UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
☑
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended: March 31,
2020
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to
_____________
Commission File Number: 001-38190
Exactus, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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27-1085858
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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80 NE 4th Avenue, Suite 28, Delray Beach, FL 33483
(Address of principal executive offices, Zip Code)
(800) 881-9352
(Registrant's telephone number, including area code)
________________________________________________________
(Former Name, Former Address and Former Fiscal Year if Changed
Since Last Report)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol(s)
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Name of each exchange on which registered
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N/A
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N/A
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N/A
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted
electronically, every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such
files). Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated Filer ☐
Non-Accelerated
Filer ☑
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Accelerated
Filer ☐
Smaller
reporting company ☑
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Emerging
growth company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☑
State the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date: 49,564,420 shares
of common stock, par value $0.0001 per share, outstanding as of
June 26, 2020.
TABLE OF CONTENTS
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Page
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PART I – FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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1
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Item 2.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
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37
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Item 3.
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Quantitative and Qualitative
Disclosures About Market Risk
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47
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Item 4.
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Controls and Procedures
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47
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PART II – OTHER INFORMATION
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Item 1.
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Legal Proceedings
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48
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Item 1A.
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Risk Factors
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48
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Item 2.
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Unregistered Sales of Equity Securities and Use of
Proceeds
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48
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Item 3.
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Defaults Upon Senior
Securities
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48
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Item 4.
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Mine Safety
Disclosures
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48
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Item 5.
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Other Information
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48
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Item 6.
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Exhibits
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EXPLANATORY NOTE
On May
15, 2020, Exactus, Inc. (the “Company”) filed a Current
Report on Form 8-K, and is filing this Quarterly Report on Form
10-Q (the “Quarterly Report”), in reliance on the Order
of the Securities and Exchange Commission (the “SEC”),
dated March 4, 2020, as updated March 25, 2020, pursuant to Section
36 of the Securities Exchange Act of 1934 modifying exemptions from
the reporting and proxy delivery requirements for public companies
(Release No. 34-22465).
As a
result of “stay at home” orders and other restrictions
imposed as a result of the COVID-19 pandemic, certain Company
officers and management as well as professional staff and
consultants have been hindered and delayed in conducting all of the
work required to prepare the financial statements for the Quarterly
Report. This has, in turn, impacted the Company’s ability to
complete its audit and file this Quarterly Report by its original
due date, May 15, 2020.
PART I. FINANCIAL INFORMATION
Our
financial statements included in this Form 10-Q are as
follows:
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Condensed Consolidated Balance Sheets as March 31, 2020
(unaudited) and December 31, 2019;
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Condensed Consolidated Statements of Operations for the
three months ended March 31, 2020 and 2019
(unaudited);
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Condensed
Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the three months ended
March 31, 2020 and 2019 (unaudited);
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Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2020 and 2019
(unaudited);
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Notes to Unaudited Condensed Consolidated Financial
Statements.
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These
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and the SEC instructions
to Form 10-Q. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
Operating results for the interim period ended March 31, 2020 are
not necessarily indicative of the results that can be expected for
the full year.
NOTE 1 - NATURE OF
ORGANIZATION
Organization and Business Description
Exactus, Inc. (the “Company”) was incorporated
on January 18, 2008 as an alternative energy research and
development company. During much of its history the Company had
designed solar monitoring and charging systems which were
discontinued in 2016 to focus on developing point-of-care
diagnostic devices. The Company has recently added to the scope of
its activities efforts to produce, market and sell products made
from industrial hemp containing cannabidiol
(“CBD”).
On
January 8, 2019 the Company began pursuing hemp-derived CBD as a
new business segment after passage of the Agriculture Improvement
Act of 2018, also known as the 2018 Farm Bill. The 2018 Farm Bill
declassified industrial hemp as a Schedule I substance, shifted
regulatory authority from the Drug Enforcement Administration to
the Department of Agriculture, and provided autonomy for states to
regulate the industry. The 2018 Farm Bill did not change the Food
and Drug Administration’s oversight authority over CBD
products. The 2018 Farm Bill defined industrial hemp as a variety
of cannabis containing an amount equal to or lower than 0.3%
tetra-hydrocannabinol (THC) and allowed farmers to grow and sell
hemp under state regulation. Industry reports indicate that 41
states have set up cultivation and production programs to regulate
the production of hemp.
Following
passage of the 2018 Farm Bill, the Company entered into a Master
Product Development and Supply Agreement (the “Development
Agreement”) with Ceed2Med, LLC (“C2M”). Under the
Master Agreement, C2M agreed to provide to the Company up to 2,500
kilograms of products (isolate or distillate) for manufacture into
consumer products such as tinctures, edibles, capsules, topical
solutions and animal health products. The Company believes
manufacturing, testing and quality akin to pharmaceutical products
is important when distributing hemp-based products. The
Company’s products originate from third party manufacturers
and farms at which the Company oversee all stages of plant growth
and are manufactured under contract arrangements with
third-parties.
The
Company identified the rapidly growing hemp-based CBD market as a
valuable target for a new company focus. On January 8, 2019, the
Company entered into the Master Product Development and Supply
Agreement with C2M. In consideration for the Development Agreement
(see Note 11), C2M was issued 8,385,691 shares of our Common Stock.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock, with exercise
price of $0.32 per share to three C2M founders. As a result, C2M
became the Company’s largest shareholder holding (inclusive
of the vested options held by its founders) approximately 51% of
the Company’s outstanding Common Stock as of the date of the
Development Agreement which has subsequently been reduced to
approximately 19% as of December 31, 2019. Consequently, such
transaction resulted in a change of control whereby, C2M obtained
majority control through its Common Stock ownership (See Note 11).
In connection with this agreement, the Company received access to
expertise, resources, skills and experience suitable for production
of CBD rich ingredients including isolates, distillates, water
soluble, and proprietary formulations. Under the Development
Agreement, the Company was allotted a minimum of 50 and up to 300
kilograms per month, and up to 2,500 kilograms annually, of CBD
rich ingredients for resale and had placed a $1 million purchase
order for products in fiscal 2019. The Company currently offers
products such as tinctures, edibles, capsules, topical solutions
and animal health products manufactured for the Company as branded
and white-label products.
On
March 11, 2019, with the assistance of C2M and assignment of
rights, the Company acquired a 50.1% limited liability membership
interest in Exactus One World, LLC (“EOW”), an Oregon
limited liability company formed on January 25, 2019, in order to
farm industrial hemp for its own use. Prior to the acquisition, EOW
had no operating activities. The Company acquired its 50.1% limited
liability membership interest pursuant to a Subscription Agreement
and a Membership Interest Purchase Agreement (See Note 3).
Following the events described above, the Company entered into the
business of production and selling of industrial hemp grown for its
own use and for sale to third-parties.
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in this
Report and in the accompanying unaudited condensed consolidated
financial statements are retroactively restated for the effect of
the Reverse Stock Split.
-7-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The
Company’s unaudited condensed consolidated financial
statements include the financial statements of its 50.1%
subsidiary, EOW and 51% subsidiary, Paradise Medlife. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
The
accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and
the rules and regulations of the United States Securities and
Exchange Commission for interim financial information, which
includes consolidated unaudited interim financial statements and
present the consolidated unaudited interim financial statements of
the Company and its majority-owned subsidiary as of March 31, 2020.
All intercompany transactions and balances have been eliminated. In
the opinion of management, all adjustments necessary to present
fairly our financial position, results of operations,
stockholders’ equity (deficit) and cash flows as of March 31,
2020 and 2019, and for the periods then ended, have been made.
Those adjustments consist of normal and recurring adjustments.
Certain information and note disclosures normally included in our
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
unaudited condensed consolidated financial statements should be
read in conjunction with the audited financial statements as of and
for the year ended December 31, 2019 and footnotes thereto included
in the Company’s Report on Form 10K filed with the SEC on May
22, 2020. The results of operations for the three months ended
March 31, 2020 are not necessarily indicative of the results to be
expected for the full year.
Going concern
These
unaudited condensed consolidated financial statements are presented
on the basis that the Company will continue as a going concern. The
going concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. As reflected in
the accompanying unaudited condensed consolidated financial
statements, the Company had a net loss attributable to Exactus Inc.
common stockholders of $2,789,684 for the three months ended March
31, 2020. The net cash used in operating activities was
$164,283 for the three months ended March 31, 2020. Additionally,
the Company had an accumulated deficit of $23,919,063 and working
capital deficit of $3,677,275 at March 31, 2020. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern for a period of twelve months from the
issuance date of this report. Management cannot provide assurance
that the Company will ultimately achieve profitable operations or
become cash flow positive, or raise additional debt and/or equity
capital. The Company is seeking to raise capital through additional
debt and/or equity financings to fund its operations in the future.
Although the Company has historically raised capital from sales of
common and preferred shares and from the issuance of convertible
promissory notes, there is no assurance that it will be able to
continue to do so. If the Company is unable to raise additional
capital or secure additional lending in the near future, management
expects that the Company will need to curtail its operations. These
unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Over
the last several months the Company and its advisors have been
evaluating numerous opportunities and relationships to increase
shareholder value. The Company expects to realize revenue through
its efforts, if successful, to sell wholesale and retail products
to third parties. However, as the Company is in a start-up phase,
in a new business venture, in a rapidly evolving industry, many of
its costs and challenges are new and unknown. In order to fund the
Company’s activities, the Company will need to raise
additional capital either through the issuance of equity and/or the
issuance of debt. During the three months ended March 31, 2020, the
Company received proceeds from the sale of the Company’s
Common Stock of approximately $100,000, related party advances of
$85,000 and issuance of a note of $22,461.
In
March 2020, the outbreak of COVID-19 (coronavirus) caused by a
novel strain of the coronavirus was recognized as a pandemic by the
World Health Organization, and the outbreak has become increasingly
widespread in the United States, including in each of the areas in
which the Company operates. The COVID-19 (coronavirus) outbreak has
had a notable impact on general economic conditions, including but
not limited to the temporary closures of many businesses,
“shelter in place” and other governmental regulations,
reduced business and consumer spending due to both job losses and
reduced investing activity, among many other effects attributable
to the COVID-19 (coronavirus), and there continue to be many
unknowns. While to date the Company has not been required to stop
operating, management is evaluating its use of its office space,
virtual meetings and the like. The Company continues to monitor the
impact of the COVID-19 (coronavirus) outbreak closely. The extent
to which the COVID-19 (coronavirus) outbreak will impact the
Company’s operations, ability to obtain financing or future
financial results is uncertain.
-8-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Use of Estimates
The
Company prepares its unaudited condensed consolidated financial
statements in conformity with GAAP which requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. In
preparing the unaudited condensed consolidated financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet, and
revenues and expenses for the period then ended. Actual results may
differ significantly from those estimates. Significant estimates
made by management include, but are not limited to the fair value
of derivative liabilities, useful life of property and equipment
and intangible assets, fair value of right of use assets,
assumptions used in assessing impairment of long-term assets,
contingent liabilities, and fair value of non-cash equity
transactions.
Fair Value Measurements
The
Company adopted the provisions of Accounting Standard Codification
(“ASC”) Topic 820, “Fair Value Measurements and
Disclosures”, which defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value, and expands disclosure of fair value
measurements. The guidance prioritizes the inputs used in measuring
fair value and establishes a three-tier value hierarchy that
distinguishes among the following:
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Level
1—Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access.
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Level
2—Valuations based on quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
models for which all significant inputs are observable, either
directly or indirectly.
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●
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Level
3—Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
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The
Company measures certain financial instruments at fair value on a
recurring basis. Assets and liabilities measured at fair value on a
recurring basis are as follows at March 31, 2020 and December 31,
2019:
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At March 31, 2020
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At December 31, 2019
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Description
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Level 1
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Level 2
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Level 3
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Level 1
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Level 2
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Level 3
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Derivative
liabilities
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—
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$773,924
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$880,410
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A roll
forward of the level 3 valuation financial instruments is as
follows:
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For the Three
Months Ended March 31, 2020
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Balance at
beginning of period
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$880,410
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Change in fair
value included in derivative gain
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(106,486)
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Balance at end of
period
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$773,924
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As of
March 31, 2020, the Company has no assets that are re-measured at
fair value.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The carrying value of those investments approximates their fair
market value due to their short maturity and liquidity. Cash and
cash equivalents include cash on hand and amounts on deposit with
financial institutions, which amounts may at times exceed federally
insured limits. The Company has not experienced any losses on such
accounts and do not believe the Company is exposed to any
significant credit risk. The Company had $0 cash balances in excess
of FDIC insured limits at March 31, 2020 and December 31, 2019,
respectively. Cash and cash equivalents were $9,541 and $18,405 at
March 31, 2020 and December 31, 2019, respectively.
Accounts receivable and allowance for doubtful
accounts
The
Company has a policy of providing an allowance for doubtful
accounts based on its best estimate of the amount of probable
credit losses in its existing accounts receivable. The
Company periodically reviews its accounts receivable to determine
whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization
of an account may be in doubt. Account balances deemed
to be uncollectible are charged to bad debt expense and included in
the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. As of March 31,
2020 and December 31, 2019, allowance for doubtful accounts
amounted to $32,583 and $13,991, respectively. Bad debt expense
amounted $18,592 and $0 during the three months ended March 31,
2020 and 2019, respectively.
-9-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Prepaid Expenses and Other Current Assets
Total
prepaid expenses and other current assets - current amounted to
$123,760 and $248,776 at March 31, 2020 and December 31, 2019,
respectively. Total prepaid expenses and other current assets
– long term amounted to $15,959 and $0 at March 31, 2020 and
December 31, 2019, respectively. Prepaid expenses to C2M who is a
related party, amounted to $622,159 – current portion and
$2,333,523 – long-term portion at March 31, 2020. Prepaid
expenses to C2M who is a related party, amounted to $622,160
– current portion and $2,492,045 – long-term portion at
December 31, 2019. Prepaid expenses consist primarily of costs paid
for future services which will occur within a year. Prepaid
expenses may include prepayments in cash and equity instruments for
an operating lease, consulting, and insurance fees which are being
amortized over the terms of their respective
agreements.
Inventory
The
Company values inventory, consisting of raw materials, growing
plants and finished goods, at the lower of cost or net realizable
value. Cost is determined on the first-in and first-out
(“FIFO”) method. The Company reduces inventory for the
diminution of value, resulting from product obsolescence, damage or
other issues affecting marketability, equal to the difference
between the cost of the inventory and its estimated net realizable
value. Factors utilized in the determination of the estimated net
realizable value include (i) estimates of future demand, and (ii)
competitive pricing pressures. In accordance with ASC 905,
“Agriculture”, all direct and indirect costs of growing
hemp are accumulated until the time of harvest and are reported at
the lower of cost or net realizable value. Included in inventory is
the Company’s hemp crop under cultivation on farm acreage
leased by the Company. The cost of the hemp crop under cultivation
is determined based upon costs to purchase industrial hemp seed and
industrial hemp cuttings, plus farm labor, fertilizer, water and
power, the cost to harvest and cost for drying services. The costs
of planting, cultivating and harvesting the Company’s hemp
crop are capitalized to hemp crop inventory under cultivation, when
incurred. The Company determined the cost allocation of the hemp
crop (hemp flowers and hemp cuttings) based upon a proforma Market
Value Method. However, based upon current actual sales prices and
after reviewing national sales trends, the Company established an
inventory reserve to write down the inventory to net realizable
value which is the estimated selling prices in the ordinary course
of business, less reasonable predictable costs of completion,
disposal and transportation or shipping. The Company recorded
impairment expense on inventory of it finished goods- hemp flowers
of $553,440 (see Note 4) during the three months ended March 31,
2020 and was included in cost of sales as reflected in the
accompanying unaudited condensed consolidated statements of
operations.
Property and Equipment
Property
and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
ranging from 3 to 10 years. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are
capitalized. When assets are retired, or disposed of, the cost
and accumulated depreciation are removed, and any resulting gains
or losses are included in the unaudited condensed consolidated
statement of operations.
Impairment of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of
impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Derivatives and Hedging- Contracts in Entity’s Own
Equity
In
accordance with the provisions of ASC 815 “Derivatives and Hedging” the
embedded conversion features in the convertible notes (see Note 9)
are not considered to be indexed to the Company’s stock. As a
result, these are required to be accounted for as derivative
financial liabilities and have been recognized as liabilities on
the accompanying consolidated balance sheets. The fair value of the
derivative financial liabilities is determined using a binomial
model with Monte Carlo simulation and is affected by changes in
inputs to that model including the Company’s stock price,
expected stock price volatility, the expected term, and the
risk-free interest rate. The derivative financial liabilities are
subject to re-measurement at each balance sheet date and any
changes in fair value is recognized as a component in other income
(expenses).
-10-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Revenue Recognition
On
January 1, 2018, the Company adopted ASC Topic 606 and the related
amendments, Revenue from Contracts with Customers, which requires
revenue to be recognized in a manner that depicts the transfer of
goods or services to customers in amounts that reflect the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The Company recognizes
revenue by applying the following steps:
Step 1:
Identify the contract(s) with a customer.
Step 2:
Identify the performance obligations in the contract.
Step 3:
Determine the transaction price.
Step 4:
Allocate the transaction price to the performance obligations in
the contract.
Step 5:
Recognize revenue when (or as) the entity satisfies a performance
obligation.
The
Company’s performance obligations are satisfied at the point
in time when products are shipped or delivered to the customer,
which is when the customer has title and the significant risks and
rewards of ownership. Therefore, the Company’s contracts
have a single performance obligation (shipment of
product). The Company primarily receives fixed consideration
for sales of product. Payments received from customers that are
related to unshipped or undelivered products are recorded as
unearned revenue until the shipment of product.
Cost of Sales
The
primary components of cost of sales include the cost of the
product, and, indirect cost such as utilities, farm lease expenses,
and depreciation expenses on farming equipment related to
production and harvesting period.
Research and Development Expenses
The
Company follows ASC 730-10, “Research and Development,” and
expenses research and development costs when
incurred. Accordingly, third-party research and
development costs, including designing, prototyping and testing of
product, are expensed when the contracted work has been performed
or milestone results have been achieved. Indirect costs are
allocated based on percentage usage related to the research and
development. Research and development costs of $0
and $15,000 were incurred for the three months ended March 31, 2020
and 2019, respectively, and are included in operating expenses on
the accompanying unaudited condensed consolidated statements of
operations.
Advertising Costs
The
Company applies ASC 720 “Other Expenses” to account for
advertising related costs. Pursuant to ASC 720-35-25-1, the Company
expenses the advertising costs when the first time the advertising
takes place. Advertising costs were $57,050 and $50,531 for the
three months ended March 31, 2020 and 2019, respectively, and are
included in selling and marketing expenses on the accompanying
unaudited condensed consolidated statement of
operations.
Shipping and Handling Costs
The
Company accounts for shipping and handling fees in accordance with
ASC 606. The amounts charged to customers for shipping products are
recognized as revenues and the related costs of shipping products
are classified in selling and marketing expenses as incurred.
Shipping costs included in selling and marketing expenses were
$16,588 and $548 for the three months ended March 31, 2020 and
2019, respectively.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the
current period presentation. The reclassified amounts have no
impact on the Company’s previously reported financial
position or results of operations.
-11-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Stock-Based Compensation
Stock-based
compensation is accounted for based on the requirements of the
Share-Based Payment Topic of ASC 718 which requires recognition in
the financial statements of the cost of employee and director
services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the
services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee
and director services received in exchange for an award based on
the grant-date fair value of the award.
Through
March 31, 2018, pursuant to ASC 505-50 - Equity-Based Payments to
Non-Employees, all share-based payments to non-employees, including
grants of stock options, were recognized in the consolidated
financial statements as compensation expense over the service
period of the consulting arrangement or until performance
conditions are expected to be met. Using a Black Scholes valuation
model, the Company periodically reassessed the fair value of
non-employee options until service conditions are met, which
generally aligns with the vesting period of the options, and the
Company adjusts the expense recognized in the consolidated
financial statements accordingly. In June 2018, the FASB issued ASU
No. 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting, which simplifies several aspects of the accounting for
nonemployee share-based payment transactions by expanding the scope
of the stock-based compensation guidance in ASC 718 to include
share-based payment transactions for acquiring goods and services
from non-employees. ASU No. 2018-07 is effective for annual periods
beginning after December 15, 2018, including interim periods within
those annual periods. Early adoption is permitted, but entities may
not adopt prior to adopting the new revenue recognition guidance in
ASC 606. The Company adoption did not have any material impact on
its consolidated financial statements.
The
expense is recognized over the vesting period of the award. Until
the measurement date is reached, the total amount of compensation
expense remains uncertain. The Company records compensation expense
based on the fair value of the award at the reporting date. The
awards to consultants and other third-parties are then revalued, or
the total compensation is recalculated, based on the then current
fair value, at each subsequent reporting date.
Related Parties
We
follow ASC 850, “Related Party
Disclosures,” for the identification of related
parties and disclosure of related party transactions.
Earnings per Share
We
compute basic and diluted earnings per share amounts in accordance
with ASC Topic 260, “Earnings per Share”. Basic
earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of
common shares outstanding during the reporting period. Diluted
earnings per share reflects the potential dilution that could occur
if preferred stock converted to Common Stock and warrants are
exercised. Preferred stock and warrants are excluded
from the diluted earnings per share calculation if their effect is
anti-dilutive. For the three months ended March 31, 2020 and
2019, the following potentially dilutive shares were excluded from
the computation of diluted earnings per shares because their impact
was anti-dilutive:
|
|
2020
|
2019
|
|
Stock
Options
|
4,809,822
|
5,434,375
|
|
Stock
Warrants
|
2,014,299
|
1,362,833
|
|
Restricted
stock to be issued upon vesting
|
3,651,379
|
-
|
|
Convertible
Preferred Stock
|
9,460,845
|
5,542,212
|
|
Convertible
Debt
|
10,833,865
|
250,000
|
|
Total
|
30,770,210
|
12,589,420
|
Income Taxes
The
Company accounts for income taxes pursuant to the provision of ASC
740-10, “Accounting for Income Taxes” (“ASC
740-10”), which requires, among other things, an asset and
liability approach to calculating deferred income taxes. The asset
and liability approach require the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. A valuation allowance is provided
to offset any net deferred tax assets for which management believes
it is more likely than not that the net deferred asset will not be
realized.
-12-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
The
Company follows the provision of ASC 740-10 related to Accounting
for Uncertain Income Tax Positions. When tax returns are filed,
there may be uncertainty about the merits of positions taken or the
amount of the position that would be ultimately sustained. In
accordance with the guidance of ASC 740-10, the benefit of a tax
position is recognized in the financial statements in the period
during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated
with other positions.
Tax
positions that meet the more likely than not recognition threshold
are measured at the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefit associated
with tax positions taken that exceed the amount measured as
described above should be reflected as a liability for uncertain
tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the
taxing authorities upon examination. The Company believes its tax
positions are all more likely than not to be upheld upon
examination. As such, the Company has not recorded a liability for
uncertain tax benefits.
The
Company has adopted ASC 740-10-25, “Definition of
Settlement”, which provides guidance on how an entity should
determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits and
provides that a tax position can be effectively settled upon the
completion and examination by a taxing authority without being
legally extinguished. For tax positions considered effectively
settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to
be sustained based solely on the basis of its technical merits and
the statute of limitations remains open. The federal and
state income tax returns of the Company are subject to examination
by the IRS and state taxing authorities, generally for three years
after they are filed.
Non-controlling interests in consolidated financial
statements
In
December 2007, the FASB issued ASC 810-10-65,
“Non-controlling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No.
51” (“SFAS No. 160”). This ASC clarifies that a
non-controlling (minority) interest in subsidiaries is an ownership
interest in the entity that should be reported as equity in the
consolidated financial statements. It also requires consolidated
net income to include the amounts attributable to both the parent
and non-controlling interest, with disclosure on the face of the
consolidated income statement of the amounts attributed to the
parent and to the non-controlling interest. In accordance with ASC
810-10-45-21, those losses attributable to the parent and the
non-controlling interest in subsidiaries may exceed their interests
in the subsidiary’s equity. The excess and any further losses
attributable to the parent and the non-controlling interest shall
be attributed to those interests even if that attribution results
in a deficit non-controlling interest balance. On March 11, 2019,
the Company acquired a 50.1% limited liability membership interest
in EOW, pursuant to a Subscription Agreement and a Membership
Interest Purchase Agreement (see Note 3) and has the right to
appoint a manager of the limited liability company. Additionally,
on July 5, 2019, the Company acquired a 51% limited liability
membership interest in Paradise Medlife (see Note 3).
Gain (Loss) on Modification/Extinguishment of Debt
In
accordance with ASC 470, “Gain (Loss) on
Modification/Extinguishment of Debt”, a modification or an
exchange of debt instruments that adds or eliminates a conversion
option that was substantive at the date of the modification or
exchange is considered a substantive change and is measured and
accounted for as extinguishment of the original instrument along
with the recognition of a gain or loss. Additionally, under ASC
470, a substantive modification of a debt instrument is deemed to
have been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of
the new debt instrument is at least 10 percent different from the
present value of the remaining cash flows under the terms of the
original instrument. A substantive modification is accounted for as
an extinguishment of the original instrument along with the
recognition of a gain/loss.
Leases
In
February 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated
guidance requires lessees to recognize lease assets and lease
liabilities for most operating leases. In addition, the updated
guidance requires that lessors separate lease and non-lease
components in a contract in accordance with the new revenue
guidance in ASC 606. The updated guidance is effective for interim
and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company adopted ASU No. 2016-02, applying the
package of practical expedients to leases that commenced before the
effective date whereby the Company elected to not reassess the
following: (i) whether any expired or existing contracts contain
leases and; (ii) initial direct costs for any existing leases. For
contracts entered into on or after the effective date, at the
inception of a contract the Company assessed whether the contract
is, or contains, a lease. The Company’s assessment is based
on: (1) whether the contract involves the use of a distinct
identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the
period, and (3) whether it has the right to direct the use of the
asset. The Company will allocate the consideration in the contract
to each lease component based on its relative stand-alone price to
determine the lease payments.
-13-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Operating
lease ROU assets represents the right to use the leased asset for
the lease term and operating lease liabilities are recognized based
on the present value of future minimum lease payments over the
lease term at commencement date. As most leases do not provide an
implicit rate, the Company use an incremental borrowing rate based
on the information available at the adoption date in determining
the present value of future payments. Lease expense for minimum
lease payments is amortized on a straight-line basis over the lease
term and is included in general and administrative expenses in the
consolidated statements of operations.
Recent Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The adoption of this guidance had
no impact on the Company’s unaudited condensed consolidated
financial statements.
The
Company has reviewed the FASB issued ASU accounting pronouncements
and interpretations thereof that have effectiveness dates during
the periods reported and in future periods. We have carefully
considered the new pronouncements that alter previous generally
accepted accounting principles and do not believe that any new or
modified principles will have a material impact on the
Company’s reported financial position or operations in the
near term. The applicability of any standard is subject to the
formal review of the Company’s financial
management.
Recent Accounting Updates Not Yet Effective
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the
Accounting for Income Taxes.” This guidance, among other
provisions, eliminates certain exceptions to existing guidance
related to the approach for intra-period tax allocation, the
methodology for calculating income taxes in an interim period and
the recognition of deferred tax liabilities for outside basis
differences. This guidance also requires an entity to reflect the
effect of an enacted change in tax laws or rates in its effective
income tax rate in the first interim period that includes the
enactment date of the new legislation, aligning the timing of
recognition of the effects from enacted tax law changes on the
effective income tax rate with the effects on deferred income tax
assets and liabilities. Under existing guidance, an entity
recognizes the effects of the enacted tax law change on the
effective income tax rate in the period that includes the effective
date of the tax law. ASU 2019-12 is effective for interim and
annual periods beginning after December 15, 2020, with early
adoption permitted. The Company is currently evaluating the impact
of this guidance.
NOTE 3 – ACQUISITION
OF ASSETS AND OWNERSHIP
Exactus One World
On
March 11, 2019, the Company acquired a 50.1% limited liability
membership interest in Exactus One World, LLC (“EOW”),
an Oregon limited liability company, formed on January 25, 2019
which since inception, had no operations.
The
Company acquired 50.1% limited liability membership interest
pursuant to a Subscription Agreement (the “Subscription
Agreement”) and a Membership Interest Purchase Agreement (the
“Purchase Agreement”). Under the terms of the
Subscription Agreement, the Company acquired a 30% interest in EOW,
and an additional 20.1% was acquired from existing members pursuant
to the terms of the Purchase Agreement. The existing members are
considered third parties. The Company has the right to appoint a
Manager of the limited liability company and has appointed its
President. Under the Operating Agreement for EOW, as amended, the
Company has the right to appoint, and remove and replace, if
desired, one of three managers of EOW, with each manager having the
full rights to control the business and affairs of EOW. The Company
appointed its Interim Chief Executive Officer, Emiliano Aloi, as
its Manager of EOW.
-14-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Under
the term of the Subscription Agreement, the Company acquired 30% of
membership interest in EOW in consideration for cash of $2,700,000
payable as follows:
|
●
|
$400,000
paid previously for purchase of Hemp Seeds;
|
|
●
|
$100,000
upon execution of the LLC Operating Agreement;
|
|
●
|
$500,000
on or before April 1, 2019;
|
|
●
|
$500,000
on or before May 1, 2019;
|
|
●
|
$300,000
on or before August 1, 2019;
|
|
●
|
$450,000
on or before September 1, 2019 and,
|
|
●
|
$450,000
on or before October 1, 2019
|
The
acquisition of the 30% membership interest is deemed to be an
investment in and capital contribution to EOW and shall be
eliminated upon consolidation. The Company paid a total of
approximately $2,344,000 between April 2019 and September 2019
fully paid the $2,700,000 purchase price during fiscal
2019.
Under
the term of the Purchase Agreement, the Company acquired 20.1% of
EOW from existing members for aggregate consideration of $2,940,000
consisting of total cash payments of $1,500,000, 937,500 shares of
the Company’s Common Stock, and $450,000 worth of shares of
Common Stock on June 14, 2019. Pursuant to the terms of the
Purchase Agreement, the Company issued 937,500 shares of its Common
Stock valued at $990,000, or $1.056 per share, the fair value of
the Company’s Common Stock based on the quoted trading price
on the date of the Purchase Agreement. No goodwill was recorded
since the Purchase Agreement was accounted for as an asset
purchase.
During
fiscal 2019, the Company fully paid the consideration and was paid
to the sellers as follows:
|
●
|
$300,000
cash and 937,500 shares of the Company’s Common Stock to the
sellers upon execution, which was paid during the year ended
December 31, 2019;
|
|
●
|
$700,000
on April 20, 2019 which was paid on April 18, 2019;
|
|
●
|
On June
10, 2019, the Company was required to issue and issued the sellers
an additional $450,000 of shares of Common Stock of the
Company based upon the 20 day volume weighted average price per
share on the date of issue which was equivalent to $0.89 per share
or 503,298 shares of the Company’s Common Stock and was
issued in August 2019; and
|
|
●
|
$500,000
on September 1, 2019 which was fully paid by November
2019.
|
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
EOW and the related agreements to determine if the Company acquired
a business or acquired assets. Based on this analysis, it was
determined that the Company acquired assets, primarily consisting
of the value of two farm leases for approximately 200 acres of
farmland in southwest Oregon for growing and processing industrial
hemp, with lease terms of one year, and a license to operate such
farms. The leases are renewable on a year-to-year basis at the
option of the Company. Accordingly, the transaction was not
considered a business.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on March 11, 2019.
Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
|
Intangible asset
– Hemp farming license
|
$10,000
|
|
Intangible assets
– farm leases
|
2,930,000
|
|
Total assets
acquired at fair value
|
2,940,000
|
|
Total purchase
consideration
|
$2,940,000
|
Additionally,
the Company recorded the acquisition of 50.1% of membership
interest in EOW under the FASB issued ASC 810-10-65,
“Non-controlling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No.
51” (“SFAS No. 160”). As of March 31, 2020, the
Company recorded a non-controlling interest balance of $(693,288)
in connection with the majority-owned subsidiary, EOW as reflected
in the accompanying unaudited condensed consolidated balance sheet
and losses attributable to non-controlling interest of $155,819 and
35,604 during the three months ended March 31, 2020 and 2019,
respectively, as reflected in the accompanying unaudited condensed
consolidated statements of operations.
-15-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Paradise Medlife, LLC
On July
5, 2019, the Company entered into an Operating Agreement (the
“Operating Agreement”) with Paradise Medlife, LLC
(“Paradise Medlife”) and Paradise CBD, LLC. Paradise
Medlife is a Florida Limited Liability Company, organized on April
12, 2019 with no operations since inception. The Company shall
contribute capital of $50,000 in the form of CBD products in
exchange for 51% ownership of Paradise Medlife. Consequently,
Paradise Medlife became a majority owned subsidiary of the
Company. To date, Paradise Medlife has no operations. At March
31, 2020, the Company has not yet contributed the capital of
$50,000. The Company anticipates that it will contribute the
capital in the form of CBD products during fiscal
2020.
Green Goddess Extracts, LLC
On July
31, 2019 the Company entered into an Asset Purchase Agreement (the
“Green Goddess Purchase Agreement”) with Green Goddess
Extracts, LLC (“Green Goddess”), a Florida contract
manufacturer and formulator of hemp and vape products. Under the
Green Goddess Purchase Agreement, the Company acquired the assets
of Green Goddess consisting principally of its right and interest
in the Green Goddess brand, inventory, customer list, intellectual
property including IP addresses and trademarks, and entered into an
option to acquire the seller’s vape assets, and entered into
an employment agreement with the founder (the
“Founder”) of Green Goddess. Green Goddess manufactures
and distributes a premium line of hemp-derived products sold
through distributors and online. Green Goddess has been a contract
manufacturer for C2M and the Company.
Under
the terms of the Green Goddess Purchase Agreement the Company
agreed to issue 250,000 shares of the Company’s Common Stock
and pay $250,000 cash for the acquisition to be paid in six
installments. The first installment of $41,667 shall be due within
90 days of the closing and the five additional installments shall
be paid starting on October 12, 2019 and continuing on the first
day of each following month. At March 31, 2020 and December 31,
2019, the Company has an outstanding balance of $250,000 to the
seller which is included in subscription payable as reflected on
the consolidated balance sheets. The Company is currently in
default under the Asset Purchase Agreement. However, there are no
penalty interest or charges from the default pursuant to the Asset
Purchase Agreement.
The
shares vest 1/24 on the closing date and an additional 1/24 vests
on the first day of each month thereafter provided that the Company
and the Executive under the Employment Agreement discussed below
are neither in breach of this Green Goddess Purchase Agreement or
the Employment Agreement. In addition, the Company entered into an
agreement under which the Company may become obligated to issue up
to an additional $250,000 of Common Stock (the “Additional
Stock Consideration”) based upon the volume weighted average
price per share (“VWAP”) for the 20 days prior to
issuance, in the event that sales of products utilizing
seller’s flavored products exceed $500,000 monthly for a
three month average period. The Additional Stock Consideration
shall vest 1/24 on the signature or execution date of this Green
Goddess Purchase Agreement and an additional 1/24 vests on the
first day of each month thereafter provided that the Company and
the Executive under the Employment Agreement discussed below are
neither in breach of this Green Goddess Purchase Agreement or the
Employment Agreement.
Additionally,
on July 1, 2019, the Company entered into an Executive Employment
Agreement (the “Employment Agreement”) with Alejandro
De La Espriella (the “Executive”) who is the managing
member of Green Goddess Extracts, LLC. The term of the Employment
Agreement shall be for two years and shall be automatically renewed
for successive one-year periods unless either party provides a
written notice of non-renewal. The Company agrees to pay the
Executive an initial base salary of $120,000 per year subject to
annual adjustments determined by the board of directors of the
Company and such Executive shall also be eligible for annual bonus,
performance bonus and equity awards as defined in the Employment
Agreement.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
Green Goddess and the related agreements to determine if the
Company acquired a business or acquired assets. The gross assets
include the intellectual property (the related trademark, brand,
and IP addresses are determined to be a single intangible asset),
the inventory, customer list, non-compete/non-solicitation and the
excess of the consideration transferred over the fair value of the
net assets acquired. The Company concluded that substantially all
of the fair values of the gross assets acquired is not concentrated
in a single identifiable asset or group of similar identifiable
assets.
The set
has outputs through the continuation of revenues, and the Company
considered the criteria in paragraph 805-10-55-5E to determine
whether the set includes both inputs and a substantive process that
together significantly contribute to the ability to create outputs.
The set is not a business because: 1) It does not include an
organized workforce that could meet the criteria in paragraph
805-10-55-5E (a) through (b), 2) There are no acquired processes
that could meet the criteria in paragraph 805-10-55-5E(c) through
(d), and 3) It does not include both an input and a substantive
process. Accordingly, the transaction was not considered a
business.
-16-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Additionally,
in accordance with ASC 805-10, the 250,000 shares of common stock
and the Additional Stock Consideration are tied to continued
employment of the Company and as such are recognized as
compensation expenses in the post combination period under
Share-Based Payment Topic of ASC 718 which requires recognition in
the financial statements of the cost of employee and services
received in exchange for an award of equity instruments over the
period the employee is required to perform the services in exchange
for the award (presumptively, the vesting period). The ASC also
requires measurement of the cost of employee and services received
in exchange for an award based on the grant-date fair value of the
award.
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on July 31, 2019.
Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
|
Intangible asset
– trademark
|
$3,500
|
|
Intangible assets
– customer list
|
212,529
|
|
Inventory
|
33,971
|
|
Total assets
acquired at fair value
|
250,000
|
|
Total purchase
consideration
|
$250,000
|
During
fiscal year 2019 the Company fully impaired the assets and resulted
in an impairment loss of $186,025 related to the Green Goddess
intangible asset.
The
Company, Green Goddess and the founder of Green Goddess have each
asserted various claims against the other for breach of contract
although no proceedings have been commenced. Currently, the
Company has suspended efforts to market and sell CBD products under
the Green Goddess brand and Green Goddess has suspended delivery of
the Company’s inventory due to the disputes which involve,
among other things, the amounts that were due and owing Green
Goddess from C2M for orders placed prior to the asset purchase, the
nature and going concern value of the assets purchased by the
Company and representations concerning the operation of the
business and performance by the founder under the employment
agreement. There can be no assurance the parties will resolve
their differences or that the prior agreements will not be
terminated. The CBD products with a cost of $837,153 held inventory
had been written down to a value of $0 due to the age and
questionable salability of the product. During fiscal 2019, the
Company fully impaired the finished goods related to CBD products
and resulted in an impairment loss of $837,153.
Levor, LLC
On
September 30, 2019 the Company entered into an Asset Purchase
Agreement (the “Levor Purchase Agreement”) with Levor,
LLC (“Levor”) and the sole owner and manager of Levor
(the “Seller”). Under the Levor Purchase Agreement, the
Company acquired the asset of Levor consisting principally of its
rights and interest in the cosmetic brand collection, “Levor
Collection”, which is an all-virtual brand that offers
cannabinoid-infused cosmetic products. Under the terms of the Levor
Purchase Agreement, the Company agreed to issue 100,000 shares of
the Company’s Common Stock at closing. In addition, the
Company entered into an agreement under which the Company may
become obligated to issue additional shares of the Company’s
common stock to be earned and payable to the Seller on the 12-month
anniversary of the closing date which value is equivalent to 35% of
the total annual net revenue of the Levor brand divided by the then
closing bid price of the common stock on the 12-month anniversary
(the Earn-out Consideration”). The Seller of Levor has been
an employee of the Company since July 24, 2019.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of
Levor and the related agreements to determine if the Company
acquired a business or acquired assets. Based on this analysis, it
was determined that the Company acquired assets, primarily
consisting of the its rights and interest in the cosmetic brand
collection, “Levor Collection”. The Company concluded
that substantially all of the fair values of the gross assets
acquired is concentrated in a single identifiable asset or group of
similar identifiable assets. Accordingly, the transaction was not
considered a business.
Pursuant
to the terms of the Levor Purchase Agreement, the Company granted
100,000 shares of its Common Stock valued at $70,000, or $0.70 per
share, the fair value of the Company’s Common Stock based on
the sale of common stock in the recent private
placement.
Additionally,
in accordance with ASC 805-10, the Earn-out Consideration is deemed
as contingent payment to an employee and the Company determined
that the arrangement is compensatory in nature and as such are
recognized as compensation expenses in the post combination period
under Share-Based Payment Topic of ASC 718 which requires
recognition in the financial statements of the cost of employee and
services received in exchange for an award of equity instruments
over the period the employee is required to perform the services in
exchange for the award (presumptively, the vesting period). The ASC
also requires measurement of the cost of employee and services
received in exchange for an award based on the grant-date fair
value of the award.
-17-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
The
relative fair value of the assets acquired were based on
management’s estimates of the fair values on September 30,
2019. Based upon the purchase price allocation, the following table
summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
|
Intangible asset
– Brand
|
$70,000
|
|
Total assets
acquired at fair value
|
70,000
|
|
Total purchase
consideration
|
$70,000
|
During
fiscal 2019 the Company recorded an impairment expense of $64,167
related to the Levor intangible asset.
NOTE 4 – INVENTORY
Inventory,
net consisted of the following:
|
|
March 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Finished goods
– CBD products
|
$-
|
$-
|
|
Finished goods
– hemp flowers and hemp cuttings
|
397,098
|
1,337,809
|
|
|
$397,098
|
$1,337,809
|
During
the three months ended March 31, 2020, the Company recorded a
reserve or inventory write-off related to damaged inventory of
$553,440 due to mold and is included in cost of sales as reflected
in the accompanying unaudited condensed consolidated statements of
operations.
NOTE 5 – PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
Estimated life
|
As of March 31, 2020
|
As of December 31,2019
|
|
|
|
(Unaudited)
|
|
|
Greenhouse
|
10
years
|
$34,465
|
$34,465
|
|
Fencing and
storage
|
5
years
|
44,543
|
44,543
|
|
Irrigation
|
5
years
|
387,975
|
387,975
|
|
Office and computer
equipment
|
3
years
|
40,834
|
40,834
|
|
Farming
Equipment
|
5
years
|
11,500
|
11,500
|
|
Leasehold
improvement
|
5
years
|
21,886
|
21,886
|
|
Less: Accumulated
depreciation
|
|
(90,497)
|
(63,770)
|
|
|
$450,706
|
$477,433
|
|
Depreciation
expense amounted to $26,727 and $0 for the three months ended March
31, 2020 and 2019, respectively.
NOTE 6 – INTANGIBLE
ASSET
At
March 31, 2020 and December 31, 2019, intangible asset consisted of
the following:
|
|
Useful
life
|
March
31, 2020
|
December
31, 2019
|
|
|
|
(Unaudited)
|
|
|
Farm leases -
EOW
|
3 year
|
$2,930,000
|
$2,930,000
|
|
Hemp operating
license - EOW
|
1 year
|
10,000
|
10,000
|
|
Trademark –
Green Goddess
|
3 year
|
-
|
3,500
|
|
Customer list
– Green Goddess
|
3 year
|
-
|
212,529
|
|
Brand -
Levor
|
3 year
|
-
|
70,000
|
|
|
2,940,000
|
3,226,029
|
|
|
Less: accumulated
amortization
|
|
(1,038,939)
|
(828,526)
|
|
Less: impairment
expense
|
|
-
|
(250,192)
|
|
|
$1,901,061
|
$2,147,311
|
|
-18-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
For the
three months ended March 31, 2020, amortization of intangible
assets amounted to $246,250 and $52,688, respectively. During
fiscal 2019, the Company fully impaired the intangible assets
related to the Green Goddess and Levor brands.
Amortization
of intangible assets attributable to future periods is as
follows:
NOTE 7 - OPERATING LEASE
RIGHT-OF-USE ASSETS AND OPERATING LEASE
LIABILITIES
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consists of approximately 100 acres. The lease requires the Company
to pay 5% of the net income realized by the Company from the
operation of the lease farm. Accordingly, the Company recognized $0
Right-of-use asset (“ROU”) and lease liabilities on
this farm lease as the Company has not determined when it will
generate net income from this lease. The lease shall continue in
effect from year to year except for at least a 30-day written
notice of termination. The Company has not paid any lease payments
under this agreement for the three months ended March 31, 2020 and
for fiscal 2019. EOW is in the process of arranging a sub-lease
agreement with the affiliated company.
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Grants Pass, Oregon and
consists of approximately 100 acres. The lease requires the Company
to pay $120,000 per year, whereby $50,000 was payable upon
execution and $70,000 shall be payable prior to planting for
agricultural use or related purposes. The lease shall continue in
effect from year to year except for at least a 30-day written
notice of termination. EOW is in the process of arranging a
sub-lease agreement with the affiliated company.
On
April 30, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consists of approximately 38 acres. The lease requires the Company
to pay $76,000 per year, whereby $38,000 was payable upon execution
and $38,000 shall be payable on September 15, 2019 and 2% of the
net income realized by the Company from the operation of the leased
farm. The lease shall continue in effect from year to year for five
years except for at least a 30-day written notice of termination.
The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company.
On July
9, 2019, the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to $40,000
per month in advance in addition to all applicable Florida sales
and/or federal taxes and security deposit of $40,000. Effective one
year from the lease commencement date and each year thereafter, the
rent shall increase at least three percent (3%) per year. The
lessor of the Premises is a limited liability company owned or
controlled by Vladislav (Bobby) Yampolsky, the manager and
controlling member of C2M, the Company’s largest
stockholder. As of March 31, 2020, no rent payments have been
made. As of March 31, 2020, the Company recorded accrued expense of
$200,000 in connection with this lease agreement.
-19-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected
the ‘package of practical expedients’, which permit it
not to reassess under the new standard its prior conclusions about
lease identification, lease classification and initial direct
costs. In addition, the Company elected not to apply ASC Topic 842
to arrangements with lease terms of 12 month or less. The Company
is reasonably certain that it will exercise its option to extend
the three farm leases for a period of three years and the Company
used 5 years lease term for the commercial lease.
The
Company adopted ASC Topic 842 on January 1, 2019. Between March
2019 and August 2019 which are the execution dates of various lease
agreements, the Company recorded right-of-use assets totaling
$2,431,362 and total lease liabilities of $2,431,362 based on an
incremental borrowing rate of 10%. The Company recorded lease
expense of $166,619 and $10,000 for the three months ended March
31, 2020 and 2019, respectively. During the three months ended
March 31, 2020, lease expenses of $0 was included in cost of sales
and $166,619 was included in general and administrative expenses as
reflected in the accompanying unaudited condensed consolidated
statements of operations.
The
cash outflows from operating leases for the three months ended
March 31, 2020 was $169,000. The weighted average remaining lease
term and the incremental borrowing rate for operating leases at
March 31, 2020 were 2.56 years and 10%, respectively.
Right
of Use (“ROU”) Asset is summarized below:
|
|
As
of
March
31, 2020
|
As
of
December 31,
2019
|
|
|
(Unaudited)
|
|
|
Farm lease, ROU
Asset
|
$506,506
|
$506,506
|
|
Commercial lease
ROU
|
1,924,856
|
1,924,856
|
|
Less: Accumulated
amortization
|
(374,996)
|
(258,109)
|
|
Balance of ROU
asset
|
$2,056,366
|
$2,173,253
|
Operating
lease right-of-use assets consisted of the following:
|
|
March
31,
2020
|
December
31,
2019
|
|
|
(Unaudited)
|
|
|
Operating lease
right-of-use assets – related party
|
$1,705,115
|
$1,782,443
|
|
Operating lease
right-of-use assets – unrelated party
|
351,251
|
390,810
|
|
Operating lease
right-of-use assets, net
|
$2,056,366
|
$2,173,253
|
Operating
lease liability related to the ROU asset is summarized
below:
|
|
As
of
March
31, 2020
|
As
of
December 31,
2019
|
|
|
(Unaudited)
|
|
|
Farm
lease
|
$506,506
|
$506,506
|
|
Commercial
lease
|
1,924,856
|
1,924,856
|
|
Total lease
liability
|
2,431,362
|
2,431,362
|
|
Reduction of lease
liability
|
(285,879)
|
(172,410)
|
|
Total
|
2,145,483
|
2,258,952
|
|
Less: current
portion
|
(498,778)
|
(432,065)
|
|
Long term portion
of lease liability
|
$1,646,705
|
$1,826,887
|
-20-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Operating
lease liabilities, current portion consisted of the
following:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
||
|
|
|
(Unaudited)
|
|
|
|
|
||
|
Operating
lease liabilities – related party
|
|
$
|
324,628
|
|
|
$
|
262,196
|
|
|
Operating
lease liabilities – unrelated party
|
|
|
174,150
|
|
|
|
169,869
|
|
|
Operating
lease liabilities
|
|
$
|
498,778
|
|
|
$
|
432,065
|
|
Operating
lease liabilities, long-term portion consisted of the
following:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
||
|
|
|
(Unaudited)
|
|
|
|
|
||
|
Operating
lease liabilities – related party
|
|
$
|
1,469,604
|
|
|
$
|
1,605,945
|
|
|
Operating
lease liabilities – unrelated party
|
|
|
177,101
|
|
|
|
220,942
|
|
|
Operating
lease liabilities
|
|
$
|
1,646,705
|
|
|
$
|
1,826,887
|
|
Minimum
lease payments under non-cancelable operating lease at March 31,
2020 are as follows:
|
Year ended December
31, 2020
|
$682,000
|
|
Year ended December
31, 2021
|
696,580
|
|
Year ended December
31, 2022
|
560,933
|
|
Year ended December
31, 2023
|
531,063
|
|
Year ended December
31, 2024
|
315,140
|
|
Total
|
2,785,716
|
|
Less: undiscounted
payments during the three months ended March 31, 2020
|
(169,000)
|
|
Total undiscounted
future minimum lease payments due as of March 31, 2020
|
2,616,716
|
|
Imputed
interest
|
(471,233)
|
|
Total operating
lease liability
|
$2,145,483
|
NOTE 8 - NOTES PAYABLE
– RELATED PARTIES
During
October 2019, the Company entered into two short-term promissory
notes (the “Notes”) for an aggregate principal amount
of $94,056 and gross cash proceeds of $85,000 (original issue
discount of $9,056). A note with principal amount of $55,556 was
subscribed by Andrew Johnson, an officer of the Company. The Notes
became due and payable between October 18, 2019 and December 16,
2019 and bear interest at a rate of twelve (12%) percent per annum
prior to the maturity date, and eighteen (18%) per annum if unpaid
following the maturity date. The Notes are unsecured obligations of
the Company. In addition, the Notes carry a 10% original issue
discount of $9,056 which have been amortized and recorded in
interest expense on the accompanying consolidated statements of
operations. In December 2019, the Company repaid one of the notes
with principal amount of $38,500 and accrued interest of $770. The
Company is currently negotiating to extend the maturity date of the
related party note with principal amount of $55,556.
During
February 2020, the Company entered into a short-term promissory
note for principal amount of $22,461 and gross cash proceeds of
$20,419 (original issue discount of $2,042) with a certain
stockholder of the Company. The note became due and payable on
March 8, 2020 and bear interest at a rate of eighteen (18%) percent
per annum prior to the maturity date, and eighteen (18%) per annum
if unpaid following the maturity date. The note is unsecured
obligation of the Company. In addition, the note carries a 10%
original issue discount of $2,042 which have been amortized and
recorded in interest expense on the accompanying unaudited
condensed consolidated statements of operations. As of March 31,
2020, the principal balance of this note amounted to
$22,461.
During
the three months ended March 31, 2020 and 2019, the Company
recognized $2,239 and $524, respectively, of interest expense. As
of March 31, 2020 and December 31, 2019, the notes had accrued
interest balances of $3,517 and $1,278, respectively. As of March
31, 2020 and December 31, 2019, the principal balance under the
notes was $78,017 and $55,556,
respectively.
-21-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
NOTE 9 - CONVERTIBLE NOTES
PAYABLE
The
Company’s convertible notes, net of debt discount, consisted
of the following as of March 31, 2020 and December 31,
2019:
|
|
2020 (Unaudited) |
2019
|
|
Convertible
Notes in the aggregate amount of $100,000, issued on March 22,
2018. The Notes bear interest at a rate of 5% per annum and will
mature on February 1, 2023. If a qualified financing from which at
least $5 million of gross proceeds are raised occurs prior to the
maturity date, then the outstanding principal balance of the notes,
together with all accrued and unpaid interest thereon, shall be
automatically converted into a number of shares of the
Company’s Common Stock at $0.40 per Share. The Notes offers
registration rights wherein the Company agrees that within 45 days
of a Qualified Offering, prior to the Maturity Date, the Company
shall file a registration statement with the SEC registering for
resale of the shares of Company’s Common Stock into which the
Notes are convertible. The Company shall send a written conversion
notice to the lender pursuant to the note agreement during the
second quarter of fiscal 2020 and as such the principal balance of
the convertible note remains outstanding as of March 31, 2020 and
December 31, 2019. The Company reclass the principal balance to
current portion as of March 31, 2020.
|
$100,000
|
$100,000
|
|
Convertible
Note in the amount of $833,333, issued on November 27, 2019. The
Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with a single institutional
investor (the “Purchaser”), pursuant to which the
Company agreed to sell to Purchaser in a series of 3 closings up to
$1,944,444 in aggregate principal amount of the Company’s
senior secured convertible promissory notes (the
“Notes”) and warrants to purchase shares of the
Company’s Common Stock (the “Warrants”). On
November 27, 2019 (the “Initial Closing Date”), the
Company issued a Note in the principal amount of $833,333, and a
two-year Warrant to purchase 275,612 shares of Common Stock at an
exercise price of $0.756 per share (see Note 10). The Notes will be
issued at a 10% original issue discount and bear an interest rate
of 8%. The Notes mature one year after their issuance unless
accelerated due to an event of default. The Notes are redeemable,
in whole or in part, at any time at the discretion of the Company.
At the Initial Closing Date, the Company received net proceeds,
after the original issue discount and the Purchaser’s counsel
fees, of $730,000. Each note is convertible at the option of the
note holder at any time into shares of our common stock at the
fixed conversion rate of $0.50 per share. However, the conversion
rate is subject to adjustment in the event of default, redemption
and upon the occurrence of certain events affecting stockholders
generally, such as stock splits and recapitalizations. The Company
must pay amortization redemption payments equaling one-ninth of the
original principal amount due on each note commencing 90 days after
issuance and continuing during the following eight months (each an
“Amortization Redemption”). The note holder may at its
option accelerate up to six future amortization redemption
payments, in which case the note holder may demand the accelerated
amortization amounts be paid in shares of the Company’s
common stock at the lesser of i) the fixed conversion rate of $0.50
per share of common stock, or (ii) the rate equal to 80% of the
lowest volume weighted average price, or VWAP, during the 10
trading days immediately before the applicable date of the
amortization redemption payment (“Amortization Conversion
Rate”). Amortization redemption payment amount is equivalent
to 110% of the sum of (i) one-ninth (1/9th) of the Original
Principal Amount of this Note, (ii) 100% of all accrued and unpaid
interest on the principal amount of this Note that is subject to
such Amortization Redemption, (iii) 100% of the Make-Whole Amount
payable in respect of the principal amount of this Note that is
subject to such Amortization Redemption (as applicable), and (iv)
all liquidated damages, costs of collection and other amounts
payable in respect of this Note as of the applicable amortization
redemption payment Date for such Amortization Redemption. If the
Company fails to make a redemption payment, the note holder may
demand the amortization amounts be paid in shares of the
Company’s common stock at the lesser of fixed conversion rate
of $0.50 per share of common stock or the Amortization Conversion
Rate. In addition, in the event of a subsequent issuance of the
Company’s common stock or debt, the Company is subject to
mandatory redemption provisions as defined in the note agreement.
The Company may not issue shares of the Company’s common
stock to third parties at a price lower than the fixed conversion
rate of $0.50 per share of common stock without the consent of the
note holder. At this time, the Company is delinquent in its
payments under the initial convertible note, with the May 1, 2020,
April 1, 2020, and a portion of the February 25, 2020 payments
currently in arrears. The Company intends to make these payments
and the upcoming monthly payments with receipts from product sales
and/or the proceeds of additional equity funding. The Company paid
original issuance cost of $83,333, cash commission and loan fees of
$92,055, and recorded redemption premium of $88,889 related to the
amortization redemption payment in connection with this note
payable and are being amortized over the term of the note. On the
Initial Closing Date, certain FINRA broker-dealers who acted on
behalf of the Company were paid aggregate cash commissions of
approximately $72,055 and were granted a four-year warrant to
acquire an aggregate of 84,187 shares of Common Stock at an
exercise price of $0.792 per share of common stock at any time
before the close of business four years after their issuance,
subject to adjustment in the event of stock dividends, splits,
fundamental transactions, or other changes in our capital
structure.
|
302,214
|
85,906
|
|
Carrying Amount of
Convertible Debt, net of debt discount
|
$402,214
|
$185,906
|
|
Less: Current
Portion, net of debt discount
|
(402,214)
|
(85,906)
|
|
Convertible Notes,
Long Term
|
$-
|
$100,000
|
The
following is a summary of the carrying amounts of convertible notes
as of March 31, 2020 and December 31, 2019:
|
|
2020
|
2019
|
|
|
(Unaudited)
|
|
|
Principal
Amount
|
$933,333
|
$933,333
|
|
Add: amortization
of redemption premium
|
33,949
|
8,280
|
|
Less: principal
payments
|
(50,000)
|
-
|
|
Less: unamortized
debt discount and debt issuance costs
|
(515,068)
|
(755,707)
|
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$402,214
|
$185,906
|
In
connection with the issuance of notes during fiscal 2019, on the
initial measurement date of the notes, the fair values of the
embedded conversion option of $1,457,290 was recorded as derivative
liabilities of which $786,823 was charged to current period
operations as initial derivative expense and $670,467 was recorded
as a debt discount which was amortized into interest expense over
the term of the note. The Company recognized change in fair value
of derivative liabilities of $106,486 during the three months ended
March 31, 2020. The Company recognized gain on extinguishment of
debt due to repayment and conversions of notes into shares of
common and preferred stock of $3,007,629 and change in fair value
of derivative liabilities of $896,000 during the three months ended
March 31, 2019. The Company determined that the conversion options
embedded in the convertible notes require liability presentation at
fair value. Each of these instruments provide the holder with the
right to convert into Common Stock at a fixed discount market, with
certain notes subject to a cap on the conversion price. These
clauses cause uncertainty as to the number of shares issuable upon
conversion of convertible debt and accordingly require liability
presentation on the balance sheet in accordance with US GAAP. For
the three months ended March 31, 2020 and 2019, the Company
measured the fair value of the embedded derivatives using a
binomial model and Monte Carlo simulations, and the following
assumptions:
|
|
2020
|
2019
|
|
Expected
Volatility
|
230.26%
|
376.76% to
567.11%
|
|
Expected
Term
|
0.66 Years
|
0.25 to 1.0
Years
|
|
Risk Free
Rate
|
0.15%
|
2.41% to
2.54%
|
|
Dividend
Rate
|
0.00%
|
0.00%
|
During
the three months ended March 31, 2020 and 2019, the Company
recognized $17,876 and $24,534, respectively, of interest expense.
During the three months ended March 31, 2020 and 2019, the Company
amortized debt discount of $266,308 and $339,806, respectively, of
interest expense.
As of
March 31, 2020 and December 31, 2019, the notes had accrued
interest balances of $22,164 and $15,399,
respectively.
-23-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
NOTE 10 - STOCKHOLDERS’ EQUITY
(DEFICIT)
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s Common Stock for all periods presented in the
accompanying consolidated financial statements are retroactively
restated for the effect of the Reverse Stock Split.
In
January 2019, the Company approved the 2019 Equity Incentive Plan
(the “2019 Plan”) which provides for the issuance of
incentive awards in the form of non-qualified and incentive stock
options, stock appreciation rights, restricted stock awards and
restricted stock unit awards. The 2019 Plan provides for a share
limit equal to 15% of the total of the number of the issued and
outstanding shares of the Company’s Common Stock and all
shares of Common Stock issuable upon conversion or exercise of any
outstanding securities of the Company.
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001.
Series A - On
February 17, 2016, the Board of Directors voted to designate a
class of preferred stock entitled Series A Preferred Stock,
consisting of up to five million (5,000,000) shares, par value
$0.0001 per share.
On
December 21, 2018, we filed a Certificate of Cancellation of our
previously filed Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock in order to designate
1,000,000 shares as a new Series of Preferred Stock for issuance to
former Holders of our Notes under the Exchange Agreements (See Note
8), and filed a new Certificate of Designation of Preferences,
Rights and Limitations of Series A Convertible Preferred
Stock.
Pursuant
to the Series A Preferred Certificate of Designation, the Company
issued shares of Series A Preferred. Each share of Series A
Preferred has a stated value of $1.00 per share. In the
event of a liquidation, dissolution or winding up of the Company,
each share of Series A Preferred Stock will be entitled to a
payment as set forth in the Certificate of Designation. The Series
A Preferred is convertible into such number of shares of the
Company’s common stock, par value $0.0001 per share equal to
the Stated Value of $1.00, divided by $0.20, subject to adjustment
in the event of stock split, stock dividends, and recapitalization
or otherwise. Pursuant to the Exchange Agreements each
holder of Notes shall be issued Series A Preferred in the amount of
the purchase price paid for such Notes by the buyer under the
Exchange Agreement, including any penalty, interest and premium
payments. Each share of Series A Preferred entitles the holder to
vote on all matters voted on by holders of Common Stock as a single
class. With respect to any such vote, each share of Series A
Preferred entitles the holder to cast such number of votes equal to
the number of shares of Common Stock such share of Series A
Preferred is convertible into at such time, but not in excess of
the conversion limitations set forth in the Series A Preferred
Certificate of Designation. The Series A Preferred will be entitled
to dividends to the extent declared by the Company.
On
January 20, 2020, the Company converted 30,090 Series A Preferred
Stock into 150,450 shares of Common Stock.
There
are 323,019 and 353,109 shares of Series A Preferred Stock
outstanding as of March 31, 2020 and December 31, 2019,
respectively.
Series B-1 - On February 29, 2016, the Company’s Board
of Directors voted to designate a class of preferred stock entitled
Series B-1 Convertible Preferred Stock (“Series B-1 Preferred
Stock”), consisting of up to 32,000,000 shares, par value
$0.0001 per share. With respect to rights on
liquidation, winding up and dissolution, the Series B-1 Preferred
Stock ranks pari passu to the class of Common Stock.
Shares of Series B-1 Preferred Stock have no dividend rights except
as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-1 Preferred Stock are convertible, at the option of the
holder, into shares of Common Stock at a conversion rate of 0.125
shares for 1 share basis. Holders of Series B-1 Preferred Stock
have the right to vote as-if-converted to Common Stock on all
matters submitted to a vote of holders of the Company’s
Common Stock. On February 29, 2016, the Company issued 30,000,000
shares of Series B-1 Preferred Stock.
There
are 1,650,000 shares of Series B-1 preferred stock outstanding,
which are convertible into 206,250 shares of common stock, as of
March 31, 2020 and December 31, 2019.
Series B-2 - On February 17, 2016, the Company’s Board
of Directors voted to designate a class of preferred stock entitled
Series B-2 Convertible Preferred Stock (“Series B-2 Preferred
Stock”), consisting of up to 10,000,000 shares, par value
$0.0001 per share, with a stated value of $0.25 per
share. With respect to rights on liquidation, winding up
and dissolution, holders of Series B-2 Preferred Stock will be paid
in cash in full, before any distribution is made to any holder of
common or other classes of capital stock, an amount of $0.25 per
share. Shares of Series B-2 Preferred Stock have no dividend rights
except as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-2 Preferred Stock are convertible, at the option of the
holder, into shares of Common Stock at a conversion rate of 0.125
shares for 1 share basis. Holders of Series B-2
Preferred Stock have the right to vote as-if-converted to Common
Stock on all matters submitted to a vote of the holders of the
Company’s Common Stock. For so long as any shares of Series
B-2 Preferred Stock are issued and outstanding, the
Corporation shall not issue any notes, bonds, debentures, shares of
preferred stock, or any other securities that are convertible to
Common Stock unless such conversion rights are at a fixed ratio or
a fixed monetary price (Note 9). On February 29, 2016, the Company
issued 2,084,000 shares of Series B-2 Preferred Stock.
There
are 7,516,000 shares of Series B-1 preferred stock outstanding,
which were convertible into 939,500 shares of common stock as of
March 31, 2020 and December 31, 2019.
-24-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Series C - On June 30, 2016, the Company’s Board of
Directors approved a Certificate of Designation authorizing
1,733,334 shares of new Series C Preferred Stock, par value $0.0001
per share. The Series C Preferred Stock ranks equally
with the Company’s Common Stock with respect to liquidation
rights and is convertible to Common Stock at a conversion rate of
0.125 shares for 1 share basis. The conversion rights of
holders of the Series C Preferred Stock are limited such that no
holder may convert any shares of preferred stock to the extent that
such holder, immediately following the conversion, would own in
excess of 4.99% of the Company’s issued and outstanding
shares of common stock. This limitation may be increased
to 9.99% upon 61 days written notice by a holder of the Series C
Preferred Stock to the Company.
As of
March 31, 2020 and December 31, 2019, there were no shares of
Series C Preferred Stock issued and outstanding.
Series D - On March 1, 2018, the Company’s Board of
Directors voted to designate a class of preferred stock entitled
Series D Convertible Preferred Stock consisting of up to 200
shares, par value $0.0001 per share, to offer for sale to certain
accredited investors, including affiliates of the Company, with a
maximum offering amount of $2,200,000. Pursuant to the terms of the
Series D Subscription Agreement, immediately following the
consummation of an offering of the Company’s Common Stock for
which the gross proceeds of the offering exceed $5,000,000, each
share of Series D automatically converts into 25,000 shares of
Common Stock. Upon the liquidation, dissolution or winding up of
the Company, each holder of Series D Convertible Preferred Stock
shall be entitled to receive, for each share of Series D
Convertible Preferred Stock held, $10,000 per share payable pari
passu with the Company’s Series B-2 Convertible Preferred
Stock. Shares of Series D Preferred Stock have no
dividend rights except as may be declared by the Board in its sole
and absolute discretion, out of funds legally available for that
purpose. Holders of Series D Preferred Stock have the right to vote
as-if-converted to Common Stock on all matters submitted to a vote
of holders of the Company’s Common Stock. At no time may
shares of Series D Convertible Preferred Stock be converted if such
conversion would cause the holder to hold in excess of 4.99% of our
issued and outstanding Common Stock, subject to an increase in such
limitation up to 9.99% of the issued and outstanding Common Stock
on 61 days’ written notice to the Company.
There
are 18 shares of Series D preferred stock outstanding which were
convertible into 450,000 shares of common stock as of March 31,
2020 and December 31, 2019.
Series E - On August 1, 2019 the Company issued 10,000
shares of newly designated Series E 0% Convertible Preferred Stock,
par value $0.0001 per share (the “Series E Preferred”)
to C2M pursuant to the MSA. Under the terms of the Series E
Preferred, C2M may only convert such shares of Series E Preferred
into shares of the Company’s Common Stock, if the closing
price of Common Stock on the principal trading market, shall exceed
$2.00 per share for 5 consecutive trading days. Once vested, the
shares of Series E Preferred held by C2M are intended to either be
converted at $1.60 per share of Common Stock or optionally redeemed
out of the proceeds of future financings, at the option of
C2M.
Each
share of Series E Preferred is convertible into 625 shares of the
Company’s Common Stock and have a stated value of $1,000 per
share. The conversion ratio is subject to adjustment in the event
of stock splits, stock dividends, combination of shares and similar
recapitalization transactions. The Company is prohibited from
effecting conversions of the Series E Preferred to the extent that,
as a result of such conversion, the holder beneficially owns more
than 4.99% (which may be increased to 9.99% upon 61 days’
written notice), in the aggregate, of the issued and outstanding
shares of Common Stock calculated immediately after giving effect
to the issuance of shares of Common Stock upon the conversion of
the Series E Preferred. Holders of the Series E Preferred shall be
entitled to vote on all matters submitted to shareholders and shall
be entitled to the number of votes equal to the number of shares of
Common Stock into which the shares of Series E Preferred Stock are
convertible, subject to applicable beneficial ownership
limitations. The Series E Preferred Stock provides a liquidation
preference equal to par value.
The
Series E Preferred has a no mandatory redemption rights however, in
the event that we raise $5,000,000 from a capital raising
transaction involving any equity or equity-linked financing during
any fiscal quarter in an amount which would cause the
Company’s cash or cash equivalents to exceed $5,000,000 (a
“Fundamental Transaction”), the Company is required
from the proceeds of such offering, to offer C2M a right to redeem
Series E Preferred then outstanding as follows:
(A) 0%
percent of the net proceeds of the Fundamental Transaction, after
deduction of the amount of net proceeds required to leave the
Company (together with our existing cash on hand immediately prior
to the completion of the Fundamental Transaction) with cash on hand
of $5,000,000; plus
(B) 10%
percent of the next $5,000,000 of net proceeds of the Fundamental
Transaction; plus
(C)
100% of the net proceeds of the Fundamental Transaction thereafter
(until the Series E Preferred is redeemed in full).
-25-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
The
shares of Series E Preferred are convertible into Common Stock,
once vested, at a price of $1.60 per share. The Company is not
obligated to file a registration statement with respect to the
shares of Common Stock into which Series E Preferred shares may be
converted. The Company believes that the occurrence of the
Fundamental Transaction is considered a conditional event and as a
result the instrument does not meet the definition of mandatorily
redeemable financial instrument based from ASC 480-10-25,
“Distinguishing Liabilities from Equity”. This
financial instrument was assessed at each reporting period to
determine whether circumstances have changed such that the
instrument met the definition of a mandatorily redeemable
instrument (that is, the event is no longer conditional). If the
event has occurred, the condition is resolved, or the event has
become certain to occur, the financial instrument will be
reclassified as a liability.
On July
31, 2019, the Company granted 10,000 Series E Preferred in
connection with a Management and Services Agreement (the
“MSA”) with C2M, the Company’s largest
shareholder (see Note 11). The Company valued the 10,000 Series E
Preferred shares which is equivalent into 6,250,000 common shares
at a fair value of $0.54 per common share or $3,375,000 based on
the sales of common stock on recent private placements on the dates
of grant. During the three months ended March 31, 2020, the Company
recorded stock-based compensation of $158,523 and prepaid expense
– related party of $2,955,681 to be amortized over the term
of the MSA.
As of
March 31, 2020 and December 31, 2019, there were 10,000 shares of
Series E Preferred Stock issued and outstanding which were
convertible into 6,250,000 shares of common stock.
Common Stock
The
Company’s authorized Common Stock consists of 650,000,000
shares with a par value of $0.0001 per share.
Sale of Common Stock for private placement
During
the three months ended March 31, 2020, the Company sold an
aggregate of 500,000 shares of Common Stock for total proceeds of
$100,000.
Conversion of Series A Preferred stock into Common
Stock
On
January 20, 2020, the Company converted 30,090 Series A Preferred
Stock into 150,450 shares of Common Stock.
Common Stock for services
On
January 23, 2020, the Company issued 250,000 shares of Common Stock
for legal services to be rendered in fiscal 2020 and valued the
shares of Common Stock at the fair value of approximately $0.4948
per common share or $123,700 based on the based on the quoted
trading price on the date of grant. The Company recorded
stock-based compensation of $123,700 during the three months ended
March 31, 2020.
On
January 23, 2020, the Company issued an aggregate of 515,000 shares
of Common Stock to two officers and three employees of the Company
for services in fiscal 2020 and as an incentive to retain such
employees and valued the shares of Common Stock at the fair value
of approximately $0.4948 per common share or $254,823 based on the
based on the quoted trading price on the date of grant. The Company
recorded stock-based compensation of $254,823.
Common Stock issued for Vested Restricted Common Stock
Award
During
the three months ended March 31, 2020, the Company issued an
aggregate of 209,727 of Common Stock to employees and consultants
for vested restricted stock awards (see Restricted Common Stock
below).
Common Stock issued for Unissued Stock
There
were 287,500 shares of common stock issuable which were issued
during the three months ended March 31, 2020.
-26-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Common Stock Warrants
A
summary of the Company’s outstanding stock warrants as of
March 31, 2020 and changes during the period ended are presented
below:
|
|
Number of
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Balance at December
31, 2019
|
2,014,299
|
$0.45
|
3.31
|
|
Granted
|
—
|
—
|
—
|
|
Cancelled
|
—
|
—
|
—
|
|
Exercised
|
—
|
—
|
—
|
|
Forfeited
|
—
|
—
|
—
|
|
Balance at March
31, 2020
|
2,014,299
|
$0.45
|
3.06
|
|
|
|
|
|
|
Warrants
exercisable at March 31, 2020
|
2,014,299
|
$0.45
|
3.06
|
|
|
|
|
|
|
Weighted average
fair value of warrants granted during the period
|
|
$—
|
|
As of
March 31, 2020, aggregate intrinsic value in connection with
exercisable warrants amounted to $0. During the three months ended March 31, 2020 and
2019, the Company recorded stock-based compensation of $0 and
$1,114,062, respectively.
Common Stock Options
Stock Option Plan
In
September 2018, the Company’s stockholders approved the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
provides for the issuance of incentive awards in the form of
non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards, and restricted stock unit awards.
The awards may be granted by the Company’s Board of Directors
to its employees, directors and officers and to consultants,
agents, advisors and independent contractors who provide services
to the Company or to a subsidiary of the Company. The exercise
price for stock options must not be less than the fair market value
of the underlying shares on the date of grant. The incentive awards
shall either be fully vested and exercisable from the date of grant
or shall vest and become exercisable in such installments as the
Board or Compensation Committee may specify. Stock options expire
no later than ten years from the date of grant. The aggregate
number of shares of Common Stock which may be issued pursuant to
the Plan is 9,500,000. Unless sooner terminated, the Plan shall
terminate in 10 years.
On January 11, 2019, the Company’s shareholders approved the
2019 Equity Incentive Plan (the “2019 Plan”). The
purpose of the 2019 Plan is to provide a means for the Company to
continue to attract, motivate and retain management, key employees,
consultants and other independent contractors, and to provide these
individuals with greater incentive for their service to the Company
by linking their interests in the Company’s success with
those of the Company and its shareholders. The 2019 Plan is limited
such that the maximum number of shares of Common Stock that may be
delivered pursuant to awards granted under the 2019 Plan may not
exceed fifteen percent (15%) of the total of: (a) the issued and
outstanding shares of our Common Stock, and (b) all shares common
stock issuable upon conversion or exercise of any of our
outstanding securities which are convertible or exercisable into
shares of Common Stock under the terms thereof.
-27-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Stock
option activity for the three months ended March 31, 2020 is
summarized as follows:
|
|
Number of
Options
|
Weighted Average
ExercisePrice
|
Weighted Average
Remaining Contractual Life(Years)
|
|
Balance at December
31, 2019
|
4,671,280
|
$0.29
|
7.29
|
|
Granted
|
1,000,000
|
0.30
|
10.00
|
|
Forfeited
|
(861,458)
|
0.53
|
0.00
|
|
Balance at March
31, 2020
|
4,809,822
|
0.29
|
8.94
|
|
Options exercisable
at March 31, 2020
|
3,450,448
|
$0.25
|
8.77
|
Weighted
average fair value of options granted during the period
$0.33
As of
March 31, 2020, aggregate intrinsic value in connection with
exercisable options amounted to $115,625. As of March 31, 2020,
1,359,375 outstanding options are unvested and there was $529,896
unrecognized compensation expense in connection with unvested stock
options.
In
February 2020, the Company granted 1,000,000 options to purchase
shares of the Company’s Common Stock to Derek Du Chesne, the
Company’s President in connection with his employment
agreement (see Note 11). The options have a 10-year term from the
date of grant and was exercisable at an exercise price of $0.30 per
share. The fair value of the options granted amounted to $0.33 per
option or $332,900.
The
Company estimates the fair value of stock options using the
Black-Scholes valuation model. Compensation expense related to
stock options granted is measured at the grant date based on the
estimated fair value of the award and is recognized on a
straight-line basis over the requisite service period. The
assumptions used in the Black-Scholes model for the options granted
during the three months ended March 31, 2020 are presented
below:
|
Risk-free
interest rate
|
1.55%
|
|
Expected
volatility
|
263%
|
|
Expected
term (in years)
|
10
|
|
Expected
dividend yield
|
0%
|
The
risk-free interest rate is based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect at
the time of the grant. Expected volatility is based on the
historical volatility of the Company’s common stock. The
expected term assumption for stock options granted is the
contractual term of the option award. The Company has never
declared or paid dividends on its common stock and has no plans to
do so in the foreseeable future. Forfeitures are recognized as a
reduction of stock-based compensation expense as they
occur.
The
Company recognized $140,866 and $891,799 of compensation expense
relate to the vesting of stock options for the three months ended
March 31, 2020 and 2019, respectively. These amounts are included
in general and administrative expenses on the accompanying
unaudited consolidated statement of operations.
Restricted Common Stock
A
summary of the status of the restricted common stock and changes
during the three months ended March 31, 2020 is as
follows.
|
|
Restricted Stock
Common
Stock
|
Weighted
Average
Grant-Date
Fair Value
Per
Share
|
|
Balance at December
31, 2019
|
3,583,328
|
$0.68
|
|
Granted
|
277,778
|
0.38
|
|
Vested and
issued
|
(209,727)
|
(0.62)
|
|
Forfeited
|
-
|
-
|
|
Balance at March
31, 2020
|
3,651,379
|
$0.66
|
-28-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
On January 14, 2020, in connection with his appointment to the
Board of Directors, Alvaro Daniel Alberttis was awarded $100,000
worth of restricted common stock, valued at the closing market
price of the Company’s common stock on the date of the
appointment. These shares vest at a rate of 1/24th on the date of
grant, and 1/24th
per month thereafter, contingent upon
his continued service. The Company valued the shares of restricted
common stock at the fair value of $0.36 per common share or
$100,000 based on the quoted trading price on the date of
grant.
During
the three months ended March 31, 2020, the Company recorded
stock-based compensation of $117,903 in connection with vested
restricted common stock grants. As of March 31, 2020, unamortized
or unvested stock-based compensation costs related to restricted
share arrangements was $2,379,344 and will be recognized over a
weighted average period of 1.11 years.
NOTE 11 - COMMITMENTS AND
CONTINGENCIES
Legal Matters
In the
ordinary course of business, the Company enters into agreements
with third parties that include indemnification provisions which,
in its judgment, are normal and customary for companies in the
Company’s industry sector. These agreements are typically
with business partners, clinical sites, and suppliers. Pursuant to
these agreements, the Company generally agrees to indemnify, hold
harmless, and reimburse indemnified parties for losses suffered or
incurred by the indemnified parties with respect to the
Company’s product candidates, use of such product candidates,
or other actions taken or omitted by us. The maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company
has not incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is
minimal. Accordingly, the Company has no liabilities recorded for
these provisions as of March 31, 2020 and December 31,
2019.
In July
2018 the Company received notice of the expiration and termination
of a license agreement dated January 19, 2016 acquired through the
Share Exchange by our subsidiary Exactus BioSolutions, Inc that the
Company recognized as an intangible asset from Digital Diagnostics,
Inc. (“Digital Diagnostics”) related to our FibriLyzer
and MatriLyzer technologies. In addition, on December 14,
2018 we received a letter from KD Innovation, Ltd.
(“KDI”) and Dr. Krassen Dimitrov, our former director
seeking payment for alleged past due consulting fees from June 2017
through November 2018 pursuant to a Consulting Agreement dated
January 20, 2016. On January 23, 2019, Digital Diagnostics,
made a demand for compensation against the Company in connection
with an alleged breach of a License Agreement. Under the terms of
these agreements, the parties are required to arbitrate
claims. Although we dispute the material allegations made by
Digital Diagnostics and KDI, if such actions were successful
damages could be awarded against us.
On
December 14, 2018, the Company received a termination and demand
notice from KD Innovation, Ltd, an entity 100% owned by a former
Board member, in connection with a consulting agreement KDI entered
into with the Company’s subsidiary, Exactus Biosolutions,
Inc., on or about January 20, 2016. No lawsuit has been filed;
however, in the event a lawsuit is filed, the Company intends to
vigorously contest the matter. On September 9, 2019, Dr. Krassen
Dimitrov, a former director, commenced an arbitration proceeding
against the Company and its wholly-owned subsidiary Exactus
Biosolutions, Inc. before the American Arbitration
Association. The complaint alleges breach of a consulting
agreement for services by Dr. Dimitrov during 2017-2019, among
other claims, and seeks $750,000 in damages. The Company has
filed an answer denying the claims and asserting numerous
counterclaims against Dr. Dimitrov and his affiliated entities, KD
Innovation Ltd., and Digital Diagnostics, Inc. An arbitrator
has been appointed in the matter and on May 1, 2020 issued a
procedural order suspending further proceedings.
-29-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
On September
25, 2019, Jonathan Gilbert, a former director, filed and served a
complaint against the Company in the courts of Nassau County, New
York. The complaint alleges that Mr. Gilbert is entitled to retain
certain cancelled equity awards and seeks specific performance and
damages. In February 2019, the Company granted 1,000,000 options to
purchase shares of the Company’s Common Stock to a former
director of the Company, Jonathan Gilbert, with vesting terms
pursuant to the respective stock option agreement. The former
director resigned as a director of the Company in August 2019. The
options have a term of 10 years from the date of grant and was
exercisable at an exercise price at $0.01. The Company already
recognized $320,000 of compensation expense which relates to the
vesting of 500,000 stock options prior to his resignation. After
Jonathan Gilbert’s resignation, he filed a complaint against
the Company disputing his rights to receive the Company’s
common stock through the exercise of his stock options. In January
10, 2020, Mr. Gilbert and the Company entered into a Settlement and
General Release Agreement and both parties agreed to such
consideration. The Company will issue to Mr. Gilbert 375,000 shares
of the Company’s common stock whereby 187,500 shares of
common stock shall be issued immediately (“First
Tranche”) and another 187,500 shares of common stock shall be
issued immediately and held by the transfer agent and delivered on
the six month anniversary of this agreement (“Second
Tranche”) (collectively the First and Second Tranche shall be
called “Settlement Stock”). The Settlement Stock is by
virtue of the exercise of Mr. Gilbert’s stock options and any
required payments from the exercise of the stock options have been
credited or forgiven. The Settlement Stock which is issued under
the Stock Option Plan based upon the exercise of the stock options
registered pursuant to the Company’s registration statement
on form S-8 (File no. 333-229025). The Company and Mr. Gilbert have
released and discharged each other from all claims and demands. In
January 2020, Mr. Gilbert dismissed the lawsuit against the
Company. Pursuant to the Settlement and General Release Agreement
dated in January 2020, the Company recorded the issuance of 375,000
shares at par value upon the exercise of the 375,000 stock options
and cancelled the remaining 625,000 stock options during fiscal
2019.
On
February 26, 2020 a complaint was filed against the Company in the
Circuit Court, Palm Beach County, Florida on behalf of two former
employees of the Company. The case is entitled Ryan Borcherds
and Miriam Martinez vs. Exactus, Inc. (Case No. 103978709). These
former employees were hired in January 2020. The complaint
alleges the Company failed to pay wages and compensation to 2
employees under the Fair Labor Standards Act, breach of contract
and violation of various Florida statutes, including allegations on
behalf of other similarly situated persons. On May 8, 2020,
an amended complaint was filed against the Company in the Circuit
Court, Palm Beach County, Florida on behalf of six former
employees, with one additional employee added to the suit in June
2020. The amended case is entitled Ryan Bocherds, Marc Reiss,
Jeannine Boffa, Benjamin Blair, Miriam Martinez and Michael Amoroso
vs. Exactus, Inc, (Case No. 50-2020-CA-002274-MB). The other four
former employees were hired between April 2019 and December 2019.
As of March 31, 2020 and December 31, 2019, the Company has
recorded total accrued salaries of $90,974 and $26,494 from these
former employees, respectively. The complaint seeks approximately
$106,000 in unpaid wages plus special damages, liquidated damages,
interest and attorney’s fees. The Company has retained legal
representation and intends to vigorously contest the
matter.
Leases
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consist of approximately 100 acres. The lease requires the Company
to pay 5% of the net income realized by the Company from the
operation of the lease farm. The lease shall continue in effect
from year to year except for at least a 30-day written notice of
termination (see Note 7).
On
March 1, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Glendale, Oregon and consist
of approximately 100 acres. The lease requires the Company to pay
$120,000 per year, whereby $50,000 was payable upon execution and
$70,000 shall be payable prior to planting for agricultural use or
related purposes. The lease shall continue in effect from year to
year except for at least a 30-day written notice of termination
(see Note 7).
On
April 30, 2019, the Company, through its majority-owned subsidiary,
EOW, entered into a farm lease agreement for a lease term of one
year. The lease premise is located in Cave Junction, Oregon and
consists of approximately 38 acres. The lease requires the Company
to pay $76,000 per year, whereby $38,000 was payable upon execution
and $38,000 shall be payable on September 15, 2019 and 2% of the
net income realized by the Company from the operation of the lease
farm. The Company has paid the initial payment of $26,000 and the
remaining $12,000 was paid directly to the landlord by an
affiliated company who is renting the portion of the lease property
from the Company. The affiliated company is owned by two managing
members of EOW. EOW is in the process of arranging a sub-lease
agreement with the affiliated company. The lease shall continue in
effect from year to year for five years except for at least a
30-day written notice of termination (see Note 7).
On July
9, 2019, the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to forty
thousand dollars per month in advance in addition to all applicable
Florida sales and/or federal taxes. Effective one year from the
lease commencement date and each year thereafter, the rent shall
increase at least three percent (3%) per year. The lessor of the
Premises is a limited liability company owned or controlled
by Vladislav (Bobby) Yampolsky, the manager and controlling
member of C2M, the Company’s largest
stockholder.
-30-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
On July
1, 2019, the Company entered into an office lease agreement for a
lease term of six months beginning July 1, 2019 ending December 31,
2019 for a total rental of $6,052 for six months. The lease premise
is located in Delray Beach, Florida. In December 2019, the Company
and landlord agreed to extend the lease for another 6-month term
from January 2020 to June 2020 with the same terms in the original
lease agreement.
Master Product Development and Supply Agreement
On
January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement (the “Development
Agreement”) with Ceed2Med, LLC (“C2M”). C2M has
provided the Company access to expertise, resources, skills and
experience suitable for producing products with active
phyto-cannabinoid (CBD) rich ingredients including isolates,
distillates, water soluble, and proprietary formulations. Under the
Development Agreement, the Company has been allotted a minimum of
50 and up to 300 kilograms per month, and up to 2,500 kilograms
annually, of active phyto-cannabinoid (CBD) rich ingredients for
resale. The Company expects to be able to offer tinctures, edibles,
capsules, topical solutions and animal health products manufactured
for us by C2M to satisfy demand for branded and white-label
products that the Company intends to offer to sell in the future.
The founders of C2M established their first CBD business in 2014.
C2M will also be responsible for overseeing all farming and
manufacturing activities of the Company.
Whereas,
in consideration for the Development Agreement, C2M was issued
8,385,691 shares of our Common Stock on January 8, 2019.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock to founders of
C2M and our Interim Chief Executive Officer, Emiliano Aloi, with
exercise price of $0.32 per share. As a result, C2M was our largest
shareholder holding (inclusive of the vested options) approximately
51% of our outstanding Common Stock on the date of the Development
Agreement.
C2M
will provide personnel necessary for the Company's growth.
Utilizing C2M employees and facilities, the Company has been able
to rapidly access resources and opportunities in the hemp-derived
CBD industry. Emiliano Aloi of C2M became a member of our Advisory
Board in January 2019 and was appointed President of the Company on
March 11, 2019.
Management and Services Agreement
As
previously disclosed, on March 11, 2019, the Company acquired,
through our majority-owned subsidiary, EOW, from the
Company’s largest shareholder, C2M, certain rights to a 50.1%
limited liability membership interest in certain farm leases and
operations in Oregon in order to enter into the business of hemp
farming for the 2019 grow season. During May 2019, the Company
appointed Emiliano Aloi, the President of the Company, to the
additional position of co-manager of EOW. The Company farmed
approximately 200 acres of hemp for harvest and production during
2019.
On July
31, 2019, the Company finalized and entered into a Management and
Services Agreement in order to provide the Company project
management and various other benefits associated with the farming
rights, operations and opportunities with C2M, including assignment
by C2M of C2M’s agreements and rights to acquire
approximately 200 acres of hemp farming. Under the terms of the
MSA, C2M agreed to provide further access to the opportunities and
know-how of C2M, consented to the appointment of Emiliano Aloi, a
seasoned hemp veteran previously an advisor and currently the
Company’s President, and to provide the Company and EOW
additional services consisting of, among other things:
●
right
of participation for further investment and business opportunities
in order to rapidly expand our business and operations in
hemp-derived CBD;
●
executive,
sourcing, vendor, product, production and other expertise and
resources;
●
appointment
of Aloi to the position of President;
●
introductions
to farming and other financing;
●
designs
for international “Hemp-Café” store design and
franchise opportunities including plans, drawings, approvals and
authorizations, leads and contacts;
●
access
to leasing of prime real estate in Delray Beach Florida with an
option to purchase, and the continuing assistance of the founder of
C2M in connection with management, design, and promotion of the
project;
●
drawings,
designs and specifications for extraction, production and
manufacturing facilities and resources;
●
brand
development and support services.
-31-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
The
Company finalized the compensation arrangements for C2M as
contemplated in connection with the March 2019 transactions and the
additional agreements with C2M under the MSA following tax,
accounting and legal review including the treatment of the issuance
of preferred stock in connection with the transactions. While the
assignment initially contemplated a $9 million payment from the
Company to C2M, the parties agreed to payment in a new class of
preferred stock, convertible above market. As a further condition
to payment of the consideration, the value of the 50.1% interest in
EOW was required to be not less than $25 million, with a
third-party valuation and fairness opinion from a third-party prior
to payment. The term of the MSA commenced on the date of this
agreement.
In
October 2019, the Company entered into an amendment to the MSA (the
“MSA Amendment”). The MSA Amendment extended the
termination date of the MSA to December 31, 2024 and expanded the
scope of services to be provided by C2M to the
Company. Included in the scope of services was to negotiate
with the minority owners of EOW, an amendment to the Operating
Agreement of EOW for the distribution and allocation to provide for
up to 100% (from 50.1%) of the results of operations of the 2019
harvest or yield resulting from all plants germinated during the
calendar year December 31, 2019.
Distribution and Profit-Sharing Agreement
On
November 20, 2019, the Company entered into the Non-Exclusive
Distribution and Profit-Sharing Agreement with Canntab Therapeutics
USA (Florida), Inc. Pursuant to the agreement, which has a term of
2 years and is subject to automatic renewal. The Company is a
non-exclusive distributor of certain Canntab products throughout
the U.S. Canntab will not grant a third-party the right to promote,
sell or deliver the products within the U.S. during the term of the
agreement, subject to certain exceptions. In addition, the Company
agreed to share equally with Canntab in the gross profits received
from the sale of their products by the Company. With respect to
Canntab’s sales of products, the Company will receive 10% of
the gross profits. In connection with the Canntab Agreement, the
Company also entered into a Supply Agreement with Canntab, which
has a term of 2 years and is subject to automatic renewal, pursuant
to which the Company agreed to sell hemp extracts to Canntab. Due
to a need for additional warehouse space and disruptions caused by
the Covid-19 pandemic, the Company has not distributed Canntab
products to date.
Employment Agreements
Andrew
Johnson, the Company’s Chief Strategy Officer, is serving
under a two-year employment agreement adopted on March 11, 2019 at
an annual salary of $110,000, which was increased to $150,000 on
January 23, 2020. In addition, he will be entitled to an
annual cash bonus, in an amount as determined by the board of
directors, if the Company meets or exceeds criteria adopted by the
Compensation Committee of the Board of Directors. He shall
also be eligible for grants of awards under stock option or other
equity incentive plans of the Company as the Company’s
Compensation Committee. For the 2019 year, he received a cash bonus
of $100,000 to be paid in equal installments over the next 12
months which have been recorded in accrued expenses on the
consolidated balance sheet as of March 31, 2020 and December 31,
2019.
Derek
Du Chesne, the Company’s current President, Chief Growth
Officer, and a Director, is serving under a two-year employment
agreement dated February 18, 2020 and entered into in connection
with his service as Chief Growth Officer. Du Chesne’s base
salary for the initial year of service will be $150,000, increasing
to not less than $250,000 for the second year of service, subject
to annual review by the Board of Directors. He will be entitled to
quarterly cash bonuses based on a percentage of our net sales to be
determined. In addition, Mr. Du Chesne will be entitled to annual
cash bonuses as follows: (1) up to 250% of base salary for the 2020
calendar year, if: (A) Company’s net income on a consolidated
basis for the 2020 fiscal year is equal to or in excess of
$5,000,000; or (B) Company’s net sales on a consolidated
basis is equal to or in excess of $40,000,000 during the 2020
fiscal year; and (2) 200% of base salary for the 2021 calendar
year, subject to the satisfaction of performance criteria set by
the Board in consultation with a third-party compensation expert
and Mr. Du Chesne. He will be eligible to participate in the
Company’s Equity Incentive Plan during his employment. Upon
execution of the Agreement, he was granted options to purchase up
to 1,000,000 shares of the Company’s common stock at a price
of $0.50 per share. 250,000 of these options were vested
immediately, with the remaining 750,000 options to vest in equal
installments over the next twenty-four months. The employment
agreement with Mr. Du Chesne is intended to provide direct
incentives to increase company sales, while providing a reasonable
base compensation for his service. Following his appointment as
President, he is to receive 1,000,000 shares of common stock as
additional compensation, with vesting and other terms to be decided
by our Compensation Committee. On March 5, 2020, the Board of
directors of the Company approved the repricing of Mr. Du
Chesne’s stock options to 90% of the market price on the
original date of grant or exercise price of $0.30 per share (see
Note 10).
-32-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Distribution Agreements
On
February 4, 2020, the Company entered into a Supply and
Distribution Agreement with HTO Holdings Inc (dba “Hemptown,
USA”), enabling the Company to purchase and sell
Hemptown’s Cannabigerol (CBG) and Cannabidiol (CBD) products,
including top flower, biomass and extracts (crude, isolates,
distillates, and water soluble). Ceed2Med, LLC, the Company’s
largest shareholder, is also a significant investor in Hemptown USA
and is party to a distribution agreement with the Company. The
Interim Chief Executive Officer and C2M, LLC will cooperate in
developing plans to coordinate the Company’s efforts to
introduce CBG and expand its efforts to sell CBD products. This
agreement shall remain in force for a period of one year from
effective date and shall renew automatically in one-year increments
for three years unless either party gives written notice of its
intention not to renew at least 60 days prior to expiration. On
March 28, 2020, the Company amended the Supply and Distribution
Agreement Pursuant to the amendment whereby the Company agreed to
also (i) aid Hemptown’s management with product compliance
requirements, (ii) participate in discussions related to
Hemptown’s 2020 farming, harvesting and processing plans as
well as joint supply scenarios, (iii) interact with
Hemptown’s ingredient and manufacturing divisions to
facilitate development of documents for selected SKUs to service
the white label market, and (iv) aid Hemptown’s CEO in
overseeing the entire supply chain to establish best practices in
quality and compliance and lower costs. In addition, Hemptown
agrees to pay the Company $3,500 a month in consulting
fees.
On
November 20, 2019, the Company entered into the Non-Exclusive
Distribution and Profit-Sharing Agreement with Canntab Therapeutics
USA (Florida), Inc. Pursuant to the agreement, which has a term of
2 years and is subject to automatic renewal. The Company is a
non-exclusive distributor of certain Canntab products throughout
the U.S. Canntab will not grant a third-party the right to promote,
sell or deliver the products within the U.S. during the term of the
agreement, subject to certain exceptions. In addition, the Company
agreed to share equally with Canntab in the gross profits received
from the sale of their products by us. With respect to
Canntab’s sales of products, the Company will receive 10% of
the gross profits. In connection with the Canntab Agreement, the
Company also entered into a Supply Agreement with Canntab, which
has a term of 2 years and is subject to automatic renewal, pursuant
to which we agreed to sell hemp extracts to Canntab. Due to a need
for additional warehouse space and disruptions caused by the
Covid-19 pandemic, the Company has not distributed Canntab products
to date.
NOTE 12 - RELATED PARTY
CONSIDERATIONS
Some of
the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On
November 20, 2017, Dr. Dimitrov, former director of the Company,
provided a notice to the Company stating that he was resigning from
the Board, effective immediately. Dr. Dimitrov indicated that his
resignation from the Board was based on the deteriorating
relationship between the Company and Digital Diagnostics over the
non-payment of fees owed by the Company pursuant to the licensing
agreement between the Company and Digital Diagnostics (See Note
11). The Company paid $0 during the three months ended March 31,
2020 and 2019. There was no change during the three months ended
March 31, 2020.
For the
three months ended March 31, 2020 and 2019, $0 and $15,000 was
recognized in Research and Development expenses for consulting
provided by Dr. Dimitrov, respectively. As of March 31, 2020 and
December 31, 2019, $575,000 was included in accounts payable for
both periods to KD Innovation Ltd., an affiliated entity of Dr.
Dimitrov. There was no change during the three months ended March
31, 2020.
On
January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement with C2M (see Note 11). At March
31, 2020 and December 31, 2019, accounts payable to C2M related to
purchase of finished products amounted to $8,342. During the three
months ended March 31, 2020, the Company did not purchase any
finished products from C2M. C2M is a majority stockholder of the
Company. During the three months ended March 31, 2020, the Company
recognized revenues from C2M of $315,800 from sales of flowers and
recorded related cost of sales of $357,783. Additionally, accounts
receivable from C2M as of March 31, 2020 amounted to
$94,800.
From
time to time, the Company’s subsidiary, EOW, receives
advances from an affiliated company which is owned by three members
of EOW for working capital purposes. The advances are non-interest
bearing and are payable on demand. The Company advanced $127,500
during fiscal 2019 to these related parties which resulted to a
receivable or due from related parties of $127,500 as of March 31,
2020 and December 31, 2019. These advances are short-term in
nature, non-interest bearing and due on demand.
-33-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
As of
March 31, 2020 and December 31, 2019, accounts receivable from a
related party customer amounted to $12,860 and $18,860,
respectively. The customer is an affiliated company which is
substantially owned by a managing member of EOW.
On July
9, 2019, the Company entered into a Commercial Lease Agreement (the
“Lease”) with Skybar Holdings, LLC, a Florida limited
liability company. Pursuant to the Lease, the Company will rent the
entire first floor (consisting of approximately 4,000 square feet)
of a property located in Delray Beach, Florida (the
“Premises”). The Company plans to develop the Premises
to create a hemp-oriented health and wellness retail venue,
including education, clothing and cosmetics, and explore franchise
opportunities. The initial term of the Lease is 5 years commencing
August 1, 2019, with two 5-year extension options. The Lease
includes a right of first refusal in favor of the Company to lease
any space that becomes available on the 2nd and 3rd floor of the
Premises and a right of first refusal to purchase the Premises.
Pursuant to the Lease, the Company will pay rent equal to $40,000
per month in advance in addition to all applicable Florida sales
and/or federal taxes and security deposit of $40,000. Effective one
year from the lease commencement date and each year thereafter, the
rent shall increase at least three percent (3%) per year. The
lessor of the Premises is a limited liability company owned or
controlled by Vladislav (Bobby) Yampolsky, a member of the
Board and the founder, manager and controlling member of C2M,
the Company’s largest stockholder. As of March 31, 2020,
no rent payments have been made. As of March 31, 2020, the Company
recorded accrued expense of $200,000 in connection with this lease
agreement.
As of
March 31, 2020 and December 31, 2019, accounts payable from two
affiliated companies and C2M totaled to $454,511 ($350,000, $96,169
and $8,342, respectively).
From
January 31, 2020 through March 31, 2020, the Company’s
Interim Executive Chairman, Bobby Yampolsky, made a series of
advances to the Company in the approximate total amount of $85,000
and has been included in due to related party as reflected in the
accompanying unaudited condensed consolidated balance sheets. These
advances are short-term in nature and non-interest bearing (see
Note 14).
Note 13 – CONCENTRATION OF REVENUE AND SUPPLIER
During
the three months ended March 31, 2020, total sale of CBD products
and hemp flowers to two customers represented approximately 89%
(51%, and 38% - related party) of the Company’s net sales.
During the three months ended March 31, 2019, total sale of CBD
products to one customer represented approximately 100% of the
Company’s net sales.
As of
March 31, 2020, total accounts receivable from two customers
represented approximately 85% (60%, and 25% - related party) of
total accounts receivable. As of December 31, 2019, total accounts
receivable, net from two customers and one related party customer
represented approximately 82% (18%, 38%, and 26% - related party)
of total accounts receivable.
As of
March 31, 2020, total accounts payable from two vendors represented
approximately 38% (23% and 15%-related party) of total accounts
payable. As of December 31, 2019, total accounts payable from two
vendors and one affiliated company represented approximately 60%
(12%, 30% and 18% -related party) of total accounts payable. The
affiliated company is owned by three members of
EOW.
NOTE 14 - SUBSEQUENT
EVENTS
In
accordance with authoritative guidance, the Company has evaluated
any events or transactions occurring after March 31, 2020, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the unaudited condensed
consolidated financial statements as of and for the quarter ended
March 31, 2020, except as disclosed below.
Sale of Common Stock
Subsequent
to the reporting period, and up through June 24, 2020, the Company
accepted shareholder subscriptions in the total amount of $250,000
in exchange for issuance of 2,500,000 shares of Common Stock in an
offering exempt under Rule 506 of Regulation D.
-34-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Due to Related party
From
April 1, 2020 through April 10, 2020, the Company’s Interim
Executive Chairman, Bobby Yampolsky, made a series of advances to
the Company in the approximate total amount of $12,000. He had
previously advanced a total of $85,000 to the Company during the
three months ended March 31, 2020 bringing into a total amount of
$97,000 to date. These advances are short-term in nature and
non-interest bearing. On June 11, 2020, Mr. Yampolsky has tendered
his resignation as a member and interim chairman of the board of
directors of the Company. Additionally, the Company agreed to pay
$12,500 on June 11, 2020 and a monthly installment payment of
approximately $7,084 beginning July 15, 2020 to June 15, 2021. On
June 11, 2020, the Company paid $12,500 of these related party
advances.
Restricted Common Stock Grants
On
April 29, 2020, the Company appointed two new board members and
shall each be granted $100,000 worth of restricted common stock
under the 2019 Equity Incentive Plan with vesting period of 1/24th
upon date of grant and 1/24th per month on the first day of each
calendar months thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
On
April 29, 2020, the Company appointed a new advisory board member
of the Company and shall be granted $50,000 worth of restricted
common stock under the 2019 Equity Incentive Plan with vesting
period of 1/24th upon date of grant and 1/24th per month on the
first day of each calendar months thereafter until fully vested so
long as they continue in their service as member of the Advisory
Board of the Company.
On
April 29, 2020, Derek Du Chesne accepted his appointment to the additional positions of
President and a member of our Board of Directors (see Note 11).
Following his appointment as President, the Company granted
1,000,000 shares of restricted common stock as additional
compensation, with vesting and other terms to be decided by the
Company’s Compensation Committee.
On June
11, 2020, the Company appointed Julian Pittam as Board Chairman and
has granted Mr Pittam $100,000 worth of restricted common stock
under the 2019 Equity Incentive Plan with vesting period of 1/24th
upon date of grant and 1/24th per month on the first day of each
calendar months thereafter until fully vested so long as they
continue in their service as board of directors of the
Company.
Notice of Delinquent Payment
At this
time, the Company is delinquent in its payments under the initial
convertible note executed on November 27, 2019 (see Note 9), with
the May 1, 2020 and April 1, 2020 payments currently in arrears.
The Company intends to make these payments and the upcoming monthly
payments with receipts from product sales and/or the proceeds of
additional equity funding. On May 20, 2020, the Company entered
into a Forbearance Agreement with the investor (the
“Holder”) regarding the initial convertible note. Under
the Forbearance Agreement, the investor has agreed to forebear from
exercising any default-related rights and remedies subject to the
following conditions and material terms:
●
The
Company has paid the Holder $60,000 in cash before July 1, 2020.
Additional monthly payments required under the Amortization
Schedule for the note shall continue to be due on or before the
first day of each calendar month thereafter, commencing with the
$110,000 payment originally due April 1, 2020 now being due on or
before August 1, 2020, and the subsequent monthly payments listed
on the Amortization Schedule to be paid monthly in the sequence
listed. Interest shall continue to accrue on the principal balance
of the Note at the rate(s) stated therein, with all additional
accrued interest resulting from this extension of payment deadlines
to be paid as part of the last monthly payment.
●
The
payments that are in arrears from February, April and May can be
paid in whole or in part at any time at the sole election of the
Holder in shares of common stock at the Amortization Conversion
Price (defined as 80% of the lowest volume weighted average price,
or VWAP, during the 10 trading days immediately before the
applicable date of the amortization redemption
payment).
●
Unless
or until a default under the Forbearance Agreement occurs, the
fixed conversion price under the note will remain $0.50 per share,
and the note shall continue to bear interest at the non-default
rate of 8% per annum.
●
Unless
or until a default under the Forbearance Agreement occurs, the
contractual limit on issuances of shares to issue shares of common
stock or options to employees, officers, directors, consultants,
advisors or contractors will be increased from 5% to 10% or our
issued an outstanding common stock.
●
The
Company has issued the Holder 500,000 shares of our common stock in
consideration for the forbearance.
-35-
EXACTUS,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2020
Conversion of Notes
On May
27, 2020, the Company issued 247,588 shares of its common stock at
a contractual conversion price of $0.130863, as a result of the
conversion of principal of $30,000 and interest of $2,400of the
convertible note.
On June
10, 2020, the Company issued 564,000 shares of its common stock at
a contractual conversion price of $0.09, as a result of the
conversion of principal of $47,000 and interest of $3,760 of the
convertible note.
U.S. Small Business Administration Loan
On May
28, 2020, the Company received a Secured Disaster Loan in the
amount of $99,100 from the U.S. Small Business Administration. The
loan carries interest at a rate of 3.75% per year, requires monthly
payments of principal and interest, and matures in thirty (30)
years. Installment payments, including principal and interest, of
$483 monthly, will begin Twelve (12) months from the date of the
promissory Note. The SBA loan is secured by a security interest in
our tangible and intangible assets. The loan proceeds are to be
used as working capital to alleviate economic injury caused by the
Covid-19 disaster occurring in the month of January 31, 2020 and
continuing thereafter.
Paycheck Protection Program Funding
On May
22, 2020, the Company received federal funding in the amount of
$236,410.27 through the Paycheck Protection Program (the
“PPP”). PPP funds have certain restrictions on use of
the funding proceeds, and generally must be repaid within five (5)
years at 1% interest. The PPP loan may, under circumstances, be
forgiven.
Forward-Looking Statements
Certain
statements, other than purely historical information, including
estimates, projections, statements relating to our business plans,
objectives, and expected operating results, and the assumptions
upon which those statements are based, are “forward-looking
statements.” These forward-looking statements generally are
identified by the words “believes,”
“project,” “expects,”
“anticipates,” “estimates,”
“intends,” “strategy,” “plan,”
“may,” “will,” “would,”
“will be,” “will continue,” “will
likely result,” and similar expressions. Forward-looking
statements are based on current expectations and assumptions that
are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements.
Our ability to predict results or the
actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on
our operations and future prospects on a consolidated basis
include, but are not limited to,: changes in economic conditions,
legislative/regulatory changes, availability of capital, interest
rates, competition, and generally accepted accounting principles.
These risks and uncertainties should also be considered in
evaluating forward-looking statements and undue reliance should not
be placed on such statements.
Business Overview
We
are a Nevada corporation organized under the name Solid Solar
Energy, Inc in 2008 and renamed Exactus, Inc. in 2016. We began to
pursue opportunities in Cannabidiol, which we refer to as CBD, in
2019.
In
December 2018, we expanded our focus to pursue opportunities in
hemp-derived CBD. This decision was based in part on the passing of
the 2018 Farm Bill, known as the Agriculture Improvement Act of
2018, which will remain in force through 2023. The 2018 Farm Bill
authorized the production of hemp and removed hemp and hemp seeds
from the Drug Enforcement Administration’s, or the
DEA’s, schedule of Controlled Substances. It also directed
the U.S. Department of Agriculture, or the USDA, to issue
regulations and guidance to implement a program to create a
consistent regulatory framework around production of hemp
throughout the United States. On October 31, 2019, the USDA,
Agricultural Marketing Services, issued an interim final rule (with
request for comments). The rule outlines provisions for the USDA to
approve plans submitted by states and Indian tribes. The U.S.
Domestic Hemp Production Program establishes federal regulatory
oversight of the production of hemp in the U.S. The program
authorizes the USDA to approve plans submitted by states and Indian
tribes for the domestic production of hemp and establishes a
federal plan for producers in states or territories that choose not
to administer a state or tribe specific plan, provide the state or
tribe does not ban hemp production.
Prior
to the 2018 Farm Bill, Cannabis sativa L. with delta-9
tetrahydrocannabinol, or THC, levels greater than 0.3% fell within
the definition of “marijuana” under the Controlled
Substances Act, or the CSA, and was therefore a Schedule I
controlled substance unless it fell under a narrow range of
exceptions (e.g., the “mature stalks” of the plant). As
a result, many aspects of domestic production of what is now
defined as hemp was limited to persons registered under the CSA to
do so. Under the Agricultural Act of 2014, which we refer to as the
2014 Farm Bill, State departments of agriculture and institutions
of higher education were permitted to produce hemp as part of a
pilot program for research purposes. The authority for hemp
production provided in the 2014 Farm Bill was extended by the 2018
Farm Bill, which was signed into law on December 20,
2018.
Ceed2Med Agreements
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for CBD
end-products to be sold to humans and for animal health, such as
nutraceuticals, supplements and pet and farm products.
On
January 8, 2019 we entered into a Master Product Development and
Supply Agreement (the “Development Agreement”) with
Ceed2Med, LLC (“C2M”). C2M has provided the Company
access to expertise, resources, skills and experience suitable for
producing products with active phyto-cannabinoid (CBD) rich
ingredients including isolates, distillates, water soluble, and
proprietary formulations. Under the Development Agreement, we have
been allotted a minimum of 50 and up to 300 kilograms per month,
and up to 2,500 kilograms annually, of active phyto-cannabinoid
(CBD) rich ingredients for resale. We expect to be able to offer
tinctures, edibles, capsules, topical solutions and animal health
products manufactured for us by C2M to satisfy demand for branded
and white-label products that we intend to offer to sell in the
future. The founders of C2M established their first CBD business in
2014. C2M will also be responsible for overseeing all farming and
manufacturing activities of the Company.
Whereas, in
consideration for the Development Agreement, C2M was issued
8,385,691 shares of our Common Stock on January 8, 2019.
Additionally, the Company granted immediately vested 10-year
options to purchase 750,000 shares of Common Stock to founders of
C2M and our Interim Chief Executive Officer, Emiliano Aloi, with
exercise price of $0.32 per share. As a result, C2M was our largest
shareholder holding (inclusive of the vested options held by its
founders) approximately 51% of our outstanding Common Stock on the
date of the Development Agreement. C2M will provide personnel
necessary for our growth. Utilizing C2M employees and facilities,
the Company has been able to rapidly access resources and
opportunities in the hemp-derived CBD industry. Emiliano Aloi
became a member of our Advisory Board in January 2019 and was
appointed President of the Company on March 11, 2019.
On
March 11, 2019, with the assistance of C2M and assignment of
rights, we acquired a 50.1% limited liability membership interest
in Exactus One World, LLC, (“EOW”), an Oregon limited
liability company, newly formed on January 25, 2019, in order to
produce industrial hemp for our own use. EOW has leases starting on
March 1, 2019 for approximately 200 acres of farmland in southwest
Oregon for growing and processing industrial hemp, with a lease
term of one year. The leases are renewable on a year-to-year basis.
We acquired the 50.1% limited liability membership interest
pursuant to a subscription agreement (the “Subscription
Agreement”) and a Membership Interest Purchase Agreement (the
“Purchase Agreement”). EOW will farm and process
industrial hemp to be manufactured into cannabidiol (CBD) and
related products. EOW will be responsible for the
Company’s initial efforts to pursue agricultural development,
including farm soil preparation, planting, harvesting,
transportation and drying. We will be responsible for funding
and the minority owners will be responsible for management,
servicing and operating the farm properties.
On
July 31, 2019, we finalized and entered into a Management and
Services Agreement in order to provide us project management and
various other benefits associated with the farming rights,
operations and opportunities with C2M, including assignment by C2M
of C2M’s agreements and rights to acquire approximately 200
acres of hemp farming. Under the terms of the MSA, C2M agreed to
provide further access to the opportunities and know-how of C2M,
consented to the appointment of Emiliano Aloi, a seasoned hemp
veteran previously an advisor and currently our Interim Chief
Executive Officer, and to provide to us and EOW additional services
consisting of, among other things:
●
right of
participation for further investment and business opportunities in
order to rapidly expand our business and operations in hemp-derived
CBD;
●
executive,
sourcing, vendor, product, production and other expertise and
resources;
●
appointment of Aloi
to the position of President;
●
introductions to
farming and other financing;
●
drawings, designs
and specifications for extraction, production and manufacturing
facilities and resources; and
●
brand development
and support services.
We finalized the compensation arrangements for C2M
as contemplated in connection with the March 2019 transactions and
the additional agreements with C2M under the MSA following tax,
accounting and legal review including the treatment of the issuance
of preferred stock in connection with the transactions. On July 31,
2019, we granted 10,000 Series E Preferred in connection with the
Management and Services Agreement (the “MSA”) with C2M,
our largest shareholder. In October 2019, we entered into an
amendment to the MSA (the “MSA Amendment”). The MSA
Amendment extended the termination date of the MSA to
December 31, 2024 and expanded the scope of services to be provided
by C2M to us. The MSA Amendment was approved by a majority of
the disinterested directors of the Company.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop underway to
the Company. As a result, the Company acquired the right to receive
100% of the distributions of net profit from the 2019 hemp crop on
approximately 226 acres of farmland currently growing in Oregon. In
addition, the members amended the payment schedule under which farm
costs are required to be made by the Company. As consideration for
the amendment, the Company agreed to issue 1,223,320 shares of its
common stock, par value $0.0001 per share, to the minority members
of EOW.
On
November 14, 2019, we entered into a Supply and Distribution
Agreement with C2M, pursuant to which C2M agreed to purchase a
minimum of 10,000 pounds of our 2019 hemp flower harvest. During
the one-year term of the agreement, we have the option to purchase
the distribution operations of C2M.
Farming Operations
On
March 11, 2019, we acquired a 50.1% limited liability membership
interest in Exactus One World, LLC, an entity formed on January 25,
2019 and which we refer to as EOW, in order to produce hemp. EOW
holds one-year leases, which commenced on March 1, 2019, for
approximately 200 acres of farmland in southwest Oregon for growing
and processing hemp. The leases are renewable on a year-to-year
basis. EOW will farm and process hemp to be manufactured into CBD
and related products, sold or processed as biomass and other
agricultural products. EOW will be responsible for our
initial efforts to pursue agricultural development, including farm
soil preparation, planting, harvesting, transportation and drying.
We have been responsible for funding and the minority owners will
be responsible for management, servicing and operating the farm
properties.
On
October 23, 2019, we amended the Amended and Restated Operating
Agreement of EOW. Under the terms of the amendment, the minority
members of EOW conveyed their 49.9% membership interest and rights
to distributions related to the current 2019 hemp crop to us. As a
result, we acquired the right to receive 100% of the distributions
of net profit from the 2019 hemp crop. In addition, the members
amended the payment schedule under which farm costs are required to
be made by us.
Due
to declining market prices for industrial hemp and a shortage of
available capital, we do not currently intend to farm hemp on the
Oregon properties in 2020. Our current plan is to sub-lease the
properties for the 2020 growing season to another farmer, although
no subleases have been made at this time.
Green Goddess Extracts, LLC
On
July 31, 2019, we entered into an Asset Purchase Agreement with
Green Goddess Extracts, LLC (“Green Goddess”) and an
Executive Employment Agreement with its founder. Under the
agreement, we agreed to acquire the business and assets of Green
Goddess relating to the manufacture, marketing and sale of CBD
products, including the right to manufacture, warehouse and ship
products under the Green Goddess brand, existing, inventory,
ingredients and materials, customer lists, websites, intellectual
property and trademarks. We also entered into an option to acquire
Green Goddess’ vape assets. Under the terms of the
Asset Purchase Agreement we agreed to issue 250,000 shares of our
restricted Common Stock and pay $250,000 cash for the acquisition.
The shares vest at a rate of 1/24 per month until fully vested. We
have issued 62,500 shares under the Agreement to date, and have not
made any payments toward the cash component of the purchase price.
We are currently in default under the Asset Purchase Agreement
however, there are no penalty, interest or charges from the default
pursuant to the Asset Purchase Agreement.
The
Company, Green Goddess Extracts and the founder have each asserted
various claims against the other for breach of contract although no
proceedings have been commenced. Currently, the Company has
suspended efforts to market and sell CBD products under the Green
Goddess brand and Green Goddess has suspended delivery of the
Company’s inventory due to the disputes which involve, among
other things, the amounts that were due and owing Green Goddess
from C2M for orders placed prior to the asset purchase, the nature
and going concern value of the assets purchased by the Company and
representations concerning the operation of the business and
performance by the founder under the employment agreement.
There can be no assurance the parties will resolve their
differences or that the prior agreements will not be terminated.
The product with a cost of $837,153 currently held inventory has
been written down to a value of $0 due to the age and questionable
salability of the product during fiscal 2019.
Additional Brands
We
have taken steps to introduce Green GoddessTM brands, LeVor
CollectionTM, Paradise CBDTM and ExactusTM, for selected markets
which, to date, have not resulted in material
revenues.
Industrial Hemp
We
seek to take advantage of an emerging worldwide trend to utilize
the production of industrial hemp in consumer products. Hemp is
being used today in cosmetics, nutritional supplements, and animal
feed, where we also intend to focus our efforts. The market for
hemp-derived products is expected to increase substantially over
the next five years, and we are endeavoring to prepare the Company
to be positioned as a significant player in the industry. According
to industry reports, CBD is expected to conservatively generate
sales of $16 billion by 2025. In one survey, nearly 7% (of 2,500
respondents) reported using CBD as a supplement in January 2019,
with retail sales of CBD consumer products in 2018 estimated as
being only between $600 million and $2 billion.
According
to the report, cannabis’ therapeutic potential is
attributable to the valuable overlap between phyto-cannabinoids
(i.e. plant-derived cannabinoids) and the endogenous cannabinoid
system in humans, termed a “therapeutic handshake”.
Clinical trial results to date demonstrate few adverse effects from
oral CBD doses of up to 1,500 mg/day or up to 30 mg IV. The
scientific understanding of CBD’s clinical effects is based
mostly on studies in specific indications, like epilepsy. GW
Pharma’s Epidiolex (a highly potent, pure formulation of CBD)
was approved by the FDA in 2018 for the treatment of seizures
associated with Lennox-Gastaut syndrome and Dravet syndrome, and
other companies have clinical trials underway in seizure
disorders.
Healthcare
CBD
products appear to be gaining traction with independent pharmacies.
The industry, including the Company, has also been approached by
several large chain pharmacies with inquiries concerning sourcing,
quality, accountability and volume. According to the report,
pharmacies likely find the high-margin profile of CBD attractive,
similar to over-the-counter drugs. We believe pharmacies will
appreciate our “seed-to-consumer” approach and our cGMP
manufacturing focus and our planned QR Code traceability and
reporting.
Currently,
CBD products are not a covered benefit, or an extra benefit, under
managed care, insurance, Medicare, Medicaid or any state programs.
This will likely continue to be the case for the intermediate term.
Legal issues and confusion concerning legality, lack of FDA
regulation and availability as an OTC medication will likely
continue for an indefinite period impeding adoption and payor
acceptance.
Competition
We
believe a multitude (hundreds) of companies, large and small,
including mom and pops, have launched or intend to launch retail
brands and white label products containing CBD. Many of these are
offering CBD and are dependent upon third parties to provide raw
material inventory for sale. We believe this makes many of the
participants in the industry vulnerable to shortages, quality
issues, reliability and pricing variability. Our management
team’s extensive experience and industry relationships may
allow us to build an efficient supply chain that will put us among
the few companies that maintain a competitive pricing and supply
advantage, poised for revenue growth during 2020 and
beyond.
The
CBD-based consumer product industry is highly fragmented with
numerous companies, many of which are under-capitalized. There are
also large, well-funded companies that currently do not offer
hemp-based consumer products including large agribusiness companies
such as Cargill and Tyson Foods, but may do so in the future and
become significant competitors.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for
end-products, such as nutraceuticals, supplements and pet and farm
products. We intend to follow regulatorily compliant pathways by
adopting practices established by the FDA for CBD and to pursue FDA
approval for our activities upon adoption of federal regulations,
including conducting independent clinical and non-clinical
trials.
Companies such as CV Sciences, Inc. (OTCQB:CVSI)
in the US and recent acquisitions by Canadian cannabis producers
reflect the growing acceptance of CBD products as a lynchpin for
growth. Transactions such as Tilray, Inc. (NASDAQ:TLRY-Manitoba Harvest $419 million
February 2019), cbdMD Inc. (NYSE:YCBD - Cure Based Development LLC December
2018), and Aurora Cannabis, Inc. (OTCQB:ACBFF–Agropro UAB
EUR6.5 million) reflect
the growing interest and M&A activity in the industry among our
competition and increasing consolidation.
Non-CBD
Competition. We do not intend
to offer and do not compete with companies that offer cannabis
products containing high levels of psychoactive THC. Although legal
in some states, and in Canada, we do not intend to enter into this
market. We may offer our industrial-hemp based products in
dispensaries, but will not compete with any medical or recreational
marijuana sellers for high THC content sales due to legal and
regulatory restrictions and uncertainty in the United States.
Because of regulatory challenges facing marijuana companies in the
United States, the vast majority of the companies focused on THC
are Canadian and foreign, although several have begun to pursue
domestic activities in states that permit marijuana sales. Federal
law does not generally recognize marijuana (or hemp that exceeds
0.3% THC) as lawful, although that may change in the future.
Because of these factors, our competitors that have focused
exclusively on CBD are limited.
Retail
Competition. Many of our
competitors are private companies and as a result, little or no
reliable information is available.
Retail Strategy
Our
focus will include establishing wholesale and retail distribution
by developing our own brands, selling white label branded products
to others and making acquisitions of existing businesses engaged in
marketing or sales, in both online and retail channels. We may
supply to wholesalers, retailers, and distribution centers as we
seek to launch our retail strategy. We intend to initially focus on
developing products to reach medical and health communities to be
sold or promoted by or through medical professionals such as
internists, dermatologists, osteopaths, chiropractors, pharmacists,
and other holistic or natural products purveyors, but will not be
limited to such efforts. We intend to focus on higher margin
opportunities utilizing online sales and sales in stores, offices
or pharmacies.
Environmental Matters
Compliance
with federal, state and local requirements regulating the discharge
of materials into the environment, or otherwise relating to the
protection of the environment, have not had, nor are they expected
to have, any direct material effect on our capital expenditures,
earnings or competitive position, however such factors could
indirectly affect us as well as participants in the supply chain
for our products, and our business, operations, vendors or
suppliers.
Recent Developments
Private Placement of Convertible Notes and Warrants
On
November 27, 2019, we entered into a Securities Purchase Agreement,
referred to as the SPA, with an institutional investor, pursuant to
which it agreed to lend us up to $1,944,444 in three tranches. On
November 27, 2019, we issued to the investor an 8% convertible note
in the principal amount of $833,333 and a warrant to purchase
275,612 shares of our common stock at an exercise price of $0.756,
in exchange for payment by the investor of $750,000. The principal
amount of the note reflects the amount invested, plus a 10%
original issue discount, or OID. We received gross proceeds of
$750,000 in exchange for the initial tranche note and warrant and
$730,000 net proceeds after the payment of fees and expenses of the
sale.
Pursuant
to the SPA, a second tranche of funding from the investor is
available in the form of a second 8% convertible note in the
principal amount of $277,778 and a warrant to purchase 91,871
shares of our common stock. This additional financing is available
within three business days after the date of the filing of a
registration statement covering the shares issuable upon conversion
of the notes and the warrants, in exchange for payment by the
investor of the sum of $250,000. The principal amount of the second
tranche note will reflect the amount invested plus the
OID.
Pursuant
to the SPA, subject to fulfillment of certain conditions, a third
tranche of funding is available from the investor in the form of an
8% convertible note in the principal amount of $833,333 and a
warrant to purchase 275,612 shares of our common stock on the date
the registration statement is declared effective by the SEC, in
exchange for payment by the investor of the sum of $750,000. The
principal amount of the third tranche note will reflect the amount
invested plus the OID.
The
notes are fully and unconditionally guaranteed on a senior secured
basis by our direct and indirect subsidiaries. The notes and the
guarantees are secured by a perfected, first priority security
interest in all of our and the guarantors’
assets.
Also
on November 27, 2019, we issued to an advisor a warrant to purchase
84,187 shares of common stock in connection with the private
placement. We agreed to issue to the advisor a warrant to purchase
28,062 shares of our common stock upon the closing of the second
tranche.
Below
is a summary of the notes and warrants. This summary is not
complete and is subject to, and qualified in its entirety by the
provisions of the notes and warrants, which are filed as exhibits
hereto. We have not completed the second or third tranches, and our
completion of these tranches are subject to conditions of the SPA.
If we do complete the second or third tranche, the terms of the
notes and warrants will be identical to those issued in the first
tranche.
At
this time, we are delinquent in our payments under the initial
convertible note, with the May 1, 2020, April 1, 2020, and a
portion of the February 25, 2020 payments currently in arrears. We
intend to make these payments and the upcoming monthly payments
with receipts from product sales and/or the proceeds of additional
equity funding.
At
this time, we are delinquent in our payments under the initial
convertible note, with the May 1, 2020 and April 1, 2020 payments
currently in arrears. We intend to make these payments and the
upcoming monthly payments with receipts from product sales and/or
the proceeds of additional equity funding. On May 20, 2020, we
entered into a Forbearance Agreement with the investor (the
“Holder”) regarding the initial convertible note. Under
the Forbearance Agreement, the investor has agreed to forebear from
exercising any default-related rights and remedies subject to the
following conditions and material terms:
●
We
paid the Holder $60,000 in cash before July 1, 2020. Additional
monthly payments required under the Amortization Schedule for the
note shall continue to be due on or before the first day of each
calendar month thereafter, commencing with the $110,000 payment
originally due April 1, 2020 now being due on or before August 1,
2020, and the subsequent monthly payments listed on the
Amortization Schedule to be paid monthly in the sequence listed.
Interest shall continue to accrue on the principal balance of the
Note at the rate(s) stated therein, with all additional accrued
interest resulting from this extension of payment deadlines to be
paid as part of the last monthly payment.
●
The
payments that are in arrears from February, April and May can be
paid in whole or in part at any time at the sole election of the
Holder in shares of common stock at the Amortization Conversion
Price (defined as 80% of the lowest volume weighted average price,
or VWAP, during the 10 trading days immediately before the
applicable date of the amortization redemption
payment).
●
Unless or until a
default under the Forbearance Agreement occurs, the fixed
conversion price under the note will remain $0.50 per share, and
the note shall continue to bear interest at the non-default rate of
8% per annum.
●
Unless or until a
default under the Forbearance Agreement occurs, the contractual
limit on issuances of shares to issue shares of common stock or
options to employees, officers, directors. consultants, advisors or
contractors will be increased from 5% to 10% or our issued an
outstanding common stock.
●
We have issued the
Holder 500,000 shares of our common stock in consideration for the
forbearance.
Terms of the Notes
The
principal amount of the notes includes an OID of 10%.
Interest
on the aggregate unconverted and outstanding principal amount is
payable at the interest rate of 8% per annum at our option
either:
●
in
cash; or
●
in
shares of our common stock, at the lesser of (i) the fixed
conversion rate of $0.50 per share of common stock, or (ii) the
rate equal to 80% of the lowest volume weighted average price, or
VWAP, during the 10 trading days immediately before the applicable
date of the amortization redemption payment, which we refer to as
the amortization conversion rate, as described below.
Each
note matures one year after its issuance unless accelerated due to
an event of default or extended by the investor. Each note is
convertible at the option of the investor at any time into shares
of our common stock at the fixed conversion rate of $0.50 per
share. However, the conversion rate is subject to adjustment in the
event of default, redemption and upon the occurrence of certain
events affecting stockholders generally, such as stock splits and
recapitalizations.
Included
in the amount that the investor may convert into common stock is
the sum of:
●
the
unpaid and unconverted principal amount outstanding on the
note;
●
100%
of the accrued and unpaid interest on the principal amount of the
note to be converted;
●
100%
of the make-whole amount (as described below) payable in respect of
the principal amount of the note to be converted; and
●
all
liquidated damages, costs of collection and other amounts payable
in respect of the note as applicable.
The
make-whole amount is the amount of interest that would have accrued
with respect to any principal amount that has been converted or
redeemed as if that principal amount was held through the maturity
date of the note.
We
must pay amortization redemption payments equaling one-ninth of the
original principal amount due on each note commencing 90 days after
issuance and continuing during the following eight months. The
investor may at its option accelerate up to six future amortization
redemption payments, in which case the investor may demand the
accelerated amortization amounts be paid in shares of our common
stock at the lesser of:
●
the
fixed conversion rate of $0.50 per share of common stock;
and
●
the
amortization conversion rate, as described above.
In
addition, if we fail to make any amortization redemption payment,
the investor may convert an amount equal to the sum
of:
●
one-ninth
of the original principal amount of the note;
●
100%
of all accrued and unpaid interest on the principal amount of the
note that is subject to the amortization redemption;
●
100%
of the make-whole amount payable in respect of the principal amount
of the note that is subject to the amortization redemption;
and
●
all
liquidated damages payable in respect of the note as of the
applicable date of the amortization redemption payment, into our
shares of common stock at the lower of (i) the fixed conversion
rate of $0.50 per share of common stock and (ii) the amortization
conversion rate.
If
we fail to make a redemption payment, the investor may demand the
amortization amounts be paid in shares of our common stock at the
lesser of fixed conversion rate of $0.50 per share of common stock
or the amortization conversion rate. For the purposes of estimating
the number of common stock shares issuable upon conversion of
principal and interest under our 8% senior secured convertible
notes, we have assumed an amortization conversion rate of $0.4208,
calculated as of November 26, 2019.
In
addition, the investor may at its option send a deferral notice and
demand that amortization amounts be paid in shares of our common
stock at the amortization conversion rate.
We
may redeem at our discretion 110% of the outstanding principal
amount of the notes, plus accrued but unpaid interest, the
make-whole amount, and liquidated damages for cash. In addition, in
the event of a subsequent issuance our common stock or debt, we are
subject to mandatory redemption provisions. We may not issue shares
of common stock to third parties at a price lower than the fixed
conversion rate of $0.50 per share of common stock without the
consent of the investor.
The
investor may not convert notes to the extent that conversion would,
together with its affiliates and attribution parties, cause the
investor to beneficially own a number of common shares which would
exceed 4.99% of our then outstanding common shares following
conversion. The investor may increase its beneficial ownership
limitation up to 9.99%.
The
notes contain standard and customary events of default, including,
but not limited to, failure to make payments when due, failure to
observe or perform covenants or agreements contained in the notes,
the breach of any material representation or warranty contain
therein, our bankruptcy or insolvency, the suspension of trading of
our common stock, failure to file required reports with the SEC,
and a change of control. If any event of default occurs, subject to
a cure period, the full principal amount, together with interest
(including default interest of 18% per annum) and other amounts
owing in respect thereof to the date of acceleration shall become
immediately due and payable in cash.
Terms of Warrants
The
warrants issued to the investor are exercisable at an exercise
price of $0.756 per share of common stock at any time before the
close of business two years after their issuance, subject to
adjustment in the event of stock dividends, splits, fundamental
transactions, or other changes in our capital structure, and
contain provisions that permit cashless exercise if a registration
statement covering the resale of the shares issuable pursuant to
the warrants is not filed within 180 days of their issuance. The
investor may not exercise warrants to the extent that exercise
would cause it, together with its affiliates and attribution
parties, to beneficially own a number of common shares which would
exceed 4.99% of our then outstanding common shares following
exercise. The investor may increase its beneficial ownership
limitation up to 9.99%.
The
warrants issued to the advisor are exercisable at an exercise price
of $ 0.792 per share of common stock at any time before the close
of business four years after their issuance, subject to adjustment
in the event of stock dividends, splits, fundamental transactions,
or other changes in our capital structure. The advisor may not
exercise warrants to the extent that exercise would cause it,
together with its affiliates and attribution parties, to
beneficially own a number of common shares which would exceed 4.99%
of our then outstanding common shares following exercise. The
advisor may remove this beneficial ownership
limitation.
Canntab Agreements
On
November 20, 2019, we entered into the Non-Exclusive Distribution
and Profit Sharing Agreement with Canntab Therapeutics USA
(Florida), Inc. Pursuant to the agreement, which has a term of 2
years and is subject to automatic renewal We are a non-exclusive
distributor of certain Canntab products throughout the U.S. Canntab
will not grant a third-party the right to promote, sell or deliver
the products within the U.S. during the term of the agreement,
subject to certain exceptions. In addition, we agreed to share
equally with Canntab in the gross profits received from the sale of
their products by us. With respect to Canntab’s sales of
products, we will receive 10% of the gross profits. In connection
with the Canntab Agreement, we also entered into a Supply Agreement
with Canntab, which has a term of 2 years and is subject to
automatic renewal, pursuant to which we agreed to sell hemp
extracts to Canntab. Due to a need for additional warehouse space
and disruptions caused by the Covid-19 pandemic, we have not
distributed Canntab products to date.
Hemptown USA Agreement
On
February 4, 2020, we entered into a Supply and Distribution
Agreement with HTO Holdings Inc (dba “Hemptown, USA”),
enabling the Company to purchase and sell Hemptown’s
Cannabigerol (CBG) and Cannabidiol (CBD) products, including top
flower, biomass and extracts (crude, isolates, distillates, and
water soluble). Ceed2Med, LLC, the Company’s largest
shareholder, is also a significant investor in Hemptown USA and is
party to a distribution agreement with the Company. The Interim
Chief Executive Officer will work to develop plans to coordinate
the Company’s efforts to introduce CBG and to expand its
efforts to sell CBD products. On March 28, 2020, we amended the
Supply and Distribution Agreement Pursuant to the amendment, we
agreed to also (i) aid Hemptown’s management with product
compliance requirements, (ii) participate in discussions related to
Hemptown’s 2020 farming, harvesting and processing plans as
well as joint supply scenarios, (iii) interact with
Hemptown’s ingredient and manufacturing divisions to
facilitate development of documents for selected SKUs to service
the white label market, and (iv) aid Hemptown’s CEO in
overseeing the entire supply chain to establish best practices in
quality and compliance and lower costs. In addition, Hemptown
agrees to pay the Company $3,500 a month in consulting
fees.
Expected Changes In Number of Employees, Plant, and
Equipment
We do
not currently plan to purchase specific additional physical plant
and significant equipment within the immediate future.
Results of Operations
Three Months ended March 31, 2020 and 2019:
Net Revenues The Company is principally engaged in the
business production and selling of products made from industrial
hemp. During the three months ended March 31, 2020, we generated
total revenues of $836,000 from the sale of CBD products and hemp
flowers, including revenues of $315,800 from a related party, C2M,
who is a majority stockholder of the Company, for the three months
ended March 31, 2020 as compared to revenues of $15,980 during the
three months ended March 31, 2019.
Cost of Sales The primary components of cost of sales
include the cost of the CBD product. For the three months ended
March 31, 2020, the Company’s cost of sales amounted to
$1,400,256 which primarily represents cost of CBD products and hemp
flowers sold including cost of hemp flowers sold to C2M for a total
of $357,783 and inventory write-off of hemp flowers of $553,440 due
to damages from mold as compared to cost of sales of $12,600 during
the three months ended March 31, 2019.
Operating Expenses
For the
three months ended March 31, 2020, we incurred $2,192,767 in
operating expenses as compared to $2,599,234 for the three months
ended March 31, 2019, a decrease of $406,467 or 16%. The decrease
in operating expenses consisted of the following:
General and administrative expenses increased by $531,797,
or 82%, from $652,209 for the three months ended March 31, 2019 to
$1,184,006 for the three months ended March 31, 2020, due to an
increase in amortization of intangible asset and depreciation
expenses of approximately $220,000, increase lease expense related
to our commercial lease and rent expense of approximately $167,000,
and increase in compensation including employee benefits of
approximately $259,000 and increase in other general administrative
expenses of approximately $6,000 primarily due to travel expenses
and increase in operations.
Selling and marketing expenses increased by $229,012, or
441%, from $51,878 for the three months ended March 31, 2019 to
$280,890 for the three months ended March 31, 2019, primarily due
to increase in marketing and advertising expenses due to
promotions, endorser’s fee, trade shows, samples, product
awareness and salaries of our sales and marketing
staff.
Professional and consulting fees decreased by $1,152,276, or
61%, from $1,880,147 for the three months ended March 31, 2019 to
$727,871 for the three months ended March 31, 2020, primarily due
to decreased stock-based consulting fees related with the grant of
stock options and warrants and issuance of stocks to
consultants.
Research and development decreased by $15,000 or 100%, from
$15,000 for the three months ended March 31, 2019 to $0 for the
three months ended March 31, 2020, as the Company delayed projects
until additional funds are raised.
Other Expenses, net
Derivative (loss) gain decreased by $1,561,215 or 107%, from
$(1,454,729) for the three months ended March 31, 2019 to $106,486
for the three months ended March 31, 2020, primarily due to the
adjustments to fair value in the first quarter of
2020.
(Loss) Gain on stock settlement of debt increased by
$3,014,129, or approximately 100%, from $3,007,629 for the three
months ended March 31, 2019 to ($6,500) for the three months ended
March 31, 2020 due to the conversion of notes and interest into
common and preferred shares during the first quarter of 2019. We
did not have comparable gains or losses during the first quarter of
2020.
Interest expense decreased by $78,447, or 21%, from $366,913
for the three months ended March 31, 2019 to $288,466 for the three
months ended March 31, 2020. The decrease in interest expense is
primarily related to decrease in amortization of debt discount and
debt issuance cost related to our convertible note payable issued
in year 2019.
Net Loss
As a
result of the foregoing, we generated a net loss of $2,945,503 for
the three months ended March 31, 2020 as compared to a net loss of
$1,409,867 for the three months ended March 31, 2019, as a result
of the items discussion above.
As a
result of the foregoing, we generated a net loss available to
stockholders of $2,789,684 or $(0.07) per common share –
basic and diluted, for the three months ended March 31, 2020 as
compared to a net loss of $2,278,713 or $(0.12) per common share
– basic and diluted, for the three months ended March 31,
2019, as a result of the discussion above.
Liquidity and Capital Resources
Since
our inception in 2008, we have generated losses from operations. As
of March 31, 2020, our accumulated deficit was
$23,919,063. As of March 31, 2020, we had $9,541 in cash
and working capital deficit of $3,677,275. Accordingly, we will
need to obtain further funding through public or private equity
offerings, debt financing, collaboration arrangements or other
sources. The issuance of any additional shares of Common Stock,
preferred stock or convertible securities could be substantially
dilutive to our shareholders. In addition, adequate additional
funding may not be available to us on acceptable terms, or at all.
If we are unable to raise capital, we will be forced to delay,
reduce or eliminate our research and development programs and may
not be able to continue as a going concern.
The
Company has various principal outstanding balances for a total of
$783,333 from convertible notes as of March 31, 2020. The
convertible notes bear interest at a rate of ranging from 5% to 8%
per annum and will mature from November 26, 2020 and February 1,
2023.
Net
cash used in operating activities for the three months ended March
31, 2020 was $164,283, due to our net loss of $2,945,503, in
addition to non-cash charges related to convertible loan notes
derivative gain of $106,486, offset by amortization of debt
discounts and debt issuance cost of $268,350 amortization of
intangible assets of $246,250, amortization of prepaid stock-based
expenses of $195,299, depreciation expense of $26,727, deferred
rent of $3,418, bad debt expense of $18,592, and stock-based
compensation of $637,292. Net changes in operating assets and
liabilities totaled $931,838, which is primarily attributable to an
increase in total accounts receivable of $236,360, an increase in
accounts receivable-related party of $88,800, an increase in
accounts payable of $552,292, an increase in accrued expenses of
$411,149 and a decrease in unearned revenues of
$215,000.
Net
cash used in operating activities for the three months ended March
31, 2019 was $1,833,755, due to our net loss of $1,409,867, offset
by non-cash charges related to convertible loan notes derivative
expense of $1,454,729, amortization of debt discounts of $339,806,
$3,007,629 for a debt settlement gain, and stock-based compensation
of $2,005,861. Changes in operating assets and liabilities totaled
a loss of $1,269,343, which primarily consisted of an increase
in advance to a related party of $1,017,225, an increase in
inventory of $422,819, and an increase in accounts payable of
$233,560.
No cash
was used in investing activity for the three months ended March 31,
2020. Net cash used in investing
activity for the three months ended March 31, 2019 was $328,500. We
paid cash for the purchase of membership interest in subsidiary for
$300,000 pursuant to a Purchase Agreement and purchase of equipment
for $28,500.
Net
cash provided by financing activities for the three months ended
March 31, 2020 was $155,419, due to proceeds from sale of our
Common Stock of $100,000, related party advances of $85,000, and
net proceeds from the issuance of notes payable and convertible
notes $20,419, offset by total note repayments of
$50,000.
Net
cash provided by financing activities for the three months ended
March 31, 2019 was $3,333,210 due to proceeds from sale of our
Common Stock of $3,309,653, $14,229 in proceeds from the issuance
of a note payable, and $206,900 in proceeds from the issuance of
convertible notes, offset by payments of principal on convertible
notes of $186,443, and payments of principal on other notes of
$11,129.
The
Company had principal outstanding balance of $100,000 from
convertible notes and such principal balance has been reclass to
current portion as of March 31, 2020. The convertible notes bear
interest at a rate of 5% per annum and will mature on February 1,
2023. If a qualified financing from which at least $5 million of
gross proceeds occurs prior to the maturity date, then the
outstanding principal balance of the notes, together with all
accrued and unpaid interest thereon, shall be automatically
converted into common stock at $0.40 per Share. We believe this
threshold has been met, and conversion of the note is
pending.
In
addition, the Company had a principal balance of $783,333 under
senior secured convertible promissory notes issued to an
institutional investor under the Securities Purchase Agreement
dated November 27, 2019. These notes bear interest at a rate of 8%
and mature one year after their issuance. These notes are issued at
10% original issue discount and include 1/3 warrant coverage as
additional consideration to the lender. All warrants are
exercisable at $0.756 per share. The notes are convertible at a
price of $0.50 per share. Additional debt financing on the same
terms is available under the Securities Purchase Agreement, with:
(1) an additional purchase of $277,778 in notes and associated
warrants expected to occur on the third business day after the date
of the filing of a registration statement on Form S-1 for the
shares issuable upon conversion of the notes as required under a
Registration Rights Agreement; and (2) an additional purchase of
$833,333 in notes and associated warrants upon effectiveness of the
registration statement. At this time, we are delinquent in our
payments under the initial convertible note, with the May 1, 2020
and April 1, 2020 payments currently in arrears. We intend to make
these payments and the upcoming monthly payments with receipts from
product sales and/or the proceeds of additional equity
funding.
We
recently received a Secured Disaster Loan in the amount of $99,100
from the U.S. Small Business Administration. The loan carries
interest at a rate of 3.75% per year, requires monthly payments of
principal and interest, and matures in thirty (30) years.
Installment payments, including principal and interest, of $483
monthly, will begin Twelve (12) months from the date of the
promissory Note. In addition, we recently received federal funding
in the amount of $236,410.27 through the Paycheck Protection
Program (the “PPP”). PPP funds have certain
restrictions on use of the funding proceeds, and generally must be
repaid within five (5) years at 1% interest. The PPP loan may,
under circumstances, be forgiven.
Off Balance Sheet Arrangements
As of
March 31, 2020, we had no material off-balance sheet
arrangements.
In the
normal course of business, we may be confronted with issues or
events that may result in a contingent liability. These generally
relate to lawsuits, claims or the actions of various regulatory
agencies. We consult with counsel and other appropriate experts to
assess the claim. If, in our opinion, we have incurred a probable
loss as set forth by accounting principles generally accepted in
the United States, an estimate is made of the loss and the
appropriate accounting entries are reflected in our financial
statements. After consultation with legal counsel, we do not
anticipate that liabilities arising out of currently pending or
threatened lawsuits and claims will have a material adverse effect
on our financial position, results of operations or cash
flows.
Critical Accounting Estimates and New Accounting
Pronouncements
Critical Accounting Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported
amounts and related disclosures in the financial statements.
Management considers an accounting estimate to be critical if it
requires assumptions to be made that were uncertain at the time the
estimate was made, and changes in the estimate or different
estimates that could have been selected could have a material
impact on our results of operations or financial
condition.
Application of Significant Accounting Policies
Section
107 of the JOBS Act provides that an emerging growth company can
take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards. In other words, an emerging growth
company can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies.
We have elected to take advantage of the benefits of this extended
transition period. Our financial statements may, therefore, not be
comparable to those of companies that comply with such new or
revised accounting standards.
Recent Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The adoption of this guidance had
no impact on the Company’s unaudited condensed consolidated
financial statements.
We have
reviewed the FASB issued ASU accounting pronouncements and
interpretations thereof that have effectiveness dates during the
periods reported and in future periods. We have carefully
considered the new pronouncements that alter previous generally
accepted accounting principles and do not believe that any new or
modified principles will have a material impact on the
Company’s reported financial position or operations in the
near term. The applicability of any standard is subject to the
formal review of the Company’s financial
management.
Recent Accounting Updates Not Yet Effective
In December 2019, the FASB issued ASU 2019-12, “Simplifying
the Accounting for Income Taxes.” This guidance, among other
provisions, eliminates certain exceptions to existing guidance
related to the approach for intra-period tax allocation, the
methodology for calculating income taxes in an interim period and
the recognition of deferred tax liabilities for outside basis
differences. This guidance also requires an entity to reflect the
effect of an enacted change in tax laws or rates in its effective
income tax rate in the first interim period that includes the
enactment date of the new legislation, aligning the timing of
recognition of the effects from enacted tax law changes on the
effective income tax rate with the effects on deferred income tax
assets and liabilities. Under existing guidance, an entity
recognizes the effects of the enacted tax law change on the
effective income tax rate in the period that includes the effective
date of the tax law. ASU 2019-12 is effective for interim and
annual periods beginning after December 15, 2020, with early
adoption permitted. The Company is currently evaluating the impact
of this guidance.
A
smaller reporting company is not required to provide the
information required by this Item.
Evaluation of Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act are
recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our
management, including our principal executive and financial
officers, as appropriate to allow timely decisions regarding
required disclosure.
Our
Interim Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), the Company’s
principal executive and financial officers, have conducted an
evaluation of the design and effectiveness of our disclosure
controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
of the Exchange Act as of the end of the period covered by this
report. Our management’s evaluation of our internal control
over financial reporting was based on the framework in Internal
Control-Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In designing
and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design
of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to
apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
Our CEO
and CFO believe that as of March 31, 2020, our disclosure controls
and procedures are not designed at a reasonable assurance level and
are ineffective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms, and that
such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure. The conclusion was due to
the presence of the following material weaknesses in disclosure
controls and procedures due to our small size and limited
resources: (i) inadequate segregation of duties and effective risk
assessment; (ii) insufficient written policies and procedures for
accounting and financial reporting with respect to the requirements
and application of both U.S. GAAP and SEC Guidelines; (iii)
inadequate security and restricted access to computer systems
including insufficient disaster recovery plans; and (iv) no written
whistleblower policy.
Our CEO
and CFO plan to review and implement appropriate disclosure
controls and procedures to remediate these material weaknesses,
including (i) appointing additional qualified personnel to address
inadequate segregation of duties and ineffective risk management;
(ii) adopting sufficient written policies and procedures for
accounting and financial reporting and a whistle blower policy; and
(iii) implementing sufficient security and restricted access
measures regarding our computer systems and implement a disaster
recovery plan.
Changes in Internal Controls over Financial Reporting
There
have been no changes in the internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended March 31, 2020
that have materially affected, or is reasonably likely to
materially affect, our internal over financial
reporting.
PART II—OTHER INFORMATION
On
January 10, 2020, the Company and Jonathan Gilbert, a former
director, entered into a Settlement Agreement and stipulation of
dismissal of certain pending litigation in New York.
Under the agreement Mr. Gilbert retained 375,000 shares of common
stock previously awarded and all other awards and obligations to
Mr. Gilbert were cancelled and the Company and Mr. Gilbert
exchanged mutual releases.
On
September 9, 2019, Dr. Krassen Dimitrov, a former director,
commenced an arbitration proceeding against the Company and its
wholly-owned subsidiary Exactus Biosolutions, Inc. before the
American Arbitration Association. The complaint alleges
breach of a consulting agreement for services by Dr. Dimitrov
during 2017-2019, among other claims, and seeks $750,000 in
damages. The Company has filed an answer denying the claims
and asserting numerous counterclaims against Dr. Dimitrov and his
affiliated entities, KD Innovation Ltd., and Digital Diagnostics,
Inc. An arbitrator has been appointed in the matter and on
May 1, 2020 issued a procedural order suspending further
proceedings.
On February 26, 2020 a complaint was filed against
the Company in the Circuit Court, Palm Beach County, Florida on
behalf of two former employees of the Company. The case is
entitled Ryan Borcherds and Miriam Martinez vs. Exactus, Inc. (Case
No. 103978709). These former employees were hired in January
2020. The complaint alleges the Company failed to pay wages
and compensation to 2 employees under the Fair Labor Standards Act,
breach of contract and violation of various Florida statutes,
including allegations on behalf of other similarly situated
persons. On May 8, 2020, an amended complaint was filed
against the Company in the Circuit Court, Palm Beach County,
Florida on behalf of six former employees, with one
additional employee added to the suit in June 2020. The amended case is entitled Ryan Bocherds, Marc
Reiss, Jeannine Boffa, Benjamin Blair, Miriam Martinez and Michael
Amoroso vs. Exactus, Inc, (Case No. 50-2020-CA-002274-MB). The
other four former employees were hired between April 2019 and
December 2019. As of March 31, 2020 and December 31, 2019, the
Company has recorded total accrued salaries of $90,974 and $26,494
from these former employees.. The complaint seeks approximately
$106,000 in unpaid wages plus special damages, liquidated damages,
interest and attorney’s fees. The Company has retained
legal representation and intends to vigorously contest the
matter.
From
time to time, we may become involved in legal proceedings arising
in the ordinary course of business. We are unable to predict the
outcome of any such matters or the ultimate legal and financial
liability, and at this time cannot reasonably estimate the possible
loss or range of loss and accordingly have not accrued a related
liability.
Please see NOTE 11 - COMMITMENTS AND
CONTINGENCIES for additional information.
A
smaller reporting company is not required to provide the
information required by this Item. For our most recent risk
factors, please consult our Annual Report on Form 10-K filed May
22, 2020.
Subsequent
to the reporting period, and up through June 24, 2020, the Company
accepted shareholder subscriptions in the total amount of $250,000
in exchange for issuance of 2,500,000 shares of Common Stock in an
offering exempt under Rule 506 of Regulation D. On April 29, 2020,
2,000,000 shares were issued at $0.10 per share and on May 13, 2020
500,000 shares were issued at $0.10 per share.
Subsequent to the reporting period, on May 27, 2020, the holder of
a convertible note converted a $32,400 portion of the amount due
under the note to 247,588 shares of our common stock. The
original issuance of the convertible note, and the issuance of the
conversion shares, were exempt from registration under Rule 506 of
Regulation D.
None.
Not applicable.
None.
|
Exhibit
Number
|
|
Description of
Exhibit
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|
|
|
|
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Loan
Agreement and Note with the U.S. Small Business
Administration
|
|
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
101
|
|
Materials
from the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2020 formatted in Extensible Business
Reporting Language (XBRL)
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
Exactus, Inc.
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|
|
June
30, 2020
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/s/
Emiliano Aloi
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Emiliano
Aloi
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Interim Chief Executive Officer and and Principal Executive
Officer
|
|
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/s/
Kenneth E. Puzder
|
|
|
Kenneth
E. Puzder
|
|
|
Chief Financial Officer and Principal Accounting
Officer
|
-49-
