UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION[X] Annual Report Pursuant to Section 13 ORor 15(d)
OF THE SECURITIES EXCHANGE ACT OF of the Securities Exchange Act of 1934
For for the fiscal year endedFiscal Year Ended December 31, 20162019
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to ________
..
Commission File Number: 333-183360001-38190
EXACTUS, INC.Exactus, Inc
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) | | 27-1085858 (I.R.S. Employer Identification No.) |
4870 Sadler Road,80 NE 4th Avenue, Suite 300
Glen Allen, Virginia28 Delray Beach, FL 33483
(Address of principal executive offices) (Zip code) |
| |
23060(800) 881-9352
(Zip Code)Registrant’s telephone number, including area code) |
(804) 205-5036
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
None
Common stock, par value of $0.0001
(Title of class)
I Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☑☐ No ☐☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☑ No ☑☐
Explanatory Note: The registrant is a voluntary filer and is therefore not subject to the filing requirements of the Securities Exchange Act of 1934; however, during the preceding 12 months, the registrant has filed all reports that it would have been required to file by Section 15(d) of the Securities Exchange Act of 1934 if the registrant was subject to the filing requirements of the Securities Exchange Act of 1934 during such time frame.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any every interactive data fileInteractive Data File required to be submitted and posted 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 and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☑ |
| | Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reportingEmerging growth company ☑ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
AsState the aggregate market value of June 30, 2016,the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter the aggregate market value of the shares of common stock held by non-affiliates of the registranton June 30, 2019, was not determinable.
$26,922,402 (1)Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 33,571,862date: 45,522,275 as of May 22, 2020.
(1) Based on a closing sale price of $0.95 per share on June 30, 2019. Excludes 10,639,120 shares of Common Stock as of March 28, 2017
DOCUMENTS INCORPORATED BY REFERENCE: Nonethe registrant’s common stock held by executive officers, directors and stockholders that the registrant has concluded were affiliates at June 30, 2019.
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EXPLANATORY NOTE
PART IOn March 17, 2020, Exactus, Inc. (the “Company”) filed a Current Report on Form 8-K, and is filing this Annual Report on Form 10-K (the “Annual Report”), in reliance on the Order of the Securities and Exchange Commission (the “SEC”), dated March 4, 2020, as updated March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934 modifying exemptions from the reporting and proxy delivery requirements for public companies (Release No. 34-22465).
Company Overview
Exactus, Inc. (“Exactus”, “our”, “us”, “we” or the “Company” refer to Exactus, Inc. and its wholly-owned subsidiary, unless the context otherwise requires) was incorporated on January 18, 2008 as “Solid Solar Energy, Inc.” in the State of Nevada as a for-profit Company. On May 16, 2013, we filed a certificate of amendment to the Company’s amended and restated articles of incorporation to change our name to “Spiral Energy Tech., Inc.” from Solid Solar Energy, Inc. On February 29, 2016, we acquired all of the issued and outstanding capital stock of Exactus BioSolutions, Inc. (“Exactus BioSolutions”) pursuant to a Share Exchange Agreement, dated February 29, 2016, with Exactus BioSolutions (the “Share Exchange”). The Company issued 30 million shares of newly-designated Series B-1 Preferred Stock to the shareholders of Exactus BioSolutions in the Share Exchange, representing approximately 87% of voting control of the Company upon consummation of the Share Exchange. As a result of “stay at home” orders and other restrictions imposed as a result of the Share Exchange, Exactus BioSolutions became a wholly-owned subsidiaryCOVID-19 pandemic, certain Company officers and management as well as professional staff and consultants have been hindered and delayed in conducting all of Exactus, Inc. Effectivethe work required to prepare the financial statements for the Annual Report. This has, in turn, impacted the Company’s ability to complete its audit and file this Annual Report by its original due date, March 22, 2016, we changed our corporate name to “Exactus, Inc.” via a merger with our wholly-owned subsidiary, Exactus Acquisition Corp.30, 2020.
Following the Share Exchange, we became a life science company based in Glen Allen, Virginia that plans to develop and commercialize Point-of-Care (POC) diagnostics for measuring proteolytic enzymes in the blood based on a novel detection platform developed by Dr. Krassen Dimitrov, PhD. Our products will employ a disposable assay test strip combined with a portable and easy to use hand held detection unit that provides a result in as little as 30 seconds.PART I
The first product will be used to assay fibrinolysis, which is the process by which clots in the blood are dissolved. The rate of fibrinolysis is carefully regulated in circulation; too little fibrinolysis leads to the formation of clots (thrombosis) and too much fibrinolysis prevents normal coagulation and can lead to excessive bleeding (hemorrhage). An elevated level of fibrinolysis is associated with many pathological conditions including myocardial infarction, pulmonary embolisms/deep vein thrombosis (PE/DVT) and ischemic stroke. Further, complications associated with surgical procedures and trauma can induce a hyperfibrinolytic state, leading to hemorrhage. In all of these medical situations, time is of the essence, and we believe current diagnostic technologies cannot return an actionable result in the time frame necessary to provide timely therapeutic intervention.
Item 1. Business
The FibriLyzer is expected to provide a simple, rapid and affordable means to assess the fibrinolytic state of a patient in a broad range of applications including (i) the management of hyperfibrinolytic states associated with surgery and trauma, (ii) obstetrics, (iii) diagnosis of acute events such as myocardial infarction and ischemic stroke, (iv) diagnosis of pulmonary embolism and deep vein thrombosis, (v) chronic coronary disease management, and (vi) as a monitoring device to evaluate the effectiveness of coagulation therapy. We anticipate that the use of FibriLyzer will provide the basis for improving management of patients who are at-risk of hemorrhage, expediting treatment, potentially improving patient outcomes, and saving money.Business Overview
We planare a Nevada corporation organized under the name Solid Solar Energy, Inc in 2008 and renamed Exactus, Inc. in 2016. We began to follow up FibriLyzer withpursue 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 similar technologyprogram to detect collagenase levelscreate 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 blood. This product, MatriLyzer,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 intendednow defined as hemp was limited to persons registered under the CSA to do so. Under the Agricultural Act of 2014, which we refer to as the 2014 Farm Bill, State departments of agriculture and institutions of higher education were permitted to produce hemp as part of a pilot program for research purposes. The authority for hemp production provided in the 2014 Farm Bill was extended by the 2018 Farm Bill, which was signed into law on December 20, 2018.
Our goal is to rapidly establish one or more principal sources of supply and to develop wholesale and retail sales channels for CBD end-products to be usedsold to detect the recurrence (orhumans and for animal health, such as nutraceuticals, supplements and pet and farm products.
Our principal executive offices are located at 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 and our telephone number is (800) 881-9352.
Farming Operations
On March 11, 2019, we acquired a 50.1% limited liability membership interest in Exactus One World, LLC, an entity formed on January 25, 2019 and which we refer to as EOW, in order to produce hemp. EOW holds one-year leases, which commenced on March 1, 2019, for approximately 200 acres of farmland in southwest Oregon for growing and processing hemp. The leases are renewable on a year-to-year basis. EOW will farm and process hemp to be manufactured into CBD and related products, sold or processed as biomass and other agricultural products. EOW will be responsible for our initial occurrence in high risk patients) of cancerefforts to pursue agricultural development, including farm soil preparation, planting, harvesting, transportation and can be used as an at-home monitoring device or during routine office visits. The appearance of elevated levels of collagenase, the enzyme that degrades collagen,drying. We have been proven to be an early biomarker of recurrent cancer. For patients that have been previously treatedresponsible for cancer, specifically, solid tumors, iffunding and when the tumor recurs is of paramount importance. Once a tumor has begun to grow and spread, we believe that MatriLyzer can be used to detect this event at an early stage. If desired, our deviceminority owners will be designed to communicate directly withresponsible for management, servicing and operating the attending oncologist via a smart phone application to ensure that the tests are being used properly and, when collagenase levels are elevated, both patient and physician will know the patient should have a more thorough examination.farm properties.
Unmet Medical NeedOn 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 formationCompany, 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 blood clotcost of $837,153 currently held inventory has been written down to a value of $0 due to the age and its successive dissolution, known asquestionable salability of the hemostatic balance, is required to arrest blood loss from an injured vessel; however, disruption of this balance leads to hemostatic disorders with either excessive bleeding (hemorrhage) or excessive clotting (thrombosis). During and after surgery or trauma, it is critical to monitor the hemostatic status of a patient because excessive bleeding (inadequate coagulation) is a common problem; however, proper peri- and post-operative patient management requires constant monitoring of hemostasis/fibrinolysis and current technologies are either too slow or too cumbersome to use efficiently, resulting in delayed, wasted or misapplied treatments and potentially poor patient outcomes.product.
Additional Brands
We have taken steps to introduce Green GoddessTM brands, LeVor CollectionTM, Paradise CBDTM and ExactusTM, for selected markets which, to date, have not resulted in material revenues.
Industrial Hemp
We seek to take advantage of an emerging worldwide trend to utilize the production of industrial hemp in consumer products. Hemp is being used today in cosmetics, nutritional supplements, and animal feed, where we also intend to focus our efforts. The Euglobulin Lysis Test (ELT) testmarket for hemp-derived products is expected to increase substantially over the only regulatory-cleared test for measuring fibrinolysis; however, it requires several hoursnext five years, and we are endeavoring to conduct and is therefore impractical for use in diagnosing hyperfibrinolysis when treating trauma cases or surgery where treatment decisions haveprepare the Company to be made withinpositioned as a few minutessignificant player in the industry. According to industry reports, CBD is expected to conservatively generate sales of symptoms. D-dimer$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 another routine test for assessing fibrinolytic activity. The D-dimer is a proteolytic breakdown product of fibrin that is easily measured by latex agglutination assay and is consideredattributable to be a surrogate biomarker for fibrinolysis; however, while the D-dimer test is used broadly, the test still requires at least 20 minutes to return a resultvaluable overlap between phyto-cannabinoids (i.e. plant-derived cannabinoids) and the test hasendogenous cannabinoid system in humans, termed a very low specificity rate (high false positives) making the utility“therapeutic handshake”. Clinical trial results to date demonstrate few adverse effects from oral CBD doses of the test less than optimal for identifying patients with hyperfibrinolysis.up to 1,500 mg/day or up to 30 mg IV. The D-dimer testscientific understanding of CBD’s clinical effects is not clearedbased mostly on studies in specific indications, like epilepsy. GW Pharma’s Epidiolex (a highly potent, pure formulation of CBD) was approved by the FoodFDA in 2018 for the treatment of seizures associated with Lennox-Gastaut syndrome and Drug Administration (“FDA”), but is provided in clinical chemistry labs and a Laboratory Developed Test (LDT).
Physicians recognize the inadequacy of ELTDravet syndrome, and other Conventional Coagulation Tests (CCTs) such as Prothrombin Time, Partial Thromboplastin Time, Fibrinogen Levels and D-dimer, so theycompanies have turned to viscoelastometric methods to gather information on the coagulation process (da Luz et al 2013, Ramos et al 2013, Yeung et al 2014). Viscoelastometric methods require a bulky apparatus (ROTEM/TEG) and at least 10-30 minutes per test to return graphical output from which parameters can then be derived to indicate levels of fibrinolytic activity. However, patients’ hemostatic conditions can change significantlyclinical trials underway in just a few minutes. These methods are unable to provide rapid diagnosis of fibrinolytic status in the OR and ER, and viscoelastometric methods lack the ability to provide true real-time feedback to physicians for optimal, case-specific administration of critical treatments to counteract hyperfibrinolysis during surgery or trauma management. Further, viscoelastometric tests provide information on only severe forms of hyperfibrinolysis and lack the sensitivity to diagnosis the onset of hyperfibrinolysis (Franz 2009, Schöchl et al 2012). The use of viscoelastometric devices is complicated further by the (i) requirement for multiple daily calibrations, (ii) the requirement for highly trained technicians to conduct the assay, and (iii) the lack of standardization of viscoelastometric protocols (da Luz et al 2013). As a result, there have been calls for a faster and easier-to-use tool for providing feedback on this important physiological process.seizure disorders.
Product Candidates
FibriLyzer
FibriLyzer is a device based on new technologies that are patented or pending patent and designed to address the shortcomings of the viscoelastometric devices, clinical tests such as D-dimer as well as ELT. FibriLyzer has two components. First, a portable, hand held analyzer about the size of blood glucose meters, measures the fibrinolytic activity in a drop of blood and returns a result in as little as 30 seconds. This unit is equipped with a bar-code scanner to record patient information. The unit can be connected via a USB port to ensure that the results of each test become part of the patient’s electronic record and are communicated to the appropriate hospital staff. Second, a disposable assay test strip or “biosensor” contains a synthetic protein matrix that simulates a clot. A proprietary electrochemically active polymer (“elactomer”) is embedded into the matrix and is released as the synthetic “clot” is dissolved, which generates electrical current in direct proportion to the amount of fibrinolysis.
In practice, a disposable assay test strip is inserted into the FibriLyzer device and a drop of blood is placed into an opening end of the strip. The blood sample is drawn into the strip by capillary action and the fibrinolysis assay begins immediately as the device measures the current across the test-end of the biosensor, which contains the synthetic fibrin matrix. At a specific time point (20 seconds), the end-point current is recorded and the results are displayed on an easy to read screen on the hand held unit. Based on a pre-defined threshold, the operator can immediately determine the fibrolytic state of the patient to inform patient management decisions in real time. Once the test is completed, the assay test strip is removed and discarded.
In May 2013,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 clinical beta test was performedcovered 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 initial assessment of a prototype device in a clinical setting. The trial included 30 healthy volunteersOTC medication will likely continue for an indefinite period impeding adoption and 62 patients from the cardiology ward at University Hospital “Queen Yoanna” in Sofia, Bulgaria and was managed by Prof. Assen Goudev, Departmental Chair of Cardiovascular Medicine.payor acceptance.
The three goals of this beta test were accomplished: (i) medical personnel easily managed the administration of FibriLyzer; (ii) samples from the healthy volunteers produced fibrinolysis readings that demonstrated a grouping from which a “normal range” could be derived; and (iii) after only 20 seconds, the samples taken from the cardiac patients yielded a scattered distribution that was very different than the comparatively tight distribution for the healthy sample, demonstrating the cardiovascular patients’ varying degrees of elevated fibrinolysis.Competition
This beta test showedWe 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 technology performedfew 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 expectedCargill and Tyson Foods, but may do so in a clinical settingthe future and confirmed that it should move into formal clinical trials designedbecome significant competitors.
Our goal is to garner marketing approval.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 anticipate submitting a premarket notificationintend to follow regulatorily compliant pathways by adopting practices established by the FDA for FibriLyzerCBD and to pursue FDA approval for our activities upon adoption of federal regulations, including conducting independent clinical and non-clinical trials.
Companies such as Class II device pursuant to Section 510(k) of the FDAC.
In the European Union (the “EU”), we will seek to register FibriLyzer under Annex II List B of the European Directive 98/79/EC, which requires that the Company declare and ensure that FibriLyzer meets the requirements described in this annex.
It is anticipated that the clinical studies will include sites in both the U.S. and the EU and the protocol will be designed such that both the FDA as well as the EU’s IVD CE Mark requirements are met. We plan to use sufficient sitesCV Sciences, Inc. (OTCQB:CVSI) in the U.S.US and EU to expediterecent acquisitions by Canadian cannabis producers reflect the time needed to completegrowing 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 clinical development. We will work closely with the FDA to ensure that our clinical developmentcompetition and analytical plans are sufficiently robust to satisfy the regulatory requirements and plan to seek marketing clearance with EU authorities concurrently with the Food, Drug, And Cosmetic Act (the “FDAC”) in mid-2018 and anticipate that we will be eligible to market and sell products by the end of 2018.increasing consolidation.
MatriLyzer
Using technology similarNon-CBD Competition. We do not intend to FibriLyzer, the Company intendsoffer 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 develop a diagnostic deviceenter 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 detect the recurrence of cancer. Each year, more than 700,000 people undergo cancer surgerylegal and regulatory restrictions and uncertainty in the United States. However, more than 40%Because of those patients develop recurrent diseaseregulatory challenges facing marijuana companies in the United States, the vast majority of the companies focused on THC are Canadian and manyforeign, although several have correspondingly poor outcomes. There remains an unmet needbegun to diagnose cancer recurrence at its earliest stagespursue domestic activities in order to treatstates 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 patient swiftly.
Well-characterized proteases have been long recognized as major contributors to the proteolytic degradation of extracellular matrix during tumor invasion. In the recent years, other non-matrix proteins have also been identified as elatinase substrates thus significantly broadening our understandingfuture. Because of these enzymes as proteolytic executors and regulators in tumor progression. As with fibrinolysis, MatriLyzer will detect the increase in collagenase activity in the blood using the same elactomer technology used in FibriLyzer. In MatriLyzer, the biosensor will contain a collagen-based matrix, but the principle of detection will remain the same. Our approach will be to validate the correlation of increased collagenase levels with cancer recurrence and then market the test for routine office use or at-home use.factors, our competitors that have focused exclusively on CBD are limited.
Global Medical Diagnostics Device Market
The In VitroRetail Competition diagnostics device industry. Many of our competitors are private companies and as a result, little or no reliable information is currently oneavailable. Of the publicly reporting companies, we believe many of the most dynamic and innovative economic sectors today, driven by rapid advances in micro-technology and biomedical research. These advances have combined to enable the collection of biometric data of scope and accuracy much greater than just ten or fifteen years ago. The sector can be divided into various horizontal segments such as cardiovascular, oncology, hematology, and neurology. Diagnostic devices may be utilized independently to assess specific biomarkers; or they may act as “companion” devices, working in conjunction with therapeutics or other treatments to improve patient outcomes. Currently bringing in over $50 billion in revenue, the industry is expected to continue to expand as new technologiesCBD companies are introduced that directly address previously unmet needs of patients and clinicians.principally focused on high THC content marijuana.
Globally,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 U.S. marketdischarge of materials into the environment, or otherwise relating to the protection of the environment, have not had, nor are they expected to have, any direct material effect on our capital expenditures, earnings or competitive position, however such factors could indirectly affect us as well as participants in the supply chain for our products, and our business, operations, vendors or suppliers.
Point of Care Diagnostics
As previously reported under “Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 the second segment of our business is the largest, providingdevelopment of point of care diagnostic devices. We have since February 2016 been developing devices for roughly one third of all revenues. The regulatory pathwaymeasuring proteolytic enzymes in the blood, known as the FibriLyzer and collagenase levels in the blood, known as the MatriLyzer. We believe our diagnostic business has been criticizedseverely hampered by a shortage of capital for being overly cumbersome; however, recent efforts to streamlinedevelopment and clarifyas a result our licenses for the processes have improved outcomes in the approval process. A recent survey (Parmar, 3.26.14) revealed that despite greater cost concerns, most hospital CEOs are open to new technologies if they can improve the quality of patient care, lower hospitals’ overall costs, or increase the efficiency of their clinical staffs. Despite increased scrutiny, the U.S. market for diagnostic devices is expected to show continued growth due to an increasing ability of researchers to address unmet needs, greater participation in preventive care, and the need to monitor and manage “lifestyle” diseases (cardiovascular, diabetes, etc.) of the growing elderly population.
The European market is currently the second largest and is generally viewed as being more accommodating to new devices and technologies. As in the U.S., serving unmet needs and managing lifestyle diseases are engines of growth. Emerging markets are recognized as providing the opportunity for fastest growth as higher middle-class incomes and increasing awareness of the benefits of a healthcare system drive new demand through higher participation rates. Also, new government policies encourage the introduction of advanced technologies to rural regions.
The Company plans to initially market FibriLyzer for (i) the identification of hyperfibrinolytic states associate with surgery and trauma, (ii) obstetrics, (iii) acute events such as myocardial infarction and ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis, and (v) chronic coronary disease management. Together these markets have more than 10 million cases annually.
The market for MatriLyzer is quite large with over 4 million patients treated for cancer each year in the U.S. and EU who could be monitored for recurrence of cancer by observing collagenase levels. In addition to newly treated patients, a pool of 20 million potentially recurrent cancer survivors would be eligible for collagenase monitoring as well. Both patients and survivors will potentially benefit from regular and frequent monitoring for recurrence.
Licensing Agreement
Our business substantially depends on our licensed technology. We have entered into an exclusive licensing agreement, the “Licensing Agreement” with Digital Diagnostics Inc. (“Digital Diagnostics”) to develop, produce and commercialize certain diagnostic products, includingunderlying technology FibriLyzer and MatriLyzer which utilize certain intellectual property rights owned or licensed by Digital Diagnostics. The Licensing Agreement provides for Exactus BioSolutionstechnology have been threatened and Digital Diagnostics to collaborate through the various stepsmay be discontinued. We have received notice of the product and device development process, including the development, regulatory approval, commercialization and manufacture stages. Exactus BioSolutions is required to pay Digital Diagnostics, in cash and/or stock, an initial signing payment, milestone fees triggered by the first regulatory clearance or approval of each of FibriLyzer and MatriLyzer, and various sales thresholds, and royalty payments based on the net sales of the products, calculated on a product-by-product basis. The initial signing payment is due within seven days of the effective date of the agreement, with the remaining amount due upon closingtermination of certain of our financing transactions. In 2016,licenses for non-payment of fees. For the past 9 months, we paid $50,000have been engaged in discussions with third-parties regarding funding and a possible third-party merger candidate to Digital Diagnosticsdevelop our diagnostic business. Accordingly, we have determined to continue to look for third-parties to partner with and/or buyers to invest in or acquire this business segment. If successful, we could sell or license our rights to third parties with substantially greater resources than us. We also may be required to terminate this segment and may not realize any benefit from our prior investment in developing this business.
Recent Developments
Private Placement of Convertible Notes and Warrants
On November 27, 2019, we entered into a Securities Purchase Agreement, referred to as partthe 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 signingtranche note and warrant and $730,000 net proceeds after the payment underof fees and expenses of the Licensing Agreement and $21,659 in legal expenses. Assale.
Pursuant to the SPA, a second tranche of December 31, 2016, we accrued an additional $171,033 in licensing fees due to closing a financing transactionfunding from the investor is available in the fourth quarterform of 2016. No milestones have been met and no milestone fees have been paid or accrued for through December 31, 2016.
The License Agreement is effective on a product-by-product and country-by-country basis until such time as neither Digital Diagnostics nor Exactus Biosolutions has any obligation to the other under the License Agreement in such country with respect to such product. The License Agreement may be terminated by Exactus BioSolutions as a whole or on a country-by-country and/or product-by-product basis, effective upon at least six (6) months written notice if regulatory approval has been obtainedsecond 8% convertible note in the U.S. orprincipal 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 EU, or upon at least three (3) months written notice if regulatory approval has not been obtained ininvestor of the U.S. or insum of $250,000. The principal amount of the EU. Either party may terminatesecond tranche note will reflect the License Agreement inamount invested plus the event the other party materially breaches the License Agreement, or becomes insolvent.OID.
Competition
We competePursuant 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 vitro diagnostics device industry, subjectthe principal amount of $833,333 and a warrant to rapid changes in micro-technology and biomedical research, and significantly affected by new product introductions. We knowpurchase 275,612 shares of no other competitor developing hand-held Point-of-Care devices that detect fibrinolysis or collagenase. The FibriLyzer works by determining fibrinolytic activityour common stock on the date the registration statement is declared effective by the rate at which a proprietary synthetic fibrin matrix is dissolvedSEC, in exchange for payment by enzymes in the blood. Competitors include companies that sell larger tabletop machines which may be used atinvestor of the Point-of-Care for detectionsum of various coagulation parameters through different methods, including thromboelastography (TEG) by Haemonetics Corporation, and rotation thromboelastometry (ROTEM) by Tem International.
Our product is unique because unlike TEG and ROTEM, it does not require a significant$750,000. The principal amount of blood, or technical expertise to operate. In addition, these products require 10-30 minutes to deliver any data. We believe that the absence of a hand-held Point-of-Care device forthird tranche note will reflect the detection of fibrinolysis or collagenase in real time creates a significant opportunity to penetrateamount invested plus the market.
Manufacturing, Distribution and Marketing
We are working with TaiDoc Technology Corporation (“TaiDoc”) in Taipei, Taiwan, a well-established medical device manufacturer with certifications from regulatory authorities worldwide, including the FDA, to manufacture the FibriLyzer and disposable assay test strips. TaiDoc and Digital Diagnostics have an existing contract manufacturer agreement pursuant to which TaiDoc will manufacture the FibriLyzer and Digital Diagnostics will be its exclusive distributor, and we currently are negotiating a formal agreement with TaiDoc to manufacture these products. As described in more detail under “—Government Regulation and Approval,” these third parties must comply with FDA and applicable foreign regulations regarding manufacturing our products. Failure to maintain compliance with such regulations could result in a sudden or unexpected interruption in our operations as we may not be able to quickly establish additional or replacement manufacturers of our products.
We do not have dedicated sales, marketing or distribution personnel yet, because none of our products have been approved for commercial sale. If and when our products are approved for commercial sale, we intend to develop an in-house team in the United States to market and distribute our products. We expect to collaborate with the medical community and to utilize online marketing to showcase and create awareness of our products. Our initial marketing efforts will target physicians, hospital administrators, hospital service providers, and group purchasing organizations.
Government Regulation and Approval
United States Product Development, Review and Approval ProcessOID.
The FDA regulatesnotes 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 medical devices commercially distributedof 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 United States. Medical devicesfirst tranche.
At this time, we are defined bydelinquent in our payments under the FDACinitial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. We intend to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding.
At this time, we are delinquent in our payments under the initial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. We intend to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding. On May 20, 2020, we entered into a Forbearance Agreement with the investor (the “Holder”) regarding the initial convertible note. Under the Forbearance Agreement, the investor has agreed to forebear from exercising any default-related rights and remedies subject to the regulatory controlsfollowing conditions and material terms:
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We must pay the Holder $60,000 in cash on or before July 1, 2020. Additional monthly payments required under the Amortization Schedule for the note shall continue to be due on or before the first day of each calendar month thereafter, commencing with the $110,000 payment originally due April 1, 2020 now being due on or before August 1, 2020, and the subsequent monthly payments listed on the Amortization Schedule to be paid monthly in the sequence listed. Interest shall continue to accrue on the principal balance of the FDACNote 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.
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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).
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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.
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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.
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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:
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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:
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the unpaid and unconverted principal amount outstanding on the note;
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100% of the accrued and unpaid interest on the principal amount of the note to be converted;
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100% of the make-whole amount (as described below) payable in respect of the principal amount of the note to be converted; and
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all liquidated damages, costs of collection and other federal regulations. The FibriLyzer is considered a medical device pursuant to the FDAC, and is thereby subject to the FDAC’s pre-market requirements.
Prior to the commercial distributionamounts payable in respect of the FibriLyzer in the United States, a pre-market approval, pre-market clearance, or an exemption from the FDA must be secured. We are requesting clearance of the FibriLyzernote as a Class II device pursuant to the FDAC 510(k) pre-market clearance process, which requires us to submit a 510(k) notification to the FDA demonstrating that the FibriLyzer is substantially equivalent to a device already on the market that does not require pre-market approval, known as a “predicate.” A device will be deemed to be substantially equivalent to a predicate if it has the same intended use and technological characteristics. Where a device’s technological characteristics are different from the predicate, the FDA may nonetheless conclude that it is substantially equivalent as long as it has the same intended use, and the information provided to the FDA does not raise new questions of safety or effectiveness and demonstrates that the device is as safe and effective as the predicate. A successful 510(k) approval results in an order from the FDA stating that the device is substantially equivalent to a predicate and that it can be marketed in the United States.applicable.
United States Post-Approval ProcessesThe 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 are in the process of pursuing the regulatory approvals required to sell our products in the United States. Any products for which we receive FDA approvals will be subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the provisionsmust pay amortization redemption payments equaling one-ninth of the approved label. Furthermore, product manufacturers must continueoriginal 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 comply with good manufacturing practices requirements,six future amortization redemption payments, in which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes tocase the manufacturing process generally require prior FDA approval before being implemented and other typesinvestor may demand the accelerated amortization amounts be paid in shares of changes toour common stock at the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.lesser of:
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the fixed conversion rate of $0.50 per share of common stock; and other entities involved in the manufacturing and distribution of an approved biological or medical device product are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices and other laws. The good manufacturing practices requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the product. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release.
Manufacturers of biological products must also report to ●
the FDA any deviations from good manufacturing practice that may affect the safety, purity or potency of a distributed product; or any unexpected or unforeseeable event that may affect the safety, purity or potency of a distributed product. The regulations also require investigation and correction of any deviations from good manufacturing practice and impose documentation requirements.
We currently rely on third parties for the production of our products. Future FDA and state inspections may identify compliance issues at the facilities of contract manufacturers may disrupt production or distribution or may require substantial resources to correct.
The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Furthermore, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, suchamortization conversion rate, as fines, warning letters, holds on clinical studies, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.described above.
In addition, from timeif we fail to time, new legislation is enacted that can significantly changemake any amortization redemption payment, the statutory provisions governinginvestor may convert an amount equal to the approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.sum of:
International Regulation●
one-ninth of the original principal amount of the note;
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100% of all accrued and unpaid interest on the principal amount of the note that is subject to the amortization redemption;
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100% of the make-whole amount payable in respect of the principal amount of the note that is subject to the amortization redemption; and
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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 beredeem 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 widely varying foreign regulations, whichmandatory redemption provisions. We may be quite different from thosenot 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 FDA, governing clinical trials, manufacture, product registration and approval, and sales. Whether orinvestor.
The investor may not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries priorconvert notes to the commencementextent that conversion would, together with its affiliates and attribution parties, cause the investor to beneficially own a number of product marketingcommon 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 these countries. In certain countries, regulatory authorities also establish pricingthe 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 reimbursement criteria. The approval process varies from countrya change of control. If any event of default occurs, subject to country,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 time may be longer or shorter than that required for FDA approval. Therefore, we cannot assure that we will be able to satisfy the regulatory requirements to sell our productsdate of acceleration shall become immediately due and payable in any foreign country.cash.
EmployeesTerms of Warrants
AsThe warrants issued to the investor are exercisable at an exercise price of December 31, 2016, we have 3 employees, all$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 are full time.would exceed 4.99% of our then outstanding common shares following exercise. The investor may increase its beneficial ownership limitation up to 9.99%.
Item 1A. Risk FactorsThe 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.
Risks Related to Our Company and Our BusinessCeed2Med Agreements
Our business is at an early stageOn January 8, 2019, we entered into a Master Product Development and Supply Agreement with Ceed2Med, LLC. Under the agreement, C2M agreed to provide us a minimum of development50 and up to 300 kilograms per month, and up to 2,500 kilograms annually, of CBD rich ingredients for resale. In addition, C2M will manufacture for us tinctures, edibles, capsules, topical solutions and animal health products. In connection with the agreement, we may not develop products that can be commercialized.
In February 2016, we acquired Exactus BioSolutionsissued C2M 8,385,691 shares of our common stock, or approximately 51% percent of our issued and changed our primary business focus to developing, producing and commercializing blood diagnostic products, including FibriLyzer and MatriLyzer, utilizing certain intellectual property rights exclusively licensed by Exactus BioSolutions. Prior to that time, our primary business focus was developing and commercializing drone technology.outstanding shares of common stock on a fully-diluted basis, on January 8, 2019. As a result, C2M is our business is at an early stage of development. We are preparing to conduct clinical trials on our primary product, FibriLyzer, and we expect to be able to market and sell products by the end of 2018. Our ability to generate revenues from sales will depend, among other things, our successful completion of clinical trials, regulatory approvals, commercialization and market acceptance of our technologies and products, medical community awareness and changes in regulations.largest stockholder.
Our products, including FibriLyzer,On July 31, 2019, we entered into a Management and Services Agreement with C2M under which it will require significant additional researchprovides us and development, clinical testingour subsidiary, EOW, with project management, farming, and regulatory approval in the United States, Canada and Europe, and, even if our products are approved for sale, we may not be able to commercialize any of these products. Our products may not reach the market for a number of reasons,operational services, including:
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failure to obtain approvals for clinical trials or unsuccessful clinical trials;
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lack of familiarity of health care providersexecutive, sourcing, vendor, product, production and patients;
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low market acceptance as a result of lower demonstrated safety or efficacy or otherdisadvantages relative to other available diagnostic products;
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insufficient or unfavorable coverage determinations or reimbursements from health plans, governments or third party payers;
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alleged infringement on proprietary rights of others related to our licenses;
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ineffective marketingexpertise and distribution support;
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lack of cost-effectiveness; or
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timing of market introduction of competitive products.resources;
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drawings, designs and specifications for extraction, production and manufacturing facilities and resources; and
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brand development and support services.
In addition, C2M has assigned us its agreements and rights to acquire approximately 200 acres of these potential problems occur,industrial hemp farmland and will provide us with business opportunities, know-how, knowledge, and experience.
In return, we issued 10,000 shares of Series E 0% Convertible Preferred Stock to C2M pursuant to the agreement. Under the terms of the Series E Preferred, C2M may never successfully commercializeonly convert such shares of Series E Preferred into shares of our product candidates, including FibriLyzer. Ifcommon stock if our closing price shall exceed $2.00 per share for 5 consecutive trading days. Once vested, the shares of Series E Preferred held by C2M are intended to either be converted at $1.60 per share of common stock or optionally redeemed out of the proceeds of future financings, at the option of C2M. For more information about the terms of the Series E Preferred, please see the section entitled “Description of Securities”.
On October 23, 2019, we are unableamended the Management and Services Agreement to develop commercially viable products, our business,extend the termination date to December 31, 2024 and expand the scope of services to be provided by C2M. Included in the scope of services was to negotiate with the minority owners of EOW, an amendment to the Operating Agreement of EOW for the distribution and allocation to provide for up to 100% (from 50.1%) of the results of operations and financial condition will be materially and adversely affected.of the 2019 harvest or yield resulting from all plants germinated during the calendar year December 31, 2019
We haveOn November 14, 2019, we entered into a historySupply and Distribution Agreement with C2M, pursuant to which C2M agreed to purchase a minimum of operating losses, do not expect to be profitable in the near future and our independent registered public accounting firm has expressed doubt as to our ability to continue as a going concern.
We currently have no products available for sale, have not generated any revenues since our entry into the life sciences business and have incurred significant operating losses. We expect to incur additional operating losses for the foreseeable future. In addition, we expect that our current cash levels will not be sufficient to enable us to complete the development of any potential products, including FibriLyzer. See “We will need additional capital to conduct our operations and develop our products and our ability to obtain the necessary funding is uncertain.”
As a result10,000 pounds of our history of operating losses,2019 hemp flower harvest. During the audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2016 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The inclusionone-year term of the going concern statement by our auditors may adversely affect our stock price and our abilityagreement, we have the option to raise needed capital or enter into advantageous contractual relationships with third parties. If we were unable to continue as a going concern,purchase the values we receive for our assets on liquidation or dissolution could be significantly lower than the values reflected in our financial statements.distribution operations of C2M.
Canntab Agreements
On November 20, 2019, we entered into the Non-Exclusive Distribution and Profit Sharing Agreement with Canntab Therapeutics USA (Florida), Inc. Pursuant to the agreement, which has a term of 2 years and is subject to automatic renewal We are a non-exclusive distributor of certain Canntab products throughout the U.S. Canntab will not grant a third-party the right to promote, sell or deliver the products within the U.S. during the term of the agreement, subject to certain exceptions. In addition, we agreed to share equally with Canntab in the gross profits received from the sale of their products by us. With respect to Canntab’s sales of products, we will receive 10% of the gross profits. In connection with the Canntab Agreement, we also entered into a Supply Agreement with Canntab, which has a term of 2 years and is subject to automatic renewal, pursuant to which we agreed to sell hemp extracts to Canntab. Due to a need for additional capitalwarehouse space and disruptions caused by the Covid-19 pandemic, we have not distributed Canntab products to conduct our operationsdate.
Hemptown USA Agreement
On February 4, 2020, we entered into a Supply and develop ourDistribution 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 our abilityextracts (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 obtaina distribution agreement with the necessary funding is uncertain.Company. The Interim Chief Executive Officer will work to develope plans to coordinate the Company’s efforts to introduce CBG and to expand its efforts to sell CBD products. On March 28, 2020, we amended the Supply and Distribution Agreement Pursuant to the amendment, we agreed to also (i) aid Hemptown’s management with product compliance requirements, (ii) participate in discussions related to Hemptown’s 2020 farming, harvesting and processing plans as well as joint supply scenarios, (iii) interact with Hemptown’s ingredient and manufacturing divisions to facilitate development of documents for selected SKUs to service the white label market, and (iv) aid Hemptown’s CEO in overseeing the entire supply chain to establish best practices in quality and compliance and lower costs. In addition, Hemptown agrees to pay the Company $3,500 a month in consulting fees.
As of December 31, 2016, we had $1,055,336 of cash. Through 2016, we used a significant amount of cash to finance the development of our products, and we expect that our current levels of cash will not be sufficient to enable us to complete the development and commercialization of any potential products, including FibriLyzer and related technology. Based on our current sources of cash, including the proceeds received from our sale of securities to MagniSci Fund, LP and POC Capital’s commitment to fund up to $1 million in clinical trial costs, and on our internal projections, we believe that our current cash and cash equivalents will fund our business until the fourth quarter of 2017.Item 1A. Risk Factors
ChangesRisks Related to Our Company and Our Business
Because we have a limited operating history to evaluate our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delay frequently encountered by an early-stage company.
Since we have a limited operating history in our current business whether or not initiated by us, could affect the rate at which we depleteof hemp-based CBD, it will make it difficult for investors and securities analysts to evaluate our cashbusiness and cash equivalents, and we may be unsuccessfulprospects. You must consider our prospects in managing our operations ortiming our capital expenditures in a manner sufficient to sustain our operations in accordance with our expectations. The timing and degree of any future capital requirements will depend on many factors, including:
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the accuracylight of the assumptions underlying our estimates for capital needs in 2017risks, expenses and beyond;
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scientific progressdifficulties we face as an early stage company with a limited operating history. Investors should evaluate an investment in our researchcompany in light of the uncertainties encountered by early-stage companies in an intensely competitive industry and development programs;
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in which the magnitudepotential hemp-based CBD competition and scope offarming, extraction, production and manufacturing companies are large well capitalized companies with resources (financial and otherwise) significantly greater than the Company’s. There can be no assurance that our research and development programs and our ability to establish, enforce and maintain strategic arrangements for research, development, clinical testing, manufacturing and marketing;
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our progress with pre-clinical development and clinical trials;
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the time and costs involved in obtaining regulatory approvals; and
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the number and type of product candidatesefforts will be successful or that we pursue.
Accordingly, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources. 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.become profitable.
We are currently completely dependent uponhave sustained losses in the successful development of our lead product candidate, FibriLyzer. Ifpast and we fail to successfully complete its development and commercialization, we will not generate operating revenues.may sustain losses in the foreseeable future.
Almost all ofWe have incurred losses from operations in prior periods, including the years ended December 31, 2019 and 2018. Our loss from operations for the year ended December 31, 2019 was $10,878,442 and our efforts are currently focused onnet loss was $10,224,506 for the development of FibriLyzer. There also isno guarantee that we will succeedyear ended December 31, 2019. Our accumulated deficit was $21,129,379 at December 31, 2019. Our loss from operations for the year ended December 31, 2018 was $2,436,226 and our net loss was $4,337,319 for the year ended December 31, 2018. Our accumulated deficit was $10,537,892 at December 31, 2018. We expect to sustain losses in developing FibriLyzer. If we are unable to consummate the productionforeseeable future and commercialization of FibriLyzer, we willmay never be unable to generate any revenues. There is no certainty as to our success, whether within a given time frame or at all.profitable.
At present, we are manufacturing the key component of our disposable assay test strip, which is our proprietary synthetic fibrin clot that contains an electro-active polymer (“elactomer”) that creates electrical current as the fibrin clot is dissolved by enzymes in the blood, and expect to begin to manufacturing FibriLyzer devices in the second quarter of 2017. There is no guarantee that we will successfully develop products suitable for use in a clinical environment, and our failure to do so on a timely basis, or at all, may delay, prevent initiation or increase the costs of our planned clinical trials. Any delays in our schedule for clinical trials, regulatory approvals or other stages in the development of our technology are likely to cause us additional expense, and may even prevent the successful finalization of any or all of our product candidates, including our anticipated follow-up product, MatriLyzer. Delays in the timing for development of our technology may also have a material adverse effect on our business, financial condition and results of operations due to the possible absence of financing sources for our operations during such additional periods of time. Although we may pursue other technologies (either developed in-house or acquired), there is no assurance that any other technology will be successfully identified or exploited.
Our business is highly dependent upon maintaining licenses with respectBecause we expect to key technology.need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
OurWe expect that as our business substantially dependscontinues to grow, we will need additional working capital. If adequate additional debt and/or equity financing is not available on licenses from third parties, including the Licensing Agreement with Digital Diagnostics.reasonable terms or at all, we may not be able to continue to expand our business, and we will have to modify our business plans accordingly. These third party license agreements impose obligationsfactors would have a material and adverse effect on us, such as payment obligationsour future operating results and obligations to diligently pursue, and cooperate with third parties in, the development, regulatory approval, manufacture and commercialization of products under the licensed patents. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time consuming litigation and, potentially, a loss of the licensed rights. The loss of any of such licenses, or the conversion of such licenses to non-exclusive licenses, could harm our operations and/or enhance the prospects of our competitors.
In addition, certain of the technology that we license from Digital Diagnostics is sub-licensed from other third parties, including the University of Queensland. If Digital Diagnostics fails to perform its obligations under the licenses pursuant to which it has licensed the intellectual property that is licensed to us, our rights to key technology could be jeopardized. In addition, certain of these licenses are governed by the laws of foreign countries such as Australia. These foreign laws may differ significantly from laws in the United States and, as a result, our ability to assess or enforce our rights under such agreements may be limited compared with our ability to assess or enforce our rights under agreements governed by laws in the United States.financial condition.
If we orreach a point where we are unable to raise needed additional funds to continue as a going concern, we will be forced to cease our licensors failactivities and dissolve the Company. In such an event, we will need to meet our respective obligations under a license agreement, or if the owner of the intellectual property otherwise seeks to terminate these agreements, costlysatisfy various creditors and time consuming litigation could result. During the period of any such litigation, our ability to carry out the developmentother claimants, severance, lease termination and commercialization of potential products could be significantly and negatively affected. Further, if our license rights were restricted, ultimately lost, or became non-exclusive,other dissolution-related obligations.
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our businessability to obtain future financing.
The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2019 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our auditor’s doubts are based on FibriLyzerour recurring losses from operations, negative cash flows from operating activities and accumulated deficit. Our ability to continue as a going concern will be determined by our ability to obtain additional funding in the related technology could be severely affected adversely.short term to enable us to fund our operations. If we are unable to raise additional capital or secure additional lending in the near future, management expects that we will need to curtail our operations.
We may not be unableable to obtainsuccessfully implement our growth strategy on a timely basis or maintain patent or other intellectual property protection for any products or processes that we may develop.at all.
We face risks and uncertainties related to intellectual property rights. We may be unable to obtain or maintain our patents or other intellectual property protection for any products or processes that we may have or may develop; third parties may obtain patents covering the manufacture, use or sale of these products or processes which may prevent us from commercializing our technology; or any patents that we have or may obtain may not prevent other companies from competing with us by designing their products or conducting their activities so as to avoid the coverage of our patents.
In addition, the growth of our business may depend in partOur future success depends on our ability to acquire or in-license additionalimplement our growth strategy of introducing new products and expanding into new markets and new distribution channels and attracting new consumers to our brand. Our ability to implement this growth strategy depends, among other things, on our ability to:
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establish our brands and reputation as a well-managed enterprise committed to delivering premium quality products;
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enter into distribution and other strategic arrangements with retailers and other potential distributors of our products;
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continue to effectively compete in specialty channels and respond to competitive developments;
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expand and maintain brand loyalty;
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develop new proprietary rights. For example,value-branded products and product line extensions that appeal to consumers;
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maintain and, to the extent necessary, improve our programs may involve additionalhigh standards for product candidatesquality, safety and integrity;
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maintain sources from suppliers that may requirecomply with all federal, state and local laws for the userequired supply of additional proprietary rights held by third parties.quality ingredients to meet our growing demand;
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identify and successfully enter and market our products in new geographic markets and market segments;
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maintain compliance with all federal, state and local laws related to our products; and
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attract, integrate, retain and motivate qualified personnel. We may not be unableable to acquire or in-license any relevant third-party intellectual property rights that we identify as necessary or important tosuccessfully implement our business operations. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all, which would harm our business. We may need to cease use of the compositions or methods covered by such third-party intellectual property rights,growth strategy and may need to seek to develop alternative approaches that do not infringe on such intellectual property rights which may entail additional costs and development delays, even if we were able to develop such alternatives, which may not be feasible. Even if we are able to obtain a license under such intellectual property rights, any such license may be non-exclusive, which may allowchange our competitors access to the same technologies licensed to us.
The licensing and acquisition of third-party intellectual property rights is a competitive practice, and companies that may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractivestrategy in order to commercializemaintain our product candidates. More established companiesgrowth. If we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful, our business, financial condition and results of operations may have a competitive advantage over us due to their larger size and cash resources or greater clinical development and commercialization capabilities. There can be no assurance that we will be able to successfully protect or acquire the rights to the intellectual property to commercialize our product candidates.materially adversely affected.
Clinical trials involve lengthy and expensive processes with uncertain outcomes, and if we are unable to satisfactorily complete such testing,We may have difficulties managing our anticipated growth, or if such testing yields unsatisfactory results, we may be unable to commercially produce our proposed products.not grow at all.
We cannot predict whetherIf we will encounter problems with any ofsucceed in growing our planned clinical trials, which would cause us or regulatory authoritiesbusiness, such growth could strain our management team and capital resources. Our ability to delay or suspend clinical trials, or delay the analysis of data from ongoing clinical trials. We anticipate submitting a premarket notification to the FDA for FibriLyzer as Class II device pursuant to Section 510(k) of the FDACmanage operations and anticipate that wecontrol growth will be eligible to market and sell products by the end of 2018; however, such trials may also take significantly longer to complete and may cost more money than we expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced, version of our product candidates.
A number of companies in the medical device, biotechnology, and biopharmaceutical industries including those with greater resources and experience than us have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials. We do not know whether any clinical trials we or any future clinical partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market FibriLyzer or MatriLyzer. If our clinical trials do not produce favorable results, we may be required to perform additional clinical trials or our ability to obtain regulatory approval may be adversely impacted, either of which may have an adverse material effect on our business, financial condition and the results of our operations.
Even if we are successful in developing FibriLyzer and other products using our technologies, it is unclear whether these products can serve as the foundation for a commercially viable and profitable business.
Life sciences technology is developing and rapidly could undergo significant changes in the future. Such rapid technological developments could result in our technologies becoming obsolete. While we believe our product candidates appear promising, they may fail to be successfully commercialized for numerous reasons, including, but not limited to, competing technologies for the same applications. In addition, our ability to commercialize our products into a profitable business dependsdependent on our ability to developraise and maintain marketingspend capital to successfully attract, train, motivate, retain and salesmanage new members of senior management and other key personnel and distribution capabilities, whichcontinue to update and improve our management and operational systems, infrastructure and other resources, financial and management controls, and reporting systems and procedures. Failure to manage our growth effectively could cause us to misallocate management or financial resources, and result in additional expenditures and inefficient use of existing human and capital resources or we currently dootherwise may be forced to grow at a slower pace that could impair or eliminate our ability to achieve and sustain profitability. Such slower than expected growth may require us to restrict or cease our operations and go out of business.
The focus of our business is to produce hemp-based products, including through farming and manufacturing. We may not have. Thus, evenbe able to successfully farm, manufacture or sell products and, if we are ableacquire hemp-based products from third parties, we may fail to realize all of the anticipated benefits of our business plans and efforts.
We acquired our farm interests and commenced hemp-based activities in 2019 in transactions which significantly changed the focus of our business and operations. We currently own several assets and although we may seek to commercialize and develop successfully and commercially market FibriLyzer and other products, using our technologies,alone or with others, there can beis no assurance that we will be able to successfully commercialize or develop products and such commercialization and development is not a commercially successful and profitable business based on these technologies.
Moreover, advances in other treatment methods or prevention techniques could significantly reduce or entirely eliminate the need for our technologies and planned products. As a result, technological or medical developments may materially alter the commercial viabilitycore focus of our technology or services, and require us to incurbusiness. There is significant costs to replace or modify equipmentrisk involved in connection with our activities in which we acquire and seek to pursue hemp-based businesses. We have a substantial investment. We are focused on Point-of-Care blood diagnostic products,no prior experience as an operator of hemp-based businesses. The acquisition of the farm and if this field is substantially unsuccessful, this outcomeoperations intended to produce sales and our business model could jeopardize our successfail to produce anticipated benefits, or future results. The occurrencecould have other adverse effects that we do not currently foresee. Failure to successfully produce biomass from agricultural crops, or failure of any of these factorsextraction, production or manufacturing operations may have a material adverse effect on our business, operatingfinancial condition and results of operations.
In addition, the pursuit of hemp-based businesses, including acquisition of businesses intended to pursue hemp-based sales, is subject to a number of risks, including, but not limited to the following:
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There is a significant time lag between investing in farm properties and harvest, during which time crops of hemp may fail. During that time lag, in the event of unforeseen occurrence, such as natural or man-made events that impact crops, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and financial condition.position;
If competitors develop●
The integration of a farm-based infrastructure is unpredictable and market productsrequires that we rely on the efforts of others, including the skills and experience of our farm partner, who are more effective, safer, or less expensive than our product candidates or offer other advantages, our commercial prospectsresponsible for providing personnel and overseeing farming, extraction, production and manufacturing. This will be limited.a time consuming and expensive process which is unpredictable and that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisitions;
We currently●
Integration of infrastructure, and acquisitions that increase our ability to sell hemp-based consumer products, is unpredictable and requires that our management oversee integration and acquisitions related to marketing and sales. This will be a time consuming and expensive process which is unpredictable and that may disrupt our operations. If our integration efforts are not awaresuccessful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other companies developing a handheld Point-of-Care device to measure fibrinolysis; however, there are other companies that currently manufacturebenefits from such acquisitions; and sell diagnostic tools for measuring other components of blood and coagulation. Any of these companies could begin to develop a competing product.We expect that our diagnostic products will face intense competition from biotechnology companies, as well as numerous academic and research institutions and governmental agencies engaged in medical device discovery activities or funding, both in the United States and abroad. Some of these competitors are pursuing the development of products or devices that target the same diseases and conditions that we are targeting with our product candidates.
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Our largest stockholder, C2M, also competes with us and will continue to compete with us. C2M may require payments for business opportunities provided to us in exchange for its lost opportunities.
Therefore, there is no assurance that the hemp-based business will be successful, will occur timely or in a timeframe that is capable of prediction, or will generate enough revenue to recoup our investment.
As a general matter,We may not be able to manage our manufacturing and supply chain effectively, which may adversely affect our results of operations.
We must accurately forecast demand for all of our products in order to ensure that we also face competitionhave enough products available to meet the needs of our customers. Our forecasts are based on multiple assumptions that may cause our estimates to be inaccurate and affect our ability to obtain adequate third-party contract manufacturing capacity in order to meet the demand for our products, which could prevent us from many companies that are researchingmeeting increased customer demand and developing blood diagnostic products. Many of these companies have financialharm our brand and other resources substantially greater than ours. In addition, many of these competitors have significantly greater experience in testing products, obtaining regulatory approvals, and marketing and selling.our business. If we ultimately obtain regulatory approvaldo not accurately align our manufacturing capabilities with demand, our business, financial condition and results of operations may be materially adversely affected.
During 2019, we relied upon a single supplier, which is our largest stockholder, C2M, for all of our supply of CBD. During 2020, we intend to manufacture some of our own products and to engage 2-3 additional suppliers. We will remain, however, dependent on a small number of suppliers for our products. If any of our product candidates,limited number of suppliers were to go out of business, we also willmight be competingunable to find a replacement for such sources in a timely manner, if at all. If a supplier were to be acquired by a competitor, the competitor may elect not to sell to us at all. The loss of a supplier could cause additional difficulties in finding a substitute supplier given the strict licensing requirements in this industry and there are a limited number of suppliers that currently hold such licenses and comply with respectthe 2014 Farm Bill (as defined below). If for any reason we were to manufacturing efficiencychange any one of our third-party contract manufacturers, we could face difficulties that might adversely affect our ability to maintain an adequate supply of our products, and marketing capabilities, areas in which we have limited or no commercial-scale experience. Competition may increase further as a result of advances madewould incur costs and expend resources in the commercial applicabilitycourse of our technologies and greater availability of capital for investment in these fields. Our competitors may develop more competitive or affordable products, or achieve earlier patent protection or product commercialization thanmaking the change. Moreover, we aremight not be able to achieve. Competitive products may render any productsobtain terms as favorable as those received from our current third-party contract manufacturers, which in turn would increase our costs.
As the largest stockholder, C2M has the ability to exert significant control in matters regarding stockholder approval. Any inability to secure required supplies and services or product candidates that we develop uneconomic or obsolete. The occurrence of any of these factors mayto do so on appropriate terms could have a materialmaterially adverse effectimpact on our business, operatingfinancial condition, results and financial condition.of operations or prospects.
In addition, we must continuously monitor our inventory and product mix against forecasted demand. If we underestimate demand, we risk having inadequate supplies. We also face the risk of having too much inventory on hand that may reach its expiration date and become unsalable, and we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory. If we are unable to keep up with rapid technological changes inmanage our field or competesupply chain effectively, we will be unable to operate profitably.
We are engaged in activities in the biotechnology field, which is characterized by extensive research effortsour operating costs could increase, and rapid technological progress. If we fail to anticipate or respond adequately to technological developments, our ability to operate profitablyprofit margins could suffer. Research and discoveries by other biotechnology, agricultural, pharmaceutical or other companies may render our technologies or potential products or services uneconomical or result in products superior to those we develop. Similarly, any technologies, products or services we develop may not be preferred to any existing or newly developed technologies, products or services.decrease.
The development and commercialization of our product candidates is subject to extensive regulation by the FDA and other regulatory agencies in the United States and abroad, and the failure to receive regulatory approvals for our other product candidates would likely have a material and adverse effect on our business and prospects.
The process of obtaining FDA and other regulatory approvals is expensive and is subject to numerous risks and uncertainties.We intend to file to gain regulatory approval to sell our products in the United States, Canada and Europe.Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application or may make it easier for our competitors to gain regulatory approval to enter the marketplace. Ultimately, the FDA and other regulatory agencies have substantial discretion in the approval process and may refuse to accept any application or may decide that our product candidate data are insufficient for approval without the submission of additional pre-clinical, clinical or other studies. In addition, varying agency interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
Any of the following factors, among others, could cause regulatory approval for our product candidates to be delayed, limited or denied:
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the product candidates require significant clinical testing to demonstrate safety and effectiveness before applications for marketing approval can be filed with the FDA and other regulatory authorities;
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data obtained from pre-clinical and clinical trials can be interpreted in different ways, and regulatory authorities may not agree with our respective interpretations or may require us to conduct additional testing;
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negative or inconclusive results or the occurrence of serious or unexpected adverse events during a clinical trial could cause us to delay or terminate development efforts for a product candidate; and/or
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FDA and other regulatory authorities may require expansion of the size and scope of the clinical trials.
Any difficulties or failures that we encounter in securing regulatory approval for our product candidates would likely have a substantial adverse impact on our ability to generate product sales, and could make any search for a collaborative partner more difficult.
We
Reliance on other Manufacturers.
The ability of the Company to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, facilities and CBD. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, facilities.
The Company relies on third parties to supply the materials for and the functions of extraction, processing and manufacturing, as well research of the retail private label and customer product candidates. The Company cannot provide assurance that access to other manufacturers for supply, expertise, or materials will not be limited, not be interrupted, not be restricted in certain geographic regions, or be of satisfactory quality or be delivered in a timely manner. In this regard, we will require continued access to Current Good Manufacturing Practices (“cGMP”) manufacturer facilities, testing laboratories, qualified extraction facilities, processing, manufacturing and related services until we are fully-funded and can acquire our own capabilities for each of these functions. If the Company is unable to obtain access to a cGMP manufacturer, for example, or any of the other supply chain elements involved in our full-integration plans, the Company may be unsuccessful in our efforts to comply with applicable federal, state and international laws and regulations,restricted from operations which could result in loss of licensure, certification or accreditation or other government enforcement actions or impact our ability to secure regulatory approval of our product candidates.
Although we seek to conduct our business in compliance with applicable governmental healthcare laws and regulations, these laws and regulations are exceedingly complex and often subject to varying interpretations. As such, there can be no assurance that we will be able, or will have the resources, to maintain compliance with all such healthcare laws and regulations. Failure to comply with such healthcare laws and regulations, as well as the costs associated with such compliance or with enforcement of such healthcare laws and regulations, maywould have a materialmaterially adverse effect on ourthe business and operations or may require restructuring of our operations or impair our ability to operate profitably.the Company.
We will continue to be subject to extensive regulation by the FDAare heavily reliant on a small number of customers and other regulators abroad following any product approvals, and if we fail to comply with these regulations, we may suffer a significant setback in our business.suppliers.
Even if we are successful in obtaining regulatory approvalDuring the year ended December 31, 2019, three customers represented 58% of our product candidates, we will continue to be subject to the requirementstotal net sales of CBD products, and review by, the FDA and comparable regulatory authorities abroad in the areasas of manufacturing processes, post-approval clinical data, adverse event reporting, labeling, advertising and promotional activities, among other things. In addition, any marketing approval we receive may be limited in termsDecember 31, 2019, four customers represented approximately 82% of the approved product indication or require costly post-marketing testing and surveillance. Discovery after approval of previously unknown problems with a product, manufacturer or manufacturing process, or a failure to comply with regulatory requirements, may result in actions such as:
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warning letters or other actions requiring changes in product manufacturing processes or restrictions on product marketing or distribution;
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product recalls or seizures or the temporary or permanent withdrawal of a product from the market; and
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federal and state investigations, fines, restitution or disgorgement of profits or revenue, the imposition of civil penalties or criminal prosecution.
our total accounts receivable. The occurrenceloss of any of these actions would likely cause a material adverse effectcustomers or their inability to make future payments could significantly impact our business and results of operation. In addition, we purchased all of our finished products from one supplier, C2M, during the year ended December 31, 2019. Our heavy reliance on our major supplier for the supply of our products could have significant impact on our business financial condition and results of operations.operation in the event of any shortage of, or delay in, the supply. The loss of this supplier could significantly impact our business and results of operation.
We depend onIf we fail to manage our collaboratorsexisting assets and third party relationships (such as farmers, extractors, producers, distributors, shippers and retail distribution clients) effectively, our revenue and profits could decline, and should we fail to help us develop and testacquire additional revenues, our proposed products, and our ability to develop and commercialize products maygrowth could be impaired or delayed if collaborations are unsuccessful.impeded.
Our strategy forsuccess depends in part on our ability to manage our existing assets and manage the development, clinical testing, manufacturethird-party relationships necessary to effectively manage our assets. Our vendors and commercialization of our proposed products requiresproviders are not bound by long-term contracts that we enter into collaborations with corporate partners, licensors, licensees and others. We are dependent upon the subsequent success of these other parties in performing their respective responsibilities and the continued cooperation of our partners. Our collaborators may not cooperate withensure us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoteda consistent access to necessary expertise, which is crucial to our researchability to generate revenues and development activities relatedearnings. The ability to utilize third-parties and benefit from our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us.assets will depend on various factors, some of which are beyond our control.
The development, manufacture and commercialization of potential products will be delayed if collaborators fail to conduct these activities in a timely manner, or at all. In addition, our collaborators could terminate their agreements with us. If we do not achieve milestones set forth in the agreements, or if our collaborators breach or terminate their collaborative agreements with us, our business may be materially harmed.
Our products may be expensive to manufacture,We are reliant on key inputs and they may not be profitable if we are unable to control thechanges in their costs to manufacture them.
We do not own or operate manufacturing facilities for production ofcould negatively impact our product candidates. As a result, we plan to outsource the manufacturing of our products, and have collaborated with a successful multi-national corporation in Taipei, Taiwan, to manufacture our products, including FibriLyzer. Manufacturers of medical device products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields and quality control, including stability of the product candidate. The occurrence of any of these problems could significantly delay our clinical trials or the commercial availability of our products.
Our reliance on a single source to manufacture our products entails risks, including:
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reliance on the third party for regulatory compliance and quality assurance;
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limitations on supply availability resulting from capacity and scheduling constraints of the third parties;
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impact on our reputation in the marketplace if manufacturers of our products, once commercialized, fail to meet the demands of our customers; and
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impact of a catastrophic event at the third party manufacturing facility on our ability to meet the demands of our customers.
The failure of any of our contract manufacturers to maintain high manufacturing standards could result in product liability claims, product recalls, product seizures or withdrawals, delays or failures in testing or delivery, cost overruns or other problems that could seriously harm our business or profitability.
Our contract manufacturers are requiredbusiness is dependent on a number of key inputs and their related costs including raw materials and supplies related to adhere to FDA regulations. These regulations cover all aspectsproduct development and manufacturing operations. Any significant interruption or negative change in the availability or economics of the manufacturing, testing, quality controlsupply chain for key inputs could materially impact our business, financial condition, results of operations or prospects. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, we might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to us in the future. Any inability to secure required supplies and recordkeeping relatingservices or to do so on appropriate terms could have a materially adverse impact on our product candidatesbusiness, financial condition, results of operations or prospects.
Increases in the cost of ingredients, labor and any products that we may commercialize. Our manufacturers may not be able to comply with applicable FDA regulations or similar regulatory requirements outside the United States. Our failure or the failure of our third party manufacturers, to comply with applicable regulationsother costs could significantly and adversely affect regulatory approval and supplies of our product candidates.operating results.
Our currentprincipal products contain hemp-derived CBD oil. Increases in the cost of ingredients in our products could have a material adverse effect on our operating results. Significant price increases, market conditions, weather, acts of God and anticipated future dependence upon others for the manufacture ofother disasters could materially affect our product candidatesoperating results. An increase in our operating costs could adversely affect our profitability. Factors such as inflation, increased labor and employee benefit costs and increased energy costs may adversely affect our future profit marginsoperating costs. Many of the factors affecting costs are beyond our control and our ability to develop product candidates and commercialize any products that obtain regulatory approval on a timely and competitive basis. In addition, we may not be able to charge a high enough pricepass along these increased costs to our customers.
If the ingredients used in our products are contaminated, alleged to be contaminated or are otherwise rumored to have adverse effects, our results of operations could be adversely affected.
We buy ingredients from other manufacturers. If these materials are alleged or prove to include contaminants that affect the safety or quality of our products or are otherwise rumored to have adverse effects, for any reason, we may sustain the costs of and possible litigation resulting from a product recall and need to find alternate ingredients, delay production, or discard or otherwise dispose of products, which could adversely affect our business, financial condition and results of operations. In addition, if any of our competitors experience similar events, our reputation could be damaged, including as a result of a loss of consumer confidence in the types of products we develop, even if theysell.
Although we insure on an economically reasonable basis against product recalls and product contamination, and carry a cannabis regulatory and enforcement endorsement under our Directors and Officers insurance policy, our insurance may not be adequate to cover all liabilities that we may incur in connection with product liability claims, including among others, that the products we sell caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. For example, punitive damages are safe and effective, to make a profit.generally not covered by insurance. If we are unablesubject to realize significant profits fromsubstantial product liability claims in the future, we may not be able to continue to maintain our potentialexisting insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage. This could result in future product candidates,liability claims being uninsured. If there is a product liability judgment against us or a settlement agreement related to a product liability claim, our business, wouldfinancial condition and results of operations may be materially harmed.
Contractual arrangements with licensorsadversely affected. In addition, even if product liability claims against us are not successful or collaboratorsare not fully pursued, these claims could be costly and time-consuming and may require usmanagement to pay royalties or make other payments related to the development of a product candidate, which would adversely affect the level of our future revenues and profits.
Even if we obtain all applicable regulatory approvals and successfully commercialize FibriLyzer and other products utilizing our technologies, contractual arrangements between us and a licensor, collaborator or other third party in connection with the respective product may require that we make royalty or other payments to the respective third party, and as a result we would not receive all of the revenue derived from commercial sales of such product.
Cybersecurity breaches could expose us to liability, damage our reputation, compromise our confidential information or otherwise adversely affectspend time defending claims rather than operating our business.
We maintain sensitive company data on our computer networks, including our intellectual property and proprietary business information. We face a number of threats to our networks from unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to attacks by hackers or other disruptive problems. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of our intellectual property or proprietary business information. A cybersecurity breach could hurt our reputation by adversely affecting the perception of customers and potential customers of the security of their orders and personal information. In addition, a cybersecurity attack could result in other negative consequences, including disruption of our internal operations, increased cyber security protection costs, lost revenues or litigation.
We depend on key personnel for our continued operationsmay become the subject of litigation and, future success, and a loss of certain key personnel could significantly hinder our abilitydue to move forward with our business plan.
Because of the specialized nature of our business, we are highly dependent on our ability to identify, hire, train and retain highly qualified scientific and technical personnel formay be the research and development activities we conduct or sponsor. The losstarget of one or more key executive officers, or scientific officers, would be significantly detrimental to us. In addition, recruiting and retaining qualified scientific personnel to perform research and development work is critical to our success. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing, marketing and distribution, will require the addition of new management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our present and planned activities. Accordingly, we may not be able to continue to attract and retain the qualified personnel, which would adversely affect the development of our business.
Our failure to maintain effective internal controls over financial reporting may adversely affect the accuracy and timeliness of our financial reporting.
As described in “Part II, Item 9A. Controls and Procedures” included in this annual report on Form 10-K for the year ended December 31, 2016, we disclosed a material weaknesses in our disclosure controls and procedures and in our internal controls over financial reporting due to our small size and limited resources. While we are continuing to work to improve our internal controls, we cannot be certainfuture legal proceedings that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement or maintain effective controls, or difficulties encountered in their implementation or improvement, could cause us to fail to meet our reporting obligations or could result in a material misstatement to our financial statements or other disclosures, either of which could have an adverse effect on our business, financial condition or resultsbusiness.
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 operations.a consulting agreement for services by Dr. Dimitrov during 2017-2019, among other claims, and seeks $750,000 in damages. The Company has filed an answer denying the claims and asserting numerous counterclaims against Dr. Dimitrov and his affiliated entities, KD Innovation Ltd., and Digital Diagnostics, Inc. An arbitrator has been appointed in the matter and on May 1, 2020 issued a procedural order suspending further proceedings.
On February 26, 2020 a complaint was filed in the Circuit Court, Palm Beach County, Florida on behalf of five former employees of the Company. The case is entitled Ryan Borcherds and Miriam Martinez vs. Exactus, Inc.. The complaint alleges the Company failed to pay wages and compensation to 2 employees under the Fair Labor Standards Act, breach of contract and violation of various Florida statutes, including allegations on behalf of other similarly situated persons. The complaint seeks approximately $82,000 in unpaid wages as well as special damages, liquidated damages, interest and attorney’s fees.
The Company may become subject to similar actions in the future which will be costly and time consuming to defend, and the outcomes of which are uncertain.
We may seek to internally develop additional hemp-based products, which would take time and be costly. Moreover, the failure to successfully develop, or obtain or maintain intellectual property rights for, such products would lead to the loss of our investments in such activities.
Part of our business may include the internal development of products that we will seek to offer and sell. However, this aspect of our business would likely require significant capital and would take time to achieve. Such activities could also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new products or developments, which would lead to a loss of our investments in time and resources in such activities.
In addition, even if we are able to internally develop new products, in order for those products to be viable and to compete effectively, we would need to develop and maintain, and we would heavily rely upon, a proprietary position with respect to such products. However, there are significant risks associated with any such efforts and products we may develop principally including the following:
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efforts may not result in success, or may take longer than we expect;
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we may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.other proceedings;
Our business●
any patents or trademarks that are issued to us may bring us into conflict withnot provide meaningful protection;
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we may not be able to develop additional proprietary technologies;
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other companies may challenge our licensors, collaboratorsefforts or others with whomintellectual property rights that are issued to us;
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other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies; and
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other companies may design around technologies we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. In addition, third parties could claim that our licensed technology or other technology relevant to or required by our expected products infringes on their intellectual property. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.developed.
Risks Related to the Securities Markets and Our Capital Structure
An active trading market for our common stock has not developed, and the market price for our common stock has been and may continue to be particularly volatile given the lack of liquidity and our status as a relatively unknown company with a limited operating history and lack of profits.
Although our common stock is quoted on the OTC Markets Group’s OTCQB tier, an active trading market has not developed for our common stock, and we cannot assure you that an active, public trading market for our common stock will develop or be sustained. If an active public trading market does not develop or is not maintained, significant sale of our common stock, or the expectation of these sales, could materially and adversely affect the market price of our common stock. In addition, holders of our common stock may experience difficulty in reselling, or an inability to sell, their shares.
In addition,If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.
Our future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products and related services to our customers. The processes of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging trends, our business could be harmed. We have already and may have to continue to commit significant resources to commercializing new products before knowing whether our investments will result in products the market forwill accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.
The success of new products depends on several factors, including proper new product definition, timely completion, and introduction of these products, differentiation of new products from those of our common stock maycompetitors, and market acceptance of these products. There can be characterizedno assurance that we will successfully identify additional new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products, or that products and technologies developed by significant price volatility when comparedothers will not render our products or technologies obsolete or noncompetitive.
Our future success depends on our ability to seasoned issuers,grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business.
To date, our revenue growth plans have been derived from projected sales of our products, not actual sales or historical experience. Our success and the planned growth and expansion of our business depends on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase our products or that we expect that our stock price couldwill continue to be more volatile than a seasoned issuer for the indefinite future. The potential volatility inexpand our share price is attributable to a number of factors. First, as a consequence of the lack of liquidity in our common stock, any future trading of shares by our stockholders may disproportionately influence the price of those shares in either direction. Second,customer base. If we are a speculativeunable to effectively market or “risky” investment due toexpand our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk averse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
Many of these factorsproduct offerings, we will be beyondunable to grow and expand our controlbusiness or implement our business strategy. This could materially impair our ability to increase sales and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time or as to what effect that the sale of shares or the availability of shares for sale at any time will have on the prevailing market price. This market volatility, as well as general domestic or international economic, marketrevenue and political conditions, could materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
Our suppliers could fail to fulfill our orders or provide raw materials to assemble our products, which would disrupt our business, increase our costs, harm our reputation, and potentially cause us to lose our market.
We depend on third party suppliers for materials used for our products, such as bottles, caps, vapes, batteries and labels. These suppliers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the market pricematerial or products on a timely basis. Our suppliers may also have to obtain inventories of the necessary materials and tools for production. Any change in our Securities.suppliers’ approach to resolving production issues could disrupt our ability to fulfill orders and could also disrupt our business due to delays in finding new suppliers, providing specifications and testing initial production. Such disruptions in our business and/or delays in fulfilling orders could harm our reputation and could potentially cause us to lose our market.
The rightsCompany’s ultimate success will be dependent in part on our ability to successfully grow, develop, produce and market a portfolio of holdershemp products and market acceptance of our common stockplanned products.
We are subordinate to significant rights, preferencesan agribusiness and privilegesgrow our product outdoors, and there are risks associated with the production of our product relating to such things as weather, soil deterioration, and infestation that could affect our supplies and inventory. In addition, market acceptance by and demand for our planned products from consumers will also be key factors in our ability to succeed. If we are unable to develop and market our portfolio of existing seriesand planned products or if they are not accepted by consumers, our business, results of preferred stock,operations and to any additional series of preferred stock created in the future.
Under the authority granted by our Articles of Incorporation, our Board of Directors has established four separate series of outstanding preferred stock, including Series A, Series B-1, Series B-2 and Series C Preferred Stock, which have various rights and preferences senior to the shares of common stock.financial condition could be seriously harmed. We do not currently carry products liability insurance. As a result, of the liquidation preferences, in the event that we voluntarily or involuntary liquidate, dissolve or windup our affairs (including as a result ofsuccessful product liability claim brought against us would have a merger), the holders of our preferred stock would be entitled to receive stated amounts per share, including any accrued and unpaid dividends, before any distribution of assets or merger consideration is made to holders of our common stock. Additionally, subject to the consent of the holders of our existing preferred stock, our Board of Directors has the power to issue additional series of preferred stock and to designate, as it deems appropriate (subject to the rights of the holders of the current series of preferred stock), the special dividend, liquidation or voting rights of the shares of those additional series. The creation and designation of any new series of preferred stock could adversely affect the voting power, dividend, liquidation and other rights of holders of our common stock and, possibly, any other class or series of stock that is then in existence.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who is not an affiliate of our company and who has satisfied a six month holding period may, as long as we are current in our required filings with the SEC, sell securities without further limitation. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company who has satisfied a one year holding period. Affiliates of our company who have satisfied a six month holding period may sell securities subject to limitations. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have anmaterial adverse effect on the market priceour business and results of our securities. Currently, a substantial majority of our securities are either free trading or subject to the release of trading restrictions under the six month or one year holding periods of Rule 144.operations.
The sale or issuance of a substantial number of shares may adversely affect the market price for our common stock.
The future sale of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could significantly and negatively affect the market price for our common stock. Our Amended and Restated Articles of Incorporation authorize us to issue 200,000,000 shares of common stock and, as of December 31, 2016, there were 34,071,862 shares of our common stock outstanding, and we have reserved 14,784,001 shares of our common stock for the potential issuance of shares upon the conversion of outstanding preferred stock or the exercise of warrants. We expect that we will likely issue a substantial number of shares of our capital stock in financing transactions in order to fund our operations and the growth of our business. Under these arrangements, we may agree to register the shares for resale soon after their issuance. We may also continue to pay for certain goods and services with equity, which would dilute our current stockholders. Also, sales of the shares issued in this manner could negatively affect the market price of our stock.
Any damage to our reputation or our brands may materially adversely affect our business, financial condition and results of operations.
Maintaining, developing and expanding our reputation with our customers and our suppliers is critical to our success. Our common stockbrand may suffer if our marketing plans or product initiatives are not successful. The importance of our brand may decrease if competitors offer more products similar to the products that we manufacture. Further, our brands may be negatively impacted due to real or perceived quality issues or if consumers perceive us as being untruthful in our marketing and advertising, even if such perceptions are not accurate. Product contamination, the failure to maintain high standards for product quality, safety and integrity, including raw materials and ingredients obtained from suppliers, or allegations of product quality issues, mislabeling or contamination, even if untrue or caused by our third-party contract manufacturing partners or raw material suppliers, may reduce demand for our products or cause production and delivery disruptions. However, we may be unable to detect or prevent product and/or ingredient quality issues, mislabeling or contamination, particularly in instances of fraud or attempts to cover up or obscure deviations from our guidelines and procedures. If any of our products become unfit for consumption, cause injury or are mislabeled, we may have to engage in a product recall and/or be subject to liability. Damage to our reputation or our brands or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and our business, financial condition and results of operations may be materially adversely affected. In addition, if any of our competitors experience similar events, our reputation could be damaged, including as a result of a loss of consumer confidence in the “penny stock” rulestypes of products we sell.
Further, our corporate reputation is susceptible to damage by actions or statements made by current or former employees, competitors, vendors, adversaries in legal proceedings and government regulators, as well as members of the SEC,investment community and the tradingmedia. There is a risk that negative information about our company, even if based on false rumor or misunderstanding, could adversely affect our business, results of operations, and financial condition. In particular, damage to our reputation could be difficult and time-consuming to repair, could make potential or existing retail customers reluctant to select us for new engagements, resulting in a loss of business, and could adversely affect our recruitment and retention efforts.
Our business depends, in part, on the sufficiency and effectiveness of our marketing and trade promotion programs and incentives.
Due to the competitive nature of our industry, we must effectively and efficiently promote and market our products through advertisements as well as through trade promotions and incentives to sustain and improve our competitive position in our common stock is limited, which makes transactions cumbersomemarket. Marketing investments may be costly. In addition, we may, from time to time, change our marketing strategies and spending, including the timing or nature of our trade promotions and incentives. We may reduce the valuealso change our marketing strategies and spending in response to actions by our customers, competitors and other companies that manufacture and/or distribute pet health and wellness products. The sufficiency and effectiveness of an investmentour marketing and trade promotions and incentives are important to our ability to retain and improve our market share and margins. If our marketing and trade promotions and incentives are not successful or if we fail to implement sufficient and effective marketing and trade promotions and incentives or adequately respond to changes in the stock.industry marketing strategies, our business, financial condition and results of operations may be adversely affected.
Rule 15g-9If we are unable to enter into such arrangements on favorable terms, are unable to achieve the desired results under these arrangements and programs, are unable to maintain these relationships, fail to generate sufficient traffic or generate sufficient revenue from purchases pursuant to these arrangements and programs, or properly manage the Exchange Act establishes the definitionactions of a “penny stock” for the purposes relevantthese providers, our ability to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subjectgenerate revenue and our ability to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person’s account for transactions in penny stocks in accordance with the provisions of Rule 15g-9 under the Exchange Act;attract and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased, provided that any such purchase shall not be effected less than two business days after the broker or dealer sends such written agreement to the investor.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (i) obtain financial information, investment experience and investment objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which: (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) in highlight form, confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokersretain our customers may be less willingimpacted, negatively affecting our business and results of operations. In addition, if Facebook restricts our ability to execute transactions in securities subjectuse such arrangements and programs or takes limits or restricts access to the “penny stock” rules. This may makeits platform by us or our applications as a result of advertisements or actions taken by third-party advertising or marketing providers, it more difficult for investors to dispose of our common stock and causecould have a decline in the market value of our common stock.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the shares of common stock. Consequently, it may be more difficult to execute trades of our common stock which may have anmaterial adverse effect on the liquidityour business or results of our common stock.operations.
The conversion of preferred stock or exercise of outstanding warrants to acquire shares of our common stock would cause additional dilution which could cause the price of our common stock to decline.
Each of our Series B-1, Series B-2 and Series C Preferred Stock is convertible into shares of our common stock. In addition, we issued warrants, pursuant to which shares of our common stock may be acquired. At December 31, 2016, there were 13,117,334 shares of our common stock underlying shares of preferred stock and 1,666,667 shares of common stock underlying the warrants, for which we have reserve an aggregate of 14,784,001 shares of our common stock for future issuance. In addition, we have agreed to issue the BioCapital Warrant and the Placement Agent Warrants and to grant stock options to certain of our officers as described under “Management—Employment Agreements.” To the extent the preferred stock is converted or warrants or stock options are exercised, existing common stockholders would experience additional dilution which may cause the price of our common stock to decline.
We do not have a class of our securities registered under Section 12 of the Exchange Act. Until we do or we become subject to Section 15(d) of the Exchange Act, we will be a “voluntary filer.”
We are not currently required under Section 13 or Section 15(d) of the Exchange Act to file periodic reports with the SEC. We have in the past voluntarily elected to file some or all of these reports to ensure that sufficient information about us and our operations is publicly available to our stockholders and potential investors. Until we become subject to the reporting rules under the Exchange Act, we are not required to file annual, quarterly or current reports and could cease doing so at any time. Additionally, until we register a class of our securities under Section 12 of the Exchange Act, we are not subject to the SEC’s proxy rules, and large holders of our capital stock will not be subject to beneficial ownership reporting requirements under Sections 13 or 16 of the Exchange Act and their related rules. As a result, our stockholders and potential investors may not have available to them as much or as robust information as they may have if and when we become subject to those requirements.
A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.
A significant product defect could materially harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers and reduce end-user loyalty. A product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and profitability and could reduce or deplete our financial resources.
We may be subject to product liability claims or regulatory action if our products are alleged to have caused significant loss or injury.
We may be subject to product liability claims, regulatory action and litigation if our products are alleged to have caused loss or injury or failed to include adequate instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. Previously unknown adverse reactions resulting from use and consumption of CBD products alone or in combination with other medications or substances could also occur. In addition, the sale of any ingested product involves a risk of injury due to tampering by unauthorized third parties or product contamination. Our products may also be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of injury or illness, or if they are alleged to have been mislabeled, misbranded or adulterated or to otherwise be in violation of governmental regulations. We may in the future have to recall, certain of our products as a result of potential contamination and quality assurance concerns. A product liability claim or regulatory action against us could result in increased costs and could adversely affect our reputation and goodwill with our patients and consumers generally. We do not currently carry products liability insurance. As a result, a successful product liability claim brought against us would have a material adverse effect on our business and results of operations. Although we are seeking to acquire product liability insurance, there can be no assurance that we will be able to obtain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.
If product liability lawsuits are successfully brought against us, we will incur substantial liabilities.
We face an inherent risk of product liability. For example, we may be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit sales of our products. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for our products;
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injury to our reputation;
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costs to defend the related litigation;
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a diversion of management's time and our resources;
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substantial monetary awards to users of our products;
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product recalls or withdrawals;
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loss of revenue; and or a decline in our stock price.
In addition, while we continue to take what we believe are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.
Our acquisitions may be time consuming, complex and costly, which could adversely affect our operating results.
Acquisitions are critical to our business plan, and are often time consuming, complex and costly to consummate. We may elect to not pursue any additional acquisitions while we focus our efforts on our existing assets. We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur significant operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is ultimately not consummated, if we determine to acquire additional patents or other assets. Even if we are able to acquire particular assets, there is no guarantee that we will generate sufficient revenue related to those assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the assets we are considering for acquisition, because we are operating in a new and uncertain industry we place less emphasis on due diligence and we may acquire assets from a seller for whom we do not have complete analysis of their history or business operations, for example, if we view the acquisition to be important strategically, the seller may not have proper title or ownership to those assets, or otherwise provides us with flawed ownership rights, including invalid or unenforceable assets. In those cases, we may be required to spend significant resources to defend our interest in the assets and, if we are not successful, our acquisition may be worthless, in which case we could lose part or all of our investment in the assets.
We may also identify assets that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any assets or, if consummated, proves to be unprofitable for us. Acquisitions involving issuance of our securities could be dilutive to existing stockholders and could be at prices lower than those prices reflected in the trading markets. These higher costs could adversely affect our operating results and, if we incur losses, the value of our securities will decline.
In addition, we may acquire assets that are in the early stages of adoption. Demand for some of these assets will likely be untested and may be subject to fluctuation based upon the rate at which our customers or associates adopt our products or utilize our materials in their products and services. As a result, there can be no assurance as to whether assets we acquire or develop will have value that can be realized through sales or other activities.
If we make acquisitions, it could divert management’s attention, cause ownership dilution to our stockholders and be difficult to integrate.
Following our acquisition of Exactus One World in March 2019, we have grown rapidly and we expect to continue to evaluate and consider future acquisitions. Acquisitions generally involve significant risks, including difficulties in the assimilation of the assets, services and technologies we acquire or industry overlay on which the assets are applicable, diversion of management's attention from other business concerns, overvaluation of the acquired assets, and the acceptance of the acquired assets and/or businesses. Acquisitions may not be successful, which can have a number of adverse effects upon us including adverse financial effects and may seriously disrupt our management’s time. The integration of acquired assets may place a significant burden on management and our internal resources. The diversion of management attention and any difficulties encountered in the integration process could harm our business.
We face risks associated with strategic acquisitions.
As an important part of our business strategy, we have strategically acquired several businesses, and plan to continue strategic acquisitions, some of which may be material. These acquisitions may involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations:
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Any acquired business could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;
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We may incur or assume significant debt in connection with our acquisitions;
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Acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long term; and
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Acquisitions could create demands on our management that we may be unable to effectively address, or for which we may incur additional costs.
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Additionally, following any business acquisition, we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers.
We may record goodwill and other intangible assets on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, Emiliano Aloi, our interim CEO, is important to the management of our business and operations and the development of our strategic direction. The loss of the services of any such individual and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
We depend on the knowledge and skills of our senior management and other key employees, and if we are unable to retain and motivate them or recruit additional qualified personnel, our business may suffer.
We have benefited substantially from the leadership and performance of our senior management, as well as other key employees. Our success will depend on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future, and we cannot guarantee that we will be able to retain our personnel or attract new, qualified personnel. In addition, we do not maintain any “key person” life insurance policies. The loss of the services of members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives, or divert management’s attention to seeking qualified replacements.
We will be required to attract and retain top quality talent to compete in the marketplace.
We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings.
If we fail to retain key personnel and hire, train and retain qualified employees, we may not be able to compete effectively, which could result in reduced revenue or increased costs.
Our success is highly dependent on the continued services of key management and technical personnel. Our management and other employees may voluntarily terminate their employment at any time upon short notice. The loss of the services of any member of the senior management team or any of the managerial or technical staff or members of our Advisory Board on which we principally rely for expertise on our CBD segment may significantly delay or prevent the achievement of product development, our growth strategies and other business objectives. Our future success will also depend on our ability to identify, recruit and retain additional qualified technical and managerial personnel. We operate in several geographic locations where labor markets are particularly competitive, and where demand for personnel with these skills is extremely high and is likely to remain high. As a result, competition for qualified personnel is intense, particularly in the areas of general management, finance, engineering and science. The process of hiring suitably qualified personnel is often lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.
War, terrorism, other acts of violence or natural or manmade disasters such as a global pandemic may affect the markets in which the Company operates, the Company's customers, the Company's delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial condition.
The Company's business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of disease (including the recent outbreak of the coronavirus commonly referred to as "COVID- 19"). Such events may cause customers to suspend their decisions on using the Company's products and services, make it impossible to attend or sponsor trade shows or other conferences in which our products and services are presented to distributors, customers and potential customers, for our customers to visit our farms, extraction facilities, manufacturing locations or other physical locations, cause restrictions, postponements and cancellations of events that attract large crowds and public gatherings such as trade shows at which we have historically presented our products, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere with purchases of goods or services, commitments to develop new brands and white label products, or agriculture and farming. Furthermore, our agriculture and farming depends on the availability of labor which in turn is dependent upon the ability of agricultural/farm workers to travel, sometimes from foreign countries, and the ability of third parties to contract with us for services on which we depend. The inability or delays in preparing farms for future crops starting in 2020, and planting, harvesting, drying, trimming, warehousing and transportation disruptions in 2020 and later could result from events such as COVID-19. These events also pose significant risks to the Company's personnel and to physical facilities, transportation and operations, which could materially adversely affect the Company's financial results.
Any significant disruption to communications and travel, including travel restrictions and other potential protective quarantine measures against COVID-19 by governmental agencies, may increase the difficulty and could make it impossible for the Company to deliver goods services to its customers. Travel restrictions and protective measures against COVID-19 could cause the Company to incur additional unexpected labor costs and expenses or could restrain the Company's ability to retain the highly skilled personnel the Company needs for its operations. The extent to which COVID-19 impacts the Company's business, sales and results of operations will depend on future developments, which are highly uncertain and cannot be predicted.
We believe the novel coronavirus (COVID-19) has negatively affected our corporate operations necessary to prepare and maintain accurate accounting and reporting, and could continue to do so in the foreseeable future. The coronavirus has resulted in restrictions, postponements and cancelations and the impact, extent and duration of the government imposed restrictions on travel and public gatherings as well as the overall effect of the COVID-19 virus is currently unknown.
The ongoing circumstances resulting from the COVID-19 virus outbreak magnify the challenges faced from our continuing efforts to introduce and sell our products in a challenging environment and could have an impact on our business and financial results.
Risks Related to Ownership of Our Common Stock.
The price of our common stock has been highly volatile due to several factors that will continue to affect the price of our stock.
Our common stock has traded as low as $0.08 and as high as $4.00 between January 1, 2019 and December 31, 2019. The reason for the volatility in our stock is not well understood and the volatility may continue. Some of the factors we believe that have contributed to our common stock volatility and which may be applicable in future periods, include:
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uncertainty surrounding our rights to development since notice of termination was received from Digital Diagnostics, Inc.
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inability to secure funding or partners for our development of the FibriLyzer and MatriLyzer;
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entry into new business ventures;
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asset acquisitions or dispositions;
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commencement of litigation;
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small amounts of our stock available for trading, expiration of any lockup agreements and terms of any leak-out rights with respect thereto;
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obligations to and filing of registration statements registering the sale of new or outstanding shares of our common stock;
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options and derivatives availability or unavailability;
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short selling and potential “short and distort” campaigns and other short attacks involving our stock;
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small public float of our outstanding common stock;
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expiration of Rule 144 holding periods with respect to our outstanding common stock;
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fluctuations in our operating results;
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changes in the capital markets and ability for the Company to raise capital;
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legal developments and public awareness with respect to hemp-based and/or CBD business plans, generally, and involving the Company;
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confusion with Companies engaged in the business of marijuana, and the legal and regulatory concerns that our business is related to the marijuana business;
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general economic conditions;
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and legal and regulatory environment.
We cannot guarantee the continued existence of an active established public trading market for our shares.
Our shares are currently quoted on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our shares for reasons unrelated to operating performance. Accordingly, OTCQB may provide less liquidity for holders of our shares than a national securities exchange such as the Nasdaq Stock Market. There is no assurance that we can successfully maintain an active established trading market for our shares.
Market prices for our shares may also be influenced by a number of other factors, including:
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the issuance of new equity securities pursuant to a public or private offering;
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changes in interest rates;
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competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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variations in quarterly operating results;
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change in financial estimates by securities analysts;
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the depth and liquidity of the market for our shares;
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investor perceptions of Exactus and its industry generally; and
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general economic and other national conditions.
Our shares of common stock are thinly traded and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise desire to liquidate their shares.
Our common stock has been “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. We believe this situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. In addition, we believe that due to the limited number of shares of our common stock outstanding, an options market has not been established for our common stock, limiting the ability of market participants to hedge or otherwise undertake trading strategies available for larger companies with broader stockholder bases which prevents institutions and others from acquiring or trading in our securities. Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our common stock may be volatile.
The market price of our common stock will likely be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as conditions or trends in the industry in which we operate or sales of our common stock. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a mature issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. It is possible that a broader or more active public trading market for our common stock will not develop or be sustained, or that trading levels will not continue. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
We can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in the Company and could depress our stock price.
Our Articles of Incorporation authorize 650,000,000 shares of common stock, of which 6,233,524 were issued and outstanding as of December 31, 2018 and a total of 44,483,905 were issued and outstanding and to be issued on December 31, 2019. Moreover, our Board of Directors is authorized to issue additional shares of our common stock and preferred stock. Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares.
We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our commoncapital stock must come from increases in the fair market value and trading price of the capital stock.
We have not historically paid any cash dividends on our common stock and we do not planintend to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant. Therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock.
We may issue additional equity shares to fund our operational requirements, which would dilute share ownership. Such sales of additional equity securities may adversely affect the market price of our common stock and your rights in the company may be reduced.
The company’s continued viability depends on its ability to raise capital. We expect to continue to incur product development and selling, general and administrative costs. Changes in economic, regulatory or competitive conditions may lead to cost increases. Management may determine that it is in the best interest of the company to develop new services or products. In any such case additional financing is required for the company to meet its operational requirements. We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. The sale or the proposed sale of substantial amounts of our common stock in the public markets may adversely affect the market price of our common stock. Also, any new securities issued may have greater rights, preferences or privileges than our existing common stock. Our stockholders may experience substantial dilution upon such issuances and a reduction in the price that they are able to obtain upon sale of their shares. There can be no assurances that the company will be able to obtain such financing on terms acceptable to the company and at times required by the company, if at all. In such event, the company may be required to materially alter its business plan or curtail all or a part of its operational plans.
We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock with respect to dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might grant to holders of preferred stock could affect the value of the common stock.
Our common stock may be considered a “penny stock” and may be difficult to sell.
The Commission has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Historically, the price of our common stock has fluctuated greatly. If, the market price of the common stock is less than $5.00 per share and the common stock does not fall within any exemption, it therefore may be designated as a “penny stock” according to SEC rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
Because we will be subject to “penny stock” rules, the level of trading activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges). The penny stock rules require a broker-dealer to deliver to its customers a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market prior to carrying out a transaction in a penny stock not otherwise exempt from the rules. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
It may be difficult to predict our financial performance because our quarterly operating results may fluctuate.
Our revenues, operating results and valuations of certain assets and liabilities may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance. Our results of operations may fall below the expectations of market analysts and our own forecasts. If this happens, the market price of our common stock may fall significantly. The factors that may affect our quarterly operating results include the following:
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fluctuations in results of our operations and capital raising efforts;
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the timing and amount of expenses incurred to establish a hemp-based operation;
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the impact of our anticipated need for personnel and expected substantial increase in headcount;
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worsening economic conditions which cause revenues or profits attributable to sales of products or services to decline;
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changes in the regulatory environment, including regulation of hemp-based products or CBD by the FDA or comparable state regulatory agencies or agricultural authorities
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the timing and amount of expenses associated with farming, extraction, production, manufacturing and selling;
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Any changes we make in our Critical Accounting Estimates described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our periodic reports;
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the adoption of new accounting pronouncements, or new interpretations of existing accounting pronouncements, that impact the manner in which we account for, measure or disclose our results of operations, financial position or other financial measures; and
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costs related to acquisitions of technologies or businesses.
Our operating results, including net sales, gross margin and net income (loss), as well as our stock price have varied in the past, and our future operating results will continue to be subject to quarterly and annual fluctuations based upon numerous factors. Our stock price will continue to be subject to daily variations as well. Our future operating results and stock price may not follow any past trends or meet our guidance and expectations.
Our net sales and operating results, net income (loss) and operating expenses, and our stock price have varied in the past and may vary significantly from quarter to quarter and from year to year in the future. We believe a number of factors, many of which are outside of our control, could cause these variations and make them difficult to predict, including:
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fluctuations in demand for our products or downturns in the industries that we serve;
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the ability of our suppliers, both internal and external, to produce and deliver products including sole or limited source components, in a timely manner, in the quantity, quality and prices desired;
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the timing of receipt of bookings and the timing of and our ability to ultimately convert bookings to net sales;
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rescheduling of shipments or cancellation of orders by our customers;
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fluctuations in our product mix;
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the ability of our customers' other suppliers to provide sufficient material to support our customers' products;
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currency fluctuations and stability, in particular the U.S. dollar as compared to, other currencies;
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introductions of new products and product enhancements by our competitors, entry of new competitors into our markets, pricing pressures and other competitive factors;
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our ability to develop, introduce, manufacture and ship new and enhanced products in a timely manner without defects;
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our ability to manage our manufacturing capacity across our diverse product lines and that of our suppliers, including our ability to successfully expand our manufacturing capacity in various locations around the world;
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our ability to successfully and fully integrate acquisitions, into our operations and management;
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our ability to successfully internally transfer products as part of our integration efforts;
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our reliance on contract manufacturing;
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our customers' ability to manage their susceptibility to adverse economic conditions;
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the rate of market acceptance of our new products;
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the ability of our customers to pay for our products;
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expenses associated with acquisition-related activities;
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access to applicable credit markets by us and our customers;
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our ability to control expenses;
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potential excess and/or obsolescence of our inventory;
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impairment of goodwill, intangible assets and other long-lived assets;
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our ability to meet our expectations and forecasts and those of public market analysts and investors;’
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our ability and the ability of our contractual counterparts to comply with the terms of our contracts;
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damage to our reputation as a result of coverage in social media, Internet blogs or other media outlets;
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managing our internal and third-party sales representatives and distributors, including compliance with all applicable laws;
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costs, expenses and damages arising from litigation;
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individual employees intentionally or negligently failing to comply with our internal controls; and
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distraction of management related to acquisition, integration or divestment activities.
Our expenses for any given quarter are typically based on expected sales and if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust spending quickly enough to compensate for the shortfall. We also base our inventory levels on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products. Accordingly, variations in timing of sales, particularly for our higher priced, higher margin products, can cause significant fluctuations in quarterly operating results. The foregoing description is not reflective of periods prior to December 31, 2018 before our entry into our current business segment and will be of minimal importance for our ramp up phase commencing in the first quarter of 2019, but will be of increasing significance as we book new sales orders for hemp-based products.
Due to these and other factors, such as varying product mix, quarter-to-quarter and year-to-year comparisons of our historical operating results may not be meaningful. You should not rely on our results for any quarter or year as an indication of our future performance. Our operating results in future quarters and years may be below public market analysts' or investors' expectations, which would likely cause the price of our stock to fall. In addition, over the past several years, U.S. and global equity markets have experienced significant price and volume fluctuations that have affected the stock prices of many companies involved in the cannabis industry and are expected to affect the hemp-based industry as well, both within and outside our industry. There has not always been a direct correlation between this volatility and the performance of particular companies subject to these stock price fluctuations. These factors, as well as general economic and political conditions, may have a material adverse effect on the market price of our stock in the future.
Our largest outside stockholder can exert significant control over our business and affairs and may have actual or potential interests that may depart from those of our other stockholders.
Our largest outside stockholder, C2M, owns a substantial percentage of our outstanding voting capital. The interests of such persons may differ from the interests of other stockholders. There can be no assurance C2M or other significant stockholders will, in future matters submitted for stockholder approval, vote in favor of such matters, even if such matters are recommended for approval by management or are in the best interests of stockholders generally. As a result, such persons will have the ability to vote their significant holdings in favor (or not in favor) of proposals presented to our stockholders for approval, including proposals to:
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elect or defeat the election of our directors;
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amend or prevent amendment of our articles of incorporation or bylaws;
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effect or prevent a merger, sale of assets or other corporate transaction; and
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control the outcome of any other matter submitted to the stockholders for vote.
In addition, such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price. C2M could also utilize their significant ownership interest to seek to influence management and decisions of the Company.
We are subject to the periodic reporting requirements of the Exchange Act, which will require us to incur audit fees and legal fees in connection with the preparation of such reports. These additional costs will reduce or might eliminate our profitability.
We are required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. To comply with these requirements, our independent registered auditors will have to review our quarterly financial statements and audit our annual financial statements. Moreover, our legal counsel will have to review and assist in the preparation of such reports. The costs charged by these professionals for such services cannot be accurately predicted at this time, because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and will have a major effect on the amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs will obviously be an expense to our operations and thus have a negative effect on our ability to meet our overhead requirements and earn a profit. We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, the trading price of our Common Stock, if a market ever develops, could drop significantly, or we could become subject to Commission enforcement proceedings.
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.
Our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2019 and December 31, 2018, our internal control over financial reporting was not effective, as a result of: (1) we lacked a sufficient number of employees to properly segregate duties and provide adequate review of the preparation of the financial statements and (2) we lacked sufficient independent directors on our Board of Directors to maintain Audit and other committees consistent with proper corporate governance standards. In the first quarter of 2019, we expanded our Board to include three independent directors. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal control over financial reporting in the future.
Because we are a “smaller reporting company,” we will not be required to comply with certain disclosure requirements that are applicable to other public companies and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors.
We are a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. As a smaller reporting company, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not smaller reporting companies, including, but not limited to:
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Reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements.
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Not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. and
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Reduced disclosure obligations for our annual and quarterly reports, proxy statements and registration statements.
We will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC, impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly after we are no longer a smaller reporting company. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short. Issuers whose securities have historically had limited trading volumes and/or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller attacks. The publication of any such commentary regarding us in the future may bring about a temporary, or possibly long term, decline in the market price of our common stock. In the past, the publication of commentary regarding us by a disclosed short seller has been associated with the selling of shares of our common stock in the market on a large scale, resulting in a precipitous decline in the market price per share of our common stock. No assurances can be made that similar declines in the market price of our common stock will not occur in the future, in connection with such commentary by short sellers or otherwise.
Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit your ability to buy and sell our stock, which could depress our share price.
FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares, depressing our share price.
Transfers of our securities may be restricted by virtue of state securities “blue sky” laws, which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as "blue sky" laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities held by many of our stockholders have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.
“Anti-Takeover” provisions in our Articles of Incorporation and Bylaws may cause a third party to be discouraged from making a takeover offer that could be beneficial to our stockholders.
Certain provisions of our Articles of Incorporation, By-Laws, and the anti-takeover provisions of the Nevada Revised Statutes, could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, or make more costly any attempt to acquire control of the Company, even if the acquisition or the Board designees would be beneficial to our stockholders. These factors could also reduce the price that certain investors might be willing to pay for shares of the common stock and result in the market price being lower than it would be without these provisions.
In addition, large stockholders may seek to influence our Board of Directors and stockholders by acquiring positions in the Company to force consideration of proposals that may be less desirable than other outcomes. The effect of such influences on our Company or our corporate governance could reduce the value of our monetization activities and have an adverse effect on the value of our assets. The effect of Anti-Takeover provisions could impact the ability of prospective stockholders to obtain influence in the Company or representation on the Board of Directors or acquire a significant ownership position and such result may have an adverse effect on the Company and the value of its securities.
Regulatory Risks Related to Our Business
FDA regulation could negatively affect the hemp industry, which would directly affect our financial condition.
The U.S. Food and Drug Administration ("FDA") may seek expanded regulation of hemp under the Food, Drug and Cosmetics Act of 1938. Additionally, the FDA may issue rules and regulations, including certified good manufacturing practices, or cGMPs, related to the growth, cultivation, harvesting and processing of hemp. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where hemp is grown register with the FDA and comply with certain federally prescribed regulations. In the event that some or all of these regulations are imposed, we do not know what the impact would be on the hemp industry, including what costs, requirements and possible prohibitions may be enforced. If we or our manufacturing partners are unable to comply with the regulations or registration as prescribed by the FDA, we or our manufacturing partners may be unable to continue to operate their and our business in its current or planned form or at all.
Changes in the Law and Development Programs
The 2018 Farm Bill declassified industrial hemp as a Schedule I substance, shifted regulatory authority from the Drug Enforcement Administration to the Department of Agriculture, and provided autonomy for states to regulate the industry. The 2018 Farm Bill did not change the Food and Drug Administration’s oversight authority over CBD products. The 2018 Farm Bill defined industrial hemp as a variety of cannabis containing an amount equal to or lower than 0.3% tetra-hydrocannabinol (THC), and allowed farmers to grow and sell hemp under state regulation. According to the National Conference of State Legislatures, 41 states have set up cultivation and production programs to regulate the production of hemp.
For the first time since 1937, industrial hemp has been decriminalized at the federal level and can be grown legally in the United States, but on a limited basis. A landmark provision passed in the Agricultural Act of 2014 had previously classified hemp as distinct from its genetic cousin, marijuana. Marijuana cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis will likely affect the perception of the lawfulness of our activity for a continuing period of time, which could result in our inability and the inability of our customers to execute their respective business plans.
Although we believe the foregoing will be applicable to business other than hemp-based CBD businesses, there is risk that confusion or uncertainty surrounding our products with regulated cannabis could occur on the state or federal level and impact us. We may have difficulty with establishing banking relationships, working with investment banks and brokers who would be willing to offer and sell our securities or accept deposits from stockholders, and auditors willing to certify our financial statements if we are confused with businesses that are in the cannabis business. Any of these additional factors, should they occur, could also affect our business, prospects, assets or results of operation could have a material adverse effect on the business, prospects, results of operations or financial condition of the Company.
We and our manufacturers and suppliers are subject to extensive governmental regulation and may be subject to enforcement if we are not in compliance with applicable requirements.
We, our manufacturers, and suppliers are subject to a broad range of federal, state and local laws and regulations governing, among other things, the testing, development, manufacture, distribution, marketing and post-market reporting of foods, including those that contain CBD. These include laws administered by the FDA, the U.S. Federal Trade Commission (“FTC”), the U.S. Department of Agriculture (“USDA”), and other federal, state and local regulatory authorities.
Failure by us or our third-party contract manufacturers and suppliers to comply with applicable laws and regulations or to obtain and maintain necessary permits, licenses and registrations relating to our or our partners’ operations could subject us to administrative and civil penalties, including fines, injunctions, recalls or seizures, warning letters, restrictions on the marketing or manufacturing of our products, or refusals to permit the import or export of products, as well as potential criminal sanctions, which could result in increased operating costs resulting in a material effect on our operating results and business.
The markets for businesses in the CBD and hemp extracts industries are competitive and evolving.
In particular, the Company will face strong competition from both existing and emerging companies that offer similar products to the Company. Some of the Company’s current and potential competitors may have longer operating histories, greater financial, marketing and other resources and larger customer bases. Given the rapid changes affecting the global, national and regional economies generally and the CBD industry, in particular, the Company may not be able to create and maintain a competitive advantage in the marketplace. The Company’s success will depend on its ability to keep pace with any changes in such markets, especially in light of legal and regulatory changes. The Company’s success will depend on its ability to respond to, among other things, changes in the economy, market conditions and competitive pressures. Any failure to anticipate or respond adequately to such changes could have a material adverse effect on the Company’s financial condition, operating results, liquidity, cash flow and operational performance.
We are subject to the risk of potential changes to state laws pertaining to industrial hemp.
As of the date hereof, approximately forty-seven states authorized industrial hemp programs pursuant to the Farm Bill. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured. While there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where the Company has business interests. Any one of these factors could slow or halt use of industrial hemp, which could negatively impact the business up to possibly causing the Company to discontinue operations as a whole.
Our product candidates are not approved by the FDA or other regulatory authority, and we face risks of unforeseen medical problems, and up to a complete ban on the sale of our product candidates.
The efficacy and safety of pharmaceutical products is established through a process of clinical testing under FDA oversight. Our products have not gone through this process because we believe that the topical products we sell are not subject to this process. However, if an individual were to use one of our products in an improper manner, we cannot predict the potential medical harm to that individual. If such an event were to occur, the FDA or similar regulatory agency might impose a complete ban on the sale or use of our products.
There are numerous costs associated with numerous laws and regulations.
The manufacture, labeling and distribution of the Company products will be regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of the Company’s product claims or the ability to sell products in the future. The FDA may regulate the Company’s products to ensure that the products are not adulterated or misbranded. The Company is subject to regulation by the federal government and other state and local agencies as a result of its CBD products. The shifting compliance environment and the need to build and maintain robust systems to comply with different compliance in multiple jurisdictions increases the possibility that the Company may violate one or more of the requirements. If the Company’s operations are found to be in violation of any of such laws or any other governmental regulations that apply to the Company, it may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of the Company’s operations, any of which could adversely affect the ability to operate the Company’s business and its financial results. Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. The Company’s advertising will be subject to regulation by the Federal Trade Commission (“FTC”) under the Federal Trade Commission Act. In recent years, the FTC has initiated numerous investigations of dietary and nutrition supplement products and companies. Additionally, some states also permit advertising and labeling laws to be enforced by private attorney generals, who may seek relief for consumers, seek class-action certifications, seek class-wide damages and product recalls of products sold by the Company. Any actions against the Company by governmental authorities or private litigants could have a material adverse effect on the Company’s business, financial condition and results of operations.
Risks Related to Information Technology and Intellectual Property
We are subject to cyber-security risks, including those related to customer, employee, vendor or other company data and including in connection with integration of acquired businesses and operations.
We currently do not utilize automated technology or software to maintain important records necessary to the successful performance of our business. We are evaluating various selling, inventory and contact management software tools, such as Shopify, in order to begin to adopt processes to track inventory, generate sales orders and invoices, promote leads and sales and support customer interaction such as customer service and warranty claims. Without these tools we operate at a significant disadvantage to our competitors who have implemented more sophisticate systems than us.
We use information technologies to securely manage certain operations and various business functions. We rely on various technologies, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including reporting on our business and interacting with customers, vendors and employees. In addition, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and controls, and those of our third-party providers, we may become subject to system damage, disruptions or shutdowns due to any number of causes, including cyber-attacks, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period. We may face other challenges and risks as we upgrade and standardize our information technology systems as part of our integration of acquired businesses and operations. We do not have contingency plans in place to prevent or mitigate the impact of these events, and these events could result in operational disruptions or the misappropriation of sensitive data, and depending on their nature and scope, could lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions and exposure to liability. Such disruptions or misappropriations and the resulting repercussions, including reputational damage and legal claims or proceedings, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our common stock.
Our intellectual property rights may be inadequate to protect our business.
Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.
We rely on our trademarks, trade names, and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
If third parties claim that we infringe upon their intellectual property rights, our business and results of operations could be adversely affected.
We face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, could be expensive and time consuming to defend; could require us to cease selling the products that incorporate the challenged intellectual property, could require us to redesign, reengineer, or rebrand the product, if feasible, could divert management’s attention and resources, or could require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative impact on our business, financial condition, results of operations and our future prospects.
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition, and our results of operations.
We may be unable to obtain intellectual property rights to effectively protect our branding, products, and other intangible assets. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our branding, products, and other intangible assets, our revenue and earnings, financial condition, or results of operations could be adversely affected.
We also rely on non-disclosure and non-competition agreements to protect portions of our intellectual property portfolio. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that third parties will not otherwise gain access to our trade secrets or proprietary knowledge, or that third parties will not independently develop competitive products with similar intellectual property.
A failure of one or more key information technology systems, networks or processes may materially adversely affect our ability to conduct our business.
The efficient operation of our business will depend on our information technology systems. We rely on our information technology systems to effectively manage our sales and marketing, accounting and financial and legal and compliance functions, engineering and product development tasks, research and development data, communications, supply chain, order entry and fulfillment and other business processes. We also rely on third parties and virtualized infrastructure to operate and support our information technology systems. The failure of our information technology systems, or those of our third-party service providers, to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer.
In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber-attacks and computer viruses. The failure of our information technology systems to perform as a result of any of these factors or our failure to effectively restore our systems or implement new systems could disrupt our entire operation and could result in decreased sales, increased overhead costs, excess inventory and product shortages and a loss of important information.
Further, it is critically important for us to maintain the confidentiality and integrity of our information technology systems. To the extent that we have information in our databases that our customers consider confidential or sensitive, any unauthorized disclosure of, or access to, such information due to human error, breach of our systems through cybercrime, a leak of confidential information due to employee misconduct or similar events could result in a violation of applicable data protection and privacy laws and regulations, legal and financial exposure, damage to our reputation, a loss of confidence of our customers, suppliers and manufacturers and lost sales. Actual or suspected cyber-attacks may cause us to incur substantial costs, including costs to investigate, deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. We have taken steps to protect the security of our systems. Despite the implementation of these security measures, our systems may still be vulnerable to physical break-ins computer viruses, programming errors, attacks by third parties or similar disruptive problems. If any of these risks materialize, our reputation and our ability to conduct our business may be materially adversely affected.
We rely heavily on third-party commerce platforms to conduct our businesses. If one of those platforms is compromised, our business, financial condition and results of operations could be harmed.
We intend to rely upon third-party commerce platforms, including Shopify. We also rely on e-mail service providers, bandwidth providers, Internet service providers and mobile networks to deliver e-mail and “push” communications to customers and to allow customers to access our website.
Any damage to, or failure of, our systems or the systems of our third-party commerce platform providers could result in interruptions to the availability or functionality of our website and mobile applications. As a result, we could lose customer data and miss order fulfillment deadlines, which could result in decreased sales, increased overhead costs, excess inventory and product shortages. If for any reason our arrangements with our third-party commerce platform providers are terminated or interrupted, such termination or interruption could adversely affect our business, financial condition, and results of operations. We exercise little control over these providers, which increases our vulnerability to problems with the services they provide. We could experience additional expense in arranging for new facilities, technology, services and support. In addition, the failure of our third-party commerce platform providers to meet our capacity requirements could result in interruption in the availability or functionality of our website and mobile applications.
Failure to comply with federal, state and foreign laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.
We may collect, store, process, and use personal information and other customer data, and we rely in part on third parties that are not directly under our control to manage certain of these operations and to collect, store, process and use payment information. Due to the volume and sensitivity of the personal information and data we and these third parties manage and expect to manage in the future, as well as the nature of our customer base, the security features of our information systems are critical. A variety of federal, state and foreign laws and regulations govern the collection, use, retention, sharing and security of this information. Laws and regulations relating to privacy, data protection and consumer protection are evolving and subject to potentially differing interpretations. These requirements may not be harmonized, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, requirements and obligations.
We expect that new industry standards, laws and regulations will continue to be proposed regarding privacy, data protection and information security in many jurisdictions. We cannot yet determine the impact such future laws, regulations and standards may have on our business. Complying with these evolving obligations is costly. For instance, expanding definitions and interpretations of what constitutes “personal data” (or the equivalent) within the United States and elsewhere may increase our compliance costs and legal liability. A significant data breach or any failure, or perceived failure, by us to comply with any federal, state or foreign privacy or consumer protection-related laws, regulations or other principles or orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, investigations, proceedings or actions against us by governmental entities or others or other penalties or liabilities or require us to change our operations and/or cease using certain data sets. Depending on the nature of the information compromised, we may also have obligations to notify users, law enforcement or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by the incident.
We are subject to risks related to online payment methods.
We accept payments using a variety of methods, including credit card and debit card. As we offer new payment options to customers, we may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we may also be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments from customers or facilitate other types of online payments. If any of these events were to occur, our business, financial condition and operating results could be materially adversely affected. We occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, financial condition and results of operations.
Significant merchandise returns or refunds could harm our business.
We allow our customers to return products or offer refunds, subject to our return and refunds policy. If merchandise returns or refunds are significant or higher than anticipated and forecasted, our business, financial condition, and results of operations could be adversely affected. Further, we modify our policies relating to returns or refunds from time to time, and may do so in the future, which may result in customer dissatisfaction and harm to our reputation or brand, or an increase in the number of product returns or the amount of refunds we make.
Item 1B.
Unresolved Staff Comments.
None.
Item 2. Properties.Properties
We entered into three farm leases, which we entered into through our majority-owned subsidiary, EOW. Two of the leases are located in Cave Junction, Oregon and the third lease is located in Glendale, Oregon. EOW has farmed and processed industrial hemp on the farm leases, which hemp will be manufactured into cannabidiol (CBD) and related products. Due to declining market prices for industrial hemp and a shortage of available capital, we do not currently leaseintend to farm hemp on the Oregon properties in 2020. Our current plan is to sub-lease the properties for the 2020 growing season to another farmer, although no subleases have been made at this time.
We have leased a mailbox addresssmall office in Delray Beach Florida to establish operations in close vicinity to our partner C2M, and shared office space in Glen Allen, Virginia. Our lease expires in March 2017. Almost all of our businessit is conducted virtually. We believeanticipated that corporate functions will move to this arrangement is adequatelocation and staff will be hired as required to meet our current needs.growth. If additional or alternative space is needed in the future, we believe such space will be available on commercially reasonable terms as necessary. In December 2019, the Company and landlord agreed to extend the lease for another 6-month term from January 2020 to June 2020 with the same terms in the original lease agreement.
On July 9, 2019, we entered into a Commercial Lease Agreement with Skybar Holdings, LLC, a Florida limited liability company. Pursuant to the lease, we planned to lease the entire first floor (consisting of approximately 4,000 square feet) of a property located in Delray Beach, Florida. We planned to develop the premises to create a hemp-oriented health and wellness retail venue, including education, clothing and cosmetics, and to explore franchise opportunities. We have determined not to move forward with the project at this time and will pursue a cancellation of the lease.
Item 3.
Legal Proceedings.Legal Proceedings
On January 20, 2017, Robert F. Parker (the “petitioner”) filed a petition in the Supreme Court of the State of New York, County of New York, naming, among others,10, 2020, the Company and Ezra Green,Jonathan Gilbert, a former shareholder, director, entered into a Settlement Agreement and officerstipulation 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 as respondents. The petition was received by the Company on February 7, 2017. The petitioner previously hadand Mr. Gilbert exchanged mutual releases.
On September 9, 2019, Dr. Krassen Dimitrov, a judgment entered in his favor and against Clear Skies Solar, Inc. and its wholly owned subsidiary Clear Skies Group, Inc. (together, “Clear Skies”), in the amount of $331,132.45, with interest accruing at a rate of 9% per year from November 21, 2014 (the “Judgment”). The Judgment remains outstanding. The petition alleges, among other things, that through a series of allegedly fraudulent conveyances occurring before the Judgment was entered against Clear Skies, the major assets of Clear Skies, which were comprised of various patents, were transferred from Clear Skies to Carbon 612 Corporation (“Carbon”), and from Clear Skies and Carbon to the Company. The petition further alleges, among other things, that the transfers were without fair consideration and rendered Clear Skies, the judgment-debtor, insolvent. The petitioner seeks the entry of a judgmentformer 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 respondentsclaims, 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 amountmatter and on May 1, 2020 issued a procedural order suspending further proceedings.
On February 26, 2020 a complaint was filed in the Circuit Court, Palm Beach County, Florida on behalf of five former employees of the outstanding Judgment, with all accrued interest, reasonable attorneys’ feesCompany. The case is entitled Ryan Borcherds and costs and disbursements. We believe the claims againstMiriam Martinez vs. Exactus, Inc.. The complaint alleges the Company are without merit,failed to pay wages and we intendcompensation to contest petitioner’s claims2 employees under the Fair Labor Standards Act, breach of contract and defend the matter vigorously. Given the uncertaintyviolation of litigation, the preliminary stagevarious Florida statutes, including allegations on behalf of the case,other similarly situated persons. The complaint seeks approximately $82,000 in unpaid wages as well as special damages, liquidated damages, interest and the legal standards that must be met for, among other things, success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.attorney’s fees.
Item 4. Mine Safety Disclosures.Not applicable.
From time to time, we may become involved in legal proceedings arising in the ordinary course of business. We are unable to predict the outcome of any such matters or the ultimate legal and financial liability, and at this time cannot reasonably estimate the possible loss or range of loss and accordingly have not accrued a related liability.
Item 4. Mine Safety Disclosures Not applicable.
PART II
Item 5. MarketMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers ofEquity Securities.Purchases of Equity Securities
Market Information
In 2015, our common stock was quoted on the Over-The-Counter QB Venture Marketplace (OTCQB) under the symbol “SGYT” and was not listed on any exchange. In 2016, our common stockOur Common Stock is quoted on the Over-The-Counter QB Venture Marketplace (OTCQB)OTCQB over-the-counter market under the symbol “EXDI” and is not listed on any exchange. The following table sets forth the range of high and low bid prices as reported for each period indicated.
| | | |
| Fiscal year ended December 31, 2015 | | |
| | | |
| March 31, 2015 | N/A | N/A |
| June 30, 2015 | N/A | N/A |
| September 30, 2015 | N/A | N/A |
| December 31, 2015 | $2.00 | $1.50 |
| | | |
| Fiscal year ended December 31, 2016 | | |
| | | |
| March 31, 2016 | $3.05 | $3.00 |
| June 30, 2016 | 3.05 | 0.55 |
| September 30, 2016 | 2.50 | 0.56 |
| December 31, 2016 | 1.50 | 0.40 |
The foregoing“EXDI.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission,commissions and may not necessarily represent actual transactions. On May 13, 2020 the closing bid price on the OTC Markets for our Common Stock was $0.1894.
HoldersPenny Stock
AsThe SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of March 12, 2017,less than $5.00, other than securities registered on certain national securities exchanges or quoted on the Company had 47 commonNASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock holdersrules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of record. In addition, asthe nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such date, there were 7 holdersduties or other requirements of recordthe securities laws; (c) contains a brief, clear, narrative description of our Series B-1 preferred stock, 21 holdersa dealer market, including bid and ask prices for penny stocks and the significance of our Series B-2 preferred stock,the spread between the bid and one holderask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of our Series C preferred stock, convertible into an aggregate of 13,217,334 shares of our common stock based on conversion ratio equal to one common share for each share of preferred stock.trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
DividendsThe broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.
We have never paid cash dividends on our capital stock. There are no restrictionsIn addition, the penny stock rules require that would limit usprior to a transaction in a penny stock not otherwise exempt from paying dividends; however, we do not anticipate paying any cash dividendsthose rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the foreseeable future.purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
Securities AuthorizedThese disclosure requirements may have the effect of reducing the trading activity for Issuance under Equity Compensation Plansour common stock. Therefore, stockholders may have difficulty selling our securities.
None
Item 6. Selected Financial Data.Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.The following discussion and analysis of our financial condition and results of operations contains information that management believes is relevant to an assessment and understanding of our results of operations. You should read this discussion in conjunction with theConsolidated Financial Statements included elsewhere in this report. References to “Exactus,” the “Company,” “we,” “us” and “our” refer to Exactus, Inc. and its subsidiary unless the context otherwise requires.
Cautionary Language RegardingHolders of Our Common Stock
As of May 22, 2020, we had 45,522,275 shares of our common stock issued and outstanding, and approximately 157 shareholders of record.
Dividends
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
1. we would not be able to pay our debts as they become due in the usual course of business, or;
2. our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.
Item 6. Selected Financial Data A smaller reporting company is not required to provide the information required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
Certain statements, set forth in this report constituteother 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” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements regarding future events and financial results, including our ability to complete development of the FibriLyzer, future clinical trials and regulatory approvals, and liquidity, as well as other statements that are not historical facts, are forward-looking statements.” These forward-looking statements generally are generally identified by suchthe words or phrases as “we expect,“believes,” “we believe,“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would, be,” “will allow,” “expects to,be,” “will continue,” “is anticipated,“will likely result,” “estimate,” “project” orand similar expressions. While we provide forward-looking statements to assist in the understanding of our anticipated future financial performance, we caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date that we make them. Forward-looking statements are based on current expectations and assumptions that are subject to significant risks and uncertainties that couldwhich may cause actual results to differ materially from those in the forward-looking statements. Except as otherwise required by law, we undertake no obligation to publicly release any updates to forward-looking statements to reflect events after the date of this yearly report on Form 10-K, including unforeseen events.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors thatwhich could have a material adverse effect on our operations and results of our businessfuture prospects on a consolidated basis include, but are not limited to:
●
our history of operating losses and lack of revenues to date;
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our limited cash resources and our ability to obtain additional funding necessary to develop our products and maintain liquidity;
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the success of our clinical trials through all phases of clinical development;
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the need to obtain regulatory approval of our products and any delays in regulatory reviews or product testing;
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market acceptance of, and our ability to commercialize, our products;
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competition from existing products or new products that may emerge;
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our dependence on the developmenteconomic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and commercialization of our primary product, the FibriLyzer, to generate revenues in the future;
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our dependence on and our ability to maintain our licensing agreement;
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our ability and third parties’ abilities to protect intellectual property rights;
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potential product liability claims;
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our ability to maintain liquidity and adequately support future growth;
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changes in, and our ability to comply with, laws or regulations applicable to the life sciences or healthcare industries;
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our ability to attract and retain key personnel to manage our business effectively; and
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othergenerally accepted accounting principles. These risks and uncertainties described from time to time,should also be considered in our filings made with the SEC.
General
On February 29, 2016,In December 2018, the Company consummated a share exchange, which resultedexpanded its focus to pursue opportunities in a changeCannabidiol (“CBD”). This decision was based in controlpart on the passing of The Hemp Farming Act of 2018. The Act was signed into law during December 2018 and removes hemp (cannabis with less than 0.3% THC) from the Company. As part of this transaction,Schedule I controlled substances list. Following passage, CBD derived from industrial hemp became legal in the Company acquired Exactus BioSolutionsUS under federal law and its Licensing Agreement with Digital Diagnostics to develop, produce and commercialize blood diagnostic products that utilize certain intellectual property rights owned or licensed by Digital Diagnostics. The Licensing Agreement provides for Exactus BioSolutions and Digital Diagnostics to collaborate throughin all 50 states, opening the various steps of the product and device development process, including the development, regulatory approval and commercialization stages.
As a result of this transaction, Exactus became a life science company that plansdoor to develop and commercialize pursuantsell hemp-based CBD products nationwide. The Company’s goal is to rapidly establish one or more principal sources of supply and to develop wholesale and retail sales channels for CBD end-products to be sold to humans and for animal health, such as nutraceuticals, supplements and pet and farm products. The Company intends to follow regulatorily compliant pathways by adopting practices established by the LicensingFDA for CBD.
On January 8, 2019 we entered into a Master Product Development and Supply Agreement Point-of-Care(the “Development Agreement”) with Ceed2Med, LLC (“POC”) diagnostics for measuring proteolytic enzymes in the blood based on a proprietary detection platform (the “New Business”C2M”). Our primary product,C2M has provided the FibriLyzer, will employCompany 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 disposable test “biosensor” strip combined with a portableminimum of 50 and easyup to use hand held detection unit300 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 provides a result in less than 30 seconds. The initial markets we intend to pursue for the FibriLyzer are (i) the management of hyperfibrinolytic states associate with surgery and trauma, (ii) obstetrics, (iii) acute events such as myocardial infarction and ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis and (v) chronic coronary disease management. We expectoffer to follow up the FibriLyzer with similar technology, the MatriLyzer to detect collagenase levelssell in the bloodfuture. The founders of C2M established their first CBD business in 2014. C2M will also be responsible for the detectionoverseeing all farming and manufacturing activities of the recurrence of cancer. We intend to file to gain regulatory approval to sell our products in the United States, Canada and Europe. Management intends to primarily focus on the development and commercialization of the FibriLyzer and related technology exclusively licensed pursuant to the Licensing Agreement.Company.
Prior
Whereas, in consideration for the Development Agreement, C2M was issued 8,385,691 shares of our Common Stock on January 8, 2019. Additionally, the Company granted immediately vested 10-year options to purchase 750,000 shares of Common Stock to founders of C2M, with exercise price of $0.32 per share. As a result, C2M was our acquisition of Exactus BioSolutions on February 29, 2016, our primary business focus was on developing and commercializing drone technology (the “Former Business”). Because we have changed our primary business focus, we do not believe a comparisonlargest shareholder holding (inclusive of the Company’s financial resultsvested options held by its founders) approximately 51% of our outstanding Common Stock on the date of the Development Agreement. These options were granted to two owners and a co-founder of C2M.C2M will provide personnel necessary for our growth. Utilizing C2M employees and facilities, the year ended December 31, 2016Company has been able to rapidly access resources and opportunities in the Company’s financial results forhemp-derived CBD industry. Emiliano Aloi of C2M became a member of our Advisory Board in January 2019 and was appointed President of the year ended December 31, 2015 is meaningful.Company on March 11, 2019.
On June 30, 2016,March 11, 2019, with the assistance of C2M and assignment of rights, we acquired a 50.1% limited liability membership interest in Exactus One World, LLC, (“EOW”), an Oregon limited liability company, newly formed on January 25, 2019, in order to produce industrial hemp for our own use. EOW has leases starting on March 1, 2019 for approximately 200 acres of farmland in southwest Oregon for growing and processing industrial hemp, with a lease term of one year. The leases are renewable on a year-to-year basis. We acquired the 50.1% limited liability membership interest pursuant to a subscription agreement (the “Subscription Agreement”) and a Membership Interest Purchase Agreement (the “Purchase Agreement”). EOW will farm and process industrial hemp to be manufactured into cannabidiol (CBD) and related products. EOW will be responsible for the Company’s initial efforts to pursue agricultural development, including farm soil preparation, planting, harvesting, transportation and drying. We will be responsible for funding and the minority owners will be responsible for management, servicing and operating the farm properties.
On October 23, 2019, we amended the Amended and Restated Operating Agreement of EOW. Under the terms of the amendment, the minority members of EOW conveyed their 49.9% membership interest and rights to distributions related to the current 2019 hemp crop underway to the Company. As a result, the Company acquired the right to receive 100% of the distributions of net profit from the 2019 hemp crop on approximately 226 acres of farmland currently growing in Oregon. In addition, the members amended the payment schedule under which farm costs are required to be made by the Company. As consideration for the amendment, the Company agreed to issue 1,223,320 shares of its common stock, par value $0.0001 per share, to the minority members of EOW.
On July 31, 2019, we finalized and entered into a Management and Services Agreement in order to provide us project management and various other benefits associated with the farming rights, operations and opportunities with C2M, including assignment by C2M of C2M’s agreements and rights to acquire approximately 200 acres of hemp farming. Under the terms of the MSA, C2M agreed to provide further access to the opportunities and know-how of C2M, consented to the appointment of Emiliano Aloi, a seasoned hemp veteran previously an advisor and currently our Interim Chief Executive Officer, and to provide to us and EOW additional services consisting of, among other things:
●
right of participation for further investment and business opportunities in order to rapidly expand our business and operations in hemp-derived CBD;
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executive, sourcing, vendor, product, production and other expertise and resources;
●
appointment of Aloi to the position of President;
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introductions to farming and other financing;
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drawings, designs and specifications for extraction, production and manufacturing facilities and resources; and
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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 Master Services Agreement with Integrium, LLC and PoC Capital, LLC to conduct clinical studies for us, including a clinical trial formajority of the FibriLyzer that is scheduled to begin indisinterested directors of the second half of 2017.Company.
Results of Operations
Year Endedended December 31, 2016 Compared to Year Ended2019 and 2018:
Net Revenues The Company is principally engaged in the business production and selling of products made from industrial hemp. During the year ended December 31, 2015:
| | | |
| | | |
| | | | |
| Revenue | $- | $- | $- |
| Operating expenses | 1,601,486 | 389,282 | 1,212,204 |
| | | | |
| Net loss from operations | (1,601,486) | (389,282) | (1,212,204) |
| Total other (loss) income | (1,453) | 31,092 | (32,545) |
| | | | |
| Loss from continuing operations | $(1,602,939) | $(358,190) | $(1,244,749) |
Operating expenses increased by $1,212,204,2019, we generated total revenues of $345,680 from $389,282the sale of CBD products, including revenues of $162,446 from a related party, C2M, who is a majority stockholder of the Company, for the year ended December 31, 20152019. We did not have comparable revenues during the year ended December 31, 2018.
Cost of Sales The primary components of cost of sales include the cost of the CBD product. For the year ended December 31, 2019, the Company’s cost of sales amounted to $1,601,486$2,046,134 which primarily represents purchase of CBD products from C2M and cost of hemp crop sold to C2M for a total of $106,752, an inventory reserve of $723,391, inventory write-off of CBD products of $837,153 and indirect cost such as utilities, farm lease expenses, and depreciation expenses on farming equipment related to production and harvesting period of $171,788. We reduced inventory by $723,391 which is equal to the difference between the cost of the inventory and its estimated net realizable value. Additionally, CBD products under the Green Goddess brand with a cost of $837,153 has been written down to a value of $0 due to the age and questionable salability of the product. We did not have comparable cost of sales during the year ended December 31, 2018.
Operating Expenses
For the year ended December 31, 2019, we incurred $9,177,988 in operating expenses as compared to $2,436,226 for the year ended December 31, 2016. The difference primarily is attributable to: the acquisition of Exactus and change in business focus to the medical devices,2018, an increase of $6,741,762 or 277%. The increase in professionaloperating expenses consisted of the following:
General and compliance feesadministrative expenses increased by $1,357,627, or 71%, from $1,914,571 for the year ended December 31, 2018 to $3,272,198 for the year ended December 31, 2019, increase in amortization of intangible asset and depreciation expenses of approximately $192,600 resulting from the acquisition$866,000, increase lease expense related to our commercial lease and patent expenses; an increase in R&Drent expense of approximately $292,000 due$247,000, increase in impairment expense related to new business focus; anour intangible assets and inventory of $250,000, and increase in other general and administrationadministrative expenses of approximately $650,000 resulting$172,000 primarily due to travel expenses and increase in operations, offset by decrease in compensation including employee benefits of approximately $177,000 due to a decrease in contractual bonuses and stock options given to management.
Selling and marketing expenses increased by $930,260, or 5,158%, from hiring two full time staff in February 2016 and license fees$18,036 for the New Business,year ended December 31, 2018 to $948,296 for the year ended December 31, 2019 primarily due to increase in marketing and $95,000advertising expenses due to promotions, endorser’s fee, trade shows, samples, product awareness and salaries of our sales and marketing staff.
Professional and consulting fees increased by $4,731,775, or 2,324%, from $203,619 for the year ended December 31, 2018 to $4,935,394 for the year ended December 31, 2019 due to increased stock based compensation.consulting fees related with the grant of stock options and warrants, issuance of stocks to consultants and C2M, increase in hiring of consultant for business development and investor relations services, and increase in accounting fees and legal fees related to our public company filings.
Research and development decreased by $277,900 or 93%, from $300,000 for the year ended December 31, 2018 to $22,100 for the year ended December 31, 2019, as the Company delayed projects until additional funds are raised.
Other Expenses, net
Derivative loss increased by $1,042,889 or 126%, from $(828,694) for the year ended December 31, 2018 to $(1,871,583) for the year ended December 31, 2019, due to the issuance of new convertible notes in 2019 and adjustments to fair value.
Loss on stock settlement decreased by $607,929, or 100%, from $607,929 for the year ended December 31, 2018 to $0 for the year ended December 31, 2019, due to issuing shares to settle accounts payable balances and conversion of convertible notes and interest in year 2018. We did not have comparable gains or losses during the year ended December 31, 2019.
Gain on stock settlement of debt increased by $3,004,630, or 100%, from $0 for the year ended December 31, 2018 to $3,004,630 for the year ended December 31, 2019 due to the conversion of notes and interest into common and preferred shares during the year ended December 31, 2019. We did not have comparable gains or losses during the year ended December 31, 2018.
Interest expense increased by $14,641, or 3%, from $464,470 for the year ended December 31, 2018 to $479,111 for the year ended December 31, 2019. The increase in interest expense is primarily related to increase in amortization of debt discount and debt issuance cost related to our convertible note payable issued in year 2019.
Net Loss
As a result of the foregoing, we generated a net loss of $10,224,506 for the year ended December 31, 2019 as compared to a net loss of $4,337,319 for the year ended December 31, 2018, as a result of the discussion above.
As a result of the foregoing, we generated a net loss from operationsavailable to stockholders of $1,601,486$10,591,487 or $(0.31) per common share – basic and diluted, for the year ended December 31, 20162019 as compared to an operatinga net loss of $389,282$4,337,319 or $(0.91) per common share – basic and diluted, for the year ended December 31, 2015, a change of 1,212,204.
The Company had other loss of $1,453 due to loss on disposal of equipment from the former business focus for the year ended December 31, 2016,2018, as compared to other income of $31,092 for the year ended December 31, 2015. The income in 2015 was $41,307 in debt forgiveness offset by $10,215 impairment of marketable securities.
As a result of the foregoing, we generated a net loss from continuing operations of $1,602,939 for the year ended December 31, 2016 as compared to a net loss from continuing operations of $358,190 for the year ended December 31, 2015, a change of $1,244,749. Net loss for year period ended December 31, 2016 was $1,602,939 compared to $357,977 for the year ended December 31, 2015 which included $213 revenue from discontinued operations.
Liquidity and Capital Resources
Since our inception in 2008, we have generated losses from operations. As of December 31, 2016,2019, our accumulated deficit was $2,339,898 of which $736,959 was related to the Former Business. Our net loss for the years ended December 31, 2016 and 2015 was $1,602,939 and $357,977, respectively.
Net cash used in operating activities for the year ended December 31, 2016 was $890,956. We recorded a net loss for the year of $1,602,939. Other items in uses of funds from operations included non-cash charges related stock compensation for $100,000 and charges for bad debt, loss on disposal of equipment, and equipment impairment, which collectively totaled $12,543. Increases in accounts payable and accrued liabilities increased net cash from operating activities by $547,941.
Net cash used in operating activities for the year ended December 31, 2015 was $640,020. We recorded a net loss of $357,977 for the period. Other items in uses of funds from operations included expenses incurred on behalf of parent company of $358,807 slightly offset by $68,885 expenses paid by related company.Changes in assets and liabilities totaled a gain of $10,015, which primarily consisted of an increase in restricted cash of $72,342 and increase in account payable of $84,748.
Net cash provided by investing activities for the year ended December 31, 2016 was $1,292 due to the acquisition of Exactus BioSolutions. Net cash provided by investing activity for the year ended December 31, 2015 was $0.
Net cash provided by financing activities for the year ended December 31, 2016 was $1,945,000 largely due to proceeds from our issuance of shares of Series B-2 Preferred Stock and offset by our payment for Series A Preferred Stock. Net cash provided by financing activities for the year ended December 31, 2015 was $598,328 due to $497,156 in proceeds from a related party and $100,000 in proceeds from the issuance of a note payable.
$21,129,379. As of December 31, 2016,2019, we had $1,055,336$18,405 of cash. While we expect the existing cash will fund operations through Q4 2017, these funds will not be sufficient to enable us to complete the developmentand working capital deficit of any potential products, including the FibriLyzer and related technology.$1,761,309. Accordingly, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources. The issuance of any additional shares of common stock,Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to delay, reduce or eliminate our research and development programs and may not be able to continue as a going concern.
The Company has various principal outstanding balance for a total of $933,333 from convertible notes as of December 31, 2019. The convertible notes bear interest at a rate of ranging from 5% to 8% per annum and will mature from November 26, 2020 and February 1, 2023.
Net cash used in operating activities for the year ended December 31, 2019 was $5,746,290, due to our net loss of $10,224,506, offset by non-cash charges related to convertible loan notes derivative loss of $1,871,583 , amortization of debt discounts and debt issuance cost of $425,712, amortization of intangible assets of $828,526, amortization prepaid stock-based expenses of $285,494,depreciation expense of $63,770, deferred rent of $85,699, bad debt expense of $32,577, impairment expense of $1,087,346, inventory reserve of $723,391 and stock-based compensation of $3,774,640 offset by $3,004,630 for a debt settlement gain. Net changes in operating assets and liabilities totaled of $(1,695,892), which is primarily attributable to increases in total accounts receivable of $107,162, inventory of $2,864,383, prepaid expenses and other current assets of $140,765, deposit of $80,000 and total accounts payable and accrued expenses of $1,294,625, and unearned revenues of $215,000.
Net cash used in operating activities for the year ended December 31, 2018 was $465,755, due to our net loss of $4,337,319, offset by non-cash charges related to convertible loan notes derivative expense of $828,694, amortization of debt discounts of $405,173, $607,929 for a debt settlement loss, stock-based compensation of $892,073. Changes in operating assets and liabilities totaled a gain of $1,137,695, which primarily consisted of an increase in accrued expenses of $905,946 and increase in account payable of $188,378.
Net cash used in investing activity for the year ended December 31, 2019 was $2,041,203. We paid cash for the purchase of membership interest in subsidiary for $1,500,000 in connection with a Purchase Agreement and purchase of equipment for $541,203 as compared to none during the year ended December 31, 2018.
Net cash provided by financing activities for the year ended December 31, 2019 was $7,803,938, due to proceeds from sale of our Common Stock of $7,215,380, net proceeds from the issuance of notes payable and convertible notes $962,001, advance from related party of $242,500 offset by total note repayments of $245,943 and repayment on related party advances of $370,000.
Net cash provided by financing activities for the year ended December 31, 2018 was $306,500 due to $178,100 in proceeds from convertible loan notes, $103,400 in proceeds from the issuance of a note payables, $50,000 of net proceeds from sale of Series D Preferred Stock and the repayment of $25,000 of principal on convertible notes.
The Company had principal outstanding balance of $100,000 from convertible notes as of December 31, 2019. The convertible notes bear interest at a rate of 5% per annum and will mature on February 1, 2023. If a qualified financing from which at least $5 million of gross proceeds occurs prior to the maturity date, then the outstanding principal balance of the notes, together with all accrued and unpaid interest thereon, shall be automatically converted into common stock at $0.40 per Share. We believe this threshold has been met, and conversion of the note is pending
In addition, the Company had a principal balance of $833,333.33 under senior secured convertible promissory notes issued to an institutional investor under the Securities Purchase Agreement dated November 27, 2019. These notes bear interest at a rate of 8% and mature one year after their issuance. These notes are issued at 10% original issue discount and include 1/3 warrant coverage as additional consideration to the lender. All warrants are exercisable at $0.756 per share. The notes are convertible at a price of $0.50 per share. Additional debt financing on the same terms is available under the Securities Purchase Agreement, with: (1) an additional purchase of $277,778 in notes and associated warrants expected to occur on the third business day after the date of the filing of a registration statement on Form S-1 for the shares issuable upon conversion of the notes as required under a Registration Rights Agreement; and (2) an additional purchase of $833,333.33 in notes and associated warrants upon effectiveness of the registration statement. At this time, we are delinquent in our payments under the initial convertible note, with the May 1, 2020, April 1, 2020, and a portion of the February 25, 2020 payments currently in arrears. We intend to make these payments and the upcoming monthly payments with receipts from product sales and/or the proceeds of additional equity funding.
Going Concern
The audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 20162019 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. We have concluded that the circumstances described above continue to raise substantial doubt about our ability to continue as a going concern as of December 31, 2019.
Off-Balance Sheet Arrangements
As of December 31, 2016,2019, we had no material off-balance sheet arrangements.
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our financial position, results of operations or cash flows.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
Application of Significant Accounting Policies
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the calendar year ending December 31, 2020. The amendments require a prospective approach to adoption and early adoption is permitted for interim or annual goodwill impairment tests. The Company is currently evaluating the impact of this standard.
We have reviewed the FASB issued Accounting Standards Update (“ASU”)ASU accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company hasWe have carefully considered the new pronouncements that alter previous generally accepted accounting principles and doesdo not believe that any new or modified principles will have a material impact on the corporation’sCompany’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of ourthe Company’s financial managementmanagement.
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 certain standards are under consideration.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.
Item 7A. QuantitativeQuantitative and QualitativeQualitative Disclosures About Market Risk.Risk
Not applicable.A smaller reporting company is not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data.Data
Index to Financial Statements Required by Article 8 of Regulation S-X:
Audited Financial Statements:
| CONTENTS | | |
| | | |
| CONSOLIDATED FINANCIAL STATEMENTS | | |
| | | |
| | F-1 |
| | | |
| | F-2 |
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| | F-3 |
| | | |
| | F-4 |
| | | |
| | F-5 |
| | | |
| | F-6 |
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Exactus, Inc. (formerly known as Spiral Energy Tech, Inc.)and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Exactus, Inc. (formerly known as Spiral Energy Tech, Inc.)and Subsidiaries (the “Company”) as of December 31, 20162019 and 2015,2018, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years in the two-year period ended December 31, 2016. These consolidated2019 and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Exactus, Inc. (formerly knownthe Company as Spiral Energy Tech, Inc.) atof December 31, 20162019 and 2015,2018, and the results of its operations and its cash flows for each of the two years in the two-year period ended December 31, 2016,2019, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered a net loss, has recurring losses from operations, limited cash flow, and an accumulated deficit and has a net working capital deficiency, which raisesdeficit. These conditions raise substantial doubt about itsthe Company’s ability to continue as a going concern. Management’s plans regarding thosein regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RBSM LLP
March 31, 2017
We have served as the Company’s auditor since 2014.
New York, New YorkHenderson, NV
May 22, 2020
Exactus,Exactus, Inc. and Subsidiaries(formerly known as Spiral Energy Tech, Inc.)
ConsolidatedConsolidated Balance Sheets
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| | | |
| | | |
| ASSETS | | |
| Current Assets | | |
| Cash and cash equivalents | $1,055,336 | $- |
| Restricted cash | - | 72,342 |
| Due from related parties | - | 7,010 |
| Prepaid expenses | 1,019,721 | - |
| Total current assets | 2,075,057 | 79,352 |
| | | |
| Property and equipment, net of accumulated depreciation of $0 and $1,914, respectively. | - | 1,453 |
| Intangible asset- license agreement | 50,000 | - |
| Intellectual property- patents, net | - | 4,080 |
| | | |
| TOTAL ASSETS | $2,125,057 | $84,885 |
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| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | |
| | | |
| Current Liabilities | | |
| Bank overdraft | $- | $1,172 |
| Accounts payable | 566,495 | 75,483 |
| Accrued expenses | 58,479 | 1,550 |
| Note payable | - | 100,000 |
| Total Current Liabilities | 624,974 | 178,205 |
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| TOTAL LIABILITIES | 624,974 | 178,205 |
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| Commitments and contingencies (see note 9) | | |
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| Stockholders' Equity (Deficit) | | |
| Preferred stock: 50,000,000 authorized; $0.0001 par value 0 shares issued and outstanding | - | - |
| Preferred stock Series A: 5,000,000 and 0 authorized; $0.0001 par value 4,558,042 and 0 shares issued, respectively and 0 shares outstanding | - | - |
| Preferred stock Series B-1: 32,000,000 and 0 authorized; $0.0001 par value 2,800,000 and 0 shares issued and outstanding, respectively | 280 | - |
| Preferred stock Series B-2: 10,000,000 and 0 authorized; $0.0001 par value 8,584,000 and 0 shares issued and outstanding, respectively | 858 | - |
| Preferred stock Series C: 1,733,334 and 0 authorized; $0.0001 par value 1,733,334 and 0 shares issued and outstanding, respectively | 173 | - |
| Common stock: 200,000,000 shares authorized; $0.0001 par value 34,071,862 and 515,290 shares issued and outstanding, respectively | 3,407 | 52 |
| Additional paid-in capital | 3,835,263 | 643,587 |
| Accumulated deficit | (2,339,898) | (736,959) |
| Total Stockholders' Equity (Deficit) | 1,500,083 | (93,320) |
| | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $2,125,057 | $84,885 |
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The accompanying notes are an integral part of these consolidated financial statements. |
| | December 31,
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| ASSETS | | |
| Current Assets: | | |
| Cash and cash equivalents | $18,405 | $1,960 |
| Accounts receivable, net | 55,725 | - |
| Accounts receivable - related party | 18,860 | - |
| Inventory, net | 1,337,809 | - |
| Prepaid expenses and other current assets | 248,776 | 12,330 |
| Prepaid expenses and other current assets - related party - current | 622,160 | - |
| Due from related parties | 127,500 | - |
| Total current assets | 2,429,235 | 14,290 |
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| Other Assets: | | |
| Deposits | 80,000 | - |
| Prepaid expenses and other current assets - related party - long-term | 2,492,045 | - |
| Property and equipment, net | 477,433 | - |
| Intangible assets, net | 2,147,311 | - |
| Operating lease right-of-use assets, net | 2,173,253 | - |
| Total other assets | 7,370,042 | - |
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| TOTAL ASSETS | $9,799,277 | $14,290 |
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| LIABILITIES AND EQUITY (DEFICIT) | | |
| | | |
| Current Liabilities: | | |
| Accounts payable | $1,442,409 | $923,429 |
| Accounts payable - related parties | 454,511 | - |
| Accrued expenses | 358,010 | 46,875 |
| Unearned revenue - related party | 215,000 | - |
| Note payable - related parties | 55,556 | 51,400 |
| Subscription payable | 250,000 | - |
| Convertible notes, net of discounts | 85,906 | 491,788 |
| Derivative liability | 880,410 | 1,742,000 |
| Settlement payable | - | 17,000 |
| Interest payable | 16,677 | 66,300 |
| Operating lease liabilities, current portion | 432,065 | - |
| Total current liabilities | 4,190,544 | 3,338,792 |
| | | |
| Long Term Liabilities: | | |
| Convertible notes payable | 100,000 | 100,000 |
| Operating lease liabilities, long-term portion | 1,826,887 | - |
| Total long-term liabilities | 1,926,887 | 100,000 |
| | | |
| TOTAL LIABILITIES | 6,117,431 | 3,438,792 |
| | | |
| Commitment and contingencies (see Note 11) | | |
| | | |
| Equity (Deficit): | | |
| Exactus, Inc. Stockholders' Equity (Deficit) | | |
Preferred stock: 50,000,000 shares authorized; $0.0001 par value, 5,266,466 undesignated shares |
| issued and outstanding | - | - |
Preferred stock Series A: 1,000,000 shares designated; $0.0001 par value, | |
| 353,109 shares issued and outstanding | 35 | - |
Preferred stock Series B-1: 32,000,000 shares designated; $0.0001 par value, | |
| 1,650,000, and 2,800,000 shares issued and outstanding, respectively | 165 | 280 |
Preferred stock Series B-2: 10,000,000 shares designated; $0.0001 par value, | |
| 7,516,000 and 8,684,000 shares issued and outstanding, respectively | 752 | 868 |
Preferred stock Series C: 1,733,334 shares designated; $0.0001 par value, | |
| none and 1,733,334 shares issued and outstanding, respectively | - | 173 |
Preferred stock Series D: 200 shares designated; $0.0001 par value, 18 and 45 | |
| shares issued and outstanding, respectively | - | 1 |
Preferred stock Series E: 10,000 shares designated; $0.0001 par value, 10,000 and none | |
| shares issued and outstanding, respectively | 1 | - |
| Common stock: 650,000,000 shares authorized; $0.0001 par value, | | |
| 43,819,325 and 6,233,524 shares issued and outstanding, respectively | 4,382 | 623 |
| Common stock to be issued (664,580 and none shares to be issued, respectively) | 66 | - |
| Additional paid-in capital | 25,343,293 | 7,111,445 |
| Accumulated deficit | (21,129,379) | (10,537,892) |
| Total Exactus Inc. Stockholders' Equity (Deficit) | 4,219,315 | (3,424,502) |
| | | |
| Non-controlling interest in subsidiary | (537,469) | - |
| | | |
| Total Stockholders' Equity (Deficit) | 3,681,846 | (3,424,502) |
| | | |
| TOTAL LIABILITIES AND EQUITY (DEFICIT) | $9,799,277 | $14,290 |
Exactus,
and Subsidiaries(formerly known as Spiral Energy Tech, Inc.)
Consolidated StatementsStatements of Operations
| | |
| | | |
| | | |
| | | |
| Net revenues | $183,234 | $- |
| Net revenues - related party | 162,446 | - |
| | | |
| Total net revenues | 345,680 | - |
| | | |
| Cost of sales | 1,939, 382 | - |
| Cost of sales - related party | 106,752 | - |
| | | |
| Total cost of sales | 2,046,134 | - |
| | | |
| Gross loss | (1,700,454) | - |
| | | |
| Operating Expenses: | | |
| General and administration | 3,272,198 | 1,914,571 |
| Selling and marketing expenses | 948,296 | 18,036 |
| Professional and consulting | 4,935,394 | 203,619 |
| Research and development | 22,100 | 300,000 |
| | | |
| Total Operating Expenses | 9,177,988 | 2,436,226 |
| | | |
| Loss from Operations | (10,878,442) | (2,436,226) |
| | | |
| Other Income (expenses): | | |
| Derivative loss | (1,871,583) | (828,694) |
| Loss on stock settlement | - | (607,929) |
| Gain on settlement of debt, net | 3,004,630 | - |
| Interest expense | (479,111) | (464,470) |
| | | |
| Total Other Income (Expenses), net | 653,936 | (1,901,093) |
| | | |
| Loss Before Provision for Income Taxes | (10,224,506) | (4,337,319) |
| Provision for income taxes | - | - |
| | | |
| Net Loss | (10,224,506) | (4,337,319) |
| | | |
| Net Loss attributable to non-controlling interest | 537,469 | - |
| | | |
| Net Loss Attributable to Exactus, Inc. | (9,687,037) | (4,337,319) |
| | | |
| Deemed dividend on Preferred Stock | (904,450) | - |
| | | |
| Net Loss available to Exactus, Inc. common stockholders | $(10,591,487) | $(4,337,319) |
| | | |
| Net Loss per Common Share - Basic and Diluted | $(0.30) | $(0.91) |
| Net Loss attributable to non-controlling interest per Common Share - Basic and Diluted | $(0.02) | $- |
| Net Loss available to Exactus, Inc. common stockholders per Common Share - Basic and Diluted | $(0.31) | $(0.91) |
| | | |
| Weighted Average Number of Common Shares Outstanding: | | |
| Basic and Diluted | 33,899,585 | 4,764,056 |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
| | | |
| | | |
| Revenues | $- | $- |
| | | |
| Operating Expenses | | |
| General and administration | 759,145 | 108,400 |
| Professional | 368,917 | 176,286 |
| Research and development | 369,344 | 77,344 |
| Impairment | 4,080 | 20,625 |
| Stock-based compensation | 100,000 | 5,000 |
| Depreciation and amortization | - | 1,627 |
| Total operating expenses | 1,601,486 | 389,282 |
| | | |
| Net loss from operations | (1,601,486) | (389,282) |
| | | |
| Other Income (loss) | | |
| | | |
| Impairment on marketable securities | - | (10,215) |
| Debt forgiveness | - | 41,307 |
| Loss on disposal of equipment | (1,453) | - |
| Total other (loss) income | (1,453) | 31,092 |
| | | |
| Net loss before income taxes | (1,602,939) | (358,190) |
| Provision for income tax | - | - |
| | | |
| Loss from continuing operations | $(1,602,939) | $(358,190) |
| | | |
| Revenue from discontinued operations | - | 213 |
| | | |
| Net Loss | $(1,602,939) | $(357,977) |
| | | |
| Basic and Diluted Loss per Common Share | $(0.08) | $(0.70) |
| | | |
| Weighted Average Number of Common Shares Outstanding | 19,220,686 | 512,003 |
| | | |
The accompanying notes are an integral part of these consolidated financial statements. |
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Exactus, Inc. and Subsidiaries Consolidated Statements of
Stockholders'Stockholders' Equity (Deficit)
For the Years Ended December 31, 2019 and 2018
| | | | | | | | | | | | | | | |
| | Preferred Stock - Series A | Preferred Stock- Series B-1 | Preferred Stock- Series B-2 | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | - | $- | - | $- | - | $- | - | $- | 511,910 | $51 | $430,905 | $(6,210) | $(378,982)
| $45,764 |
| | | | | | | | | | | | | | | |
| Stock issued to related party | - | - | - | - | - | - | - | - | 3,380 | 1 | 4,999 | - | - | 5,000 |
| Capital Conribution | - | - | - | - | - | - | - | - | - | - | 207,683 | - | - | 207,683 |
| Impairment of investment in marketable securities | | - | - | - | - | - | - | - | - | - | - | 6,210 | - | 6,210 |
| Net loss | - | - | - | - | - | - | - | - | - | - | - | - | (357,977) | (357,977) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2015 | - | $- | - | $- | - | $- | - | $- | 515,290 | $52 | $643,587 | $- | $(736,959) | $(93,320) |
| | | | | | | | | | | | | | | |
| Common Stock Exchanged for Preferred Stock Series A | 4,558,042 | 455 | - | - | - | - | - | - | (393,314) | (39) | (416) | - | - | - |
| Preferred Series A Stock purchased and cancelled, February 29, 2016 | (50,000) | (5) | - | - | - | - | - | - | - | - | (49,995) | - | - | (50,000) |
| Preferred Series B-1 stock issued for acquisition of Excatus Bioslution, Inc., February 29, 2016 | - | - | 30,000,000 | 3,000 | - | - | - | - | - | - | (2,708) | - | - | 292 |
| Preferred Series B-2 stock issued for cash, note payable and liability, February 29, 2016 | - | - | - | - | 2,084,000 | 208 | - | - | - | - | 520,792 | - | - | 521,000 |
| Preferred Series A conversion to common stock, March 28, 2016 and March 30, 2016 | (4,508,042) | (450) | - | - | - | - | - | - | 4,508,042 | 450 | - | - | - | - |
| Preferred Series B-1 conversion to common stock, June 15, 2016 | - | - | (27,200,000) | (2,720) | - | - | - | - | 27,200,000 | 2,720 | - | - | - | - |
| Common stock, Preferred Series C stock, and warrants issued for prepaid services, June 30, 2016 | - | - | - | - | - | - | 1,733,334 | 173 | 1,600,000 | 160 | 999,667 | - | - | 1,000,000 |
| Preferred Series B-2 stock issued for cash, July 15, 2016 | - | - | - | - | 500,000 | 50 | - | - | - | - | 124,950 | - | - | 125,000 |
| Preferred Series B-2 stock issued for cash, October 27, 2016 | - | - | - | - | 6,000,000 | 600 | - | - | - | - | 1,499,400 | - | - | 1,500,000 |
| Common Stock issued, Share based Payment, November 11, 2016 | - | - | - | - | - | - | - | - | 141,844 | 14 | 99,986 | - | - | 100,000 |
| Common Stock Issued, Share based Payment, December 13, 2016 | | - | - | - | - | - | - | - | 500,000 | 50 | - | - | - | 50 |
| Net Loss | - | - | - | - | - | - | - | - | - | - | - | - | (1,602,939) | (1,602,939) |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2016 | - | $- | 2,800,000 | $280 | 8,584,000 | $858 | 1,733,334 | $173 | 34,071,862 | $3,407 | $3,835,263 | $- | $(2,339,898) | $1,500,083 |
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | Preferred Stock- Series B-1 | Preferred Stock- Series B-2 | | | | Common Stock | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2017 | - | $- | 2,800,000 | $280 | 8,684,000 | $868 | 1,733,334 | $173 | - | $- | - | $- | 4,383,983 | $439 | - | $- | $3,983,171 | $(6,200,573) | $- | $(2,215,642) |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of Series D preferred stock for cash | - | - | - | - | - | - | - | - | 45 | 1 | | | - | - | | | 549,999 | - | - | 550,000 |
| Common stock issued for debt settlement | - | - | - | - | - | - | - | - | - | - | | | 214,834 | 21 | | | 343,714 | - | - | 343,735 |
| Common stock issued upon convesion of | | | | | | | | | | | | | | | | | | | | |
| convertible debt | - | - | - | - | - | - | - | - | - | - | | | 685,644 | 69 | | | 400,411 | - | - | 400,480 |
| Common stock issued for services | - | - | - | - | - | - | - | - | - | - | | | 375,000 | 37 | | | 25,963 | - | - | 26,000 |
| Common stock issued for settlement | - | - | - | - | - | - | - | - | - | - | | | 574,063 | 57 | | | 86,742 | - | - | 86,799 |
| Warrants issued to Series B-2 holders | - | - | - | - | - | - | - | - | - | - | | | - | - | | | 138,679 | - | - | 138,679 |
| Related party debt forgiveness | - | - | - | - | - | - | - | - | - | - | | | - | - | | | 1,355,372 | - | - | 1,355,372 |
| Stock-based compensation | - | - | - | - | - | - | - | - | - | - | | | - | - | | | 227,394 | - | - | 227,394 |
| Net Loss | - | - | - | - | - | - | - | - | - | - | | | - | - | | | - | (4,337,319) | - | (4,337,319) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2018 | - | - | 2,800,000 | 280 | 8,684,000 | 868 | 1,733,334 | 173 | 45 | 1 | - | - | 6,233,524 | 623 | - | - | 7,111,445 | (10,537,892) | - | (3,424,502) |
| | | | | | | | | | | | | | | | | | | | | |
| Preferred stock issued upon convesion of convertible debt | 849,360 | 84 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 849,276 | - | - | 849,360 |
| Preferred stock issued for private placement | 55,090 | 6 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 55,084 | - | - | 55,090 |
| Preferred stock issued pursuant to Management and Services Agreement | - | - | - | - | - | - | - | - | - | - | 10,000 | 1 | - | - | - | - | 3,374,999 | - | - | 3,375,000 |
| Conversion of Series A Preferred Stock to Common Stock | (551,341) | (55) | - | - | - | - | - | - | - | - | - | - | 2,756,705 | 276 | - | - | (221) | - | - | - |
| Conversion of Series B-1 Preferred Stock to Common Stock | - | - | (1,150,000) | (115) | - | - | - | - | - | - | - | - | 143,750 | 14 | - | - | 101 | - | - | - |
| Conversion of Series B-2 Preferred Stock to Common Stock | - | - | - | - | (1,168,000) | (116) | - | - | - | - | - | - | 146,000 | 15 | - | - | 101 | - | - | - |
| Conversion of Series D Prefered Stock to Common Stock | - | - | - | - | - | - | - | - | (27) | (1) | - | - | 675,000 | 68 | - | - | (67) | - | - | - |
| Deemed dividend on Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 904,450 | (904,450) | - | - |
Common stock issued for private placement | - | - | - | - | - | - | - | - | - | - | - | - | 22,187,007 | 2,219 | - | - | 7,213,161 | - | - | 7,215,380 |
| Common Stock issued for Master Supply | - | - | - | - | - | - | - | - | - | - | - | - | 8,385,691 | 839 | - | - | (839) | - | - | - |
| Common stock issued for debt settlement | - | - | - | - | - | - | - | - | - | - | - | - | 203,080 | 20 | - | - | 40,596 | - | - | 40,616 |
| Common stock issued for purchase of membership interest in subsidiary | - | - | - | - | - | - | - | - | - | - | - | - | 937,500 | 94 | - | - | 989,906 | - | - | 990,000 |
Common stock issued for purchase of membership interest in subsidiary | - | - | - | - | - | - | - | - | - | - | - | - | 503,298 | 50 | - | - | 449,950 | - | - | 450,000 |
| Common stock unissued for pursuant to Asset Purchase Agreement | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 100,000 | 10 | 69,990 | - | - | 70,000 |
| Common stock issued upon conversion of convertible debt | - | - | - | - | - | - | - | - | - | - | - | - | 250,000 | 25 | - | - | 195,975 | - | - | 196,000 |
| Common stock issued and unissued for prepaid services | - | - | - | - | - | - | - | - | - | - | - | - | 150,000 | 15 | 100,000 | 10 | 120,355 | - | - | 120,380 |
| Common stock issued and unissued for services | - | - | - | - | - | - | - | - | - | - | - | - | 1,312,490 | 131 | 20,830 | 2 | 925,714 | - | - | 925,847 |
| Stock-based compensation in connection with restricted common stock award grants | - | - | - | - | - | - | - | - | - | - | - | - | 115,280 | 11 | 68,750 | 7 | 143,896 | - | - | 143,914 |
| Common stock and preferred stock cancelled per Surrender and Release Agreement | | | | - | - | - | (1,733,334) | (173) | - | - | - | - | (180,000) | (18) | - | - | 191 | - | - | - |
| Common stock issued for exercise of stock options | - | - | - | - | - | - | - | - | - | - | - | - | | | 375,000 | 37 | (37) | - | - | - |
| Stock options granted for services | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 1,276,636 | - | - | 1,276,636 |
| Stock warrants granted for services | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 1,428,243 | - | - | 1,428,243 |
| Stock warrants granted as debt discount | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 194,388 | - | - | 194,388 |
| Net Loss | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | | (9,687,037) | (537,469) | (10,224,506) |
| Balance, December 31, 2019 | 353,109 | $35 | 1,650,000 | $165 | 7,516,000 | $752 | - | $- | 18 | $- | 10,000 | $1 | 43,819,325 | $4,382 | 664,580 | $66 | $25,343,293 | $(21,129,379) | $(537,469) | $3,681,846 |
The accompanying notes are an integral part of these consolidated financial statements.
Exactus, Inc.
and Subsidiaries(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of CashCash Flows
| | |
| | | |
| | | |
| Cash Flows From Operating Activities: | | |
| Net loss | $(1,602,939) | $(357,977) |
| Adjustments to reconcile net loss to cash used in operations: | | |
| Depreciation and amortization | - | 1,627 |
| Expenses incurred on behalf of parent company | - | (358,807) |
| Expenses paid by related company | - | 68,885 |
| Bad debt | 7,010 | 1,704 |
| Debt forgiveness | - | (41,307) |
| Loss on disposal of property and equipment | 1,453 | - |
| Impairment of equipment | 4,080 | 20,625 |
| Impairment of marketable securities | - | 10,215 |
| Stock-based compensation | 100,000 | 5,000 |
| Bank overdraft write-off | (1,172) | - |
| Changes in operating assets and liabilities: | | |
| (Increase) decrease in operating assets: | | |
| Accounts receivable | - | (213) |
| Due from related parties | - | (895) |
| Prepaid expenses | (19,671) | 4,167 |
| Restricted cash | 72,342 | (72,342) |
| Increase (decrease) in operating liabilities: | - | - |
| Accounts payable | 491,012 | 84,748 |
| Accrued expenses | 56,929 | (5,450) |
| Net Cash Used In Operating Activities | (890,956) | (640,020) |
| | | |
| Cash Flows From Investing Activities: | | |
| Acquisition of cash balance from Exactus BioSolutions Inc. | 1,292 | - |
| Net Cash Provided by Investing Activities | 1,292 | - |
| | | |
| Cash Flows From Financing Activities: | | |
| Proceeds from sale of Series B-2 Preferred Stock | 1,995,000 | - |
| Payment for Series A Preferred Stock | (50,000) | - |
| Proceeds from related party (contributed capital) | - | 497,156 |
| Proceeds from issuance of note payable | - | 100,000 |
| Bank overdraft | - | 1,172 |
| Net Cash Provided By Financing Activities | 1,945,000 | 598,328 |
| | | |
| Net increase (decrease) in cash and cash equivalents | 1,055,336 | (41,692) |
| Cash and cash equivalents at beginning of period | - | 41,692 |
| | | |
| Cash and cash equivalents at end of period | $1,055,336 | $- |
| | | |
| Supplemental Cash Flow Information: | | |
| Cash paid for interest | $- | $- |
| Cash paid for taxes | $- | $- |
| | | |
| Non-Cash transactions: | | |
| Purchase of Patent by related party | $- | $450 |
| Acquisition of license agreement from Exactus BioSolutions Inc | $50,000 | $- |
| Preferred Stock Series B-2 issued as payment for Note payable | $100,000 | $- |
| Preferred Stock Series B-2 issued as payment for Exactus shareholder loans | $51,000 | $- |
| Preferred Stock Series C, common stock, and warrants issued as part of Master Service Agreement and Stock Subscription Agreement as prepaid expense | $1,000,000 | $- |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | |
| | | |
| | | |
| Cash Flows From Operating Activities: | | |
| Net loss | $(10,224,506) | $(4,337,319) |
| Adjustments to reconcile net loss to cash used in operating activities: | | |
| Depreciation | 63,770 | - |
| Derivative loss | 1,871,583 | 828,694 |
| Stock-based compensation | 3,774,640 | 892,073 |
| Bad debt expense | 32,577 | - |
| Impairment expense | 1,087,346 | - |
| Inventory reserve | 723,391 | - |
| Amortization of prepaid stock-based expenses | 285,494 | - |
| Amortization of discount and debt issuance costs for convertible notes | 425,712 | 405,173 |
| Amortization of intangible assets | 828,526 | - |
| Deferred rent | 85,699 | - |
| Loss on stock settlement | - | 607,929 |
| Gain on settlement of debt | (3,004,630) | - |
| Changes in operating assets and liabilities: | | |
| (Increase) decrease in operating assets: | | |
| Accounts receivable | (88,302) | - |
| Accounts receivable - related party | (18,860) | - |
| Inventory | (2,864,383) | - |
| Prepaid expenses and other current assets | (140,765) | (872) |
| Deposit | (80,000) | - |
| Increase (decrease) in operating liabilities: | | |
| Accounts payable | 518,979 | 188,378 |
| Accounts payable - related party | 454,511 | - |
| Accrued expenses | 321,135 | 905,946 |
| Unearned revenues | 215,000 | - |
| Settlement payable | (20,000) | (3,000) |
| Interest payable | 6,793 | 47,243 |
| Net Cash Used In Operating Activities | (5,746,290) | (465,755) |
| | | |
| Cash Flows From Investing Activities: | | |
| Purchase of membership interest in subsidiary | (1,500,000) | - |
| Purchase of property and equipment | (541,203) | - |
| Net Cash Used in Investing Activities | (2,041,203) | - |
| | | |
| Cash Flows From Financing Activities: | | |
| Proceeds from sale of Series D preferred stock | - | 50,000 |
| Advances from related party | 242,500 | - |
| Repayments on related party advances | (370,000) | - |
| Proceeds from sale of common stock | 7,215,380 | - |
| Payments of principal on notes payable | (59,500) | - |
| Proceeds from issuance of notes payable | 97,156 | 103,400 |
| Payments of principal on convertible notes | (186,443) | (25,000) |
| Proceeds from issuance of convertible notes, net of issuance cost | 864,845 | 178,100 |
| Net Cash Provided By Financing Activities | 7,803,938 | 306,500 |
| | | |
| Net increase (decrease) in cash and cash equivalents | 16,445 | (159,255) |
| | | |
| Cash and cash equivalents at beginning of year | 1,960 | 161,215 |
| | | |
| Cash and cash equivalents at end of year | $18,405 | $1,960 |
| | | |
| Supplemental Cash Flow Information: | | |
| Cash paid for interest and finance charges | $40,116 | $- |
| Cash paid for taxes | $- | $- |
| | | |
| Non-Cash investing and financing activities: | | |
| Forgiveness of debt by officers and directors | $- | $1,355,372 |
| Proceeds from sale of Series D preferred stock paid directly to settle amounts | | |
| due to officers and directors | $- | $500,000 |
| Proceeds from sale of Series A preferred stock paid directly to settle debts | $55,090 | $- |
| Convertible notes and interest payable settled by Series A preferred stock issued | $849,360 | $- |
| Note payable, accrued expense and interest payable settled by common stock issued | $40,616 | $- |
| Convertible notes settled by common stock issued | $196,000 | $46,295 |
| Accounts payable settled by common stock issued | $- | $85,934 |
| Common stock issued for purchase of membership interest in subsidiary | $1,440,000 | $- |
| Common stock and preferred stock issued for prepaid services | $3,495,380 | $- |
| Common stock issued pursuant to asset purchase agreement | $70,000 | $- |
| Increase in intangible assets for subscription payable | $250,000 | $- |
| | | |
| Initial beneficial conversion feature and debt discount on convertible notes | $670,467 | $236,500 |
| Stock warrants granted as debt discount | $194,388 | $- |
| Initial derivative liability on convertible notes | $- | $469,000 |
| Fair value of common stock issued on conversion of notes | $- | $400,480 |
| Fair value of common stock issued for settlement of accounts payable | $- | $343,735 |
| Preferred deemed dividend | $904,450 | $- |
| Operating lease right-of-use assets and operating lease liabilities | | |
| recorded upon adoption of ASC 842 | $2,431,362 | $- |
| Reduction of operating lease right-of-use asset and operating lease liabilities | $258,109 | $- |
| Prepaid expenses directly paid by a related party | $35,000 | $- |
The accompanying notes are an integral part of these consolidated financial statements.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)NOTE 1 - NATURE OF ORGANIZATIONNotes to the Audited Financial Statements
December 31, 2016 and 2015
NOTE 1. BUSINESS DESCRIPTIONOrganization and Business Description
Exactus, Inc. (the “Company”) was incorporated on January 18, 2008 as “Solid Solar Energy, Inc.”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 Statescope of Nevadaits 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 for-profit Company. On May 16, 2013, we filednew 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 certificate of amendmentSchedule I substance, shifted regulatory authority from the Drug Enforcement Administration to the Company’s amendedDepartment of Agriculture, and restated articlesprovided 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 incorporationcannabis containing an amount equal to change our nameor lower than 0.3% tetra-hydrocannabinol (THC) and allowed farmers to “Spiral Energy Tech., Inc.” from Solid Solar Energy, Inc. On February 29, 2016, we acquired allgrow and sell hemp under state regulation. Industry reports indicate that 41 states have set up cultivation and production programs to regulate the production of hemp.
Following passage of the 2018 Farm Bill, the Company entered into a Master Product Development and Supply Agreement (the “Development Agreement”) with Ceed2Med, LLC (“C2M”). Under the Master Agreement, C2M agreed to provide to the Company up to 2,500 kilograms of products (isolate or distillate) for manufacture into consumer products such as tinctures, edibles, capsules, topical solutions and animal health products. The Company believes manufacturing, testing and quality akin to pharmaceutical products is important when distributing hemp-based products. The Company’s products originate from farms at which the Company (or C2M) oversee all stages of plant growth and are manufactured under contract arrangements with third-parties.
The Company identified the rapidly growing hemp-based CBD market as a valuable target for a new company focus. On January 8, 2019, the Company entered into the Master Product Development and Supply Agreement with C2M. In consideration for the Development Agreement (see Note 11), C2M was issued 8,385,691 shares of our Common Stock. Additionally, the Company granted immediately vested 10-year options to purchase 750,000 shares of Common Stock, with exercise price of $0.32 per share to three C2M founders. As a result, C2M became the Company’s largest shareholder holding (inclusive of the vested options held by its founders) approximately 51% of the Company’s outstanding Common Stock as of the date of the Development Agreement which has subsequently been reduced to approximately 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 outstanding capital stockexperience suitable for production of CBD rich ingredients including isolates, distillates, water soluble, and proprietary formulations. Under the Development Agreement, the Company was allotted a minimum of 50 and up to 300 kilograms per month, and up to 2,500 kilograms annually, of CBD rich ingredients for resale and placed a $1 million purchase order for products. The Company currently offers products such as tinctures, edibles, capsules, topical solutions and animal health products manufactured for the Company as branded and white-label products.
On March 11, 2019, with the assistance of C2M and assignment of rights, the Company acquired a 50.1% limited liability membership interest in Exactus BioSolutions, Inc.One World, LLC (“Exactus BioSolutions”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 Share ExchangeSubscription Agreement dated February 29, 2016, with Exactus BioSolutions (the “Share Exchange”)and a Membership Interest Purchase Agreement (See Note 3). TheFollowing the events described above, the Company issued 30 million sharesentered into the business of newly-designated Series B-1 Preferred Stockproduction and selling of industrial hemp grown for its own use and for sale to third-parties.
On January 11, 2019, the shareholdersBoard of Exactus BioSolutions in the Share Exchange, representing approximately 87% of voting controlDirectors of the Company upon consummationapproved a reverse stock split of the Share Exchange. AsCompany’s Common Stock at a resultratio of 1-for-8 (the “Reverse Stock Split”) including shares issuable upon conversion of the Share Exchange, Exactus BioSolutions became a wholly-owned subsidiaryCompany’s outstanding convertible securities. All share and per share values of Exactus, Inc. Effective March 22, 2016, we changed our corporate name to “Exactus, Inc.” via a merger with our wholly-owned subsidiary, Exactus Acquisition Corp. the Company’s Common Stock for all periods presented in this Report and in the accompanying consolidated financial statements are retroactively restated for the effect of the Reverse Stock Split.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FollowingBasis of presentation and principles of consolidation
The Company’s consolidated financial statements include the Share Exchange, we became a life science company that plans to developfinancial statements of its 50.1% subsidiary, EOW and commercialize Point-of-Care (“POC”) diagnostics for measuring proteolytic enzymes51% subsidiary, Paradise Medlife. All significant intercompany accounts and transactions have been eliminated in the blood based on a proprietary detection platform (the “New Business”). Our primary product, the FibriLyzer, will employ a disposable test “biosensor” strip combinedconsolidation.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The accompanying consolidated financial statements have been prepared in accordance with a portable and easy to use hand held detection unit that provides a result in less than 30 seconds. The initial markets we intend to pursue for the FibriLyzer are (i) the management of hyperfibrinolytic states associate with surgery and trauma, (ii) obstetrics, (iii) acute events such as myocardial infarction and ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis and (v) chronic coronary disease management. We expect to follow up the FibriLyzer with similar technology, the MatriLyzer, to detect collagenase levels in the blood for the detection of the recurrence of cancer. We intend to file to gain regulatory approval to sell our productsaccounting principles generally accepted in the United States Canadaof America and Europe. Management intends to primarily focus on the developmentrules and commercializationregulations of the FibriLyzerUnited States Securities and related technology exclusively licensed by Exactus. Exchange Commission, which present the consolidated financial statements of the Company and its majority-owned subsidiaries as of December 31, 2019. All intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, stockholders’ equity (deficit) and cash flows as of December 31, 2019 and 2018, and for the years then ended, have been made. Those adjustments consist of normal and recurring adjustments.
Prior to our acquisition of Exactus BioSolutions pursuant to the Share Exchange, our primary business focus was on developing and commercializing drone technology (the “Former Business”).
NOTE 2. GOING CONCERNGoing concern
These consolidated financial statements are presented on the basis that wethe 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 ourthe Company’s assets and the carrying amount of ourits liabilities based on the going concern uncertainty. We have considered ASU 2014-15As reflected in considerationthe accompanying consolidated financial statements, the Company had a net loss attributable to Exactus Inc. common stockholders of reporting requirements$10,591,487 for the year ended December 31, 2019. The net cash used in operating activities was $5,746,290 for the year ended December 31, 2019. Additionally, the Company had an accumulated deficit of $21,129,379 and working capital deficit of $1,761,309 at December 31, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern financial statements.
Since our inceptionfor 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 2008, we have generated lossesthe future. Although the Company has historically raised capital from operationssales of common and we anticipatepreferred shares and from the issuance of convertible promissory notes, there is no assurance that weit will be able to continue to generate significant losses from operations fordo so. If the foreseeable future. As of December 31, 2016, our accumulated deficit was $2,339,898 of which $736,959 wasCompany 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 consolidated financial statements do not include any adjustments related to the Former Business. Asrecoverability and classification of December 31, 2016, we had $1,055,336assets or the amounts and classification of cash. We expectliabilities that these funds will notmight be sufficient to enable us to completenecessary should the development of any potential products, including the FibriLyzer and related technology. 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 couldCompany 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.
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 year ended December 31, 2019, the Company received proceeds from the sale of the Company’s Common Stock of approximately $7.2 million.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIESIn 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.
BasisUse of Presentation. The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC. The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.Estimates
Use of Estimates.The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP")GAAP which requirerequires 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 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 couldmay differ significantly from those estimates. As of December 31, 2016, the Company's accounts included significantSignificant estimates relatingmade by management include, but are not limited to recovery/execution on prepayments made on clinical research services.
Stock-Based Compensation. We recognize compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the datederivative liabilities, useful life of grant using the Black-Scholes method for stock optionsproperty and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, we calculate theequipment, fair value of the award on the dateright of grantuse assets, assumptions used in the same manner as employee awards, however, the awards are revalued at the endassessing impairment of each reporting periodlong-term assets, contingent liabilities, and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.non-cash equity transactions.
We may issue restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is measurable more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.Fair Value Measurements
Share-based expense totaled $100,000 and $5,0000 for the year ended December 31, 2016 and 2015, respectively.
Research and Development Expenses. We follow ASC 730-10, “Research and Development,” and expense 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 $369,344 on the new business focus and $77,344 for the former business were incurred for the year ended December 31, 2016 and 2015, respectively.
Revenue Recognition. We recognize revenue when it is realized or realizable and estimable in accordance with ASC 605, “Revenue Recognition”. All revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) the service or sale is completed; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured.
Fair Value Measurements. WeThe Company adopted the provisions of ASCAccounting 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
measurements. The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate theirguidance prioritizes the inputs used in measuring fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fairthree-tier value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based onamong the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:following:
| ● | Level 1 - Unadjusted1—Valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities that the Company has the ability to access. |
| ● | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including2—Valuations based on quoted prices for similar assets or liabilities in active markets;markets, quoted prices for identical or similar assets or liabilities in markets that are not active;active and models for which all significant inputs other than quoted prices that are observable, for the asseteither directly or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.indirectly. |
| ● | Level 3 - Inputs3—Valuations based on inputs that are bothunobservable and significant to the overall fair value measurement and unobservable.measurement. |
FairEXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The Company measures certain financial instruments at fair value estimates discussed hereinon a recurring basis. Assets and liabilities measured at fair value on a recurring basis are based upon certain market assumptionsas follows at December 31, 2019 and pertinent information available to management2018:
| | | |
| Description | | | | | | |
| Derivative liabilities | — | — | $880,410 | — | — | $1,742,000 |
A roll forward of the level 3 valuation financial instruments is as follows:
| |
| Balance at beginning of year | $1,742,000 |
| Initial fair value of derivative liabilities as debt discount | 670,467 |
| Initial fair value of derivative liabilities as derivative expense | 786,823 |
| Reduction through conversion of debt | (3,403,640) |
| Change in fair value included in derivative loss | 1,084,760 |
| Balance at end of year | $880,410 |
| |
Balance at beginning of year
| $930,000 |
| Initial fair value of derivative liabilities as debt discount | 236,500 |
| Initial fair value of derivative liabilities as derivative expense | 232,500 |
| Reduction through conversion of debt | (90,855) |
Change in fair value included in derivative loss | 433,855 |
| Balance at end of year | $1,742,000 |
As of December 31, 2016.2019 and 2018, the Company has no assets that are re-measured at fair value.
Cash and Cash Equivalents. We consider
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.As of December 31, 2016, we 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 and cash equivalents of $1,055,336, and as of December 31, 2015, we had cash and cash equivalents of $0 and a bank overdraft of $1,172. As of December 31, 2016, we had approximately $805,336balances in excess of FDIC insured limits.limits at December 31, 2019 and 2018, respectively. Cash and cash equivalents were $18,405 and $1,960 at December 31, 2019 and 2018, respectively.
Restricted Cash. Accounts receivable and allowance for doubtful accounts
The carrying amountsCompany has a policy of cashproviding 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 cash equivalent items whichother factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are restricted ascharged to withdrawal or usage. Restrictions may include legally restricted deposits held as compensating balances against borrowing arrangements, contracts entered into with others, or entity statements of intention with regard to particular deposits; however, time depositsbad debt expense and short-term certificates of deposit are not generally included in legally restricted deposits. At December 31, 2016 and 2015, the Company's current restricted cash consistedallowance after all means of cash held in trust account of $0 and $72,342, respectively.
Marketable Securities. The Company’s marketable equity securitiescollection have been classifiedexhausted and accountedthe potential for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. We classify our marketable equity securities as either short-term or long-term based on the nature of each security and its availability for use in current operations. Our marketable equity securities are carried at fair value, with the unrealized gains or losses reported as a component of shareholder’s equity. Adjustments resulting from the change in fair value, included in accumulated other comprehensive income (loss) in shareholder’s equity, were $0 and $6,210 asrecovery is considered remote. As of December 31, 20162019, and 2015,2018, allowance for doubtful accounts amounted to $13,991 and $0, respectively. We recognized an impairment of $10,215 in our marketable securities forBad debt expense amounted $32,577 and $0 during the year ended December 31, 2015.2019 and 2018, respectively.
Long-LivedPrepaid Expenses and Other Current Assets Including Other Acquired Intangible Assets. Property
Total prepaid expenses and equipmentother current assets amounted to $248,776 and $12,330 at December 31, 2019 and 2018, respectively. Prepaid expenses to C2M who is stateda related party, amounted to $622,160 – current portion and $2,492,045 – long-term portion at cost. Depreciation is computed byDecember 31, 2019 (see Note 10). Prepaid expenses consist primarily of costs paid for future services which will occur within a year. Prepaid expenses may include prepayments in cash and equity instruments for an operating lease, consulting, and insurance fees which are being amortized over the straight-line method over estimated useful lives, which is between 3 years for computer equipment and 5-20 years for production equipment. The carrying amountterms of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted.their respective agreements.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Long-livedInventory
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.
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 suchranging from 3 to 10 years. The cost of repairs and maintenance is expensed as property, equipmentincurred; major replacements and identifiable intangiblesimprovements are reviewedcapitalized. When assets are retired, or disposed of, the cost and accumulated depreciation are removed, and any resulting gains or losses are included in the consolidated statement of operations.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever facts andevents or changes in circumstances indicate that the carrying valueamount of the assets may not be recoverable. When requiredfully recoverable, or at least annually. The Company recognizes an impairment lossesloss 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. The Company recorded impairment expense of $250,192 and $0 related to its intangible assets (see Note 6) and impairment expense on assetsinventory of its CBD products of $837,153 (see Note 3) during the year ended December 31, 2019 and 2018, respectively and was included in cost of sales as reflected in the accompanying consolidated statements of operations.
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 heldindexed to the Company’s stock. As a result, these are required to be accounted for as derivative financial liabilities and usedhave been recognized as liabilities on the accompanying consolidated balance sheets. The fair value of the derivative financial liabilities is determined using a binomial model with Monte Carlo simulation and is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, the expected term, and the risk-free interest rate. The derivative financial liabilities are subject to re-measurement at each balance sheet date and any changes in fair value is recognized as a component in other income (expenses).
Revenue Recognition
On January 1, 2018, the Company adopted ASC Topic 606 and the related amendments Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company recognizes revenue by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company’s performance obligations are satisfied at the point in time when products are shipped or delivered to the customer, which is when the customer has title and the significant risks and rewards of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment of product). The Company primarily receives fixed consideration for sales of product. Payments received from customers that are related to unshipped or undelivered products are recorded as unearned revenue until the shipment of product. As of December 31, 2019 and 2018, the Company had $215,000 and $0, respectively, of unearned revenue recorded from the Company’s related party customer, C2M (see Note 12).
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 follow ASC 730-10, “Research and Development,” and expenses research and development costs when incurred. Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development. Research and development costs of $22,100 and $300,000 were incurred for the year ended December 31, 2019 and 2018, respectively and are included in operating expenses on the accompanying 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 $496,908 and $18,036 for the year ended December 31, 2019 and 2018, respectively, and are included in selling and marketing expenses on the accompanying 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 $11,835 and $0 for the year ended December 31, 2019 and 2018, 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.
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 asset.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, is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, we estimate fair value by using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. We recognized impairment losses of $4,080 and $20,625 for the year ended December 31, 2016 and 2015, respectively.each subsequent reporting date.
Related Parties. Parties
We follow ASC 850, “” Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Earnings per Share
Income Taxes. We account for income taxes under ASC 740 “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. Deferred tax assets totaled $0 as of December 31, 2016 and 2015.
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 optionsconverted to Common Stock and other commitments to issue commonwarrants are exercised. Preferred stock were exercised or equity awards vest resulting inand warrants are excluded from the issuance of common stock that coulddiluted earnings per share in the earnings of the Company. As of December 31, 2016 and 2015, the Company had 14,784,001 and 0 dilutive potential common shares, respectively.calculation if their effect is anti-dilutive.
Comprehensive For the year ended December 31, 2019 and 2018, the following potentially dilutive shares were excluded from the computation of diluted earnings per shares because their impact was anti-dilutive:
| | | |
| Stock Options | 4,671,280 | 959,375 |
| Stock Warrants | 2,014,299 | 644,083 |
| Restricted stock to be issued upon vesting | 3,583,328 | - |
| Convertible Preferred Stock | 9,611,295 | 2,602,167 |
| Convertible Debt | 3,027,778 | 22,134,849 |
| Total | 22,907,980 | 26,340,474 |
Income (Loss). Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. 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 requiredprovided to record all componentsoffset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provision of comprehensive income (loss)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 recognized. Netfiled.
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 (loss)to include the amounts attributable to both the parent and other comprehensivenon-controlling interest, with disclosure on the face of the consolidated income (loss)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”, neta modification or an exchange of their related tax effect, arriveddebt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a comprehensive income (loss)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.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). Other comprehensive loss was $0The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning after December 15, 2018.
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
Operating lease ROU assets represents the right to use the leased asset for the year ended December 31, 2016lease term and 2015.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
DuringIn January 2017, the first quarterFASB 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 2015,goodwill by eliminating Step 2 from the company adopted FASB’s guidance on reporting discontinued operations and disclosuresgoodwill impairment test. Under the amendments of disposals of components ofASU 2017-04, an entity. This standard raisesentity should perform its goodwill impairment test by comparing the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definitionfair value of a discontinued operation. The adoption of this guidance has not had a material impact onreporting unit with its financial position, results of operations or cash flows.
Duringcarrying amount. An entity will recognize an impairment charge for the fourth quarter of 2015, the Company adopted ASU 2015-03,amount by which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the associated debt liability, and amortization of those costs should be reported as interest expense. Thisreporting unit. ASU 2017-04 is effective for annual and interim periods beginning afterthe calendar year ending December 15, 2015,31, 2020. The amendments require a prospective approach to adoption and early adoption is permitted for financial statementsinterim or annual goodwill impairment tests. The Company is currently evaluating the impact of this standard.
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 been previously issued. Thebelieve that any new guidance should be applied on a retrospective basis for each period presented in the balance sheet. The adoption of this guidance has not hador modified principles will have a material impact on itsthe Company’s reported financial position resultsor operations in the near term. The applicability of operationsany 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 cash flows.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, an Oregon limited liability company, formed on January 25, 2019 which since inception, had no operations.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
In September 2015,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 FASB issued ASU 2015-16, “Simplifyingterms of the Accounting for Measurement –Period Adjustments.” ChangesSubscription Agreement, the Company acquired a 30% interest in EOW, and an additional 20.1% was acquired from existing members pursuant to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amountsterms of the acquiree recognized atPurchase Agreement. The existing members are considered third parties. The Company has the acquisition date withright to appoint a corresponding adjustment to goodwill as a result of changes made to the balance sheet amountsManager of the acquiree.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 measurement period isCompany appointed its President, Emiliano Aloi, as its Manager of EOW.
Under the period afterterm of the acquisition date during whichSubscription Agreement, the acquirer may adjust the balance sheet amounts recognizedCompany acquired 30% of membership interest in EOW in consideration for a business combination (generally up to one year from the datecash of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. The adoption of this guidance has not had a material impact on its financial position, results of operations or cash flows.$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 |
In November 2015,The acquisition of the FASB issued (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes.” Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability30% membership interest is deemed to be an investment in and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilitiescapital contribution to EOW and assets for all jurisdictions along with any related valuation allowancesshall be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted.eliminated upon consolidation. The Company has adopted this guidance inpaid a total of approximately $2,344,000 between April 2019 and September 2019fully paid the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
Recent Accounting Pronouncements Issued But Not Adopted$2,700,000 purchase price as of December 31, 2016
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40), effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. The Company adopted this guidance on January 1, 2017. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2016-02, 2019Leases (Topic 842), which amends the FASB Accounting Standards Codification and creates Topic 842, "Leases." The new topic supersedes Topic 840, "Leases," and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements..
In March 2016,Under the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspectsterm of the accountingPurchase Agreement, the Company acquired 20.1% of EOW from existing members for share-based payment transactions, includingaggregate consideration of $2,940,000 consisting of total cash payments of $1,500,000, 937,500 shares of the income tax consequences, classificationCompany’s Common Stock, and $450,000 worth of awards as either equityshares 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 liabilities, and classification$1.056 per share, the fair value of the Company’s Common Stock based on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The adoption of this guidance is not expected to have a material impactquoted trading price on the Company's consolidated financial statements.date of the Purchase Agreement. No goodwill was recorded since the Purchase Agreement was accounted for as an asset purchase.
In August 2016,The consideration shall be paid to the FASBsellers 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. |
At December 31, 2019, the Company has an outstanding balance of $0 to the existing members which was included in subscription payable in the consolidated balance sheets.
Pursuant to ASU 2016-15, Cash Flow Statements, Classification2017-01 and ASC 805, the Company analyzed the operations of Certain Cash ReceiptsEOW and Cash Payments, which addresses eight specific cash flow classification issuesthe 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 objectiveoption of reducing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance isthe Company. Accordingly, the transaction was not expected to haveconsidered a material impact on the Company's consolidated financial statements.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 |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
NOTE 4. AGREEMENTS
Through the Share Exchange,Additionally, the Company acquired an exclusive license agreement (the “Licensing Agreement”) between Exactus BioSolutions and Digital Diagnostics Inc. (“Digital Diagnostics”) thatrecorded the Company recognized as an intangible asset. Pursuant to the Licensing Agreement, Digital Diagnostics granted to Exactus BioSolutions an exclusive license to develop, produce and commercialize certain diagnostic products, including the FibriLyzer and MatriLyzer, that utilize certain intellectual property rights owned or licensed by Digital Diagnostics. The Licensing Agreement provides for Exactus BioSolutions and Digital Diagnostics to collaborate through the various stepsacquisition of the product and device development process, including the development, regulatory approval and commercialization stages. Exactus BioSolutions is required to pay Digital Diagnostics,50.1% of membership interest in cash and/or stock, an initial signing payment, milestone fees triggered by the first regulatory clearance or approval of each of the FibriLyzer and the MatriLyzer, and various sales thresholds, and royalty payments based on the net sales of the products, calculated on a product-by-product basis. In 2016, the Company paid $50,000 to Digital Diagnostics as part of the initial signing paymentEOW under the Licensing Agreement and $21,659FASB issued ASC 810-10-65, “Non-controlling Interests in legal expenses.Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). As of December 31, 2016,2019, the Company accrued an additional $171,033recorded a non-controlling interest balance of $537,469 in licensing fees due to closing a financing transactionconnection with the majority-owned subsidiary, EOW as reflected in the fourth quarteraccompanying consolidated balance sheet and losses attributable to non-controlling interest of 2016. No milestones have been met and no milestone fees have been paid or accrued for through$537,469 during the year ended December 31, 2016.2019, as reflected in the accompanying consolidated statements of operations.
The License Agreement is effective until such time as neither Digital Diagnostics nor Exactus Biosolutions has any obligation to the other under the License Agreement in any country with respect to any product. The License Agreement may be terminated by the Company effective upon at least six (6) months written notice if regulatory approval has been obtained in the U.S. or in the European Union, or upon at least three (3) months written notice if regulatory approval has not been obtained in the U.S. or in the European Union. Either party may terminate the License Agreement in the event the other party materially breaches the License Agreement, or becomes insolvent.Paradise Medlife, LLC
On June 30, 2016, in order to conduct a clinical trial for the FibriLyzer and other studies,July 5, 2019, the Company entered into a Master Servicesan Operating Agreement (the “MSA”“Operating Agreement”) with IntegriumParadise Medlife, LLC and Paradise CBD, LLC. Paradise Medlife is a Florida Limited Liability Company, organized on April 12, 2019 with no operations since inception. The Company shall contribute capital of $50,000 in the form of CBD products in exchange for 51% ownership of Paradise Medlife. Consequently, Paradise Medlife became a majority owned subsidiary of the Company. To date, Paradise Medlife has no operations. At December 31, 2019, the Company has not yet contributed the capital of $50,000. The Company anticipates to contribute the capital in the form of CBD products during 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 (“Integrium”Green Goddess”), a Florida contract manufacturer and formulator of hemp and vape products. Under the Green Goddess Purchase Agreement, the Company acquired the assets of Green Goddess consisting principally of its right and interest in the Green Goddess brand, inventory, customer list, intellectual property including IP addresses and trademarks entered into an option to acquire the seller’s vape assets, and entered into an employment agreement with the founder (the “Founder”) of Green Goddess. Green Goddess manufactures and distributes a premium line of hemp-derived products sold through distributors and online. Green Goddess has been a contract manufacturer for C2M and the Company.
Under the terms of the Green Goddess Purchase Agreement the Company agreed to issue 250,000 shares of the Company’s Common Stock and pay $250,000 cash for the acquisition to be paid in six installments. The first installment of $41,667 shall be due within 90 days of the closing and the five additional installments shall be paid starting on October 12, 2019 and continuing on the first day of each following month. At December 31, 2019, the Company has an outstanding balance of $250,000 to the seller which is included in subscription payable in 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.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
Additionally, in accordance with ASC 805-10, the 250,000 shares of common stock and the Additional Stock Consideration are tied to continued employment of the Company and as such are recognized as compensation expenses in the post combination period under Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and services received in exchange for an award based on the grant-date fair value of the award (see Note 10).
The relative fair value of the assets acquired were based on management’s estimates of the fair values on July 31, 2019. Based upon the purchase price allocation, the following table summarizes the estimated relative fair value of the assets acquired at the date of acquisition:
| Intangible asset – trademark | $3,500 |
| Intangible assets – customer list | 212,529 |
| Inventory | 33,971 |
| Total assets acquired at fair value | 250,000 |
| Total purchase consideration | $250,000 |
During the year ended December 31, 2019 the Company fully impaired the assets and resulted in an impairment loss of $186,025 related to the Green Goddess intangible asset (see Note 6).
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 currently held inventory has been written down to a value of $0 due to the age and questionable salability of the product. During the year ended December 31, 2019, the Company fully impaired the finished goods related to CBD products and resulted in an impairment loss of $837,153 which is included in cost of sales on the consolidated statements of operations.
Levor, LLC
On September 30, 2019 the Company entered into an Asset Purchase Agreement (the “Levor Purchase Agreement”) with Levor, LLC (“Levor”) and PoC Capital, LLC (“PoC Capital”the sole owner and manager of Levor (the “Seller”). Under the MSA, Integrium hasLevor 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 perform clinical research services in supportissue 100,000 shares of the development of POC diagnostics devices. Integrium isCompany’s Common Stock at closing. In addition, the Company entered into an agreement under which the Company may become obligated to conduct one or more studies in compliance with FDA regulations and pursuant to the Company’s specific service orders. PoC Capital has agreed to fund up to the first $1,000,000 in study costs and fees due to Integrium, with all fees in costs in excess of that amount being the Company’s sole responsibility, in exchange for 1,600,000issue additional shares of the Company’s common stock 1,733,334to 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 newly designated Series C Preferredits Common Stock and 1,666,667 warrants to purchasevalued at $70,000, or $0.70 per share, the fair value of the Company’s Common Stock based on the sale of common stock at a pricein 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 $0.60 per share exercisableASC 718 which requires recognition in the financial statements of the cost of employee and services received in exchange for three years.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 Company has accounted $1,000,000 as prepaid expensesASC also requires measurement of the cost of employee and services received in exchange for an award based on the balance sheet. See Note 8 below for additional information regardinggrant-date fair value of the Company’s common stock, Series C Preferred Stock and warrants.award.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 the year ended December 31, 2019 the Company recorded an impairment expense of $64,167 related to the Levor intangible asset (see Note 6).
NOTE 4 – INVENTORY
Inventory, net consisted of the following:
| | |
| | |
| Finished goods – hemp flowers and hemp cuttings | $1,337,809 | $- |
During the year ended December 31, 2019, the Company recorded a reserve or inventory write-off related to inventory of $723,391 which is equal to the difference between the cost of the inventory and its estimated net realizable value and is included in cost of sales as reflected in the accompanying consolidated statements of operations. Additionally, during the year ended December 31, 2019, the Company fully impaired the finished goods related to purchased CBD products from C2M and resulted in an impairment loss of $837,153 which is included in cost of sales on the consolidated statements of operations (see Note 3).
NOTE 5. 5 – PROPERTY AND EQUIPMENT
Property consists of equipment purchased for the production of revenues. The following table shows the Company’s property and equipment asconsisted of December 31, 2016 and 2015:the following:
| | | | Estimated Service Lives in Years |
| Production equipment | $- | $900 | 5-20 |
| Office and computer | - | 2,467 | 3 |
| Total property and equipment | - | 3,367 | |
| Less accumulated depreciation | - | 1,941 | |
| Property and equipment, net | $- | $1,453 | |
| Estimated life | | |
| | | |
| Greenhouse | 10 years | $34,465 | $- |
| Fencing and storage | 5 years | 44,543 | - |
| Irrigation | 5 years | 387,975 | - |
| Office and computer equipment | 3 years | 40,834 | - |
| Farming Equipment | 5 years | 11,500 | - |
| Leasehold improvement | 5 years | 21,886 | - |
| Less: Accumulated depreciation | | (63,770) | - |
| $477,433 | $- |
Assets are depreciated over their useful lives when placed in service. Depreciation expense wasamounted to $63,770 and $0 and $1,627 for the year ended December 31, 20162019 and 2015,2018, respectively. During the year ended December 31, 2019, depreciation expense of $26,069 was included in cost of sale and $37,701 was included in general and administrative expenses as reflected in the accompanying consolidated statements of operations.
NOTE 6 – INTANGIBLE ASSET
At December 31, 2019 and 2018, intangible asset consisted of the following:
| Useful life | | |
| Participation rights - EOW | 3 year | $2,930,000 | $- |
| Hemp operating license - EOW | 1 year | 10,000 | - |
| Trademark – Green Goddess | 3 year | 3,500 | - |
| Customer list – Green Goddess | 3 year | 212,529 | - |
| Brand - Levor | 3 year | 70,000 | - |
| 3,226,029 | - |
| Less: accumulated amortization | (828,526) | - |
| Less: Impairment expenses | (250,192) | - |
| $2,147,311 | $- |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
WeFor the year ended December 31, 2019 and 2018, amortization of intangible assets amounted to $828,526 and $0, respectively. Amortization of intangible assets attributable to future periods is as follows:
| Year ending December 31: | |
| 2020 | $978,750 |
| 2021 | 976,667 |
| 2022 | 191,894 |
| | $2,147,311 |
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 disposal loss30-day written notice of $1,453 on computer equipment and an impairment loss of $20,625 on production equipmenttermination. The Company has not paid any lease under this agreement for the year ended December 31, 2016 and 2015, respectively.
NOTE 6. NOTE PAYABLE2019.
On December 16, 2015, we receivedMarch 1, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a subscriptionfarm lease agreement for 2,500,000 sharesa lease term of our common stock,one year. The lease premise is located in Glendale, Oregon and consists of approximately 100 acres. The lease requires the Company to pay $120,000 per year, whereby $50,000 was payable upon execution and $70,000 shall be payable prior to planting for agricultural use or related purposes. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination. The Company has recognized lease expense of $100,000 from one institutional investor. As offor the year ended December 31, 2015, we failed2019 and was included in cost of sales on the consolidated statements of operations.
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 issuepay $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 shares. On February 12, 2016,net income realized by the subscription was rescindedCompany 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 $100,000 depositremaining $12,000 was mutually agreedpaid directly to the landlord by an affiliated company who is renting the portion of the lease property from the Company. The affiliated company is owned by two managing members of EOW. EOW is in the process of arranging a sub-lease agreement with the affiliated company. The Company recognized lease expense of $134,667 included in cost of sales for the year ended December 31, 2019 and recorded $17,333 as prepaid expense to be treated asamortized over the term of this lease.
On July 9, 2019, the Company entered into a short-term loanCommercial 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 balancefounder, manager and controlling member of $72,342 in escrow account was shown as Restricted cash onC2M, the balance sheet. Accordingly, the $100,000 was recorded as a Note Payable as of December 31, 2015. The Note Payable was unsecured, non-interest bearing, and is due on demand. On February 29, 2016, the Company issued 400,000 shares of Series B-2 Preferred Stock to extinguish the loan.Company’s largest stockholder.
NOTE 7. INCOME TAXES
As of December 31, 2016,In adopting ASC Topic 842, Leases (Topic 842), the Company has a deferred tax asset, resulting from benefitselected the ‘package of net operating loss carry forward generated from inception,practical expedients’, which expire in varying amounts between 2028permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and 2036.
The carry-forwards may be further subjectinitial direct costs. In addition, the Company elected not to the applicationapply ASC Topic 842 to arrangements with lease terms of Section 382 of the Internal Revenue Code of 1986. The Company’s past sales and issuances of common and preferred stock have likely resulted in ownership changes as defined by Section 382 of the Code.12 month or less. The Company has not conductedis reasonably certain that it will exercise its option to extend the three farm leases for a Section 382 study to date. It is possible that a future analysis may result inperiod of three years and the conclusion that a substantial portion, or perhaps substantially all, ofCompany used 5 years lease term for the NOLs and credits will expire due to the limitations of Sections 382 and 383 of the Code. As a result, the utilization of the NOLs and tax credits may be limited and a portion of the carry-forwards may expire unused. The Company has provided a valuation allowance to offset the deferred tax assets due to the uncertainty of realizing the benefits of the net deferred tax asset.
As of December 31, 2016, there was approximately $795,500 in deferred tax assets, which were off-set by an equal valuation allowance.commercial lease.
The Company has not taken positions contrary toadopted ASC Topic 842 on January 1, 2019. Between March 2019 and August 2019 which are the Internal Revenue Code, however,execution dates of various lease agreements, the tax yearsCompany recorded right-of-use assets totaling $2,431,362 and total lease liabilities of 2012 through 2016 remain subject to audit by$2,431,362 based on an incremental borrowing rate of 10%. The Company recorded lease expense of $340,365 and $0 for the Internal Revenue Service.year ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, lease expenses of $134,667 was included in cost of sale and $205,698 was included in general and administrative expenses as reflected in the accompanying consolidated statements of operations.
The tax effects of temporary differences that give rise tocash outflows from operating leases for the Company’s net deferred tax asset as ofyear ended December 31, 20162019 was $172,410. The weighted average remaining lease term and 2015 are as follows:the incremental borrowing rate for operating leases at December 31, 2019 were 2.81 years and 10%, respectively.
| | | |
| | | |
| Current tax benefit | $(545,000)
| $(121,700)
|
| Valuation allowance | 545,000 | 121,700 |
| Total tax expense | $- | $- |
| | | |
| | December 31, | December 31, |
| | 2016 | 2015 |
| Balance forward | $250,500 | $128,800 |
| Change in deferred tax asset | 545,000 | 121,700 |
| Total deferred tax asset | 795,500 | 250,500 |
| Valuation allowance | (795,500)
| (250,500)
|
| Total tax expense | $- | $- |
The Company has net operating loss carryforwards of approximately $2,339,898 included in the deferred tax asset table above for 2016 and 2015, respectively. However, due to limitations of carryover attributes, it is unlikely the company will benefit from these NOL's and thus Management has determined a 100% valuation reserve is required.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
NOTE 8. EQUITY TRANSACTIONSROU is summarized below:
| |
| Farm lease ROU | $506,506 |
| Commercial lease ROU | 1,924,856 |
| Less accumulated amortization | (258,109) |
| Balance of ROU asset as of December 31, 2019 | $2,173,253 |
Operating lease liability related to the ROU asset is summarized below:
| |
| Farm lease | $506,506 |
| Commercial lease ROU | 1,924,856 |
| Total lease liability | 2,431,362 |
| Reduction of lease liability | (172,410) |
| Total | 2,258,952 |
| Less: current portion | (432,065) |
| Long term portion of lease liability as of December 31, 2019 | $1,826,887 |
Minimum lease payments under non-cancelable operating lease at December 31, 2019 are as follows:
| Year ended December 31, 2019 | $270,672 |
| 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 | 3,056,388 |
| Less: undiscounted payments during the year ended December 31, 2019 | (270,672) |
| Total undiscounted future minimum lease payments due as of December 31, 2019 | 2,785,716 |
| Imputed interest | (526,764) |
| Total operating lease liability | $2,258,952 |
NOTE 8 - Recapitalization and Change in ControlNOTES PAYABLE – RELATED PARTIES
On February 29, 2016,June 28, 2017, the Company consummatedissued promissory notes to two of the Share Exchange, which resultedCompany’s then executive officers. The promissory notes accrue interest at a rate of 8.0% per annum and matures on the earlier of (i) one (1) year from the date of the promissory note, and (ii) the closing the sale of the Company’s securities in a changesingle transaction or a series of related transactions from which at least $500,000 of gross proceeds are raised. During the year ended December 31, 2019, the Company had borrowed $14,229 under the promissory notes. Between February 2019 and March 2019, the Company paid $11,129 under the promissory notes. Additionally, in controlMarch 2019, the Company issued 153,080 shares of its Common Stock to a former executive officer upon the conversion of $27,000 of principal amount and accrued interest of $3,267 under a promissory note. In August 2019, the Company repaid principal amount of $21,000 and accrued interest of $1,769. The remaining principal balance of $6,500 and accrued interest of $2,107 were deemed paid pursuant to their severance arrangements. During the year ended December 31, 2019 and 2018, the Company recognized $1,214 and $3,981, respectively, of interest expense. As of December 31, 2019 and 2018, the notes had accrued interest balances of $0 and $5,928, respectively. As of December 31, 2019 and 2018, the principal balance under the notes was $0 and $51,400, respectively.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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. As partThe Notes became due and payable between October 18, 2019 and December 16, 2019 and bear interest at a rate of this transaction,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 acquired a $50,000 license agreementrepaid one of the notes with principal amount of $38,500 and $1,292 in cashaccrued interest of $770. During the year ended December 31, 2019 and assumed liabilities2018, the Company recognized $2,048 and $0, respectively, of $51,000.interest expense. As of December 31, 2019 and 2018, the notes had accrued interest balances of $1,278 and $0, respectively. As of December 31, 2019 and 2018, the principal balance under the notes was $55,556 and $0, respectively. The Company initially reported an issuanceis currently negotiating on extending the maturity date of 32 million sharesthe related party note with principal amount of newly designated Series B-1 Preferred Stock to the shareholders$55,556.
NOTE 9 - CONVERTIBLE NOTES PAYABLE
| The Company’s convertible notes consist of the following as of December 31, 2019 and 2018: | | |
| | | |
| Convertible note in the amount of $110,000 dated, August 14, 2017, accruing interest at an annual rate of 8%, matured on August 14, 2018, and convertible into Common Stock of the Company at a conversion price equal to the lesser of (i) $2.00 and (ii) 60% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-day trading period prior to the conversion (the “Note”). The Company received net proceeds of $87,000 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. On December 18, 2017, the Company further amended the Note to (i) increase the aggregate principal amount of the Note to $115,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to January 4, 2018. On January 4, 2018, the Company further amended the Note to (i) increase the aggregate principal amount of the Note to $125,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to February 1, 2018. In March 2018, the Company paid $25,000 towards principal of the Note. On May 7, 2018, the Company further amended the Note to (i) increase the aggregate principal amount of the Note to $121,481 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to May 31, 2018. On June 11, 2018, the holder of the Note converted $10,000 of the principal of the Note into 22,727 shares of Common Stock. On July 13, 2018, the holder of the note converted $10,500 of the principal of the Note to 116,667 shares of Common Stock. On August 30, 2018, the holder of the Note converted $10,500 of the principal of the Note to 218,750 shares of Common Stock. On November 13, 2018, the Company further amended the Note to (i) increase the aggregate principal amount of the Note by $10,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to December 13, 2018. The Company determined that the conversion feature embedded in the Note required bifurcation and presentation as a liability. | $- | $101,481 |
| | | |
| Convertible note in the amount of $27,500 dated, September 27, 2017, accruing interest at an annual rate of 8%, matured on September 27, 2018, and convertible into Common Stock of the Company at a conversion price equal to the lesser of (i) $2.00 and (ii) 60% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-day trading period prior to the conversion (the “Note”). The Company received net proceeds of $21,750 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. On May 7, 2018, the Company further amended the Note to increase the aggregate principal amount of the Note to $4,125. On November 13, 2018, the Company amended the Note to (i) increase the aggregate principal amount of the Note by $5,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to December 13, 2018. | - | 36,625 |
| Convertible note in the amount of $65,000 dated, December 21, 2017, accruing interest at an annual rate of 12%, matured on December 21, 2018, and convertible into Common Stock of the Company at a conversion price equal to the lesser of (i) closing sale price of the Common Stock on the principal market on the trading day immediately preceding the closing date and (ii) 60% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-day trading period prior to the conversion (the “Note”). The Company received net proceeds of $62,400 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. On March 28, 2018, the Company amended the Note to (i) increase the aggregate principal amount of the Note to $71,500 and (ii) adjust the conversion price to the lesser of (i) closing sale price of the Common Stock on the principal market on the trading day immediately preceding the closing date and (ii) 51% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-five day trading period prior to the conversion. On November 11, 2018, the holder of the note converted $5,325 of the principal of the Note to 187,500 shares of Common Stock. On December 18, 2018, the holder of the Note converted $4,850 of the principal of the Note to 100,000 shares of Common Stock. The Company determined that the conversion feature embedded in the Note required bifurcation and presentation as a liability.- | 89,588 | |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
| Convertible note in the amount of $125,000 dated, December 26, 2017, accruing interest at an annual rate of 12%, matured on September 26, 2018, and convertible into Common Stock of the Company at a conversion price equal to the lesser of (i) the lowest trading price of the Company's Common Stock during the twenty-five-day trading period prior to the issue date of the Note and (ii) 50% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-five day trading period prior to the conversion (the “Note”). The Company received net proceeds of $112,250 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. On July 11, 2018, the holder of the note elected to convert interest of $3,120 into 15,000 shares of Common Stock. On November 28, 2018, the holder of the Note converted $2,000 of the interest of the Note to 25,000 shares of Common Stock. The Company determined that the conversion feature embedded in the Note required bifurcation and presentation as a liability. | - | 125,000 |
Convertible note in the amount of $58,500 dated, March 16, 2018, accruing interest at an annual rate of 9%, matures on December 16, 2018, and convertible into Common Stock of the Company at a conversion price equal to the lesser of (i) $2.00 and (ii) 51% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-five day trading period prior to the conversion (the “Note”). The Company received net proceeds of $41,050 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. The Company determined that the conversion feature embedded in the Note required bifurcation and presentation as a liability.
| - | 58,500 |
| Convertible note in the amount of $60,000 dated, June 29, 2018, accruing interest at an annual rate of 12%, maturing on June 29, 2019, and convertible into Common Stock of the Company at a conversion price equal to 50% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-day trading period prior to the conversion (the “Note”). The Company received net proceeds of $51,900 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. In December 2018, the Company agreed to increase the principal balance of note by $30,000 in relation to the assignment of the Note by the holder to another third party. The Company determined that the conversion feature embedded in the Note required bifurcation and presentation as a liability. | - | 55,881 |
| Convertible note in the aggregate amount of $30,000 dated, July 3, 2018, accruing interest at an annual rate of 12%, maturing on July 3, 2019, and convertible into Common Stock of the Company at a conversion price equal to 50% of the average of the three lowest trading prices of the Company’s Common Stock during the twenty-day trading period prior to the conversion (the “Notes”). The Company received net proceeds of $28,000 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. The Company determined that the conversion feature embedded in the Note required bifurcation and presentation as a liability. During the year ended December 31, 2018, the Company recorded an initial derivative liability of $68,000, resulting in initial derivative expense of $40,000, and an initial debt discount of $28,000 to be amortized into interest expense through the maturity of the Note. | - | 14,120 |
| | | |
| Convertible notes in the aggregate amount of $70,500 dated October 23, 2018 ($35,250) and October 26, 2018 ($35,250), accruing interest at an annual rate of 12%, maturing in one year, and convertible into Common Stock of the Company at a conversion price equal to the lesser of i) the closing sale price of the Company's Common Stock on closing date and ii) 60% of the lowest trading price of the Company’s Common Stock during the twenty-day trading period prior to the conversion (the “Note”). The Company received net proceeds of $57,000 from the issuance of the Note, after deducting an original issue discount and debt issuance costs. The Company determined that the conversion features embedded in the Notes required bifurcation and presentation as liabilities. During the year ended December 31, 2018, the Company recorded initial derivative liabilities of $187,000, resulting in initial derivative expense of $127,000, and initial debt discounts of $60,000 to be amortized into interest expense through the maturity of the Note. | - | 10,593 |
| | | |
| Convertible Notes in the aggregate amount of $100,000, issued on March 22, 2018. The Notes bear interest at a rate of 5% per annum and will mature on February 1, 2023. If a qualified financing from which at least $5 million of gross proceeds are raised occurs prior to the maturity date, then the outstanding principal balance of the notes, together with all accrued and unpaid interest thereon, shall be automatically converted into a number of shares of the Company’s Common Stock at $0.40 per Share. The Notes offers registration rights wherein the Company agrees that within 45 days of a Qualified Offering, prior to the Maturity Date, the Company shall file a registration statement with the SEC registering for resale of the shares of Company’s Common Stock into which the Notes are convertible. 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 December 31, 2019. | 100,000 | 100,000 |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
| | |
| Convertible Notes in the amount of $229,890, issued on January 11, 2019 which features an original issue discount of 10%. The Note bears interest at a rate of 8% per year, and is due 12 months from the date of issue. Beginning on the 170th day after issue, the Note is convertible to our Common Stock at price equal to the lesser of $2.00 ($0.25 pre-split) per share, or the variable conversion price. The variable conversion price is defined as 60% of the average of our 3 lowest trading prices in the 20 trading days prior to the conversion. |
- |
- |
| | |
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 (see Note 10). | 85,906 | - |
| Carrying Amount of Convertible Debt | $185,906 | $591,788 |
| Less: Current Portion | (85,906) | (491,788) |
| Convertible Notes, Long Term | $100,000 | $100,000 |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The following is a summary of the carrying amounts of convertible notes as of December 31, 2019 and 2018:
| | | |
| Principal Amount | $933,333 | $701,694 |
| Add: amortization of redemption premium | 8,280 | - |
| Less: unamortized debt discount and debt issuance costs | (755,707) | (109,906) |
| Total convertible debt less unamortized debt discount and debt issuance costs | $185,906 | $591,788 |
In connection with the issuance of notes during the year ended December 31, 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 has consideredrecognized gain on extinguishment of debt due to repayment and conversions of notes into shares of common and preferred stock of $3,004,630 and change in fair value of derivative liabilities of $1,084,760 during the guidance pursuantyear ended December 31, 2019. The Company determined that the conversion options embedded in the Notes require liability presentation at fair value. Each of these instruments provide the holder with the right to Rule 11-01(d)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 Regulation S-Xshares issuable upon conversion of convertible debt and related interpretationsaccordingly require liability presentation on the balance sheet in accordance with US GAAP. For the year ended December 31, 2019 and has concluded2018, the acquisitionCompany measured the fair value of Exactus BioSolutionsthe embedded derivatives using a binomial model and Monte Carlo simulations, and the following assumptions:
| | 2019 | | | 2018 |
| Expected Volatility | 239.97% to 567.11% | | | 85.80% to 455.80% |
| Expected Term | 0.25 to 1.0 Years | | | 0.25 to 1.0 Years |
| Risk Free Rate | 1.59% to 2.54% | | | 1.60% to 2.60% |
| Dividend Rate | 0.00% | | | 0.00% |
During the year ended December 31, 2019, the Company issued an aggregate of 849,360 Series A preferred stock to various note holders and also sold an aggregate of 55,090 shares of preferred stock for $55,090 which were used to repay and convert a total of $842,791 of principal amount (includes penalty fees of $149,313, included in derivative expenses) during the year ended December 31, 2019 and accrued interest of $61,569 pursuant to the Share Exchange isAgreements (the “Exchange Agreements”) (see Note 10). During the acquisition of an asset and not of a business. The license agreement and shareholder loans have been accounted for and recorded at historical cost.
Concurrently with the closing of the Share Exchange,year ended December 31, 2019, the Company closed a private offering of Series B-2 Preferred Stock. The Company sold a total of 2,084,000issued 250,000 shares of Series B-2 PreferredCommon Stock at an offering priceto a note holder upon the conversion of $0.25 per share, for an aggregate subscription price$4,000 of $521,000. Theaccrued interest. In March 2019, the Company originally reportedpaid off the principal notes of $186,443 (includes penalty fees of $48,337, included in derivative expenses) during the year ended December 31, 2019 and accrued interest of $20,467. During the year ended December 31, 2019, the Company recorded a totalgain on settlement of 2,884,000 sharesdebt of Series B-2 preferred stock being issued in the offering. Due to: (i) an anticipated investment for 1,000,000 shares which was not made, and (ii) an additional subscription for 200,000 shares for which documentation had not been completed at that time, however, the final total issued shares of Series B-2 Preferred Stock was 2,084,000. The shares sold in the offering included 400,000 shares of Series B-2 preferred stock issued to extinguish a $100,000 loan and 204,000 shares of Series B-2 preferred stock issued to former creditors of Exactus BioSolutions in exchange for their release of $51,000 in debt owed by Exactus. After accounting for these issuances, net cash proceeds from the offering were $370,000. No underwriting discounts or commissions have been or will be paid$3,004,630 in connection with the saleexchange and repayments of Series B-2 Preferred Stock.various convertible notes.
Also on February 29, 2016,During the years ended December 31, 2019 and 2018, the Company entered into Exchange Agreements with certain holdersrecognized $11,481 and $55,877, respectively, of common stock holding an aggregate of 393,314 post-split (11,636,170 pre-split) shares of common stock. Underinterest expense. During the Exchange Agreements, these shareholders exchanged their common stock for a total of 4,558,042 shares of Series A Preferred Stock. These exchanges consisted of: (i) thirteen common stock holders holding 10,894,070 (pre-split) shares of common stock who exchanged their common stock for 3,458,042 shares Series A Preferred Stock, resulting in a (pre-split) exchange ratio of approximately 1 for 3.15,years ended December 31, 2019 and (ii) one shareholder who, under a separately negotiated agreement, exchanged 742,100 (pre-split) shares common stock for 1,100,000 shares of Series A Preferred Stock, resulting at a (pre-split) exchange ratio of approximately 1.48 for 1. Immediately following such share exchanges,2018, the Company repurchased 50,000 sharesamortized debt discount of Series A Preferred Stock from a shareholder for a total price$425,712 and $405,173, respectively, of $50,000.interest expense.
Reverse Stock SplitAs of December 31, 2019 and 2018, the notes had accrued interest balances of $15,399 and $60,372, respectively.
Effective March 22, 2016, the Company performed a reverse split of common stock on a 1 for 29.5849 basis, pursuant to the prior approval byNOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT)
On January 11, 2019, the Board of Directors and a majority of shareholders. On March 22, 2016, the effective date 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 had approximately 3,608,715 sharesapproved the 2019 Equity Incentive Plan (the “2019 Plan”) which provides for the issuance of commonincentive 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 which were split into 121,978 shares of common stock. The par valuethe Company’s Common Stock and all shares of Common Stock issuable upon conversion or exercise of any outstanding securities of the common stock was unchanged at $0.0001 per share, post-split. All per share information in the condensed financial statements gives retroactive effect to the 1 for 29.5849 reverse stock split that was effected on March 22, 2016.Company.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.$0.0001 per share.
On December 21, 2018, we filed a Certificate of Cancellation of our previously filed Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock in order to designate 1,000,000 shares as a new Series of Preferred Stock for issuance to former Holders of our Notes under the Exchange Agreements (see Note 9), and filed a new Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Series A Preferred Certificate of Designation”).
Pursuant to the Series A Preferred Certificate of Designation, the Company issued shares of Series A Preferred. Each share of Series A Preferred has a stated value of $1.00 per share. In the event of a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock will be entitled to a payment as set forth in the Certificate of Designation. The Series A Preferred is convertible into such number of shares of the Company’s Common Stock, par value $0.0001 per share equal to the Stated Value of $1.00, divided by $0.20, subject to adjustment in the event of stock split, stock dividends, and recapitalization or otherwise. Pursuant to the Exchange Agreements each holder of Notes shall be issued Series A Preferred in the amount of the purchase price paid for such Notes by the buyer under the Exchange Agreement, including any penalty, interest and premium payments. Each share of Series A Preferred entitles the holder to vote on all matters voted on by holders of Common Stock as a single class. With respect to any such vote, each share of Series A Preferred entitles the holder to cast such number of votes equal to the number of shares of Common Stock such share of Series A Preferred is convertible into at such time, but not in excess of the conversion limitations set forth in the Series A Preferred Certificate of Designation. The Series A Preferred will be entitled to dividends to the extent declared by the Company.
During the year ended December 31, 2019, the Company issued an aggregate of 849,360 shares of Series A Preferred Stock were automatically converted to 4,508,042various note holders and also sold an aggregate of 55,090 shares of common stock on March 30, 2016, thirty (30) days after the closing of the Share Exchange and offering of Series B-2 Preferred Stock. As a result, there are 4,558,042 Series A preferred stock issuedfor $55,090 in a private placement, which was used to repay and zeroconvert a total of $842,791 of principal amount (includes penalty fees of $149,313 during the year ended December 31, 2019) and accrued interest of $61,569 pursuant to Exchange Agreements. Accordingly, the Company recognized a deemed dividend of $904,450 during the year ended December 31, 2019 in connection with the issuance of these Series A Preferred Stock.
During the year ended December 31, 2019, the Company converted 551,341 Series A Preferred Stock into 2,756,705 shares of Common Stock. There are 353,109 and 0 shares of Series A Preferred Stock outstanding as of December 31, 2016.2019 and 2018, respectively.
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.
Also onDuring the year ended December 31, 2019, the Company converted 1,150,000 Series B-1 Preferred Stock into 143,750 shares of Common Stock. There are 1,650,000 and 2,800,000 shares of Series B-1 preferred stock outstanding, which are convertible into 206,250 and 350,000 shares of common stock, as of December 31, 2019 and 2018, respectively.
Series B-2 - On February 17, 2016, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B-2 Convertible Preferred Stock (“Series B-2 Preferred Stock”), consisting of up to six million (6,000,000)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 onCommon Stock at a one (1)conversion rate of 0.125 shares for one (1)1 share basis. Holders of Series B-2 Preferred Stock have the right to vote as-if-converted to common stockCommon Stock on all matters submitted to a vote of the holders of the Company’s common stock.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.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
On August 1, 2016,During the year ended December 31, 2019, the Company closed a private offering of Series B-2 Preferred Stock. The Company sold a total of 500,000 shares ofconverted 1,168,000 Series B-2 Preferred Stock to accredited investors at an offering price of $0.25 per share, for an aggregate subscription price of $125,000. No underwriting discounts or commissions have been paid in connection with the sale of the Series B-2 Preferred Stock.
Effective October 13, 2016, the Company amended the Certificate of Designation for its Series B-2 Preferred Stock to increase the number ofinto 146,000 shares of the Series B-2 Preferred Stock from 6,000,000 to 10,000,000 shares.Common Stock. There were no other changes to the terms of the Company’s Series B-2 Preferred Stock.
On October 27, 2016, the Company closed a private offering of Series B-2 Preferred Stock. The Company sold a total of 6,000,000are 7,516,000 and 8,684,000 shares of Series B-2 Preferred Stock to accredited investors at an offering price of $0.25 per share, for an aggregate subscription price of $1,500,000. No underwriting discounts or commissions have been or will be paid in connection with the sale of the Series B-2 Preferred Stock. As of December 31, 2016, 8,584,000 shares of Series B-2 Preferred Stock are issued and outstanding.
On February 29, 2016, the Company’s Board of Directors voted to designate a class ofB-1 preferred stock entitled Series B-1 Convertible Preferred Stock (“Series B-1 Preferred Stock”)outstanding, consisting of up to thirty-two million (32,000,000) shares, par value $0.0001. With respect to rights on liquidation, winding upwhich were convertible into 939,500 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, into1,085,500 shares of common stock on a one (1) for one (1) basis. Holders of Series B-1 Preferred Stock have the right to vote as-if-converted to common stock on all matters submitted to a vote of holders of the Company’s common stock. On February 29, 2016, the Company issued 30,000,000 shares of Series B-1 Preferred Stock, of which 2,800,000 remain outstanding as of December 31, 2016.2019 and 2018, respectively.
Series C - On June 30, 2016, pursuant to the MSA summarized in Note 4, 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.$0.0001 per share. The Series C Preferred Stock ranks equally with our common stockthe Company’s Common Stock with respect to liquidation rights and is convertible to common stock onCommon Stock at a 1conversion 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 ourthe 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. On June 30, 2016,
Due to the Company had been unable to proceed with the clinical trials and research, on July 31, 2019, the Company entered into a Surrender and Mutual Release Agreement (the “Cancellation Agreement”) to terminate the agreements and to cancel all issued and outstanding shares of Series C Preferred. Accordingly, the Company cancelled 1,733,334 shares of Series C Preferred Stock to PoC Capital valuedwhich was recorded at $511,334. par value.
As of December 31, 2016,2019 and 2018, there were 0 and 1,733,334 shares of Series C Preferred Stock are issued and outstandingwhich were convertible into 0 and 216,667 shares of common stock, respectively.
Series D - On March 1, 2018, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series D Convertible Preferred Stock consisting of up to 200 shares, par value $0.0001 per share, to offer for sale to certain accredited investors, including affiliates of the Company, with a maximum offering amount of $2,200,000. Pursuant to the terms of the Series D Subscription Agreement, immediately following the consummation of an offering of the Company’s Common Stock for which the gross proceeds of the offering exceed $5,000,000, each share of Series D automatically converts into 25,000 shares of Common Stock. Upon the liquidation, dissolution or winding up of the Company, each holder of Series D Convertible Preferred Stock shall be entitled to receive, for each share of Series D Convertible Preferred Stock held, $10,000 per share payable pari passu with the Company’s Series B-2 Convertible Preferred Stock. Shares of Series D Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Holders of Series D Preferred Stock have the right to vote as-if-converted to Common Stock on all matters submitted to a vote of holders of the Company’s Common Stock. At no time may shares of Series D Convertible Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of our issued and outstanding Common Stock, subject to an increase in such limitation up to 9.99% of the issued and outstanding Common Stock on 61 days’ written notice to the Company.
On March 28, 2018, the Company issued 45 shares of Series D Preferred Stock. The Company received $550,000 in connection with the Offering including $50,000 in cash for 5 shares of Series D Preferred Stock and $500,000 in debt re-payment to officers and directors for 2016 and 2017 bonuses for 40 shares of Series D Preferred Stock. During the year ended December 31, 2019, the Company converted 27 shares of Series D Preferred Stock into 675,000 shares of Common Stock. There are 18 and 45 shares of Series D preferred stock outstanding which were convertible into 450,000 and 1,125,000 shares of common stock as of December 31, 2019 and 2018, respectively.
Series E - On August 1, 2019 the Company issued 10,000 shares of newly designated Series E 0% Convertible Preferred Stock, par value $0.0001 per share (the “Series E Preferred”) to C2M pursuant to the MSA. Under the terms of the Series E Preferred, C2M may only convert such shares of Series E Preferred into shares of the Company’s Common Stock, if the closing price of Common Stock on the principal trading market, shall exceed $2.00 per share for 5 consecutive trading days. Once vested, the shares of Series E Preferred held by C2M are intended to either be converted at $1.60 per share of Common Stock or optionally redeemed out of the proceeds of future financings, at the option of C2M.
Each share of Series E Preferred is convertible into 625 shares of the Company’s Common Stock and have a stated value of $1,000 per share. The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company is prohibited from effecting conversions of the Series E Preferred to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99% (which may be increased to 9.99% upon 61 days’ written notice), in the aggregate, of the issued and outstanding shares of Common Stock calculated immediately after giving effect to the issuance of shares of Common Stock upon the conversion of the Series E Preferred. Holders of the Series E Preferred shall be entitled to vote on all matters submitted to shareholders and shall be entitled to the number of votes equal to the number of shares of Common Stock into which the shares of Series E Preferred Stock are convertible, subject to applicable beneficial ownership limitations. The Series E Preferred Stock provides a liquidation preference equal to par value.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The Series E Preferred has a no mandatory redemption rights however, in the event that we raise $5,000,000 from a capital raising transaction involving any equity or equity-linked financing during any fiscal quarter in an amount which would cause the Company’s cash or cash equivalents to exceed $5,000,000 (a “Fundamental Transaction”), the Company is required from the proceeds of such offering, to offer C2M a right to redeem Series E Preferred then outstanding as follows:
(A) 0% percent of the net proceeds of the Fundamental Transaction, after deduction of the amount of net proceeds required to leave the Company (together with our existing cash on hand immediately prior to the completion of the Fundamental Transaction) with cash on hand of $5,000,000; plus
(B) 10% percent of the next $5,000,000 of net proceeds of the Fundamental Transaction; plus
(C) 100% of the net proceeds of the Fundamental Transaction thereafter (until the Series E Preferred is redeemed in full).
The shares of Series E Preferred are convertible into Common Stock, once vested, at a price of $1.60 per share. The Company is not obligated to file a registration statement with respect to the shares of Common Stock into which Series E Preferred shares may be converted. The Company believes that the occurrence of the Fundamental Transaction is considered a conditional event and as a result the instrument does not meet the definition of mandatorily redeemable financial instrument based from ASC 480-10-25, “Distinguishing Liabilities from Equity”. This financial instrument was assessed at each reporting period to determine whether circumstances have changed such that the instrument met the definition of a mandatorily redeemable instrument (that is, the event is no longer conditional). If the event has occurred, the condition is resolved, or the event has become certain to occur, the financial instrument will be reclassified as a liability.
On July 31, 2019, the Company granted 10,000 Series E Preferred in connection with a Management and Services Agreement (the “MSA”) with C2M, the Company’s largest shareholder (see Note 11). The Company valued the 10,000 Series E Preferred shares which is equivalent into 6,250,000 common shares at a fair value of $0.54 per common share or $3,375,000 based on the sales of common stock on recent private placements on the dates of grant. During the year ended December 31, 2019, the Company recorded stock-based compensation of $260,795 and prepaid expense – related party of $3,114,204 to be amortized over the term of the MSA.
As of December 31, 2015, no2019 and 2018, there were 10,000 and 0 shares of Series E Preferred Stock issued and outstanding which were issued or outstanding. convertible into 6,250,000 and 0 shares of common stock, respectively.
Common Stock
The Company’s authorized common stockCommon Stock consists of 200,000,000650,000,000 shares with a par value of $0.0001.$0.0001 per share.
The following were transaction during the year ended December 31, 2018:
Common stock issued for the settlement of accounts payable
During the year ended December 31, 2018, the Company automatically converted all outstandingissued 214,834 post-split shares (1,718,675 pre-split shares) of Series A Preferred Stock toits common stock with a fair value of $343,735 to settle $85,934 of accounts payable and the balance of $257,801 recorded as loss on March 30, 2016. Asstock settlement.
Common stock issued for the service
During the year ended December 31, 2018, the Company issued 250,000 post-split shares (2,000,000 pre-split shares) of its common stock with a result, 4,508,042fair value of $18,000 recorded as expenses.
Common stock upon conversion of convertible debt
During the year ended December 31, 2018, the Company issued 685,644 post-split shares (5,485,152 pre-split shares) of common stock were issued in exchangeupon the conversion of 4,508,042convertible notes and interest of $46,295. The fair value of shares on conversion was $400,480 having a derivative value on date of Series A Preferred Stock.conversion of $90,855 and balance $263,330 was recorded as loss on stock settlement.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Certain shareholders convertedCommon stock issued for services
During the year ended December 31, 2018, the Company issued 125,000 post-split shares (1,000,000 pre-split shares) of common stock, with a fair value of $8,000 for services rendered.
Common stock issued for settlement of Preferred B-2
During the year ended December 31, 2018, the Company issued 574,063 post-split shares (4,592,500 pre-split shares) of common stock, with a fair value of $86,798 in settlement with two holders of our Series B-2 Preferred Stock in exchange for their agreement to convert their shares of Series B-1B-2 Preferred Stock into Common Stock, an additional further investment or agreement to purchase and thereafter restructure certain outstanding notes of the Company by cancelling such notes in exchange for shares of newly-designated Series A Preferred Stock of the Company, and release of any and all claims in connection with their prior investments.
The following were transaction during the year ended December 31, 2019:
Sale of Common Stock for private placement
During the year ended December 31, 2019, the Company sold an aggregate of 22,187,007 shares of Common Stock for total proceeds of $7,215,380.
Common Stock issued for Development Agreement
In consideration for the Development Agreement (see Note 11), C2M was issued 8,385,691 shares of our Common Stock on January 8, 2019. Additionally, the Company granted immediately vested 10-year options to purchase 750,000 shares of Common Stock, with exercise price of $0.32 per share to certain C2M founders. As a result, C2M became the Company’s largest shareholder holding (inclusive of the vested options held by its founders) approximately 51% of the Company’s outstanding Common Stock as of the date of the Development Agreement. Consequently, such transaction resulted in a change of control whereby, C2M obtained majority control through its Common Stock ownership (See Note 11). Therefore, the Company accounted for the 8,385,691 shares of Common Stock under ASC 845-10-S99 “Transfer of Nonmonetary Assets by Promoters or Shareholders” whereby the transfer of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the company's initial public offering normally should be recorded at the transferors' historical cost basis determined under GAAP. The Company determined that the value of the Development Agreement is $0 and recording it in a step-up basis would not be appropriate since C2M is considered a promoter, majority shareholder and also a related party having an ownership interest of 51% in the Company on the execution date of the Development Agreement. Accordingly, the Company recorded the issuance of 8,385,691 shares of Common Stock at par value. The 750,000 options were valued on the grant date at approximately $0.13 per option for a total of $96,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.13 per share (based on the quoted trading price on the dates of grants), volatility of 296%, expected term of 10 year, and a risk free interest rate of 2.74%. During the year ended December 31, 2019, the Company recorded stock-based compensation of $96,000.
Common Stock issued for settlement of debt
During the year ended December 31, 2019, the Company issued 250,000 shares of Common Stock to note holders upon the conversion of $4,000 of accrued interest. The fair value of shares on conversion was $196,000 having a derivative value on date of conversion of $18,000 and the balance of $178,000 was recorded as loss on settlement of debt. Additionally, in March 2019, the Company issued an aggregate of 203,080 shares of Common Stock to a noteholder upon the conversion of $27,000 of principal amount, accrued interest of $3,267 and $10,349 of accrued expenses.
Common Stock for membership interest in subsidiary
On March 11, 2019, with the assistance of C2M and assignment of rights, under the term of the Purchase Agreement, the Company acquired additional 20.1% from existing members in consideration for payment of 937,500 shares of Common Stock (see Note 3). The 937,500 shares of Common Stock were valued at the fair value of $1.056 per common share or $990,000 based on the quoted trading price on the date of grant. Additionally, on June 10, 2019, the Company was required to issue the existing members an additional $450,000 of shares of Common Stock of the Company based upon the 20 day volume weighted average price per share on the date of issue which was equivalent to $0.89 per share or 503,298 shares of the Company’s Common Stock and was issued in August 2019.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Common Stock for services
In April 2019, the Company entered into a consulting agreement for investor relations services. The consultant shall receive compensation of 50,000 shares of the Company’s Common Stock and shall vest over one year with 4,174 common stock to vest on the date of this agreement and 4,166 common shares on the first day of each month thereafter. During the year ended December 31, 2019, the Company granted 50,000 shares of Common Stock and valued the shares of Common Stock at the fair value of $1.55 per common share or $77,500 based on the quoted trading price on the date of grant. The Company recorded stock-based compensation of $58,128 during the year ended December 31, 2019. In connection with this transaction, there were 20,830 shares of Common Stock to be issued as of December 31, 2019.
In May 2019, the Company entered into a 6-month consulting agreement for investor relations services. The consultant shall receive compensation of 10,000 shares of the Company’s Common Stock per month or a total of 60,000 shares of Common Stock. During the year ended December 31, 2019, the Company issued an aggregate of 60,000 shares of Common Stock and valued the shares of Common Stock at the average fair value of $0.72 per common share or $43,000 based on the sales of common stock on June 15, 2016.recent private placements on the dates of grants at the end of each month. The Company recorded stock-based compensation of $43,000 during the year ended December 31, 2019.
Between August 2019 and November 2019, the Company entered into various consulting agreements with terms from 6 months to 2 years. The Consultants shall receive compensation in aggregate of 150,000 shares of the Company’s Common Stock. During the year ended December 31, 2019, the Company issued 50,000 shares of Common Stock and 100,000 shares remains to be unissued as of December 31, 2019 and valued the shares of Common Stock at the fair value ranging from approximately $0.50 to $0.61 per common share or $80,500 based on the sales of common stock on recent private placements on the dates of grants. During the year ended December 31, 2019, the Company recorded stock-based compensation of $24,699 and prepaid expense of $55,801 to be amortized over the term of this agreement.
In December 2019, the Company issued 100,000 shares of Common Stock for legal services to be rendered and valued the shares of Common Stock at the fair value of approximately $0.40 per common share or $39,880 based on the based on the quoted trading price on the date of grant. During the year ended December 31, 2019, the Company recorded prepaid expense of $39,880 to be amortized over the term of this agreement.
On October 23, 2019, the Amended and Restated Operating Agreement (the “Amended Operating Agreement”) of EOW was amended. Under the terms of the Amended Operating Agreement, the minority members of EOW conveyed their rights to distributions related to the current 2019 hemp crop. As a result, 27,200,000the Company shall receive 100% of the distributions of net profit from the 2019 hemp crop on approximately 226 acres of farmland currently growing in Oregon. The minority EOW members acknowledge and agree that each is waiving their right to participate, to the extent of their respective percentage interest, in distributions arising from the profits generated from the harvest of the 2019 hemp crop. Thereafter, the distributions shall continue as set forth in Section 5.02(a) of the Operating Agreement. Since March 2019, the Company has owned 50.1% of the limited liability membership interests in EOW. In addition, the members amended the payment schedule under which farm costs are required to be made by the Company. As consideration for the amendment, the Company agreed to issue 1,223,320 shares of its common stock, par value $0.0001 per share, to the minority members of EOW (“EOW Members”). The Company determined that the 1,223,320 shares of common stock were issuedis deemed compensation to the EOW Members in exchange of 27,200,000for their right to receive their respective membership distribution which is considered income to them. As such the Company valued the shares of Series B-1 Preferred Stock.Common Stock at the fair value of $0.69 per common share or $844,091 based on the quoted trading price on the date of grant. The Company recorded stock-based compensation of $844,091 during the year ended December 31, 2019.
Common Stock in connection with Asset Purchase Agreements
On June 30, 2016, pursuantJuly 31, 2019, under the terms of the Green Goddess Purchase Agreement the Company agreed to issue 250,000 shares of the Company’s Common Stock to the MSA summarized inFounder (see Note 4,3). In accordance with ASC 805-10, the Company issued 1,600,000250,000 shares of common stock and the Additional Stock Consideration are tied to PoC Capital valued at $480,000.
Pursuant to acontinued 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 agreement with IRTH Communications, LLC (“IRTH”)received in which IRTH agreedexchange for an award of equity instruments over the period the employee is required to perform certain investor relations, financial communications, and strategic consultingthe services in exchange for the award (presumptively, the vesting period). During the year ended December 31, 2019, the Company recorded stock-based compensation of $33,750 in connection with this agreement. In connection with this transaction, the Company issued $100,00062,500 shares of ourcommons stock which represents the vested shares and there remains 187,500 unvested shares as of December 31, 2019.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
On September 30, 2019, pursuant to the terms of an asset purchase agreement with Levor, LLC, the Company granted 100,000 shares of its Common Stock valued at $70,000, or $0.70 per share, the fair value of the Company’s Common Stock based on the sale of common stock or 141,844in the recent private placement (see Note 3). In connection with this transaction, there were 100,000 shares of Common Stock to IRTH on November 18, 2016 in partial consideration for those services. be issued as of December 31, 2019.
Common Stock grants under the 2019 Plan
On DecemberSeptember 13, 2016,2019, the board of directors (the “Board”) of the Company issued an additional 500,000appointed Vladislav “Bobby” Yampolsky to serve as its Interim Executive Chairman. Prior to his appointment, Mr. Yampolsky served as a member of the Board. In addition, the Board also appointed the Company’s current President, Emiliano Aloi, to serve as the Company’s Interim Chief Executive Officer. The appointments were made following the departure of the Company’s Chairman and CEO in August 2019. Vladislav (Bobby) Yampolsky is the founder, manager and controlling member of C2M, the Company’s largest stockholder.
On September 13, 2019, the Board delegated authority to the Chairman of the Board and/or the CEO to issue restricted stock and options under the 2019 Equity Incentive Plan (the “2019 Plan”) to non-executive employees and consultants. The aggregate number of shares of common stock to IRTH pursuant to an addendum to the services agreement and in consideration of certain additional services, including telemarketing and investor outreach services, to be provided by IRTH. On February 22, 2017, the Company, par value $0.0001 (“Common Stock”), issuable under delegated authority may not exceed 500,000 shares, and IRTH agreedno individual award may exceed 100,000 shares, provided, further, that IRTH would not provide the minimum exercise price of awards made shall be the fair market value of the Common Stock determined in accordance with the 2019 Plan.
On September 13, 2019, the Board approved additional servicespursuantawards to an addendum to a services agreementofficers, directors and consultants under the 500,00002019 Plan as follows:
| Name | Amount of Grant | Vesting Period | Vesting Commencement Date |
| Bobby Yampolsky - Director | 1,000,000 shares of restricted Common Stock. | 1/48th per month. | Vests October 1, 2019. |
| Emiliano Aloi - CEO | 1,000,000 shares of restricted Common Stock. | 1/48th per month. | Vests on the first day of calendar month following: (A) the date that the 2019 Exactus One World agriculture total yield is at least 400,000 pounds of total biomass for production and held for sale or processing (including top flower harvest) and (B) the date that the Company has reported at least $5 million of revenue on a consolidated basis. |
Consultant – Legal and consulting services | 100,000 shares of restricted Common Stock. | 1/48th per month. | Vests October 1, 2019. |
| Consultant – consulting services | 1,000,000 shares of restricted Common Stock. | 1/48th per month. | Vests on the first day of calendar month following: (A) the date that the 2019 Exactus One World agriculture total yield is at least 400,000 pounds of total biomass for production and held for sale or processing (including top flower harvest) and (B) the date that the Company has reported at least $5 million of revenue on a consolidated basis. |
The Company valued the shares of Common Stock at the average fair value of $0.70 per common share or $2,170,000 based on the sales of common stock issued on recent private placements on the dates of grants. During the year ended December 13, 2016 were returned to31, 2019, the Company recorded stock-based compensation of $48,125 in connection with these restricted common stock grants. In connection with this transaction, there were an aggregate of 68,750 shares of Common Stock to be issued as of December 31, 2019 which represents the vested shares and retired.there remains 3,031,250 unvested shares as of December 31, 2019.
There
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Approval of Director Compensation Plan
On September 13, 2019, the Board established a new Director Compensation Plan (the “Director Plan”) to be administered under the 2019 Plan applicable to each non-employee/non-executive director, which Director Plan replaces the prior compensation arrangements previously applicable to non-employee/non-executive directors. The material terms of the Director Plan are set forth below:
| Timing | Amount | Vesting |
Initial appointment (non-employee/non-executive directors) | $100,000 of the Company’s Common Stock issued on and priced at fair market value of the Common Stock on the last calendar date prior to appointment. | 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director. |
Directors continuing after initial appointment (non-employee/non-executive directors) | $25,000 of Common Stock issued annually on the first day of September and priced at fair market value of the Common Stock as of the calendar date prior to the issuance for each continuing director that has served a minimum of 9 consecutive months as of the first day of September each year. | 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director. |
In June 2019, the Company granted 100,000 shares of restricted common stock to a former director who resigned in December 2019. The vesting period was 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director. In December 2019, the Company issued the 27,778 vested shares of Common Stock and was valued at the fair value of $1.05 per common share or $29,167 based on the quoted trading price on the date of grant. During the year ended December 31, 2019, the Company recorded stock-based compensation of $29,167 in connection with these restricted common stock grants.
In December 2019, the Company granted an aggregate of 300,000 shares of restricted common stock to three directors of the Company. The vesting periods are 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director. The Company valued the shares of Common Stock at the fair value of $0.54 per common share or $162,000 based on the quoted trading price on the date of grant. During the year ended December 31, 2019, the Company recorded stock-based compensation of $13,500 in connection with these restricted common stock grants. In connection with this transaction, there were 34,071,862an aggregate of 25,002 shares of Common Stock issued as of December 31, 2019 which represents the vested shares and 515,290 commonthere remains 274,998 unvested shares as of December 31, 2019.
Cancellation of Common Stock
On July 31, 2019, the Company entered into a Surrender and Mutual Release Agreement (the “Cancellation Agreement”) to terminate the agreements and to cancel all issued and outstanding shares of Series C Preferred and 180,000 shares of Common Stock, and all warrants issued under these arrangements. Accordingly, the Company cancelled 180,000 shares of Common Stock which was recorded at par value.
Common Stock Warrants
A summary of the Company’s outstanding stock warrants as of December 31, 20162019 and 2018 and changes during the period ended are presented below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) |
| Balance at December 31, 2017 | 208,333 | $4.80 | 1.50 |
| Granted | 435,750 | 0.32 | 1.79 |
| Balance at December 31, 2018 | 644,083 | 1.77 | 1.38 |
| Granted | 1,578,549 | 0.45 | 5.00 |
| Cancelled | — | — | — |
| Exercised | — | — | — |
| Forfeited | (208,333) | 4.80 | — |
| Balance at December 31, 2019 | 2,014,299 | $0.45 | 3.31 |
| | | | |
| Warrants exercisable at December 31, 2019 | | $0.45 | 3.31 |
| | | | |
| Weighted average fair value of warrants granted during the period | | $1.05 | |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
As of December 31, 2015, respectively.
Warrants and Options2019, aggregate intrinsic value in connection with exercisable warrants amounted to $178,610.
On June 30, 2016, pursuant to the MSA summarized in Note 4,October 15, 2018, the Company issued 435,750 warrants to purchase 1,666,667 common stock shares for awith an exercise price of $0.60$0.32 per share and exercisable for threetwo years to PoC Capital.
a Series B-2 Holder. These warrants have a grant date fair value of $0.0052$0.32 per warrant, determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.71%2.54%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 27.2%396.30%; and (4) an expected life of the warrants of 32 years.
The Company has recorded a prepaidan expense on these warrants of $8,667$138,679.
On March 21, 2019, the Company issued 718,750 warrants to purchase shares of the Company’s Common Stock in connection with a consulting agreement in exchange for corporate development and advisory services. The warrants have a term of 5 years from the date of grant and are exercisable at an exercise price of $0.20. The 718,750 warrants were valued on the grant date at approximately $1.55 per warrant for a total of $1,114,062 using a Black-Scholes option pricing model with the following assumptions: stock price of $1.55 per share (based on the quoted trading price on the dates of grants), volatility of 602%, expected term of 5 year, and a risk free interest rate of 2.35%. During the year ended December 31, 2019, the Company recorded stock-based compensation of $1,114,062.
On November 13, 2019, the Company issued 500,000 warrants to purchase shares of the Company’s Common Stock in connection with a consulting agreement in exchange for corporate development and advisory services. The warrants have a term of 5 years from the date of grant and are exercisable at an exercise price of $0.70. The 500,000 warrants were valued on the grant date at approximately $0.63 per warrant for a total of $314,181 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.63 per share (based on the quoted trading price on the dates of grants), volatility of 270%, expected term of 5 year, and a risk free interest rate of 1.69%. During the year ended December 31, 2019, the Company recorded stock-based compensation of $314,181.
On November 27, 2019, the Company issued a convertible note in the principal amount of $833,333, and a warrant to purchase 275,612 shares of Common Stock (see Note 9). The Company granted the note holder warrants in connection with the issuance of this note. The warrants had a term of 2 years from the date of grant. The warrants are exercisable at an exercise price of $0.756 per share of Common Stock at any time before the close of business on the day two years after their issuancesubject to adjustment in the event of stock dividends, splits, fundamental transactions, or other changes in 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 Company accounted for the warrants by using the relative fair value method and recorded debt discount from the relative fair value of the warrants of $140,243 using the Binomial Lattice method and is being amortized over the term of the note. Additionally, the Company issued 84,187 warrants to purchase shares of the Company’s common stock to a certain FINRA broker-dealer who acted on behalf of the Company in connection with the issuance of this convertible note. The warrants had a term of 4 years from the date of grant and was exercisable at an exercise price of approximately $0.08. The 84,187 warrants were valued on the grant date at approximately $0.64 per warrant for a total of $54,145 using a Binomial Lattice method with the following assumptions: stock price of $0.65 per share (based on the quoted trading price on the date of grant), volatility of 270%, expected term of 4 years, and a risk free interest rate of 1.63%. The Company recorded these warrants as debt discount which is being amortized over the term of the note. The Company assessed the classification of its common stock purchase warrants as of June 30, 2016.the date of each equity offering and determined that such instruments met the criteria for equity classification under the guidance in ASU 2017-11 “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Feature”. The Company has no warrants that contain a ‘round down’ feature under Topic 815 of ASU 2017-11.
There were 1,666,667Common 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 0 warrants outstanding atincentive 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.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Stock option activity for the year ended December 31, 20162019 and 2018 is summarized as follows:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life(Years) |
| Balance at December 31, 2017 | - | $- | - |
| Granted | 959,375 | 0.41 | 9.00 |
| Balance at December 31, 2018 | 959,375 | 0.41 | 8.79 |
| Granted | 4,753,572 | 0.21 | 8.54 |
| Exercise | (375,000) | 0.01 | 9.12 |
| Forfeited | (666,667) | 0.05 | 8.56 |
| Balance at December 31, 2019 | 4,671,280 | 0.29 | 7.29 |
| Options exercisable at December 31, 2019 | 3,798,888 | $0.31 | 6.88 |
Weighted average fair value of options granted during the period $0.55
As of December 31, 2015, respectively.2019, aggregate intrinsic value in connection with exercisable options amounted to $726,371.
The following were transactions during the year ended December 31, 2018:
On September 4, 2018, the Company granted a total of 209,375 five-year non-qualified stock options to the Company’s former officers exercisable at $0.712 per share, of which 138,844 vested immediately, 11,179 vest monthly in equal increments over a 16-month period beginning on September 1, 2018, and 57,812 vest monthly in equal increments over a 28-month period beginning on September 1, 2018. As part of the employment agreements with three of the Company’s former officers, 18,750 of their remaining unvested options on December 1, 2018 vested immediately. As of December 31, 2019, there were a total of 167,708 vested stock options to these former officers which are exercisable one year from the date of terminations.
On October 22, 2018, the Company granted 250,000 ten-year non-qualified stock options to a consultant exercisable at $0.32 per share, all of which vested immediately.
On December 28, 2018, the Company granted 500,000 ten-year non-qualified stock options to a consultant exercisable at $0.32 per share, all of which vested immediately.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the requisite service period. The assumptions used in the Black-Scholes model for the options granted during the year ended December 31, 2018 are presented below:
| Risk-free interest rate | 2.72 – 3.20% |
| Expected volatility | 343.72 – 412.31% |
| Expected term (in years) | 5-10 |
| Expected dividend yield | 0% |
The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Expected volatility is based on the historical volatility of the Company’s common stock. The expected term assumption for stock options granted is the contractual term of the option award. The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.
The Company recognized $227,394 of compensation expense relate to the vesting of stock options for the year ended December 31, 2018. These amounts are included in general and administrative expenses on the accompanying consolidated statement of operations.
The following were transactions during the year ended December 31, 2019:
Between January 2019 and March 2019, the Company granted 4,003,572 options to purchase shares of the Company’s Common Stock to various members of the Board of Directors of the company and consultants with vesting terms pursuant to their respective sock option agreements. The options have a term of 10 years from the date of grant and were exercisable at an exercise price ranging from $0.01 to $0.96. The Company recognized $1,276,637 of compensation expense related to the vesting of stock options for the year ended December 31, 2019. These amounts are included in general and administrative expenses on the accompanying consolidated statement of operations.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
In February 2019 and April 2019, the Company granted an aggregate of 750,000 options to purchase shares of the Company’s Common Stock to an investor in connection with the sale of Common Stock. The options have a nine-month term from the date of grant and was exercisable at an exercise price of $0.50 per share. The fair value of the options granted amounted to $0.92 per option or $688,674.
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 shall cancel the remaining 625,000 stock options as of December 31, 2019 (see Note 11).
As of December 31, 2019, aggregate intrinsic value in connection with exercisable options amounted to $726,371. As of December 31, 2019, 872,392 outstanding options are unvested and there was $337,863 unrecognized compensation expense in connection with unvested stock options (see Note 11).
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the requisite service period. The assumptions used in the Black-Scholes model for the options granted during the year ended December 31, 2019 are presented below:
| Risk-free interest rate | 2.43 – 2.7495% |
| Expected volatility | 293 – 296% |
| Expected term (in years) | 10 |
| Expected dividend yield | 0% |
Restricted Common Stock
A summary of the status of the restricted common stock and changes during the year ended December 31, 2019 is as follows. There was no activity during the year ended December 31, 2018.
| | Restricted Stock Common Stock | Weighted Average Grant-Date Fair Value Per Share |
| Balance at December 31, 2018 | - | $- |
| Granted | 3,727,778 | 0.69 |
| Vested and issued | (144,450) | (0.84) |
| Forfeited | - | - |
| Balance at December 31, 2019 | 3,583,328 | $0.68 |
As of December 31, 2019, unamortized or unvested stock-based compensation costs related to restricted share arrangements was $2,390,997 and will be recognized over a weighted average period of 1.34 years.
NOTE 9. 11 - COMMITMENTS AND CONTINGENCIES
Legal Matters
In the ordinary course of business, we enterthe Company enters into agreements with third parties that include indemnification provisions which, in ourits judgment, are normal and customary for companies in ourthe Company’s industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, wethe Company generally agreeagrees to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to ourthe Company’s product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments wethe Company could be required to make under these indemnification provisions is unlimited. We haveThe 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, we havethe Company has no liabilities recorded for these provisions as of December 31, 2016,2019 and 2015.2018.
On January 20, 2017, Robert F. Parker (the “petitioner”) filed a petition in the Supreme Court of the State of New York, County of New York (the “Court”), naming, among others, the Company and Ezra Green, a former shareholder, director and officer of the Company, as respondents. The petition was received by the Company on February 7, 2017. The parties reached an agreement on settlement which requires co-defendant Ezra Green to make an initial payment with subsequent, additional payments over time. The Company has agreed, in exchange for the dismissal of all claims with prejudice, to pay up to $20,000, at $1,000 per month beginning in January 2018 at the earliest, if co-defendant Ezra Green defaults on his subsequent payment obligations under the terms of the settlement agreement. During the year ended December 31, 2018, the Company paid $3,000 towards the settlement with a remaining balance due of $17,000. During the year ended December 31, 2019, the Company paid an aggregate of $20,000 towards the settlement and recorded a loss on settlement of $3,000 on the consolidated statements of operations. Accordingly, the Company has $0 balance as of December 31, 2019.
In July 2018 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, environmental actions or the action of various regulatory agencies. If necessary, management consults with counsel and other appropriate experts to assess any matters that arise. If, in management’s opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is madeCompany received notice of the loss,expiration and termination of a license agreement dated January 19, 2016 acquired through the appropriate accounting entriesShare 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 reflected in our financial statements. We do not anticipate that liabilities arising out of currently pending or threatened lawsuitsrequired to arbitrate claims. Although we dispute the material allegations made by Digital Diagnostics and claims will have a material adverse effect on our financial position, results of operations or cash flows.KDI, if such actions were successful damages could be awarded against us.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
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 shall cancel the remaining 625,000 stock options as of December 31, 2019.
Leases
On March 1, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consist of approximately 100 acres. The lease requires the Company to pay 5% of the net income realized by the Company from the operation of the lease farm. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination (see Note 7).
On March 1, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Glendale, Oregon and consist of approximately 100 acres. The lease requires the Company to pay $120,000 per year, whereby $50,000 was payable upon execution and $70,000 shall be payable prior to planting for agricultural use or related purposes. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination (see Note 7).
On April 30, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consists of approximately 38 acres. The lease requires the Company to pay $76,000 per year, whereby $38,000 was payable upon execution and $38,000 shall be payable on September 15, 2019 and 2% of the net income realized by the Company from the operation of the lease farm. The Company has paid the initial payment of $26,000 and the remaining $12,000 was paid directly to the landlord by an affiliated company who is renting the portion of the lease property from the Company. The affiliated company is owned by two managing members of EOW. EOW is in the process of arranging a sub-lease agreement with the affiliated company. The lease shall continue in effect from year to year for five years except for at least a 30-day written notice of termination (see Note 7).
On July 9, 2019, the Company entered into a Commercial Lease Agreement (the “Lease”) with Skybar Holdings, LLC, a Florida limited liability company. Pursuant to the Lease, the Company will rent the entire first floor (consisting of approximately 4,000 square feet) of a property located in Delray Beach, Florida (the “Premises”). The Company plans to develop the Premises to create a hemp-oriented health and wellness retail venue, including education, clothing and cosmetics, and explore franchise opportunities. The initial term of the Lease is 5 years commencing August 1, 2019, with two 5-year extension options. The Lease includes a right of first refusal in favor of the Company to lease any space that becomes available on the 2nd and 3rd floor of the Premises and a right of first refusal to purchase the Premises. Pursuant to the Lease, the Company will pay rent equal to forty thousand dollars per month in advance in addition to all applicable Florida sales and/or federal taxes. Effective one year from the lease commencement date and each year thereafter, the rent shall increase at least three percent (3%) per year. The lessor of the Premises is a limited liability company owned or controlled by Vladislav (Bobby) Yampolsky, a member of the Board and the founder, manager and controlling member of C2M, the Company’s largest stockholder.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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, with exercise price of $0.32 per share (see Note 10). As a result, C2M was our largest shareholder holding (inclusive of the vested options) approximately 51% of our outstanding Common Stock on the date of the Development Agreement.
C2M will provide personnel necessary for 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 currently is farming approximately 200 acres of hemp for harvest and production during 2019.
On July 31, 2019, the Company finalized and entered into a Management and Services Agreement in order to provide the Company project management and various other benefits associated with the farming rights, operations and opportunities with C2M, including assignment by C2M of C2M’s agreements and rights to acquire approximately 200 acres of hemp farming. Under the terms of the MSA, C2M agreed to provide further access to the opportunities and know-how of C2M, consented to the appointment of Emiliano Aloi, a seasoned hemp veteran previously an advisor and currently the Company’s President, and to provide the Company and EOW additional services consisting of, among other things:
●
right of participation for further investment and business opportunities in order to rapidly expand our business and operations in hemp-derived CBD;
●
executive, sourcing, vendor, product, production and other expertise and resources;
●
appointment of Aloi to the position of President;
●
introductions to farming and other financing;
●
designs for international “Hemp-Café” store design and franchise opportunities including plans, drawings, approvals and authorizations, leads and contacts;
●
access to leasing of prime real estate in Delray Beach Florida with an option to purchase, and the continuing assistance of the founder of C2M in connection with management, design, and promotion of the project;
●
drawings, designs and specifications for extraction, production and manufacturing facilities and resources;
●
brand development and support services.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 (see Note 14).
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 Agreement
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 December 31, 2019.
NOTE 10. 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 provided a notice dated November 21, 2017 to the Company stating that he was resigning from the Board, effective immediately. Dr. Dimitrov indicated that his resignation from the Board was based on the deteriorating relationship between the Company and Digital Diagnostics over the non-payment of fees owed by the Company pursuant to the licensing agreement between the Company and Digital Diagnostics (see Note 11). Dr. Dimitrov currently serves as the President of Digital Diagnostics, and the Company has licensed the right to develop, produce and commercialize certain diagnostic products, including the FibriLyzer and MatriLyzer, utilizing certain intellectual property rights owned or licensed by Digital Diagnostics. Dr. Dimitrov believes that, in light of these concerns, his role as both a Director of the Company and the President of Digital Diagnostics creates a conflict of interest and has decided to focus his time and energy on doing what is best for the shareholders of Digital Diagnostics. For the year ended December 31, 2016, $251,0962017, the Company accrued $30,000 in licensing fees expenses to Digital Diagnostics. As of December 31, 2017, $126,032 was included in accounts payable. The Company has also accrued interest at 3% over the prime rate, per the Licensing Agreement, of $9,802 for the remaining balance due as of December 31, 2017. The Company paid $0 and $126,032 during the years ended December 31, 2019 and 2018. There was no change during the year ended December 31, 2019.
For the years ended December 31, 2019 and 2018, $22,100 and $300,000, respectively, was recognized in Research and Development expenses for consulting provided by a director and shareholder.Dr. Dimitrov. As of December 31, 2016, $101,095 is shown as accrual under2019 and 2018, $575,000 was included in accounts payable. In addition, $71,659payable for both periods to KD Innovation Ltd., an affiliated entity of Dr. Dimitrov. There was paid and $171,033 was accrued for a director and shareholderno change during the year ended December 31, 2016 for the Licensing Agreement disclosed in Note 4.2019.
InOn June 28, 2017, the Company issued promissory notes to two of the Company’s then executive officers and directors. The promissory note bore interest at a rate of 8.0% per annum and matured on the earlier of (i) one (1) year from the date of the promissory note, and (ii) the closing the sale of the Company’s securities in a single transaction or a series of related transactions from which at least $500,000 of gross proceeds are raised (See Note 8). As of December 2015, we issued 100,00031, 2019 and 2018, the principal balance under the notes was $0 and $51,400, respectively.
On January 8, 2019, the Company entered into a Master Product Development and Supply Agreement with C2M (see Note 11). At December 31, 2019, accounts payable to C2M related to purchase of finish products amounted to $8,342. During the year ended December 31, 2019, the Company purchased finished products from C2M totaling approximately $1,033,213. During the year ended December 31, 2019, cost of sales of $217,156 represents the purchase of CBD products from C2M. C2M is a majority stockholder of the Company. During the year ended December 31, 2019, the Company recognized revenues from C2M of $125,000 from sales of flowers and recorded related cost of sales of $96,647. Additionally, the Company recorded unearned revenues of $215,000 related to advance payments for unshipped products as of December 31, 2019.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
On April 30, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consists of approximately 38 acres. The lease requires the Company to pay $76,000 per year, whereby $38,000 was payable upon execution and $38,000 shall be payable on September 15, 2019 and 2% of the net income realized by the Company from the operation of the lease farm. The lease shall continue in effect from year to year for five years except for at least a 30-day written notice of termination. The Company has paid the initial payment of $26,000 and the remaining $12,000 was paid directly to the landlord by an affiliated company who is renting the portion of the lease property from the Company. The affiliated company is owned by two managing members of EOW.
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 year ended December 31, 2019, the Company recorded stock-based compensation of $260,795 and prepaid expense – related party of $3,114,205 to Elliot Maza, our Chief Executive and Chief Financial Officer, for services valued at $5,000.be amortize over the term of the MSA.
During the year ended December 31, 2015, we received $497,156 from Fuse Science, Inc. (“Fuse”)2019, the Company reimbursed a managing member of EOW and paid $358,808an affiliated company which is owned by two managing members of EOW, for operating expenses paid on behalf of Fuse,EOW for the following:
●
$400,000 worth of hemp seeds
●
$50,000 lease payment related to a lease agreement (see Note 11)
●
$100,000 for irrigation cost
During the year ended December 31, 2019, the Company paid a total of $1,005,825 to affiliated companies which are owned by three members of EOW, for farm labor, farming supplies and other cost related to planting, harvesting and drying the hemp which was recorded in inventory.
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 affiliated company provided advances to the Company for working capital purposes for a total of $242,500 and the Company paid back these advances. The Company also advanced $127,500 to these related parties which resulted to a receivable or due from related parties of $127,500 as of June 30, 2015,December 31, 2019. These advances are short-term in nature, non-interest bearing and due on demand.
The Company recognized revenues from a related party customer of $37,446 during the year ended December 31, 2019. As of December 31, 2019, accounts receivable from a related party customer amounted to $18,860. Additionally, the Company wrote-off $18,586 of accounts receivable from this related party customer into bad debt expense during the year ended December 31, 2019. The customer is an affiliated company which is substantially owned 7,723,892 (51%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.
On October 23, 2019, the Amended and Restated Operating Agreement (the “Operating Agreement”) of Spiral shares. Fuse then sold 6,600,000EOW was amended (the “First Amendment”). Under the terms of the First Amendment, the minority members of EOW conveyed their Spiral shares49.9% 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 private transactions,Oregon. Since March 2019, the Company has owned 50.1% of the limited liability membership interests in EOW. In addition, the members amended the payment schedule under which reduced their ownershipfarm costs are required to 7.4%. Of these shares, 6,200,000 were soldbe made by the Company. As consideration for the benefitamendment, the Company issued 1,223,320 shares of Spiralits common stock, par value $0.0001 per share, to the minority members of EOW.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
During October 2019, the Company entered into a short-term promissory note for an aggregate principal amount of $55,556 and recordedgross cash proceeds of $50,000 (original issue discount of $5,556). The note with principal amount of $55,556 was subscribed by Andrew Johnson, an officer of the Company. The note became due and payable on December 16, 2019 and bears 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 note carries a 10% original issue discount. The Company is currently negotiating on extending the maturity date of the related party note.
On December 20, 2019, the CFO of the Company provided advances of $5,000 to the Company for working capital purposes. The short-term advance was paid back on December 23, 2019 and was non-interest bearing.
As of December 31, 2019, accounts payable from two affiliated companies and C2M totaled to $454,511 ($350,000, $96,169 and $8,342, respectively).
NOTE 13 – CONCENTRATION OF REVENUE AND SUPPLIERS
During the year ended December 31, 2019, total sale of CBD products to one customer and two related party customers represented approximately 58% (11%, 36% - related party, and 11% - related party) of the Company’s net sales. There were no revenues generated during the year ended December 31, 2018.
As of December 31, 2019, total accounts receivable, net from two customers and one related party customer represented approximately 82% (18%, 38%, 25% - related party, and 27%) of total accounts receivable as a contributioncompared to capitalnone as of $25,595.December 31, 2018.
During the year ended December 31, 2019, the Company purchased finished products from C2M (see Note 11) totaling approximately $1,033,213 (98% of the purchases). During the year ended December 31, 2019, the Company fully impaired finished goods related to purchased CBD products from C2M and resulted in an impairment loss of $837,153 which is included in cost of sales on the consolidated statements of operations (see Note 3).
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 11.14 – INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act decreased the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018. The Act also includes a number of other provisions including, among others, the elimination of net operating loss carrybacks and limitations on the use of future losses, the repeal of the Alternative Minimum Tax regime and the repeal of the domestic production activities deduction. These provisions are not expected to have a material effect on the Corporation. Given the significant complexity of the Act and anticipated additional implementation guidance from the Internal Revenue Service, further implications of the Act may be identified in future periods.
The Company has incurred aggregate net operating losses of approximately $16,509,160 for income tax purposes as of December 31, 2019. The net operating losses carry forward for United States income taxes, which may be available to reduce future years’ taxable income. Management believes that the realization of the benefits from these losses appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary.
The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for the years ended December 31, 2019 and 2018:
| | | |
| US Federal Statutory Tax Rate | 21.00% | 21.00% |
| State taxes | 4.60% | 4.35% |
| Change in valuation allowance | (25.60%) | (25.35%) |
| | 0.00% | 0.00% |
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2019 and 2018 are summarized as follows:
| Deferred Tax Asset: | | |
| Net operating loss carryforward | $4,226,345 | $2,668,829 |
| Valuation allowance | (4,226,345) | (2,668,829) |
| Net deferred tax asset | $- | $- |
Of the $16,509,160 of available net operating losses, $2,257,487 begin to expire in 2034 and $14,251,673 which were generated after the Act’s effective date can be utilized indefinitely subject to annual usage limitations.
The Company provided a valuation allowance equal to the deferred income tax asset for the year ended December 31, 2019 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the allowance was $1,5577,516 in fiscal 2019. Additionally, the future utilization of the net operating loss carryforward to offset future taxable income may be subject to an annual limitation, based upon IRC Section 382/383 Ownership change rules that may have or could occur in the future. The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2017, 2018 and 2019 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
IRC Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance. Management is in the process of evaluating IRC Section 280E, as it relates to the Companies business and the amount of net operating losses above that the Companies Management has provided a Full Valuation Reserve on.
NOTE 15 - SUBSEQUENT EVENTS
In accordance with authoritative guidance, we havethe Company has evaluated any events or transactions occurring after December 31, 2016,2019, the balance sheet date, through the date of filing of this report and note that there have been no such events or transactions that would require recognition or disclosure in the consolidated financial statements as of and for the year ended December 31, 2016,2019, except as disclosed below.
Sale of Common Stock
Subsequent to the reporting period, and up through May 13, 2020, the Company accepted shareholder subscriptions in the total amount of $100,000 in exchange for issuance of 500,000 shares of Common Stock in an offering exempt under Rule 506 of Regulation D.
Common Stock for Services
On January 6, 2017,23, 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 $0.49 per common share or $122,500 based on the based on the quoted trading price on the date of grant.
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 $0.49 per common share or $225,350 based on the based on the quoted trading price on the date of grant.
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.
Legal Matters
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. (the “Company”)(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, 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 December 31, 2019, the Company has recorded total accrued salaries of $26,494 from these four former employees who were hired in fiscal 2019. The complaint seeks approximately $82,000 in unpaid wages plus special damages, liquidated damages, interest and attorney’s fees. The Company intends to vigorously contest the matter.
Employment Agreement
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 an agreementin connection with BioCapital Partners, LLC (“BioCapital”) pursuanthis service as Chief Growth Officer. Du Chesne’s base salary for the initial year of service will be $150,000, increasing to which BioCapitalnot less than $250,000 for the second year of service, subject to annual review by the Board of Directors. He will provide general financial advisorybe 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 consulting services through December 31, 2017. In consideration(2) 200% of base salary for those services, the Company agreed2021 calendar year, subject to issuethe 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 BioCapital, on or about April 6, 2017, a warrantparticipate in the Company’s Equity Incentive Plan during his employment. Upon execution of the Agreement, he was granted options to purchase the Company’s common stock equalup to four percent of the Company’s issued and outstanding capital stock on a fully-diluted basis (the “Warrant”). The Warrant will have an initial exercise price equal to the par value1,000,000 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 $0.0001exercise price of $0.30 per share,share.
Loans – Related party
From January 31, 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 $97,000. There are currently no specific terms of repayment.
Supply and Distribution Agreement
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.
Restricted Common Stock Grants
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 1/24thper month thereafter, contingent upon continued service to the company.
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 1/24thupon date of grant and 1/24thper 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 1/24thupon date of grant and 1/24thper 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.
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, 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. 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 certain customary anti-dilution reset adjustments. the following conditions and material terms:
●
The Warrant mayCompany must pay the Holder $60,000 in cash on or before July 1, 2020. Additional monthly payments required under the Amortization Schedule for the note shall continue to be exercised bydue on or before the holderfirst 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 any time,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 untilat any time at the fourth anniversarysole election of the issuance date.
On January 20, 2017, Robert F. Parker (the “petitioner”) filed a petitionHolder in the Supreme Court of the State of New York, County of New York, naming, among others, the Company and Ezra Green, a former shareholder, director and officer of the Company, as respondents. The petition was received by the Company on February 7, 2017. The petitioner previously had a judgment entered in his favor and against Clear Skies Solar, Inc. and its wholly owned subsidiary Clear Skies Group, Inc. (together, “Clear Skies”), in the amount of $331,132.45, with interest accruing at a rate of 9% per year from November 21, 2014 (the “Judgment”). The Judgment remains outstanding. The petition alleges, among other things, that through a series of allegedly fraudulent conveyances occurring before the Judgment was entered against Clear Skies, the major assets of Clear Skies, which were comprised of various patents, were transferred from Clear Skies to Carbon 612 Corporation (“Carbon”), and from Clear Skies and Carbon to the Company. The petition further alleges, among other things, that the transfers were without fair consideration and rendered Clear Skies, the judgment-debtor, insolvent. The petitioner seeks the entry of a judgment against the Company and the other respondents in the amount of the outstanding Judgment, with all accrued interest, reasonable attorneys’ fees and costs and disbursements. We believe the claims against the Company are without merit, and we intend to contest petitioner’s claims and defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
On January 26, 2017, the Company closed a private offering of Series B-2 Preferred Stock. The Company sold a total of 100,000 shares of Series B-2 Preferred Stock to accredited investors at an offering price of $0.25 per share, for an aggregate subscription price of $25,000. No underwriting discounts or commissions have been or will be paid in connection with the sale of the Series B-2 Preferred Stock.
On February 22, 2017, the Company and IRTH agreed that IRTH would not provide the additional servicespursuant to an addendum to a services agreement(Note 8) and the 500,0000 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 on December 13, 2016 were returned toan outstanding common stock.
●
The Company has issued the Holder 500,000 shares of our common stock in consideration for the forbearance.
Covid-19
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. While to date the Company has not been required to stop operating, management is evaluating its use of its office space, virtual meetings and retired.the like. The Company continues to monitor the impact of the COVID-19 (coronavirus) outbreak closely. Since the Company closed its office and travel is limited, the Company’s sales operations were impacted substantially. The extent to which the COVID-19 (coronavirus) outbreak will impact our operations, ability to obtain financing or future financial results is uncertain.
ItemItem 9.Changes in Changes In and Disagreements Withwith Accountants on Accounting and Financial Disclosure.Disclosure
None.No events occurred requiring disclosure under Item 307 and 308 of Regulation S-K during the fiscal year ending December 31, 2019.
Item 9A.Controls and Procedures. (a) Disclosure Controls and Procedures
Our principal executive officer and principal financial officerAs required by Rule 13a-15 under the Securities Exchange Act of 1934, we have evaluatedcarried out an evaluation of the effectiveness of our disclosure controls and procedures as definedof the end of the fiscal year ended December 31, 2019. This evaluation was carried out under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Rules 13a – 15(e) and 15d – 15(e)our reports filed or submitted under the Securities Exchange Act of 1934 as amended (the “Exchange Act”),is 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 controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based upon that evaluation, including our Interim Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this annual report. We have concluded that, based on such evaluation, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting as of December 31, 2016, as further described below.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Overview
Internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors,Our management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting cannot provide absolute assurance(as defined in Rule 13a-15(f) under the Securities Exchange Act of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
1934). Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluateassessed the effectiveness of our internal control over financial reporting.reporting as of December 31, 2019 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of the material weaknesses described below,this assessment, management has concluded that, the Company’sas of December 31, 2019, our internal control over financial reporting was not effective as of December 31, 2016.
Management’s Assessment
Management has determined that, as ofeffective. Our management identified the December 31, 2016 measurement date, there were material weaknesses in both the design and effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and has determined that there were four general categories of material weaknesses in internal control over financial reporting. As a result of our assessment thatfollowing material weaknesses in our internal control over financial reporting, existed aswhich are indicative of December 31, 2016, management has concluded that our internal control over financial reporting was not effective as of December 31, 2016. A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the our ability to initiate, authorize, record, process, or report external financial data reliably in accordancemany small companies with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified at least two material weaknesses in our internal control over financial reporting. Specifically,small staff: (1) we lacklacked a sufficient number of employees to properly segregate duties and provide adequate review of the preparation of the financial statements and (2) we lack sufficient independent directorsdue to turnover on our Board of Directors, to maintainour Audit and other committees consistent with proper corporate governance standards. have not always been fully staffed.
We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have limited financial resourcesnot been able to remediate the material weaknesses identified above. To remediate such weaknesses, we have appointed additional independent directors and only three employees. The lackwe plan to appoint additional qualified personnel to address inadequate segregation of duties. Our ability to retain additional personnel is largely dependent upon our securing additional financing to cover the costs required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP. Accordingly, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of December 31, 2016.material manner.
This Annual Reportannual report does not include an attestation report of the Company’sour registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’sour registered public accounting firm pursuant to rulesan exemption for non-accelerated filers set forth in Section 989G of the SecuritiesDodd-Frank Wall Street Reform and Exchange Commission.Consumer Protection Act.
Changes in Internal Control Over Financial Reporting
No changes in the Company’s internal control over financial reporting have come to management’s attention during the Company’s last fiscal quarter that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.Information
None.None
PART III
Item 10. Directors, Executive Officers and Corporate Governance.Governance The following information sets forth the names, ages, and positions of our current directors and executive officers as of May 14, 2020.
| Name | Age | Present Positions |
| Bobby Yampolsky | 42 | Director, Interim Executive Chairman |
| Kenneth E. Puzder | 53 | Director, Chief Financial Officer |
| John Price | 50 | Director |
| Alvaro Daniel Alberttis | 43 | Director |
| Derek Du Chesne | 32 | Director, President, and Chief Growth Officer |
| Larry Wert | 63 | Director |
| Justin A. Viles | 48 | Director |
| Emiliano Aloi | 46 | Interim Chief Executive Officer |
| Andrew L. Johnson | 35 | Chief Strategy Officer |
Director Information
The Board of Directors of the Company is currently comprised of threeseven (7) members. The following biographical information discloses each director’s age, business experience and other directorships held during the past five years. It also includes the experiences, qualifications, attributes and skills that led to the conclusion that the individual should serve as a director for the Company.
Philip J. YoungBobby Yampolsky,, age 59,42, was appointed as our President, Chief Executive Officer, and Chairman of the Board in March 2016. He was previously appointed as a member of the Board of Directors on February 29, 2016. Mr. Young was a Founder of Exactus BioSolutions and served as its Chairman, President and Chief Executive Officer. He has served as a Director and Executive Officer for public and private companies for the past 20 years where he has created significant shareholder value, built integrated commercial operations and directed successful M&A transactions. From October 2011 through December 2014, he served as President, Chief Executive Officer and Director for AmpliPhi Biosciences, a global biopharmaceutical company, where he completed a transformational restructuring, collaborations and financings. He was the President, Chief Executive Officer and Director of Osteologix, Inc. from April 2007 – March 2011, where he established corporate offices in Ireland after successfully completing a global divestiture of its lead program. Prior to joining Osteologix, Mr. Young served as an Executive Vice President and Chief Business Officer for Insmed Inc., a publicly traded biotechnology company where he directed all financing, commercial and corporate communications activities. Prior to Insmed Inc., Mr. Young held executive positions at Élan, Neurex, and Pharmacia Corporations. Mr. Young started his management career in the biopharmaceutical industry at Genentech Inc. where he was responsible for their cardiovascular and endocrine product launches sales and marketing.
Timothy Ryan, age 56, was appointed as our Executive Vice President in March 2016. He was appointed as a member of our Board of Directors on February 29, 2016.June 24, 2019, and was appointed Interim Executive Chairman on September 13, 2019. He is the founder ECJ Luxe, a family-owned luxury shopping destination that specializes in an array of ultra-exclusive items including everything from high end time pieces, jewelry and diamonds, to exotic cars and yachts. The Yampolsky family established the business as East Coast Jewelry in 1986 and Bobby opened the West Palm Beach, Florida location in 1996. East Coast Jewelry evolved into ECJ Luxe in 2015 and has expanded to multiple locations throughout southern Florida. Mr. Ryan wasYampolsky owns and operates multiple other businesses, including restaurant, nightclub, yacht and exotic car sales, and real estate investments. In addition, Mr. Yampolsky is the Co-Founder and CEO of Ceed2Med, LLC, a Founderhemp and Executive Vice Presidenthemp-derivative supply sourcing, production, distribution, and development company that secures production of industrial hemp biomass and raw ingredients that invests in developing supply chain partners and distribution channels worldwide. Ceed2Med is heavily invested in the hemp industry and is currently the largest shareholder of Exactus BioSolutions. He was the Founder, and for the past seven years, Managing Director, of Inc. as well as substantial shareholder in Hemptown Organics Corp.
The Shoreham Group, a Life Sciences Advisory and Investor Relations firm. In 2012,Board nominated Mr. Ryan led the successful leveraged buy-out of Merrill Industries, a manufacturer and distributor of packaging products. He currently serves on its board of directors. For the five years preceding Shoreham’s formation in 2008, he was a Senior Vice President of the Trout Group, a Life Sciences Advisory and Investor Relations firm. PriorYampolsky to that, he was the Chairmanserve as director of the Board because of Stracq, Inc., an acquisition vehicle where he led the successful buyout of a healthcare ingredient company, Stryka Botanics, from Chapter 11 bankruptcy. On Wall Street, he has been an Investment Bankerhis executive and Head of Capital Markets where he managed both public offeringsmanagement experience and private placements. He also ran a syndicate department and managed Institutional and Retail sales teams. Mr. Ryan was a Senior Vice President of Lehman Brothers and a Principalunderstanding of the Hambrecht & Quist Group. He is a graduate of Boston College.CBD business.
Krassen Dimitrov,age 48, was appointed to serve as a member of our Board of Directors in March 2016. Dr. Dimitrov is the Founder and Managing Director of Digital Diagnostics, Pty. Ltd – a spinout startup company from the Australian Institute for Bioengineering and Nanotechnology (AIBN) where Dr. Dimitrov was a Group Leader from 2006 until 2012. Prior to AIBN, he was the Founder and CTO of NanoString Technologies (NASDAQ: NSTG) in Seattle (2003-2006), a company he founded to commercialize his invention of fluorescent nanobarcodes for single molecules. Prior to NanoString, Dr. Dimitrov was the Director of the DNA Microarray Laboratory at the Institute for Systems Biology in Seattle (2000-2003), and played a significant role in the formation and early growth of the Institute. During his research career Dr. Dimitrov has made many significant research discoveries. Most importantly he invented and pioneered the barcodes for single-molecule detection, which are currently marketed by NanoString Technologies. More recently Dr. Dimitrov invented and developed products for rapid and sensitive detection of proteolytic activities with handheld electronic devices. These products are currently in the process of clinical testing and commercialization by Exactus, Inc. (OTC: EXDI) and will find applications in detection of fibrinolysis and metastatic degradation of extracellular matrices. Dr. Dimitrov holds a Ph.D. in Biochemistry from Baylor College of Medicine, and M.Sc. in Biotechnology from Sofia University. Dr. Dimitrov is invaluable to our Board of Directors as a recognized leader in the field of diagnostics and nanotechnology and as the primary developer of the technology upon which our products are dependent.
Kenneth E. Puzder, age 53, was appointed to the Board of Directors of the Company on January 9, 2019 and as our CFO on July 10, 2019. Mr. Puzder previously served as Chief Financial Officer of C2M and is currently President of that company. In addition, from December of 2014 to December of 2018, he served as the co-founder, Managing Member, and CFO of the Lukens Group, LLC, a behavioral therapy firm that focuses on a variety of behavioral struggles including alcoholism, drug abuse, depression and anxiety with a special emphasis on PTSD. Previously, from January of 2007 to December of 2017, Mr. Puzder was president of his own consulting firm, Kenneth E. Puzder Consulting. As a seasoned financial executive, Mr. Puzder specialized in debtor side representations in financial leadership, mergers and acquisitions, restructuring and turnaround, and personal and partnership tax returns. From July of 2003 through December of 2006, he served in various positions with the Arby’s Restaurant Group (“ARG”) family of companies, including as Chief Financial Officer of AFA Service Corporation (a sister company to ARG), VP of Accounting and Finance or Arby’s Restaurant Group, Inc., and Regional Controller or RTM, Inc. (a subsidiary of ARG). From August of 2000 through April of 2003, Mr. Puzder served as Corporate Controller for Panera Bread Company and President of Panera Enterprises, LLC. From January of 1999 through August of 2000, he served as Vice President and Secretary of the Linder Funds, a series of mutual funds. Prior to serving that position, from March of 1998 through August of 2000, he served as Financial Operations Principal and Assistant Secretary of Lindner Asset Management, the asset management firm for the Linder Funds. From February of 1996 until March of 1998, he was an audit manager with KPMG Peat Marwick, LLP, a Big 4 accounting firm. From June of 1990 through February of 1996, Mr. Puzder served as the Chief Financial Officer and Treasurer of Mills Group, Inc.
Mr. Puzder holds a B.S. in Accounting from the University of Missouri, St. Louis and is a Certified Public Accountant in the state of Missouri.
The Board nominated Mr. Puzder to serve as a director of the Board because of his expensive senior management and operational experience, and in particular his accounting and audit experience.
John Price, age 50, was appointed to the Board of Directors of the Company on February 7, 2019. Mr. Price previously served as Chief Financial Officer, Treasurer and Secretary of SCWorx Corp., a publicly-traded provider of data normalization, application interoperability and big data analytics within the healthcare provider market. Mr. Price was the CFO of SCWorx Corp. (f/k/a Alliance MMA, Inc.) since August 2016. Previously, Mr. Price was Chief Financial Officer of MusclePharm Corporation, a publicly-traded nutritional supplement company. Prior to joining MusclePharm in 2013, Mr. Price served as Vice President of Finance – North America at Opera Software, a Norwegian public company focused on digital advertising. From 2011 to 2013, he served as Vice President of Finance and Corporate Controller of GCT Semiconductor. From 2004 to 2011, Mr. Price served in various roles at Tessera Technologies, including VP of Finance & Corporate Controller. Prior to Tessera Technologies, Mr. Price served various roles at Ernst &Young LLP. Mr. Price served nearly three years in the San Jose, California office and nearly five years in the Pittsburgh, Pennsylvania office of Ernst & Young. Mr. Price has been a certified public accountant (currently inactive) since 2000 and attended Pennsylvania State University, where he earned a Bachelor’s of Science Degree in Accounting.
The Board nominated Mr. Price to serve as a director of the Board because of his past experience as a Chief Financial Officer and other financial oversight positions at public companies.
Alvaro Daniel Alberttis, age 43, was appointed to the Board of Directors of the Company on January 16, 2020. Mr. Alberttis is an entrepreneurial executive, advisor and investor with over twenty years of experience across diverse small-middle market businesses and nonprofit organizations. Since 2013, he has served as the Managing Director of Strategic Philanthropy for The Kannico Agency, LLC. At the Kannico Agency, Mr. Alberttis directs strategy and execution of the firm’s global philanthropic consulting operations. In addition, Mr. Alberttis is an experienced commercial banking executive, and has served in a multitude of financial advisory positions for consumers and corporations for over thirteen years. He began his commercial banking career as a Senior Branch Manager with a staff of thirty and transitioned into a Senior Commercial Banker advising clients in all industries with a specialization in Government, Large Nonprofit and Educational clients across the South East U.S. As a commercial banker, Mr. Alberttis has served with JP Morgan Chase, NA (2011-2017); PNC Bank NA (2007-2011); and TD Bank, NA (2004-2007). Since 2013, he has also served as a Trustee of the Quantum Foundation, a private philanthropic foundation focused solely on supporting healthcare initiatives. Mr. Alberttis holds a B.S. in Business Management from Lynn University (2010), and a Master's Degree in Nonprofit Management from Florida Atlantic University (2013). Mr. Alberttis has not had any material direct or indirect interest in any of our transactions or proposed transactions over the last two years.
The Board nominated Mr. Alberttis to serve as a director of the Board because of his past experiences with small to middle market businesses providing strategic advising and consulting services.
Derek Du Chesne, age 32, was appointed as our President and a member of the Board of Directors effective April 24, 2020. He also serves as our Chief Growth Officer, a position he assumed in February of 2020. Mr. Du Chesne has been the Chief Growth Officer for EcoGen Laboratories, a vertically-integrated manufacturer and supplier of hemp-derived specialty ingredients. Mr. Du Chesne is a brand management professional who has a proven track record of success through concept, development, and launch, building iconic brands by orchestrating successful campaign deployment on both a global and regional scale. He is a strategic leader who has repeatedly led teams to maximize performance in order to achieve stakeholders’ goals on time and in full. Prior to serving at EcoGen, Mr. Du Chesne served as CEO and co-founder at Healing Ventures, a full-service marketing and supply chain management firm dedicated to servicing the hemp industry. Earlier in his career Mr. Du Chesne served as Chief Marketing Officer of Klique, Inc., a group dating platform created to help curb sexual assaults on campuses. Previously Derek was known as a film/television producer and actor, working with Bruce Willis, Robert DeNiro, and a multitude of prominent film makers.
Larry Wert, age 63, was appointed to our Board of Directors on April 29, 2020. Mr. Wert has over 40 years in broadcasting. He served as the President of Broadcast Media for Tribune Media Company from 2013 through September of 2019. He was responsible for overseeing the strategy and day-to-day activities of Tribune Media Company’s forty-two owned or operated television stations, their related websites, digital properties and the company’s Chicago radio station WGN-AM. Wert previously served on the NAB TV Board of Directors, Fox Board and the CBS Board of Governors. In 2017, he was named “Broadcaster of the Year” by the Illinois Broadcaster’s Association. In 2018, under his leadership, Tribune Broadcasting was named “Station Group of the Year” by Broadcasting and Cable. Prior to his time at Tribune Media, Mr. Wert served from 1998 until 2013 as the President and General Manager of WMAQ-TV, the NBC owned and operated station in Chicago. During his tenure there, he expanded local news hours, launched the first street side studio in the city and oversaw integration of WSNS-TV/Telemundo into the station. Under his leadership, he brought key events to the station including the Chicago Marathon and Chicago Auto Show. During his time at NBC, Mr. Wert also had group responsibilities. He was named president of NBC Local’s central and western regions in 2008, overseeing NBC-owned stations in Los Angeles, San Francisco, San Diego, Dallas and Chicago. In September, 2011, he became executive vice president of station initiatives for all ten NBC-owned stations. Mr. Wert started his career at Leo Burnett Advertising in Chicago in 1978, and moved on to television sales with ABC, working in Los Angeles, New York and Chicago, where he became local sales manager at WLS-Ch. 7. In 1989, Mr. Wert shifted to radio as president and general manager of WLUP-97.9 FM and AM 1000 in Chicago, better known as “The Loop.” In 1996, he was named president of Evergreen Media. When it merged with Chancellor Broadcasting he became senior vice president of Chancellor, overseeing 13 radio properties.
Mr. Wert is very involved in the community and recently finalized his term as Chairman of the Museum of Broadcast Communications in Chicago. Currently, he serves on the Board of Directors for several charities, including the Children’s Brittle Bone Foundation, Catholic Charities, the Chicagoland Chamber of Commerce and the 100 Club. He is a member of the Governing Board of Gilda’s Club of Chicago, an advisor the Chicago Chapter of Make-A-Wish Foundation and an honorary board member of RAINBOWS, an organization that helps children cope with loss. In 2018, he was inducted into the Chicago Catholic League Hall of Fame. Mr. Wert also sits on Board of Trustees for Fenwick High School in Oak Park, Ill. Mr. Wert holds a BA degree in Journalism from the University of Wisconsin, Madison.
Justin A. Viles, age 48, was appointed to our Board of Directors on April 29, 2020. He is the Chief Innovation Officer of Rokt, a leading e-commerce marketing technology company he founded in March of 2010. Prior to serving as Chief Innovation Officer, Mr. Viles served as CEO of Rokt from March of 2010 until January of 2013. From February of 2003 until March of 2009, he was Head of Content Acquisition for Australia and New Zealand at Google / YouTube. Mr. Viles studied tourism at Southern Cross University.
Executive Officers Who Are Not Directors
The following provides certain biographical information with respect to each executive officer of the Company who is not a director.
James R. Erickson, Ph.D.Emiliano Aloi, age 54,46, was appointed as our Interim Chief BusinessExecutive Officer on December 1, 2016, effective December 5, 2016.April 24, 2020, after having served previously as Interim CEO. He also served as our President from March 11, 2019 through April 24, 2020, and has served as a member of our Advisory Board since January 9, 2019. Prior to joining Exactus Dr. EricksonInc., Mr. Aloi co-founded Ceed2Med, LLC (“C2M”) in 2018 a global sourcing and distribution platform for industrial hemp and industrial hemp-derived products. From January, 2017 to November, 2017, Mr. Aloi served as Vice President and Director of Strategic Development for GenCanna Global, Inc., where he initiated a Senior Transaction Advisorgo-to-strategy, recruited the commercial leadership team, developed compliance, executed product launches, and advanced manufacturing in European markets. In 2016 Mr. Aloi achieved the first country-wide agricultural permit for flower cultivation in Uruguay. In addition, Mr. Aloi co-sponsored research programs for Stevia and Aloe Vera extraction methods from 2010 to 2013 and participated in the insertion of Chia as a novel crop in Paraguay in 2011 in a program later merged into Cargill. Mr. Aloi also co-developed the agricultural solid biofuels program for Camargo Correas Cement company, a Loma Negra subsidiary from 2009 to 2011.
Andrew L. Johnson, age 35, was appointed Chief Strategy Officer on March 11, 2019 and has been working with the company since January 2019. From November 2014 to November 2018, he served as Director of Investor Relations at Ferghana Partners, a healthcareChromaDex Corp. (NASDAQ:CDXC), an integrated, global nutraceutical company devoted to improving the way people age. While at ChromaDex, the company raised over $50 million without an investment bank, focusingtransitioned from the OTC Market to the Nasdaq, significantly increased institutional ownership, and improved liquidity by over 500%. Mr. Johnson was instrumental in establishing an investor relations platform including, but not limited, to composing and disseminating corporate messaging, press releases, quarterly earnings, conference call transcripts, shareholder update letters, and marketing materials. Before joining ChromaDex, he held the role of Director of Outreach at Alliance Advisors, an investor relations consulting firm from April 2014 to July 2014. During this time, Mr. Johnson worked with various C-level management teams of small and micro-cap companies to increase investor awareness through the facilitation and attendance of non-deal roadshows, investment conferences, group meetings, and one-on-one meetings with institutional investors. From September 2011 to January 2013, he worked at Sidoti & Company, an institutional equity research firm, where he sat on financings, M&A and corporate partneringthe sales desk. During his time in the diagnosticfirm, he built relationships, presented investment ideas, and therapeutic sectors,provided equity research, including corporate access to over 750 small and mid-cap companies. Mr. Johnson has over ten years of experience communicating with investors and has held the Series 3, 7, and 63 licenses in the past. He has a position he held since October 2013. Previously, Dr. Erickson served as Chief Executive OfficerBachelor of BayPoint Biosystems, Inc., a proteomic company focused on commercializing diagnostics/research tools-oriented technologyArts degree in Social Sciences from the M.D. Anderson Cancer Center, from December 2005 to August 2013.
Kelley A. Wendt, age 43, was appointed as our Chief Financial Officer and Treasurer in January 2016. From December 2011 through September 2014, Ms. Wendt served as the Chief Financial Officer and consultant for Ampliphi BioSciences Corporation, a global biopharmaceutical company. Prior to joining AmpliPhi, she served as the Chief Financial Officer for Osteologix, Inc. Prior to joining Osteologix, Ms. Wendt served as the Chief Financial Officer for Crop Life America, a global chemical industry trade organization, from 2006 to 2008. She is the former Controller for Sheltering Arms Hospitals, a rehabilitation hospital company with nine facilities across the Richmond, Virginia region. Her pre-executive experience consists of several regional and national public accounting firms, primarily in audit and consulting roles. Ms. Wendt received a B.S. in business and accounting from WrightWashington State University.
No Term of Office
Our Directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Family Relationships
There are no family relationships between anyor among the directors, andexecutive officers or persons nominated or chosen by the Company to become directors or executive officers.
Code of Ethics
Due to change of control and business focus, we currently do not have a Code of Ethics. Our Board is reviewing a Code of Ethics that applies to our Chief Executive Officer and our Chief Financial Officer as well as to our other senior management. This Code of Ethics will comply with the requirements imposed by the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations issued thereunder for codes of ethics applicable to such officers. When the Code of Ethics is final, it will be available on our website, located at http://www.exactusinc.com
Audit Committee
Due to the limited size of our Board of Directors, the entire Board acts as the audit committee.
Audit Committee Financial Expert
Due to the limited size of our Board of Directors, we do not have a financial expert on the audit committee. We will be expanding our Board in the near future to include a financial expert.
Item 11. Executive Compensation.The following table sets forth certain information about the compensation paid or accrued to the persons who served as our Chief Executive Officer and our two highest-paid executive officers during the last two completed fiscal years whose total compensation exceeded $100,000 for that year (the “named executive officers”).
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Code of Ethics
On January 9, 2019, our board of directors adopted a Code of Business Conduct and Ethics applicable to all directors, executive officers, and employees of the Company.
Audit Committee
On February 7, 2019, John Price was appointed to the Board of Directors of the Company. Mr. Price was also appointed to serve as the Chairman of our Audit Committee.
Item 11. Executive Compensation Compensation Discussion and Analysis
Our former CEO, Philip J. Young resigned on August 15, 2019 and our former CFO Kelley Wendt resigned on April 30, 2019. They were serving under two-year employment agreements adopted January 11, 2019. Mr. Young’s annual salary was $150,000 and Ms. Wendt’s annual salary was $120,000 per annum.
Our Interim Chief Executive Officer, Emiliano Aloi, has signed an offer letter and will receive an annual base salary of $150,000. He will also be eligible to participate in our benefit plans. Mr. Aloi will also receive an equity award, which will be determined and approved by the Board. The offer letter has no set term and may be terminated by Mr. Aloi or us on two weeks written notice.
Our Chief Financial Officer, Ken Puzder, has signed an offer letter featuring an annual base salary of $120,000, which was increased to $150,000 on January 23, 2020. He will also be eligible to participate in our benefit plans. In January of 2020, Mr. Puzder received an equity award as additional compensation in the amount of 250,000 shares.
Andrew Johnson, our Chief Strategy Officer, is serving under a two-year employment agreement adopted March 11, 2019 at an annual salary of $110,000, 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. For the 2019 year, he received a cash bonus of $100,000 to be paid in equal installments over the next 12 months. 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. He has been awarded 250,000 shares as additional compensation in January 2020.
Derek Du Chesne, our 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) our net income on a consolidated basis for the 2020 fiscal year is equal to or in excess of $5,000,000; or (B) our 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 our Equity Incentive Plan during his employment. Upon execution of the Agreement, he was granted options to purchase up to 1,000,000 shares of our common stock at a price equal to 90% of the market price for our common stock on the date of grant. 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.
With regard to our full-time executive officers, the goal of the salary component of our compensation policy is to provide reasonable compensation for their full-time service within the constraints faced by a rapidly developing business with significant cash needs for its planned expansion. Option grants for our full-time executive officers are currently under review by the compensation committee. The goal of our anticipated option grants to these executives will be to provide an appropriate mixture of short term and long-term incentives to increase shareholder value.
Kevin Esval, Jeffrey Thompson, and Ken Puzder, each directors, have each been awarded 250,000 10 year options under the 2019 Equity Incentive Plan, exercisable at $0.20 per share and vesting 1/24 on the date of award and 1/24 on the first day of each calendar month thereafter until fully vested. The goal of these grants, with their vesting gradually over the course of two years, is to provide a blend of short and long-term incentives to contribute toward the growth of the company’s value. Effective April 29, 2020, Mr. Thompson and Mr. Esval resigned from the Board of Directors. Per the approval of the Board, their remaining unvested shares and options were deemed fully vested on the resignation date.
In connection with his appointment on February 10, 2019 to the Board of Directors and as our Executive Chairman, Jonathan Gilbert was granted options to purchase 1,000,000 shares of our common stock at an exercise price of $0.01 per share, exercisable for ten years. Mr. Gilbert’s stock options vest as follows:
| Date Installment Becomes Exercisable | |
| February 11, 2019 | 250,000 |
| Upon the raise of > $2.5m new equity capital | 250,000 |
| Upon the filing of a Nasdaq listing application | 250,000 |
| Upon $150,000 gross revenue from operations | 250,000 |
With regard to Mr. Gilbert, the goal of the options grant and vesting schedule was to incentivize the achievement of certain key company objectives. Mr. Gilbert resigned from the board on July 1, 2019. On September 25, 2019, Jonathan Gilbert, a former director, filed and served a complaint against us in the U.S. District Court - Eastern District of New York. The complaint alleged that Mr. Gilbert is entitled to retain certain cancelled equity awards and seeks specific performance and damages. On January 10, 2020, we entered into a Settlement Agreement and Mutual Release with Mr. Gilbert. Under the settlement agreement, we agreed to issue Mr. Gilbert a total of 375,000 shares of common stock, with 187,500 shares issued immediately and 187,500 shares to be issued in six months. Resales of these shares by Mr. Gilbert on any given day are limited to no more than 10% of the average daily market volume for our common stock calculated from the prior week. The settlement agreement also contains general mutual releases between us and Mr. Gilbert.
In connection with his appointment to the Board Directors and Chair of the Audit Committee, John Price was granted immediately vested options to purchase 250,000 shares of our common stock at a price of $0.20 per share, exercisable for ten years.
On June 24, 2019, Vladislav Yampolsky was appointed to our board of directors and is currently serving as our interim executive chairman. In 2019, he was awarded 1,000,000 restricted common stock as compensation with vesting term of 1/48thper month starting on October 1, 2019.
On January 14, 2020, in connection with his appointment to the Board of Directors, Alvaro Daniel Alberttis was awarded $100,000 worth of common stock, valued at the closing market price of our common stock on the date of the appointment (277,778 shares). These shares vest at a rate of 1/24th on the date of grant, and 1/24thper month thereafter, contingent upon continued service to the company. April 29, 2020, in connection with their appointments to the Board of Directors, Lawrence J. Wert and Justin Viles were also issued 100,000 worth of common stock, valued at the closing market price of our common stock on the date of the appointment (526,316 shares). These shares also vest at a rate of 1/24th on the date of grant and 1/24thper month thereafter, contingent upon continued service to the company. The goal of these grants, with their vesting gradually over the course of two years, is to provide a blend of short-term and long-term incentives to contribute toward the growth of the company’s value.
Summary Compensation Table
| | Year | | | Non-Equity Incentive Plan Compensation(1) | | |
| | | | | | | |
| Philip J. Young | 2016 | $297,917 | $-- | $-- | $-- | $297,917 |
| President and Chief Executive Officer | | | | | | |
| | | | | | |
| Timothy Ryan | 2016 | $110,000 | $-- | $-- | $-- | $110,000 |
| Executive Vice President | | | | | | |
______________ (1) Pursuant to our employment agreements with Mr. Young and Mr. Ryan, we have agreed to grant stock options to these officers as described under “—Employment Agreements” below. We anticipate that our Board of Directors will determine the amount of these awards and grant these stock options following adoption of our Stock Option Plan in the first quarter of 2017. |
Summary Compensation Table
| | Year | | | |
Emiliano Aloi(2) | 2019 | $108,036 | $32,000 | $140,036 |
| Interim Chief Executive Officer | 2018 | $— | $— | $— |
Philip J. Young(2)(3) | 2019 | $150,000 | $— | $150,000 |
| Former Chief Executive Officer | 2018 | $165,417 | $20,025 | $185,442 |
Kenneth E. Puzder(4) | 2019 | $81,428 | $70,000 | $151,428 |
| Chief Financial Officer | 2018 | $— | $— | $— |
Andrew Johnson(5) | 2019 | $92,977 | $174,500 | $267,477 |
| Chief Strategy Officer | 2018 | $— | $— | $— |
(1)
The amounts in these columns do not reflect compensation actually received by the named executive officer nor do they reflect the actual value that will be recognized by the named executive officer. Instead the amounts reflect the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718. For additional information on the valuation assumptions regarding the option awards, refer to Note 3 to our financial statements for the year ended December 31, 2019, which are included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.
(2)
Mr. Aloi was appointed to serve as our interim CEO on September 13, 2019. Our former CEO, Mr. Young, resigned on August 15, 2019.
(3)
Mr. Young's 2018 salary includes 11 shares of Series D preferred stock.
(4)
Mr. Puzder was appointed to our Board of Directors on January 11, 2019 and was appointed to serve as CFO on July 1, 2019.
(5)
Mr. Johnson was appointed to serve as Chief Strategy Officer on March 1, 2019.
Employment Agreements and Change in Control Arrangements
On January 11, 2019, we entered into new employment agreement with our CEO, Philp J. Young, and our CFO Kelley Wendt. Under their new Employment Agreement withAgreements, Mr. Young and Ms. Wendt each agreed to a service period of two (2) years, subject to renewal. Mr. Young’s annual salary was $150,000 per annum and Ms. Wendt’s annual salary was $120,000 per annum.
On August 15, 2019, Philip J. Young,. Effective December 15, 2015, we agreed to resign as our Chief Executive Officer and Chairman, effective July 31, 2019 and entered into an employment agreement with Mr. Young pursuant to which he will serve as our Presidenta Confidential Severance, Settlement and Chief Executive Officer.Non-Disparagement Agreement and General Release. Under the terms of the employment agreement,Severance Agreement the Company agreed to pay Mr. Young will receive a50% of his base salary at an initial rate of $390,000 per year. For($75,000) payable over a limited6-month period until we have raised at least $5 million of capital, he will receive a reduced salary of $325,000 per year. Within 30 days after we raise at least $5 million of capital, Mr. Young will receive, as a lump sum bonus payable in cash or stock at our discretion, the amount equal to the difference between the amount he would have been paid at his initial rate of $390,000exchange for ongoing consulting and the amount he was paid at the reduced salary level.transition assistance. In addition, Mr. Young will havereceive payment consisting of 2 weeks of vacation, and continuation of health benefits, and reimbursement for documented expenses. In addition, all unvested options and share awards will be cancelled. Pursuant to the opportunitySeverance Agreement, Mr. Young also agreed to earnthe terms of a 6-month lock-up under which he may not sell, transfer, assign, or otherwise dispose of more than 15% of the average daily volume of our common stock per week, subject to certain exclusions. In addition, we repaid a $21,000 loan made to us by Mr. Young, plus $1,769 in accrued interest pursuant to the Severance Agreement. Mr. Young also provided a general waiver and release of claims against the Company and is subject to certain restrictive covenants, including confidentiality, non-disparagement, non-solicitation, and non-competition.
On April 30, 2019 Ms. Wendt agreed to resign as Chief Financial Officer.
Our Interim Chief Executive Officer, Emiliano Aloi, has signed an offer letter and will receive an annual performancebase salary of $150,000. He will also be eligible to participate in our benefit plans. Mr. Aloi will also receive an equity award, which will be determined and approved by the Board. The offer letter has no set term and may be terminated by Mr. Aloi or us on two weeks written notice.
Our Chief Financial Officer, Ken Puzder, has signed an offer letter featuring an annual base salary of $120,000, which was increased to $150,000 on January 23, 2020. He will also be eligible to participate in our benefit plans. In January of 2020, Mr. Puzder received an equity award as additional compensation in the amount of 250,000 shares.
Andrew Johnson, our Chief Strategy Officer, is serving under a two-year employment agreement adopted March 11, 2019 at an annual salary of $110,000, 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. For the 2019 year, he received a cash bonus of $100,000 to be paid in equal installments over the next 12 months. 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. He has been awarded 250,000 shares as additional compensation in January 2020.
Derek Du Chesne, our 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 75%250% of his base salary basedfor the 2020 calendar year, if: (A) our net income on a consolidated basis for the 2020 fiscal year is equal to or in excess of $5,000,000; or (B) our 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 our BoardEquity Incentive Plan during his employment. Upon execution of Directors. Also, pursuant to the employment agreement, we agreed to grant stockAgreement, he was granted options to Mr. Youngpurchase up to purchase1,000,000 shares of our common stock at an exercisea price equal to 90% of the fair market value ofprice for our common stock on the date of grantgrant. 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 reasonablyPresident, 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.
Generally, our executives shall be entitled to an annual cash bonus in an amount as determined by ourthe board of directors, if the Company meets or exceeds criteria adopted by the Compensation Committee of the Board of Directors. The executives shall also be eligible for grants of awards under stock option or other equity incentive plans of the Company as the Company’s Compensation Committee or, in the absence thereof, the Company’s Board of Directors in good faith. Pursuantmay from time to the agreement, 50% of the options were to vest on December 31, 2016time determine and the other 50% will vest ratably over a thirty-six month period beginning in January 2017. Mr. Young also isshall be entitled to an automobile allowance of $1,500 per month, disability insurance coverage equal to his base salary, life insurance with a $2 million death benefit, reimbursement of certain expenses, health, dental and vision coverage in accordance with our usual practices and participationparticipate in all other benefitbenefits plans maintained by the Company.
Mr. Young’sCompany provides to its senior executives. The Company shall reimburse the executives for all reasonable expenses incurred in the course of employment. In the event employment agreement may beis terminated by us at any time for “Cause” (as defined in his employment agreement) and by Mr. Young upon 14 days’ prior written notice, or upon Mr. Young’s death or disability. The employment agreement also provides for termination of Mr. Young’s employment by us without Cause or by Mr. Young for “Changed Circumstances”the executives with Good Reason (as such terms are defined in his employment agreement).
If Mr. Young’s employment is terminated by us without Cause or by him for Changed Circumstances, and provided that Mr. Young releases and waives his claims against the Company as provided inEmployment Agreements), the employment agreement, he is entitled to receive (i) monthly severance payments and continuation of benefits for a period equal to the greater of (A) 6 months or (B) the number of months between December 15, 2015 and his termination, up to a maximum of twelve months, (ii) accelerated vesting of equity awards as if his employment had continued during such period and (iii) a pro rata portion of any eligible bonus compensation. If Mr. Young’s employment is terminated by us (with or without Cause) or by him for Changed Circumstances in connection with or following a “Change in Control” (as defined in his employment agreement), he willExecutives shall be entitled to receive severance benefits equal to the benefitslesser of 50% of their base salaries or the amount of salary unpaid for the remaining term then in effect, continued coverage under the preceding sentence as if his employment were terminated more than twelve months after December 15, 2015, plus the pro rata portionCompany’s benefit plans and payment of any eligibletheir pro-rated earned annual bonus, compensation.provided certain conditions are met. The executives are subject to a one (1) year non-competition and non-solicitation provision.
Mr. Young’s employment agreement also contains restrictive covenants relating to the protection of confidential information, non-competition and non-solicitation. The non-solicitation and non-competition covenants apply during the term of his employment and continue generally for a period of 12 months following the termination of his employment. Mr. Young will not be entitled to any severance or change in control benefits under his employment agreement if he breaches any of these covenants.
Equity Awards At Year End Table
The following table sets forth certain information regarding all outstanding equity awards held by our named executive officers as of December 31, 2019.
| | Number of Securities Underlying Unexercised Options (#) Exercisable | Equity Incentive Plan Award: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | |
Emiliano Aloi(1) | 250,000(1) | — | $0.320 | 01/09/2029 |
| Interim Chief Executive Officer | | | | |
Philip J. Young(2)(3) | 28,125(2) | — | $0.712 | 09/04/2023 |
| Former Chief Executive Officer | | | | |
Kenneth E. Puzder(4) | 250,000(3) | 149,739 | $0.200 | 01/11/2029 |
| Chief Financial Officer | | | | |
Andrew Johnson(5) | 12,500(4) | — | $0.320 | 01/15/2029 |
| Chief Strategy Officer | 31,250(5) | 15,625 | $0.960 | 01/15/2029 |
| | 125,000(6) | 20,832 | $0.560 | 03/12/2029 |
* Resigned from his positions in 2019.
(1)
One hundred percent of the options vested immediately at grant date.
(2)
Seventy-eight percent of the options vested immediately at grant date. The balance vested on December 1, 2018.
(3)
1/24thof the options vested immediately at grant date, with the balance vesting 1/24th per month on the first calendar date of each calendar month following appointment until fully vested so long as continuing as a director.
(4)
One hundred percent of the options vested immediately at grant date.
(5)
Fifty percent of the options vested immediately at grant date, with the balance vesting upon the achievement of certain goals.
(6)
1/12th of the options vested immediately at grant date, with the balance vesting 1/12th per month on the first calendar date of each calendar month flowing grant date until fully vested.
All of the stock options held by our named executive officers listed in the table above were granted under and subject to the terms of our 2018 Plan, the terms of which are described below under “2018 Stock Option Plan”.
Option Exercises and Stock Vested
Our named executive officers did not exercise any stock option awards during the year ended December 31, 2019.
2018 Stock Option Plan
In September 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, and restricted stock unit awards. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. The incentive awards shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board or Compensation Committee may specify. Stock options expire no later than ten years from the date of grant. The aggregate number of shares of Common Stock which may be issued pursuant to the Plan is 1,187,500. Unless sooner terminated, the Plan shall terminate in 10 years.
As of December 31, 2019, the Company had reserved shares of its common stock for future issuance under the 2018 Plan as follows (figures reflect the effect of the 1 for 8 Reverse Stock Split in January 2019):
| |
| Stock options outstanding | 959,375 |
| Available for future grants under the 2018 Plan | 228,125 |
| Warrants outstanding | 644,083 |
| Total shares reserved | 1,861,583 |
2019 Equity Incentive Plan
On January 11, 2019, our shareholders approved the Exactus, Inc. 2019 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to provide a means for the Company to continue to attract, motivate and retain management, key employees, consultants and other independent contractors, and to provide these individuals with greater incentive for their service to the Company by linking their interests in the Company’s success with those of the Company and its shareholders. The Plan is limited such that the maximum number of shares of Common Stock that may be delivered pursuant to awards granted under the Plan may not exceed fifteen percent (15%) of the total of: (a) the issued and outstanding shares of our Common Stock, and (b) all shares common stock issuable upon conversion or exercise of any of our outstanding securities which are convertible or exercisable into shares of Common Stock under the terms thereof.
Compensation of Directors Table
The following table shows the compensation paid during the year ended December 31, 2019 to our non-employee directors, other than Mr. Puzder, whose 2019 compensation is set forth above under “Executive Compensation.”
|
| Name | | Fees Earned or Paid in Cash ($) | | | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | |
Vladislav Yampolsky Interim Executive Chairman | (a) | - | 700,000 | 32,000 | - | - | - | 732,000 |
Philip J. Young Former Board Chairman | | - | - | - | - | - | - | - |
John Price Board Member | (b) | - | 54,000 | 70,000 | - | - | - | 124,000 |
Kevin J. Esval Former Board Member | (c) | - | 54,000 | 70,000 | - | - | - | 124,000 |
Jeffrey Thompson Former Board Member | (d) | - | 54,000 | 70,000 | - | - | - | 124,000 |
Jonathan R. Gilbert Former Board Member | (e) | - | - | - | - | - | - | - |
Steven Schwartz Former Board Member | (f) | - | 29,167 | - | - | - | - | 29,167 |
Alvaro Daniel Alberttis Board Member | | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
Derek Du Chesne Board Member | | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
Lawrence J. Wert Board Member | | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
Justin A. Viles Board Member | | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
(a)
Includes 1,000,000 shares of common stock at $0.70 per share, vesting 1/48th on date of grant and 1/48th per month until fully vested and 250,000 vested stock options to purchase Common Stock exercisable at $0.32 per share.
(b)
Includes 100,000 shares of common stock at $0.54 per share, vesting 1/24th on date of grant and 1/24th per month until fully vested and 250,000 stock options exercisable at $0.20 per share, vesting 1/24th on date of grant and 1/24th per month until fully vested.
(c)
Includes 100,000 shares of common stock at $0.54 per share, vesting 1/24th on date of grant and 1/24th per month until fully vested and 250,000 stock options exercisable at $0.20 per share, vesting 1/24th on date of grant and 1/24th per month until fully vested. Mr. Esval resigned from the Board on April 29, 2020. All shares of common stock and all options were deemed fully vested upon the director’s resignation on April 29, 2020.
(d)
Includes 100,000 shares of common stock at $0.54 per share, vesting 1/24th on date of grant and 1/24th per month until fully vested and 250,000 stock options exercisable at $0.20 per share, vesting 1/24th on date of grant and 1/24th per month until fully vested. Mr. Thompson resigned from the Board on April 29, 2020. All shares of common stock and all options were deemed fully vested upon the director’s resignation on April 29, 2020.
(e)
Mr. Gilbert resigned from the Board on July 1, 2019. On January 10, 2020, we entered into a Settlement Agreement and Mutual Release with Mr. Gilbert. Under the settlement agreement, we agreed to issue Mr. Gilbert a total of 375,000 shares of common stock, with 187,500 shares issued immediately and 187,500 shares to be issued in six months. Resales of these shares by Mr. Gilbert on any given day are limited to no more than 10% of the average daily market volume for our common stock calculated from the prior week. The settlement agreement also contains general mutual releases between us and Mr. Gilbert.
(f)
Includes 27,778 shares of common stock at $1.05 per share. All shares are fully vested at December 31, 2019. Mr. Schwartz resigned from the Board on December 17, 2019
Employment Agreement with Timothy Ryan. Effective December 15, 2015, we entered into an employment agreement with Mr. Ryan pursuant to which he will serve as our Executive Vice President. Under the terms of the employment agreement, Mr. Ryan will receive a base salary at an initial rate of $240,000 per year. For a limited period until we have raised at least $5 million of capital, he will receive a reduced salary of $120,000 per year. Within 30 days after we raise at least $5 million of capital, Mr. Ryan will receive, as a lump sum bonus payable in cash or stock at our discretion, the amount equal to the difference between the amount he would have been paid at his initial rate of $240,000 and the amount he was paid at the reduced salary level. In addition, Mr. Ryan will have the opportunity to earn an annual performance bonus of up to 50% of his base salary based on performance criteria set by our President and Chief Executive Officer. Also pursuant to the employment agreement, we agreed to grant stock options to Mr. Ryan to purchase shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant as reasonably determined by our Board of Directors in good faith. Pursuant to the agreement, 50% of the options were to vest on December 31, 2016 and the other 50% will vest ratably over a thirty-six month period beginning in January 2017. Mr. Ryan also is entitled to an automobile allowance of $1,250 per month, disability insurance coverage equal to his base salary, life insurance with a $1 million death benefit, reimbursement of certain expenses, health, dental and vision coverage in accordance with our usual practices and participation in all other benefit plans maintained by the Company.
Mr. Ryan’s employment agreement may be terminated by us at any time for “Cause” (as defined in his employment agreement) and by Mr. Ryan upon 14 days’ prior written notice, or upon Mr. Ryan’s death or disability. The employment agreement also provides for termination of Mr. Ryan’s employment by us without Cause or by Mr. Ryan for “Changed Circumstances” (as defined in his employment agreement).
If Mr. Ryan’s employment is terminated by us without Cause or by him for Changed Circumstances, and provided that Mr. Ryan releases and waives his claims against the Company as provided in the employment agreement, he is entitled to receive (i) monthly severance payments and continuation of benefits for a period equal to the greater of (A) 6 months or (B) the number of months between December 15, 2015 and his termination, up to a maximum of twelve months, (ii) accelerated vesting of equity awards as if his employment had continued during such period and (iii) a pro rata portion of any eligible bonus compensation. If Mr. Ryan’s employment is terminated by us (with or without Cause) or by him for Changed Circumstances in connection with or following a “Change in Control” (as defined in his employment agreement), he will be entitled to receive the benefits in the preceding sentence as if his employment were terminated more than twelve months after December 15, 2015, plus the pro rata portion of any eligible bonus compensation.
Mr. Ryan’s employment agreement also contains restrictive covenants relating to the protection of confidential information, non-competition and non-solicitation. The non-solicitation and non-competition covenants apply during the term of his employment and continue generally for a period of 12 months following the termination of his employment. Mr. Ryan will not be entitled to any severance or change in control benefits under his employment agreement if he breaches any of these covenants.
Employment Agreement with James R. Erickson, Ph.D. On December 1, 2016, we entered into an employment agreement with Dr. Erickson, dated December 1, 2016 (the “Employment Agreement”), which provides for his service as Chief Business Officer of the Company. Dr. Erickson’s employment will continue until it is otherwise terminated by either party pursuant to the terms of the Employment Agreement. The Employment Agreement may be terminated by us without “Cause” upon three months’ advance written notice, or for “Cause”, and by Dr. Erickson without “Good Reason” or for “Good Reason” (as those terms are defined in the Employment Agreement).
Dr. Erickson will receive an initial limited annual base salary of $125,000 (the “Limited Salary”) from December 5, 2016 until we have brought in an aggregate of $5 million in financing, whether through the sale of securities or otherwise (the “Limited Salary Period”). At the conclusion of the Limited Salary Period, Dr. Erickson will receive an annual base salary of $250,000 (the “Base Salary”). Dr. Erickson is eligible to earn an annual performance bonus equal to up to 55% of his Limited Salary or Base Salary, based upon performance criteria set by the Board of Directors in its sole discretion on an annual basis. The agreement provides for the grant of stock options for 1,000,000 shares of our common stock, half of which will vest on December 31, 2017, or immediately upon the establishment of a stock option plan in 2017. The other half will vest monthly on the first day of each subsequent month, commencing January 1, 2018, at a rate of 1/36 of the total number of remaining shares per month. Pursuant to the terms of the Employment Agreement, vesting will be accelerated following a termination or Change in Control (as defined in the Employment Agreement). Dr. Erickson will be entitled to participate in all employee benefit plans for which he is eligible, including health and dental insurance, life and disability insurance, and all other employee benefit plans effected for our employees generally pursuant to the Employment Agreement.
If we terminate Dr. Erickson’s employment for Cause, as provided by the Employment Agreement, he will be entitled to receive the Initial Salary or Base Salary or bonus earned and unpaid through the date of termination. In the event we terminate Dr. Erickson’s employment without Cause or Dr. Erickson terminates his employment for Good Reason, as provided in the Employment Agreement, Dr. Erickson will be entitled to receive (i) a payment in the amount of his Base Salary or Limited Salary (whichever is applicable) for the greater of six months or the number of full months between December 5, 2016 and date of termination up to a maximum of twelve months (the “Severance Period”), (ii) continuation of his benefits (to the extent authorized by COBRA) on a monthly basis for the Severance Period; and (iii) accelerated vesting of any stock options subject to vesting with respect to the number of shares that would have vested during the Severance Period if Dr. Erickson had remained employed by us during such time. In the event that we terminate Dr. Erickson’s employment without Cause, or by the Executive for Good Reason, within six months following a Change in Control of the Company, pursuant to the terms of the Employment Agreement, Dr. Erickson will be entitled to receive (i) payment in the amount of his Base Salary or Limited Salary (whichever is applicable) for twelve months, (ii) continuation of his benefits for twelve months (to the extent authorized by and consistent with COBRA), (iii) accelerated vesting of any stock options subject to vesting with respect to the number of shares that would have vested during the Severance Period if Dr. Erickson had remained employed by us during such time, and (iv) any pro-rated bonus portions which the Board of Directors, at its sole discretion, determines had been earned by Dr. Erickson, which will be in lieu of any benefits to which Dr. Erickson is otherwise entitled.
Dr. Erickson’s agreement also includes covenants relating to non-disclosure of confidential information and non-competition, non-solicitation, non-interference with customers, and non-hiring of employees for a period of one year following termination of employment.
Employment Agreement with Kelley Wendt. Effective March 16, 2017, we entered into an employment agreement with Kelley Wendt which provides for her continued services as the Chief Financial Officer of the Company. The initial term of the employment agreement will end on February 1, 2019 and will automatically renew for successive one (1) year terms, unless either we provide to Ms. Wendt, or Ms. Wendt provides to us, written notice of nonrenewal at least thirty (30) days prior to the expiration of the then current term. The employment agreement may be immediately terminated by us for “Cause” (as defined in her employment agreement) or by us or Ms. Wendt upon two (2) months’ advance written notice.
Ms. Wendt will receive an initial annual gross base salary of $90,000 (the “Annual Base Salary”) and is eligible to earn an annual performance bonus equal to up to 60% of her Annual Base Salary (the “Performance Bonus”) based upon performance criteria established by the Company from time to time. She also is eligible to participate in the Company’s stock incentive plan. Ms. Wendt will be entitled to receive up to twenty-five (25) days paid vacation each year and to participate in all employee health and welfare benefits plans for which she is eligible.
The employment agreement also includes covenants relating to non-disclosure of confidential information and non-competition, non-solicitation of customers, and non-solicitation and non-hiring of employees for a period of one year following termination of employment.
Stock Option Plan
We anticipate adopting a Stock Option Plan in the first quarter of 2017, pursuant to which our Board of Directors may grant stock options to employees, directors and consultants from time to time. Pursuant to our employment agreements with Mr. Young and Mr. Ryan, we have agreed to grant stock options to these officers as described under “—Employment Agreements” above. We anticipate that our Board of Directors will determine the amount of these awards and grant these stock options following adoption of our Stock Option Plan.
As of December 31, 2016, we did not have any compensation plans under which shares of our common stock were authorized for issuance, nor did we have any stock options outstanding.
Director Compensation
Our directors currently do not receive any compensation for their service as members of our Board of Directors.
Item 12. SecuritySecurity Ownership of Certain Beneficial Owners and ManagementManagement and Related StockholderMatters.Stockholder Matters
The following table sets forth information as of December 31, 2016,April 30, 2020, regarding the number of shares of our common stock beneficially owned by each director, each named executive officer and by all directors and executive officers as a group. Beneficial ownership includes shares, if any, held in the name of the spouse, minor children or other relatives of the director or executive officer living in such person’s home, as well as shares, if any, held in the name of another person under an arrangement whereby the director or executive officer can vest title in himself at once or at some future time. In determining the number and percentage of shares beneficially owned by each person, shares that may be acquired by such person pursuant to options exercisable within 60 days after April 30, 2020 are deemed outstanding for purposes of determining the total number of outstanding shares for such person and are not deemed outstanding for such purpose for all other shareholders. To our knowledge, except as otherwise indicated, beneficial ownership includes sole voting and dispositive power with respect to all shares. Unless otherwise noted, each shareholder’s address is 4870 Sadler Road,80 NE 4th Avenue, Suite 300, Glen Allen, VA 23060,28, Delray Beach, FL 33483, and each shareholder has sole voting power and investment power with respect to securities shown in the table below.
| Title of Class | | Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent ofClass (1) |
| | | | | | | |
| Common Stock | | Philip J. Young | | 8,668,000(2) | | 25.3% |
| Common Stock | | Kelley A. Wendt | | 600,000(3) | | 1.7% |
| Common Stock | | Timothy Ryan | | 8,618,000(4) | | 25.2% |
| Common Stock | | James R. Erickson | | 1,600,000 | | 4.7% |
| Common Stock | | Krassen Dimitrov | | 3,600,000(5) | | 10.6% |
| Directors and executive officers as a group (5 individuals) | | 23,086,000 | | 65.9% |
_________________| Title of class | Name and address of beneficial owner | Amount and Nature of Beneficial Ownership | | |
| Current Named Executive Officers & Directors: |
| Common Stock | Vladislav Yampolsky 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 6,873,192 | (2) | 15.10% |
| Common Stock | Philip Young** 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 28,141 | (3) | 0.06% |
| Common Stock | Kevin Esval** 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 639,742 | (4) | 1.41% |
| Common Stock | John Price 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 283,336 | (5) | 0.62% |
| Common Stock | Emiliano Aloi 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 250,000 | (6) | 0.55%* |
| Common Stock | Andrew Johnson 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 453,125 | (7) | 1.00% |
| Common Stock | Jeffrey Thompson** 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 193,492 | (8) | 0.43% |
| Common Stock | Kenneth E. Puzder 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 410,156 | (9) | 0.90% |
| Common Stock | Alvaro Daniel Alberttis 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 69,444 | (10) | 0.15% |
| Common Stock | Derek Du Chesne 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 1,312,500 | (11) | 2.88% |
| Common Stock | Lawrence J. Wert 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 3,859,986 | (12) | 8.48% |
| Common Stock | Justin A. Viles 80 NE 4th Avenue, Suite 28 Delray Beach, FL 33483 | 63,962 | (13) | 0.14% |
| Common Stock Total of All Current Directors and Executive Officers: | 14,437,076 | | 31.72% |
* Less than 1%.
**No longer serving in his previous positions with the Company.
(1)
Based on 34,071,86245,522,275 shares of our common stock issued and outstanding as of December 31, 2016.
April 30, 2020.(2)
Includes 168,000(i) 187,501 shares of common stock issuable upon the conversion of shares of Series B-2 PreferredCommon Stock, at a rate of one share of common stock for each share of Series B-2 Preferred Stock.
(3)
Includes 600,000 shares of common stock issuable upon the conversion of shares of Series B-1 Preferred Stock at a rate of one share of common stock for each share of Series B-1 Preferred Stock.
(4)
Includes (i) 2,950,000(ii) 6,435,691 shares of common stock held by Willets CapitalCeed2med, LLC over which Mr. RyanYampolsky has sole voting power and investment power and (iii) 250,000 vested stock options to purchase Common Stock exercisable at $0.32 per share.
(3) Includes (i) 16 shares of common stock and (ii) 2,850,00028,125 vested stock options to purchase common stock exercisable at $0.712 per share.
(4) Includes (i) 33,586 shares of common stock, (ii) 237,500 shares of common stock held by TonsetVelocity Health Capital over which Mr. RyanEsval has sole voting power and investment power, (iii) 400,000187,500 shares of common stock held by NYTX LLC,Donegal Bio Ventures, over which Mr. RyanEsval has sole voting power and investment power, (iv) 300,00021,000 shares issuable upon conversion of shares of common stockSeries B-2 held by Brosis LLC,Velocity Health Capital over which Mr. RyanEsval has sole voting power and investment power, and (v) 168,000vested options to purchase 160,156 shares of common stock issuable upon the conversion ofexercisable at $0.20 per share.
(5) Includes (i) 250,0000 vested stock options to purchase Common Stock exercisable at $0.20 per share and (ii) 33,336 shares of Series B-2 PreferredCommon Stock.
(6) Includes 250,000 vested stock options to purchase Common Stock exercisable at a rate$0.32 per share.
(7) Includes (i) 300,000 shares of oneCommon Stock, (ii) 12,500 vested stock options to purchase Common Stock exercisable at $0.32 per share, of common(iii) 15,625 vested stock for eachoptions to purchase Common Stock exercisable at $0.96 per share of Series B-2 Preferredand (iv) 125,000 vested stock options to purchase Common Stock held directly by Mr. Ryan.
(5)
(8) Includes 3,600,000(i) 33,336 shares of common stock held by Digital Diagnostics, Inc.,and (ii) 160,156 vested stock options to purchase Common Stock exercisable at $0.20 per share.
(9) Includes (i) 250,000 shares of which Dr. Dimitrov is PresidentCommon Stock, and 78% owner.(ii) 160,156 vested stock options to purchase Common Stock exercisable at $0.20 per share.
(10) Includes 69,444 shares of Common Stock.
(11) Includes (i) 1,000,000 shares of Common Stock, and (ii) 312,500 vested stock options to purchase Common Stock exercisable at $0.30 per share.
(12) Includes 3,859,986 shares of Common Stock.
(13) Includes 63,962 shares of Common Stock.
The following table sets forth information, as of December 31, 2016,April 30, 2020, regarding the number of shares of our common stock beneficially owned by all persons known by us, other than those set forth in the table above, who own five percent or more of our outstanding shares of common stock.
| Name and address of beneficial owner | Amount and Nature of Beneficial Ownership | |
| Common Stock | Ceed2Med, LLC(2) 95 NE 4th Ave. Delray Beach, FL 33483 | 6,435,691 | 14.14% |
Title of Class
| | Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent ofClass (1) |
| | | | | | |
Common Stock | | MagniSciFund, LP
123 N Post Oak Lane, Suite 400
Houston, TX 77024
| | 6,000,000 (2)
| | 15.0% |
Common Stock | | PoC Capital LLC
2995 Woodside Avenue, Suite 400-121
Woodside, CA 94062
| | 3,400,001 (3)
| | 9.1% |
Common Stock | | Sandor Capital Master Fund
2828 Routh Street, Suite 500
Dallas, TX 75201-1438
| | 2,300,000 (4)
| | 6.5% |
Common Stock | | Velocity Health Capital
95 White Bridge Road, Suite 509
Nashville, TN 37205
| | 2,068,000 (5)
| | 6.0% |
_________________
(1)
Based on 34,071,86245,522,275 shares of our common stock outstanding as of December 31, 2016.
(2)
Includes 6,000,000 Vladislav Yampolsky is the Manager of Ceed2Med, LLC, and, in that capacity, has the ability to make voting and investment decisions with regard to its shares of common stock issuable upon the conversion of shares of Series B-2 Preferred Stock at a rate of one share of common stock for each share of Series B-2 Preferred Stock.stock.
(3)
Includes 1,733,334 shares of common stock issuable upon the conversion of shares of Series C Preferred Stock at a rate of one share of common stock for each share of Series C Preferred Stock and 1,666,667 shares of common stock issuable upon exercise of outstanding warrants.
-58-(4)
Includes 300,000 shares of common stock issuable upon the conversion of shares of Series B-1 Preferred Stock at a rate of one share of common stock for each share of Series B-1 Preferred Stock and 900,000 shares of common stock issuable upon the conversion of shares of Series B-2 Preferred Stock at a rate of one share of common stock for each share of Series B-2 Preferred Stock.
Includes 168,000 shares of common stock issuable upon the conversion of shares of Series B-2 Preferred Stock at a rate of one share of common stock for each share of Series B-2 Preferred Stock.
Item 13. CertainCertain Relationships and Related Transactions, and Director Independence.Independence
We have entered into agreements in 2019 with Ceed2Med, LLC, our largest stockholder. For more information about these agreements please see “Business Overview – Ceed2Med Agreements” above.
We are party to an arbitration proceeding commenced September 2019 in San Francisco, California currently have a consulting arrangement withpending before the American Arbitration Association in New York, New York. The proceeding was brought by our former director, Dr. Krassen Dimitrov, a directorDimitrov. The complaint generally alleges that we and shareholder of the Company. In February 2016, we entered into aour subsidiary Exactus Biosolutions, Inc. breached an alleged consulting agreement with Dr. Dimitrov pursuantand owe unpaid consulting fees, plus interest. Dr. Dimitrov also licensed certain technology to which we retained KD Innovations Ltd., a company fully owned by him (“KD Innovations”),Exactus Biosolutions, Inc. The Company is conducting an investigation into matters concerning the licenses and payments previously made, and disputes that any amounts are due and the existence of any contract. The Company intends vigorously to defend such action. The Company believes that there exist grounds to assert various counter-claims and third-party claims against Dr. Dimitrov and his affiliated companies for a feereturn of $25,000 per month during the term of the arrangement, to manage the design and production of our lead device, FibriLyzer, and provide scientific expertise.amounts previously paid. For the year 2016, weyears ended December 31, 2019 and 2018, $0 and $300,000 was recognized $250,000 in researchResearch and developmentDevelopment expenses in connection with thesefor consulting services. The consulting agreement does not have a fixed term; however, it may be terminated with immediate effect at any time upon mutual agreement between us and KD Innovations, orprovided by either party with 90-days written notice to the other party.
In addition, Dr. Dimitrov is President and a 78% owner of Digital Diagnostics, Inc., with whom we have entered into the Licensing Agreement. The Licensing Agreement provides for Exactus BioSolutions and Digital Diagnostics to collaborate through the various steps of the product and device development process, including the development, regulatory approval and commercialization stages. Exactus BioSolutions is required to pay Digital Diagnostics, in cash and/or stock, an initial signing payment, milestone fees triggered by the first regulatory clearance or approval of each of FibriLyzer and MatriLyzer, and various sales thresholds, and royalty payments based on the net sales of the products, calculated on a product-by-product basis. The initial signing payment is due within seven days of the effective date of the agreement, with the remaining amount due upon closing of certain of our financing transactions. In 2016, we paid $50,000 to Digital Diagnostics as part of the initial signing payment under the Licensing Agreement and $21,659 in legal expenses.Dimitrov. As of December 31, 2016,2019 and 2018, $575,000 was included in accounts payable, respectively. During the year ended December 31, 2019 and 2018, $0 was paid.
On June 28, 2017, we accrued an additional $171,033 in licensing fees dueissued to closingtwo of our former executive officers a financing transactionpromissory note in the fourth quarterprincipal amount up to $100,000, which amount may be drawn upon by the Company as bridge financing for general working capital purposes. The promissory note accrues interest at a rate of 2016. No milestones have been met8.0% per annum and no milestone fees have been paidmatures on the earlier of (i) one (1) year from the date of the promissory note, and (ii) the closing the sale of our securities in a single transaction or a series of related transactions from which at least $500,000 of gross proceeds are raised.
On July 5, 2018, we issued our officer 15 shares of Series D Preferred shares in exchange for the forgiveness of $200,000 worth of accrued for throughdebt owed to the officer by the us.
On January 8, 2019, the Company entered into a Master Product Development and Supply Agreement with C2M (see note 12). At December 31, 2016.2019, accounts payable to C2M related to purchase of finish products amounted to $8,342. Ceed2Med is our largest stockholder.
On March 29, 2019, we retired a note payable owing to our former officer in the amount of $30,616. To retire the note, we issued the officer shares of common stock valued at $0.20 per share, for a total of 153,080 shares issued to retire the debt.
On March 1, 2019, we, through our majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consists of approximately 100 acres. The lease requires us to pay 5% of the net income realized by us from the operation of the lease farm. Accordingly, we recognized $0 Right-of-use asset and lease liabilities on this farm lease as we have not determined when it will generate net income from this lease. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination.
On March 1, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Glendale, Oregon and consists of approximately 100 acres. The lease requires the Company to pay $120,000 per year, whereby $50,000 was payable upon execution and $70,000 shall be payable prior to planting for agricultural use or related purposes. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination.
On April 30, 2019, we through our majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consists of approximately 38 acres. The lease requires the Company to pay $76,000 per year, whereby $38,000 was payable upon execution and $38,000 shall be payable on September 15, 2019 and 2% of the net income realized by us from the operation of the lease farm. The lease shall continue in effect from year to year for five years except for at least a 30-day written notice of termination. We have paid the initial payment of $26,000 and the remaining $12,000 was paid directly to the landlord by an affiliated company who is renting the portion of the lease property from us. The affiliated company is owned by two managing members of EOW. EOW is in the process of arranging a sub-lease agreement with the affiliated company.
On July 9, 2019, the Company entered into a Commercial Lease Agreement with Skybar Holdings, LLC, a Florida limited liability company. Pursuant to the lease, the Company will rent the entire first floor (consisting of approximately 4,000 square feet) of a property located in Delray Beach, Florida. The Company plans to develop the premises to create a hemp-oriented health and wellness retail venue, including education, clothing and cosmetics, and explore franchise opportunities. The initial term of the lease is 5 years commencing August 1, 2019, with two 5-year extension options. The lease includes a right of first refusal in favor of the Company to lease any space that becomes available on the 2nd and 3rd floor of the premises and a right of first refusal to purchase the premises. Pursuant to the lease, the Company will pay rent equal to $40,000 per month in advance in addition to all applicable Florida sales and/or federal taxes and security deposit of $40,000. Effective one year from the lease commencement date and each year thereafter, the rent shall increase at least three percent (3%) per year. The lessor of the premises is a limited liability company owned or controlled by Bobby Yampolsky, a member of the Board and the founder, manager and controlling member of Ceed2Med, the Company’s largest stockholder.
On July 31, 2019, we granted 10,000 Series E Preferred in connection with a Management and Services Agreement with Ceed2Med, our largest stockholder. We valued the 10,000 Series E Preferred shares which is equivalent into 6,250,000 common shares at a fair value of $0.54 per common share or $3,375,000 based on the sales of common stock on recent private placements on the dates of grant.
On September 13, 2019, we issued 2,000,000 shares of restricted common stock to officers and directors of the Company subject to vesting periods.
During the nine months ended September 30, 2019, we reimbursed a managing member of EOW and an affiliated company which is owned by two managing members of EOW, for operating expenses paid on behalf of EOW for the following:
●
$400,000 worth of hemp seeds
●
$50,000 lease payment related to a lease agreement
●
$100,000 for irrigation cost
During October 2019, we entered into two short-term promissory notes for a total net proceeds of $85,000 with an officer and an investor.
During October 2019, we entered into a short-term promissory note for a total net proceeds of $50,000 and a principal amount of $55,556 with an officer (See Note 12 to financial statements).
We recognized revenues from a related party customer of $37,446 during the year ended December 31, 2019. As of December 31, 2019, accounts receivable from a related party customer amounted to $18,860. The customer is an affiliated company which is substantially owned by a managing member of EOW.
From time to time, the Company’s subsidiary, EOW, receives advances from an affiliated company which is owned by three members of EOW for working capital purposes. The advances are non-interest bearing and are payable on demand. The affiliated company provided advances to the Company for working capital purposes for a total of $242,500 and the Company paid back these advances. The Company also advanced $127,500 to these related parties which resulted to a receivable or due from related parties of $127,500 as of December 31, 2019. These advances are short-term in nature, non-interest bearing and due on demand.
From January 31, 2020 through April 10, 2020, our Interim Executive Chairman, Bobby Yampolsky, made a series of advances to us in the approximate total amount of $97,000. There are currently no specific terms of repayment.
On February 4, 2020, we entered into a Supply and Distribution Agreement with HTO Holdings Inc (dba “Hemptown, USA”). On March 28, 2020, we amended the Supply and Distribution Agreement. Ceed2Med, LLC, our largest shareholder, is also a significant investor in Hemptown USA and is party to a distribution agreement.
Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. They may face a conflict in selecting between the Company and other business interests. We have not formulated a policy for the resolution of such conflicts.
Director Independence
Our Board of Directors currently consists of three directors: Philip J. Young, Timothy Ryan and Krassen Dimitrov, none of whom would be considered “independent”We are not a “listed issuer” within the meaning of NASDAQItem 407 of Regulation S-K and there are no applicable listing standards.standards for determining the independence of our directors. Applying the definition of independence set forth in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc., we believe that Daniel Alberttis, John Price, Larry Wert, and Justin Viles are independent directors.
Item 14. Principal PrAiccountingncipal Accountant Fees and Services.Services The following table presents the aggregate fees billed for each of the last two fiscal years by the Company’s independent registered public accounting firm, RBSM LLP, in connection with the audit of the Company’s consolidated financial statements and other professional services rendered.
| Year Ended: | | | | |
| December 31, 2019 | $100,700 | n/a | n/a | n/a |
| December 31, 2018 | $71,300 | n/a | n/a | n/a |
Audit Fees
The aggregate fees billed by our principal accountantrepresent the professional services rendered for the audit of ourthe Company’s annual consolidated financial statements and the review of the Company’s consolidated financial statements included in the quarterly reports, and other fees that arealong with services normally provided by the accountantaccounting firm in connection with statutory and regulatory filings or engagements for the year ended December 31, 2016 and 2015 was $58,000 and $42,000, respectively.
Audit-Related Fees
The aggregateother engagements. Audit-related fees billed by our principal accountantrepresent professional services rendered for assurance and advisoryrelated services by the accounting firm that wereare reasonably related to the performance of the audit or review of ourthe Company’s consolidated financial statements for the year ended December 31, 2016 and 2015 was $0.00 each year. that are not reported under audit fees.
Tax Fees
The aggregate fees billed forrepresent professional services rendered by our principal accountantthe accounting firm for tax compliance, tax advice, and tax planning for the years ended December 31, 2016 and 2015 was $0 each year. Theseplanning. All other fees related to the preparation of federal income and state franchise tax returns.
All Other Fees
The aggregaterepresent fees billed for products and services provided by someonethe accounting firm, other than our principal accountantthe services reported for the fiscal year ended December 31, 2016 and 2015 was $0 each year.other categories.
Pre–Approval Policy on Auditof Services Performed by Independent Registered Public Accounting Firm
We do not currently have anThe Audit Committee. TheCommittee’s policy of our Board of Directors, which acts as our Audit Committee, is to pre-approvepre–approve all audit and permissible non-audit services provided by the independent auditors. These services may include non–audit services, audit-relatedrelated services, tax services and other services. Pre-approvalPre–approval is generally provided for up to one year, and any pre-approvalpre–approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated the pre–approval authority to its chairperson when expedition of services is necessary. The independent auditorsregistered public accounting firm and management are required to periodically report to our Board of Directorsthe full Audit Committee regarding the extent of services provided by the independent auditorsregistered public accounting firm in accordance with this pre-approval,pre–approval and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
Item 15. Exhibits, Financial Statement Schedules.Statements Schedules
1. |
| Documents filed as part of this report:
|
(a) Financial Statements and SchedulesThe following financial statements and schedules listed below are included in this Form 10-K.
Financial Statements (See Item 8)
| (b) | | |
| 1. | Financial Statements. Reference is made to the Index to the Consolidated Financial Statements set forth under Part II, Item 8, on page 22 of this Form 10-K. |
| | |
| 2. | Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are not applicable, or the information is included in the Consolidated Financial Statements, and therefore have been omitted. |
| | |
| 3. | Exhibits. The following exhibits, are filed as part of, or incorporated by reference into, this reportExhibits |
Exhibit Number | Description |
| Share Exchange Agreement, dated February 29, 2016, by and among Spiral Energy Tech, Inc., Exactus BioSolutions, Inc. and the stockholders of Exactus BioSolutions, Inc. signatories thereto (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 4, 2016 and incorporated herein by reference). |
| Amended and Restated Articles of Incorporation (attached as Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-183360), filed August 16, 2012 and incorporated herein by reference). |
| Certificate of Amendment to Amended and Restated Articles of Incorporation (attached as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-183360, filed December 19, 2013 and incorporated herein by reference). |
| Bylaws (attached as Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (Registration No. 333-183360), filed August 16, 2012 and incorporated herein by reference). |
| Articles of Merger, dated March 10, 2016, between Exactus Acquisition Corp. and Spiral Energy Tech, Inc. (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 28, 2016 and incorporated herein by reference) |
3.4 | Certificate of Designation for Series A Preferred Stock (attached as Exhibit 3.13.2 to the Company’s Amendment to the Current Report on Form 8-K/A8-K filed February 17, 2016January 14, 2019 and incorporated herein by reference) |
3.5 | Certificate of Designation for Series B-1 Preferred Stock (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 4, 2016 and incorporated herein by reference) |
3.6 | Certificate of Designation for Series B-2 Preferred Stock (attached as Exhibit 3.2 to the Company’s Amendment to the Current Report on Form 8-K/A filed February 17, 2016 and incorporated herein by reference) |
3.7 | Amendment to Certificate of Designation After Issuance of Class or Series (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 1, 2016 and incorporated herein by reference). |
3.8 | Certificate of Amendment to Articles of Incorporation (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 12, 2018 and incorporated herein by reference) |
| Certificate of Designation for Series CD Preferred Stock (attached as Exhibit 3.11 to the Company’s Annual Report on 10-K filed March 29, 2019) |
| Form of Certificate of Designation of Preferences, Rights and Limitations of 0% Series E Convertible Preferred Stock (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 7, 2016 and incorporated herein by reference) |
3.8 | Bylaws (attached as Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (Registration No. 333-183360), filed August 16, 20121, 2019 and incorporated herein by reference) |
| 4.1 | Form of Leak Out Agreement by and between Spiral Energy Tech, Inc. and the holders signatory thereto (attached as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference)Common Stock Certificate** |
| Stock and Warrant Subscription Agreement, between Exactus, Inc. and POC Capital, LLC (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 7, 2016 and incorporated herein by reference) |
4.3 | Warrant to Purchase Common Stock of Exactus, Inc., dated June 30, 2016 (attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 7, 2016 and incorporated herein by reference) |
4.4 | Form of Exchange Agreement for Series A Preferred Stock (attached as Exhibit 10.1 to the Company’s Amendment to the Current Report on Form 8-K/A filed February 17, 2016 and incorporated herein by reference) |
4.5 | Form of Subscription Agreement for Series B-2 Preferred Stock8% Convertible Promissory Note (attached as Exhibit 10.2 to the Company’s Amendment to the Current Report on Form 8-K/A filed February 17, 2016 and incorporated herein by reference)
|
4.6 | Leak-Out Agreement dated October 13, 2016 between Exactus, Inc. and MagnaSci Fund LP (attached as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 1, 2016 and incorporated herein by reference).
|
10.1 | Master Services Agreement, dated June 30, 2016, between Exactus, Inc. and Integrium, LLC (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 7, 2016 and incorporated herein by reference) |
10.2 | Amended and Restated Collaboration and License Agreement dated August 18, 2016 between Digital Diagnostics Inc. and Exactus BioSolutions, Inc. (attached as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference)** |
10.3 | Consulting Agreement, dated January 20, 2016, between Exactus BioSolutions, Inc. and KD Innovation Ltd. (attached as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) (+) |
10.4 | Employment Agreement, dated December 15, 2015, between Exactus BioSolutions, Inc. and Philip J. Young (attached as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) (+) |
10.5 | Employment Agreement, dated December 15, 2015, between Exactus BioSolutions, Inc. and Timothy J. Ryan (attached as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) (+) |
10.6 | Employment Agreement, dated March 16, 2017, between Exactus, Inc. and Kelley Wendt (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 22, 2017 and incorporated herein by reference). (+) |
10.7 | Employment Agreement, dated December 1, 2016, between Exactus, Inc. and James R. Erickson (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 8, 20164, 2019 and incorporated herein by reference) (+)
reference herein). |
21.1 | Subsidiary ListForm of Warrant (attached as Exhibit 21.110.3 to the Company’s QuarterlyCurrent Report on Form 10-Q for the period ended June 30, 20168-K filed December 4, 2019 and incorporated herein by reference) |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
32.1 | Certification of Chief Executive Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002 (filed herewith) |
32.2 | Certification of Chief Financial Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002 (filed herewith)reference herein). |
| Interactive Data FilesWarrant to Purchase Common Stock, issued on November 27, 2019 (attached as Exhibit 10.7 to the Current Report on Form 8-K filed December 4, 2019 and incorporated by reference herein) |
+ Indicates management compensatory plan, contract or arrangement.
**Certain portions of this exhibit have been omitted pursuant to a confidential treatment request granted on September 23, 2016, pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. Omitted information has been filed separately with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
| | | |
Date: March 31, 2017 | | By: | /s/ Philip J. Young |
| | | Philip J. Young
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated on March 31, 2017.
| | | |
Date: March 31, 2017 | | By: | /s/ Philip J. Young |
| | | Philip J. Young
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
|
| | | |
Date: March 31, 2017 | | By: | /s/ Kelley A. Wendt |
| | | Kelley A. Wendt
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
|
| | | |
Date: March 31, 2017 | | By: | /s/ Timothy Ryan |
| | | Timothy Ryan
Executive Vice President and Director
|
| | | |
Date: March 31, 2017 | | By: | /s/ Krassen Dimitrov |
| | | Krassen Dimitrov
Director
|
| | | |
EXHIBIT INDEX
Exhibit No. | Description |
2.1 | Share Exchange Agreement, dated February 29, 2016, by and among Spiral Energy Tech, Inc., Exactus BioSolutions, Inc. and the stockholders of Exactus BioSolutions, Inc. signatories thereto (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 4, 2016 and incorporated herein by reference) |
3.1 | Amended and Restated Articles of Incorporation (attached as Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-183360), filed August 16, 2012 and incorporated herein by reference) |
3.2 | Certificate of Amendment to Amended and Restated Articles of Incorporation (attached as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-183360, filed December 19, 2013 and incorporated herein by reference) |
3.3 | Articles of Merger, dated March 10, 2016, between Exactus Acquisition Corp. and Spiral Energy Tech, Inc. (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 28, 2016 and incorporated herein by reference) |
3.4 | Certificate of Designation for Series A Preferred Stock (attached as Exhibit 3.1 to the Company’s Amendment to the Current Report on Form 8-K/A filed February 17, 2016 and incorporated herein by reference) |
3.5 | Certificate of Designation for Series B-1 Preferred Stock (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 4, 2016 and incorporated herein by reference) |
3.6 | Certificate of Designation for Series B-2 Preferred Stock (attached as Exhibit 3.2 to the Company’s Amendment to the Current Report on Form 8-K/A filed February 17, 2016 and incorporated herein by reference) |
3.7 | Amendment to Certificate of Designation After Issuance of Class or Series (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 1, 2016 and incorporated herein by reference). |
3.8 | Certificate of Designation for Series C Preferred Stock (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 7, 2016 and incorporated herein by reference) |
3.8 | Bylaws (attached as Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (Registration No. 333-183360), filed August 16, 2012 and incorporated herein by reference) |
4.1 | Form of Leak Out Agreement by and between Spiral Energy Tech, Inc. and the holders signatory thereto (attached as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) |
4.2 | Stock and Warrant Subscription Agreement, between Exactus, Inc. and POC Capital, LLC (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 7, 2016 and incorporated herein by reference) |
4.3 | Warrant to Purchase Common Stock of Exactus, Inc., dated June 30, 201612% Promissory Note (attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 7, 2016October 24, 2019 and incorporated herein by reference) |
4.4 | Form of Exchange Agreement for Series A PreferredWarrant to Purchase Common Stock, issued November 27, 2019 (attached as Exhibit 10.110.7 to the Company’s Amendment to the Current Report on Form 8-K/A8-K filed February 17, 2016December 4, 2019 and incorporated herein by reference) |
4.5 | Form of Subscription Agreement for Series B-2 Preferred Stock (attached as Exhibit 10.2 to the Company’s Amendment to the Current Report on Form 8-K/A filed February 17, 2016 and incorporated herein by reference) |
4.6 | Leak-Out Agreement dated October 13, 2016 between Exactus, Inc. and MagnaSci Fund LP (attached as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 1, 2016 and incorporated herein by reference). |
10.1 | Master Services Agreement, dated June 30, 2016, between Exactus, Inc. and Integrium, LLC2018 Equity Incentive Plan (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 7, 2016September 5, 2018 and incorporated herein by reference) |
10.2 | Amended and Restated Collaboration and License Agreement dated August 18, 2016 between Digital Diagnostics Inc. and Exactus BioSolutions, Inc.2019 Equity Incentive Plan (attached as Exhibit 10.210.7 to the Company’s QuarterlyAmended Current Report on Form 10-Q for the period ended June 30, 20168-K/A filed January 22, 2019 and incorporated herein by reference)** |
10.3 | ConsultingMaster Product Development and Supply Agreement with Ceed2Med, LLC dated January 20, 2016, between Exactus BioSolutions, Inc. and KD Innovation Ltd. (attached as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) (+) |
10.4 | Employment Agreement, dated December 15, 2015, between Exactus BioSolutions, Inc. and Philip J. Young (attached as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) (+) |
10.5 | Employment Agreement, dated December 15, 2015, between Exactus BioSolutions, Inc. and Timothy J. Ryan (attached as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) (+) |
10.6 | Employment Agreement, dated March 16, 2017, between Exactus, Inc. and Kelley Wendt8, 2019 (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 22, 2017January 14, 2019 and incorporated herein by reference). (+) |
10.7 | EmploymentForm of Subscription Agreement dated December 1, 2016, between Exactus, Inc.for Common Stock (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 14, 2019 and incorporated herein by reference) |
| Form of Exchange Agreement for Series A Preferred Stock (attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 14, 2019 and incorporated herein by reference) |
| Form of 2019 Incentive Plan Non-Qualified Option Award Certificate (attached as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed January 14, 2019 and incorporated herein by reference) |
| Form of Subscription Agreement for Series A Preferred Stock (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 29, 2019 and incorporated herein by reference) |
| Form of Subscription Agreement for Common Stock (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 21, 2019 and incorporated herein by reference) |
| Termination an Mutual Release Agreement with James R. Erickson (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 8, 2016February 22, 2019 and incorporated herein by reference) (+) |
| Securities Purchase Agreement for 8% Notes, dated November 27, 2019 (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 4, 2019 and incorporated herein by reference) |
| Subsidiary Guarantee, executed by Exactus, Inc. and its subsidiaries named therein, dated November 27, 2019 (attached as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed December 4, 2019 and incorporated herein by reference) |
| Security Agreement, dated November 27, 2019 (attached as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed December 4, 2019 and incorporated herein by reference) |
| Intellectual Property Security Agreement, dated November 27, 2019 (attached as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed December 4, 2019 and incorporated herein by reference) |
| Registration Rights Agreement, dated November 27, 2019 (attached as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed December 4, 2019 and incorporated herein by reference) |
| Green Goddess Extracts Purchase Agreement (attached as Exhibit 10.1 to the Current Report on Form 8-K filed August 1, 2019 and incorporated herein by reference) |
| Management and Services Agreement (attached as Exhibit 10.2 to the Current Report on Form 8-K filed August 1, 2019 and incorporated herein by reference) |
| Commercial Lease Agreement, dated July 9, 2019, by and between Skybar Holdings, LLC and the Company (attached as Exhibit 10.1 to the Current Report on Form 8-K filed July 15, 2019 and incorporated herein by reference) |
| First Amendment to Operating Agreement of Exactus One World, LLC, dated October 23, 2019 (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 24, 2019 and incorporated herein by reference) |
| Amendment to Management and Services Agreement, dated October 23, 2019 (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 24, 2019 and incorporated herein by reference) |
| Severance Agreement, by and between the Company and Philip J. Young, dated August 15, 2019 (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 21, 2019 and incorporated herein by reference) |
| Subscription Agreement with Exactus One World, LLC (attached as Exhibit 10.1 to the Quarterly Report on Form 10-Q filed May 31, 2019 and incorporated herein by reference) |
| Membership Purchase Agreement (attached as Exhibit 10.2 to the Quarterly Report on Form 10-Q filed May 31, 2019 and incorporated herein by reference) |
| Operating Agreement for Exactus One World, LLC (attached as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed May 31, 2019 and incorporated herein by reference) |
| Unanimous Written Consent of the Managers of Exactus One World, LLC (attached as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed May 31, 2019 and incorporated herein by reference) |
| Lease for Premises in Delray Beach, Florida (attached as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 11, 2019 and incorporated herein by reference) |
| Employment Agreement with Andrew Johnson (attached as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed March 11, 2019 and incorporated herein by reference) |
| First Amendment to Employment Agreement with Philip Young (attached as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed March 11, 2019 and incorporated herein by reference) |
| First Amendment to Employment Agreement with Kelley Wendt (attached as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed March 11, 2019 and incorporated herein by reference) |
| Separation Agreement and Consulting Agreement with Timothy Ryan (attached as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed March 11, 2019 and incorporated herein by reference) |
| Non-Exclusive Distribution and Profit Sharing Agreement by and between the Company and Canntab Therapeutics USA (Florida), Inc., dated November 20, 2019 (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 20, 2019 and incorporated herein by reference) |
| Supply Agreement by and between the Company and Canntab Therapeutics USA (Florida), Inc., dated November 20, 2019 (attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed November 20, 2019 and incorporated herein by reference) |
| Registration Rights Agreement, dated November 27, 2019 (attached as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed December 4, 2019 and incorporated herein by reference) |
| Supply and Distribution Agreement by and between the Company and Ceed2Med, LLC, dated November 14, 2019 (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 20, 2019 and incorporated herein by reference) |
| Employment Agreement with Derek Du Chesne (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 20, 2020 and incorporated herein by reference) |
| Supply and Distribution Agreement with HTO Holdings, Inc. (Hemptown, USA) |
| Amendment to Supply and Distribution Agreement with HTO Holdings, Inc. (Hemptown, USA) |
| 10.38* | Forbearance Agreement with 3i, LP |
| Subsidiary List (attached as Exhibit 21.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference) |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) and /15d-14(a), as adopted pursuant to sectionSection 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
32.1 | Certification of Interim Chief Executive Officer pursuant to Rule 18 U.S.CU.S.C. Section 1350, as adopted pursuant to sectionSection 906 of the Sarbanes-Oxley actAct of 2002 (filed herewith) |
32.2 | Certification of Chief Financial Officer pursuant to Rule 18 U.S.CU.S.C. Section 1350, as adopted pursuant to sectionSection 906 of the Sarbanes-Oxley actAct of 2002 (filed herewith) |
101 INS101** | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in Extensible Business Reporting Language (XBRL). |
| 101.INS | XBRL Instance Document |
101 SCH | 101.PRE | XBRL Taxonomy Extension Schema DocumentPresentation Linkbase |
101 CAL | 101.LAB | XBRL Taxonomy CalculationExtension Label Linkbase Document |
101 LAB | XBRL Taxonomy Labels Linkbase Document |
101 PRE | XBRL Taxonomy Presentation Linkbase Document |
101 DEF101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.SCH | XBRL Taxonomy Extension Schema |
+ Indicates management compensatory plan, contract or arrangement.
**Certain portions of this exhibit have been omitted pursuant to a confidential treatment request granted on September 23, 2016, pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. Omitted information has been filed separately with the Securities and Exchange Commission.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Exactus, Inc.
By:/s/ Emiliano Aloi
Emiliano Aloi
Interim Chief Executive Officer
(Principal Executive Officer)
May 22, 2020
By:/s/ Kenneth Puzder
Kenneth Puzder
Chief Financial Officer and Director
(Principal Financial Officer and Principal Accounting Officer)
May 22, 2020
In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
By:/s/ Bobby Yampolsky
Bobby Yampolsky
Interim Executive Chairman and Director
May 22, 2020
By:/s Kenneth Puzder
Kenneth Puzder
Chief Financial Officer and Director
May 22, 2020
By:/s/ John Price
John Price
Director
May 22, 2020
By:/s/ Alvaro Daniel Alberttis
Alvaro Daniel Alberttis
Director
May 22, 2020