relea s e, ei th er by i t self o r in c o mbina t i o n wi t h ot h e r ma t erials ex p e c t ed t o be o n t he P r emi s es, is ei th er: (i) p o ten t ially injuri o us to the p u blic health, sa f ety or welfare, t he e nvir on ment o r t he P r em i se s , (ii) re g ula t ed o r m o ni to red by any g o vern m en t al authority, or (iii) a basis for p o ten t ial liability of Less o r to any g o vernmen t al agency or th i rd party u n der an y applicab l e s t atu t e or c o mm o n law t h eory. Hazard o us Subst a n c es s hall

inclu d e, but n o t b e limi t ed to , hydr o carb o ns, pe t r o l eu m, gas o li n e, a n d /o r cru d e o il o r any pr o d u c t s, b y -pr o d uc t s o r frac t i o ns t he r e o f. L es se e sh a ll n o t engage in a ny activity in or on the Premises which c o nstitutes a Rep o rt a ble Use of Hazardous S ubstan c es without the express prior w r itten c o n s e nt of Lessor and timely compliance (at Less e e's e x p e n s e) with all Applicable Require m ents. "R ep ortable Use" shall mean (i) the installation or use of any abo v e or be l ow ground stora g e t ank, (ii) t he g en era t i o n, p os s e ssi o n, s to ra g e, use, transportation, or disposal of a Hazardous Subst a n c e that requires a permit from, or w ith respect to w hich a rep o rt, n o tice, regis t ration or bus i n e ss plan is requ i red to be filed w i th, any g o vern me n t al authority, and/or (iii) the pre s ence at t he Pr e mises o f a Hazard o u s S u b s ta n c e wi t h r es p ect t o wh i ch a ny Ap p li c a b l e R e q u ir e m en t s re qu ire s t h a t a n oti ce b e gi ve n t o pe r s on s en t e rin g o r o c c upy in g t h e P r em i ses o r nei g hb o r i n g pr o p e rtie s . N o twithsta n di n g t h e f or eg o i n g, L e s s ee m ay u se a ny or di n ary a n d c u st o ma r y materials re a s o nably r e qui r ed to be u s e d i n t he no rm a l c o u r se o f t he Agr e ed U s e , o rdi n ary o ffice s u pplies (c o pier to ne r , liquid pa p er, g l u e , e t c.) a n d c o mm o n ho us e h o ld cle a ning ma t erials, so l o ng as such u s e is in c o mplian c e with a l l Applicab l e R e qui re men t s, is n o t a R e p o r t able U s e, a nd d o es n o t e x p o se t he P r emi s es o r n e i g h b o ring p r o p e r t y t o any meani n gf u l r i sk of c o n t amination or damage or exp o se Less o r to any liability therefor. In addition, Less o r may c o ndition its consent to a ny Reportable Use upon receiving su c h additional as s urances as Lessor reas o nably d e e ms ne c e s sary t o pr ot ect i t self, t he p u blic, t he P rem i s e s a n d/ o r t he e nvir onm ent agai n st dam ag e, c o n ta mina t i o n, i n jury a nd/or liabi l ity, includi n g, but not limited to, the installation (and remov a l o n or before Lease e x piration or termi n a t ion) of protective modifications (such a s c on cre t e e n cas e m e n t s) a n d/ o r incr e asi n g th e S ec uri t y D e p o si t .

 

(b) D u t y t o In f o r m Lesso r . I f L e s s ee k n ow s, o r has reas o nable ca u se t o believ e , t hat a Hazard ou s S ubs ta n c e h a s c om e t o b e l o ca t ed i n, on , u n d er o r ab o ut t he Pr e mis e s, ot h e r t han a s p revi o usly c o n s en t e d t o by L e ss or , L e ss e e s hall imm e d i a t ely give wri tt en n ot ice o f s u ch fact t o Less or , a n d p ro vide L e ss o r wi t h a c o py o f a n y r e p o r t , n ot ic e , claim o r o t her d o c u m e n t a t i o n w hi c h it has c on ce r ni n g t he p r e s e n ce o f s u c h H azar do us S u bs ta n c e.

 

(c) Lessee R e m e diation . L e s s e e s h al l n o t cause o r pe rmi t a ny Hazar d o us S ubs ta n c e t o be spilled or re l eased in, on, under, or about the Prem i ses (incl u ding t hr oug h t he pl u mbi n g o r sani t ary s e w e r sys te m) a n d s hall promptly, at Lessee's expense, c o mply with all Ap plicable R e qui r e m ents a nd ta k e all inves t igatory and / or remedial action reason a bly rec o mmen d e d , w h et h er or not formally order e d or re q ui r ed, for the c l ea nu p of a n y contamination o f, and f o r the ma i n t e nan ce, s e c uri t y an d/ o r m o n i to ring o f t he P re m i s e s o r n e i g hboring propertie s , t h at was c a u s ed or materially contr i buted to by L es see , o r p e r t aining t o o r inv o lving a n y Ha z ard ou s S u bs t a n ce br ou ght o n t o t he Prem i s e s d uri n g the t e rm of this L e ase, by or for L e s s ee, or any t hird p a rt y .

 

(d) Lessee Ind e mnificati o n . L e ss ee s h al l i n d e m n ify , de fe nd a nd h ol d L e s s or , it s age n t s, empl o y e e s , l e n de rs a n d gr o u n d le s s o r, if an y , h a rm l ess f r o m and aga i nst any a nd all loss of rents and/or d a mages, liabilities, jud gm ents, claims, e x pen s es, penalties, a nd attorne y s' and c onsultants' fees arising out of o r inv o lving any Ha z ard ou s S u bs t a n ce br ou ght o n t o t he Prem i s e s by o r f o r Le s s e e, o r a ny t h i rd par t y ( pr o vi d e d , h ow ev e r, t hat Le ss e e shall ha v e no liability under th i s Lease w ith res p e c t to undergr o und migration of any Hazardous S ub s t an c e u n d er th e P re mis e s fr o m a dja ce nt pr op er t ies n o t cau se d or contr i b uted to by L e s s e e ). Lessee's obligations shall inclu d e, but not be limited to, the e ff e cts o f any c o ntaminati o n o r injury to pers o n, pr o perty o r t h e envir o n m ent c r e at ed o r suf f er e d by L e s s e e, a nd t he c o st o f i n ve s ti g atio n, r e moval , r e m edi atio n, r e storation an d /or aba t emen t , and s hall s urvive t he expira t i o n o r termination of this Lease. No termination, cancellation or release agreement en t e red into by L e s s o r a nd L e s s e e s h al l r e l e as e Le s s ee f r o m it s o b li g atio ns u n d e r t h i s L e as e wi t h r e s p e ct to Hazardous S ubstan c es, unless specifically so agreed by Lessor in w riting at the time of such agreement.

 

(e) L e ssor I ndemnificati o n. L e sso r and i t s s u c c es so rs a n d a ssi g ns s hall in d e m nify, d e fe n d, rei m b u r s e a nd h o ld L e s s e e , i t s e mpl o y e es a n d len d e r s , harmless from an d aga i nst a ny a nd all environmental dam a g e s, i nc l ud i ng t he c o st of remediation, which result from Hazardous Su b s t a n c e s whi c h exis te d o n t he Prem i ses prior to Lessee's occup a n c y or which a re c a u s ed by t he gr o ss n e gligence or wil l ful miscond u ct of Lessor, its agen t s or e m ploye e s. Lessor's o bligations, as and w h en required by the Applic a ble Require m en t s, shall include, but not be limited to, the cost of investigation, rem o val, re m ediation, res t oration and/or abate m ent, and shall survi v e the e x piration or termination of this Le a se.

 

(f) Investig a tio n s and R emedia t ions. Less o r shall retain the resp o nsibility and pay for any i n ves t iga t ions or remediation measu r es required by g ov e r n m en ta l en t i ti es ha v i ng ju r i s d i c tio n wi t h r es p ect t o th e ex i s te n c e o f Ha zar d o us Su bs tan c e s o n t he P r em is es pr io r t o L e ss e e ' s oc c u pa n cy, u n l e s s s uch re m ediation m ea s ure i s requi r ed as a result of Les s ee's u s e (includ i ng 'Alterations', a s defin e d in par a graph 7.3(a) below) of the P r em i se s , in whi c h ev e nt L e s se e shall be r e s p on sib l e f o r s u ch p ay me n t . L e s s ee s hall c oo pera t e f ully in a n y su c h ac t ivi t ies a t t he re q u e st o f Less or , inc l udi n g all o wing L ess o r a nd Less or 's a g en t s t o have re a sonab l e a cc e ss to t h e P r em i ses at re a sonab l e times in o r der to carry out L esso r 's i nv e stigative a n d r em e dial r e sp o nsib i lities.

 

(g) Les s or Term i nation O p tio n . I f a Hazard o us S u b s t an c e C o ndi t i o n ( s e e Par a gr a ph 9. 1 (e)) oc c u rs dur i ng t he t e r m o f t his Lea s e, un l e s s L es s e e i s l ega ll y re sp o nsible t he r ef o r (i n w h ic h ca s e L e s s e e s h al l mak e t he investigation and re m edi a tion thereof required by the Applica b le R e qui r e m en t s a nd t h i s L ea s e s ha l l c o n t in u e in full f o rce a n d ef f ec t , b ut su b j e ct t o Less o r's righ t s u n d er Par a gra p h 6.2( d ) and Paragr ap h 13), L e ssor may, at L e s s or's option, either (i) inves t igate an d r e m edi at e s u c h Hazar d ou s S ubs tan ce C on d itio n, i f re qu ir ed, a s s oo n a s r e a s ona b l y p o s si b l e a t L e s s or' s e x p e n s e, i n w h i ch ev ent this L e a se s h al l c o n tin ue i n full force an d effec t , or (ii) if the estimated c o st to remediate such c o ndit i o n e x c e e d s 12 t i mes the then m o n t hly B a se Rent o r $10 0 ,000, whi ch ever is g r ea t e r , g i ve written n o tice to Lessee, within 30 days after rece i p t by L e ss o r o f kno w l e d ge o f th e oc cu rre n c e o f s u ch Ha zar d ou s Su bs ta n c e C o n dition, of Lessor's d e sire to terminate th i s Le a se as of the date 60 days following the date of such notice. In the e v e n t Less o r e l ects to give a termination notice, L e s s ee m ay, within 10 da y s t he r ea ft e r , gi v e writt en n oti ce t o Le ss o r o f L e s s e e ' s commitm ent t o p a y t he a m ou nt by w h ic h th e c o st o f t he r e m edi atio n o f s u ch Haza r d o us Su b stan c e C o ndit i o n ex c e e ds an am o u nt equal t o 12 t i m es t he th en m o n t hly Base R ent o r $100,000, whic he ver is gr e a t er. L e s s e e shall pr o vide Le s s o r w ith said f u n ds or satisfact o ry a ss uran ce t h er e o f wi t h i n 3 0 da y s f o llo wing s u c h c om m itm en t . I n s u ch ev e n t , t h i s L e as e sh al l c o n ti n u e i n f u l l for ce an d e ffect , a n d L e s s o r s ha l l pr o c ee d t o ma ke su c h r e m ediation as soon a s r eas o nably possib l e af t er th e r e q u i r e d fu nds are ava il abl e . I f Le s s e e does no t give s u c h no tic e a n d pr o v i de t he re q u i r e d f u n ds o r ass u ra n ce t he r e o f wi t hin th e t ime p ro vide d , t his L ea s e shall t er m i nate a s of the da t e specified in Less o r ' s n o tice of terminati o n.

 

6.3 Lessee's C o m p liance with A pplicable R equirement s . Ex c ept a s ot h er w is e pr ovid ed i n t h i s Leas e, L e s s e e sh all , a t L es s e e' s s ol e ex pe n s e, f u lly, diligently a nd in a timely m a n n e r , materially co m p l y with all Applic a ble Requirements, the require m ents of any applicable fire i n s ura n ce un de r wr it er o r ra ti n g bu r ea u , a n d th e r ec o m me nda t i o ns o f Le s s o r's e n gin e ers a nd/ o r c on sul t an t s w hi c h rela t e i n any ma n n e r t o t he s u c h R e q uir em en ts , w ith o ut reg a rd to w h et h er s u c h Re q uir e m e n t s are n o w in ef f ect o r bec om e eff e c t ive a ft er t he S t art Date. Lessee shall, wi t hin 10 days after receipt of Lessor ' s wr itt en r e q u e s t , pr ovi de L e s s o r wi th c o pies o f all perm i t s and ot her d o c u men t s, a n d ot her inf o rma t i o n ev ide nci n g Le s s ee ' s c o m p lia n c e wi t h an y A pp li c a b l e R e q u ir em e n t s s p e cified by L e ss o r, a nd sh all immediately upon receipt, notify Lessor in writing ( with copies of any d o cu m en t s involve d ) of any threatened or actual claim, n oti ce, ci tatio n, w a r n i n g , c om p lai nt or report pertain i ng t o or involving the failure of Lessee o r the Premises to c o mply with any A pplicab l e Requiremen t s.

 

6.4 Inspecti o n; Compl i ance . L e s so r a n d L e s s o r's "L e n der" (as d efi n ed in Para g ra p h 30) a n d c on sul ta n t s s h al l ha v e th e ri ght t o en t er i n t o P remi s e s at any time, in the case of a n emergenc y , and oth e rw i s e at re a son a ble t i mes after re a son a ble n o tice, for t he purpose of ins p e c ting t he c on d itio n o f t he P r em i s e s a nd f o r verify i ng c omp liance by L e s s ee wi t h t his L ea s e. T he c o st o f any su ch i n s p e c t i o ns sh a ll be paid by L e s so r, u nl e ss a vi o la t i o n of Applicable Requirements, or a Hazard ou s S u bs ta n c e C on di t i o n (s e e par a gr a ph 9.1) is f o u n d t o exist o r be i m min e n t , o r t he in s p e c t i o n is re q u e s t ed o r or d e red by a go v ern m ental authority. In su c h c a se, L e s s e e shall up o n re qu est rei m bu r se L e s sor for the cost of such i n s p ection, so long as s u c h ins p ection is r e asonably r e lat ed t o t he viol a tio n o r c o n tami n atio n. I n ad di tio n, L e s s e e sh al l provi de c o p i es o f al l re l evant material sa f ety d a ta s h eets (M S DS) to L e ss o r within 10 da y s o f th e re ce i pt o f a w r itt en r e q u e st t h er ef or.

 

7. Mai n tenance; R e pairs, Utili t y In s talla t ion s ; Trade Fix t ures and Al t erations.

 

7.1 Lessee's O b l ig ation s .

 

(a) In Genera l . S ub j ect t o th e pr o visi o ns o f Para g ra p h 2.2 ( C o ndi t i o n), 2.3 ( C o m plian c e ) , 6.3 (Le s s e e's C o mplian c e with A pplicable Requireme n ts), 7.2 (Le s s o r's O bligations ) , 9 ( Dam a ge or D e s t ruc t ion), a nd 14 ( C o ndemna t i o n), L e s s ee s hall, a t Le s s e e's s o le e xp e n se, k e ep th e P re m ises, Utility Ins t allations (in t e n d e d f o r Les s ee ' s exc l u sive u s e, no ma tt er w h e r e l o ca te d ) , a nd Al t era t i o ns i n g oo d or de r , c on di t i o n a n d r epair (w h e th er o r n o t t he p ortio n o f t he Prem i s e s r e q u iring repai r s, o r t he m ea n s o f r epairi n g t he s a m e , a r e r e a s o nably o r re a dily accessible to Lessee, a nd whether or not the n e ed f or s u ch r e pairs oc cu r s as a r e s ult o f Le s s e e's u s e, any prior u se, the el e men t s or t h e a g e of su c h portion of the P rem i s e s), i n cludi n g, b ut not limited to, all e q ui p ment or f a cilities, such a s plumb i ng, HVAC e q uip m ent, electrica l , ligh t ing facilities, b o ilers, p r e s sure v essels, fire protection sys t e m , fixtu r es, walls (in t erior a nd exterior), fou n dations, ceilings, roofs, r oo f draina g e sys t em s , fl oo rs, wi n d o w s, d oo rs, pla t e g lass, skyli g h t s, la n dsc a pi n g, dri ve w a ys, pa r king l ot s, f e n ce s , re t ain i ng w alls, sig n s, si de w a lks and pa r kwa y s l o ca t ed in, o n, o r adja c ent t o t he Prem i s e s. L es s e e , in keep i ng th e Pr em is es i n g oo d or de r , c on d itio n a nd r epa ir , sh al l ex er ci s e and perform good maintenance pr a c tic es, s p ec ificall y i nclud in g th e pr o c u r e m e nt and main t e n a n ce o f th e s ervi c e c o n t r a c t s r e qui r ed by P ar agra p h 7.1 ( b) b e l o w. L e s s e e ' s o b ligatio ns sh al l i nc l u d e res to ra t i o ns, r e pl a ce m en t s o r r e n e w als w h e n n e c e s sa r y t o keep t he P re mis e s a n d all imp ro vem e n t s th e r e o n o r a part th e r e o f in g o o d or de r , c o n d itio n a nd s tat e of repai r . L e s s ee s h a ll, duri n g t he t e r m o f t his Leas e , ke e p t he exterior ap p earance of the B u i ld i ng in a first-cla s s c o nditi o n (inc l u d ing, e . g . graffi t i r e m o val) c o nsis te nt with the exterior appearance of other similar facilities of c o mpar a ble a ge and size in t he vicinity, including, when necessary, the exterior repaint i ng of the Building.

 

(b) Service Contracts . L e s s ee sha l l, at Less e e ' s s o le ex p e n s e , pr oc ure and main t a i n c o n t rac t s, wi t h c o pi e s t o Less o r, in c us t o mary f o rm a n d s u bs t a n c e for, a nd with contractors specializing and experienced i n the m a i n tena n c e o f t he follo w ing e qu i p m ent a nd im pr ov e m en ts , i f a n y , i f an d w h en i ns tall ed o n the Prem i ses: (i) HV A C e q uip m en t , (ii) b o iler, and pressure vesse l s, (iii) fire extin g uish i ng s y s t ems, including fire alarm and/or smoke de t ection, ( i v) landscaping and irrigation sys t ems, (v) roof c o vering and drains, (vi) c l arifi e rs (vii) basic u t ility feed to the peri m eter of t he B uilding, a n d (viii) any oth e r equip m ent, if reas o nab l y re q uir e d b y L e ss or . H ow e v er, L e ss o r re s er v es t he r i gh t , u p o n n ot ice t o L es s e e , t o pr oc u r e and main t ain a ny o r all o f su c h s ervice c o ntract s , a nd i f Le s s o r so el e cts, Le s s e e s ha l l re imb ur s e L e s s o r, up o n dem an d, f o r th e co st t here of.

 

(c) Failure to P e rform . If Les s ee f ails to perform Less e e's o bligations u n der t his Par a g r aph 7. 1 , L e ssor m ay ent e r u pon t h e Prem i s e s after 1 0 days' prior written n o tice to Les s ee (e x cept in the c a se of a n e m e r g e nc y , in which case no n o tice shall be require d ), p e rform such o b ligations on Les s ee ' s b e half, a nd put the P r emi s es in g o o d o rd e r, c o nditi o n a n d r epai r , a n d Le s s e e s hall pr om ptly pay to L e ss o r a s u m e qual to 115% o f the c o st th e r e of.

 

(d) R epla c e m en t . Sub j ect t o L e s s ee ' s in d e m nifica t i o n o f Le s s o r as set forth in Par a gr a ph 8 .7 below, and without relieving Les s e e of liability resulting from Lessee ' s failure to exerci s e and pe r f o rm g oo d maint e na n ce p r actice s , if an i t em des c rib e d in Par a gra p h 7.1(b) c anno t be repair e d ot her t han at a c o st whi c h is in ex c e s s o f 50% o f t he c o st o f replac i ng s u c h i te m, t h e n s u c h i t em shall be r epla c ed by L e ss or , and th e c o st t here o f shall be p r o ra t ed be t w een the Parties a nd Lessee shall on l y be o b li g at ed t o pay , ea c h mo n t h d u rin g th e r e mai n d er o f t he t e r m o f t h i s Le a s e , o n th e da t e o n w h ic h Ba se R ent i s d u e, a n amou n t e q ual t o t he pr o d u ct o f multiplying t he c o st of s u ch replacement by a f raction, the n u m e ra to r o f whi c h is o n e , a nd th e d e n o mina t o r o f whi c h is 144 (ie. 1/144t h o f th e c o st per mo n th ) . Lessee shall pay i nterest on the unamortized balan c e at a rate that is c o mmercially reasonable in th e j ud gm e nt o f L e ss o r's acc o untan t s. L es s e e ma y , h ow ev e r, prepay its obligat i on at anytime.

 

7.2 Lessor's O b li g ation s . S u b j e c t t o t he pr o visi o ns o f Par a gr a p h s 2.2 (C on di t i o n), 2.3 (C om plian c e), 9 ( Dam a ge o r Des tr uc t i o n) and 14 ( C on d em n atio n), i t i s i n te n d ed by t he Parti es h e r e t o t h a t L ess o r ha v e no o b li g atio n, i n a ny man n e r wh at s o eve r , t o r epa i r a nd m a i ntain t h e P r em i se s , o r t h e e q uip m ent the r ein, all of which obligations are in t ended to be that of the Lessee. It is the intention of the P a rties that the ter m s of this L ea s e g o vern t he re sp ecti v e obligations of the Parties as to maintenance and repair of the Pr e mis e s, and t hey e xp r e s sly wai v e th e b e n e fit o f any s t a t u t e n o w or here a fter i n effect to the exte n t it is inc o nsis t ent with the terms of this Le a se.

 

7.3 Utility Ins t al l atio n s; Trade F ix tures; A l terat i o n s.

 

(a) Definitions . The term 'Utility Ins t allations' refers to all floor and window c o verin g s, air and/or v a cuum lines, p o wer p a nels, electrical di s tribution, se c uri t y a nd fire pr ot ec t i o n sys tem s, c o m m uni c a t i o n cabli n g, ligh t i n g fix t ure s , HVAC eq uip m en t , p l umb i n g, a nd f e nc i ng in o r o n th e Pr e m i s e s. T he t erm "T ra de Fixt ur e s" s h al l mea n L e s s e e ' s ma ch i nery a nd e qui pme nt t h a t can b e remov ed wi t h o ut d o i ng mat e ria l da ma ge t o t he P r em ise s. T he t e rm "Alte r ations" shall me a n any m o dification of the i mpro v e m e n ts, oth e r th a n Utility Ins t allations or Trade Fixtu r e s , whe t her by a ddition or deletion. ' Le s see Own e d Alterat i ons a nd/or Utility Installations' are defin e d a s Alterations a nd/or Utility I nstallat i ons made by Les s ee that are n o t yet own e d by Lessor pursu a nt t o Paragr a ph 7 .4( a ).

 

(b) Co n sent . Lessee shall n o t make any Alterations or Utility Ins t allatio n s to the Premises without Lessor's prior written c o n s ent. Lessee may, h owe v er, make n o n - structu r al Utility Install a t i ons to the i nterior of the Prem i ses ( excluding the roof) without such c o nsent but upon n o t ice t o L e ss or , as l o ng a s th ey a r e n o t vi sible fro m t he o u t s i d e , do n o t i n volv e p u nc t u rin g, r e lo ca ti ng or removing the roof or a ny existing walls, will not affect t he elec t rica l , pl u mb i n g, HVA C , a nd/ o r l i f e sa f e t y sys t em s , a nd t he c u m u lativ e c o st t he r e o f du r i ng t h i s Le a se a s ex t e n d e d d oe s n o t ex c e e d a s um e qual t o 3 mo n th' s Bas e Re n t i n t he ag gr e g at e o r a sum e q ual t o on e m o n t h's Ba s e R e nt in a ny on e yea r . N otw i t hs t andi n g t he f or eg o i n g, L e s s ee sh all n o t ma k e o r p e rmit any r oo f pen e t r a tions a nd/or i ns t all any t hing on the roof w ithout the prior w ritten a pproval o f Le s s o r. Less o r m ay, as a prec o ndi t i o n t o gran t ing s u c h a p pr o val, re q uire L e s s e e to utilize a c o nt r actor chosen and / or appro v ed by Less o r. A ny Alterations or Utility Installat i ons that L es s ee shal l desi r e t o mak e a nd w h ic h r e q u ir e t he c o n se nt o f th e L e ss o r s h al l b e p r e s en te d t o L e s s or in written form wi t h detailed plans. Consent shall be deemed c o ndition e d upon Les s ee ' s: (i) acquiring all applicable g o vern m ental permits, (ii) furn i shing Lessor with copies of both the permits and the plans a nd specifications p r ior to c o mmen c e m ent of the w o rk, and (iii) c o mpliance with a ll c o nditions of said permits and other Applicab l e R e qui re men t s in a pr o m p t and ex p editi o us ma n ne r . Any Alte r ati o ns o r Util i ty I n stallati o ns shall be p e rf o rm e d in a w o rkm a nlike m an ner with good a n d suffic i ent materia l s. Les s ee shall p r omp t ly upon c om pletion furnish Lessor with as - built plans and s p ecifica t ions. For w o rk wh i ch c o s t s an am ou nt in ex c e s s o f on e mo n t h's Ba se Rent , Le ss o r ma y c on d itio n it s c on s e nt up o n L es se e provi d i ng a lie n a nd c o m p l e tio n b on d i n a n am o unt e q ual t o 150 % of t h e es t imated cost of s uc h Alteration or Utili t y Installation and / or upon Les s ee ' s posting an a dditional Sec u rity D e pos i t with Lessor.

 

(c) Lie n s; Bon d s . Les s ee shall pay, w h en due, all cla i ms for lab o r or m aterials f u rni s h e d o r alleg e d t o have b e en f u rni s h e d t o o r f o r L e s s e e at o r f o r u se o n the P r emi s e s , whi c h claims a re o r may be s e c ur e d by a ny m e c han i c's o r material m en ' s lien aga i nst t h e P r emi s es o r any int e re s t th e r ein. L e s se e s hall give L ess o r not less th a n 10 days notice prior to the commen c ement of any work in, on or about the P r emises, an d L e ssor shall h a ve the r i g h t to p o st n o tices of n o n- respons i bility. If Les s ee shall c o n t e s t the validity of any such lien, claim or dem a n d , then Les s ee shall, at its s o le expense de fe nd a n d pr ote ct i t self, L e ss o r a nd th e Prem i s e s a gainst the sa m e a nd s ha ll pay a nd satisfy any s u ch ad v er s e j u d g m e nt that m ay b e r e n d e r e d t h ere o n b ef or e t h e enf or ce m e nt th e r e of. I f L essor s hall re q uir e , L e s s ee sh all furnish a s u r e t y b o nd in a n am o unt e qual t o 150% o f t he am o unt o f su c h c o n t es te d li e n, claim o r d em an d, i n d e m nifying Lessor against liabili t y for the s am e . I f L e ssor e l ects to p a rticipate in a ny s u ch action, L e s s e e sh all pay L e ssor ' s attorne y s' f e es a n d c osts.

 

7.4 Ownership; Re m ova l ; Surre nd er; and Re s tor a tion.

 

(a) Ownershi p . S ub j ect t o L e s s or' s ri ght t o re qu ir e remova l o r el e ct ow ne r s h i p as here i n a fter provided, all Alterations and U t ility Installati o ns made b y Le s s e e shall be th e pr op er t y o f L e s s ee, b ut c o ns i de r ed a part o f t he P re mis e s. L e ss o r ma y , at a ny t i m e, el ec t in wri t ing t o be t he owner of all or any s p ecified part of the Lessee Own e d Alterations a nd Utility Ins t all a tions. U nless otherw i se i ns t ruc t ed p e r p a ragr ap h 7 .4(b) hereo f , all Lessee Ow n e d Alterations a nd Utility I ns t alla t i o ns shall, at t he e x pira t i o n o r t ermina t i o n o f t his L ea s e, b e c o me t he p r o p e r t y o f L e ss o r a nd be su r r en de r ed by L e s s e e w i t h t he P r em i se s .

 

(b) R e m o v al . By delivery to L e s s ee of written n o tice from Less o r n o t earlier th a n 90 a nd n o t lat e r th a n 30 days prior to the e n d of the term of this Lea s e, L e s s o r m a y requi r e t hat any or all Less e e Own e d Alterations or Util i ty Installa t ions be removed by the expiration or te r mination of this Lease. L e ss o r m a y require t he remo v al at any time of a ll or any part of any Les s ee Ow n e d Alterations or Utility Ins t allations made with o ut the r e qu ired c o n s en t .

 

(c) Surrender; R estora t io n . L e s se e s hall su r r e n d er t he P r e mis e s by t h e E x pira t i o n Da t e or any e a rlier termination date, wi t h all of the improvements, par t s a n d s u rfa c es t here o f br oo m c l ean a n d fr e e o f d ebri s , a n d in g oo d o pera t ing o r d er, c o ndi t i o n and s t a t e o f repair, o rd i n a ry wear a nd t ear ex c ep te d. 'O r din ar y wear and tea r ' sh all not inclu d e a ny dam a ge o r d e t e r i oratio n t h a t w o uld ha v e b e e n pr e ve n t ed by g oo d ma i n t en a n c e pr a c tic e. Not w i t hs t a n ding t he f or eg o i n g, if t his Lea s e is f o r 12 mo n t hs o r le s s, the n L e s s ee s hall s ur re n d e r t he P r e mi s es in th e sa m e c o ndi t i o n as d elive r ed t o Le s s e e o n t he S t art Date with NO allowance fo r o rdinary w ear a nd t ear. L e s s ee s hall r e pair a ny d a ma g e o c c asi o ned by t he i nstallation, m a inten a n c e or rem o val of Trade Fixtu r e s , L es s ee ow n e d Alt e ratio ns an d/ o r Utility Installat i ons, f urnish i n g s, an d equ i p m ent a s well as t he removal of any storage t a nk installed by or for Lessee. Les s ee shall c om pletely remove f rom the Prem i s e s a ny a nd al l Ha zar d ou s Sub s ta n c es br o u g ht o n t o t he P r em i s es by o r fo r L e s s e e, o r a ny t h ir d p art y ( e xc ept Ha zar d o us Su b s tan c e s wh i ch w ere d ep o si t ed via u n de r gr ou nd m i g r a t i o n fr o m areas o u t side o f t he P r e m ise s , o r if applicable, t he Pr oj ec t ) e v en if su c h r e m o val w o uld re q ui r e Le s s e e to perform or pay for work that ex c e e ds statut o ry re q uir e m e nts. T r a de Fixtu r es s hall remain t h e pr op er t y o f Les s ee a n d s hall be r e m o v e d b y Le s s e e. Any pe r s o nal pr op er t y o f Le s s e e n o t r e move d on or before the Expiration Date or any earlier termination date shall be de e m e d to have b e en ab a nd o n e d b y Les s ee a nd may be d i sp o s e d o f o r re t ained b y Le s s o r as Less o r may d e sire. The failure by L e s s ee to timely vacate the Premises pursuant to t his P a ragr a ph 7. 4 (c) without the e x press wr itt en c ons ent o f L e s s o r s h a l l c o ns t i t u t e a h o ld o ver u n der t he pr o visi o ns o f Par a gr a ph 26 b el ow .

 

8. Insurance; Indemni t y.

 

8.1 P ay ment For Insur a n c e . Lessee shall pay for a ll insur a n c e required under Par a gr a ph 8 exc e pt to the extent of the c o st attribu t ab l e to liability ins u rance c a rried by Less o r under Paragr a ph 8.2 ( b) in exc e ss of $2,000,000 per occ u rren c e. P r emiums for policy periods c om me n ci n g pri o r t o or ex t e n di n g bey on d the Lease term shall be prora t ed to correspond to the Lease ter m . Pay m ent s hall be ma d e by L es s ee to Le ss or within 10 d a ys f ol l o w ing receipt of an invoice.

 

8.2 Liability I ns u ranc e .

 

(a) Carried by L essee . Les s ee s h all obtain and keep in force a C om me r cial General L i ability p o licy of insur a n c e protecting Les s ee a nd Lessor as an addi t i o nal ins u r e d against clai m s f o r b o dily inj u ry, p e rso nal injury a nd p ro per t y d a ma g e b a sed up o n o r arisi n g o ut o f t he ow ne r sh ip , u se, o c c up an cy o r ma i n te na n ce o f t he Prem i ses a nd all areas a p p u r t en a nt t here to . S u c h ins u ra n ce s h a ll be o n an o ccu rr e n ce b a sis pr o vid i ng si n gle limit c o ver a g e in an am o unt n o t less t h a n $1,000,000 per o cc u rren c e w ith an annual agg r ega t e of n o t less th a n $2,000,000, a n 'Additional Insu r ed - Man a ge r s or L ess or s of P rem i s e s E ndo r se me nt' an d c o n t ain th e 'A m e n dm e nt o f th e P o ll ut i o n Excl u si o n E n do rse m en t ' f o r d am age ca u s e d b y he a t , sm ok e o r f um es fr o m a h o s t ile f ire. T he p o licy s ha ll n o t c o n t ain any i n tra-i n s u re d e x c l us io ns a s b e t w ee n i nsu r ed pe r s on s o r or gani z a tions, but shall inclu d e coverage for liabili t y ass u med under t h is Le a se as a n 'in s ur e d c o n t r a c t ' f o r the perform a n c e of Lessee's ind e mn i ty obligations un d er this Lease. The limits of said insuran c e shall n o t, h o w e v er, limit the liability of Less e e nor relieve Lessee of a ny o b li g atio n h e r e u n d e r . Al l in su ra n c e ca rri ed by L e s s e e s h al l be primary to and n o t c o n t ributory with any similar insur a n c e c a r ried by L e s s o r, w h os e in s ur an c e shall b e c on si d er e d e x c e ss i n s u ra nc e o nly.

 

(b) Carried by L essor . Lessor s h all maintain liabil i ty insur a n c e as des c rib e d in Para g raph 8.2 ( a), in a ddi t i o n to , and no t in lieu o f, t he ins u ra nc e re q uir e d t o be ma i n t ain e d by L e s s e e . Le s s e e s hall n o t b e n a m e d as a n ad di t i o nal insu r ed t h ere i n.

 

8.3 Property I n s urance - Buildi n g, Improv e men t s and R e n tal V a l ue.

 

(a) Building and Improveme n ts . The Ins u ring P a rty shall obtain and keep in force a policy or policies in the n a me of Lessor, with loss p a yable to Le s s o r, any gr o u n d-le s s o r, a n d t o a ny L e n d e r i n s u ring l o ss o r da m a g e t o t he Pr e mis e s. T he am ou nt o f s uc h i n su r a n ce s h all be e q u al to the f u l l repl a cement c o st of the P r emise s , as the s a me shall e x ist from time to t ime, or the amo u nt re q uir e d by an y Le n d e r, b ut in no ev e nt more t h an the com m erci a lly reason a ble and available insurab l e value there o f. If Lessor is the Insuring P a rty, ho w ev e r, L e s s ee O w n ed Alterations and Ut i lity Ins t alla t ion s , T r a de Fixt u r e s, an d Le s s e e's p e r sonal prop e rty shall b e in s ur e d by L e s s e e u n der Para g ra p h 8.4 rather t h a n b y Le s sor. If the c o vera g e is availab l e and com m ercial l y appropriate, such policy or policies shall insure against all risks of direct ph y sical loss or damage ( e xc ept t he p e ril s o f floo d a nd / o r ear th qu ak e u n l e s s r e q u i r e d by a Lender ) , including c ov erage f o r d e br i s r e mova l an d t he e n forc e m e n t o f a ny Ap p li c a b l e R e q u ir e me n t s r e q u iri ng t he u pg ra d i n g , d e molitio n, r ec o ns tr uc tio n o r r epl a c e m e nt o f a ny p o rt io n o f t he Prem i ses as the result of a c o vered loss. Said p o licy or p o lici e s shall also contain an agreed valuation provision in lieu of a ny c o ins u ra nc e clau s e, waiver o f su bro g atio n, a nd i n flatio n gu a rd pr o t ec tio n c a us in g a n i nc r ea s e i n t he a n n u a l pr o per t y i n s ura n ce c o v e ra g e a m o unt by a f a c to r o f n o t l ess t h a n t he a d j us t ed U.S. De p ar t m e nt o f L a b o r C o n s um e r Pr i ce In dex f o r All U rban C on s u m e rs fo r t he ci t y nea r e s t t o whe r e th e P r emi s es a r e l o ca te d. I f s u c h i n sur an ce c o ver a ge has a d e d u ctible clause, the deductib l e amount shall not exc e ed $1,000 per occu r rence, and L es s ee shall be liable for such deduct i ble am ou nt in the ev e nt o f an I nsur e d L o ss.

 

(b) Ren t al Valu e . The Insur i ng P a rty shall o btain a nd keep i n force a p o licy or p o licies in t he n a me of Lessor w ith loss payable to Lessor and any Le n d e r, i n s uri n g t he los s o f th e f u l l Rent f o r o ne ye a r wi t h a n e x t e n d e d peri o d o f i n d e m n i t y f o r a n a ddi tiona l 18 0 days ( ' R ent a l Value insur a n c e'). S aid insurance shall c o n t ain an a greed valuation provision in lieu of a ny c o insur a n c e clause, and the am o unt of c o ver a ge shall be adjus t ed a n n ually to reflect the projected Rent ot herw i se payab l e by L es se e, f o r th e next 12 m o n t h pe ri o d. L es s ee s hall be liable f o r any d e d uc t ible a m ou nt in t he e v ent o f s u c h l o ss.

 

(c) Adjacent Premise s . I f t he Pr e mis e s are p a rt o f a larger b uildi n g, o r o f a gr o up o f buildings owned by Lessor which are a djacent to the Premises, t he Lessee shall pay fo r any incre a se in the premiums for the property i n s u r an c e o f s u ch b uild i ng o r buildings if said incre a se is ca u sed b y L e s s e e's act s, o m is si o n s , u s e o r o cc u pa n cy o f th e P r emi s e s .

 

8.4 Lessee's Pr op erty; Busine s s Interruption I ns urance.

 

(a) Property D a ma g e . Les s ee s h all obtain and maintain insurance c o verage on all of Les s e e 's p ers o nal pr o p e rty, T ra d e Fixtur e s, a n d L e s se e O w n e d Alterations and Utility Ins t allations. Such insurance s h all be f ull replacement c o st c o ver a ge with a d e d u c t ible of n o t to exce e d $1 , 00 0 p er oc c urr e n c e . Th e pr oc e eds from a n y s u c h i ns ura n ce s hall b e u s ed by L e s s ee for t he r e plac e m e nt of p e rsonal pro p ert y , Tra d e Fix t ur e s a nd L e s s ee O wn ed Alte r ations and Utility Ins t allat i ons. Lessee shall prov i de Lessor with wr i tten evide n ce that s u ch ins u rance is in force.

 

(b) Busin e ss I nt erru p tion . Lessee shall obtain and maintain loss of inc o me an d extra exp e n s e insur a n c e i n amounts a s will reimburse Lessee f or direct or indirect loss of earn i ngs attribu ta ble to all perils c o mmon l y i n s u r e d a gainst by pr u d e nt les s e e s in t he b us i n e ss o f L e s s ee or attribu t able to prevention of a ccess to t he P r emi s es as a re s ult o f s u ch peri l s.

 

(c) N o R epresentati o n of Adequ a te Cove r age . L e ssor makes no repre s entation that the limits or forms o f cover a ge of i n s u ran c e s p e cified h e rein a r e adequate to co v er Lessee's propert y , business operations or obligations u n der t his Lease.

 

8.5 Insu r ance P olicies . In s uran ce re qu ir ed h e r e i n s h al l b e by c om p ani es du l y li c e n s ed o r admitt ed t o tran sact b u sin e ss i n th e s tat e w h ere th e Pr em i s e s are located, and maintaining dur i ng the p o licy term a 'Gene r al Policyholders Ratin g ' of a t least B+, V, as set forth in the mo s t c u rr e nt i s s u e o f 'B e s t 's In s u ra n c e Guide ' , o r su c h ot her ra t i n g as may be r e qui r ed by a Le n d e r. L es s ee s h all n o t do o r per m it to be d o ne any t hing whi c h invali d a t e s the required ins u rance policies. Lessee shall, prior to the Start Date, deli v er to Less o r certifi e d c o p i es o f p o licies of such ins u rance or certi f icates eviden c i ng the ex i ste n ce an d amounts of the required insur a n c e. No such p o licy shall be c a n c elab l e or subject to m o dification exc e pt after 30 days pri o r w ritten n o tice to Lesso r . L e s s ee sh all, at least 30 days prior to the expiration of such p o licies, furnish Les s or with e v id e n ce o f re n ewa l s o r 'i n sur a n c e bi n d e rs' ev i d e nc i ng r e newa l t h ere o f, or Lessor may order such ins u ra n ce a n d ch a rge th e c o st t her eo f t o Les s ee, whi c h am o unt s hall be payable by L e s se e t o Less o r up o n d em a nd. S u c h p o licies s hall be for a term of at least o n e year, or the length of the remaining term of this Lease, whiche v er is less. If either P a rty shall fail to procu r e and maintain th e ins u ra n ce r e q uir e d t o be carried by i t , the oth e r Party may, but s h all n o t be required to, procure an d maintain t he same.

 

8.6 Waiver of S ub ro g ation . With o ut affecti n g any o ther ri g hts or r e m edi e s, L e s s e e a n d Le s sor ea c h h e re by re l ea s e a n d re l ieve t h e othe r , a n d waive their e ntire r i ght t o recov e r d a ma ge s agai n s t t he othe r, f o r l o ss o f o r d a mage t o i t s p r operty arising o ut of or incid e nt to t h e perils required to be ins u red aga i nst he r e in . T he ef f ect o f su c h r e l e as es a nd wa iv e r s i s n o t limit ed by t h e a m ount of in s ur a nce carri e d or r eq uir e d, or b y any d e d u ct i b l es a pp li c a b l e he r e to . Th e Parties agr e e to ha v e the i r re s p e ctive p rop e rty dam a ge i n s u r a n c e carr i ers wai v e any ri g ht t o su bro ga t i o n t hat su c h c o mp a nies may h ave a ga i nst L ess o r o r Le s s e e, a s th e case may b e , so long a s the insur a n c e is not invalida t ed thereby.

 

8.7 Indemni t y . Except for Lessor ' s gross n e gligence or willful m i sc o n d uct, Less e e sh a ll inde m nify, protect, de f end a nd hold harm l ess the Pr e m i s es , Le s sor a n d its ag e nts, L e s sor's mas t er or gr o u n d le s sor, par t ne r s a n d Le n d er s , from a nd a gainst a n y a n d all claims, loss of r e n t s and/ o r dam a g e s, lie n s, j u d g m en t s , p e na lti es, attor n ey s' a nd c on sul ta n t s' fe e s , ex p e n s e s a nd/ o r li a bilities arising o ut of, i nvolving, or in c o nnection with, t he u s e a nd/ o r o c c up a ncy o f t he Pr emi s e s by Le s s e e. I f any a c t i o n o r pr o c e edi n g is br o u g ht agai ns t Less o r by re a s o n o f any o f t he f o reg o i n g ma tt e r s, Le s s e e s hall up o n n ot i ce d e f e nd th e sa m e at L e s s ee ' s ex p e n se by c o u ns el re a s o nably sa t isfac to ry t o L e ss o r and L e ss o r s hall c oo pera t e wi t h L e ss e e in s u ch d e f e n s e. L e s s o r n e e d n o t h a ve fi r st pa i d any s u ch claim in order to be de f ended or ind e mnified.

 

8.8 Exemption o f Lessor from Liabilit y . Lessor s h all n o t be liable f o r injury or dam a ge to the person or goods, wares, merch a ndise or other proper t y of Le s s e e, L e s s e e ' s e m ploy e es, con t ractors, i nvite e s, custo m er s , or any other person in or about the Premises, w h eth e r such da m age or injury is caused by or results from fire, steam, electricity, gas, water or ra i n, or f r o m t he b r eaka g e, l eaka g e, o bs t r u c t i o n o r ot her d ef e c t s o f pip e s , fire s prinkl e rs, wir e s, a pplia n c e s, plu m bin g , HV A C o r ligh t ing fix t u r es, o r fr o m any ot h e r cau s e, w h ether the sa i d injury or damage results from c o nditions arising u p o n t he P r e m i s e s o r up o n other p o r t i o ns o f t he bu i lding o f whi c h t he Prem i s e s are a p a r t , o r fr o m ot her s o ur c es o r plac e s. Le s s o r shall n o t be liable f o r any damag e s arisi n g fr o m any act o r neg l ect of any other ten a nt of L e ssor nor f rom the failure of Lessor to enforce the provisions of any other le a se in the Project. Notw i t hs t a n di n g L e sso r's n egli g e n ce o r bre a ch o f t his L e a se, L e ss o r shall un der no ci r cu m s t a n ces b e liable f o r i n jury t o L es se e's b usi n e s s o r f o r a ny l o ss o f inc om e o r pr o fit the r efr o m.

 

8.9 Failure t o P r ovide Insu r ance . Les s ee a c k nowled g es that a ny fai l ure o n its p a rt to obtain or mainta i n the insur a n c e required herein will expose Lessor to risks an d p o ten t ially cau s e Less o r to incur c o s t s n o t c o n t e m plated by th i s Lease, the ex t ent of which will be extrem e ly diffi c ult to asc e rtain. A cco r di n gly, for any month or portion the r eof that Lessee d o es n o t maintain t h e re qui r ed i n s u ra n ce and/ o r d oe s n o t p r o vide L e s s o r wi t h t he re q uir e d bin d ers o r c er t ifica t es evid e nc i ng t he ex i s t e n ce o f t he r e q uir e d in s ur a n c e, t he B a s e R e nt s ha l l be a u to ma t ically inc r ea s e d , wi t h o u t any r e qui r e m ent f o r n ot ice t o L es s ee, by a n am o unt e q ual to 10% of t he then ex i sting Base R ent or $100, w hich e ver is g r eater. The parties agree that such increase in Base Rent r e p r e s ents f air and re a s o n a b l e c o mpe n sation for the a dditional ris k / c o s t s that Lessor will incur by re as on of Lessee's failure to maintain t h e required insu r ance. Such incre a se in Base Rent shall in no ev e nt c on s tit u t e a w a iv er o f L es s ee ' s D e fa ult o r Brea ch w i t h res p ect t o the failure to m a intain s u ch i nsur a n c e, pre v ent the exercise of any of the other rights an d re m edies granted hereunder, n o r re l ieve Lessee of its obligation to maintain the insurance specified in this Lease.

 

9. Damage or De st ruction.

 

9.1 Definitions .

 

(a) " Premis e s P artial D a ma g e " shall m ean dam a ge or des t ruc t ion t o the improve m e n ts o n t he P r em ise s, oth er t h a n L e ss ee Ow n e d Alt e rat i o ns and Utility Ins t allations, wh i ch c a n re a s o nably be repaired in 6 mon t hs or less from the da t e of the dam a ge or destruction. Lessor shall n o tify Les s ee i n w riting w ithin 3 0 days f rom the da t e of the dam a ge o r d e str u ction as to w h et h er or not the d a ma g e is P a rtial or Total.

 

(b) " Pr e mises T o tal De s tru c tio n " shall m ean damage or d e s t ruc t ion to the Premise s , other than Les s ee Ow n e d Alterations an d Utility Ins t allati o ns a n d T r a de Fix tu r e s, w hi ch c a nn o t r e a s ona b l y be r e pa i r e d i n 6 m o n th s o r l es s fr o m th e da t e o f t he d a ma g e o r d e s t ruc t i o n. L e ss o r s hall n o tify Lessee i n writing with i n 3 0 days f rom the da t e of the dam a ge o r d e str u ction as to w h et h er or not the d a ma g e is P a rtial or Total.

 

c) "I n sured Los s " sh al l m e a n da m age o r d es tr uc tio n t o im pr ov em e n t s o n t he Pr e m ises, other than Lessee Own e d Alterations and Utility Installatio n s and T r a de Fix t u r e s , w hi c h w as ca u s e d by an e v ent r e q uir e d t o be c ov er e d by t he in s ur a n c e d e scr i b e d in Par a gra p h 8.3( a ), ir r e s p e cti v e of any deductible a mounts o r c o ver a ge limits involved.

 

(d) " R epl a ce me n t C os t " shall me a n the c o st to repair or rebuild the improvements o w ned by L e ss o r at the time of the occurre n ce to their c o nditi o n existing im m edia t ely prior the r e t o, including d e moliti o n, debr i s removal and upgrading required by the oper at ion of Applicable R e q u ireme n t s, an d wi t h o ut d e d uc tion f o r d e pr e cia t i o n.

 

(e) "H a z ardous Substance C on d itio n " shall m ean the o ccurre n ce o r discovery of a condition involving the p r e s e n ce o f , or a c o ntaminat i o n b y , a Hazard ou s S u b s t an c e as def i n e d in Paragr ap h 6.2(a ) , in, o n, o r u n d er th e P r emi s es wh i ch re q uir e s r epai r , r e media t i o n, o r r e s to r ation.

 

9.2 Part i al D a m a ge - Insured Lo s s . I f a P rem i s e s P ar t ial Dama g e t h a t is an In su r ed L o ss oc cu r s, t h e n Le ss o r s hall, at L e sso r's e x p e n s e, r e p a ir s u ch damage (but n o t Lessee's Tr a de Fi xt ures or Les s ee O w ned Alterations and Utility Ins t all a tions) as soon as reas o nably p o ssib l e a nd t h i s L e as e s h al l c o n ti n u e i n full f o rce a nd eff e c t ; pr o vid e d, h ow ev e r, t hat L es s ee s h all, at Less o r ' s e l ec t i o n, m ake th e repair o f a ny d a mage o r d es t r u c t i o n t he total c o st to repair of which i s $10,000 or less, and, i n s u ch e v ent, Less o r shall ma k e a ny a ppl i cable insur a n c e proceeds a vailable to L essee on a re a son a ble b a s is for that p urp o se . Notwithstand i ng t he fo r egoi n g, if t h e r eq uired in s ur an ce was not in fo rc e or t h e in s ur a n c e pro c e e ds a re not suffic i ent to ef f e c t s u ch r e pair, t h e I n s uri n g Party sha l l promp t ly c o n t rib u te the shortage in proce e ds ( except as to the d e d u ct i b l e wh ic h i s L e s s e e ' s r e s p on sib ility ) a s an d wh en r e quir e d t o c om p l e t e sai d re pa irs . I n the ev e n t , h o w ev e r , s u c h s h orta ge w a s d u e t o t he fa ct t h at , by r e a s o n o f t he u n iq ue na tur e o f t h e i m pr o v em en ts , full r epla ce ment cost in s ur an ce cover a ge w a s not c o mmercially re as onable a nd a v ailable, Lessor shall have no obli g ation to pay for the sh o rtage in i nsurance proceeds or to ful l y res to re th e u n i q u e as p e c t s o f the Prem i s e s unl e ss L es s ee p r o vid e s Le ss o r wi t h t he f un ds t o c o ver s a m e , o r a d e q ua t e a s s u ran c e t he r e o f, wi t hin 10 da y s f o ll o wing r e c e i pt o f w ritt en n oti ce o f s uch sh o r t a g e a nd r e q u est th e r ef o r. I f L e ss o r r e c eiv e s said fu n ds o r a d e q ua t e as s ur a n c e th e r e o f wi t hin said 10 d ay p eri o d, t he pa rt y re s po n sible for making the r epa ir s shall c om plete them as soon as re a sonably p o ss i ble a nd th i s Le a se shall remain i n full force a nd effec t . If such fun d s or ass u r an c e a r e n o t r e c e i ve d , L e s s o r may ne v er th ele s s elect by wri tt en n ot ice t o Les s ee wi t h i n 1 0 days t he r eaf te r to : (i) make s u ch res to ra t i o n a n d re pair as i s c om m er c ially reas o nable with Lessor pay i ng any short a ge in proce e d s , in w h i ch case this Lease s h all remain in full force and effec t , or (ii) have this Lease term i nate 30 days t h e reaf t er. L es s ee s hall n o t be entitled to reimbursement of any funds c o n t ributed by Les s ee to repair any su c h d a ma g e o r destruction. Premises Partial D a mage d u e to flood or earthqu a ke shall be sub j ect to Paragraph 9.3, n o twi t hstanding that there may be s o me insurance c ov er a ge, but the net pr o ceeds of any such insur a n c e shall be made available for the repairs if made by either Party.

 

9.3 Partial Da ma ge - Uninsured L oss . If a Premises Partial Damage that is n o t an Insured Loss occ u rs, unless caused by a negligent or willful act of Le s s e e (in whi c h ev e nt L e s s ee s hall make th e r e pairs at Les s ee ' s e xpe n s e), L e s s o r may ei t her: (i) r e pair s u c h dam a ge a s s o o n as re a s o n a bly p o ssib l e at Le s s o r 's ex p e n s e , i n wh ic h event t h i s L e as e sh al l c o n ti n u e i n f u l l for ce and effect, or (ii) terminate this Lease by giving written n o t i ce to Les s ee with i n 30 days after rece i pt by Le s sor of kno w led g e of the occu r re n ce of s u ch d am age. S u c h termin a tion shall be eff e ctive 60 days following the d ate of su c h n ot ice. I n t he e v ent L e ss o r el ec t s to terminate this Lease, L e s s ee shall have the right within 10 days after receipt of the termination n o tice to g i ve written n o t ice t o Less o r o f Le s s ee 's c o mmi t m e nt t o pay f o r t he r epair o f s u ch d a ma g e w i t h o ut rei m b u r s e m ent f r o m L e s s o r. L es s ee s hall p r o vi d e L e s s o r wi t h said f u n d s o r sa t isf a c to ry a s sur a n c e t h e re o f wi t hin 30 da y s after m a king such c o mmitment. In such event this Le a se shall c o n t inue i n f ull force a nd ef f ec t , and Lessor s h all proceed to make s u c h repairs as s oon as re a sonab l y p o ssib l e af t er t he requi r ed f u n ds a re available. I f L e ss e e d oe s n o t m a ke t he r eq uir e d co mmi t men t , t his Lea s e s hall t ermina t e as o f t he d at e sp e c ifi ed i n the termination n o tic e .

 

9.4 Total De s tr u ction . Notwithst a nding any other provision hereof, if a Premises Total Des t ruc t ion occurs, this Lease shall termina t e 60 days follo w i ng su c h D e structio n . I f the d a ma g e or dest r uction was c au s ed by t h e gr o s s n egli g e n ce or w i llful misco n d u ct of Le s s e e, L e ssor s h all have t h e ri g ht to recover L e ssor ' s dama g es from L e s s e e, ex c ept as pr o vided i n Par a gr ap h 8.6.

 

9.5 Damage N ear End of Ter m . I f a t a n ytim e d uri ng t he la st 6 mo n th s o f t h i s L e as e th e r e i s d amag e fo r w h i ch th e c o st t o re pa i r ex c e e ds o ne mo n t h's Base R en t , w he t h er o r n o t a n In s ur ed L o s s , L e ss o r m ay t erm i na t e t his Lea s e ef f ec t ive 60 da y s f o ll o wing th e d a t e o f o c c ur r e n ce o f s u c h dam ag e b y giving a wr itt en termination n o tice to Les s ee w ithin 30 days after the date of o c c ur r e nc e o f s u ch dam age . N ot wi t hs t a n di n g t he f o r e g o in g , if L essee at t hat t ime has a n e x e r cisab l e o p t i o n t o ex t e n d t his L ea s e o r t o p u rch a se t he Pr e mi s es, t h e n L e s s e e may p r e s er v e t his Lea s e by, ( a ) e x ercis i ng s u ch o p t i o n a n d ( b ) provid i ng L e s sor with a n y sh o r t a g e in in s ur a n c e p r o c e e d s ( o r ad e qua t e a s sur an ce t he r e o f) n e e de d t o ma k e th e r e p airs o n o r b ef o re t he earlier o f (i) th e d a t e which is 10 days after Les s e e' s receipt of L e ssor ' s written notice purporting to term i n a te this L e ase, or ( i i) the day prior to the da t e upon w h ich such option ex pire s . I f L e s s ee du ly exe r cis e s s u c h o p tio n d u ring s u c h p eri o d an d pr ovi des L e ssor wi t h f u n ds (or a d e qua t e as s u ra n ce t h e r eo f) t o cover a ny s h o r ta ge i n i n s ur an ce pr o c e e d s , L e sso r sha ll , at L e s s or 's c o mmercially reasonable e x p e n s e, repair such dam a ge as soon as re a sonably p o ssible and this Lease s h all c o n t inue in fu l l force and ef f ec t . I f Less e e fails t o exe r ci s e s u c h o p t i o n a n d p r o vide su ch f u n ds o r a s s ur an c e d uri n g s u ch peri od , th en t his Lea s e shall t e r mi n a t e o n th e da t e s peci f i ed i n th e t e rmi n atio n n oti ce a nd Le s s e e's o p t i o n s h all be ex t i n gu i s he d.

 

9.6 Abate m e n t o f R ent; Lessee's R emedies.

 

(a) Abateme n t . I n t he e v ent o f Premi s es Par t ial D a mage o r P r emi s es Tot al Des t ruc t i o n o r a Hazard o us Su b s t an c e C on di t i o n f o r which L e ss ee is not re s p o ns i ble u n d er t his Lea s e, th e R ent pay a ble by Le ss e e f o r t he p eri o d re q ui r ed f o r t he repair, r e m edia t i o n o r res to ra t i o n o f su c h dam a ge s hall be aba te d in pr o p o rti o n to t h e d e gr e e to wh i ch L es s e e 's u s e o f the P r emi s es i s i m paire d , but n o t to e x c e ed t he pr o c e e d s r e cei v ed fr o m t h e R e nt a l Va l ue i n s ura n c e . Al l other obligations of Les s ee h e reu n der shall be p e rfor m ed by Lessee, a nd Less o r shall have no liability for any such damage, des t ruc t i o n, r em e dia t i o n, r epair o r res to ra t i o n ex c ept as pr o vi de d h ere i n.

 

(b) R e me d ies . If Lessor shall be obligated to repair or restore the Pre m ises a n d d oe s n o t c o mm e n c e, in a s ubs ta n t ial and m e aning f ul wa y , s u c h r e pa i r or restoration within 90 days after such obligation s h all accru e , Les s ee may, at any time prior to the c o mmen c e m ent of such re p air or res t oration, give writt e n notice to L e ssor a nd to a ny Lende r s of wh i ch L e s s ee has a ctual notice, of L e ss e e ' s e l ection to termina t e this Lease on a d a te n o t le s s th a n 6 0 days f o ll o wi n g t h e giving o f s u ch n o t ice. I f Le s s e e giv e s su c h n ot ice a nd su c h r e pair o r re sto ra t i o n is n o t c o mm e n c ed wi t hin 30 days t he r eaf t e r , this Lease s hall termina t e as of the date s pecif i ed in s aid notice. I f the r epair or res t oration is c o m m e n c e d within such 30 da ys , this Le a se shall con t inue in f ull for c e and eff e ct. ' C o m me n c e ' shall m ean ei t her t he u n c on di t i o nal au t h o riza t i o n o f t he p r epa r a t i o n o f t he r e qui r ed p lans, o r t he b e gi n ning o f t he a c t ual w o rk o n th e P r e mise s , whi c he v er fi rs t o ccu r s.

 

9.7 Termin a tio n ; Advance P ay m e nts . Up o n t erm i n at i o n o f t his Le a se pu r su a nt t o Par ag raph 6.2( g ) o r P ar agra p h 9, an e q u i t able a d j u s t m e nt shall be made con c e r ni n g a dva n ce B a se Ren t a nd a ny ot h e r a dva n ce pa y m en t s made by L e s s ee t o Less or . L e ss o r s hall, in addi t i o n, r e t u r n t o Les s ee s o much o f L e s s e e ' s S e c u rit y D e p o sit a s h a s n o t b e e n, o r i s n o t t h e n r e q u ir ed t o b e, u s ed by Le s s or.

 

9.8 Waive Stat ut e s . Le s s o r a n d L e ss e e ag r ee t hat th e t erms o f t his L e ase s hall g o vern t he ef f ect o f any d ama g e t o o r des t ruc t i o n o f t he Pr em ises wi t h respect to the termination of this Lease a nd h e reby waive the provisions of any p r esent o r future s t atu t e to the ex t ent inc o ns i s t ent he r ewi th.

 

10. Real P r o p erty T a xes.

 

10.1 Definition . As u s ed here i n, t he term "Real Property Taxes" s h all inclu d e a n y f o rm of as s e s s m en t ; real e state, g en eral, s p e cial, ord i nary or extraordin a ry, or ren t al levy or tax (other than inh e ritance, p e rsonal inc o me or estate taxes); improve m ent b o nd; and/or license fee i m posed upon or levi e d against a ny legal or e q uitable interest of L essor in t he Pr e mi s es or t h e P roject, L esso r 's ri g ht to other inco m e the r efro m , a n d / o r L e ss o r ' s b us i n e ss o f leasi n g, by a n y authority having the direct or indirect p o w e r to tax and whe r e t he f u n ds ar e g e n e rate d w i t h r e f e r e n ce t o t he B u il d i ng a d dr e s s a nd w h ere t he p r o c e eds so g e n e ra te d are to be applied by the city, c o unty or other local taxing a ut h ority of a jurisd i ction within which the Prem i ses are loca t ed. R eal Property Taxes sh all also inclu d e a n y t ax, fee, lev y , as s es s m e nt o r char ge , o r any incre a se t he r ein: (i) imp ose d by reas o n o f even t s o c c urr i ng d u r ing t he t erm o f t h i s Lease, includ i ng but n o t limited to, a ch a n g e in th e o w n er s hip o f th e Pr emi s es, a n d (ii) l e vied o r a ss e s s ed o n m a chi n ery o r e q uip m ent p r o vid e d by L ess o r t o L e s s e e p ursuant to this Lease.

 

10.2 Pa y ment of Taxes . Lessee shall have no obligation to pay any portion of Real Property Tax assessed on or related to the Premises

 

10.3 Joint Asse s sment. If the Premises are n o t separately ass e s s e d , Lessee's liability s h all be an e q uitab l e proportion of the Real Property Taxes for all o f t he la n d a n d impr o v e m e n t s i n c l u d ed wi t hin th e t ax par c el a s s e s se d, s u c h p r o p o r t i o n t o be c o nc l usi v ely de t erm i n e d by Le s s o r f rom t h e re s p e ctive valuat i o ns assigned in the as sessor's work sheets or such oth e r information as m a y be re a sonably a vailable.

 

10.4 Personal P r o p erty Tax e s . Less e e shall pa y , p r ior to delinq u e n c y , all taxes ass e s s ed a gainst a nd l e vied upon Les s ee Owned Alterations, Utility I ns t alla t i o ns, T ra d e Fix t u r e s , f u rni sh ing s , e qu i pm e nt a nd all p ers o nal p ro per t y o f L e s s e e. Wh e n p o ssibl e , Le ss e e s hall c a u s e its Les s ee Own e d A l terations and Utility Ins t allations, Trade Fixtu r e s , f urnishings, equ i p m ent a nd all other p e r s o n a l pr o per t y t o b e a s s e s s e d an d b ill ed s e pa rat e l y f r o m the real proper t y of L e ss o r. If any of Le s s e e's sa i d pr op er t y s ha l l be a s s e s sed wi t h Le s s o r's r eal property, L e s s ee shall pay L e ss o r the ta x es attributable to Lessee ' s property within 10 days af t er receipt of a w ritten s t atement setting forth the taxes applic a ble to L e s s ee ' s pr o perty.

 

11. Utilities and Se r vice s . L e s s or s h al l pay fo r al l wa t e r , ga s , h e at , lig h t , p o w er , t e l e p h o n e , tra sh disp o s a l an d ot her u tiliti es an d s e rvic es su pp lie d t o t he Prem i ses, together with a ny taxes t he r e o n. T h e r e sh a ll be no abatement of rent and Les s or shall not be li a ble in any r e s p ect wha t s o e v er f o r t he inadequ a cy, stoppage, interruption or discontinu a n c e of any utility o r s e rvic e d u e t o riot , s trike , la b o r d i s p u t e, b r ea k d ow n, a cci d en t , r epa i r o r ot her ca u se b ey o n d Lessor's re a sonab l e c o n t rol or in cooperation w ith g ove rnmen t al request or direc t ions.

 

12. Assignme n t and Subletting.

 

12.1 Lessor's Co nsent Re q uire d .

 

(a) Lessee shall not voluntarily or by operation of law assig n , t rans f e r , m o r t ga g e o r en cu mb e r (c o llec t ively, " assign o r assi g nment") or s u blet all or any part of L e s s ee ' s interest in this Lease or in the P r em i s es without Less o r ' s prior written c o nsent.

 

(b) U nless Les s ee is a c o rporation and its s t ock is publicly traded on a national s t ock exch a nge, a ch a nge in the c o n t rol of L e s s e e s h al l c o n stit u t e an assi g n m ent r e qui r ing c on s e n t . T he t rans f er, o n a c u mula t ive bas i s, o f 25% o r m o re o f t he v ot ing c o n t r o l o f Less e e s h all c o ns t itu t e a ch a n g e in c o n t r o l f o r t h i s pu r p o s e .

 

(c) T he inv o lv em ent o f L e s s ee o r its as s ets i n a ny transacti on , o r se ries o f tra n sacti o ns (by w a y o f m er g er, sa l e, a c qu i siti o n, fin a nci n g, t rans f er, lever a g e d bu y - o ut o r ot h e rw i se ) , w he th er o r n o t a f o rmal a s si g nm e nt o r h y p ot h e c atio n o f t h i s Le a se o r L es s e e' s a s s e t s o c c u rs , w hich results or will result in a re d ucti o n o f t h e N et W o rth o f L e s se e by a n am ou nt g reater t han 25% o f s u ch N et W o rth as it was r e p r e s en ted at the ti m e o f the e x e c u tio n o f t h i s L e as e o r a t the t ime o f th e m o st r e c ent a ssi g n m ent t o whi c h L e s s o r h as c o n s en te d, o r a s it exis t s im m ed i a t ely pri o r t o said t ransac t i o n o r t r a n sacti on s c o nstit u ting s u c h r e d ucti o n, whi c h e ver was o r is grea t er, shall b e c on sid e r e d an a ssi g n m ent o f t his Lea s e t o wh i ch Le ss o r may wi th h o ld i t s c o n s en t . " Net W o r t h o f Le s s e e" sh al l me a n th e net w o r t h o f L e s s e e ( e xclud i ng a ny g ua r an to rs) es t abli s h e d u n d er g e nerally acc e p te d a c c ou n t ing pri n ciple s .

 

(d) A n assig n ment or s u bletting without con s ent shall, at Lessor's option, be a De f ault cur a ble after n o tice p e r Paragraph 13. 1 ( c), o r a n on cur a b l e B r ea c h without the necessity of any n o tice and gr a ce period. If Less o r elects to treat such un a p p roved ass i g n ment or subletting as a n o n c ur a ble Br e a ch , Le s s o r may ei t h e r: (i) terminate this Lease, or (ii) upon 30 days written notice, inc r ease the mon t hly Base Rent to 110% of the Base Rent then in effec t . F ur th e r , in t he ev e nt o f su c h Bre a ch a n d r e n t al adjus tm en t , (i) the p ur c ha s e pri c e o f any o p t i o n t o pur c ha s e t he P r em i ses h eld by L e s s e e shall be s ub j ect t o similar adjus tm ent t o 110% o f t he price p r evi o usly in eff e c t , a n d (ii) all fixed a n d n o n-fi x ed r en t al ad j us t m en t s s c h e dul e d du ring th e r e mai n d e r o f t he Le a se t e r m shall be incre a sed to 110% of the sc h e d ul e d a d j u s te d r e n t .

 

(e) L e s s e e's r e m e dy f o r a n y b r ea c h o f Paragr a ph 12.1 by L ess o r s h all be limi t ed t o c o mp en sa to ry dam a g e s a nd/ o r i nj u nc t ive r e li e f.

 

12.2 Terms and Conditions Appl ic a b le to Assig n ment and Subletting.

 

(a) R e ga r dle s s o f Le s s o r's c o n s en t , no assi g n m ent o r s u ble tt ing shall: ( I ) be e ff e c t ive wi t h o ut t he ex p r e ss wri tt en a s s um p t i o n b y s u c h a ssi gn e e or sub l e s s e e of the obligations of Les s ee u n der this Lease, (ii) r e lease Lessee of any obligations he r e u n d e r , o r (i i i) al t er t he p rimary liability of Less e e for the pay m ent of Rent or for t he performance of an y other obligations to be performed by Les s e e .

 

(b) L e ss o r may acc e pt Re nt o r p erf o rm a n c e o f L e ss e e's o bliga t i o ns from a ny pers o n other than L e ssee pending a pproval or dis a pp r o v al of an assi g n m en t . N ei th er a delay in th e appr o val o r dis ap pr o val o f su c h as s ign m ent n o r th e acc e p t a n ce o f R e nt o r perf o rm a n c e s hall c onstitute a w aiver or estop p el of Le s s or' s ri ght t o ex erci s e it s r e m ed i es for Le s s e e ' s De fault or Bre a c h .

 

(c) Lessor's c o n s ent to any assig n ment or sub l etting shall n o t c o nstitute a c o n s ent to any sub s equent assignment or s u blettin g .

 

(d) I n t he e v ent o f any D ef a ult o r Bre a ch by L e s s e e, Le s s o r may p r oc e e d di r ec t ly a gai n st L e s s e e , any G u aran to rs o r a ny on e el s e r e s p on sible f o r the perf or ma n ce o f L e ss e e's o bliga t i o ns u n der t his L ea s e, includ i ng a n y ass i g n ee o r s u ble s s ee , wi t h o ut first ex h aus t i n g Le s s o r's r e medies against a ny other p e rson o r entity responsible the r efor to Lessor, or any security held by L e ss o r.

 

(e) E a ch request for c o nsent to an assign m ent or s u b l etting s h all be in w riting, a cc om panied by information relev a nt to Less o r ' s determ i nation as to the financial a nd o p er a t i o nal re s p o nsibi l i t y and a ppr o pria t e n ess o f th e p r opo sed ass i g n ee o r sub l e s s e e, i ncl u d i ng but n o t limi t ed to t he i n ten d e d u se a n d / o r r e q u i r ed modification of the Premises, if an y , tog e ther with a fee of $500 as c o nsideration for Less o r's c o ns i der i ng and pr o cessing said re q u e s t . L es se e ag r e e s t o pr o vi d e Lessor with s u ch other or a dditional information and/or d o c u m e ntation as may b e r eason a b l y re qu est e d. ( S ee also Parag r a p h 36)

 

(f) Any a s sig ne e o f, o r s ub l es s ee u n d er, t h i s L e a se s ha ll , by re a s o n o f ac c ep tin g s u c h a ssi g n m ent o r en t e ring i n t o s u ch s u bl ea s e , b e d e e m ed t o ha v e ass u m e d a n d ag re ed t o c o nf o rm a n d c o mply wi t h ea c h and e v ery t er m , co ven a n t , c on di t i o n and o bliga t i o n h e rein t o be o b s erv e d o r perfor m ed by Les s ee dur i ng the term o f sa i d a s si g nm e nt o r s ub l ea s e, o t h er th a n s u c h o bligati o ns a s a re c o ntrary to o r i nc on sist e nt with p r o visi o ns o f an a s si g n m e nt o r s ubl ea se t o w h ic h L e ssor has s p ecifically c o n s ented to in writing.

 

(g) L e s s or' s c on s e nt t o a ny a ssi g n m ent o r s u ble tti ng sh al l n o t tran s f er t o t he as sig n ee o r s u ble s s e e a ny O p tio n gr a n t ed t o t he or i g i n a l L e s s e e by t h is Lea s e unl e ss s u ch t rans f er is s p ecifi c ally c o ns e n te d t o by L ess o r i n w ri t ing. ( S ee Par a gra p h 39.2)

 

12.3 Additional Terms and Condi t ions Applicable to Sublettin g . T he f o ll o wing t erms a nd c on di t i o ns shall apply t o any sub l e tt ing by L e s s ee o f all or any p a rt of the Premises a nd shall be deemed inc l u d ed in all suble a s e s u n der t his Lease w h e t her or n o t e x pressly inc o rpora t ed th e r e i n:

 

(a) L e s s ee h e r e by assi g ns a nd tr a ns f ers to L e s sor all of Le s s e e's i nte r est i n all R e nt pay a ble on any s u blea s e, and L e s sor m a y c o llect s u ch R e nt a n d apply s a me t o ward Les s ee ' s obligat i o ns under t his Le a se; provided, h o wever, that until a Bre a ch shall occur in the p e rform a n c e of L e s s ee ' s o bli g a t i o ns, L es s ee m a y c o llect said R e n t . I n t he e v ent t hat t he am ou nt c o lle ct ed by L e s s o r ex c e e ds L es se e's o bl i ga t i o ns any s u c h ex c ess shall b e r e fu n d e d to Les s e e . Lessor shall not, by reas o n o f t he f o r e g o ing o r any a ss i g nm e nt o f s u ch s u blea s e, n o r by r e a s o n o f t he c o ll e c t i o n o f Ren t , be d e em e d liable t o t he s u b l es se e f o r any failure o f L e s s ee t o perf or m a nd c om ply wi t h any o f Le ss e e's o bliga t i o ns t o su c h su ble s s ee . L es s ee h e r eby i r rev o c a bly au t h o rizes a nd di r ec t s a n y s u c h s ubl e s s e e , up o n r e c e i pt o f a written n o tice fr o m L e ss o r s t ating t hat a Breach ex i sts in the p e rformance of Lessee's o bligations under th i s Lease, to pay to L essor all Rent d u e and to b eco m e du e u n der t he s u blea s e. S ubl e s s ee shall rely u p o n a ny s u c h n ot ice f r o m L e s so r and shall pay a l l Ren t s t o L e ss o r wi t h o ut any o blig a t io n o r ri ght t o i n q u ir e a s t o w h e t h e r su c h B re a ch exis ts , n ot wi th s t and i ng any claim f r o m Le ss e e t o t he c o n t r a ry.

 

(b) I n t he ev e nt o f a Brea c h by L e ss e e, L e s s o r ma y , at i t s o p t i o n, re q uire s ub l es s ee t o a tto rn t o Less o r, i n w hich ev e nt L e ss o r s hall un d er ta ke th e o b li g atio ns o f th e sub l e s s o r u n der s u c h s ub l ea s e f r o m t he tim e o f t he ex erci s e o f sa i d o p t i o n t o t he e x pi ratio n o f s u c h s u ble a s e; pr ovid ed, h o w ev e r , L essor s h al l not be liable for any p repa i d r e nts or s ec urity d e posit paid by s u c h s ubl e s s ee to su c h s ubl e ssor or for any prior De faults or B r ea c h e s of su c h s ub l e s sor.

 

(c) A ny ma tt er r eq uiring t he c o n s ent o f t he s ub l ess o r u n d er a su blea s e s hall also re q ui r e th e c on s e nt o f L e ss o r.

 

(d) No s ub l es se e s hall fur th er a ssi g n o r s u blet all o r a n y part o f t he P r e m ises wi t h o ut L e s s o r's p ri o r wri tt en c o n s en t .

 

(e) L e s sor s hall d e liver a copy of a ny notice of D efault or Breach by L e ss ee t o t he s ubl e s se e, who s h al l ha v e t he rig ht t o cu r e t he Def a ult of L e s s e e wi t h i n th e gr ac e p e rio d, i f any , s p e c ifi ed i n s u c h n ot ic e . Th e s ub l es s ee s hall have a right o f r eim b ur se ment a nd o f f set f r om and a gai n st L e ss e e for a ny s u c h Def a ul t s c ur e d b y t he s ub l es se e.

 

13. Default; Breach; R emedies.

 

13.1 Default; Br e ach . A "Defaul t " is def i n e d as a failure by the Lessee to c o mply with or perf or m a n y o f t h e ter m s, c o v e nan t s, c o nditi o ns o r R u les a n d Regulations u n der this Lease. A "Breach" is def i n e d as the occ u rrence of one or more of t h e following De f aults, a nd t he failure o f Le s s e e t o c ure su c h Def a ult wi t h i n any a p plicab l e gr a ce period:

 

(a) Th e a ba n d on ment o f th e P r em ises; o r th e vaca t ing o f t he P r e m ises w ithout provid i ng a c o mmercially re a son a ble l evel of secu r ity, o r w he r e t h e c o ver a ge o f th e p ro per t y in s ur a n c e de s cri b ed i n Par ag raph 8 .3 is je o pa r dized a s a r e sult t he r e o f, o r wi t h o ut pr o vidi n g re a s on a b le assurances to minimize potential vandalism.

 

(b) The failure of Lessee to make any payment of R e nt or any S e c u rity Dep o sit requi r ed t o be made by Le s s e e he r e un de r , wh eth e r to Less o r or to a third party, when due, to provide reas o n able evide n ce of insurance or surety b o n d , or to fulf i ll any obligation un d er this Lease whi c h e n da n ge r s o r t hrea te ns life o r pr o p e r t y, w h e r e s u c h fa il u r e c o n tinu e s f o r a p e ri o d o f 3 bus i n e ss days f o ll o wing w ri tt en n o t ice t o L e s s ee.

 

(c) The failure by Lessee to provide (i) reas o nable written evide n ce of c o mpliance with Applicable Requirements, (ii) the serv i ce contracts, (iii) the rescission of a n unauthori z ed assignment or s u bletting, (iv) an Estop p el C e rtificate, (v) a requested s u b o rdination, (vi) evid e n ce c o n c ern i ng a ny g uar a n t y an d/o r Guarantor, (vii) a ny d o c u ment requested under Paragraph 42, (viii) material sa f ety d a ta s h eets (M S DS ) , or (ix) a ny other d o cu m e n t ation or information which Lessor may re a sonably require of Les s ee u n d er t h e t e rms of this Le a s e , w h ere any s u ch f a ilure c o ntin u es for a period of 10 d a ys follo wing wr itte n n oti ce t o L e s s ee.

 

(d) A D ef a ult by L es s ee as t o th e t e r ms, c o v e n a n t s, c o ndi t i o ns o r p r o visi o ns o f t his Le a s e , o r o f t he r ules ad o p t ed u n d er Par a g r aph 40 h e r e o f, oth er than t h o se d e s cri b ed i n su b par a gr a p h s 13 . 1 (a), ( b) o r ( c ), ab o ve, w h e r e such Default c o n t inu e s for a p e riod of 30 days after w ritten n ot ice; p r o vid e d, h o we v e r , t hat i f t he na t u r e o f L e s s ee ' s D e fa ult i s s u c h t h a t mor e t h a n 3 0 da y s ar e r e a s o n a b l y r e q u ire d fo r it s cu r e, th en i t s hal l n o t be d e eme d t o be a B r ea c h i f Le s s e e c om m e n ces su c h cu r e wi t h i n sai d 3 0 day p e rio d a nd th e r ea ft er d ili g e n tl y pr os e c u t es su c h cu r e t o c ompl e tio n. 

 

(e) T he o c c ur r e nc e o f a ny o f t h e f o ll o wing e v en t s: (i) the maki n g o f a ny g e n eral a r ra n g em ent o r a s sig n m e nt f o r t h e b e nefit o f c r e ditors; (ii) b ec o ming a " d e b tor" a s d e fin ed i n 1 1 U . S . C . § 10 1 o r a ny s u c c e ss o r s tat u t e t he ret o ( unl e s s , i n th e case o f a p e titio n fil ed a g ain st L e ss ee, th e sa m e i s d i sm i s s ed wi t h i n 60 days); (iii) the app o intment of a trustee or recei v er to take p o ss e ssion of subst a n t ially all of Less e e's a ssets located at the Pr em is es o r o f L e ss ee ' s i n t e r est i n t h is Lea s e, w h e r e p oss essi o n is n o t res t o red t o L e s s ee wi th in 30 days; o r (iv) t he a tt ach m en t , ex e cu t i o n o r ot her judicial s eizu r e of substan t ially all o f Lessee's a sse t s l o ca t ed at t he Pr emi s es o r o f L es s ee ' s in t e r est in th is Lea s e, w he r e s u c h sei z ure i s n o t dis c har g ed wi t h i n 30 day s ; pr o vi d ed, h o w e v er, in t he ev e nt that a n y provision of this subparagraph (e) is c o n t rary to any applicab l e law, such provision sha l l be of no force o r effec t , a nd n o t a f fect the validity of the remaining provision s .

 

(f) T he di s c o very t hat any f i na n cial st a t ement o f L e s s e e o r of a n y G uar a ntor given to L e s s or was materially f alse.

 

(g) I f t he p e rf o r m an c e o f L e s s ee ' s o bliga t i o ns u n d er t his L ea s e is guar a nteed: (i) the de at h of a Guar a ntor, (ii) the terminat i on of a Guar a ntor's liability with res p ect to this Le a se other than in acc o rd a nce wi t h the t e rms of such g u arant y , (iii) a G u arantor ' s bec o ming ins o lvent or the sub j ect of a bankrup t cy filing, ( i v) a Guar a ntor's r e f u sal to honor t h e g uarant y , or (v) a Guarantor ' s b r ea c h of its gu a ranty obligation on an a nticipat o ry bas i s, and L e s s e e ' s f a ilur e, wi t h i n 6 0 da y s follow i ng writt en n oti ce o f a ny s u c h e ve n t , t o pr ovid e writt en al t e r na t ive a s s u ra n ce o r s e c uri t y, whi c h, wh en c ou pled wi t h t he t h e n e xisting r eso u rc e s of L e s see , e q uals o r e x c e e ds t he c om bi n ed f i n a ncial r e s o u r c e s o f Le s s e e a n d th e G u aran to rs t hat exis t ed at th e t ime o f e xe c u t i o n o f t his L ease.

 

13.2 R e me d ies. If Les s ee f ails to perform any of its affirmative duties or obli g ations, within 10 days after written n o tice (or in case of a n e me rg e nc y , wi t h o ut n otic e ) , L ess o r may , a t it s o p tio n, p e rfor m s u c h d u t y o r o b li g atio n o n L es s e e' s b e ha lf , in cl u d i ng but n o t limit ed t o t h e o btaining of reas o nably required b o n d s, i nsurance p o licies, or g ov ernmental lice n s e s, permits or a p p rovals. L e s see s hall p a y to Le s sor an a m ount equal to 11 5 % of th e c o s t s a n d e x p e n s es in c ur re d by L essor i n s u c h perfo r ma n ce up o n re c eipt of an i n vo ice th e re f or. In the event of a Breach, L e ss o r may, with or with o ut furth e r n o tice o r d e man d , a nd with ou t limiting Lessor in t he exercise of any right or re m e dy w h i ch L e ss o r m ay h ave by re a s o n o f s u c h B r ea c h:

 

(a) T erm i na t e L e s s e e's r i ght t o p oss essi o n o f t he Pr e mis e s by a ny l a w f ul me a n s , in w h i c h c a se t h i s L ea s e shall t erm i na t e an d Les s ee s h all immedia t ely sur re n d er p os s e s s i o n t o Less o r. I n su c h e v ent L e s so r shall be e n t i t led t o rec o v e r fr o m Le s s e e: (i) t he unpa i d R e nt wh i ch h a d b e e n ea r n e d a t t he ti me of t ermina t i o n; (ii) t he w o r t h at t he t ime o f a wa r d o f th e am o unt by whi c h th e u npa i d r ent whi c h w o uld ha v e b e en ea rn ed af t e r t er m i n atio n u n ti l t he tim e o f a w ard ex c e e ds th e am o u nt o f s u ch r en ta l l o ss t h a t t he Le s se e pr ov es c o uld h a ve been reason a b l y avoided; (iii) the w o rth at the ti m e o f award o f th e a m o unt b y w hich t he u n paid r ent f o r th e bal a n c e o f th e t erm a f t er t he t i m e o f a w ard e x c e e d s th e am o unt o f s u c h r en t al l o ss th at t he L e s s e e pr o ves c ould b e r ea s onably avoi d ed; a nd (iv) any oth er a mo unt n e c e s sary t o c o m p e n sa t e L e sso r f o r a l l t he detriment proximately cau s ed by t he Lessee's failure to perfo r m it s o b li g atio ns u n der t h i s L e a s e or which in the ordinary cou r se of things would be likely to r e sult there f rom, including but n o t limited to the c o st of recove r ing p o s s e s si o n o f t he P r em i se s , expenses of reletting, inc l uding n e c e ssary renovation a nd alteration of the P r emise s , reas o nable attorne y s' fe es, and that por t ion of a ny le a sing commission paid by Le s s o r i n c o n n ec t i o n wi t h t h i s L eas e a pp li c a b l e t o t he u n expi r ed t erm of this Le a se. The w o rth at the time of award of the a m o u nt referred to in provision (iii) of the immedia t ely pr e c e ding se n t e n ce sh a ll be c o m p u t ed by disc ou n t ing s u c h am o unt at t he di s c o unt ra t e o f t he Fe d eral R e s e rve B ank o f t he Dis tri ct w i t h i n w h i ch t h e Prem i s e s are l o ca t ed at t he t ime o f award pl u s o ne p e rc e n t . Eff o r t s by L ess o r t o mi t iga t e dama g es ca u s e d b y Le s s e e's B re a ch o f this Lease shall n o t w aive Less o r ' s right to rec ov er damages under Paragraph 1 2 . If termination of t h i s L e as e i s o b tai n e d t h rou gh t he provi s io nal reme dy o f unla w f u l de tain e r , L ess o r s h al l h av e the right t o rec ov er in su c h p r o c e ed i ng any u npa i d R e nt a nd dama g es a s a r e r e c o ver a ble th e r ein, o r L e s s o r may re s er v e t he r i ght t o recover all or a ny part t h e r eof in a se p ara t e s ui t . I f a n ot ice and gr a ce peri o d r e qui r ed u n d er Para g ra p h 13.1 was n o t prev i o usly giv e n, a n ot ice t o pay rent o r qu i t, or to perform or quit given to Le s s e e u nd er t he unl a w f ul de tain er s tat u t e sh al l al so c o ns tit u t e t he n o ti ce r e q u ire d by Para gr a ph 13 .1. I n su c h ca s e, t he a ppl i cab l e gr a ce p eri o d r e qui r ed b y Paragr ap h 13.1 a nd th e u nla w ful d e t ainer s t a t u t e s h all run c o n c ur r en t ly, and t he fail u re o f Le s s e e t o cu r e t he D ef a ult wi t hin t he g r eater of t he two s u ch gr ac e periods shall c o nstitute b o th an unlawful detainer a nd a Bre a ch of th i s Lease entitling Lessor to the remedies provided for in t his Le a se a n d/or by said statut e .

 

(b) C o n t in u e th e Lea s e a n d L e s s e e ' s right t o p os s e ss i o n and r e c o ver th e R e nt as it b ec o mes d u e, i n w hi c h ev e nt L e s s ee m a y s u bl e t o r ass i g n , s u b j ect only to reasonab l e limitations. Acts of maintenance, efforts to relet, and/or the app o in t ment of a receiver to protect the Les s or' s i n t e r es ts , sh al l n o t c o ns tit u t e a termination of the Lessee's right to poss e ssion.

 

(c) P u r s u e a ny oth er r e m edy n o w o r he r eaf t er available u n d e r th e la w s o r j u dicial d ecisi on s o f t he s t a t e w h er e in t he P r emi s es a r e l o ca te d. Th e ex p ira t i o n or termination of t his Lease a nd/or the t ermination of Lesse e 's right to poss e ssion shall n o t relie v e Lessee fr o m liability under a ny ind e mnity provisions of t his Lease as to matters o c c u rring or a c c rui n g d uri n g the t erm h er e of or by reas o n o f Lessee's occup a ncy of the Premise s .

 

13.3 Inducement R ecapture . A ny agr e e m ent for f r ee or abat e d r e nt or other cha r g e s, or for the giving or paying by L e s s or to or f o r Les s ee of any cash o r oth er b o n us, i n d u c em e nt o r c o ns i dera t i o n f o r Le s s e e's en t eri n g in t o t his Le a s e , all o f which c o n c essi on s a r e h ere i naf t e r r ef e rr e d to as "Inducem e n t Provis i ons , " sha l l be d e e m ed c o nditioned upon Les s ee's f ull and faith f ul perfor man ce o f al l o f t he t e rms , c o v en a n t s a nd c on d i tio ns o f t h i s L e a s e . Up o n B re a ch o f this Lease by Lessee, a ny such Induce m ent Provision shall automat i cally be d e e m e d de l et ed fr o m t his L ea s e and o f no f u r t h e r f o r ce o r ef f ec t , a nd any re n t , ot her cha r g e , b o n u s, in d u c em e nt o r c on si d era t i o n th ere to f or e aba t e d , gi v en o r paid by L e ss o r un der s u c h a n i n d uc em e nt P r o visi o n s hall be im m edia t e l y d u e a nd pa y able by L e s s e e t o L e sso r, no t w ith s tan d in g an y s u b s e q ue nt cu r e o f sa i d Bre ac h b y L e s s e e. T he a cc e pt an ce by L es s o r o f r ent o r t he cu r e of t he Breach which initiated the o pera t i o n o f t his paragr a ph s hall n o t be d e e m ed a wa i ver by L essor of the provisions of this paragr a ph unless s p ecifically so s tat ed i n w r iti ng by Le s s o r a t t he time o f su c h a c c e p t a nc e.

 

13.4 Late C har g es. L e s s ee h er e by ackn o w l e d g es t h a t la t e pay m ent by Le s s e e o f Re nt w i ll cau s e L e s s o r t o inc u r c o s t s n o t c o n t e m pla t ed by t h i s L e as e , the ex a ct amount of which will be extremely difficult to ascerta i n . Su ch c o s t s i nc l u d e, b ut ar e n o t limit ed to , pr o c e ssi n g an d a cco u n ti ng c ha r g es , and l a t e c ha r g es whi c h m a y b e i m p o s e d u p o n L e ss o r by a ny L e n d e r. Acc o rd i ngly, if a n y R e nt shall n o t b e r e cei v ed by L e s s o r wi t hin 5 da y s af t er s u c h a m o unt sh al l b e d u e , the n, wi t h o ut a ny re qu ir em e nt fo r n oti ce t o Les se e, L e s s e e sh al l imm edi at ely pay t o Le s s o r a o ne- tim e lat e c h arg e e qual t o 10 % o f ea c h s u c h ov e r d u e amou nt o r $100, which e ver i s grea t er. T he Parties hereby agree that such late ch a rge repre s ents a fair a nd reas o nable estim a te of the c o s t s Le s s o r will incur by reason of s u ch late pay m en t . A c c e pt a n c e o f su c h l a t e c har g e by L e s s o r s ha l l i n no event constitute a waiver of Less e e ' s Def a ult or Breach with res p ect t o su c h o ver d ue am o un t , n o r pre v ent th e e x erc i se o f any o f t he o t her r i gh t s a nd re med i es g ran te d h er e u n d e r. I n th e e vent t hat a la t e c h arge is payab l e he r e u n d e r , w het h er o r n o t c oll ected, for 3 c o n s e c u t ive i ns t allmen t s o f Ba s e Ren t , th en n ot wi t hs t a n di n g a n y provision of this Le as e to the c o n t r a ry, Base Rent shall, at Le s s or' s o p tion , b ec om e d u e a nd payable q uarterly in adv a n c e.

 

13.5 Interest . A ny monetary pa y ment due L e ss o r hereunder, other than late c h a r g e s , not recei v ed b y Le s sor, w h en du e as to sch e du l ed pay m ents (such as B a se Ren t ) or within 30 days following the date on which i t was d u e for n o n-scheduled pay m ent, shall bear in t erest fr o m the d a te w h en due, as to sc h e d ul e d pay me n t s, o r t he 31st day af t er it was due as t o n o n-sc hed uled pa y m e n t s. T he in t e r est ( "I n t e r es t" ) cha r g e d sha l l be c o mpu t ed at t he ra t e o f 10% per annum but shall not exc e ed the ma x imum ra t e allow e d by law. Interest i s pay a ble in addit i on to the p o ten t ial late charge prov i d e d for in P ara g r a ph 13. 4 .

 

13.6 Breach b y L essor .

 

(a) N o tice of Breach . Less o r shall n o t be dee m ed i n bre a ch of this Le a se unless Less o r f ails w ithin a reas o nable time to p e r f orm an obligation req u ir e d t o be perf or m e d b y Le s s o r. F o r p u rpo ses o f t his Par a g r ap h , a reas o nab l e t ime shall in no e v ent b e le s s t han 3 0 days af t er r e c e i pt by L e ss o r, a nd any L e n d er wh os e na m e an d ad dr es s s hal l ha v e b e en f u r n i s h ed L e s s e e i n w r iti ng fo r su ch pu r p os e, o f writt en n oti ce s p e c ifyi ng w h ere i n s u c h o b li g a tion of L e ssor h a s not b ee n performed; provided, h o we v er, that if the na t ure of Lessor ' s o bli g ation is s u c h that more than 30 da y s a r e re a sonably requi r ed fo r it s pe rforma n c e, t h e n L e s s or shall n o t be in breach if performance is c o m m e n c e d within such 30 day period and the r eafter diligently pursued to c om pletion.

 

(b) Performance b y Lessee on B ehalf of Les s o r . I n t he e v ent tha t ne ith er L e s s o r n o r L e n d er cu r es sa i d b r ea c h wi t h i n 3 0 da y s a f t er r e c e i pt o f sa i d n oti ce, o r i f h avin g c om m e n c ed sa i d c u r e th ey do n o t d ili gen tl y pu r s u e i t t o c om p l e tio n, t hen Le s s ee ma y elect t o c u r e sa i d br e a ch at L es s e e 's ex pe n s e a n d o f fs et from R e nt t h e ac t ual a n d r eason a b l e cost to p erform su c h cu r e, provi de d h o we v er, that s u c h off s et s h all not exc e ed an a mo u nt equal to the g r eater of o ne mon t h's Base R e nt o r th e Se c uri t y D ep o si t , re s erv i ng Le s s e e ' s ri g ht t o s e ek re imbu r s e m e nt fr o m L e ss or . L e s s e e shall d o cu me nt t he c o st o f sa i d c ure a n d s u p p l y s a id d o c u m e n t a t i o n t o Le s s o r.

 

14. Condemn a t i on. I f t he P r emi s es o r any p o r t i o n t he r e o f a r e t a k en u n der th e p ow er o f em i n e nt d o ma i n o r s o ld u n d er t h e th reat o f t he ex erci s e o f said p o w er (collec t ively " C o nd emnat i on"), th i s Lease shall terminate as to the p a rt taken as of the date the c o ndemning a uthority takes title or p o ss e s s ion, wh i chever f i rst o ccu r s. I f m o re th an 10% o f th e B u i lding, o r m or e t h a n 25% o f that portion of the Premises not occ u pied by any building, i s ta k en by C o n d e m na t i o n, L e s s e e m a y, at Les s ee ' s o p t i o n, t o be exe r cis e d in wri t ing wi t hin 10 days af t er L e s so r shall have gi ve n L e ss e e w ri tt en n ot ice o f su c h t aki n g ( o r in t he a bs e n ce o f s u ch n ot i c e , within 10 days af t er the c o n d e m ning authority shall have taken p o s s ession) terminate this Lease as of the date the c o nde m n i ng a u t h o ri t y t akes su c h p o s s e s si o n. I f Lessee does not t ermina t e th i s Lease in accord a nce with the foregoing, t his Lease shall remain in full force and ef f ect a s to t h e p ortio n o f th e Pr em is es remai n in g, ex c ept t h a t t he B ase Re nt s h al l b e r e d u c ed i n pr o p ortio n t o t h e reduction in utility of the Premi s e s ca u s e d by s u c h C on d emnati o n. C on d e mna t i o n a w a r d s an d/ or pay m en t s shall be t he pr op er t y o f L ess or , w he t her s u ch a ward shall be made a s c om p e n s a t i o n f o r diminu t i o n in value o f th e lea s e h o ld, t he val u e o f t he part t ak e n , o r f o r se v era n ce d ama g es; pr o vid ed , h ow ev e r, that Le ss e e s hall be enti t led to any c om p en sati o n f o r Le s s e e's rel o cati o n ex pe n s e s , los s o f b u si n e s s g ood w il l a nd/ or Trade Fixtu r e s , w i thout regard to whe t her or n o t this Lease is t e rmina t ed pursu a nt to the provisions of this Paragr ap h. All Al t erations and Utili t y Ins t allations made t o t he Pr e mi s es by L es s e e , f o r p u rp o s e s o f C o n de mna t i o n o nly, s h all be c on si d er e d t he p r o p e r t y o f t he L e s s e e a n d L es s ee s hall b e e n titled to any and all c o mpe n sation which is payab l e therefor. In the e v ent that this Le a se i s n o t termina t ed by re a son of the C o n d e m nation, Less o r s h all repair a ny d a mage to the Prem i s e s c a u s ed b y s u ch Co n d e mna t ion.

 

15. Bro k e r age Fees.

 

15.1 A dd itional Co m mi s sion. I n a ddi tio n t o t he p a ym e n t s ow ed p ur s uant t o P a ragr a ph 1 .9 a b ov e, an d u n l e s s L e s s o r a nd t he Br o k e rs oth e rwi se a gr e e in wri t ing, L e s s o r agr e es t ha t : (a) if Les s ee ex e rci s es any Op t i o n, ( b) if Le s s e e ac q ui r es a ny righ t s t o t he P r emi s es o r ot her pr emi s es ow n e d by Le s s o r and l o ca te d wi t h i n t he sa m e Proj ec t , i f a n y , wi t h i n wh i ch t he Premi s e s i s l o ca t e d , (c) if L e s s ee r em ains in p o s s essi o n o f t he P r emi s e s , with th e c o n s ent o f L e ss or , aft er the expiration of this Lease, or (d) if B a se Rent is incre a sed, w h e t her by ag re e m e nt o r o p e r atio n o f a n e sca latio n cl au se h ere i n, th e n, Lessor shall pay Bro k ers a fee in acc o rd a nce w ith the s c h e dule of the Broke r s in effect at the time of the execu t ion of this Lease.

 

15.2 Ass u m p tion of O b li g atio n s. Any b u y er o r t r a ns f er e e o f L e ss o r ' s in t e r est i n t his Lea s e shall b e d e em e d t o h ave a s s um e d Le s s o r's o b l iga t i o n he r e u n d e r . Br o ke r s shall be t hird p a r t y be n eficiari e s o f t he pr o visi o ns o f Paragr a p h s 1.9, 15, 22 and 31. I f Le s s o r fails t o p a y to Brokers any amounts d ue a s and f o r br o kera g e f e es per t aini n g t o t his Lease w h en d u e , t hen s u ch am o u nt s shall accr u e I n t er e s t . I n addi t i o n, if Less o r fails t o pay any am ou nts to Less e e's Br ok er w h en d u e , L e s s ee ' s Br o ker may sen d wri tt en n ot i c e t o Less o r a n d L e s s ee o f s u ch failu r e and if Le s s o r fails t o pay such am o un t s within 10 days after said n o tice, Le s s e e sha l l pay s a i d m o n i es t o it s B r o ker a nd o ff s et s u c h am o un t s aga i nst Re n t . I n a d di tio n, L e s s e e's Br oke r s ha l l b e d e em e d t o be a t hird p a r t y b en eficiary o f any c o mmi s si o n ag r e e ment en t er e d in t o by a n d/ o r be tw e e n L e ss o r an d L e s so r's Br o k e r f o r th e limi t ed p u rp os e o f c o llec t ing a ny b ro ke r a g e f e e ow e d .

 

15.3 R epresent a tions and Ind e mnities of B r o k er Relatio n shi ps . Le s s e e a nd L e sso r each r ep r e se nt a nd w a rra nt t o t he ot h e r t h a t i t has had no deali n gs with a n y pe r s o n, fir m , br ok er o r find e r ( o ther than the Br o ke r s, if any) in c o nn e cti o n with this Lea s e, a n d that no o n e ot her t han sa i d na m ed Br o k e rs i s entitled to a ny c o mmission or f i n d er's f ee in c o nnection herewit h . L e s s e e a nd L e ss o r d o ea c h he r e b y ag ree t o i n d e m n i fy, pr ote c t , de f e n d a nd h ol d t he oth er harmless from an d against liability f or compensation o r charg e s w h ich m ay be claimed by any s u ch u n na me d broker, finder or oth e r similar par t y by reas o n of a n y dealings or a ctions of the ind e mnify i ng Party, including any c o s t s, ex p e ns es, a tto rne y s' f e es reas o nably i n c u r r ed wi t h r e s pect th ere to .

 

16. Estoppel Certifi c ates.

 

(a) Ea c h Party (as "Respo n di n g Party") shall within 10 days after written n o tice from the other Party (the "Re q u e s t ing Party") ex e cut e , a ckn o w le d g e and deliver to the Requesting P a rty a s t atement in writing in form s i milar to the then most current "Es t oppel C e rtificate" form p u b lis h ed b y t he A mer i can In d u s t rial Re a l Es t a t e A s s o cia t i on , pl u s s u c h a d di t i o nal i n f o rmati o n, co nfirmati o n a n d/ o r state m ents a s m ay be re a s o nably r e q u e sted by t h e R e q u e s ti ng P a r t y.

 

(b) I f t he R esp o n ding P a r t y shall f ail t o execu t e o r deliver th e E s to p p el Cer t ifica t e wi t h i n s u ch 10 day p e ri o d, t he R e q u e s t ing Party m a y ex e cute a n Es to p p el Cer t ifica t e s t a t i n g t ha t : (i) t he L e a se i s in full f o rce a n d ef f ect w i t h o ut m o difica t i o n ex ce pt as may be r e pr e s e n te d by th e R e q u e s t ing Par t y, (ii) th e r e a r e no u n cu r ed de fa ul t s i n t he R e q u e s ti ng Party' s perform a nce, a nd (iii) if Lessor is the R e questing Party, n o t mo re than one month's r e nt has b ee n pa i d i n a dva n c e. Pr o s p ec t ive p u r c h ase r s and e n c u m b ran c ers m ay rely up o n th e R e q u es t i ng Par t y ' s Es topp el Cer t ifica te , and t he Re s p on ding P ar t y s h all be es t o p p ed fr o m d eny i n g t he t ru t h o f t he f a c t s c o n t ai n ed in s a id C e r t ifica t e.

 

(c) I f L e ss o r d esi r es t o f i na n c e , r ef i na n c e , o r sell t he P r emi s e s , or a ny part t he r e o f, Lessee a nd all Guar a ntors shall deliver to any potential lender o r pu r ch a s e r d esi g n at ed b y L e s s o r s u c h fi n a nc ia l s tatem en t s a s ma y b e rea s o n a b l y re qu ir ed by s u c h le n d er o r pu r ch a s er , in cl u d i ng b ut n o t limited to Les s e e 's f i nancial s t a t em e n t s f o r th e past 3 ye a rs. All su c h fin a ncial s t a t em e n t s shall b e re ceiv e d by L e ss o r a nd s u ch l e n d er o r pu r ch a s e r in c o n f i d e n c e an d s h al l b e u s e d o n l y f o r the pu r p o s e s he r e i n s et f o r t h.

 

17. Definition of Le s so r . Th e t e r m " L essor" a s used here i n shall me a n the owner or own e rs at the time i n question of the fee title to the P r emises, or, i f t his is a sublea s e, o f t he Less e e ' s in t erest in t he pri o r leas e . I n t he ev en t o f a t ransfer o f Less o r ' s t i t le o r inter e st in t h e Premises or this Le a se, Lessor shall deliv e r t o t he t rans f er e e o r assi g n e e (in c ash o r by cr e di t ) any u n u s e d Se c uri t y D e p o sit held by L e ss o r. Ex c e p t as pr o vid e d in Paragr a p h 15, u po n s u ch t r a ns f er o r assi g n m ent a n d d elivery o f t he S e c u ri t y Deposit, as a f oresaid, the prior Lessor shall be rel i eved of all liabi l ity w ith respect t o t he o bliga t i o ns a n d /o r c o ven a n t s u n de r t his Lea s e t he r eaf t er t o be perf or m e d by t he L e ss or . Sub j ect t o the foregoing, the obligations and/or c o venants in this Lease to be p erf o r m ed by t he L e ss o r s hall be bind i ng only up o n the L e s sor as h e r e inabove def i n e d.

 

18. Severabilit y . The invalidity of a ny provision of t his Lease, a s de t ermined by a c o urt of competent jurisdic t ion, shall in no w a y affect the validity of any other provision here o f.

 

19. Days. Unless other w ise specifically indicated to the c o n t rary, t he w o rd ' days' a s used in t h is Le a se shall m e a n and refer to calendar da y s.

 

20. Limit a tion o n Li ab ility. The obligat i ons of Lessor under this Lease shall no constitute personal obligations of Lessor or its par t ners, membe r s, direc t ors, officers or share h olders, and L e s s ee shall look to the Prem i se s , and to no other assets o f Lessor, for the satisfaction of any liability of Less o r with res p ect to th i s Lea s e, a nd s hall n o seek r e c o u r se a gainst L e s s o r's pa rt ner s , m e m be r s, d irec to rs, o ffice r s o r sh a r e h o lde r s, o r any o f t heir p er s o nal as s e t s f o r s u ch sa t isfac t i o n.

 

21. Time of Essence. Time is of the essence with respect to the p e rform a n c e of all obligations to be performed or obs e rved by t h e Parties under th i s Le a s e .

 

22. N o Pr i or or Ot h er Agreements; Bro k er Discl a imer. This Le a se c o n t ains all agreements be t ween the Parties with res p ect to any matter men t ioned he r ei n , and no ot her pri o r o r c o n t e m p o ra n e o us a g r ee m ent o r u n d ers ta nd i ng s hall be eff e c t ive. L e s s o r a n d L es s e e ea c h r ep r e s e nt s and w arr a n t s to the Brokers th a t it has made, a nd is relying s o lely upon, its o w n inves t igation as to the nature, quality, ch a racter and financ i al responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Prem i se s . Broke r s h a ve no resp o nsibility w ith res p ect the r eto or w ith respect to any default o r brea c h h e r e o f by either Part y . The liability (including court costs and attorneys' f ees), of any Broker with res p ect to negotiation, execution, del i very o r pe r f o rma n ce by ei th er L e ss o r o r Le s s e e u n d er t his L ea s e o r any a me n d m ent o r m o difica t i o n h e re t o s hall be limi t ed t o an am ou nt u p t o t he f ee re c eiv e d b y s u ch B r o ker p ur su a nt t o t his Le as e; provided, h o wever, that the foreg o ing limitation on each Bro k er's liability shall n o t be applicable to any gross n e gligence or will f ul misc o n d uct of such Bro k er.

 

23. Notice s .

 

23.1 N otice R e q uirement s . All n ot ices r e qui r ed o r permi tt ed by t his Lease or applicable law shall be in writing and may be delive r ed in person (by ha n d o r by c ou ri e r) o r may be s ent by r e gula r , cer t if i ed o r r e gis t er e d mail o r U . S. P o s ta l Servi c e Ex p r e ss Mail, wi t h p o s ta ge p r epai d , o r by f a csimile t r a n s miss i o n, and s hall be d e e m ed s uffici e n t ly given if ser v ed in a ma n ner s p e cified i n t his Paragr ap h 23. T he add r e s s e s n ot ed adj a c e nt t o a Party's signa t u r e on this Lea s e s h all be that P a rty's ad dress for delivery or mailing of n o tices. Either Party m ay by written n o t i ce to the other specify a dif f e r ent a dd r e s s f o r n ot ic e , ex c ept t hat u p o n Le s s e e's t aki n g po ss e ssi o n o f t he Prem i s e s, t he Pr e mis e s shall c on s t i t u t e Le s s e e's a d d re s s f o r n ot ice. A c o py o f all n ot i c es t o Le s sor sha l l be con c ur r ent l y t ransmi tt ed t o su c h par t y o r par t i e s at su c h a d d r e s s e s as L e ss o r may fr o m t ime t o t ime he reaf t er d e si g na t e i n w ri t ing.

 

23.2 Date of N otice . Any n ot ice s e nt by regis t er e d o r cer t ified mail, r et urn r e ce i pt re q u e s t e d , shall be d e e med gi v en o n th e da t e o f delivery s h o w n o n the receipt card, or if no delivery date is shown, the p o s t mark th e r e on. I f sent by r e gular mail the n o tice shall be d ee med given 48 h o urs af t er th e sa m e is add r e s s e d as r eq uir e d h ere i n a n d mailed wi t h p o s ta ge pr e pai d . N ot ices delive r ed by U ni t ed S t a t es E x p r ess Mail o r o vern i ght c o u r ier that g uaran t ee next d a y de liv ery s h al l b e d ee m ed gi v en 2 4 ho urs a f t er de liv ery o f t he s am e to the P o s t al S ervice o r c o urier. Notic e s transmitted by fa c simile tra n smi s sion or similar m e an s sh al l b e d e e m ed d e liv er e d up o n t e le ph on e c o nf irmati o n o f r e c e i p t ( confi r mation r e port fr o m fax machine is suffic i ent), prov i d ed a c o py is also d eliver e d via deliv e ry or mail. If n o tice i s recei v ed o n a S a turda y , Sunday or legal h o lida y , it shall be d e e m ed received on t he next b u sin e ss day.

 

24. Waivers. No w a i ver by Lessor of t he De f ault or Breach of any t erm, c o v e n a nt or cond i tion he r eof b y L e s s e e, shall b e d ee med a waiver of any other t erm, c o v e nant o r c o ndi t i o n h e r e o f, o r o f any s u b s eq u e nt Def a ult o r B r ea c h by Le s s e e o f t he s a me o r o f a ny ot her t er m , c o ven a nt or co n dition h ereo f . L essor ' s c o n s ent to, or approval of, any act shall n o t be d e e m ed to ren d e r u n n e c ess a ry th e o b tai n i ng o f L e s s o r's c on s e nt to , o r a ppr ova l o f, a ny s u b s e q u ent o r sim ila r a ct by Le s s e e, or be co n stru e d as the bas i s of an estop p el to enfor c e t h e p rovision or provisio n s of this L ea s e re quiri n g s u c h c o n s en t . T he a c c ep t a n ce o f R ent by L e s s o r shall n o t be a wa i ver o f any D efau l t o r Breach b y L e ss e e. A ny pa y m e nt by L e s s ee may be ac c ep t ed by Le s s o r o n acc o unt o f m o neys o r d a mag e s d ue L e s s or , n ot w it hs tan d in g a ny qu ali fyi n g s tat em e n t s o r c o nd itio ns ma d e by L e ss ee i n c on n e c tio n t he r ew ith , w h i ch s u c h s tate m e n t s a nd/ o r c o n d itio ns s h al l b e o f no for ce or eff e ct w ha t s o e v er unl e ss s p ecifically agr e ed t o in wri t i n g by L e ss o r at o r bef or e t he t ime o f d e p o sit o f s u ch p a ym e n t .

 

25. Disclosures Re g ar d ing The Na tu re of a Real E st a te A g ency Re l at i onshi p .

 

(a) W hen entering into a dis c u s sion with a real estate agent regarding a real estate trans a c t ion, a L e ss o r or Lessee shou l d fr o m the outset u n derst a nd what t y pe of age n cy relationship or rep r e s entation it has with th e a g e nt o r a g e n t s i n th e tra ns a c tio n. L e s s o r a nd L e s s ee a c k n o w l e d ge b e in g a dvised by th e B r o ke r s in this transac t ion, as follows:

 

(i) Le s sor's A g en t . A Lessor's a gent un d er a listing a gree m ent w ith the L e ss o r acts a s the agent for the Lessor only. A L e ss o r's a gent o r subagent h a s the following affirmative obligations: To the L e ssor: A fi d uciary d u t y o f u t m o st car e , in te gr i t y, h o n e s t y, a nd l o yalty in dealings w ith the Le s s o r. To t he L e s s ee a nd t he L e s s o r: a . D ilig ent ex er cise o f r e a s ona b l e sk ill s a nd ca r e i n pe rfo r man ce o f th e a g e n t' s du tie s. b . A du t y o f h o n e st an d fa i r de alin g a nd g oo d f a it h. c . A d u t y t o discl os e al l fa c t s k n ow n t o the a gent materially af f ec t i ng the value or desirability of t h e pr operty t hat a r e not known to, or within the diligent atten t ion and o bservation o f, the P a rti e s. An agent is n o t obl i gated to re v eal t o either Party any c onf i d e ntial information o btained f r o m t h e o ther Party w hich d o es n o t inv o lve t he affi r mative d uties s et f o rth a b o v e .

 

(ii) Les se e's A g e n t . An agent can a gree to act as agent for the L e s s ee o nly. In these situations, the agent is not the L e ssor ' s a gent, e v en if by agr e e m ent t h e a g ent may r e c eive co mp e nsati o n f o r s ervi c es r e n d e r e d, either in full o r in part fr o m t h e L e s so r. An a ge nt acti n g only for a L e s se e h a s the following affir m ative obligation s . To t he L e s s e e : A fiduci a ry du t y o f ut m o st ca r e, i n t e gr i t y, h on es t y, a n d l o yal t y in deali n gs wi t h t he L es s e e . To the Le s s e e a n d th e Le ss o r: a . Diligent exercise of reason a ble skills a nd care in p e rform a n c e o f t he age n t' s d u tie s. b . A d u ty of h o n e st and f air dealing a nd good faith. c. A duty to disclose all f ac t s kn o wn to the agent materially a ffecting the value or d e sirability of the property that a re not known to, o r with i n the diligent atten t ion and observati o n of, the Parties. An agent is n o t obligated to reveal to either Party any c o nfidential i n formation obtained from the o ther Party w hich d o es n o t inv o lve t he affi r mative d uties s et f o rth a b o v e .

 

(iii) A g ent R ep r e s en t i n g B ot h L e ss o r and Le s s e e. A real estate a gent, either a cting directly or through one or more a ss o ci at e lice n s e s, c a n legally be the agent of b o th the L e ssor and the L e s s ee in a tra n s a ction, but only with the knowled g e and c o n s ent of b o th the L e s s o r a n d t he Le ss e e. I n a dual a g ency situa t ion, the a g ent h a s the follo w ing affirmative obligations to b o th t he Less o r and th e L e s s ee: a. A fiduciary d u t y o f u t m o st care, i nt egri t y,

h o n e s t y and l o yal t y in t he dealin g s wi t h ei t her L e s s o r o r t he Les se e. b. O t her d u t ies t o t he Le s s o r and th e Les s ee as s t a te d a b o ve in su b par a gr a phs (i) o r (ii). In representing both L e ssor a nd Lessee, the agent may not w i t h o ut t he e x pr e ss pe rm i ssi o n o f t he r e s p e c tiv e Pa rty , d i scl o s e to the other P a rty that the Less o r will accept rent in an a mount less than t hat indicated in the listing or that the Les s ee is willing to pay a higher r ent t h a n t h a t offer e d . The above duties of the agent in a real estate transac t ion do n o t r e li e v e a L ess o r o r Le s s ee fro m t he r e s p on sib ilit y t o pr ot ect t h e ir o w n in t er e s t s. L e ss o r a nd Lessee sh o uld carefully re a d all agree m ents to assure that they ad e q u a t ely exp r ess th e i r un d e r s t and i ng o f t he t ransac t i on . A r e al estate agent is a pe r son qualified to advise about r eal estate. I f l e gal or t ax advi c e is d esi re d, c o n s ult a com p etent prof e ssional.

 

(b) Brokers ha v e no respons i bility with res p ect to any def a ult or breach hereof by either Party. The liability ( includ i ng c o urt c o s t s and a tto rne y s' fe e s), o f any Broker with res p ect to any breach of duty, error or omission r e lati ng t o t h i s Le as e s h al l n o t exce e d th e f ee r e c e ive d by s u c h Br ok er p u r su ant t o t his Lease; provided, h o wever, that the foreg o ing limitation on each Bro k er's liability shall n o t be applicable to any gross n e gligence or will f ul misc o n d uct of such Bro k er.

 

(c) L e s sor a n d L e s s e e ag r ee to iden t ify to Brokers a s ' C onfi d en t ial' any communication or information gi v en Broke r s that is c o n si d e r ed by s u c h Par t y t o be c o nfi d en t ial.

 

26. No Ri g ht To H old over. Le s s e e h a s no right t o re t ain p o s s e s si o n o f t he Pr e mis e s o r a n y part there o f bey o nd the expiration or termination of this Le a s e. I n t he e v ent t hat Le s s e e h o lds ov er, th en th e B as e R e nt shall b e inc r ea s ed t o 150% o f t he B a se R ent a p plicable i m media t ely pr e c e d i ng t h e e x piration or t ermina t i o n. N ot h i ng c o n t ain e d he r e i n s hall be c on s t r u ed a s c on s e nt by L ess o r t o a ny h o ld i ng ov er by L e s s e e .

 

27. Cumu l at i ve R e m e d ies. No rem e dy or election h e r e u n d er s hall be d ee med exc l usive but shall, wh ere v er p ossibl e , be c u mul a tive with all other re m edi e s at law or in equit y .

 

28. Cove n ants and C on d itio n s; Co n s t ru c tion of A g re e ment. Al l pr ovi s i o ns o f t h i s L e as e t o be o b s e rv ed o r p e rform ed by L e s se e ar e b ot h c ov en a n t s a nd c o nd itio n s . I n c on s tr ui n g t h i s L e as e, al l he a d in gs a nd titl es are f o r t he co nven i e n ce o f th e Par t ies o nly a nd shall n o t be c on s ide r ed a part o f t his Le a s e . W h e n e ve r re q uir e d by th e co n t ex t , t he sin g u l ar shall incl ud e th e plural a nd vi c e vers a . T his L ea s e shall n o t be c o n st rued a s if p r epa r ed by o ne of the Parties, but rather accord i ng to its fa i r me a ni n g as a wh ole, as if both Par t ies h a d p r e pa r ed i t.

 

29. Binding Effect; Choice of Law. Th is Lea s e s hall be bind i ng up o n t he Par t ies, t heir pe rso nal re p re se n t a t ives, s u c c e s s o rs an d ass i g n s a n d b e g o ve r n e d by the la w s of the State in w hich the Premises are located. Any litigation be t w e en t h e Pa r ties he r eto con c e r ning this L ea s e s h a ll be initiated in t he c o unty in wh i c h t he P r emi s es are l o ca t ed.

 

30. Subordinatio n ; A ttor n men t ; Non - Disturbance.

 

30.1 Subordination. T his Le a se an d any Op t i o n g ra nt ed h e r e by s hall be s u b j ect and s ubo rdina t e t o any g ro und le a s e , m o r tg age, d e ed o f t rus t , o r ot h e r hyp o thecation or security device (collec t ively, "Se c urity Device" ) , n o w or hereafter placed upon the Premise s , to any and all a dvan c es m a de o n th e s e curi t y t he r e o f, and to all renew a ls, modifications, and extensions t h ereo f . L e s s ee a grees that the holders of a ny such S ecurity Devices (in th i s L e as e to g et her r e ferre d t o as "Le n der") shall h a ve no liability or obligation to perform any of the obligations of Les s or un d er this Lease. Any Lender m a y e l ect to have this Lease and/or any Option gr a nted h e reby s u p e rior to t he lien of its Sec u rity Device by giv i ng written n o tice the r e o f to Lessee, w h ereup o n this Lease a nd s u c h O p tio ns s ha l l be d e emed prior to such S ecurity Device, n o twithstanding the rel a tive dates of t he documen t ation or rec o rdation the r e of .

 

30.2 Attor n men t . I n t he e v ent t h a t Less o r t ra n s f ers t i t le t o t he Prem i s es, o r th e P r emi se s are a c qui r ed by an ot her up o n t he f o recl os ure o r t e r mination o f a Securi t y D evice t o whi c h t his L ea s e is s u b o rd i na t ed (i) L es se e shal l , s u b j ect t o t he no n-dis tu rb a n c e p ro visi o ns o f Parag r a ph 30.3, a tto rn t o su c h n e w ow n er , and upon request, enter into a n e w lease, c o n t ain i ng a ll of the terms a nd provisions of this Lease, with s u ch new own e r for the r emai n der of the t e rm h e reof, or, a t t he e l ec t i o n o f su ch n e w ow n e r, t h i s Le a se s h all au to ma t ically bec o me a n e w L ea s e b e tw e e n L es s ee a n d s u c h n ew o w n e r , u p o n all of the terms and c o nditions hereof, for the remainder of the term h e reo f , and (ii) Lessor shall the r eafter be r e li e v e d of any f u rth e r o bli g a t i o ns h e r e u n der and s u ch n e w ow ner shall a s s u me all of Less o r ' s obligations hereu n d e r, e x cept that such n e w owner shall n o t: (a) be liable for any act or omission of any prior le s s o r or with respect to events occurring pri o r t o acqu i si t i o n o f o w n e r shi p ; ( b ) be s u b j ect t o a n y o ffse t s o r de f e n ses w hich L e s s ee might h a ve a gain s t any pri o r l e ss o r, (c) b e b o u n d by p repa y m e nt of mo r e than one m o nth's rent, or (d) be liable for the return of any security dep o sit paid to any pr i or lessor.

 

30.3 Non-D i stu r bance. With respect to Security Devices en t ered into by L e ss o r a fter t he execu t ion of this Le a se, L e s s ee ' s s u b o rdination of this Le a se shall be sub j ect to receiving a c o m m ercially re a son a ble n o n - dis t u r bance agree m ent (a " N o n-Disturbance Ag reement " ) fr o m t he L e n der w h i ch No n-Dist u rb an c e Agr e e m ent pr o v i d es t hat L e s s ee ' s po ss e ssi o n o f t he P remi s e s , a n d t his Lea s e, i n cl u ding a ny o p t i o ns t o ex t e n d t he t e r m h e r e o f, w il l n o t be d i s t ur b ed so lo ng a s Lessee is n o t in Breach hereof a nd attorns to the record owner of the Prem i ses. Further, within 60 days a fter the e x e c u t ion of this Lease, Less o r shall use its c o mmercially reasonable effor t s to obtain a Non-Dis t urb a n c e Agree m e nt fr o m t he h o l d er o f any pre - exis t i n g Se c uri t y Devi c e whi c h is s e c u r e d by t he P r emi s e s . I n t he e v ent t hat L e s s o r is u nable t o p r o vide th e N o n - Dis t urb a n c e A g r e e m ent wi t h i n said 60 days, t h e n L es se e may, at L e s s e e ' s o p t i on, di r ectly contact L e n d er an d a tt empt t o n e g ot ia t e f o r t he ex e cu t i o n a n d d elivery o f a N o n-Dis tu rb a n c e Agr e e m en t .

 

30.4 Self-Executin g . The a gr e e me n t s c o n t ai n ed i n t his Par a gr a ph 30 shall b e ef f ec t ive wi t h o ut t he e x e cut i o n o f any fur the r d o c u m e n t s; pr o vide d , h o w ev e r , t h at , upo n wr itte n req u e st fro m L e s s o r o r a Le n d e r i n c on n e c tio n wi t h a s a l e , fi n anci n g o r r efin a n c ing o f th e P r em i s e s , L e s s e e a nd L es s o r s ha l l ex e cu t e such f urther writings a s may be re as onably required to s e parately doc um ent any subordin a tion, attornment and/or N o n-Dis t urban c e Ag re em e nt p rovided for h ere i n.

 

31. Attorn e ys' Fe e s. If any P a rty or Broker brings a n ac t ion or proce e ding involvi n g t h e P re mis e s w he t her f ou n d ed i n t o rt, c o nt r act o r e quity, o r to decl are rights hereu n d e r, the Prevailing P a rty (as hereaf t er d e fined) in a ny s u c h pr oc e e di n g, a c tio n, o r ap pe a l t he reo n, s h al l b e en ti t l e d to re a s o n a ble a t t o rneys' f e e s . S u ch fe e s may b e awa r d e d in t he s a me s uit o r rec o ve r ed i n a s e para t e s ui t , whe t her o r n o t su c h ac t i o n o r pr oc e e ding is p u r s u ed t o d e cisi o n o r j u dg m en t . T he t e rm, "Prevailing Party" shall inc l u d e, without limitation, a Party or Broker w ho substan t ially obtai n s o r d e f e at s t he r e li ef s o u g h t , as t he ca s e may b e, w h e th er by comprom i se, settlement, j u d g ment, or the a bandon m ent by the other Party or Bro k er of its claim or defen s e. T he attorne y s' f ees a w a rd s h al l no t be c o m p u te d i n acc o rd a nce with a ny c o urt fee s c h e dule, but shall be such as to fully reimburse all att o rne y s' fees reas o nably incurre d . In ad d ition, Lessor shall be entitled to attorneys' f e e s, c o sts and ex pe n s es inc u rr e d in the p r eparation a nd s e r vice of notices of Def a ult and c o n su ltations in conn e c t i o n t her e wi t h, w h e t h e r o r n o t a le g al action is subsequently c om menced in c o nnection w i th s u ch D e fault or resulting Bre a ch ($200 is a re a sonable mini m um per occurre n c e f o r s u ch serv i c e s a n d c o n s ul t a t i o n).

 

32. Lessor's Acces s ; Showing Pr e m i ses; Re p airs. L es s o r a n d L e s s o r's a g e n t s s ha l l ha v e t he right t o e n t er t he Pr e m i s e s a t an y ti me, i n t he c a se o f an emer g ency, a nd o t he r wise at r eas o nable ti m es after reas o nable prior n otice for the p ur po se o f sh o w i ng t h e sa m e t o pr o s pe c tiv e p u r c ha s er s , l e n de r s, o r te nant s, and maki n g s u c h alterati o ns, r e pairs, i m pr ov em e nts o r a d diti o ns to the Pr e mis e s a s L ess o r may d e em n e c e ssa r y o r d e sirable a n d t h e e rec tin g, us i ng a n d mai n tai n in g o f u tiliti es, s e rvic es, pi p es a nd c o n d ui t s t h rou gh th e Premises a nd/or other p r emises a s long a s the r e is no mater i al adver s e eff e ct t o Les s ee ' s u se o f the Premise s . All su c h activities shall be w ithout aba t ement of rent or li a bility to Less e e.

 

33. Auctions. L e s s ee sh al l n o t c o n d uc t , n o r p e rmi t t o b e co nd u c t e d , a ny a u ctio n up o n t he P remi s e s w i t h o ut L e s s or' s pr io r w r itt en c o n s en t . L e ss o r s hall n o t be obliga t ed to e x ercise a ny st a ndard of re a son a bleness in de t ermin i ng w h ether to p e rmit an auction.

 

34. Signs. L e ss o r m a y pla c e o n t he P r emi s es or dinary ' F o r Sale' sig n s at any time a n d or dinary ' F o r L ea s e' sig n s dur i ng t he last 6 m o nt h s of the term he r e o f. E x c e pt f o r o rdinary 'f o r s ub l e ase' s i g n s, L es s ee shall n o t place an y sign u p o n th e P r emi s es wi t h o ut L e ss o r's pri o r writt e n con se nt. All sig n s m u st comply wi t h all Applicable Require m en t s.

 

35. Terminat i on; M e rger. Unless spec i fically s t ated oth e r w ise in w riting by Lessor, the volun t ary or other surre n d e r of this Le a se by Lessee, the mutu a l termination or c a n c ellation hereof, or a t e rmination hereof by Lessor for Bre a ch by Lessee, shall autom a tically terminate any s ub l ea s e o r les s er es t a t e i n t h e Prem i s e s; pr o vi de d, h o we v er, t hat Le s s o r may el e ct t o c o n t inue any o ne or all existing sub t en a nc i es. Lessor's failure within 10 days following any s u ch e ve nt to elect to the c o n t rary by written n o t ice to the h o lder of any s u ch les s er interes t , shall c o nstitute Less o r's election to have s uch event constitu t e the termination of su c h in t er e s t .

 

36. Conse n ts. E x c e pt as otherwise pr o vided herein, wherever in this Le as e the c o nsent of a Party is required to an act by or for the other P a r ty, su c h c o n s ent shall n o t be u n re a sonably w ithheld or dela ye d. Lessor's actual reas o nable c o s t s a nd expenses ( i ncluding but n o t limited t o ar c hi t ec t s ' , a t to rneys ' , e n gin e e r s' and ot h e r c o n s ul t an t s' f e es) i n cu r r e d in t he c o nsi d era t i o n o f, o r resp o n s e to , a requ e st by L es s ee f o r a ny L e s so r c o ns e n t , inc l ud i ng but not limited to consen t s to an assi g n m en t , a su ble tt ing o r t he p r e s en c e o r u s e o f a Hazard o us S u bst anc e , s hall b e p a id by Le s s e e up o n r ece i pt o f an i n v o ice a n d su pp o r t ing d o c u m e n t a t i o n the r efor. L e ssor ' s con s ent to a ny ac t , assignment or subletting shall not constitute a n a ckn o wledgment that no Def a ult or Bre a c h by L e s s e e of th i s L ea s e exist s , nor shall s u c h c on s e nt be d e e m ed a wa i ver o f any t h e n e xis t ing D efault o r Bre a ch, e x c e pt as may b e ot he r wi s e s p ecifically s t a t ed in writing by Lessor at the ti m e o f such c o n s ent. The failure to specify herein a ny particular c o n d itio n t o Le ss or' s c on s e nt s h al l n o t prec l u d e th e im p o si tio n by L es s o r at t he t i m e o f c o n s ent o f s u ch furt h er or ot h er c o nditions a s are t h en r e as o nab l e wi t h re f e r ence to the particular ma tt er f o r wh i ch c o n s ent is be i ng giv e n. I n t he e ve nt t hat ei t her Par t y d i sag r e e s wi t h a n y d e t e r mi n a t i o n made by t he ot her h e r e u n der and re a s o nably r e q u ests t he re a so n s for s u c h de term i n atio n, th e d e t e rmi n i ng party s h all furn i sh its re a sons i n writing a nd i n reasonable detail with i n 10 business da y s following such req u est.

 

37. G uarantor.

 

37.1 Executio n . The G uaranto r s, i f any, s hall ea c h execute a g uar an ty in the fo r m m ost re c ently pu b lis h ed by t h e A m e r ican In d u strial R e al Est ate Ass o ciati o n, a nd e ach s u ch G uar a nt o r shall h ave t h e s a me o bligati o ns as Le s s e e u n d er t his Lea s e.

 

37.2 Default . It shall constitute a Default of the L e s s ee if any Guar a ntor f a ils or refuses, upon req u est to p r ovide: (a) ev i dence of the e x e c u tio n o f t he guar a n t y, i ncl u di n g t he au t h o ri t y o f t he par t y s i gni n g o n Gu a ran t o r's b ehalf to obligate Guaranto r , a n d in t he ca s e o f a c or p o r ate Guarantor, a c e rtified c o py o f a res o lu t i o n o f i t s bo ard o f di r ec to rs a u t h o rizing t he m a king o f s u ch gu a r a n t y, ( b) c ur re nt fina n cial s t a t e m en t s, ( c) a n E s to p p el C ertificate, or ( d) written confirmat i on that the guar a nty is s t ill in effec t .

 

38. Quiet P oss e ssi o n. Sub j ect t o payment by L es se e o f t he Rent a n d per fo rman c e o f all o f the c o v e n a n t s, c on di t i o ns and pr o vis i o ns o n Le s s e e's p art t o b e o bse r v e d a n d p er fo rmed u n d er t his Lea s e, L e s s ee sha l l have quiet p o s s ession a nd quiet e n j o yment of the Premises during the term h e re o f.

 

39. Options. If L e s s e e is g rant e d a n O p tion, as d efi n ed b e low, then the following provisions shall apply:

 

39.1 Definition . " Op t ion" shall me a n: (a) t he r i ght to extend the term of or r e n ew t h i s L e as e o r t o ex te nd o r r e ne w a ny l e as e t h a t L es s ee h a s o n ot h e r property of Lessor; (b) the right of f irst refusal or first offer t o lease ei t her th e P r emi s es o r ot her pr op er t y o f Less or ; (c) the right to purch a se or the right of first refusal to p u rchase the P r emises or other property of Lessor.

 

39.2 O p tions Pe r sonal To Ori g in a l Lessee . Any Option granted to Less e e in this Lease is pers o nal to the original Les s ee, a nd c a nnot be ass i g n ed or exe r cised by any o ne other th a n said original Les s ee a nd only while t he original Les s ee is i n full p o ssession o f the Prem i ses a n d, if r e q u e s t ed by Le s s o r, wi t h L es s e e cer t ifyi n g t hat L e s s e e h a s no in t en t i o n o f t he r eaf t er a s signi n g o r s u ble tt ing. 

 

39.3 Mu l tiple Option s . I n t he e v e n t t h a t L e s s ee has a ny m u lti p l e O p tio ns t o ex t e n d o r re n e w t h i s L e as e, a lat er O p tio n ca n n o t be ex er ci s ed u n l ess t h e prior Options ha v e b e en validly exercis e d.

 

39.4 Effect of Default on O p t i on s .

 

(a) Lessee shall have no right to exercise an Option: (i) during the per i od commenc i ng with the giving of any notice of Def a ult and continui n g until said Def a ult is c u r ed, ( i i) dur i ng t he p e riod of time a ny R e nt is u n pa i d ( w i t h ou t rega r d t o w h e t h e r n ot ice t he r e o f is given L e s s e e ), (iii) d u ring the time Les s ee is in Brea c h o f t h i s L e as e, o r (i v) i n th e e v e nt tha t Le s s e e has b ee n gi v en 3 or more n o tices of sep a r a te D e fault, w h ether or n o t the Def a u l t s are c u r ed, du ring t he 12 m o n t h peri o d i m m e dia t e l y pr e c e di n g th e e x erci s e o f th e O p t i o n.

 

(b) T he period of time with i n which an O ption m a y be e x ercised shall not be exten d ed or enlarged by re as on of Lessee's in a bili t y t o exe r cise a n O p t i o n because of the provisions of Par a gr a ph 39.4( a ).

 

(c) An O p t i o n sha l l t ermina t e a n d be o f no fur t her f o r c e o r eff e c t , n ot wi t hs t a n di n g L e s s ee ' s d u e a n d t imely exe r ci s e o f t he O p t i o n, if, af t er s u ch exe r c i s e and prior to the c o mmen c ement of the exten d ed term or c o mpletion of the p u r c ha s e, (i) Les se e fails to pay Rent for a p e riod of 30 days after su c h R e nt b e co m es d u e ( wi t h o ut any n e ce s si t y o f L e ss o r t o give n ot ice th ere o f ) , or (ii) if Le ss e e c o mmits a Br ea c h of this L ea s e.

 

40. Multiple Buildi n gs. If the Premises are a part of a group of buildings c o n t rolled by L esso r , L e s s e e a g r e e s t h a t i t w il l abi de b y an d conf or m t o a l l reas o nable ru l es and r e gulations w hich L e ssor may make f rom time t o time for the management, sa f ety, and care of s a id properti e s, i n c l udi n g th e c a re an d cleanli n e s s o f t he gr ou n d s a nd i ncl u ding the p a rkin g , l o ading a n d unl o a d ing o f ve hicle s , an d to c a u s e its e mp l o yees, s u p plie r s, shi p pe r s, c us to m e rs, c o n t r a c to rs an d invi t ees t o so a bi d e a n d c o nf o rm. L e ss e e also a gr e es t o pay i t s fair s ha r e o f c o mm o n e xpe n s es i n c u rr e d in co nn e c t i o n wi t h s uc h ru l es a nd r e gul a tions.

 

41. Security Mea s ures. Le s s e e h er e by acknow l e d g e s th a t the Rent pa y able to Lessor h e r e u nd er do e s not incl ud e the cost of g u a r d se r vice or other se c u r ity measu r e s , a nd t h at Lessor shall h a ve no obligation whats o ever to pr o vide sa m e. Les s ee assu m es all res p onsibility for the prote c t i o n o f th e Pr emi s es, L e s s e e, i t s agents and invitees and their prope r ty from the a cts of third p a rties.

 

42. Reserv a tio n s. Less o r reserves to itself the r i ght, fr o m time to time, to grant, without the c o n s ent or j o i nder of L e s s e e , such easemen t s, r i gh t s a nd d e dica t i o ns t hat L ess o r d e e m s n e ce ssar y , a n d t o ca us e t he r e c o rda t i o n o f par c el ma p s a n d r e s t ric t i o ns, so l o ng as s u ch e a s e ments, ri g h ts , d e di ca tio ns, m a ps a n d restrictions do not un r eas o nably i n terfe r e with t h e u s e of t h e P r emi s es by L e s s e e. L e ss e e a gr e es to sign a ny doc u m e n t s re a son a b ly r e qu es te d by L ess o r t o eff e c t ua t e a ny s uc h e a s e m e nt righ t s , d edica t i o n, map o r res t ric t i on s.

 

43. Performance U n der Protest. If at any time a dis p ute shall ari s e as t o any amount or sum of mon e y to be paid by one P a rty to the other under the provisions hereof, the Party aga i nst whom the obligation to pay the money is asserted shall have the r i ght to make pa y ment 'un d er pr ote s t ' and su c h pa y m e nt sh a ll not be regarded a s a voluntary pa y ment and the r e shall survi v e the r i ght on t he part of said Party to institute suit for recov e r y o f s u c h su m . I f i t shall b e a d j u d g e d that the r e w a s no legal obligation o n the p a rt of said Party to pay such sum or any part there of , said Party shall be entitled t o rec ov er s u ch s um o r so m u ch t h e re o f as it was not legal l y required to pa y .

 

44. Authori t y; Mu l t ip le Partie s ; Exe c ution.

 

(a) If either Party hereto is a c o rporation, trust, limited li a bility company, partnership, or similar entity, each individual executing this Le a se on b e half o f su c h en tit y r e pres en t s an d wa rra n t s t h a t h e o r s he i s du l y a u t h o riz e d t o e x e c u t e a nd d eliver t h i s L ea s e o n i t s b ehal f . Ea c h p a r ty shall, within 30 days after req u es t , deliver to t h e o th e r party satisf a ct or y evi d e n ce o f s u ch auth o rity.

 

(b) I f t his Lea s e is exe c u t ed by m or e t han o ne pe r s o n o r en t i t y as 'Les s ee ' , ea c h s u ch p e r s o n o r en t i t y shall be j o in t ly and s e verally liable hereu n der. It is agr e ed t hat any o ne o f t he nam e d Les s e e s s h all be emp o w e r e d t o execu t e a n y am e n dm ent t o t his Leas e , o r ot her d o c u m e nt ancil l ary thereto and b i nd all of the na m ed L e s s e e s , a nd L e s s o r may re l y o n t he sa m e as i f a l l o f t he n a m e d Le s s e es had e x e cut ed s u c h d o cu ment.

 

(c) This Lease m a y be e x e c uted by the Parties in counterparts, each of which shall be d e emed an original and all of which t oge t her shall constitute one and th e s ame ins t ru m en t .

 

45. Conflict . Any c o nflict between the printed provisions of this Lease and typewritten o r h a n d written pr o visi o ns s hall be c o ntr o lled by the typ e w r itten or ha n d w ritten p r o vi s i o ns.

 

46. Offer . Preparation of this L e ase by either Party or their a gent and s u bmi ssi o n o f s am e t o t he oth er Pa rt y sh al l n o t be d e em ed a n of f er t o le a se t o t he other Part y . This Lease is n o t intended to be b i nding until exe c u t ed and delive r ed by all P a rties hereto.

 

47. Amendme n ts . T his Le a se may be modified only in writing, s i g n ed by the Parties in interest at the time of the modificati o n. As long as th e y do not materially ch a nge Lessee's obligati o ns hereunder, L e ssee agrees to make s u ch re a sonab l e n o n-m o netary modifications to this Lea s e as m a y b e reas o nably r e q uired by a L e n der i n c o n n e c tio n wi t h th e o b tai n i ng o f n o rm a l financ i ng o r ref i na nc in g o f th e P re m i s e s.

 

48. Waiver of Jury Trial. T H E P A R T IES H E R E BY W A I V E T H E I R R E S PECTI V E R I G H T S TO T R IAL BY JU R Y IN A N Y A CTION O R P R OCEEDI N G INVOLVING T H E PR O PERTY O R A R IS I N G OUT OF T H IS AG R E E M EN T.

 

49. Mediati o n and Ar b itration of D is p utes. T he Parties agree to mediate all d i s p utes betwe e n t he Parties a nd/orBroke r s arising out of this Le a se.

 

50. Americans w ith Disabiliti e s Ac t. Sin c e co m plian c e with t he A m e ricans with Disabi l ities Act (ADA) is d e p e n d ent upon L es s e e 's s p ecific u s e of the P r emi s es, Lessor ma k es no w arr a n t y or rep r esentation as to whe t her or n o t the Prem i ses co m ply with ADA or a ny similar legislation. In the e v e nt t h a t Le s s e e's u s e o f the Prem i s e s r e qui r es m o difica t i o ns o r addi t i o ns t o t he P remi s es i n o r d er t o be in A DA c omp liance, L e s s ee a g r e e s t o make a ny su c h n e c e s sary m odifications a n d/or a ddi tio ns a t L e s s e e's ex p e n s e.

 

 

 
 

LESSOR AND L E SSEE HAVE C AR EFULLY READ A ND R E VIEWED THIS LEASE A N D EACH TE R M A ND P R O V I S ION CONTA I NED H E RE I N, AND BY T HE E X ECUTI O N OF THIS LEASE SH O W THEIR I NFORMED AND V OL U NTA R Y C O NS EN T THE R ETO. THE PA R TIES H E R E BY AG R EE THAT, AT THE TIME THIS LEASE IS E X EC U T ED, T H E TERMS OF T H IS LEASE A R E C O MMERC I ALLY R E AS O N A B LE A N D E F FEC T UATE T H E I N T E N T A N D PURPO S E OF LESSOR AN D LESSEE WITH RESPECT TO T H E P R E MISES.

 

ATTE N T ION: N O R E P R ESE N TAT I ON O R R E CO MM E N DATI O N IS M ADE BY BY A N Y B R O K E R AS TO T H E LEGAL SU F FICI E N CY, LEG A L EFFECT, O R T AX CO N SEQU E N CES OF T H IS LEASE OR T H E T R A N S A CTION TO W H IC H IT R E LATES. T H E P A R T IES A R E U R GED TO:

1. SEEK ADVICE OF CO U N SEL AS TO T H E LEGAL A N D TAX C O N SE Q UE N CES O F T H IS LEASE.

2. RETA I N A PP R O P RIATE C O N SULTANTS TO R EVIEW A ND IN VESTI G A T E THE CONDITI O N O F THE PR E MIS E S. SAID INVES T IGATION S H O U LD I N CLUDE BUT NOT BE L I MITED TO: T H E POSSIBLE P R ES E N CE O F H AZ A R DOUS S UBSTA N CE S , THE ZO N I N G OF T H E P R E MISES, T H E ST R U CTU R AL INTEGRITY, T HE CONDITI O N O F THE R O OF A ND OPE R AT I N G SY S TEMS, A N D T H E SUITABILITY OF T H E P R EMISES FOR LESSEE'S I N TE N DED USE.

 

WARN I N G' IF T H E P R E MISES IS LOCATED IN A STATE OTHER T H A N CAL I F O RN I A, CERTA I N PR O V ISI O NS OF T H E LEASE MAY N E ED TO BE R E VI S ED TO COMPLY WI T H T H E L A WS OF T H E STATE IN W H I C H T H E P R EMISES IS LOCAT E D.

 

The p a r t ies he r e t o have e x e c u t ed t his Le a se at t he pla c e a n d o n th e da te s s p ecifi e d a b o ve t heir r e s p e c t ive s i g na t u r es.

 

Executed at: ___________________________ Executed at: ___________________________
on: ___________________________________ on: ___________________________________
   
For LESSOR By LESSEE:
   
Lessor: ARIZONA DP CONSULTING LLC Lessee: ITEM 9 LABS CORP.
By: ___________________________________ By: ___________________________________
Name Printed: SARA GULLICKSON Name Printed: BRYCE SKALLA
Title: MEMBER Title: CHIEF EXECUTIVE OFFICER
Telephone: ______________________________ By: ____________________________________
Facsimile: _______________________________ Name Printed: ___________________________
Email address: ___________________________ Title: __________________________________
Address: ________________________________ Telephone: _____________________________
Facsimile: ______________________________
  Email address: __________________________
  Address: _______________________________
 

Exhibit 10.6

 

LOAN AND Revenue PARTICIPATION AGREEMENT

 

This Loan and Revenue Participation Purchase Agreement (the " Agreement ") is made as of September___, 2018 (the " Effective Date ") by and among Item 9 Labs Corp. , a Delaware corporation (the " Item 9 Labs "), BSSD Group, LLC, an Arizona limited liability company (“ Arizona Subsidiary ”), Item 9 Properties, LLC, a Nevada limited liability company (“ Nevada Subsidiary ”), and Viridis Group I9 Capital, LLC, an Arizona limited lability company (hereinafter the " Purchaser "). Item 9 Labs, the Arizona subsidiary, and the Nevada subsidiary are defined herein collectively as the “ Company ”.

 

Recital

 

WHEREAS, The C omp a n y a nd Purchase r a r e e x ec uting a n d d e liv er i n g this Ag re e m e nt in re li a n c e upon the e x e mption fr om s ec u r iti e s re g is t ra tion aff o r d e d b y the r u l e s a nd re g u l a tions a s p r omul g a t e d b y the Unit e d S t a t e s S ec u r iti e s a nd E x c h a n g e C ommission ( the S E C ) un d e r t h e S ec u r iti e s A c t of 1933, a s a m e nd e d ( the 1933 A c t ”) ;

 

WHEREAS, Item 9 Labs owns 100% of the membership interests in each of the Arizona subsidiary and the Nevada subsidiary;

 

WHEREAS, To provide the Company with additional resources to conduct its business and specifically to expand and construct additional improvements (“ AZ Expansion ”) on and to certain real property as described in the AZ Deed of Trust (as defined below) (the “ AZ Facility ”) located in Coolidge, Arizona, Purchaser desires to lend the amount of $1,200,000 for the AZ Expansion, subject to the conditions specified herein;

 

WHEREAS, To provide the Company with additional resources to conduct its business and specifically to reimbursement costs of acquisition, and to expand and construct additional improvements (“ NV Expansion ”) on and to certain real property as described in the NV Deed of Trust (as defined below) (the “ NV Facility ”) located in Pahrump, Nevada, Purchaser desires to lend the amount of $1,500,000 for the NV Expansion, subject to the conditions specified herein;

 

WHEREAS, parcel consideration of funding loans for the AZ expansion and the NV expansion, the Company desires to provide Purchaser with a revenue participation, subject to the conditions specified herein.

 

Now, Therefore , in consideration of the foregoing, and the representations, warranties, covenants and conditions set forth below, the Company and Purchaser, intending to be legally bound, hereby agree as follows:

 

1. Amount and Terms of the Loans

1.1 The AZ Expansion Loan. Subject to the terms of this Agreement, the Purchaser agrees to lend to the Arizona Subsidiary at the AZ Loan Closing (as hereinafter defined), the sum of $1,200,000 for the AZ Expansion (the “ AZ Loan ”) and specifically the construction of a 10,000 square foot facility (the “ AZ Facility ”) located on the AZ Property. The AZ Loan will be evidenced by the following: (i) a promissory note by the Arizona Subsidiary in an amount up to $1,200,000, in the form attached hereto as Exhibit A (the “ AZ Note ”); (ii) a personal guaranty by Item 9 Labs of the AZ Note in the form attached hereto as Exhibit D (the “ AZ Guaranty ”); and (iii) a first priority Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing (“ AZ Deed of Trust ”) secured by the AZ Facility, in the form attached hereto as Exhibit C . At or prior to the AZ Loan Closing, Purchaser may file a UCC-1 financing statement as the Collateral, and Purchaser agrees that upon repayment of the principal and interest on the AZ Loan, the UCC-1 financing statement shall be terminated. Purchaser and the Company agree that there is no obligation of the Company to obtain a mortgagee’s policy of title insurance.

 

1.2 The NV Expansion Loan. Subject to the terms of this Agreement, the Purchaser agrees to lend to the Nevada Subsidiary at the NV Loan Closing (as hereinafter defined), the sum of $1,500,000 for the NV Expansion (the “ NV Loan ”) and specifically for reimbursement costs of acquisition, and to expand and construct additional improvements (the “ NV Facility ”) located on the NV Property. The NV Loan will be evidenced by the following: (i) a promissory note by the Nevada Subsidiary in the amount $1,500,000, in the form attached hereto as Exhibit D (the “ NV Note ”); (ii) personal guaranty by Item 9 Labs of the NV Note in the form attached hereto as Exhibit E (the “ NV Guaranty ”); and (iii) a first priority Deed of Trust, Assignment of Rents and Fixture Filing (“ NV Deed of Trust ”) secured by the NV Facility, in the form attached hereto as Exhibit F . At or prior to the NV Loan Closing, Purchaser may file a UCC-1 financing statement as the Collateral, and Purchaser agrees that upon repayment of the principal and interest on the NV Loan, the UCC-1 financing statement shall be terminated. Purchaser and the Company agree that there is no obligation of the Company to obtain a mortgagee’s policy of title insurance.

 

1.3 Revenue Participation . As additional consideration for the AZ Loan and the NV Loan, the Company grants to Purchaser the right to participate in the Gross Revenues generated from the operations of the AZ Facility and the NV Facility. For avoidance of doubt, the calculation of Gross Revenues will not be aggregated for both the Arizona Operations and the Nevada Operations, but will be calculated separately, and the applicable percentage of Gross Revenues will be applied separately, as set forth below. In addition to the defined terms above, the following terms will have the meanings set forth below:

 

Arizona Operations ” means the commencement of operations at the AZ Facility.

 

Change in Control ” means the occurrence of any of the following events: (i) a change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“ Person ”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than fifty one percent (51%) of the total voting power of the stock of the Company; provided, however, that for purposes of this definition, the acquisition of additional stock by any one Person, who is considered to own more than twenty percent (20%) of the total voting power of the stock of the Company will not be considered a Change of Control; or (ii) a change in the ownership of all or substantially all of the Company’s assets which occurs on the date that any Person or entity acquires (or has acquired during the period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty one percent (51%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this subsection, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

 

Deferment Period ” means, as the case may require: (i) the period commencing on the AZ Loan Closing date and ending on the date which is 90 days after the Arizona Subsidiary commences revenue generation from Arizona Operations; and (ii) the period commencing on the NV Loan Closing date and ending on the date which is 90 days after the Nevada Subsidiary commences revenue generation from Nevada Operations.

 

Distribution(s) means the distribution of Gross Revenues to Purchaser.

 

Gross Revenue ” means all revenues of the Company from the Arizona Operations of the Company, including, but not limited to, (i) investment income, (ii) rental income, (iii) income from the operations of the Company, (iv) net proceeds of business interruption insurance, if any, (v) income from fees and charges (whether such fees and charges are paid by or on behalf of patients or by any other party) and (vii) without duplication, all other accounts receivable, revenues, profits and receipts derived by or on behalf of the Company from any source relating to the Arizona Operations.

 

Nevada Operations ” means the commencement of operations at the NV Facility.

 

Nevada Subsidiary’s Interest ” shall mean only the amount in which the Company has an interest in the NV Facility. Purchaser is expressly aware that the Company shall only be entitled to 51% of the aggregate NV Facility operations, and that the percentage interest in which Purchaser is entitled is not from the whole operation, rather only of the 51% to which Company has an interest.

 

Revenue Participation Payments ” means the payments described in Section 1.3(a) as to the Arizona Operations, and Section 1.3(b) below as to the Nevada Operations.

 

(a) Arizona Facility Revenue Participation . Commencing on the first calendar quarter following the Deferment Period for the Arizona Operations, and continuing on the fifteenth day after the close of each calendar quarter thereafter, unless earlier terminated pursuant to the terms of this Agreement, the Company and the Arizona Subsidiary shall make Distributions of Revenue Participation Payments generated from Gross Revenues during the immediately preceding calendar quarter pursuant to the following schedule:

 

1) 5% of Gross Revenues generated by the Arizona Operations until the AZ Note is repaid; such payments are estimated to be between $250,000 to $350,000 annually once the Arizona Operations are fully operational, however, actual results may vary and a lower annual revenue amount shall not constitute a default or breach; then,

 

2) 2% of Gross Revenues generated by the Arizona Operations until Lender has been paid amounts under the AZ Note and this Section 1.3(a) equal to 200% of the principal amount of the AZ Note; such payments are estimated to be $100,000 to $140,000 annually, however, actual results may vary and a lower annual revenue amount shall not constitute a default or breach; then,

 

3) 1% of Gross Revenues generated by the Arizona Operations in perpetuity or until a Change in Control triggering a Mandatory Buyout, notwithstanding the repayment of the AZ Note.

 

4) No distributions of Revenue Participation Payments shall be made during the Deferment Period.

 

5) Upon payment of Revenue Participation Payments equal to 200% of the principal amount of the AZ Note, the payments under Section 1.3(a)(1) and (2) shall terminate, and if not previously done, the Purchaser shall release its UCC-1, its security interest against the Collateral, and the AZ Deed of Trust.

 

(b) Nevada Facility Revenue Participation . Commencing on the first calendar quarter following the Deferment Period for the Nevada Operations, and continuing on the fifteenth day after the close of each calendar quarter thereafter, unless earlier terminated pursuant to the terms of this Agreement, the Company and the Nevada Subsidiary shall make Distributions of Revenue Participation Payments generated from the Nevada Subsidiary’s Interest in the Nevada Gross Revenues during the immediately preceding calendar quarter pursuant to the following schedule:

 

1) 5% of Gross Revenues generated from the Nevada Subsidiary’s Interest in Nevada Operations until the NV Note is repaid; such payments are estimated to be between $250,000 to $350,000 annually once the Nevada Operations are fully operational, however, actual results may vary and a lower annual revenue amount shall not constitute a default or breach; then,

 

2) 2% of Gross Revenues generated from the Nevada Subsidiary’s Interest in the Nevada Operations until Lender has been paid amounts under the NV Note and this Section 1.3(a) equal to 200% of the principal amount of the NV Note; such payments are estimated to be $100,000 to $140,000 annually, however, actual results may vary and a lower annual revenue amount shall not constitute a default or breach; then,

 

3) 1% of Gross Revenues generated from the Nevada Subsidiary’s Interest in Nevada Operations in perpetuity or until a Change in Control triggering a Mandatory Buyout, notwithstanding the repayment of the NV Note.

 

4) No distributions of Revenue Participation Payments shall be made during the Deferment Period.

 

5) Upon payment of Revenue Participation Payments equal to 200% of the principal amount of the NV Note, the payments under Section 1.3(b)(1) and (2) shall terminate, and if not previously done, the Purchaser shall release its UCC-1, its security interest against the Collateral, and the NV Deed of Trust.

 

(c) Mandatory Buyout . Upon the occurrence of a Change in Control the Purchaser shall be entitled to receive: (i) the balance of 200% of the principal amount of the AZ Note, which balance will be calculated after crediting to the Company any and all Revenue Participation Payments paid to the Purchaser through the date of the Change in Control; (ii) the balance of 200% of the principal amount of the NV Note, which balance will be calculated after crediting to the Company any and all Revenue Participation Payments paid to the Purchaser through the date of the Change in Control and (iii) 1% of the aggregate sales price or consideration received pursuant to such Change in Control, and thereafter all obligations of the Company and its subsidiaries to the Purchaser shall be deemed to be satisfied in full.

 

2. Closing and Delivery; Loan Advances

2.1 Initial Closing. The initial closing (the " Initial Closing ") of the sale and purchase of the Notes shall be held on the Effective Date, or at such other time as the Company and the Purchaser may mutually agree (such date is hereinafter referred to as the " Initial Closing Date ").

 

2.2 Deliveries.

 

1) At the AZ Loan Closing (i) Purchaser shall deliver to the Arizona Subsidiary a check or wire transfer funds in the amount of an initial advance of the AZ Loan in the amount of $____________ (the “ Initial Advance ”), with further advances as provided in the AZ Note; (ii) the Arizona Subsidiary shall issue and deliver to the Purchaser the AZ Note, the AZ Security Agreement, and the AZ Deed of Trust; (iii) Item 9 Labs shall delver the AZ Guaranty; and (iv) the Company and the Arizona Subsidiary will deliver such other documents and certificates, corporation resolutions, and the like (the “ Company Closing Documents ”), as may be necessary or desired by Purchaser to consummate the AZ Loan as contemplated hereby.

 

2) At the NV Loan Closing (i) Purchaser shall deliver to the Nevada Subsidiary a check or wire transfer funds in the amount of $1,500,000; (ii) the Nevada Subsidiary shall issue and deliver to the Purchaser the NV Note, the NV Security Agreement, and the NV Deed of Trust; (iii) Item 9 Labs shall deliver the NV Guaranty; and (iv) the Company and the Nevada Subsidiary will deliver such other documents and certificates, corporation resolutions, and the like (the “ Company Closing Documents ”), as may be necessary or desired by Purchaser to consummate the NV Loan as contemplated hereby.

 

3. Representations and Warranties of the Company

 

The Company hereby represents and warrants to Purchaser as of the AZ Loan Closing and the NV Loan Closing as follows:

 

3.1 Organization and Qualification. The C omp a n y is a c o r p o ra tion, and the Arizona Subsidiary and the Nevada Subsidiary are each limited liability companies, du l y o r g a ni z e d, v a lid l y e x isting a nd in g ood st a ndi n g und e r the l a ws of the ju r isdi c tion in whi c h formed or in c o r po ra t e d, with f ull pow e r a n d a utho r i t y ( c o r po r a te a nd oth er ) to own, l ea s e , use a nd op era te its p r op er t i e s a nd to car r y on its busin e ss a s a nd wh er e now own e d, l ea s e d, us e d, op era t e d a nd c ondu c t e d . Item 9 Labs is duly qualified as a foreign c o r po ra tion, and the Arizona Subsidiary and the Nevada Subsidiary are each qualified, to do busin e s s a nd is in good st a ndi n g in e v e r y ju r isdi c tion in whi c h its own e r ship or use of p r op er t y or the n a tu r e of the busin e ss c ondu c t e d b y it m a k e s su c h qu a li f i ca tion n ece s s a r y e x ce pt wh er e the fa ilu r e to be so qu a li f i e d or in g ood st a nding would not h a ve a M a t er i a l Adv er se E f f ec t. M a t e r i a l Adv er s e E f f e c t” m e a n s a n y m a t e r i a l a d v er se e ffec t o n the busin e ss, op era tions, a ss e ts, f i n a n c i a l c ondition or p r osp e c ts of the C omp a n y and its subsidiaries, t a k e n a s a whol e , o r on t he t ra n s ac tions c on t e mpl a t e d h e re b y or b y the a g r ee m e nts or inst r um e nts to be e nt ere d into in c onn ec tion h ere with.

 

3.2 Authorization; Enforcement. ( i) The C omp a n y and its subsidiaries each have all re quisite c o r po ra t e pow e r a nd a u tho r i t y to e nt e r into a n d p erf o r m this A g r ee m e nt, the Notes, and the Closing documents, a nd to c onsumm a te the t ra ns ac t ions c ont e mpl a t e d h ere b y (collectively with this Agreement, the " Loan Documents ") a nd th ere b y a nd to issue the securitie s, i n acc o r d a n c e with the t er m s h ere of a nd t h ere o f , ( ii) the e x ec ution a nd d e liv e r y of this A g r e e m e nt, the Notes, and the Closing documents, a nd the c onsumm a tion b y it of the t r a ns ac tions c ont e mpl a t e d h e r e b y a nd th ere b y h a ve b e e n du l y a utho r i z e d b y the C omp a n y s and its subsidiaries B o ar d of Di rec t o r s a nd no f u r th e r c on s e nt or a utho r i z a tion of the C omp a n y and its subsidiaries, its B o ar d of D i r ec to r s, or its sh are hol d e r s is re qui re d, ( iii) this Ag ree m e nt h a s b ee n du l y e x ec ut e d a nd d e l iv ere d b y t h e C omp a n y and its subsidiaries b y its a utho r i z e d re p re s e nt a tiv e , a nd su c h a utho r i z e d re p re s e n t a tive is the t r u e a nd o ff i c i a l re p re s e nt a tive with a utho r i t y to si g n this A g ree m e nt a nd the oth e r d o c um e nts e x ec ut e d in c o nn ec tion h e r e with a nd bind the C omp a n y and its subsidiaries a c c o r din g l y , a nd ( iv) this A g r ee m e nt c onstitut e s, a n d upon e x ec ution a nd d e liv e r y b y the C omp a n y and its subsidiaries of the Not es and Closing documents , eac h of su c h inst r um e nts will c onsti t ut e , a l e g a l, v a lid a nd binding obli g a tion of the C omp a n y and its subsidiaries, as applicable, e n f o r c e a ble a g a inst the C omp a n y and its subsidiaries i n acc o r d a n c e with its t er ms.

 

3.3 Governmental Consents. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any governmental authority, required on the part of the Company and its subsidiaries in connection with the valid execution and delivery of this Agreement, the offer, sale or issuance of the Notes issuable or the consummation of any other transaction contemplated hereby shall have been obtained and will be effective at such time as required by such governmental authority.

 

3.4 Compliance with Laws. To its knowledge, the Company and its subsidiaries are not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition or operations of the Company and its subsidiaries.

 

3.5 Compliance with Other Instruments. The Company and its subsidiaries are not in violation or default of any term of its articles of organization or operating agreement, or of any provision of any mortgage, indenture or contract to which it is a party and by which it is bound or of any judgment, decree, order or writ, other than such violations that would not individually or in the aggregate have a material adverse effect on the Company and its subsidiaries. The execution, delivery and performance of the Loan Documents, and the consummation of the transactions contemplated by the Loan Documents will not result in any such violation or be in conflict with, or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, decree, order or writ or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company and its subsidiaries or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization or approval applicable to the Company and its subsidiaries, their respective business or operations or any of its assets or properties.

 

3.6 Offering. Assuming the accuracy of the representations and warranties of the Purchasers contained in Section 4 hereof, the offer, issue and sale of the Notes (collectively, the " Securities ") are and will be exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the " Securities Act "), and have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws.

 

3.7 Use of Proceeds. The Company and its subsidiaries shall use the proceeds of sale and issuance of the Notes solely for the costs of constructing the AZ Expansion and the NV Expansion, and equipping each project in accordance with the construction contracts for each project, and any other costs in the project budgets approved in writing by Purchaser; (B) other costs and expenses incurred or to be incurred in connection with such construction as Purchaser in its sole discretion shall approve; and (C) costs and expenses the operations of the Company business as Purchaser in its sole discretion shall approve, and not for any personal, family or household purpose.

 

4. Representations and Warranties of the Purchasers

Purchaser hereby represents and warrants to the Company as follows:

 

4.1 Purchase for Own Account. The Purchaser represents that it is acquiring the Securities solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of the Notes or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention.

 

4.2 A cc r e dit ed I n v e stor S t a t us . The Purchaser is a n ac cre dit e d in v e sto r a s th a t t er m is d ef in e d in R ule 501 (a ) of Re g ul a ti o n D (a n A c c re dit e d I n v e sto r”) because such Purchaser meets at least one (1) of the categories of "accredited investors" set forth on Exhibit G attached hereto. Any assignee of Purchaser under Section 1.1 will also be an Accredited Investor.

 

4.3 Ability to Bear Economic Risk. The Purchaser acknowledges that investment in the Securities involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of its investment.

 

4.4 Restricted Securities. The Purchaser understands that the Notes have not been, and will not be, registered under the Securities Act, or any state securities laws, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Purchaser’s representations as expressed herein. The Purchaser understands that the Notes are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, and except as provided in Section 1.1, such Purchaser must hold the Notes indefinitely (or until maturity) unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Such Purchaser acknowledges that the Company is under no obligation to effect any such registration with respect to the Notes. Such Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser’s control, and which the Company is under no obligation and may not be able to satisfy.

 

4.5 Further Limitations on Disposition. Without in any way limiting the representations set forth above, Purchaser further agrees not to make any disposition of all or any portion of the Note unless and until:

 

(a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement;

 

(b) The Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, Purchaser shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration under the Securities Act or any applicable state securities laws, provided that no such opinion shall be required for dispositions in compliance with Rule 144, except in unusual circumstances; or

 

(c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by Purchaser to a partner (or retired partner) or member (or retired member) of Purchaser in accordance with partnership or limited liability company interests, or transfers by gift, will or intestate succession to any spouse or lineal descendants or ancestors, if all transferees agree in writing to be subject to the terms hereof to the same extent as if they were the Purchaser hereunder.

 

4.6 No General Solicitation. Neither Purchaser, nor any of its officers, directors, managers, employees, agents, members, stockholders or partners, has either directly or indirectly, including through a broker or finder, (a) engaged in any general solicitation in connection with the offer and sale of the Notes, (b) published any advertisement in connection with the offer and sale of the Notes, (c) been presented with or solicited by any publicly issued or circulated newspaper, mail, radio, television or other form of general advertising or solicitation in connection with the offer, sale or purchase of Notes, or (d) attended any public meeting or seminar concerning an investment in the Notes.

 

4.7 Exculpation by Purchaser. The Purchaser acknowledges that it is not relying upon any person other than the Company and its officers and managers, in making its investment or decision to invest in the Company and its subsidiaries. Purchaser agrees that neither Purchaser nor the respective controlling persons, officers, directors, managers, partners, agents, or employees of Purchaser shall be liable to any assignee under Section 1.1 for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Notes.

 

4.8 Residence. If such Purchaser is an individual, such Purchaser resides in the state or province identified in the address of such Purchaser set forth on such Purchaser’s signature page to this Agreement; if such Purchaser is a partnership, corporation, limited liability company or other entity, then the principal place of business of such Purchaser is located at the address of such Purchaser set forth on such Purchaser’s signature page to this Agreement.

 

4.9 Autho r i z a tion; En f o rce m e nt . This A g r e e m e nt h a s b ee n du l y a nd v a lid l y a utho r i z e d. This A g r ee m e nt h a s b e e n du l y e x ec ut e d a nd d e li v ere d on b e h a lf of the Purchaser , a nd this A g r e e m e nt c onstitut e s a v a lid a nd binding a g r ee m e nt o f the Purchaser e n f o r c ea ble in acc o r d a n c e with its t er ms.

 

4.10 " Bad Actor " Status. Purchaser hereby represents and warrants that neither it nor any of its Rule 506(d) Related Parties is subject to any Disqualification Event. For purposes of this Agreement, " Rule 506(d) Related Party " shall mean a person or entity covered by the "Bad Actor" disqualification provision of Rule 506(d) of the Securities Act.

 

4.11 Legends. Such Purchaser understands that the Notes may bear any one or more of the restrictive legends, including any legend required by federal securities laws or the securities laws of any state to the extent such laws are applicable to the securities so legended.

 

5. Further Agreements; Covenants

5.1 Further Assurances. Purchaser agrees and covenants that at any time and from time to time it will promptly execute and deliver to the Company such further instruments and documents and take such further action as the Company may reasonably require in order to carry out the full intent and purpose of this Agreement and to comply with state or federal securities laws or other regulatory approvals.

 

5.2 B e st E f f o r ts . T h e p ar ti e s sh a ll use t h e ir b e st eff o r ts to s a tis f y tim e l y e a c h of the c onditions d e s cr ib e d in this Ag r e e m e n t.

 

5.3 C o r po ra te E x ist e n ce . S o long a s the Purchaser b e n e f i c i a l l y o wns a n y Not e , the C omp a n y sh a ll m a int a in its c o r po ra te e x ist e n c e a nd sh a ll not s e ll a ll or subst a nti a l l y a ll of the C omp a n y s a ss e t s, e x ce pt in the e v e nt of a m e r g e r or c onsolid a tion or s a le of a ll or subst a nti a l l y a ll of the C omp a n y s a ss e ts, wh e r e the su r viving or su c c e ssor e nti t y in su c h t ra ns ac tion ( i) a ssum e s the C omp a n y s obli g a t i ons h ere und e r a nd und e r the a g r ee m e nts a nd inst r um e nts e nt ere d into in c onn ec tion h e re with a nd ( ii) is a publi c l y t r a d e d c o r p o ra tion whose C ommon S to c k is l ist e d f or t ra di n g on the P i n k S h ee ts, OT C QX, O T C QB , N a sd a q, N a sd a q S m a ll C a p, NY S E or AMEX.

 

5.4 Fa ilu r e to C omp l y with the 1934 A c t . S o l o ng a s the Purchaser b e n ef i c i a l l y owns each N ot e, if applicable, the C omp a n y s h a ll c omp l y with the r e po r t i ng r e qui re m e nts of t h e Securities Exchange Act of 1934, as amended (the “ 1934 A c t ”); a nd the C o m p a n y sh a ll c ontinue to b e subj ec t to t h e r e po r ting re qui r e m e nts of t h e 1934 A c t.

 

5.5 T ra di n g A c tiviti e s . N e i t h e r the Purchaser nor its aff i li a t e s h a s a n op en sho r t position in the c ommon sto c k of the C omp a n y a nd the Purchaser a g r e es t h a t it sh a ll not, a nd th a t it will ca use its aff ili a t e s not to, e n g a g e in a n y sh o r t s a l e s of or h e d g i n g t r a ns ac tions with re s p ec t to the c ommon sto c k of the C omp a n y .

 

5.6 C onditions to the C om p a n y s Obli g a tion to S e ll . The obli g a tion of the C omp a n y h e re un d e r to issue a nd s e ll the No t es to the Purchaser a t the C losing is subj ec t to the s a tis fac tion, a t or b ef o r e the C losing D a t e of e a c h of the f ollowi n g c onditions th ere to, p r ovi d e d th a t th e se c onditions a r e f or the C omp a n y s sole b e n ef it a nd m a y be w a i v e d b y the C omp a n y a t a n y time in its sole dis cr e tion:

 

a . The Purchaser sh a ll h a ve e x ec ut e d this Ag ree m e nt a nd d e liv ere d the s a me to the C omp a n y .

 

b. The Purchaser s h a ll h a ve agreed to d e liv er the Loan Amount in a cc o r d a n c e with the terms of this Agreement, and a copy of each Note to the Company .

 

c . The re p re s e nt a tions a nd w ar r a nti e s of the Purchaser sh a ll be t r ue a nd c o rr e c t in a ll m a t er i a l r e sp ec ts a s of the d a te w h e n m a de a nd a s of the C losing D a te a s thou g h m a de a t t h a t time ( e x ce pt f or re p r e s e nt a tions a nd w ar r a nti e s th a t sp e a k a s of a s p ec i f ic d a t e ) , a nd the Purchaser sh a ll h a ve p erf o r m e d, s a tis f i e d a nd c ompli e d in a ll m a t e r i a l re sp ec ts with the c ov e n a nts, a g r ee m e nts a nd c onditions re qui re d b y this A g r e e m e nt to be p erf o r m e d, s a tis f i e d or c ompli e d with b y the Purchaser a t or p r i o r to the C losing D a t e .

 

d. No liti g a tion, st a tut e , r ul e , r e g ul a tion, e x ec utive o r d er , d e cr e e , r uling o r injun c tion sh a ll h a ve b ee n e n a c t e d, e n t e r e d, p r omu l g a t e d or e ndo r s e d b y or in a n y c ou r t or g ov er nm e n t a l a utho r i t y o f c omp e t e nt ju r isdi c tion or a n y s e l f- r e g ul a to r y or g a ni z a tion h a ving a utho r i t y ov e r the m a tt e r s c ont e mpl a t e d h e r e b y w hi c h p r ohibits the c onsumm a tion of a n y o f the t ra ns ac tions c ont e mpl a t e d b y this A g r e e m e nt.

 

5.7 C onditions to Purchaser s Oblig a tion to P u rc h a s e . The obl i g a tion of the Purchaser h ere un d e r to pu r c h a se the Notes a t a C losing is subj ec t to the s a tis f ac tion, a t or b ef o r e the C losing D a te of eac h o f the f ollowing c onditions, p r ovid e d th a t th e se c onditions ar e f or the Purchaser s sole b e n ef it a nd m a y b e w a iv e d b y t h e Purchaser a t a n y time in its sole dis cre tion:

 

a . The C omp a n y and its subsidiaries, as applicable, sh a ll h a v e e x ec ut e d this A g r e e m e nt, the Notes, and the Closing documents, a nd d e liv ered the s a me (including the original Notes) to the Purchaser .

 

b. The r e p re s e nt a tions a nd w ar r a nti e s of the C om p a n y and its subsidiaries sh a ll be t r ue a nd c o rr e c t in a ll m a t er i a l re s p ec ts a s of the d a te wh e n m a de a nd a s o f the C losing D a te as thou g h m a de a t su c h time (e x ce pt f or re p r e s e nt a t i ons a nd w a r ra nti e s th a t s p ea k a s o f a sp e c i f ic d a t e ) a nd the C omp a n y and its subsidiaries s h a ll h a ve p e r f o r m e d, s a t i s f i e d a nd c ompli e d in a ll m a t er i a l r e sp ec ts with the c ov e n a nts, a g r e e m e n ts a nd c onditions re qui re d b y this A g r e e m e nt to be p erf o r m e d, s a tis f i e d or c ompli e d with b y the C omp a n y a t or p r ior to t he C losing D a t e .

 

c. No liti g a tion, st a tut e , r ul e , r e g ul a tion, e x ec utive o r d er , d e cr e e , r uling o r injun c tion sh a ll h a ve b ee n e n a c t e d, e n t e r e d, p r omu l g a t e d or e ndo r s e d b y or in a n y c ou r t or g ov er nm e n t a l a utho r i t y o f c omp e t e nt ju r isdi c tion or a n y s e l f- r e g ul a to r y or g a ni z a tion h a ving a utho r i t y ov e r the m a tt e r s c ont e mpl a t e d h e r e b y w hi c h p r ohibits the c onsumm a tion of a n y o f the t ra ns ac tions c ont e mpl a t e d b y this A g r e e m e nt.

 

d. No e v e nt sh a ll h a ve o c c u rre d whi c h c ould rea s o n a b l y be e x p ec t e d to h a ve a M a t er i a l Adv e r se E ff e c t on the C omp a n y in c ludi n g but not lim i t e d to a c h a nge in the re p o r ting st a tus of the C omp a n y or t h e f a ilu r e of the C omp a n y to be tim e l y in its re po r ti n g obl i g a tions.

 

6. Miscellaneous

6.1 Binding Agreement. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, expressed or implied, is intended to confer upon any third party any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

 

6.2 Governing Law. This Agreement and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, without regard to the conflicts of law provisions of the State of Arizona, or of any other state.

 

6.3 Counterparts. This Agreement may be executed in two or more counterparts, which may be delivered by electronic transmission (including delivery facsimile copies of signatures via email in PDF or similar readily accessible format), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties may execute this Agreement electronically.

 

6.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

6.5 S e v era bili t y . I n the e v e nt th a t a n y p r ovision of this A g ree m e nt is inv a lid or un e n f o r cea b l e und e r a n y a ppli ca ble st a t ute or r ule of l a w, th e n s u c h p r ovision sh a ll be d ee m e d ino p era tive to t h e e x t e nt th a t it m a y c on f li c t th ere with a nd sh a ll b e d e e m e d modi f i e d to c on f o r m to su c h st a tute or r ule of l a w. A n y p r ovision h ere of whi c h m a y p r o v e inv a lid or un e n f o r c ea ble und e r a n y l a w sh a ll not a ff e c t the v a lidi t y or e n f o r c e a bili t y of a n y oth e r p r ovision h ere o f .

 

6.6 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address on the signature page below, and to each Purchaser at the address set forth on the signature page below or at such other addresses as the Company or such Purchaser may designate by 10 days advance written notice to the other parties hereto.

 

6.7 Modification; Waiver. Any modification or waiver of any provision of this Agreement or consent to departure therefrom shall be effective only upon the written consent of the Company and the Purchaser. Any provision of the Notes may be amended or waived by the written consent of the Company and the Purchaser, or requisite holder.

 

6.8 Expenses. Each Purchaser shall bear its respective expenses and legal fees incurred with respect to this Agreement and the transactions contemplated herein.

 

6.9 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to each Purchaser, upon any breach or default of the Company under the Loan Documents shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character by any Purchaser of any breach or default under this Agreement, or any waiver by any Purchaser of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing and that all remedies, either under this Agreement, or by law or otherwise afforded to any Purchaser, shall be cumulative and not alternative.

 

6.10 P ubli c i t y . T h e C omp a n y sh a ll h a ve the r i g ht to re vi e w a r e a son a ble p e r iod of time b ef o r e issu a n c e o f a n y p re ss r e l e a s e s, S E C , OT C Markets o r F I N R A f ilin g s, or a n y oth e r public st a t e m e nts with re sp ec t to the t ra ns ac tions c ont e mpl a t e d h ere b y ; p r ovid e d , ho w e v er , th a t the C omp a n y sh a ll be e ntitl e d, without the p r ior a pp r ov a l of the Purchaser , to m a ke a n y p r e ss re l e a se , S E C , O T C Markets ( or oth e r a ppli ca b le t ra di n g m ar k e t) or F I N R A f ili n g s with re s p ec t to su c h t ra ns ac tions a s is re qui re d b y a ppli ca b le l a w a nd r e g ul a tions (a lthou g h t h e Purchaser sh a ll be c onsult e d b y the C omp a n y in c on n ec tion with a n y s u c h p r e ss re l ea s e p r ior to its re l ea s e a nd sh a ll be p r ovid e d with a c o p y th e re of a nd be g iv e n a n oppo r tuni t y to c omm e nt th ere on ).

 

6.11 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

6.12 S u r viv a l . The re p re s e nt a tions a nd w arra nti e s of the C omp a n y a nd the a g r ee m e nts a nd c o v e n a nts s e t f o r th in this Ag ree m e nt sh a ll su r vive the c losi n g h ere un d e r notwithst a nding a n y due dili g e n c e inv e st i g a tion c ondu c t e d b y or on b e h a lf of the Purchaser .

 

6.13 Entire Agreement. This Agreement and the Exhibits hereto and the Loan Documents constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein.

 

( signature pages follow )

 
 

In Witness Whereof , the parties have executed this Loan and Revenue Participation Agreement as of the date first written above.

 

Company:

 

ITEM 9 LABS CORP.

 

 

By: _______________________________

 

Name: ____________________________

 

Title: ______________________________

 

 


Address
:

 

_______________________________

 

_______________________________

 

_______________________________

 

Email: __________________________

 
 

  

In Witness Whereof , the parties have executed this Loan and Revenue Participation Agreement as of the date first written above.

 

ARIZONA SUBSIDIARY:

 

BSSD GROUP, LLC

 

 

By: _______________________________

 

Name: ____________________________

 

Title: ______________________________

 

 


Address
:

 

_______________________________

 

_______________________________

 

_______________________________

 

Email: __________________________ 

 
 

In Witness Whereof , the parties have executed this Loan and Revenue Participation Agreement as of the date first written above.

 

NEVADA SUBSIDIARY:

 

ITEM 9 PROPERTIES, LLC.

 

 

By: _______________________________

 

Name: ____________________________

 

Title: ______________________________

 

 


Address
:

 

_______________________________

 

_______________________________

 

_______________________________

 

Email: __________________________

 
 

In Witness Whereof , the parties have executed this Loan and Revenue Participation Agreement as of the date first written above.

 

PURCHASER:

 

VIRIDIS GROUP I9 CAPITAL, LLC

 

By: _______________________________

 

Name: ____________________________

 

Title: ______________________________

 

 


Address
:

 

_______________________________

 

_______________________________

 

_______________________________

 

Email: __________________________

 

 

PURCHASER: (NV NOTE)

 

By: _______________________________

 

Name: ____________________________

 

Title: ______________________________

 

 


Address
:

 

_______________________________

 

_______________________________

 

_______________________________

 

Email: __________________________

 

 
 

Exhibit A

 

Promissory Note

ARIZONA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

PROMISSORY NOTE

 

Total Principal Amount: Up to $1,200,000
Issue Date: September 11, 2018
Location of Execution: Scottsdale, Arizona
Borrower: BSSD Group, LLC
Borrower’s Address: 2033 N. Overfield Road
  Casa Grande, AZ 85194
Lender: Viridis Group I9 Capital, LLC
Lender’s Address: 2727 N. 3 rd Street, Suite 301
  Phoenix AZ 85004

 

THIS PROMISSORY NOTE (the " Note ") is made and entered to be effective as of the 11 th day of September, 2018, by and between BSSD Group, LLC , an Arizona limited liability company (the " Borrower ") and Viridis Group I9 Capital LLC , an Arizona limited liability company (the " Lender "). For value received, and in consideration of the mutual promises and covenants hereinafter set forth, Borrower and Lender agree as follows:

 

1. Promise to Pay . Borrower promises to pay to Lender or order, in lawful money of the United States of America, the principal amount up to One Million Two Hundred Thousand Dollars and no/100 Dollars ($1,200,000), or so much as may be advanced to Borrower by Lender together with interest on the unpaid outstanding principal balance.

 

2. Maturity Date . As used herein, the "Maturity Date" shall be September 11, 2023.

 

3. Interest Rate . Prior to the Maturity Date, interest on the principal balance outstanding shall accrue at a rate per annum of 2.9% interest, compounded annually.

 

4. Payment of Principal and Interest . This Note is due and payable in monthly payments of interest only, with all principal and any accured and unpaid interest is due and payable in full on the Maturity Date, whether such maturity occurs by acceleration or otherwise. All Distributions, as defined in and made under the Loan and Revenue Participation Agreement of even date herewith, shall first be applied to accrued and unpaid interest then principal. All payments called for hereunder shall be paid in lawful money of the United States of America in federal or other immediately collected funds, which, at the time of payment is legal tender for the payment of public and private debts. All written communications and payments will be mailed or delivered to Lender at the address above.

 

5. Prepayment . Borrower may pay, without penalty, at any time and from time to time, all or a portion of the amount owed earlier than it is due.

 

6. Loan Advances . Lender’s obligation to make the Initial Advance (as defined in the Loan and Revenue Participation Agreement) and each subsequent advance of the loan proceeds under this Note shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Section 6. Lender shall have received and accepted a complete set of written Plans and Specifications setting forth all improvements for the AZ Expansion (as defined in the Loan and Revenue Participation Agreement), and Borrower shall have furnished to Lender copies of all permits and requisite approvals of any governmental body necessary for the construction and use of the AZ Expansion. Borrower shall have furnished in form and substance satisfactory to Lender an executed copy of the Architect's Contract and an executed copy of the Construction Contract.

 

a. Application for Advances . Each application shall be stated on a standard AIA payment request form or other form approved by Lender, executed by Borrower and the Architect, and supported by such evidence as Lender shall reasonably require. Borrower shall apply only for disbursement with respect to work actually done by the General Contractor and for materials and equipment actually incorporated into the Project. Each application for an Advance shall be deemed a certification of Borrower that as of the date of such application, all representations and warranties contained in the Agreement are true and correct, and that Borrower is in compliance with all of the provisions of this Agreement. Lender will fund each such application for payment within five (5) business days.

 

b. Cessation of Advances . Lender shall have no obligation to make loan advances or to disburse Loan proceeds if: (A) Borrower is in default under the terms of this Note or any other agreement of the Borrower and Lender; (B) Borrower becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; or (C) there occurs a material adverse change in Borrower's financial condition or in the value of any collateral securing this Note.

 

c. Limitation of Responsibility . The making of any advance by Lender shall not constitute or be interpreted as either (A) an approval or acceptance by Lender of the work done through the date of the advance, or (B) a representation or indemnity by Lender to any party against any deficiency or defect in the work or against any breach of any contract. Inspections and approvals of the Plans and Specifications, the improvements, the workmanship and materials used in the improvements, and the exercise of any other right of inspection, approval, or inquiry granted to Lender in this Agreement are acknowledged to be solely for the protection of Lender's interests, and under no circumstances shall they be construed to impose any responsibility or liability of any nature whatsoever on Lender to any party. Neither Borrower nor any contractor, subcontractor, materialman, laborer, or any other person shall rely, or have any right to rely, upon Lender's determination of the appropriateness of any advance. No disbursement or approval by Lender shall constitute a representation by Lender as to the nature of AZ Expansion, its construction, or its intended use for Borrower or for any other person, nor shall it constitute an indemnity by Lender to Borrower or to any other person against any deficiency or defects in AZ Expansion or against any breach of any contract.

 

7. Interest After Default . At Lender's option and without prior notice, upon the occurrence of an Event of Default under this Note or any Related Documents, Lender may increase the interest rate applicable to the Note to twelve (12%) percent per annum, compounded annually (the " Default Rate "). Lender shall give written notice to Borrower of Lender's imposition of the Default Rate. If the Note is not paid on the Maturity Date, Lender may impose the Default Rate from the Maturity Date to the date paid in full without notice. Lender's imposition of the Default Rate shall not constitute an election of remedies or otherwise limit Lender's rights concerning other remedies available to Lender as a result of the occurrence of an event of default. In the event of a conflict between the provisions of this paragraph and any other provision of this Note or any Related Document, the provisions of this paragraph shall control.

 

8. Security . This Promissory Note is secured by a Security Agreement and Deed of Trust of even date herewith.

 

9. Default . Each of the following shall constitute an event of default (" Event of Default ”) under this Note:

 

a. Payment Default . Borrower fails to make any payment when due under this Note.

 

b. Other Defaults . Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower, after Lender has given Borrower written notice specifying the default and Borrower has failed to cure the default within fifteen (15) calendar days thereafter.

 

c. Default in Favor of Third Parties . Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may, in Lender’s commercially reasonable judgment, materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the documents related to or executed in connection with this Note (the “ Related Documents ”).

 

d. False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf, under this Note or any Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

 

e. Dissolution or Insolvency . The dissolution of Borrower, any member withdraws from Borrower, or any other termination of any Borrower's existence as a going business, the insolvency of any Borrower, the appointment of a receiver for any part of any Borrower's property, any assignment for the benefit of creditors, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower not dismissed within sixty (60) days.

 

f. Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of any Borrower or by any governmental agency. However, this Event of Default shall not apply if there is a good faith dispute by such Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if such Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its commercially reasonable discretion, as being an adequate reserve or bond for the dispute.

 

10. Lender's Rights . Upon an Event of Default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.

 

11. Attorney's Fees; Expenses . Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender the reasonable costs of such collection. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including without limitation attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.

 

12. Application of Payments . Unless otherwise agreed, all sums received from Borrower may be applied to interest, fees, principal, or any other amounts due to Lender in any order at Lender's sole discretion.

 

13. Further Assurances . The parties hereto agree to do all things deemed reasonably necessary by Lender in order to fully document the loan evidenced by this Note and any Related Documents. The undersigned agree to assist in the cure of any defects in the execution, delivery or substance of the Note and Related Documents to the extent consistent with the understanding of the parties.

 

14. Successors in Interest . The terms of this Note shall be binding upon Borrower, and upon Borrower's successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

 

15. General Provisions . Lender may delay or forgo enforcing any of its rights or remedies under this Note without waving those rights. Borrower and any other person who signs or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party; and take any other action deemed necessary by Lender without the consent of or notice to anyone.

 

16. Borrower's Representations and Warranties . Borrower represents and warrants to Lender that Borrower has been duly organized under the laws of the State of Arizona and has the requisite power and authority to enter into and perform this Note, the Related Documents, and instruments required to be executed and delivered by Borrower pursuant hereto. This Note has been duly executed and delivered by Borrower, and is a valid and binding obligation of Borrower enforceable in accordance with its terms. This Note, the Related Documents, and instruments required to be executed and delivered by Borrower pursuant hereto have each been duly authorized by all limited liability company action on the part of Borrower and such execution, delivery and performance does not and will not conflict with or result in a violation of Borrower’s certificate of formation or other organizational documents of Borrower or any judgment, order or decree of any court or arbiter to which Borrower is a party, or any agreement to which Borrower is bound or subject.

 

17. Waiver of Right to Jury Trial . Borrower hereby knowingly, voluntarily and intentionally waives any right it may have to a trial by jury in respect of any litigation arising out of, under or in connection with this Note, the Related Documents, or the transactions contemplated herein. Borrower hereby certifies that no representative or agent of the Lender or the Lender's counsel has represented, expressly or otherwise, that the Lender would not, in the event of such litigation, seek to enforce this waiver of right to jury trial provision. Borrower acknowledges that the Lender has been induced to make the loan evidenced by this Note by, among other things, the provisions of this section.

 

18. Governing Law . This Note is and shall be deemed entered into in the State of Arizona and shall be governed by and construed in accordance with the laws of the State of Arizona and no defense given or allowed by the laws of any state or country shall be interposed in any action or proceeding hereof unless such defense is also given or allowed by the laws of the State of Arizona. In the event that any word, phrase, clause, sentence, or other provision hereof shall violate any applicable statute, ordinance or rule of law in any jurisdiction in which it is used, such provisions shall be ineffective to the extent of such violation without invalidating any other provision hereof.

 

19. Jurisdiction and Venue . With respect to any claim arising out of this Note or any other agreement to or for the benefit of Lender, Borrower (a) irrevocably submits, for itself and its property, to the exclusive jurisdiction and venue of the courts of Maricopa County, Arizona, and any appellate courts therefrom, and (b) irrevocably waives any objection which it may have at any time to venue of any suit, action or proceeding arising out of or relating to this Note or any Related Document brought in any such court, (c) irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum and (d) further irrevocably waives the right to object with respect to such claim, suit, action or proceeding brought in any such court that such court does not have jurisdiction over it. Borrower irrevocably and unconditionally consents to the service of process in any such suit, action or proceeding in the aforesaid court by the mailing of copies of such process by certified mail to Borrower’s address above.

 

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE.

 

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

 

IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed as of the date set forth above written.

 

BSSD GROUP, LLC, An Arizona limited liability company

 

By:       ITEM 9 LABS CORP.

A Delaware corporation

Its Manager

 

By: _______________________________

Bryce Skalla, President

     

 


Exhibit B

 

Guaranty

ARIZONA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

GUARANTY AGREEMENT

 

THIS GUARANTY AGREEMENT is dated and effective September 11, 2018, and is made by Item 9 Labs Corp., a Delaware corporation (“ Guarantor ”) to and for the benefit of Viridis Group I9 Capital, LLC, an Arizona limited liability company (“ Lender ”).

 

Recitals

 

A. For sufficient value, BSSD Group LLC, an Arizona limited liability company (“ Borrower ”) executed a Promissory Note dated September 11, 2018 (the “ Note ”) in the principal amount of up to $1,200,000 for the benefit Lender as Note Holder.

 

B. In order to induce Lender to convey its assets to Borrower, Guarantor agrees to personally guarantee the obligations of Borrower under the Note as provided herein.

 

C. Guarantor is the owner of 100% of the membership interests in the Borrower, and acknowledges that it is receiving an indirect benefit from the funding of the Note by the Lender.

 

Agreement

 

IN CONSIDERATION of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees as follows:

 

1. Guarantee .

 

(a) Guarantor, severally and unconditionally, guarantees to Lender the full and prompt payment of the principal and any interest at the rate specified under the Note, in lawful money of the United States, upon demand when due, whether at maturity or by acceleration or otherwise, including but not limited to, all of Borrower’s present and future obligations under the Note, and all modifications, amendments, restatements, extensions and renewals thereof, whether for principal, interest or otherwise.

 

(b) In addition, Guarantor agrees to pay Lender any and all expenses, including, without limitation, attorneys’ fees, court costs and related legal expenses incurred by Lender in connection with the enforcement of this Guaranty.

 

(c) All of the obligations, indebtedness and liabilities of Guarantor set forth in this Section 1 are referred to herein as the “Obligations.”

 

2. Obligations Absolute . The Obligations of the Guarantor hereunder are primary, absolute and unconditional and are intended as a continuing guaranty of payment and performance by Guarantor. Guarantor acknowledges having been provided with a copy of the Note and having consulted with counsel concerning Guarantor’s Obligations hereunder.

 

3. No Impairment of Liability . Guarantor agrees that Guarantor’s liability hereunder will not be released, reduced, impaired or affected by any one or more of the following events: (a) Lender’s obtaining additional collateral from Borrower or any other person to secure payment or performance of the Note; (b) the assumption of liability by any other person (whether as guarantor or otherwise) for payment or performance under the Note; (c) the release, surrender, exchange, loss, termination, waiver or other discharge of any collateral securing payment or performance under the Note; (d) the subordination, relinquishment or discharge of the Lender’s rights relating to the Note or any collateral described therein; (e) the foreclosure upon any collateral given to secure any liability of Borrower by judicial or non-judicial sale (though it is acknowledged that no collateral was pledged in connection with the origination of the Note or this Guaranty); (f) the loss or impairment of any right of subrogation of the Guarantor; (g)  (h) the insolvency, bankruptcy, reorganization, discharge, waiver or other exoneration of the Borrower or any other person now or hereafter liable for payment or performance of the Obligations; (i) the renewal, consolidation, extension, modification, rearrangement or amendment from time to time of the Note, including, without limitation, the extension of the maturity date of the Note; (j) the failure, delay, waiver or refusal by Lender to exercise any right or remedy held by Lender under the Note; (k) Lender’s application of any monies available to Lender in payment or reduction of any of the Obligations in such manner and such amounts and at such times and in such order of priority as Lender may see fit to the payment or reduction of such portions of the Obligations as Lender may elect; (l) the sale, encumbrance, transfer or other modification of the ownership of the Borrower or the Borrower’s assets, or the change in the financial condition or management of the Borrower; (m) the invalidity, unenforceability or insufficiency of any provision of the Note or any collateral securing payment or performance thereunder; or (n) the failure of the Guarantor to receive notice of any one or more of the foregoing actions or events.

 

4. Waivers by Guarantor . Guarantor hereby expressly waives (a) diligence, presentment, protest, notice of dishonor, demand for payment, notice of nonpayment or nonperformance; (b) notice of the acceptance of this Guaranty; (c) notice of the existence or creation of all or any part of the Obligations of Borrower; (d) notice of termination as to future liability given by any other guarantor; (e) notice of demand, advertisement or notice of time or place of sale of any Collateral securing any of the Borrower’s Obligations; (f) all presentments, demands for performance, notices of nonperformance, protests and all other notices whatsoever; (g) any right to require Lender to proceed against Borrower or any security held in relation to the Borrower’s Obligations or to pursue any other right or remedy in Lender’s power; (h) any right to contest the enforcement of this Guaranty by virtue of any statute of limitations or other law varying the terms of this Guaranty; (i) any other defense available to Guarantors at law or in equity; or (j) and the right to interpose counterclaims or setoffs of any kind or description in any litigation arising under this Guaranty.

 

5. Amendments . No provision or term of this Guaranty may be amended, modified, revoked, supplemented, waived or otherwise changed except by a written instrument duly executed by Guarantor and Lender and designated as an amendment, supplement or waiver

 

6. Transfer of Assets . Guarantor will not voluntarily or involuntarily transfer title to any of his or her material assets without fair consideration or take any other action or suffer the same to be done, which would have a materially adverse effect on Guarantor’s ability to fulfill his Obligations to Lender hereunder.

 

7. Notices . Any notice given to any party in connection with this Guaranty shall be in writing, shall be (i) hand delivered, (ii) sent by registered or certified mail, return receipt requested, postage prepaid, or (iii) sent by Federal Express or other nationally recognized overnight courier service, and if hand delivered shall be deemed received when delivered, if mailed shall be deemed received one day after having been deposited in the United States mail, postage prepaid, and if sent by Federal Express or other nationally recognized overnight courier service shall be deemed received one business day after having been deposited with Federal Express or other nationally recognized overnight courier service if designated for next-day delivery, addressed as follows:

 

If to Lender to:

Viridis Group I9 Capital, LLC

2727 N. 3 rd Street, Suite 301

Phoenix AZ 85004

 

If to Guarantor to:

Item 9 Labs Corp.

2033 N. Overfield Road

Casa Grande, AZ 85194

 

Either party may change its address for notices by giving the other party notice thereof.

 

8. Counterparts . This Guaranty may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

 

9. Captions and Pronouns . The captions and headings of the various sections of this Guaranty are for convenience only, and are not to be construed as confining or limiting in any way the scope or intent of the provisions hereof.

 

10. Binding Effect . This Agreement will be binding on the Guarantor and his successors and permitted assigns, and will inure to the benefit of the Lender and all successors and permitted assigns of the Lender. Guarantor consents to the assignment of all or any portion of the rights of the Lender hereunder in connection with any assignment of the rights of the Lender under the Note without notice to the Guarantor.

 

11. Rights Cumulative . Each right, power and remedy of Lender under this Guaranty and the Note is cumulative and in addition to every other right, power or remedy, existing or implied, given now or hereafter existing, at law or in equity, and each and every right, power and remedy set forth herein or otherwise so existing may be exercised from time to time as often and in such order as may be deemed expedient by Lender, and the exercise or the beginning of the exercise of one right, power or remedy shall not be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy; and no delay or omission of Lender in the exercise of any right, power or remedy accruing hereunder or arising otherwise shall impair any such right, power or remedy, or be construed to be a waiver of any default or acquiescence therein.

 

12. Waiver . Lender shall not be deemed to have waived any provision of this Guaranty or the Note unless such waiver is in writing and is signed by Lender.

 

13. Choice of Law . This Agreement has been negotiated, executed and delivered in Scottsdale Arizona, and is intended to be construed in accordance with the laws of the State of Arizona.

 

14. Time of the Essence . Time is of the essence hereof with respect to the dates, terms and conditions of this Guaranty.

 

IN WITNESS WHEREOF, the Parties have duly executed this Personal Guaranty the date first above written.

 

ITEM 9 LABS CORP.

A Delaware corporation

 

By: ________________________

Bryce Skalla, President

 

 
 

Exhibit C

 

DEED OF TRUST AND SECURITY AGREEMENT

ARIZONA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

RECORDING REQUESTED BY:

Viridis Group I9 Capital, LLC

AND WHEN RECORDED MAIL TO:

2727 N. 3 rd Street, Suite 301

Phoenix AZ 85004

Attn: Andrew Bowden, Manager

 

 

 

 

ESCROW NO.:   

SPACE ABOVE THIS LINE FOR RECORDER’S USE

CONSTRUCTION DEED OF TRUST, SECURITY AGREEMENT,

AND ASSIGNMENT OF RENTS AND FIXTURE FILING

[Arizona]

 

Date:  September 11, 2018
   
Trustor:  BSSD GROUP, LLC, an Arizona limited liability company 
whose address is: 2033 N. Overfield Rd
  Casa Grande, AZ 85194
   
Beneficiary: Viridis Group I9 Capital, LLC, an Arizona limited liability company
whose address is: 2 727 N. 3 rd Street, Suite 301
  Phoenix AZ 85004
  Attn: Andrew Bowden, Manager    
   
Trustee: Chicago Title Agency, Inc.
  6710 N. Scottsdale Rd., Suite 100
  Scottsdale, AZ 85253

 

This Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing (“Deed of Trust”) is made on the above date between the Trustor, Trustee, and Beneficiary above named.

 

WITNESSETH: That Trustor irrevocably grants and conveys to Trustee in Trust, with Power of Sale, all of the following described property, both real and personal (collectively, the “Property”):

 

A. The certain tract or parcel of land being legally described on Exhibit A hereto (the “Land”);

 

B. All buildings, structures and improvements of every nature whatsoever now or hereafter constructed and/or situated on the Land, and all fixtures, machinery, appliances, equipment, furniture and personal property of every kind and nature whatsoever now or hereafter owned or leased by Trustor and located in, on or attached to, and used or intended to be used in connection with the Land, buildings, structures or other improvements, or in connection with any construction being conducted or which may be conducted on the Land, and owned by Trustor, and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to any of the foregoing (collectively, the “Improvements”);

 

C. All easements, rights-of-way, gores or strips of land, streets, ways, alleys, passages, sewer rights, water courses, water rights and powers, and all appurtenances whatsoever, in any way belonging, relating or appertaining to any of the Land, or which hereinafter shall in any way belong, relate or be appurtenant thereto, whether now owned or hereafter acquired by Trustor;

 

D. All of the estate, right, title and interest of Trustor of, in and to (i) all judgments, insurance proceeds, awards of damages and settlements hereafter made resulting from condemnation proceedings or the taking of the Property or any part thereof under the power of eminent domain, or for any damage (whether caused by such taking or otherwise) to the Property or any part thereof, or to any rights appurtenant thereto, and all proceeds of any sales or other dispositions of the Property or any part thereof, and Beneficiary is hereby authorized to collect and receive the awards and proceeds and to give proper receipts and acquittances therefor, and (if it so elects) to apply the same toward the payment of the indebtedness and other amounts secured hereby, notwithstanding the fact that the amount owing may not then be due and payable; (ii) all contracts rights, general intangibles, actions and rights in action, including without limitation all rights to insurance proceeds and unearned premiums arising from or relating to the Property; and (iii) all proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Property;

 

E. All rents, issues, profits, other income and other benefits that are now due or hereafter may become due by reason of the lending, leasing, or bailment of all or a portion of the Property or use or occupancy thereof to which Trustor may now or hereafter be entitled to and have received (collectively, the “Property Income”), to be applied against the indebtedness and other sums secured hereby;

 

F. Subject to the rights of the Trustor hereunder, all right, title and interest of Trustor in and to any and all leases now or hereafter which grant a possessory interest in, or the right to use or occupy, all of part of the Property, together with all security therefor and all amounts payable thereunder, and all books and records which account for payments made under the leases and all security therefor (collectively, the “Leases”); and

 

G. All right, title and interest of Trustor in and to the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the “Collateral”): (a) all accounts; (b) all cash and cash equivalents; (c) all general intangibles; (d) all deposit accounts, and any replacement or successor accounts relating thereto; (e) all documents; (f) all instruments; (g) all inventory; (h) all chattel paper; (i) all commercial tort claims; (j) all equipment (including all software, whether or not the same constitutes embedded software, used in the operation thereof); (k) all goods; (l) investment property, including, without limitation, all swap contracts, commodity accounts, commodity contracts, securities, security entitlements and securities accounts; (m) contract rights; (n) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks, and related data processing software (owned by Borrower or in which it has an interest) that at any time evidence or contain information relating to any Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (o) furniture and removable fixtures; and (p) to the extent not otherwise included, all accessions, proceeds and products of any and all of the foregoing.

 

Due on Sale: The unpaid balance, including accrued interest, fees and penalties, is immediately due and payable in the event that the Premises is sold, transferred, or conveyed in any manner, unless otherwise prohibited by law.

 

THIS DEED OF TRUST is entered into by the Trustor, Trustee and Beneficiary. Trustor irrevocably grants and conveys to Trustee in Trust, with Power of Sale, the Property, together with leases, rents, issues, profits, or income generated by the Property (collectively, the “Property Income”); SUBJECT, HOWEVER, to the right, power and authority given to and conferred upon Beneficiary to collect and apply the Property Income; AND SUBJECT TO existing taxes, assessments, liens, encumbrances, covenants, conditions, restrictions, rights of way, and easement of record.

 

This Deed of Trust has been granted to secure: 1) performance of each agreement of Trustor contained in this Deed of Trust; 2) all indebtedness and interest that may arise out of any construction financing advances provided by Beneficiary as contemplated under the Loan and Revenue Participation Agreement (the “Loan Agreement”); as evidenced by that certain Promissory Note of even date herewith (the “Note”), and any extensions or renewals of the Note, in the principal sum of up to $1,200,000.00 executed by Trustor, in favor of Beneficiary or order; and 3) payment of additional sums and interest on these additional sums which may be loaned to Trustor, or Trustor’s successors or assigns, after the date of this Deed of Trust when evidenced by a promissory note reciting that they are secured by this Deed of Trust.

 

TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR AGREES:

 

1. To keep the Property in good condition and repair; not to remove or demolish any building thereon; to complete or restore promptly and in good and workmanlike manner any building thereon which may be damaged, or destroyed and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting the Property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer, or permit any act upon the Property in violation of law; and do other acts which from the character or use of the Property may be reasonably necessary, the specific enumerations herein not excluding the general. If this Deed of Trust encumbers a unit in a condominium or a planned unit development, Trustor shall perform when due all of Trustor’s obligations under the declaration or covenants creating or governing the condominium or planned unit development, the bylaws and regulations of the condominium or planned unit development and all related documents.

 

2. To keep the improvements now existing or hereafter erected on the Real Property insured against loss by fire, hazards included within the term “all risk,” in such amounts (including replacement cost coverage) and for such periods as Beneficiary may require, but in no event less than the principal balance due under the Note secured by this Deed of Trust . Trustor shall also insure all fixtures encumbered hereby against the same loss hazards in an amount acceptable to Beneficiary. Beneficiary shall be named as an insured mortgagee. In the event of loss, all property and casualty insurance proceeds shall be payable jointly to Trustor and Beneficiary and shall be applied as directed by Beneficiary in its sole discretion. Any application for or release of any insurance proceeds shall not cure or waive any default under the Note or this Deed of Trust or any notice of Trustee’s sale hereunder or invalidate any act done pursuant to such notice. In the event of a conveyance to Beneficiary, or other transfer of title to the Property in extinguishment of the indebtedness secured by this Deed of Trust, all right, title, and interest of Trustor in and to any insurance policies then in force and proceeds thereof shall pass to the purchaser or grantee. The hazard insurance policy shall contain a standard non-contributory mortgage clause in favor of Beneficiary and shall provide that the policies cannot be cancelled or materially changed without thirty (30) days' prior written notice to Beneficiary. Trustor shall provide Beneficiary with satisfactory and complete certificates of insurance and copies of all policies. In the event of loss, Trustor shall give prompt notice to the insurance carrier and to Beneficiary. Beneficiary may make proof of loss if not made promptly by Trustor. If the Real Property is located in whole or in part in a flood hazard area as designated by the appropriate government entity, Trustor shall procure and keep in force such flood insurance as may be required to meet any applicable requirements of federal, state or local laws, regulations or ordinances. The insurance carriers providing all insurance shall be chosen by Trustor subject to approval by Beneficiary.

 

3. Trustor shall fully cooperate with respect to any action or proceeding which may reasonably affect the rights or powers of Beneficiary or Trustee hereunder, and in connection therewith, permit Beneficiary or Trustee, at its election to participate in such proceedings. In any suit brought by Beneficiary or Trustee to foreclose this Deed of Trust, Trustor agrees to pay all costs and expenses of Beneficiary and Trustee, including reasonable attorney’s fees, actually incurred in connection therewith.

 

4. To pay before delinquent all taxes and assessments affecting the Property; when due, all encumbrances, charges, and liens, with interest, on the Property or any part thereof, which appear to be prior or superior hereto; all costs, fees, and expenses of the Trust, including, without limiting the generality of the foregoing, the fees of Trustee for issuance of any Deed of Partial Release and Partial Reconveyance, or Deed of Release and Full Reconveyance, and all lawful charges, costs, and expenses in the event of reinstatement of, following default under, this Deed of Trust or the obligations secured hereby.

 

Should Trustor fail to make any payment or to do any act as required in the Note or Deed of Trust, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon the Property for such purposes; appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest, or compromise any encumbrance, charge, or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such power, pay necessary expenses, employ counsel, and pay his reasonable fees.

 

Should Trustor fail to make any tax and assessment payment or fail to maintain the insurance required herein, Beneficiary may establish an account servicing arrangement, with an account servicing agent designated by Beneficiary, at the Trustor’s sole cost and expense, in order to impound for taxes, assessments, and insurance and to otherwise collect sums due under the Note and this Deed of Trust.

 

5. To pay immediately and without demand all sums expended by Beneficiary or Trustee pursuant to the provisions hereof, together with interest from date of expenditure at the same rate as is provided for in the Note secured by this Deed of Trust or at the highest legal rate, whichever be the greater rate. Any amounts so paid by Beneficiary or Trustee shall become a part of the debt secured by this Deed of Trust and a lien on the premises or immediately due and payable at option of Beneficiary or Trustee.

 

6. Not to sell, convey, transfer, or dispose of the Property, or any part thereof, or any interest therein, either voluntarily or involuntarily, or agree so to do, without the written consent of Beneficiary being first obtained, which consent shall be at the sole and absolute discretion of Beneficiary. Consent to one such transaction shall not be deemed a waiver of the right to require such consent to any future or successive transactions. Acceptance by Beneficiary from any transferee or person other than Trustor of any payment(s) for application on the unpaid balance of the Note shall not constitute a waiver of Beneficiary's rights as granted pursuant to this paragraph. In the event that Trustor is other than a natural person, any transfer or series of transfers of the capital stock of or ownership interests in Trustor resulting in a change in ownership of more than forty nine percent (49%) of the voting stock or ownership interests in the aggregate shall constitute a transfer within the meaning of this paragraph.

 

7. To indemnify and hold Beneficiary harmless from and against and to reimburse Beneficiary with respect to, any and all claims, demands, causes of action, loss, damage, liabilities, costs and expenses, including but not limited to Beneficiary's costs, of any and every kind or character, known or unknown, fixed or contingent, asserted against or incurred by Beneficiary by reason of or arising out of any violation of any "Applicable Environmental Law," as hereinafter defined, in effect (including without limitation the presence on the Property or release from the Property of hazardous substances or solid waste disposed of or otherwise released from the Property), The terms "hazardous substance" and "release" shall have the meanings specified in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), and the terms "solid waste" and "disposed" shall have the meanings specified in the Resource Conservation and Recovery Act of 1976 ("RCRA"); provided, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and provided further to the extent that state laws establish a meaning for "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply. The provisions of this paragraph shall survive the release of this Deed of Trust or any foreclosure of this Deed of Trust and shall continue thereafter in full force and effect. As used herein, the term Applicable Environmental Law shall include CERCLA, RCRA and all other state and local government laws of like nature, as each may now exist or be hereinafter amended, supplemented or replaced and any other laws of the United States of America or state or local government now existing or hereafter enacted which pertain to hazardous or toxic substances on or from the Property, the environmental condition of the Property or the environmental contamination of or from the Property.

 

IT IS MUTUALLY AGREED:

 

8. Trustor hereby absolutely and unconditionally assigns to Beneficiary and Trustee, all of Trustor's right, title and interest in and to all current and future leases and all Property Income arising therefrom; it being intended by Trustor that this assignment constitutes a present, absolute assignment and not an assignment for additional security only. Nevertheless, Beneficiary grants to Trustor a revocable license to collect and receive the Property Income provided that the existence or exercise of such license shall not operate to subordinate the assignment provided for in this Deed of Trust to any subsequent assignment. The assignment contained herein shall be fully operative without any further action on the part of either party, and upon any default, Beneficiary may at any time, without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of the Property or any part thereof, in Beneficiary’s own name sue for or otherwise collect the Property Income, including that past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of the Property, the collection of the Property Income, and the application thereof as aforesaid, shall not cure or waive any default or notice of Trustee's sale hereunder or invalidate any act done pursuant to the notice.

 

9. Any award of damages in connection with any condemnation or any such taking, or for injury to the Property by reason of public use, or for damages for private trespass or injury thereto, is assigned and shall be paid to Beneficiary as further security for all obligations secured hereby (reserving unto the Trustor, however, the right to sue therefor and the ownership thereof subject to this Deed of Trust), and upon receipt of such monies Beneficiary may hold the same as such further security, or apply or release the same in the same manner and with the same effect as the above provided or disposition of proceeds of fire or other insurance.

 

10. Time is of the essence of this Deed of Trust, and that by accepting payment of any sum secured hereby after its due date, Beneficiary does not waive its right either to require prompt payment when due of all other sums so secured or to declare default for failure so to pay.

 

11. In addition to creating a lien against the Property, this Deed of Trust constitutes a security agreement within the meaning of the Arizona Uniform Commercial Code (“UCC”), and is intended to and does hereby create a security interest in favor of Beneficiary in all fixtures, equipment, Property Income and other personal property of Trustor, and all replacements and substitutions thereof (collectively, the "Personal Property") at any time situated on or used in connection with the maintenance and operation of the Property. This Deed of Trust shall constitute a “fixture filing” within the meaning of the UCC and shall be self-operative with respect to such Personal Property, but Trustor shall execute and deliver on demand from Beneficiary one or more security agreements, financing statements and other instruments as Beneficiary may request in order to impose the lien hereof more specifically upon any such Personal Property, the terms and conditions thereof to be as required by Beneficiary, in Beneficiary's sole and absolute discretion. The security interest in the Personal Property as created hereby (the “Security Interest”) shall be subject to the right of Trustor and tenants of Trustor to replace any such Personal Property from time to time so long as the replacement Personal Property has a fair market value, as determined by Beneficiary, in Beneficiary's sole and absolute discretion, equal to, or greater than the fair market value of the Personal Property replaced. The Personal Property may be moved about and relocated from time to time within the Property without the prior consent of Beneficiary first obtained. Trustor agrees that all Property of every kind and nature and description, whether real or personal, covered by this Deed of Trust, together with all Personal Property covered by the security interest granted hereby, encumbered as one unit, and upon default by Trustor under the Note secured hereby, or under this Deed of Trust, or any security agreement given pursuant to this paragraph, in addition to the remedies available to a secured party under the Code, this Deed of Trust and such Security Interest, at Beneficiary's option, may be foreclosed or sold in the same proceeding in accordance with the provisions of Arizona law, and all of the Property (both realty and personalty) may, at Beneficiary's option, be sold as such in one unit as a going business. The filing of any financing statement relating to any Personal Property or rights or interest generally or specifically described herein shall not be construed to diminish or alter any of Beneficiary's rights or priorities hereunder.

 

The Security Interest, at all times, shall be prior to any other interests in the Personal Property except any lien or security interest granted in connection with any permitted exception. Trustor shall act and perform as necessary and shall execute and file all security agreements, financing statements, continuation statements and other documents requested by Beneficiary to establish, maintain and continue the perfected Security Interest. Trustor, on demand, shall promptly pay all costs and expenses of filing and recording, including the costs of any searches, deemed necessary by Beneficiary from time to time to establish and determine the validity and the continuing priority of the Security Interest.

 

Except as provided herein, Trustor shall not sell, transfer, assign or otherwise dispose of any Personal Property or any interest therein without obtaining the prior written consent of Beneficiary, except Personal Property that Trustor may dispose of Personal Property in the ordinary course of business that is obsolete and which Trustor replaces with Personal Property of similar value and function. Trustor shall keep the Personal Property free of all security interests or other encumbrances, except the Security Interest and any security interests and encumbrances granted in connection with any Permitted Exception. Although proceeds of Personal Property are covered hereby, this shall not be construed to mean that Beneficiary consents to any sale of the Personal Property. Trustor shall keep and maintain the Personal Property in good condition and repair, and shall promptly replace any part thereof that from time to time may become obsolete. Except for purposes of replacement and repair, Trustor, without the prior written consent of Beneficiary, shall not remove, or permit the removal of, any Personal Property from the Land.

 

Trustor hereby warrants, covenants and agrees that: (i) the Personal Property is or will be used primarily for business (other than farm) purposes; (ii) the Personal Property will be kept at the Land; and (iii) Trustor's records concerning the Personal Property will be kept at Trustor's address as set forth in the beginning of this Deed of Trust.

 

Trustor represents and warrants that: (i) the name specified above for Trustor is the true and correct legal name of Trustor, and (ii) the address specified above is the mailing address of Trustor. Trustor shall give Beneficiary immediate written notice of any change in the location of: (i) Trustor's chief executive office as set forth in the beginning of this Deed of Trust; (ii) the Personal Property or any part thereof; or (iii) Trustor's records concerning the Personal Property. Trustor shall give Beneficiary sixty (60) days prior written notice of any change in the name, identity, state of formation, organizational identification number, or organizational structure of Trustor.

 

Upon its recording in the real property records, this Deed of Trust shall be effective as a financing statement filed as a fixture filing. In addition, a carbon, photographic or other reproduced copy of this Deed of Trust and/or any financing statement relating hereto shall be sufficient for filing and/or recording as a financing statement. The filing of any other financing statement relating to any personal property, rights or interest described herein shall not be construed to diminish any right or priority hereunder.

 

12. That upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed of Trust and the Note to Trustee for cancellation and retention, and upon payment of its fees, Trustee shall release and reconvey, without covenant or warranty, express or implied, the Property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The Grantee in such reconveyance may be described as "the person or persons legally entitled thereto."

 

13. Except as otherwise required by applicable law, all notices or other communications required or permitted under this Deed of Trust shall be in writing, and shall be personally delivered or sent to the mailing address of the party entitled to receive such notice by registered or certified mail, return receipt requested, with postage fully prepaid or receipted overnight courier, and shall be deemed received upon the earlier of (a) the date of delivery, if personally delivered, (b) three (3) business days after the date of deposit in the U.S. Mail, if mailed, or (c) the one (1) business day after delivery to an overnight courier.

 

14. That (a) upon default by Trustor in the payment of any principal or interest under the Note secured by this Deed of Trust when due, with such failure continuing for 10 days after written notice thereof to Trustor, (b) upon default by Trustor in the payment of any other indebtedness secured by this Deed of Trust that is not subject to reasonable dispute or controversy, with such failure continuing for ten days after written notice thereof to Trustor, or (c) upon the occurrence of one or more of the following events, each of which is an event of default under this Deed of Trust: (i) Trustor voluntarily files a petition or case under any state insolvency law or any Federal Bankruptcy Code, and that petition is not withdrawn within 60 days, (ii) an involuntary petition or case is filed against Trustor under any state insolvency law or any Federal Bankruptcy Code and the petition is not withdrawn, discharged, stayed, or dismissed for more than 60 days or the court in which such petition is pending approves it or Trustor is adjudicated a bankrupt or becomes a debtor or debtor in possession in any such proceeding, or (iii) Trustor makes an assignment for the benefit of creditors , then Beneficiary may, at its option, and in its sole discretion, declare all sums secured hereby immediately due and may, at its option, and in its sole discretion, by delivering to Trustee a written declaration setting forth the Trustor’s default and may demand that the Property be sold pursuant to a trustee’s sale. Beneficiary will also deposit with Trustee this Deed of Trust and all note(s) and other documents evidencing expenditures secured by this Deed of Trust. Trustee will record and give notice of trustee’s sale in the manner required by law. Trustee will sell, in the manner required by law, the Property at public auction at the time and place fixed in the notice of trustee’s sale to the highest bidder for lawful money of the United States, payable at time of sale. Trustee may postpone or continue the sale by giving notice of postponement or continuance by public declaration at the time and place last appointed for the sale. Trustee will deliver to the purchaser its deed conveying the property so sold, but without any covenant or warranty, expressed or implied. Any person, including Trustor, Trustee, or Beneficiary may purchase at the trustee’s sale. After deducting all costs, fees and expenses of Trustee and of this Trust, including the cost of evidence of title in connection with sale and reasonable attorney’s fees of Trustee, Trustee will apply the proceeds of sale to payment of all sums then secured by this Deed of Trust including all other sums due under the terms of this Deed of Trust. To the extent permitted by law, an action may be maintained by Beneficiary to recover a deficiency judgment for any balance remaining unsatisfied after application of the proceeds of the trustee’s sale. In lieu of sale pursuant to the power of sale conferred by this Deed of Trust, this Deed of Trust may be foreclosed in the manner provided by law for the foreclosure of mortgages on real property. Beneficiary also retains all other rights and remedies available to it at law or in equity. All rights and remedies are cumulative. If the Property encumbered by this Deed of Trust is located in more than one county, regardless of whether the Property is contiguous or not, the Trustee may sell all of the Property in any one of the counties in which part of the Property is located; and, unless Trustee receives contrary written instructions from the Beneficiary or Trustor, Trustee may sell all of the Property either in parcels or in whole. If the indebtedness secured hereby is secured by one or more other Deeds of Trust, then upon default of Trustor in the payment of the indebtedness or performance of any other agreement secured hereby, the Trustee may sell the Property subject to the Deed of Trust and to any other Deeds of Trust securing the indebtedness at Trustee's sales conducted serially. The undersigned Trustor requests that a copy of any notice of Trustee's sale hereunder be mailed to Trustor at the mailing address set forth herein.

 

15. Beneficiary may appoint a successor Trustee in the manner prescribed by law. A successor Trustee herein shall, without conveyance from the predecessor Trustee, succeed to all the predecessor's title, estate, rights, powers, and duties. Trustee may resign by mailing or delivering notice thereof to Beneficiary and Trustor.

 

16. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term Beneficiary shall mean the owner and holder of the Note secured hereby, whether or not named as Beneficiary herein. In this Deed of Trust, whenever the context so requires, the masculine gender includes the feminine and neuter, and the singular number includes the plural.

 

17. That Trustor for itself and all who may claim through or under Trustor, waives, to the fullest extent permitted by law, any and all (a) homestead rights, (b) rights to reinstatement, and (c) rights to have the property comprising the Property marshaled upon any trustee’s sale or foreclosure of all or any portion of the Property. Beneficiary named on this Deed of Trust shall be subrogated to the lien, notwithstanding its release of record of any prior mortgage, Trust Deed or other encumbrance paid or discharged from the proceeds of the Note secured hereby or from any advance made by the Beneficiary. This right of subrogation shall not be affected by the creation or declaration of homestead on the Property.

 

18. That Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. Trustee is not obligated to notify any party hereto of pending sale under any other Deed of Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee shall be a party unless brought by Trustee.

 

19. This Deed of Trust will be governed by the laws of the State of Arizona without regard to its conflicts of law provisions. This Deed of Trust has been accepted by Beneficiary in the State of Arizona. If any provision or clause of this Deed of Trust or the Note conflicts with applicable law, such conflict shall not affect other provisions of this Deed of Trust or the Note which can be given effect without the conflicting provision, and to this end the provisions of this Deed of Trust and the Note are declared to be severable.

 

20. This Deed of Trust secures an obligation incurred for the construction of improvements on land. This Deed of Trust is a “construction mortgage” and is entitled to the benefits of A.R.S. Section 47-9334.

 

 

Remainder of Page Intentionally Left Blank

 

Signature Appears Next Page

 

 
 

 

IN WITNESS WHEREOF, the undersigned hereto has duly executed this Deed of Trust as of the Date set forth above.

 

TRUSTOR:

 

BSSD GROUP, LLC,

an Arizona limited liability company

 

By:    Item 9 Labs Corp.,

a Delaware corporation

Its:     Manager and Member

 

By: _________________________

Name: Bryce Skalla

Its:     President

 

STATE OF ARIZONA    )

) SS:

County of __________   )

 

The foregoing instrument was acknowledged before me this ____ day of ______________, 2019, by Bryce Skalla, President of Item 9 Labs Corp., a Delaware corporation, the Manager and Member of BSSD GROUP, LLC, an Arizona limited liability company, being authorized to do so.

 

 

My Commission Expires:

_______________________

Notary Public

 
 

EXHIBIT A

(Legal Description)

 

A parcel of land lying in and being a part of the Southwest quarter of Section 24, T6S-R7E, G&SRM, Pinal County, Arizona, more particularly described as the follows:

 

Commencing at the South quarter corner of said Section 24, a found Arizona Department of Transportation brass cap in hand hole, from whence the Southwest corner of said Section 24, a found Arizona Department of Transportation brass cap in hand hole, bears N89°36'44"W, a distance of 2606.89'; thence, N01°14'53"E along the cast line of the Southwest quarter of said Section 24, a distance of 1388.14', a set ½” iron pin capped LS 17278, to the TRUE POINT OF BEGINNING;

 

Thence, S89°59'36"W, a distance of 755.60', a set ½'' iron pin capped LS 17278;

Thence, N01°14'55"E, a distance of 288.25', a set ½'' iron pin capped LS 17278;

Thence, N89°59'36"E, a distance of 755.60', a set ½'' iron pin capped LS 17278;

Thence, S01°14'53"W, a distance of 288.25', to the TRUE POINT OF BEGINNING.

 

Contains in all 5.00 Acres or 217,750.0 SF more or less.

 
 

Exhibit D

 

Promissory Note

Nevada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

PROMISSORY NOTE

 

Total Principal Amount: $1,500,000
Issue Date: September 28, 2018
Location of Execution: Scottsdale, Arizona
Promissory Note Due Date: September 27, 2023
Interest Rate: 0% interest in lieu of Gross Revenue Participation
Payment Obligations: Monthly Payments to begin 30 days after Nevada Facility construction commences; Gross Revenue Participation payments due quarterly and applied in lieu of interest to the principal balance of this Note, with such payments to begin at the end of Deferment Period.
Borrower: Item 9 Properties, LLC
Borrower’s Address: 2033 N. Overfield Rd, Casa Grande, AZ 85194
Lender: Viridis Group I9 Capital, LLC
Lender’s Address: 2727 N. 3 rd Street, Suite 301
  Phoenix AZ 85004

   

For Value Received, the Borrower, with its address of record being Borrower’s Address, promises to pay to the order of the Lender the Total Principal Amount advanced to the Borrower, from time to time, until paid in full pursuant to the terms of this Promissory Note (this “Note”). The Principal shall be due and payable, if not sooner paid, on or before the Promissory Note Due Date.

 

1.   Definitions . In addition to: (i) terms defined in the Secured Promissory Note and Revenue Participation Purchase Agreement of even date herewith (the “ Loan Agreement ”), and (ii) terms defined above or otherwise defined in the body of this Note, the following terms will have the meanings indicated below and will be used as defined terms in connection with this Note.

 

“Borrower’s Interest ” means only the Borrower’s ownership interest in the Nevada Operations.

 

Nevada Construction ” means the construction for an approximately 20,000 square foot facility located at LOT ONE (1) IN BLOCK THIRTY-SEVEN (37) OF CALVADA VALLEY UNIT NO. 11 AS SHOWN BY MAP THEREOF RECORDED FEBRUARY 5, 1974 AS FILE NO. 40749 IN THE OFFICE OF THE COUNTY RECORDER OF NYE COUNTY, NEVADA.

 

Nevada Operations ” means the commencement of operations resulting from the completion of the Nevada Construction.

 

Deferment Period ” means the period commencing on the Issue Date and ending on the date which is 90 days after the Borrower commences revenue generation from Nevada Operations.

 

Distribution(s) means the distribution of Gross Revenues to Lender.

 

Gross Revenue ” means all revenues of the Company from Borrower’s Interest in the Nevada Operations of the Company, including, but not limited to, (i) investment income, (ii) rental income, (iii) income from the operations of the Company, (iv) net proceeds of business interruption insurance, if any, (v) income from fees and charges (whether such fees and charges are paid by or on behalf of patients or by any other party) and (vii) without duplication, all other accounts receivable, revenues, profits and receipts derived by or on behalf of the Company from any source relating to Borrower’s Interest in the Arizona Operations.

 

Note ” means this Note and each amendment hereto as entered into from time to time.

 

Principal Amount ” means the total dollar amount actually advanced to the Borrower under this Note.

 

Revenue Participation Payments ” means the payments described in Section 2.A, and Section 2.B, and Section 2.C below.

 

2. Interest; Repayment; Revenue Participation. This Note shall not accrue any interest (0% Interest); the Borrower hereby agrees to pay and Lender expressly agrees to receive the Revenue Participation Payments herein in lieu of interest. All payments made by Borrower to Lender, including Monthly Payments and Revenue Participation Payments, shall be applied towards the unpaid Principal Amount of this Note. Borrower shall begin making payments of 1% of the Principal Amount, or $1,250, whichever is lower, per month 30 days after commencement of the Arizona Construction (the “ Monthly Payments ”). In addition to Monthly Payments, Borrower hereby grants to Lender the right to participate in the Gross Revenues generated from Borrower’s Interest in the Nevada Operations commencing on the first calendar quarter following the Deferment Period, and continuing on the fifteenth day after the close of each calendar quarter thereafter, unless earlier terminated pursuant to the terms of this Note. Borrower shall make Distributions of Revenue Participation Amounts generated from Gross Revenues during the immediately preceding calendar quarter pursuant to the following schedule:

 

6) 5% of Gross Revenues generated by the Borrower’s Interest in the Nevada Operations until the Principal Amount is repaid; such payments are estimated to be between $765,000 to $1,500,000 annually once the Borrower’s Interest in Nevada Operations are fully operational, however, actual results may vary and a lower annual revenue amount shall not constitute a default or breach; then,

 

7) 2% of Gross Revenues generated by the Borrower’s Interest in the Nevada Operations until Lender has recouped two times the Principal Amount; such payments are estimated to be $300,000 to $600,000 annually, however, actual results may vary and a lower annual revenue amount shall not constitute a default or breach; then,

 

8) 1% of Gross Revenues generated by the Borrower’s Interest in the Nevada Operations in perpetuity or until a Change in Control (as defined in Section 3) triggering a Mandatory Buyout (as defined in Section 3), notwithstanding the repayment of the Principal Amount of the Note.

 

9) No distributions of Revenue Participation Payments shall be made during the Deferment Period.

 

10) Upon payment of 200% of the Principal Amount of this Note, the Note shall be deemed repaid in full, except with respect to Lender’s right to the Revenue Participation Payments under Section 2.C above, and Lender shall release its UCC-1, its security interest against the Company’s collateral, and the NV Deed of Trust (as defined in the Loan Agreement).

 

11) Lender expressly acknowledges the Borrower owns only a 51% interest in the Nevada Operations and that Lenders’ interest in any Gross Revenues from the Nevada Operations is limited based upon Borrower’s Interest therein.

 

3.   Mandatory Buyout . Upon the occurrence of a Change in Control (defined below) the Lender shall be entitled to receive: (i) the balance of 200% of the Principal Amount of this Note, which balance will be calculated after crediting to the Borrower any and all Monthly Payments and Revenue Participation Payments paid by Borrower to Lender through the date of the Change in Control, and (ii) 1% of the aggregate sales price or consideration received pursuant to such Change in Control (the “ Sales Price ”) and thereafter this Note shall be deemed to be satisfied in full.

 

A. Change in Control ” means the occurrence of any of the following events:

i. A change in the ownership of the Borrower which occurs on the date that any one person, or more than one person acting as a group (“ Person ”), acquires ownership of the stock of the Borrower that, together with the stock held by such Person, constitutes more than fifty one percent (51%) of the total voting power of the stock of the Borrower; provided, however, that for purposes of this subsection, the acquisition of additional stock by any one Person, who is considered to own more than twenty percent (20%) of the total voting power of the stock of the Borrower will not be considered a Change of Control; or

 

ii. A change in the ownership of all or substantially all of the Borrower’s assets which occurs on the date that any Person or entity acquires (or has acquired during the period ending on the date of the most recent acquisition by such person or persons) assets from the Borrower that have a total gross fair market value equal to or more than fifty one percent (51%) of the total gross fair market value of all of the assets of the Borrower immediately prior to such acquisition or acquisitions. For purposes of this subsection, gross fair market value means the value of the assets of the Borrower, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

 

4. Prepayment . The Borrower may prepay the Principal Amount of the outstanding balance of the Note, in whole or in part at any time in Borrower’s sole discretion for any reason. Prepayment of the Note shall have no effect on any outstanding Revenue Participation Payments under Section 2.B and Section 2.C. For example, if Borrower repays Principal in full, Lender shall still receive 2% of Gross Revenues from Borrower’s Interest in the Nevada Operations, until Lender has been paid 200% of the Principal Amount, and the 1% of such Gross Revenues in perpetuity or until a Change in Control.

 

5. Default. If: (1) Principal Amount of this Note is not paid by the Promissory Note Due Date; or (2) Borrower has failed, after the Deferment Period, to make Distributions to Lender for two consecutive quarters, or (3) if the Company becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt, or (4) is the Company is in default under the Loan Agreement or any other Note or obligation of the Company to Lender, each will constitute a default (“ Default ”) under this Note. Upon the occurrence of a Default, Lender shall provide written notice of Default to Borrower and provide the Company the opportunity to cure such default within 10 business days; if Borrower does not cure the Default, then (a) all amounts payable under this Note will be due and payable immediately, and (b) the Lender shall be entitled to exercise any and all rights and remedies available to the Lender under this Note, Lender’s security interest, the NV Deed of Trust, or under applicable law.

 

6. Secured Obligation . The Borrower further agrees as follows:

 

A. Grant of Security Interest : Subject to the rights and security interests of a secured party, as defined in the Arizona Uniform Commercial Code, and without interfering with or diminishing the Borrower’s right to dispose of, transfer, or sell any of the assets set forth below (provided any disposition, transfer or sale would remain subject to Lender’s security interest therein, unless and until this Note is paid as provided in Section 2.E), the Borrower hereby unconditionally grants, assigns, and pledges to the Lender to secure the obligations evidenced by this Note, a continuing security interest in all of the Borrower’s right, title, and interest in and to the following, whether now owned or hereafter acquired or arising and wherever located (the “Collateral”),:

 

i. all of the Borrower’s accounts (as that term is defined in Article 9 of the Arizona Uniform Commercial Code, as in effect from time to time (the “Code”; any terms (whether capitalized or lower case) used in Section 1 and this Section 6 Note that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein; provided, that to the extent that the Code is used to define any term used herein and if such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 of the Code shall govern;

 

ii. all of the Borrower’s books and records;

 

iii. all of the Borrower’s chattel paper (as that term is defined in the Code);

 

iv. all of the Borrower’s commercial tort claims (as that term is defined in the Code);

 

v. all of the Borrower’s deposit accounts and securities accounts (as each such term is defined in the Code);

 

vi. all of the Borrower’s equipment (as that term is defined in the Code);

 

vii. all of the Borrower’s general intangibles (as that term is defined in the Code);

 

viii. all of such the Borrower’s inventory (as that term is defined in the Code);

 

ix. all of the Borrower’s investment property (as that term is defined in the Code);

 

x. all of the Borrower’s letters of credit, letter-of-credit rights, instruments, promissory notes, drafts and documents (as each such term is defined in the Code);

 

xi. all of the Borrower’s supporting obligations, and includes letters of credit and guaranties issued in support of accounts, chattel paper, documents, general intangibles, instruments or investment property (as each such term is defined in the Code);

 

xii. all of the Borrower’s money, cash equivalents, or other assets of the Borrower that now or hereafter lawfully come into the possession, custody, or control of the Lender (or its agent or designee); and

 

xiii. all of the proceeds (as such term is defined in the Code) and products, whether tangible or intangible, of any of the foregoing.

 

B. Authorization to File Financing Statements : Borrower shall execute and deliver to Lender, concurrently with Borrower’s execution of this Note and at any time or times hereafter at the request of Lender, all financing statements, continuation financing statements, assignments, certificates of title, affidavits, reports, schedules of account, designations of inventory, letters of authority and all other documents that Lender may request, in form satisfactory to Lender, to perfect and maintain a perfected security interest in the Collateral in order to fully consummate all of the transactions contemplated hereunder.

 

C. No Further Encumbrances : Borrower shall not further encumber, transfer, abandon or dispose of the Collateral without the written consent of Lender, which may not be unreasonably withheld.

 

D. Control Arrangement : Borrower and Lender acknowledge Borrower’s pledge of a security in the interest in the Collateral pursuant to the Code, so that Lender’s possession, direct or indirect, of the Collateral, will, upon giving value, perfect Lender’s first lien security interest in the same. Borrower acknowledges the right of Lender, in the event of an uncured Default, to have the Collateral sold or liquidated, and agrees to comply with written notices from Lender directing the transfer, redemption, sale, or liquidation of all or a portion of the Collateral without further consent by Borrower in the event of an uncured Default by Borrower. It is the intention of the parties hereto that the provisions of this Section 6 confer on the Lender “control” over the Collateral, as defined in the Code. The Borrower and Lender agree that the Company will register the pledge on the books of the Company with respect to the Collateral.

 

7. Representations, Warranties, Covenants and Agreements of the Borrower : The Borrower represents and warrants, and covenants and agrees, as follows:

 

A. The Borrower has the requisite power and authority to execute, deliver this Note and perform the obligations under this Note. This Note constitutes a legal, valid and binding obligation of the Borrower enforceable in accordance with its terms.

 

B. The name (within the meaning of Section 9-503 of the Code) of the Borrower is Item 9 Labs Corp. and the jurisdiction of organization of the Borrower is the State of Delaware.

 

C. As of the Date of this Note, the Borrower does not hold any commercial tort claims.

 

D. All information heretofore, herein or hereafter supplied to the Lender by or on behalf of the Borrower with respect to this Note is accurate and complete in all material respects as of the date furnished.

 

E. All reasonable attorneys’ fees, expended or incurred by the Parties in connection with the enforcement of any rights or obligations set forth under this Note of the Loan Agreement shall be paid to the prevailing party in the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by the Lender or any other person) relating to the Borrower or any other person or entity.

 

8. Rights and Remedies Upon Default :

 

A. Upon occurrence of Default as defined herein and subject to the rights and security interests of a secured party as set forth under the Code, the Lender shall have the right to exercise all of the rights and remedies of a secured party under the Code or any other applicable law.

 

B. Each right, power, and remedy of the Lender as provided for in this Note, now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Note now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Lender, of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Lender of any or all such other rights, powers, or remedies.

 

9. Term of this Note : The Promissory Note Due Date of this Note is described in Section 1 above. Principal amounts, calculations and payments for this Note shall be determined by the amount(s) of the funds actually delivered by the Borrower and received by the Lender in the Lender’s bank account on the date(s) of said receipt. The Principal Amount is due and payable on the Promissory Note Due Date. This Note shall be deemed repaid in full, except with respect to Lender’s right to the Revenue Participation Payments under Section 2.C above, on the date on which all payments under Section 2.A, Section 2.B, and any other costs or expenses to which Lender may be entitled paid in full, and all other obligations under this Note and the Loan Agreement have been paid or discharged.

 

10. Notices : All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties, and shall be deemed to have been duly given when delivered personally or mailed by first-class certified mail, return receipt requested, five (5) days after posting in the U.S. mail, in each case if delivered to the addresses given for each of the parties.

 

11. Miscellaneous :

 

A. No course of dealing between the Borrower and the Lender, nor any failure to exercise, nor any delay in exercising, on the part of the Lender, any right, power or privilege under this Note will operate as a waiver of any term of this Note, nor shall any single or partial exercise of any right, power or privilege under this Note preclude any other or further exercise of the right, power or privilege or the exercise of any other right, power or privilege. No waiver of any breach or default or any right under this Note will be considered valid unless in writing and signed by the party giving such waiver, and no such waiver will be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise.

 

B. In the event that any provision of this Note is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Note shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If notwithstanding the foregoing, any provision of this Note is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Note and without affecting the validity or enforceability of such provision or the other provisions of this Note in any other jurisdiction.

 

C. This Note shall be binding upon and inure to the benefit of each party and its successors and assigns.

 

D. Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Note.

 

E. Except as to applicable provisions of the Code with respect to the security interest granted in Section 6, and except as to the terms and enforcement of the NV Deed of Trust, this Note shall be construed in accordance with the laws of the State of Arizona and the Parties irrevocably submit to the exclusive jurisdiction of any court sitting in Maricopa County, Arizona over any action or proceeding arising out of or relating to this Note, and the Parties irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such Arizona State or Federal court. The Parties agree to waive its respective rights to a jury trial of any claim or cause of action based upon or arising out of this Note. The Parties acknowledge that this waiver is a material inducement for the Parties to provide financial accommodations as described in this Note and that the Parties rely on this waiver.

 

F. This Note may be amended from time to time by mutual agreement of Borrower and Lender.

 

G. Insofar as there is no interest payable under this Note, and in lieu thereof, the Borrower has agreed to pay Lender the Monthly Payments and Revenue Participation Payments, the Borrower and Lender agree, that to the extent such Monthly Payments and Revenue Participation Payments constitute “interest” that the Borrower and Lender agree that the provisions of A.R.S. Section 44-1201.A shall apply and that the Borrower and Lender have agreed the Monthly Payments and Revenue Participation Payments constitute “a different rate contracted for in writing” for purposes of A.R.S. Section 44-1201.A and that there is no maximum rate of interest applicable to this Note.

 

IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed to be effective as of the Date of this Note at the Location of Execution above written.

 

Borrower:

 

ITEM 9 PROPERTIES, LLC

A Nevada limited liability company

 

By:       ITEM 9 LABS CORP.

A Delaware corporation

Its Manager

 

By: _______________________________

Bryce Skalla, President

 

 
 

Exhibit E

 

Guaranty

NEVADA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

GUARANTY AGREEMENT

 

THIS GUARANTY AGREEMENT is dated and effective September 28, 2018, and is made by Item 9 Labs Corp., a Delaware corporation (“ Guarantor ”) to and for the benefit of Viridis Group I9 Capital, LLC, an Arizona limited liability company (“ Lender ”).

 

Recitals

 

D. For sufficient value, Item 9 Properties LLC, a Nevada limited liability company (“ Borrower ”) executed a Promissory Note dated September 28, 2018 (the “ Note ”) in the principal amount of up to $1,500,000 for the benefit Lender as Note Holder in connection with the Loan and Revenue Participation Agreement dated September 12, 2018 for the facility development and expansion of Borrower’s Nevada operations.

 

E. In order to induce Lender to provide the loan to Borrower, Guarantor agrees to personally guarantee the obligations of Borrower under the Note as provided herein.

 

F. Guarantor is the owner of 100% of the membership interests in the Borrower, and acknowledges that it is receiving an indirect benefit from the funding of the Note by the Lender.

 

Agreement

 

IN CONSIDERATION of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees as follows:

 

15. Guarantee .

 

(a) Guarantor, severally and unconditionally, guarantees to Lender the full and prompt payment of the principal and any interest at the rate specified under the Note, in lawful money of the United States, upon demand when due, whether at maturity or by acceleration or otherwise, including but not limited to, all of Borrower’s present and future obligations under the Note, and all modifications, amendments, restatements, extensions and renewals thereof, whether for principal, interest or otherwise.

 

(b) In addition, Guarantor agrees to pay Lender any and all expenses, including, without limitation, attorneys’ fees, court costs and related legal expenses incurred by Lender in connection with the enforcement of this Guaranty.

 

(c) All of the obligations, indebtedness and liabilities of Guarantor set forth in this Section 1 are referred to herein as the “Obligations.”

 

16. Obligations Absolute . The Obligations of the Guarantor hereunder are primary, absolute and unconditional and are intended as a continuing guaranty of payment and performance by Guarantor. Guarantor acknowledges having been provided with a copy of the Note and having consulted with counsel concerning Guarantor’s Obligations hereunder.

 

17. No Impairment of Liability . Guarantor agrees that Guarantor’s liability hereunder will not be released, reduced, impaired or affected by any one or more of the following events: (a) Lender’s obtaining additional collateral from Borrower or any other person to secure payment or performance of the Note; (b) the assumption of liability by any other person (whether as guarantor or otherwise) for payment or performance under the Note; (c) the release, surrender, exchange, loss, termination, waiver or other discharge of any collateral securing payment or performance under the Note; (d) the subordination, relinquishment or discharge of the Lender’s rights relating to the Note or any collateral described therein; (e) the foreclosure upon any collateral given to secure any liability of Borrower by judicial or non-judicial sale (though it is acknowledged that no collateral was pledged in connection with the origination of the Note or this Guaranty); (f) the loss or impairment of any right of subrogation of the Guarantor; (g) removed and reserved (h) the insolvency, bankruptcy, reorganization, discharge, waiver or other exoneration of the Borrower or any other person now or hereafter liable for payment or performance of the Obligations; (i) the renewal, consolidation, extension, modification, rearrangement or amendment from time to time of the Note, including, without limitation, the extension of the maturity date of the Note; (j) the failure, delay, waiver or refusal by Lender to exercise any right or remedy held by Lender under the Note; (k) Lender’s application of any monies available to Lender in payment or reduction of any of the Obligations in such manner and such amounts and at such times and in such order of priority as Lender may see fit to the payment or reduction of such portions of the Obligations as Lender may elect; (l) the sale, encumbrance, transfer or other modification of the ownership of the Borrower or the Borrower’s assets, or the change in the financial condition or management of the Borrower; (m) the invalidity, unenforceability or insufficiency of any provision of the Note or any collateral securing payment or performance thereunder; or (n) the failure of the Guarantor to receive notice of any one or more of the foregoing actions or events.

 

18. Waivers by Guarantor . Guarantor hereby expressly waives (a) diligence, presentment, protest, notice of dishonor, demand for payment, notice of nonpayment or nonperformance; (b) notice of the acceptance of this Guaranty; (c) notice of the existence or creation of all or any part of the Obligations of Borrower; (d) notice of termination as to future liability given by any other guarantor; (e) notice of demand, advertisement or notice of time or place of sale of any Collateral securing any of the Borrower’s Obligations; (f) all presentments, demands for performance, notices of nonperformance, protests and all other notices whatsoever; (g) any right to require Lender to proceed against Borrower or any security held in relation to the Borrower’s Obligations or to pursue any other right or remedy in Lender’s power; (h) any right to contest the enforcement of this Guaranty by virtue of any statute of limitations or other law varying the terms of this Guaranty; (i) any other defense available to Guarantors at law or in equity; or (j) and the right to interpose counterclaims or setoffs of any kind or description in any litigation arising under this Guaranty.

 

19. Amendments . No provision or term of this Guaranty may be amended, modified, revoked, supplemented, waived or otherwise changed except by a written instrument duly executed by Guarantor and Lender and designated as an amendment, supplement or waiver

 

20. Transfer of Assets . Guarantor will not voluntarily or involuntarily transfer title to any of his or her material assets without fair consideration or take any other action or suffer the same to be done, which would have a materially adverse effect on Guarantor’s ability to fulfill his Obligations to Lender hereunder.

 

21. Notices . Any notice given to any party in connection with this Guaranty shall be in writing, shall be (i) hand delivered, (ii) sent by registered or certified mail, return receipt requested, postage prepaid, or (iii) sent by Federal Express or other nationally recognized overnight courier service, and if hand delivered shall be deemed received when delivered, if mailed shall be deemed received one day after having been deposited in the United States mail, postage prepaid, and if sent by Federal Express or other nationally recognized overnight courier service shall be deemed received one business day after having been deposited with Federal Express or other nationally recognized overnight courier service if designated for next-day delivery, addressed as follows:

 

If to Lender to:

Viridis Group I9 Capital, LLC

2727 N. 3 rd Street, Suite 301

Phoenix AZ 85004

 

If to Guarantor to:

Item 9 Labs Corp.

2033 N. Overfield Road

Casa Grande, AZ 85194

 

Either party may change its address for notices by giving the other party notice thereof.

 

22. Counterparts . This Guaranty may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

 

23. Captions and Pronouns . The captions and headings of the various sections of this Guaranty are for convenience only, and are not to be construed as confining or limiting in any way the scope or intent of the provisions hereof.

 

24. Binding Effect . This Agreement will be binding on the Guarantor and his successors and permitted assigns, and will inure to the benefit of the Lender and all successors and permitted assigns of the Lender. Guarantor consents to the assignment of all or any portion of the rights of the Lender hereunder in connection with any assignment of the rights of the Lender under the Note without notice to the Guarantor.

 

25. Rights Cumulative . Each right, power and remedy of Lender under this Guaranty and the Note is cumulative and in addition to every other right, power or remedy, existing or implied, given now or hereafter existing, at law or in equity, and each and every right, power and remedy set forth herein or otherwise so existing may be exercised from time to time as often and in such order as may be deemed expedient by Lender, and the exercise or the beginning of the exercise of one right, power or remedy shall not be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy; and no delay or omission of Lender in the exercise of any right, power or remedy accruing hereunder or arising otherwise shall impair any such right, power or remedy, or be construed to be a waiver of any default or acquiescence therein.

 

26. Waiver . Lender shall not be deemed to have waived any provision of this Guaranty or the Note unless such waiver is in writing and is signed by Lender.

 

27. Choice of Law . This Agreement has been negotiated, executed and delivered in Scottsdale Arizona, and is intended to be construed in accordance with the laws of the State of Arizona.

 

28. Time of the Essence . Time is of the essence hereof with respect to the dates, terms and conditions of this Guaranty.

 

IN WITNESS WHEREOF, the Parties have duly executed this Personal Guaranty the date first above written.

 

ITEM 9 LABS CORP.

A Delaware corporation

 

By: ________________________

Bryce Skalla, President

 

 
 

Exhibit R

 

DEED OF TRUST and Security Agreement

NEVADA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

When Recorded Return To:

 

Viridis Group I9 Capital, LLC

AND WHEN RECORDED MAIL TO:

2727 N. 3 rd Street, Suite 301

Phoenix AZ 85004

Attn: Andrew Bowden, Manager

 

DEED OF TRUST, SECURITY AGREEMENT,

AND ASSIGNMENT OF RENTS AND FIXTURE FILING

[Nevada]

 

Date: September 28, 2018
   
Trustor: Item 9 Properties, LLC, a Nevada limited liability company
whose address is: 2033 N. Overfield Rd
  Casa Grande, AZ 85194
   
Beneficiary: Viridis Group I9 Capital, LLC, an Arizona limited liability company
whose address is: 2727 N. 3 rd Street, Suite 301
  Phoenix AZ 85004
  Attn: Andrew Bowden, Manager   
   
Trustee: First American Title Insurance Company
  1000 W. Charleston Blvd., Suite 180
  Las Vegas, NV 89135

 

This Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing (“Deed of Trust”) is made on the above date between the Trustor, Trustee, and Beneficiary above named.

 

WITNESSETH: That Trustor irrevocably grants and conveys to Trustee in Trust, with Power of Sale, all of the following described property, both real and personal:

 

A. The certain tract or parcel of land being legally described on Exhibit A hereto (the “Land”);

 

B. All buildings, structures and improvements of every nature whatsoever now or hereafter situated on the Land, and all fixtures, machinery, appliances, equipment, furniture and personal property of every kind and nature whatsoever now or hereafter owned or leased by Trustor and located in, on or attached to, and used or intended to be used in connection with the Land, buildings, structures or other improvements, or in connection with any construction being conducted or which may be conducted on the Land, and owned by Trustor, and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to any of the foregoing (collectively, the “Improvements” and together with Land, the “Property”);

 

C. All easements, rights-of-way, gores or strips of land, streets, ways, alleys, passages, sewer rights, water courses, water rights and powers, and all appurtenances whatsoever, in any way belonging, relating or appertaining to any of the Land, or which hereinafter shall in any way belong, relate or be appurtenant thereto, whether now owned or hereafter acquired by Trustor;

 

D. All of the estate, right, title and interest of Trustor of, in and to (i) all judgments, insurance proceeds, awards of damages and settlements hereafter made resulting from condemnation proceedings or the taking of the Property or any part thereof under the power of eminent domain, or for any damage (whether caused by such taking or otherwise) to the Property or any part thereof, or to any rights appurtenant thereto, and all proceeds of any sales or other dispositions of the Property or any part thereof, and Beneficiary is hereby authorized to collect and receive the awards and proceeds and to give proper receipts and acquittances therefor, and (if it so elects) to apply the same toward the payment of the indebtedness and other amounts secured hereby, notwithstanding the fact that the amount owing may not then be due and payable; (ii) all contract rights, general intangibles, actions and rights in action, including without limitation all rights to insurance proceeds and u nearned premiums arising from or relating to the Property; and (iii) all proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Property;

 

E. All rents, issues, profits, other income and other benefits that are now due or hereafter may become due by reason of the lending, leasing, or bailment of all or a portion of the Property or use or occupancy thereof to which Trustor may now or hereafter be entitled to (collectively, the "Property Income" ), to be applied against the indebtedness and other sums secured hereby; and

 

F. Subject to the rights of the Trustor hereunder, all right, title and interest of Trustor in and to any and all leases now or hereafter which grant a possessory interest in, or the right to use or occupy, all of part of the Property, together with all security therefor and all amounts payable thereunder, and all books and records which account for payments made under the leases and all security therefor (collectively, the “Leases”).

 

Due on Sale: The unpaid balance, including accrued interest, fees and penalties, is immediately due and payable in the event that the Premises is sold, transferred, or conveyed in any manner, unless otherwise prohibited by law.

 

THIS DEED OF TRUST is entered into by the Trustor, Trustee and Beneficiary. Trustor irrevocably grants and conveys to Trustee in Trust, with Power of Sale, the Property, together with leases, rents, issues, profits, or income generated by the Property (collectively, the “Property Income”); SUBJECT, HOWEVER, to the right, power and authority given to and conferred upon Beneficiary to collect and apply the Property Income; AND SUBJECT TO existing taxes, assessments, liens, encumbrances, covenants, conditions, restrictions, rights of way, and easement of record.

 

This Deed of Trust has been granted to secure: 1) performance of each agreement of Trustor contained in this Deed of Trust; 2) payment of the indebtedness evidenced by the promissory note of even date herewith (the “Note”), and any extensions or renewals of the Note, in the principal sum of $1,500,000.00 executed by Trustor in favor of Beneficiary or order; and 3) payment of additional sums and interest on these additional sums which may be loaned to Trustor, or Trustor’s successors or assigns, after the date of this Deed of Trust when evidenced by a promissory note or notes reciting that they are secured by this Deed of Trust.

 

TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR AGREES:

 

1. To keep the Property in good condition and repair; not to remove or demolish any building thereon; to complete or restore promptly and in good and workmanlike manner any building thereon which may be damaged, or destroyed and to p ay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting the Property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer, or permit any act upon the Property in violation of law; and do other acts which from the character or use of the Property may be reasonably necessary, the specific enumerations herein not excluding the general. If this Deed of Trust encumbers a unit in a condominium or a planned unit development, Trustor shall perform when due all of Trustor’s obligations under the declaration or covenants creating or governing the condominium or planned unit development, the bylaws and regulations of the condominium or planned unit development and all related documents.

 

2. To keep the improvements now existing or hereafter erected on the Real Property insured against loss by fire, hazards included within the term “all risk,” in such amounts (including replacement cost coverage) and for such periods as Beneficiary may require, but in no event less than the principal balance due under the Note secured by this Deed of Trust . Trustor shall also insure all fixtures encumbered hereby against the same loss hazards in an amount acceptable to Beneficiary. Beneficiary shall be named as an insured mortgagee. In the event of loss, all property and casualty insurance proceeds shall be payable jointly to Trustor and Beneficiary and shall be applied as directed by Beneficiary in its sole discretion. Any application for or release of any insurance proceeds shall not cure or waive any default under the Note or this Deed of Trust or any notice of Trustee’s sale hereunder or invalidate any act done pursuant to such notice. In the event of a conveyance to Beneficiary, or other transfer of title to the Property in extinguishment of the indebtedness secured by this Deed of Trust, all right, title, and interest of Trustor in and to any insurance policies then in force and proceeds thereof shall pass to the purchaser or grantee. The hazard insurance policy shall contain a standard non-contributory mortgage clause in favor of Beneficiary and shall provide that the policies cannot be cancelled or materially changed without thirty (30) days' prior written notice to Beneficiary. Trustor shall provide Beneficiary with satisfactory and complete certificates of insurance and copies of all policies. In the event of loss, Trustor shall give prompt notice to the insurance carrier and to Beneficiary. Beneficiary may make proof of loss if not made promptly by Trustor. If the Real Property is located in whole or in part in a flood hazard area as designated by the appropriate government entity, Trustor shall procure and keep in force such flood insurance as may be required to meet any applicable requirements of federal, state or local laws, regulations or ordinances. The insurance carriers providing all insurance shall be chosen by Trustor subject to approval by Beneficiary.

 

3. Trustor shall fully cooperate with respect to any action or proceeding which may reasonably affect the rights or powers of Beneficiary or Trustee hereunder, and in connection therewith, permit Beneficiary or Trustee, at its election to participate in such proceedings. In any suit brought by Beneficiary or Trustee to foreclose this Deed of Trust, Trustor agrees to pay all costs and expenses of Beneficiary and Trustee, including reasonable attorney’s fees, actually incurred in connection therewith.

 

4. To pay before delinquent all taxes and assessments affecting the Property; when due, all encumbrances, charges, and liens, with interest, on the Property or any part thereof, which appear to be prior or superior hereto; all costs, fees, and expenses of the Trust, including, without limiting the generality of the foregoing, the fees of Trustee for issuance of any Deed of Partial Release and Partial Reconveyance, or Deed of Release and Full Reconveyance, and all lawful charges, costs, and expenses in the event of reinstatement of, following default under, this Deed of Trust or the obligations secured hereby.

 

Should Trustor or Parent fail to make any payment or to do any act as required in the Note or Deed of Trust, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon the Property for such purposes; appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest, or compromise any encumbrance, charge, or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such power, pay necessary expenses, employ counsel, and pay his reasonable fees.

 

Should Trustor fail to make any tax and assessment payment or fail to maintain the insurance required herein, Beneficiary may establish an account servicing arrangement, with an account servicing agent designated by Beneficiary, at the Trustor’s sole cost and expense, in order to impound for taxes, assessments, and insurance and to otherwise collect sums due under the Note and this Deed of Trust. Notwithstanding anything to the contrary contained in this Deed of Trust, all impounds shall be subject to Nevada Revised Statutes (“NRS”) 100.091.

 

5. To pay immediately and without demand all sums expended by Beneficiary or Trustee pursuant to the provisions hereof, together with interest from date of expenditure at the same rate as is provided for in the Note secured by this Deed of Trust or at the highest legal rate, whichever be the greater rate. Any amounts so paid by Beneficiary or Trustee shall become a part of the debt secured by this Deed of Trust and a lien on the premises or immediately due and payable at option of Beneficiary or Trustee.

 

6. Not to sell, convey, transfer, or dispose of the Property, or any part thereof, or any interest therein, either voluntarily or involuntarily, or agree so to do, without the written consent of Beneficiary being first obtained, which consent shall be at the sole and absolute discretion of Beneficiary. Consent to one such transaction shall not be deemed a waiver of the right to require such consent to any future or successive transactions. Acceptance by Beneficiary from any transferee or person other than Trustor of any payment(s) for application on the unpaid balance of the Note shall not constitute a waiver of Beneficiary's rights as granted pursuant to this paragraph. In the event that Trustor is other than a natural person, any transfer or series of transfers of the capital stock of or ownership interests in Trustor resulting in a change in ownership of more than forty nine percent (49%) of the voting stock or ownership interests in the aggregate shall constitute a transfer within the meaning of this paragraph.

 

7. To indemnify and hold Beneficiary harmless from and against and to reimburse Beneficiary with respect to, any and all claims, demands, causes of action, loss, damage, liabilities, costs and expenses, including but not limited to Beneficiary's costs, of any and every kind or character, known or unknown, fixed or contingent, asserted against or incurred by Beneficiary by reason of or arising out of any violation of any "Applicable Environmental Law," as hereinafter defined, in effect (including without limitation the presence on the Property or release from the Property of hazardous substances or solid waste disposed of or otherwise released from the Property), The terms "hazardous substance" and "release" shall have the meanings specified in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), and the terms "solid waste" and "disposed" shall have the meanings specified in the Resource Conservation and Recovery Act of 1976 ("RCRA"); provided, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and provided further to the extent that state laws establish a meaning for "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply. The provisions of this paragraph shall survive the release of this Deed of Trust or any foreclosure of this Deed of Trust and shall continue thereafter in full force and effect. As used herein, the term Applicable Environmental Law shall include CERCLA, RCRA and all other state and local government laws of like nature, as each may now exist or be hereinafter amended, supplemented or replaced and any other laws of the United States of America or state or local government now existing or hereafter enacted which pertain to hazardous or toxic substances on or from the Property, the environmental condition of the Property or the environmental contamination of or from the Property.

 

IT IS MUTUALLY AGREED:

 

8. Trustor hereby absolutely and unconditionally assigns to Beneficiary and Trustee, all of Trustor's right, title and interest in and to all current and future leases and all Property Income arising therefrom; it being intended by Trustor that this assignment constitutes a present, absolute assignment and not an assignment for additional security only. Nevertheless, Beneficiary grants to Trustor a revocable license to collect and receive the Property Income provided that the existence or exercise of such license shall not operate to subordinate the assignment provided for in this Deed of Trust to any subsequent assignment. The assignment contained herein shall be fully operative without any further action on the part of either party, and upon any default, Beneficiary may at any time, without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of the Property or any part thereof, in Beneficiary’s own name sue for or otherwise collect the Property Income, including that past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of the Property, the collection of the Property Income, and the application thereof as aforesaid, shall not cure or waive any default or notice of Trustee's sale hereunder or invalidate any act done pursuant to the notice. Notwithstanding anything contained herein to the contrary, this Deed of Trust is subject to the Uniform Assignment of Rents Act, NRS Chapter 107 A.

 

9. Any award of damages in connection with any condemnation or any such taking, or for injury to the Property by reason of public use, or for damages for private trespass or injury thereto, is assigned and shall be paid to Beneficiary as further security for all obligations secured hereby (reserving unto the Trustor, however, the right to sue therefor and the ownership thereof subject to this Deed of Trust), and upon receipt of such monies Beneficiary may hold the same as such further security, or apply or release the same in the same manner and with the same effect as the above provided or disposition of proceeds of fire or other insurance.

 

10. Time is of the essence of this Deed of Trust, and that by accepting payment of any sum secured hereby after its due date, Beneficiary does not waive its right either to require prompt payment when due of all other sums so secured or to declare default for failure so to pay.

 

11. Reserved.

 

12. In addition to creating a lien against the Property, this Deed of Trust constitutes a security agreement within the meaning of the Nevada Uniform Commercial Code, NRS 104.1101 et seq. (the "Code"), and is intended to and does hereby create a security interest in favor of Beneficiary in all fixtures, equipment, Property Income and other personal property of Trustor, and all replacements and substitutions thereof (collectively, the "Personal Property") at any time situated on or used in connection with the maintenance and operation of the Property. This Deed of Trust shall constitute a “fixture filing within the meaning of the Code and shall be self-operative with respect to such Personal Property, but Trustor shall execute and deliver on demand from Beneficiary one or more security agreements, financing statements and other instruments as Beneficiary may request in order to impose the lien hereof more specifically upon any such Personal Property, the terms and conditions thereof to be as required by Beneficiary, in Beneficiary's sole and absolute discretion. The security interest in the Personal Property as created hereby shall be subject to the right of Trustor and tenants of Trustor to replace any such Personal Property from time to time so long as the replacement Personal Property has a fair market value, as determined by Beneficiary, in Beneficiary's sole and absolute discretion, equal to, or greater than the fair market value of the Personal Property replaced. The Personal Property may be moved about and relocated from time to time within the Property without the prior consent of Beneficiary first obtained. Trustor agrees that all Property of every kind and nature and description, whether real or personal, covered by this Deed of Trust, together with all Personal Property covered by the security interest granted hereby, encumbered as one unit, and upon default by Parent or Trustor under the Note secured hereby, or under this Deed of Trust, or any security agreement given pursuant to this paragraph, in addition to the remedies available to a secured party under the Code, this Deed of Trust and such security interest, at Beneficiary's option, may be foreclosed or sold in the same proceeding in accordance with the provisions of NRS 104.9604, and all of the Property (both realty and personalty) may, at Beneficiary's option, be sold as such in one unit as a going business. The filing of any financing statement relating to any Personal Property or rights or interest generally or specifically described herein shall not be construed to diminish or alter any of Beneficiary's rights or priorities hereunder.

 

13. That upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed of Trust and the Note to Trustee for cancellation and retention, and upon payment of its fees, Trustee shall release and reconvey, without covenant or warranty, express or implied, the Property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The Grantee in such reconveyance may be described as "the person or persons legally entitled thereto."

 

14. Except as otherwise required by applicable law, all notices or other communications required or permitted under this Deed of Trust shall be in writing, and shall be personally delivered or sent to the mailing address of the party entitled to receive such notice by registered or certified mail, return receipt requested, with postage fully prepaid or receipted overnight courier, and shall be deemed received upon the earlier of (a) the date of delivery, if personally delivered, (b) three (3) business days after the date of deposit in the U.S. Mail, if mailed, or (c) the one (1) business day after delivery to an overnight courier.

 

15. That (a) upon default by Parent in the payment of any principal or interest under the Note secured by this Deed of Trust when due, with such failure continuing for 10 days after written notice thereof to Trustor, (b) upon default by Parent in the payment of any other indebtedness secured by this Deed of Trust that is not subject to reasonable dispute or controversy, with such failure continuing for ten days after written notice thereof to Trustor or (c) upon the occurrence of one or more of the following events, each of which is an event of default under this Deed of Trust: (i) Parent or Trustor voluntarily files a petition or case under any state insolvency law or any Federal Bankruptcy Code, and that petition is not withdrawn within 60 days, (ii) an involuntary petition or case is filed against Parent or Trustor under any state insolvency law or any Federal Bankruptcy Code and the petition is not withdrawn, discharged, stayed, or dismissed for more than 60 days or the court in which such petition is pending approves it or Trustor is adjudicated a bankrupt or becomes a debtor or debtor in possession in any such proceeding, or (iii) Parent or Trustor makes an assignment for the benefit of creditors then Beneficiary may, at its option, and in its sole discretion, declare all sums secured hereby immediately due and may, at its option, and in its sole discretion, prepare and record on its own behalf, or to deliver to Trustee for recording, if appropriate, a Notice of Breach and Election to Sell pursuant to NRS 107.080(3) which, to the extent applicable, complies with NRS 107.087 to cause the Trust Estate to be sold to satisfy the obligations secured by this Deed of Trust, and in the case of delivery to Trustee, Trustee shall cause said notice to be filed of record. Beneficiary shall, concurrently with its recordation or delivery to Trustee of the Notice of Breach and Election to Sell, deliver to Trustee the original Note and such receipts and evidence of expenditures made and secured hereby as Trustee may require. After the lapse of time as may then be required by law following the recordation of said Notice of Breach and Election to Sell, Trustee shall cause to be recorded, published and delivered to Trustor such notice of sale as then required by applicable law including, but not limited to, NRS 107.080 (the “Notice of Sale”). Trustee shall, without demand on Trustor, after lapse of such time as may then be required by applicable law and after recordation of such Notice of Sale and Notice of Sale having been given as required by applicable law, sell the Property at the time and place of sale fixed by it in said Notice of Sale, either as a whole, or in separate lots or parcels or items as Trustee shall deem expedient, and in such order as it may determine, at public auction to the highest bidder for credit or cash in lawful money of the United States payable at the time of sale. Subject to NRS 107.081, Beneficiary may be a purchaser at such sale and, if Beneficiary is the highest bidder, Trustee may credit the portion of the purchase price that would be distributed to Beneficiary against the Obligations in lieu of paying cash. Trustee shall deliver to the purchaser or purchasers at the sale good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. Subject to NRS 107.030(8), the recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Subject to NRS 107.081, any person, including, without limitation, Trustor, Trustee or Beneficiary, may purchase at such sale and Trustor hereby covenants to warrant and defend the title of such purchaser or purchasers. After deducting all costs, fees and expenses of Trustee and of this Trust, including, without limitation, Trustee’s fees and reasonable attorneys’ fees, and costs of evidence of title in connection with the sale, Trustee shall, subject to NRS 40.462, apply the proceeds of sale in the following priority, to payment of (i) first, to all amounts expended under the terms of the Loan Documents, not then repaid, with accrued interest thereon; (ii) second, to all amounts due under the Note; (iii) third, to all other amounts secured by this Deed of Trust; and (iv) fourth, the remainder, if any, to the person or persons legally entitled thereto or as provided in NRS 40.462 or any similar or successor statute. Subject to NRS 107.082, Trustee may postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement or subsequently noticed sale, and without further notice make such sale at the time fixed by the last postponement, or may, in its discretion, give a new notice of sale. Beneficiary may foreclose this Deed of Trust as a realty mortgage. If the Property encumbered by this Deed of Trust is located in more than one county, regardless of whether the Property is contiguous or not, the Trustee may sell all of the Property in any one of the counties in which part of the Property is located; and, unless Trustee receives contrary written instructions from the Beneficiary or Trustor, Trustee may sell all of the Property either in parcels or in whole. If the indebtedness secured hereby is secured by one or more other Deeds of Trust, then upon default of Trustor in the payment of the indebtedness or performance of any other agreement secured hereby, the Trustee may sell the Property subject to the Deed of Trust and to any other Deeds of Trust securing the indebtedness at Trustee's sales conducted serially. In the absence of written instructions from the Beneficiary to the contrary, the Trustee may, in its sole discretion, designate the order in which property subject to the various Deeds of Trust is to be sold. The undersigned Trustor requests that a copy of any notice of Trustee's sale hereunder be mailed to Trustor at the mailing address set forth herein.

 

16. Beneficiary may appoint a successor Trustee in the manner prescribed by law. A successor Trustee herein shall, without conveyance from the predecessor Trustee, succeed to all the predecessor's title, estate, rights, powers, and duties. Trustee may resign by mailing or delivering notice thereof to Beneficiary and Trustor.

 

17. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term Beneficiary shall mean the owner and holder of the Note secured hereby, whether or not named as Beneficiary herein. In this Deed of Trust, whenever the context so requires, the masculine gender includes the feminine and neuter, and the singular number includes the plural.

 

18. That Trustor for itself and all who may claim through or under Trustor, waives, to the fullest extent permitted by law, any and all (a) homestead rights, (b) rights to reinstatement, and (c) rights to have the property comprising the Property marshaled upon any trustee’s sale or foreclosure of all or any portion of the Property, including any rights provided under NRS 100.040 and 100.050. Beneficiary named on this Deed of Trust shall be subrogated to the lien, notwithstanding its release of record of any prior mortgage, Trust Deed or other encumbrance paid or discharged from the proceeds of the Note secured hereby or from any advance made by the Beneficiary. This right of subrogation shall not be affected by the creation or declaration of homestead on the Property.

 

19. That Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. Trustee is not obligated to notify any party hereto of pending sale under any other Deed of Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee shall be a party unless brought by Trustee.

 

20. This Deed of Trust will be governed by the laws of the State of Nevada without regard to its conflicts of law provisions. This Deed of Trust has been accepted by Beneficiary in the State of Nevada. If any provision or clause o f this Deed of Trust or the Note conflicts with applicable law, such conflict shall not affect other provisions of this Deed of Trust or the Note which can be given effect without the conflicting provision, and to this end the provisions of this Deed of Trust and the Note are declared to be severable.

 

TRUSTOR

 

ITEM 9 PROPERTIES, LLC,

A Nevada limited liability company

 

By:       Item 9 Labs Corp.,

a Delaware corporation

Its Manager

 

By: _________________________

Bryce Skalla, President

 

 

NOTARY ACKNOWLEDGMENT(S) TO DEED OF TRUST

 

State of Arizona                                           } ss:

County of Maricopa                                  

 

Acknowledged before me this                    day of        2019        by Bryce Skalla, Preisident of Item 9 Labs Corp., the Manager of Item 9 Properties, LLC

 

Signature                                                                   

  Notary Public                                                       My Commission expires: 

 

 
 

 

EXHIBIT A

(Legal Description)

 

 

LOT ONE (1) IN BLOCK THIRTY-SEVEN (37) OF CALVADA VALLEY UNIT NO. 11 AS SHOWN BY MAP THEREOF RECORDED FEBRUARY 5, 1974 AS FILE NO. 40749 IN THE OFFICE OF THE COUNTY RECORDER OF NYE COUNTY, NEVADA.

 

 

 
 

Exhibit G

 

DEFINITION OF ACCREDITED INVESTOR

 

In connection with the potential offer and sale by the Company of the Notes, each Purchaser hereby represents and warrants to the Company that such Purchaser meets at least one (1) of the categories of "accredited investors" set forth below and intends that the Company rely upon these representations and warranties.

 

1. A natural person who had an individual income [1] in excess of $200,000 in each of the two (2) most recent years or joint income [2] with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
2. A natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his/her purchase exceeds $1,000,000. Please note that, when calculating your individual or joint net worth for purposes of this representation and warranty, you should not include the estimated fair market value of your primary residence as an asset nor should you include indebtedness secured by your primary residence as a liability (except to the extent that such indebtedness at the present time exceeds the estimated fair market value of your primary residence).

3. A bank as defined in Section 3(a)(2) of the Securities Act of 1933, as amended (the " Act "), or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940, as amended, or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958, as amended; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors.

4. A private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, as amended.

5. An organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, a corporation, a Massachusetts or similar business trust, or a partnership, not formed for the specific purpose of acquiring the Interest, with total assets in excess of $5,000,000.

6. A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Interest, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D.

7. An entity in which all of the equity owners are accredited investors.

8. A director, executive officer, or manager of the Company, or director, officer, or managing member of the manager of the Company.

___________________________ 

[1] For purposes of this item, "individual income" means adjusted gross income as reported for federal income tax purposes, less any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (but not including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any interest income received which is tax-exempt under §103 of the Code; (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040); (iii) any deduction claimed for depletion under §611 et seq. of the Code; and (iv) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of §1202 of the Code prior to its repeal by the Tax Reform Act of 1986.

[2] For purposes of this item, "joint income" means adjusted gross income as reported for federal income tax purposes, including any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any interest income received which is tax-exempt under §103 of the Code; (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040); (iii) any deduction claimed for depletion under §611 et seq. of the Code; and (iv) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of §1202 of the Code prior to its repeal by the Tax Reform Act of 1986.

 

     

 

Exhibit D

 

Form of DEED OF TRUST

ARIZONA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

Exhibit E

 

Form of DEED OF TRUST

NEVADA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.8

 

EXECUTIVE EMPLOYMENT AGREEMENT

 

This Employment Agreement (" Agreement ") is effective on November 26, 2018 (the “ Effective Date ”) between Item 9 Labs Corp., a Delaware corporation (" Company ") and Sara Gullickson (" Executive "). The Company and Executive are sometimes referred to herein individually as a “ Party ” and collectively as the “ Parties .”

 

RECITALS:

 

WHEREAS, the Company, by and through its wholly owned subsidiary AZ DP Holdings, LLC (“ AZDP ”), acquired the Purchased Assets of Arizona DP Consulting LLC, an Arizona limited liability company (“ ADP ”), pursuant to that certain Asset Purchase Agreement of even date herewith by and between the Company, AZDP, ADP, and Executive as sole owner of ADP, incorporated herein by reference (the “ Asset Purchase Agreement ”).

 

WHEREAS , any terms not herein defined shall have the same meaning as set forth in the Asset Purchase Agreement.

 

WHEREAS, the Company is a publicly traded corporation engaged in the business of cultivating quality-driven cannabis flower and marijuana products in Arizona and Nevada (the “ Business ”) and following the Closing of the Asset Purchase Agreement, the Company will own and operate the Purchased Assets by and through AZDP.

 

WHEREAS, the Executive is in the business of providing the kinds of services required in the Company’s Business and has extensive experience in operating the business related to the Purchased Assets.

 

WHEREAS , the Company desires that Executive be employed by the Company, and render services to the Company, and Executive is willing to be so employed and to render such services to the Company, all upon the terms and subject to the conditions contained herein.

 

NOW, THEREFORE , in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

AGREEMENT:

 

1. EMPLOYMENT .  Subject to and upon the terms and conditions contained in this Agreement, the Company hereby agrees to employ Executive and Executive agrees to be employed by the Company, for the period set forth in paragraph 2 hereof, to render to the Company, its affiliates and/or subsidiaries the services described in paragraph 3 hereof.

 

The Executive hereby acknowledges and agrees that upon the Effective Date, any and all existing employment or consulting agreements entered into between Company and Executive are hereby expressly terminated and replaced in entirety by this Agreement.

 

2. TERM .  Executive’s employment under this Agreement shall commence as of the Effective Date hereof and shall continue for a period of three (3) years unless earlier terminated by the Board of Directors (the “ Board ”) of the Company or by the Executive in accordance with the terms of this Agreement (the “ Employment Term ”).

 

3. DUTIES .

 

(a) Executive shall serve as the Chief Executive Officer of the Company, reporting directly to the Board and shall be responsible for the management and running of the day-to-day operations of the Company, including, but not limited to, those services set forth in Exhibit A , attached hereto and incorporated herein by reference (the “ Services ”).

 

(b) Executive shall perform all duties and services incidental to the positions held by her. The Board retains the right to change Executive's duties and reporting relationships as may be determined to be in the best interests of the Company; provided, however, that any such change in Executive's duties shall be consistent with Executive's training, experience, and qualifications.

 

(c) Executive shall serve as a member of the Board of the Company during the Employment Term.

 

(d) Executive agrees to abide by all bylaws and policies of the Company promulgated from time to time by the Company and made available to Executive as well as all laws, statutes and regulations in all material respects.

 

4. BEST EFFORTS .   Executive agrees to devote her full business time and attention, subject to absences for customary vacations and for temporary illness, as well as her best efforts, energies and skill, to faithfully and industriously perform the duties and responsibilities attributable to her position, to the reasonable satisfaction of the Company. In addition, Executive will not engage in any other gainful occupation which requires Executive’s personal attention and/or creates a conflict of interest with job responsibilities under this Agreement without the prior approval of the Board, with the exception that Executive may personally trade in stock, bonds, securities, commodities or real estate investments for her own benefit. Company hereby grants express permission to Executive to continue operating the existing business ventures as set forth in Exhibit B attached hereto and incorporated herein by reference, so long as such obligations do not materially interfere with Executives performance of the Services.

 

5. COMPENSATION . The Company will pay Executive the following compensation for her services under this Agreement:

 

(a) Base Salary . As compensation for her services and covenants hereunder, the Parties mutually agree that the Company shall pay executive an annual salary of $200,000 USD per annum, payable in accordance with the Company’s normal payroll methods (the “ Base Salary ”). The Base Salary will be reviewed from time to time in accordance with the established procedures of the Company for adjusting salaries for similarly situated executives and may be adjusted upwards in the sole discretion of the Company.

 

(b) Performance Bonus . Executive is eligible to receive a discretionary annual bonus in an amount up to 100% of Executives Base Salary, to be determined in the sole and absolute discretion of the Board, payable in cash, based upon the Company’s operating results and gross sales, or such other performance benchmarks as determined by the Board (“ Performance Bonus ”), with the criteria for eligibility to receive such Performance Bonus to be provided to Executive at the beginning of each year of the Employment Term.

 

(c) Incentive Plan . Executive shall also be eligible to participate in the Company’s annual incentive plan for executives (“ Incentive Bonus ”), if applicable. The criteria for determining the amount of the Incentive Bonus, and the conditions that must be satisfied to entitle Executive to receive the Incentive Bonus for any year during the Employment Term of this Agreement shall be determined by the Board or its compensation committee and provided to Executive at the beginning of such year.

 

6. EXPENSES .   

 

(a) Reimbursement . Executive shall receive a Company credit card with a limit of at least $10,000 per month in order to directly charge to the Company all business expenses incurred by her which are reasonable and necessary for Executive to perform her duties under this Agreement in accordance with policies established from time to time by the Company.  All charges and expenditures in excess of $500 shall be subject to pre-authorization by Company in accordance with Company policy and procedures.

 

(b) Travel . Where Executive is required to travel for Company, including but not limited to events, conferences and meetings related to the Company, Company shall pay the costs of such travel which shall be pre-approved by the Board prior to incurring any expense.

 

7. EXECUTIVE BENEFITS .

 

(a) Benefits . During the Employment Term, Executive shall be entitled to participate in all group term insurance, disability insurance, health and medical insurance benefits, life insurance, retirement plans or programs and any other employee benefits as are from time to time generally made available to executive employees of the Company pursuant to the policies of the Company; provided that Executive shall be required to comply with the conditions attendant to coverage by such employee benefit plans (collectively, “ Benefit Plans ”). The Board shall present any offerings for Benefit Plans in writing to Executive when available. The Company may withhold from any benefits payable to Executive under any Benefit Plans all federal, state, local and other taxes and amounts as shall be permitted or required to be withheld pursuant to any applicable law, rule or regulation.

 

(b) Vacation. Executive shall be entitled to four (4) weeks paid vacation per year during the Employment Term. Vacation time shall be taken in accordance with the Company’s policies as may be established from time to time by the Company for its executive staff.

 

(c) Maternity Leave . To the extent that the Company does not have a maternity leave policy in place for executive employees of the Company, Executive shall be entitled to eight (8) weeks of paid maternity leave during the Employment Term.

 

8. DEATH AND DISABILITY .

 

(a) Death . The Employment Term shall terminate on the date of Executive’s death, in which event the Company shall, within 30 days of the date of death, pay to her estate, Executive’s Base Salary, any unpaid Performance Bonus, Incentive Bonus or any other stock or bonus awards (including any bonus award for a plan year that has ended prior to the time employment terminated where the award was scheduled to be paid after the date employment terminated), reimbursable expenses and benefits owing to Executive through the date of Executive’s death together with any benefits payable under any life insurance program in which Executive is a participant.   

 

(b) Disability . The Employment Term shall terminate upon Executive’s Disability. For purposes of this Agreement, “ Disability ” shall mean that Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.  For purposes of determining Executive’s Disability, the Board may rely on a determination by the Social Security Administration that Executive is totally disabled or a determination by the Company’s disability insurance carrier that Executive has satisfied the above definition of Disability.  In case of such termination, Executive shall be entitled to receive the Executive’s Base Salary, any unpaid Performance Bonus, Incentive Bonus or any other stock or bonus awards (including any bonus award for a plan year that has ended prior to the time employment terminated where the award was scheduled to be paid after the date employment terminated), reimbursable expenses and benefits owing to Executive through the date of termination within 30 days of the date of the Company’s determination of Executive’s Disability, together with any benefits payable under any disability insurance program in which Executive is a participant. Except as otherwise contemplated by this Agreement, Executive will not be entitled to any other compensation upon termination of employment pursuant to this subparagraph 8(b).

 

9. TERMINATION OF EMPLOYMENT .

 

(a) Termination With Cause By Company . The Company may terminate this Agreement at any time during the Employment Term for Cause upon written notice to Executive, upon which termination shall be effective immediately. For purposes of this Agreement, “ Cause” means any one or more of the following:

 

i. the commission of fraud by the Executive against the Company;

 

ii. a material breach by Executive of any provision of this Agreement, including the continued failure of Executive to perform the Services set forth in Section 3(a) of this Agreement, which breach is not cured within thirty (30) days after receipt of written notice from the Company to Executive specifying the breach or, if notice and cure have previously taken place regarding the same or a substantially similar breach, if the breach recurs;

 

iii. Executive’s theft of funds or material property of the Company; or

 

iv. Executive’s conviction of a felony, plea of guilty or nolo contendere to a felony charge or any criminal act involving moral turpitude.

 

(b) Termination Without Cause By Company . The Company may terminate this Agreement at any time during the Employment Term without Cause upon ninety (90) days written notice to Executive.

 

(c) Termination Without Good Reason by Executive . Executive may terminate this Agreement at any time during the Employment Term without Good Reason by providing the Company thirty (30) days’ written notice.

 

(d) Termination With Good Reason By Executive . Executive may terminate this Agreement at any time during the Employment Term with Good Reason upon written notice to Company, upon which termination shall be effective immediately. For purposes of this Agreement “ Good Reason ” means any one or more of the following:

 

i. material breach by the Company of any provision of this Agreement, including without limitation, the Company’s failure to pay Executive any Base Salary, Performance Bonus or vested Incentive Bonus, which such breach is not cured within thirty (30) days after receipt of written notice from Executive to the Company specifying the breach or, if notice and cure have previously taken place regarding the same or a substantially similar breach, if the breach recurs;

 

ii. a requirement by the Company that Executive change her primary work location to a location that is more than thirty–five (35) miles from her then-existing main work location without Executive’s consent to such change;

 

iii. the creation and continuation of a hostile work environment which continues without corrective action being taken by the Company for a period of more than fifteen (15) days following written notice by Executive to the Company identifying the nature and cause of such hostile work environment; or

 

iv. the Company, without Executive’s consent (A) changes Executive’s title or position to a lower title or position, (B) reduces Executive’s current salary and/or benefits, or (C) assigns duties or responsibilities to Executive that are materially inconsistent with her position.

 

(e) Compensation upon Termination .

 

i. In the event that the Company terminates the Executive’s employment hereunder for Cause or the Executive terminates employment hereunder without Good Reason, the Executive shall be entitled to receive the Executive’s Base Salary, any unpaid Performance Bonus, Incentive Bonus or any other vested stock or bonus awards, reimbursable expenses and benefits owing to Executive (collectively, the “ Accrued Amounts ”) through the last day on which Executive is actively employed by the Company under the terms of this Agreement (“ Date of Termination ”). The Accrued Amounts shall be paid when required under applicable law and in any event within thirty (30) business days after the Date of Termination.

 

ii. In the event that the Company terminates the Executive’s employment hereunder without Cause or the Executive terminates employment hereunder with Good Reason, Executive shall be entitled to all Accrued Amounts, which shall be paid when required under applicable law and in any event within thirty (30) business days after the Date of Termination. In addition, the Company shall pay severance to Executive consisting of Executive’s Base Salary, payable in accordance with normal payroll practices of the Company, and benefits under Benefit Plans (including health care as applicable), for a period of twelve (12) months from the Date of Termination (the " Severance Period "). Except as otherwise contemplated by this Agreement, Executive will not be entitled to any other compensation upon termination of this Agreement.

 

iii. The salary, applicable bonuses and fringe benefits to be paid to Executive under Section 9(f)(ii) above during the Severance Period are referred to herein as the " Termination Compensation ." Executive shall not be entitled to any Termination Compensation unless: (1) Executive complies with the surviving restrictive covenants set forth in Section 10 of this Agreement and (2) Executive executes and delivers to Company, on the Date of Termination, a release in form and substance reasonably acceptable to Company and Executive, by which Executive releases Company from any obligations and liabilities of any type whatsoever under this Agreement, except for Company's obligations with respect to the Termination Compensation. For the avoidance of doubt, the release shall not affect (a) Executive’s right to indemnification, if any, for actions taken within the scope of Executive’s employment with the Company or (b) any rights of Executive under the Asset Purchase Agreement. Notwithstanding anything herein, no Termination Compensation shall be paid or otherwise provided to Executive until the applicable revocation period related to the release has fully expired, not later than sixty (60) days from the Date of Termination, and the release becomes fully and finally enforceable. The parties hereto acknowledge that the Termination Compensation to be provided is in consideration for Executive’s release.

 

iv. If Executive terminates this Agreement without Good Reason by providing appropriate notice, the Company, at its election, may (1) require Executive to continue to perform duties hereunder for the full notice period, or (2) terminate Executive's employment at any time during such notice period, provided that any such termination shall not be deemed to be a termination without Cause of Executive's employment by the Company. Unless otherwise provided by Section 9(f), all compensation and benefits paid by Company to Executive under this Agreement shall cease upon the Date of Termination.

 

10. DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION .

 

(a) Executive acknowledges that she is prohibited from disclosing any confidential information about the Company, including but not limited to trade secrets, formulas, processes, methods, plans, and financial information, to any party who is not a director, officer or authorized agent of the Company or its subsidiaries and affiliates.  The Company will provide Executive with valuable confidential information belonging to the Company or its subsidiaries or its affiliates above and beyond any confidential information previously received by Executive and will associate Executive with the goodwill of the Company or its subsidiaries or its affiliates above and beyond any prior association of Executive with that goodwill.  In return, Executive promises never to disclose or misuse such confidential information and never to misuse such goodwill. This Section 10(a) shall not apply to the extent that such confidential information of the Company is generally available to and known by the public through no fault of Executive or if Executive is compelled to disclose confidential information by judicial or administrative process or by other requirements of law.

 

(b) Executive will not, during the Employment Term, directly or indirectly, as an executive, employer, consultant, agent, principal, partner, manager, stockholder, officer, director, or in any other individual or representative capacity, engage in or participate in any other business for her own account or for or on behalf of another person, firm, or corporation that is competitive with, conflicts, or interferes with the Company’s Business or Executive’s performance of duties under this Agreement, except those permitted business obligations of Executive as set forth in Exhibit B hereto or those that may otherwise be pre-approved by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, solely as an investment, securities of any company traded on any national securities exchange if Executive does not, directly or indirectly, own 5% or more of any class of securities of such company.

 

(c) Executive will not, during the Employment Term and for a period of one (1) year thereafter, directly or indirectly, work in Arizona as an employee, employer, consultant, agent, principal, partner, manager, stockholder, officer, director, or in any other individual or representative capacity for any person or entity who is competitive with the Business of the Company, except for those permitted business obligations of Executive as set forth in Exhibit B hereto or those that may otherwise be pre-approved by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, solely as an investment, securities of any company traded on any national securities exchange if Executive does not, directly or indirectly, own 5% or more of any class of securities of such company. For the avoidance of doubt, Executive is also a party to that certain Non-Competition Agreement of even date herewith in favor of AZDP on the terms set forth therein.

 

(d) Executive will not, during the Employment Term and for a period of one (1) year thereafter, on her behalf or on behalf of any other business enterprise, directly or indirectly, under any circumstance other than at the direction and for the benefit of the Company, (i) solicit for employment or hire any person employed by the Company or any of its subsidiaries, or (ii) call on, solicit, or take away any person or entity who was a customer of the Company or any of its subsidiaries or affiliates during Executive’s employment with the Company, in either case for a business that is competitive with the Business of the Company.

 

(e) It is expressly agreed by Executive that the nature and scope of each of the provisions set forth above are reasonable and necessary. If, for any reason, any aspect of the above provisions as it applies to Executive is determined by a court of competent jurisdiction to be unreasonable or unenforceable under applicable law, the provisions shall be modified to the extent required to make the provisions enforceable.  Executive acknowledges and agrees that her services are of unique character and expressly grants to the Company or any subsidiary or affiliate of the Company or any successor of any of them, the right to enforce the above provisions through the use of all remedies available at law or in equity, including, but not limited to, injunctive relief.

 

11. COMPANY PROPERTY .

 

(a) Any patents, inventions, discoveries, applications, processes, models or financial statements designed, devised, planned, applied, created, discovered or invented by Executive during the Employment Term, regardless of when reduced to writing or practice, which pertain to any aspect of the Company’s or its subsidiaries’ or affiliates’ Business shall be the sole and absolute property of the Company, and Executive shall promptly report the same to the Company and promptly execute any and all documents that may from time to time be reasonably be requested by the Company to assure the Company the full and complete ownership thereof.

 

(b) All records, files, lists, including computer generated lists, drawings, documents, equipment and similar items relating to the Company’s Business which Executive shall prepare or receive from the Company shall remain the Company’s sole and exclusive property. Upon termination of this Agreement, Executive shall promptly return to the Company all property of the Company in her possession. Executive further represents that she will not copy or cause to be copied, print out or cause to be printed out any software, documents or other materials originating with or belonging to the Company except as needed to perform the Services under this Agreement. Executive additionally represents that, upon termination of her employment with the Company, she will not retain in her possession any such software, documents or other materials.

 

12. EQUITABLE RELIEF .   It is mutually understood and agreed that Executive’s services are special, unique, unusual, extraordinary and of an intellectual character giving them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in the event of any breach of this Agreement by Executive, including, but not limited to, the breach of any of the provisions of paragraphs 10 or 11 hereof, the Company shall be entitled to equitable relief by way of injunction or otherwise in addition to any damages which the Company may be entitled to recover.

 

13. CONSENT TO JURISDICTION AND VENUE; ARBITRATION .    The Executive hereby consents and agrees that the State of Arizona shall have personal jurisdiction and proper venue with respect to any dispute between the Executive and the Company. In any dispute with the Company, the Executive will not raise, and hereby expressly waives, any objection or defense to any such jurisdiction as an inconvenient forum. Executive and the Company agree that all disputes and claims of any nature that Executive may have against the Company including all statutory, contractual, and common law claims (including all employment discrimination claims), and all other disputes and claims of any nature that the Company may have against Executive, shall be settled by binding arbitration in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, as set forth in the Asset Purchase Agreement, Section 8.10.

 

14. NOTICE .   Any notice, request, demand or other communication permitted or required to be given under this Agreement shall be in writing and shall be given in accordance with the notice provisions set forth in the Asset Purchase Agreement, Section 8.02.

 

15. INTERPRETATION; HEADINGS .   The parties acknowledge and agree that the terms and provisions of this Agreement have been negotiated, shall be construed fairly as to all parties hereto, and shall not be construed in favor of or against any party. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

 

16. SUCCESSORS AND ASSIGNS; ASSIGNMENT; INTENDED BENEFICIARIES .   Neither this Agreement, nor any of Executive’s rights, powers, duties or obligations hereunder, may be assigned by Executive. This Agreement shall be binding upon and inure to the benefit of Executive and her heirs and legal representatives and the Company and its successors. Successors of the Company shall include, without limitation, any corporation or corporations acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, purchase, lease or otherwise, and such successor shall thereafter be deemed “the Company” for the purpose hereof.

 

17. NO WAIVER BY ACTION .   Any waiver or consent from the Company respecting any term or provision of this Agreement or any other aspect of the Executive’s conduct or employment shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of the Company at any time or times to require performance of, or to exercise any of its powers, rights or remedies with respect to, any term or provision of this Agreement or any other aspect of the Executive’s conduct or employment in no manner (except as otherwise expressly provided herein) shall affect the Company’s right at a later time to enforce any such term or provision.

 

18. COUNTERPARTS; GOVERNING LAW; AMENDMENTS .   This Agreement may be executed in two counterpart copies, each of which may be executed by one of the parties hereto, but all of which, when taken together, shall constitute a single agreement binding upon all of the parties hereto. This Agreement and all other aspects of the Executive’s employment shall be governed by and construed in accordance with the applicable laws pertaining in the State of Delaware (other than those that would defer to the substantive laws of another jurisdiction). Each and every modification and amendment of this Agreement shall be in writing and signed by the parties hereto, and any waiver of, or consent to any departure from, any term or provision of this Agreement shall be in writing and signed by each affected party hereto.  

 

20. Severability.

If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law.

21. ENTIRE AGREEMENT .   The entire understanding and agreement between the Parties has been incorporated into this Agreement, and this Agreement supersedes all other agreements and understandings between Executive and the Company with respect to the relationship of Executive with the Company or its affiliates or subsidiaries.

 

22. EXECUTIVE AcknowledgEment

EXECUTIVE ACKNOWLEDGES THAT EXECUTIVE HAS HAD THE OPPORTUNITY TO CONSULT LEGAL COUNSEL CONCERNING THIS AGREEMENT, THAT EXECUTIVE HAS READ AND UNDERSTANDS THE AGREEMENT, IS FULLY AWARE OF ITS LEGAL EFFECT, AND THAT EXECUTIVE HAS ENTERED INTO IT FREELY BASED ON EXECUTIVE’S OWN JUDGMENT AND NOT ON ANY REPRESENTATIONS OR PROMISES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.

 

 

 

[Signature page follows.]

 
 

 

 

IN WITNESS WHEREOF , the Parties hereto have executed this Executive Employment Agreement as of the date set forth above.

 

 

(“ COMPANY ”) (“ EXECUTIVE ”)
Item 9 Labs Corp.  
   
   
_____________________________ _____________________________
By:  Bryce Skalla By: Sara Gullickson
Its: Chief Executive Officer  

 

 

 
 

 

EXHIBIT A

DESCRIPTION OF EMPLOYMENT SERVICES

 

 

As the Chief Executive Officer (“ CEO ”) of Item 9 Labs Corp. (the “ Company ”), the CEO shall report to the board of directors (the “ Board ”) and is responsible for leading the development and execution of the Company’s long term strategy with a view to creating shareholder value. The CEO’s leadership role also entails being ultimately responsible for all day-to-day management decisions and for implementing the Company’s long and short term plans. The CEO acts as a direct liaison between the Board and management of the Company and communicates to the Board on behalf of management. Specifically, the duties of the CEO shall include:

 

Strategy & Planning

· Drafting / Execution of Short Term Execution of National Expansion Plan
o Submission of Applications (Dispensary Permits.com Team to Execute)– Markets TBD – See 09-20-18 - DP - Our Brands Page - v3- Page 9 for Markets with Opportunities in 2019.
o Selection of Distressed Cannabis Assets for INLB Acquisition, specifically, Licensees: Cultivation, MM Product Lines & Dispensary – Markets TBD (Based on bullet above).

 

Financial Planning & Budgets

· Create Budget with Jeffrey Rassas for Expansion, Acquisition and INLB Operations.
· Assist, as required, in raising additional capital at appropriate valuations to enable the Company to meet sales, growth and market share objectives.

 

 

SEC and OTC Filings

· Assist in the preparation, review, and filing of all interim, quarterly, and annual reports and other filings necessary for OTC and SEC compliance.

 

Investor Relations Management

· Manage and interface with investors for general relations outreach and response, as necessary, and attend local and national conferences to promote the Company generally.

 

Management & Execution

· Ensure Vice President(s) of Southwest, Midwest, East Coast, and Southern Regions for Expansion are executing National Expansion Strategy though Application, Acquisition, and Operations mentioned above.
· Ensure Cultivation, Processing, and Dispensary Department Heads Meet Revenue Milestones & Expansion Milestones
o SOPS
o R&D
o Training
o Sales

 

Company Leadership/Vision

· Employee / Management Staffing Plan
o Build Organizational Chart & Ensure Chart Includes Examples Below:

  Chief Financial Officer

  Chief Operating Officer

  Chief Compliance Officer

  Medical Advisory Board

  Director of Community

  Dispensary / Retail Manager

  Director of Security

  Director of Technology

  Director of Extraction

  Director of Patient Services

  Director of Cultivation

  Human Resources

  Banking Relations

  Real Estate Advisor /Firm for Expansion

  Architect/ Engineer(S)

  Director of Marketing

  Legal / Attorney

  Insurance

  Director of Staffing

· Roles, Responsibilities & Expectations
· Selection, Hiring, Retainment and Termination Policies & Procedures
 
 

 

EXHIBIT B

Pre-existing business obligations of Executive

· Strive Wellness of Nevada, LLC
· Strive Management, LLC 
· North Dakota – WE- Mend d/b/a Strive Life Dispensary
· West Hollywood – November 2018: Dispensary 10, LLC
o Sara Gullickson owns 33% ownership
· Nevada (Retail) – December 2019- Strive Wellness of Nevada, LLC 
o Sara Gullickson, Larry Lemons & Donnie Burton control the license if it is awarded.  Local partner collectively has 13% of the facility.
· Ohio – December 2018 Strive Wellness of Ohio, LLC 
o Sara Gullickson, Larry Lemons & Donnie Burton control the license if it is awarded. 
· New Jersey – January 2019 Modern Remedies, LLC 
o Sara Gullickson has 2% ownership and facility will be Strive Model if license is awarded. 
· Michigan, Benton Harbor – February 2019 The Harvest Foundation, LLC
o Sara Gullickson, Larry Lemons & Donnie Burton control the license if it is awarded.

Exhibit 14.1

  

EXHIBIT A

ITEM 9 LABS CORP.

(THE “COMPANY”)

 

CODE OF CONDUCT AND ETHICS

 

INTRODUCTION

 

This Code of Conduct and Ethics (the “Code”) of the Company applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, pursuant to Item 406 of Regulation S-K, as well as directors, officers, and employees, pursuant to the listing standards of Rule 5610 of the NASDAQ Stock Market (“NASDAQ”). The foregoing persons shall collectively be referred to herein as the “Covered Persons” and individually as a “Covered Person.” The purpose of the Code is to deter wrongdoing and to promote:

 

· honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
· full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission (“SEC”) or NASDAQ, and in other public communications made by the Company;
· compliance with applicable laws and governmental rules and regulations;
· the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and
· accountability for adherence to the Code.

 

Each Covered Person should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.

 

This Code is intended to qualify as a "code of conduct" within the meaning of NASDAQ Rule 5610 and as a "code of ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.

 

STANDARDS OF CONDUCT

 

The Covered Persons are subject to the following standards of conduct. Each Covered Person will:

 

· Engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest (as described under the heading "Conflicts of Interest" below) in personal and professional relationships;
· Provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the SEC or NASDAQ, and in other public communications made by the Company;
· Comply with applicable governmental laws, rules and regulations as well as the rules and regulations of NASDAQ and any other self-regulatory organizations of which the Company is a member;
· Promptly report any violations of the Code to a supervisor or manager, the Company's Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof;
· Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgment to be subordinated; and
· Take reasonable measures to protect the confidentiality of non-public information about the Company and to prevent the unauthorized disclosure of such information unless such disclosure is required by applicable laws or regulations or other legal or regulatory processes.

 

CONFLICTS OF INTEREST

 

All Covered Persons should be scrupulous in avoiding a conflict of interest with regard to the Company's interests. A "conflict of interest" exists whenever an individual's private interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of the Company. A conflict situation can arise when a Covered Person takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively. Conflicts of interest may also arise when a Covered Person, or a member(s) of his or her family, receives improper personal benefits as a result of his or her position in the Company, whether received from the Company or a third party. Loans to, or guarantees of obligations of, Covered Persons and their respective family members may create conflicts of interest. Federal law prohibits the Company from giving loans to directors and executive officers.

 

Except as set forth below, Covered Persons shall not accept personal gifts (monetary or non-monetary), payments, fees, services, or privileges without a business purpose from the Company or outside parties which do or might do business with, or are competitors of, the Company. The Company shall establish appropriate annual reporting procedures for all such items. In the event a Covered Person receives such an item, he or she should immediately notify his or her supervisor or manager, the Company's Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof. If practical, the gift must be returned to the sender or given as a donation to a local charity. Covered Persons may occasionally accept gifts of limited value which are consistent with business practices; however, cash gifts are prohibited. Such gifts which are consistent with business practices are gifts that cannot influence or be perceived as influencing judgment of the recipient, embarrass the Company, or are of such value as to have an impact on the recipient or the operations of the Company. Reasonable entertainment is permitted if for a business purpose.

 

It is almost always a conflict of interest for a Company employee to work simultaneously for a competitor, customer or supplier. You may encounter potential conflicts of interest in a variety of situations. Some of the more likely areas are relationships with customers or suppliers, especially relating to entertainment situations or gifts, and financial or other dealings with outside organizations that do business with our Company.

 

Any proposed related party transaction, as such term is described in Item 404 of Regulation S-K, involving the Company and a Covered Person, in which a Covered Person has a direct or indirect material interest, shall be analyzed and reviewed by the Nominations and Governance Committee of the Board of Directors, for potential conflicts of interest.

 

To provide for the ethical handling of conflicts, Covered Persons are required to promptly report any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest to a supervisor or manager, the Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof. Additionally, directors of the Company should recuse themselves from participation in any decision of the Board in which there is a conflict between their private interests and the interests of the Company.

 

Conflicts of interest are prohibited as a matter of Company policy. Conflicts of interest may not always be clear-cut, so if you have a question, you should consult a supervisor or manager, the Company's Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof. Any Covered Person who becomes aware of a conflict or potential conflict of interest should bring it to the attention of management or consult the procedures described in this Code.

 

CONFIDENTIALITY

 

Covered Persons must maintain the confidentiality of confidential information entrusted to them by the Company or its suppliers or customers, except when disclosure is required by applicable laws or regulations or other legal or regulatory processes. Confidential information includes all non-public information that may be of use to competitors of the Company, or harmful to the Company if disclosed.

 

PUBLIC COMPANY REPORTING

 

As a public company, it is of critical importance that the Company's filings with the SEC be full, fair, accurate, timely and understandable. Depending on his or her position with the Company, a Covered Person may be called upon to provide necessary information to assure that the Company's public reports filed with the SEC or otherwise made to the public are full, fair, accurate, timely and understandable. The Company expects Covered Persons to take this responsibility very seriously and to provide prompt accurate answers to inquiries related to the Company's public disclosure requirements.

 

COMPLYING WITH LAW

 

All Covered Persons should respect and comply with all of the laws, rules and regulations which are applicable to the Company. Such legal compliance includes, without limitation, compliance with the “insider trading” prohibitions applicable to the Company and Covered Persons. Generally, Covered Persons who have access to, or knowledge of, confidential or non-public information from or about the Company are not permitted to buy, sell or otherwise trade in the Company’s securities, whether or not they are using or relying upon that information.

 

Please consult your supervisor or manager, the Company's Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof, if you have any questions with regard to the applicability of, and compliance with, any specific laws, rules and regulations, including the insider trading policies of the Company and related securities laws.

 

REPORTING VIOLATIONS

 

Covered Persons who are concerned that violations of this Code, or that other illegal or unethical conduct by Covered Persons have occurred or may occur should promptly contact their supervisor or manager, the Company's Chief Executive Officer or the Board of Directors. If their concerns or complaints require confidentiality, including keeping their identity anonymous, then this confidentiality will be protected to the extent possible. The Company strictly prohibits any retaliation against a Covered Person who, in good faith, reports known or suspected violations.

 

ACCOUNTING COMPLAINTS

 

The Company's policy is to comply with all financial reporting and accounting regulations applicable to the Company. If any Covered Person has concerns or complaints regarding questionable accounting or auditing matters of the Company, then he or she is encouraged to submit those concerns or complaints (anonymously, confidentially or otherwise) to a supervisor or manager, the Company's Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof. Confidentiality will be maintained to the extent possible. Such submissions may also be directed to the attention of the Audit Committee, or any director who is a member of the Audit Committee, at the principal executive offices of the Company.

 

ACCOUNTABILITY AND ADHERENCE

 

The Board of Directors, or Nominations and Governance Committee thereof, will investigate any reported violations of this Code and will determine appropriate disciplinary actions, up to and including termination of employment or removal as an officer or director. Such disciplinary actions will be based on the facts and circumstances of each particular case and shall be reasonably designed to deter wrongdoing and promote accountability for adherence to the Code. Violations of this Code may also constitute violations of law which may result in criminal or civil penalties.

 

WAIVERS AND AMENDMENTS

 

Waivers of or amendments to this Code must be approved by the Board of Directors, or the Nominations and Governance Committee thereof. Waivers will be granted on a case-by-case basis in the sole discretion of the Board of Directors or its Nominations and Governance Committee, and any such waiver or amendment shall be publicly disclosed to the extent required by the SEC or NASDAQ.

 

CONCLUSION

 

This Code contains general guidelines for conducting the business of the Company with a high standard of business ethics. Please contact a supervisor or manager, the Company's Chief Executive Officer or the Board of Directors, or Nominations and Governance Committee thereof, with any questions about compliance with this Code. This Code and the matters contained herein are neither a contract of employment nor a guarantee of continuing Company policy. The Company reserves the right without prior notice and at any time, to amend, supplement or discontinue this Code and the matters addressed herein, subject to the disclosure and other applicable provisions of the Securities Exchange Act of 1934, and the rules promulgated thereunder, and the applicable NASDAQ rules.

 

 
 

 

CERTIFICATION REGARDING CODE OF CONDUCT AND ETHICS

OF

ITEM 9 LABS CORP.

 

The undersigned hereby certifies that the undersigned:

 

1. Has received, read and retained a copy of the Code of Conduct and Ethics (the "Code") of ITEM 9 LABS CORP. (the “Company”), and understands the Code and the responsibilities of the undersigned thereunder; and

 

2. Will comply with the Code in connection with all activities undertaken by the undersigned, or in which the undersigned participates or provides assistance, while in the service of the Company.

 

 

 

Date: _____________________ ___________________________
  By:________________________
  Title: ______________________

Exhibit 21
Subsidiaries of Registrant

 

Name   State of Incorporation or Organization  
       
BSSD Group, LLC   Arizona  
AZ DP Holdings, LLC   Nevada  
BSSD Consulting, LLC   Arizona  
Strive Life Management, LLC   Arizona  
I9 IP Holdings, LLC   Arizona  
I9 Management, LLC   Arizona  
Item 9 Properties LLC   Nevada  
Strive Management LLC   Nevada  
Airware Holdings LLC   Nevada  
       

Exhibit 99.1

 

EXHIBIT B

ITEM 9 LABS CORP.

Audit Committee Charter

 

I. Mission Statement

 

The Audit Committee (the “ Committee ”) is established by the Board of Directors (the “ Board ”) of ITEM 9 LABS CORP. (the “ Company ”). The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities related to: (i) appointing, overseeing and replacing, if necessary, the independent auditor; (ii) overseeing the accounting and financial reporting processes and the audits of the financial statements of the Company and its subsidiaries; (iii) overseeing the integrity of the financial statements of the Company and its subsidiaries; (iv) establishing procedures for complaints relating to accounting, internal accounting controls or auditing matters; (v) examining the independence qualifications; (vi) preparing the report rules of the Securities and Exchange Commission (the “ SEC ”) to be included in the Company’s annual meeting proxy statement, if any; and (vii) assisting the Board’s oversight of the Company’s compliance with legal and regulatory requirements; and (viii) assisting the Board in fulfilling its oversight responsibilities related to the systems of internal controls and disclosure controls which management has established regarding finance, accounting, and regulatory compliance.

 

II. Membership and Qualifications

 

Membership : The Committee shall consist of at least two independent members of the Board, each of whom shall serve for a term of one year or until the successor shall be duly elected and qualified, and shall be elected annually by the Board.

 

Qualifications : All members of the Committee:

 

A. Shall be Independent Directors as defined under NASDAQ Rule 5605(a)(2), and free from any material relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee;

 

B. Shall satisfy the independence requirements of Rule 10A-3(b)(1) of the Securities and Exchange Act of 1934 (the “Act”) as such requirements are interpreted by the Board and its business judgment.

 

C. Shall be able to read and understand fundamental financial statements, including balance sheets, income statements, and cash flow statements, as required by NASDAQ Rule 5605(c)(2); and

 

D. Shall not have participated in the preparation of the financial statements of the Company or any current subsidiary at any time during the preceding three years

 

E. Shall not accept any consulting, advisory, or other compensatory fee from the Company or any subsidiary of the Company, other than in his or her capacity as a member of the Committee, Board or any other Board committee, and they must not be an affiliated person of the Company or any subsidiary of the Company, as such term is defined in Rule 10A-3(e)(1) of the Act.

 

Chairman : The Committee Chairman shall be elected by the Board annually.

 

Financially Sophisticated Member : The Committee shall include at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. A Committee member who qualifies as an audit committee financial expert under Item 407(d)(5)(ii) and (iii) of Regulation S-K is presumed to qualify as a financially sophisticated Committee member under NASDAQ Rule 5605(c)(2)(A).

 

Resignation, Removal and Replacement : Any member of the Committee may resign from the Committee at any time upon written notice of such resignation to the Company. The Board shall have the power at any time to remove a member of the Committee with or without cause, to fill all vacancies, and to designate alternate members, upon the recommendation of the Committee, to replace any absent or disqualified members, so long as the Committee shall at all times have at least three members and be composed solely of independent directors who meet the qualifications described above.

 

III. Meetings and Other Actions

 

The Committee will meet at least once per calendar quarter and at such additional times as may be necessary to carry out its responsibilities. All meetings and other actions by the Committee shall be organized and governed as follows:

 

A. Action may be taken by the Committee upon the affirmative vote of a majority of the members present at a meeting if a majority of Committee members are present, as determined in accordance with the Company’s bylaws;

 

B. Any two members, the Chairman of the Committee or the Chairman of the Board and/or the Chief Executive Officer of the Company may call a meeting of the Committee whenever they deem such meeting to be necessary;

 

C. Action may be taken by the Committee without a meeting if all of the members of the Committee indicate their approval thereof in writing; and

 

D. The Committee may invite any Director who is not a member of the Committee, or any officer, employee, counsel, representative of service providers or other persons to attend meetings and provide information as the Committee, as determined appropriate by the Committee.

 

IV. Goals, Responsibilities and Authority

 

While the Committee has the responsibilities set forth in this Charter, it is not the responsibility of the Committee to plan or conduct audits, to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles (“ GAAP ”) or to assure compliance with laws, regulations or any internal rules or policies of the Company. The independent auditor is responsible for planning and performing independent audits of the Company’s consolidated financial statements in accordance with generally accepted auditing standards and for issuing reports thereon. The Committee has direct and sole responsibility for the appointment, compensation, retention, replacement, if necessary, and oversight of the work of the independent auditor, including the resolution of disagreements between management and the auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company and each auditor must report directly to the Committee. The Committee also has the responsibility to ensure the independence of the outside auditor. Each member of the Committee shall be entitled to rely on (i) the integrity of those persons and organizations within and outside the Company that it receives information from and (ii) the accuracy of the financial and other information provided to the Committee by such persons or organizations absent actual knowledge to the contrary. In fulfilling this responsibility, the independent auditor is ultimately accountable to the Board and the Committee.

 

In carrying out its mission, the Committee shall assist the Board in fulfilling its oversight responsibilities by accomplishing the following:

 

Retention and Oversight of Independent Auditor and Approval of Services:

 

A. Evaluating annually the appointment, compensation and retention of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company and its subsidiaries, including resolution of disagreements between management and the independent auditor regarding financial reporting;

 

B. Pre-approving any independent auditors’ engagement to render audit and/or permissible non-audit services (including the fees charged and proposed to be charged by the independent auditors);

 

C. Receiving formal written statements, at least annually, from the independent auditor regarding the auditor’s independence, including a delineation of all relationships between the auditor and the Company; actively engaging in discussions with the independent auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditor, addressing at least the matters required by applicable requirements of the Public Company Accounting Oversight Board); taking or recommending that the Board take appropriate action to oversee the independence of the outside auditor;

 

D. Obtaining and reviewing at least annually a report from the independent auditor detailing the firm’s internal quality control procedures, any material issues raised by the independent auditor’s internal quality control review, peer review or any governmental or other professional inquiry performed within the past five years and any remedial actions implemented by the firm and all relationships between the independent auditor and the Company;

 

E. Obtaining from the independent auditors annually a formal written statement of the fees billed in the last fiscal year for each of the following categories of services rendered by the independent auditors:

 

(i) the audit of the Company’s annual financial statements and the reviews of the financial statements included in the Company’s quarterly reports or services

that are normally provided by the independent auditors in connection with statutory or regulatory filings or engagements;

 

(ii) services that are reasonably related to the performance of the audit or review of the Company’s financial statements, in the aggregate and by each service;

 

(iii) tax compliance, tax advice and tax planning services, in the aggregate and by each service; and

 

(iv) all other products and services rendered by the independent auditors in the aggregate and by each service; and

 

F. Monitoring the rotation of the lead (or coordinating) audit partner (or other employees of the independent auditor if required by SEC rules and regulations) having primary responsibility for the audit and the audit partner responsible for reviewing the audit.

 

G. Considering the effect on the Company of:

 

(i) any changes in accounting principles or practices proposed by management or the independent auditors; and

 

(ii) any changes in service providers, such as the accountants, that could impact the Company’s internal control over financial reporting; and

 

H. Evaluating the efficiency and appropriateness of the services provided by the independent auditors, including any significant difficulties with the audit or any restrictions on the scope of their activities or access to required records, data and information;

 

I. Interacting with the independent auditors, including reviewing and, where necessary, resolving any problems or difficulties the independent auditors may have encountered in connection with the annual audit or otherwise, any management letters provided to the Committee and the Company’s responses (any such review shall address any difficulties encountered in the course of the audit work, including any restrictions on the scope of the activities or access to required information, any disagreements that have arisen between management and the independent auditors regarding financial reporting); and

 

J. Reviewing with the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company.
     
    The Committee may delegate its pre-approval responsibilities to a sub-committee consisting of one or more of its members. The member(s) to whom such responsibility is delegated sub-committee must report, for informational purposes only, any pre-approval decisions to the Committee at its next scheduled meeting.

 

Oversight of Audit Process and Company’s Compliance Program

 

A. Reviewing with independent auditor the overall scope and plans for audits, including authority and organizational reporting lines and adequacy of staffing and compensation. Review with independent auditor any difficulties with audits and management’s response;

 

B. Meeting with the Company’s independent auditors at least four times during each fiscal year, including private meetings, and review written materials prepared by the independent auditors, as appropriate. At these meetings, the Committee shall:

 

(i) review the arrangements for and the scope of the annual audit and any special audits or other special permissible services;

 

(ii) review the Company’s financial statements and discuss any matters of concern arising in connection with audits of such financial statements including any adjustments to such statements recommended by the independent auditors or any other results of the audits;

 

(iii) consider and review, as appropriate and in consultation with the independent auditors, the appropriateness and adequacy of the Company’s financial reporting and, as appropriate, the internal controls of key services providers, and review management’s responses to the independent auditors’ comments relating to those policies, procedures and controls, and take any necessary action in light of significant and material control deficiencies;

 

(iv) review with the independent auditors their opinions as to the fairness of the financial statements;

 

(v) review and discuss quarterly reports from the independent auditors relating to: (a) all critical accounting policies and practices to be used; (b) all alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditors; and (c) other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences; and

 

(vi) prepare the report required by the SEC to be included in the Company’s public filings and annual proxy statement; and

 

C. Reviewing and discussing with management and the independent auditor the Company’s system of internal controls (including any significant deficiencies in the design or operation of those controls which could adversely affect the Company’s ability to record, process, summarize and report financial data, its financial and critical accounting practices, and policies relating to risk assessment and management;

 

D. Receiving and reviewing reports of the independent auditor discussing (1) all critical accounting policies and practices to be used in the firm’s audit of the Company’s financial statements, (2) all alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor, and (3) other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences;

 

E. Reviewing and discussing with management and the independent auditor the Company’s annual and quarterly financial statements, including reviewing the Company’s specific disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” prior to the filing of the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q; discussing results of the annual audit and quarterly review and any other matters required to be communicated to the Committee by the independent auditor under generally accepted auditing standards; discussing with management and the independent auditor their judgment about the quality of accounting principles, the reasonableness of significant judgments, including a description of any transactions as to which the management obtained Statement on Auditing Standards No. 50 letters, and the clarity of disclosures in the financial statements, including the Company’s disclosures of critical accounting policies and other disclosures and recommend to the Board whether to include the audited financial statements in the 10-K;

 

F. Discussing the Company’s earnings press releases, if any, as well as the nature of financial information provided to analysts and rating agencies;

 

G. Reviewing material pending legal proceedings involving the Company and other contingent liabilities;

 

H. Meeting separately with the management, with internal auditors (or other personnel responsible for the internal audit function) and with independent auditors to discuss results of examinations of the Company’s internal controls and procedures, including receiving from the Chief Executive Officer and Chief Financial Officer of the Company a report of all significant deficiencies and material weaknesses in the design or operation of internal controls, and any fraud that involves management or other employees who have a significant role in the Company’s internal controls;

 

I. Discussing with the independent auditors the matters required to be communicated to the Audit Committee in accordance with Statement on Auditing Standards No. 61;
J. Establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees, consultants or contractors of the Company of concerns regarding questionable accounting or accounting matters;

 

K. Reviewing or establishing standards for the type of information and the type of presentation of such information to be included in earnings press releases, financial information and earnings guidance provided to analysts, if any, and rating agencies.

 

L. Reviewing with the independent auditor any significant audit problems or difficulties and management’s response; and

 

M. Setting hiring policies, if required, relating to the Company’s hiring of employees or former employees of the independent auditors.

 

Other

 

A. Producing a Committee report for inclusion in the Company’s annual report on Form 10-K or proxy statement for the annual meeting of shareholders;

 

B. Reviewing and assessing periodically the adequacy of this Charter and submit any proposed amendments to the Charter to the Board for approval;

 

C. Reporting regularly its recommendations to the Board and performing annually, or participating in, an evaluation of the Committee, the results of which shall be presented to the Board;

 

D. Reviewing such other matters as the Board or the Committee shall deem appropriate; and

 

E. Determining funding necessary for ordinary administrative expenses that are necessary or appropriate in carrying out the Committee’s duties.
     
    In discharging its duties hereunder, the Committee shall have the authority, to the extent it deems necessary or appropriate to carry out its duties, to retain, oversee and compensate independent legal, accounting or other advisors. The Company shall provide for appropriate funding, as determined by the Committee, for payment of: compensation to the independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company; compensation to any advisors employed by the Committee; and ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

 

V. Disclosure of Charter

 

This Charter will be made available on the Company’s Internet website.

 

 

 

 

* * * * * * *

Exhibit 99.2

 

EXHIBIT C

 

ITEM 9 LABS CORP.

Compensation Committee Charter

 

I. Mission Statement

 

The Compensation Committee (the “ Committee ”) is established by the Board of Directors (the “ Board ”) of ITEM 9 LABS CORP. (the “ Company ”). The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities related to the Company’s compensation structure and compensation, including equity compensation, if any, paid by the Company.

 

II. Membership and Qualifications

 

Membership : The Committee shall consist of at least two independent members of the Board, each of whom shall serve for a term of one year or until the successor shall be duly elected and qualified, and shall be elected annually by the Board.

 

In affirmatively determining the independence of any director who will serve on the Committee, the Board must consider all factors specifically relevant to determining whether a director has a relationship to the Company which is material to that director’s ability to be independent from management in connection with the duties of a Committee member, including, but not limited to:

 

(i) the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the Company to such director; and

 

(ii) whether such director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company.

 

Qualifications : All members of the Committee:

 

A. Shall be Independent Directors as defined under NASDAQ Rule 5605(a)(2), and free from any material relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee.

 

B. Shall not have participated in the preparation of the financial statements of the Company or any of its subsidiaries at any time during the preceding three years.

 

Chairman : The Committee Chairman shall be elected by the Board annually.

 

Resignation, Removal and Replacement : Any member of the Committee may resign from the Committee at any time upon written notice of such resignation to the Company. The Board shall have the power at any time to remove a member of the Committee with or without cause, to fill all vacancies, and to designate alternate members, upon the recommendation of the Committee, to replace any absent or disqualified members, so long as the Committee shall at all times have at least two members and be composed solely of directors meeting the qualifications set forth above.

 

III. Meetings and Other Actions

 

The Committee will meet at least once a year and at such additional times as may be necessary to carry out its responsibilities. All meetings and other actions by the Committee shall be organized and governed as follows:

 

A. Action may be taken by the Committee upon the affirmative vote of a majority of the members present at a meeting if a majority of Committee members is present, as determined in accordance with the Company’s bylaws;

 

B. Any two members, the Chairman of the Committee, the Chairman of the Board, and/or the Chief Executive Officer of the Company (the “ CEO ”) may call a meeting of the Committee whenever they deem such meeting to be necessary;

 

C. Action may be taken by the Committee without a meeting if all of the members of the Committee indicate their approval thereof in writing; and

 

D. The CEO may not be present during voting or deliberations on his or her compensation;

 

E. The Committee may invite any director who is not a member of the Committee, officer, or any employee, counsel, representative of service providers or other persons to attend meetings and provide information as the Committee, as determined by the Committee.

 

IV. Goals, Responsibilities and Authority

 

In carrying out its mission, the Committee shall have direct responsibility and authority to perform the following duties:

 

A. Assist the Board in developing and evaluating potential candidates for executive positions (including the CEO) and oversee the development of executive succession plans;

 

B. Review and approve annually Company goals and objectives relevant to the CEO and other executive officers’ total compensation, evaluate the CEO’s and other executive officers’ performance to ensure that it is designed to achieve the objectives of rewarding the Company’s executive officers appropriately for their contributions to Company growth and profitability and, together with the CEO, evaluate and approve the compensation of the Company’s other executive officers;

 

C. Review, determine and approve, or recommend to the Board for review, determination, and approval, the compensation paid to the CEO and to all other executive officers of the Company;

 

D. Review the Company’s compensation practices and the relationship among risk, risk management and compensation in light of the Company’s objectives, including its safety and soundness and the avoidance of practices that would encourage excessive risk;

 

E. Review the Company’s incentive compensation plans and perquisites, if any, to ensure such plans are consistent with the Company’s goals and objectives and appropriately aligning executive officers’ interests with those of the Company’s shareholders, make recommendations to the Board regarding the adoption of new employee incentive compensation plans and equity-based plans, and administer the Company’s existing incentive compensation plans and equity-based plans, including reviewing and approving stock option and restricted stock grants;

 

F. Evaluate periodically the compensation of directors, including compensation for service on Board Committees, and make recommendations to the Board regarding adjustments to such compensation;

 

G. Prepare annually, if required, the Compensation Committee Report on executive compensation for inclusion in the Company’s annual report on Form 10-K or the Company’s proxy statement for the annual meeting of shareholders in accordance with Item 407(e)(5) of Regulation S-K;

 

H. Review and discuss annually with Company management the executive compensation disclosure to be included in the Company’s annual report on Form 10-K or the Company’s proxy statement for the annual meeting of shareholders, including, if required, any Compensation Discussion and Analysis required under Item 402 of Regulation SK and, after such review, propose any recommended changes to such disclosures to be included in such report or proxy statement;

 

I. Review and assess periodically the adequacy of this Charter and submit any proposed amendments to the Charter to the Board for approval;

 

J. Report regularly recommendations to the Board and perform annually, or participate in, an evaluation of the Committee, the results of which shall be presented to the Board;

 

K. Review such other matters as the Board or the Committee shall deem appropriate;

 

L. Retain or obtain the advice of a compensation consultant, legal counsel or other adviser;

 

M. Appoint, determine the compensation to be paid and oversee the work of any compensation consultant, legal counsel and other adviser retained by the Committee;

 

N. Determine the appropriate amount of funding, to be provided by the Company, for payment of reasonable compensation to a compensation consultant, legal counsel or any other adviser retained by the Committee; and

 

O. Select, or receive advice from, a compensation consultant, legal counsel or other adviser to the Committee, other than in-house legal counsel, only after taking into consideration the following factors:

 

(i) the provision of other services to the Company by the person that employs the compensation consultant, legal counsel or other adviser;

 

(ii) the amount of fees received from the Company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;

 

(iii) the policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;

 

(iv) any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the Committee;

 

(v) any stock of the Company owned by the compensation consultant, legal counsel or other adviser; and

 

(vi) any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an Executive Officer of the Company.

 

The Committee is required to conduct the independence assessment outlined in NASDAQ Rule 5605(d) with respect to any compensation consultant, legal counsel or other adviser that provides advice to the Committee, other than in-house legal counsel. However, nothing in Rule 5605(d) requires a compensation consultant, legal counsel or other compensation adviser to be independent, only that the Committee consider the enumerated independence factors before selecting, or receiving advice from, a compensation adviser. The Committee may select, or receive advice from, any compensation adviser they prefer, including ones that are not independent, after considering the six independence factors outlined above.

 

V. Disclosure of Charter

 

This Charter will be made available on the Company’s Internet website.

Exhibit 99.3

 

EXHIBIT D

 

ITEM 9 LABS CORP.

Nominations and Governance Committee Charter

 

I. Mission Statement

 

The Nominations and Governance Committee (the “ Committee ”) is established by the Board of Directors (the “ Board ”) of ITEM 9 LABS CORP. (the “ Company ”). The purpose of the Committee is to assist the Board in fulfilling its fiduciary responsibilities with respect to the oversight of the Company in the areas of corporate governance and membership of the Board and any committee of the Board.

 

II. Membership and Qualifications

 

Membership : The Committee shall consist of at least two independent members of the Board, each of whom shall serve for a term of one year or until the successor shall be duly elected and qualified, and shall be elected annually by the Board.

 

Qualifications : All members of the Committee:

 

A. Shall be Independent Directors as defined under NASDAQ Rule 5605(a)(2), and free from any material relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee.

 

Chairman : The Committee Chairman shall be elected by the Board annually.

 

Resignation, Removal and Replacement : Any member of the Committee may resign from the Committee at any time upon written notice of such resignation to the Company. The Board shall have the power at any time to remove a member of the Committee with or without cause, to fill all vacancies, and to designate alternate members, upon the recommendation of the Committee, to replace any absent or disqualified members, so long as the Committee shall at all times have at least two members and be composed solely of directors meeting the qualifications set forth above.

 

III. Authority and Responsibilities Relating to Board and Board Committee Membership

 

A. Selection of Director Nominees. Except where the Company is legally required by contract or otherwise to provide third parties with the ability to nominate directors to the Board, the Committee will evaluate and recommend to the Board for its review and approval nominees to the Board. The Committee shall recommend nominees to stand for election at the annual meeting of stockholders, including considering recommendations from stockholders, as well as nominees for a replacement member to the Board when a vacancy occurs by reason of disqualification, resignation, retirement, death or an increase in the size of the Board. The Committee shall also be responsible for selecting, evaluating and recommending to the Board the directors to be appointed as members and chair of each committee of the Board to fill vacancies as they arise.

 

B. Criteria for Selecting Directors. The Committee shall be responsible for reviewing with the Board on an annual basis the requisite skills and criteria for new Board members, as well as the composition of the Board as a whole and the committees of the Board. The Committee will consider, among others, the following factors in recommending to the Board potential new Board members or the continued service of existing Board or Board committee members and committee chairs:

 

(i) The extent of the member's/potential member's business experience, technical expertise, or specialized skills or experience, and whether he or she, by virtue of particular experience relevant to the Company's current or future business, will add specific value as a Board member.

 

(ii) Whether the member/potential member assists in achieving a mix of Board members that represents a diversity of background and experience.

 

(iii) The member's/potential member's independence and freedom from conflicts of interest.

 

(iv) Whether the member would be considered a "financial expert" or "financially literate" as described in applicable listing standards, legislation or Audit Committee guidelines.

 

(v) Any other factors related to the ability and willingness of a new member to serve, or an existing member to continue his or her service, including whether he or she has sufficient time to devote to the affairs of the Company.

 

C. Search Firms. The Committee shall have the sole authority to retain and terminate any search firm to be used to identify director nominees, including sole authority to approve the search firm’s fees and other retention terms. The Committee is empowered, without further action by the Board, to cause the Company to pay the compensation of any search firm engaged by the Committee.

 

D. Director Removal . The Committee shall be responsible for recommending to the Board the removal of a Director from the Board, Board committee or committee chair where appropriate.

 

IV. Authority and Responsibilities Relating to Corporate Governance

 

A. Corporate Governance Principles. The Committee shall develop and recommend to the Board a set of Corporate Governance Principles applicable to the Company. The Committee shall, from time to time as it deems appropriate, review and reassess the adequacy of such Corporate Governance Principles and recommend any proposed changes to the Board for approval.

 

B. Evaluation of Board structure. The Committee shall be responsible for evaluating the composition, size, structure and practices of the Board on at least an annual basis.

 

C. Monitoring Board independence. The Committee shall be responsible for reviewing and monitoring the independence (within the meaning of the NASDAQ listing and other applicable legal and regulatory requirements) of Board members and Board nominees and the overall Board composition and making recommendations to the Board regarding such matters.
     
  D. Meeting Schedules and Reporting. The Committee shall review the Board’s policies or processes relating to meeting schedules and agendas and the Company’s processes for providing information to the Board. The Committee should assess the reporting channels through which the Board receives information and see that the Board obtains appropriately detailed information in a timely manner.

 

E. Review of Director and Officer Board Service. The Committee shall review annually the service of Board members and executive officers on the board of directors of any other company.

 

F. Stockholder Proposals . The Committee shall (i) evaluate each stockholder proposal submitted for inclusion in the Company’s proxy materials to determine whether the proposal is eligible for inclusion based on compliance with substantive and procedural requirements of the Company’s Bylaws, Nevada Revised Statutes, and SEC proxy rules, and (ii) shall recommend to the Board whether the Company shall support or oppose the proposal.

 

G. Other Board Practices and Policies . The Committee shall be responsible for considering and making recommendations to the Board concerning such other matters relating to the practices, policies and performance of the Board and corporate governance as may be appropriate from time to time.

 

V. Authority and Responsibilities Relating to Evaluation of the Board

 

A. Evaluation of the Board. The Committee shall be responsible for overseeing an annual self-evaluation of the Board and its committees to determine whether it and its committees are functioning effectively. The Committees shall determine the nature of the evaluation, supervise the conduct of the evaluation and prepare an assessment of the Board’s performance, to be discussed with the Board. The Committee shall also periodically assess the size of the Board and make any recommendations for changing the number of directors serving on the Board.

 

VI. Procedures and Administration

 

A. Meetings. The Committee shall meet as often as it deems necessary in order to perform its responsibilities, but not less than twice during any fiscal year. The Committee shall keep such records of its meetings as it shall deem appropriate.

 

B. Subcommittees. The Committee may form and delegate authority to one or more subcommittees (including a subcommittee consisting of a single member), as it deems appropriate from time to time under the circumstances unless otherwise prohibited by applicable law or the listing standards of The Nasdaq Stock Market.

 

C. Reports to the Board. The Committee shall report regularly to the Board.

 

D. Charter. The Committee shall periodically review and reassess the adequacy of this Charter and submit any proposed amendments to the Charter to the Board for approval.

 

E. Independent Advisors. The Committee shall have the authority to engage such independent legal and other advisors as it deems necessary or appropriate to carry out its responsibilities. Such independent advisors may be the regular advisors to the Company. The Committee is empowered, without further action by the Board, to cause the Company to pay the compensation of such advisors as established by the Committee.

 

F. Investigations. The Committee shall have the authority to conduct or authorize investigations into any matters within the scope of its responsibilities as it shall deem appropriate, including the authority to request any officer, employee or advisor of the Company to meet with the Committee or any advisors engaged by the Committee.

 

VII. Disclosure of Charter

 

This Charter will be made available on the Company’s Internet website.