Attached files
| file | filename |
|---|---|
| EX-32 - Notis Global, Inc. | ex32.htm |
| EX-31 - Notis Global, Inc. | ex31.htm |
| EX-21.1 - Notis Global, Inc. | ex21-1.htm |
| EX-10.130 - Notis Global, Inc. | ex10-130.htm |
| EX-10.129 - Notis Global, Inc. | ex10-129.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-54928
NOTIS GLOBAL, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 45-3992444 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 1715 Highway 35 North, Suite 101 | ||
| Middletown, NJ | 07748 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(800) 762-1452
(Issuer’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001 Per Share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 [X]
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
| Large Accelerated Filer [ ] | Accelerated Filer [ ] | |
| Non-accelerated Filer [X] | Smaller Reporting Company [X] | |
| Emerging growth company [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the OTC markets on June 30, 2016 was $592,086.
As of January 2, 2019, the Company had 9,982,923,868 shares of common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Report”), including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, any statements relating to our ability to consummate any acquisition or other business combination and any other statements that are not statements of current or historical facts. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:
| ● | a continued decline in general economic conditions nationally and internationally; | |
| ● | decreased demand for our products and services; | |
| ● | market acceptance of our products; | |
| ● | impact of any litigation or infringement actions brought against us; | |
| ● | the outcome of litigation or regulatory proceedings; | |
| ● | the regulation and legalization of hemp; | |
| ● | risks in product development; | |
| ● | inability to raise capital to fund continuing operations; | |
| ● | inability to honor our debt obligations; and | |
| ● | other factors, including the risk factors described in greater detail in Item 1A of this Report under the heading “Risk Factors.” |
The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “Risk Factors” may not be exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
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PART I
| ITEM 1. | BUSINESS |
Overview
We are a diversified holding company in the industrial hemp market. Based upon our knowledge and expertise in the regulation of the cannabis industry, we are refocusing our business plan to create a sustainable business model to grow crops and manufacture products from hemp farmland and to market, sell and distribute hemp derivative products such as cannabidiol (“CBD”) distillate and isolate, while exploring other business opportunities that complements our core business. At this time, we cultivate industrial hemp and then through a toll processing and extraction process we sell the hemp derivative product such as CBD IMA on a wholesale basis. We plan to cultivate industrial hemp based on our 320-acre farm in Pueblo, Colorado, through our wholly owned subsidiary, EWSD I, LLC. In 2017, we completed a pilot study on the Pueblo farm where we planted 15 acres of land, which was processed by a third- party contractor and distributed through our network. Based on the pilot study, we planted and harvested an aggregate of 100 acres of land in the planting season (early June to the end of September) of 2018.
Through our subsidiary, NY – SHI, LLC, we conducted a similar pilot study on 1.5 acres in the Hudson Valley region of New York State in 2018 through a contractor to determine if it is viable to cultivate industrial hemp in New York on a larger scale. We have received good education on our pilot study and are considering scaling in 2019. In addition to hemp cultivation, we also plan to establish our own pre-processing plant through a joint venture agreement with one of the leading hemp processors in the nation. The plant will not only have the capacity to process our own hemp but also service other hemp farmers. Leveraging our industry experience and existing logistics, we also plan to contract other farmers to grow hemp for us at pre-determined prices so be processed and distributed by us.
In February 2018, we, through a newly formed subsidiary, SOCO Processing, LLC, entered into a non-binding memorandum of understanding with Mile High Labs LLC and Rush Ventures LLC to build a pre-processing hemp extraction line on our farm in Pueblo, which we plan to license to Rush Ventures LLC for a monthly fee. The plant will not only have the capacity to process hemp grown by EWSD I, LLC, but allow us to generate revenues by referring customers to utilize the pre-processing hemp extraction line at an agreed upon rate. We may also generate revenues by referring customers to utilize the pre-processing hemp extraction line at an agreed upon rate. We are in negotiation for a definitive agreement as of the date of this report.
State and local laws regarding farming and growing hemp and processing centers for hemp vary. In June, 2018, the Senate passed the Farm Bill which contains provisions to legalize the cultivation, processing and sale of industrial hemp. With an eye focused on the future and ultimately anticipated FDA approval of hemp and CBD production and sales in the United States, we are honing our focus to controlling our supply chain. From “seed to sale,” we will control our own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products.
Leveraging our industry experience and existing logistics, we also plan to contract other farmers to grow hemp at pre-determined prices to be processed and distributed by us
Historically, we established joint ventures and entered into operating and management agreements with our partners and acted as a distributor of hemp products processed by our contractors. We also generated revenue from various sources on a “one-time basis” for services that we provided to clients in helping them obtain licenses, build out and open dispensaries and cultivation centers. We also sold a line of portable vaporizers and accessories under the brand name Vaporfection. We have discontinued these business operations to focus on our current business model, which we believe will generate consistent and predictable revenues.
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We operate through the following subsidiaries:
| ● | EWSD I, LLC d/b/a Shi Farms, a Delaware corporation established in March 2016 that cultivate and process industrial hemp in Colorado; | |
| ● | NY-SHI, LLC, a New York limited liability company established in May 2018 to conduct our pilot study in New York; | |
●
|
SHI Cooperative, LLC, a Colorado limited liability company established in May 2018 to contract with third party farmers to cultivate hemp; | |
| ● | Pueblo Agriculture Supply and Equipment, LLC, a Delaware corporation that was established in July of 2016 to own extraction equipment; | |
| ● | SOCO Processing, LLC, a Colorado limited liability company established in May 2018 to establish a pre-processing plant; and | |
| ● | Rock Acquisition Corporation, a New Jersey corporation established in December 2017, which has a mining permit with the State of Colorado and manages land containing the potential sand and gravel assets of our company. |
Corporate History
We were originally incorporated on June 16, 1977 in the State of Nevada under the name “Rabatco, Inc.” In May 2000, we changed our name to MindfulEye, Inc. On November 25, 2011, P. Vincent Mehdizadeh purchased 50% of the outstanding shares of our common stock. On August 30, 2011, in anticipation of the transaction discussed below, we changed our name to “Medbox, Inc.” Pursuant to a Stock Purchase Agreement with PVM International, Inc. dated December 31, 2011, we acquired all of the outstanding shares of common stock in various entities controlled by Mr. Mehdizadeh, in exchange for 2,000,000 shares of our common stock and a $1 million promissory note. The promissory note was repaid in full on April 16, 2013. In August 2012, Mr. Mehdizadeh purchased the remainder of our outstanding shares in a private transaction. During December of 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 12 to our consolidated financial statements.)
Effective January 28, 2016, we changed our name from Medbox, Inc., to Notis Global, Inc.
Government Regulations
The Agriculture Improvement Act of 2018 (the “Farm Bill”) was signed into law in December 2018, which legalizes hemp cultivation broadly and the transfer of hemp-derived products across state lines. Pursuant to the Farm Bill, hemp may not contain more than 0.3 percent tetrahydrocannabinol (“THC”). Any cannabis plant that contains more than 0.3 percent THC would be considered non-hemp cannabis under federal law with no legal protection. In addition, state departments of agriculture must consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary of USDA. A state’s plan to license and regulate hemp can only commence once the Secretary of USDA approves that state’s plan. In states opting not to devise a hemp regulatory program, USDA will construct a regulatory program under which hemp cultivators in those states must apply for licenses and comply with a federally-run program. The Farm Bill also outlines actions that are considered violations of federal hemp law (including such activities as cultivating without a license or producing cannabis with more than 0.3 percent THC). The law details possible punishments for such violations, pathways for violators to become compliant, and even which activities qualify as felonies under the law, such as repeated offenses.
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On August 11, 2016, a Statement of Principles on Industrial Hemp (the “Statement”) was issued by the Office of Secretary of the U.S. Department of Agriculture (“USDA”), the Drug Enforcement Administration (“DEA”) of the U.S. Department of Justice (“DOJ”) and the Food and Drug Administration (“FDA”) of the Department of Health and Human Service (“HHS”). On this date, Jonathan Miller, Esq., Frost, Brown Tod, Lexington, KY., and Co-signed by Joseph Sandler, Esq. , Sandler Reiff Lamb Rosenstein & Berkenstock, Washington, DC., provided to the Members of the Kentucky Hemp Industry Counsel, a legal Opinion on the U.S. Federal Agency Statement of Principles. This legal opinion provided:
As we outlined comprehensively in our Opinion on the Legal Status of Industrial Hemp, dated December 21, 2015 and attached as Appendix B (“our December Opinion”), the Agricultural Act of 2014, P.L. No. 113-79 (the “2014 Farm Bill”) and the Consolidated Appropriations Act for FY 2016 (the “Omnibus Law”) constitute a sweeping legal revolution for the industrial hemp crop. Taken together, the two laws ensure that individuals and firms that are engaged in authorized agricultural pilot programs should be permitted to grow, cultivate, transport, process, sell and/or use industrial hemp under the guidelines and regulations of state law, without interference from agencies using federally-authorized funds.
The issuance of the Statement of Principles by the three federal agencies most involved in these issues – the USDA, the DEA and FDA – brings that valued sense of certainty to individuals and firms involved in the industrial hemp business. Further, clarity provided by the Statement brings several items of good news to hemp farmers and firms:
| [ ] | While initially, the DEA rejected a clear understanding of the 2014 Farm Bill that institutions of higher education and state departments of agriculture could contract out hemp pilot projects to private farmers and business – requiring us to go to federal court to clarify – the Statement clearly acknowledges that private “persons licensed, registered, or otherwise authorized” by state agriculture departments and “persons employed by or under a production contract or lease” with colleges and universities may participate in pilot programs. | |
| [ ] | Moreover, in the most welcome portion of the Statement, authorized pilot program participants “may be able to participate in USDA research or other programs to the extent otherwise eligible for participation in those programs.” We believe that this broad language for the first time opens up duly registered pilot projects to be eligible for loans, grants, certification programs, and the wide variety of other opportunities made available to farmers and agri-businesses at USDA and its sub-agencies. | |
| [ ] | These federal agencies also for the first time acknowledge that, as part of marketing research programs, “industrial hemp products can be sold” in or among states with pilot programs. This recognition, which reflects clear authorization by the 2014 Farm Bill and the Omnibus Law, will not only give hemp farmers and businesses confidence that they can sell their products; but perhaps more importantly, provides much needed assurance to financial institutions that such commerce is legal, and that they can facilitate financial transactions in the industry. | |
| [ ] | The Statement makes clear that the FDA will continue to oversee “marketing claims” and the “process for drug applications,” while the Controlled Substances Act will still apply to “the manufacture, distribution, and dispensing of drug products.” Accordingly, the advice we shared in our December Opinion is confirmed: Firms engaged in producing hemp products for human consumption should not market their products as a “drug” nor make any medicinal claims without prior FDA approval. However, there are no blanket prohibitions on any other kind of sale of hemp-based consumable products such as cannabidiol (“CBD”), nor even any mention of CBD in the Statement. |
In addition, our subsidiaries, including but not limited to EWSD I, LLC, are also subject to other federal and local regulations, including the Pesticide Act of the State of Colorado.
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Competition
Our competitors in both the hemp space include sellers of products and services dedicated to the hemp and compliance regulated cannabis industry, including the cultivation, processing and distribution of industrial hemp products. We compete in markets where cannabis has been legalized and regulated, which includes various states within the United States. We expect that the quantity and composition of our competitive environment will continue to evolve as the industry matures. Additionally, increased competition is possible to the extent that new states and geographies enter the marketplace as a result of continued enactment of regulatory and legislative changes that de-criminalize and regulate cannabis products. We believe that by diligently establishing and expanding our brands, product offerings and services in new and existing locations, we will become well established in this growing industry. Additionally, we expect that establishing our product offerings in new and existing locations are factors that mitigate the risk associated with operating in a developing competitive environment. Additionally, the contemporaneous growth of the industry as a whole will result in new customers entering the marketplace, thereby further mitigating the impact of competition on our operations and results. Our competitors may have substantially greater resources, experience in obtaining regulatory approvals, operating experience, marketing capabilities, name recognition and production capabilities.
Employees
As of November 19, 2018, we have no full time employees and one of our subsidiaries, EWSD I, LLC, has ten (10) full time employees. The number of our, and our subsidiaries, part time employees fluctuates over the course of one year due to the nature of our business. We also use the services of five (5) independent contractors, of whom two (2) are through EWSD I, LLC. Neither we nor our subsidiaries have experienced any work stoppages and we consider the relations with their respective employees and independent contractors to be good.
Implications of Emerging Growth Company Status
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:
| ● | reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data in this prospectus; | |
| ● | an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; | |
| ● | reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and | |
| ● | exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements. |
We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our capital stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. For example, we intend to take advantage of the reduced reporting requirements with respect to disclosure regarding our executive compensation arrangements, have presented only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus, and have taken advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. To the extent that we take advantage of these reduced reporting burdens, the information that we provide stockholders may be different than you might obtain from other public companies in which you hold equity interests.
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In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
| ITEM 1A. | RISK FACTORS |
Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the risks and uncertainties described below together with all other information contained in this Report before making investment decisions with respect to our common stock. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. If any of the following risks actually occur, our business, financial condition, results of operations and our future growth prospects would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline, resulting in a loss of all or part of your investment. The risks and uncertainties described in this Report are not the only ones facing us. Additional risks and uncertainties of which we are not presently aware, or that we currently consider immaterial, may also affect our business operations.
Past financial performance should not be considered to be a reliable indicator of future performance, and current and potential investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to our Securities
There is no assurance that the Company will ever have enough authorized shares of common stock to honor the conversion or exercise of its convertible notes, warrants and other derivative securities.
Our Articles of Incorporation authorize 10,000,000,000 shares of common stock, of which 9,942,223,868 shares of common stock are issued and outstanding as of December 31, 2016, and 10,000,000 shares of preferred stock, of which 5,000,000 shares were issued as Series A Preferred Stock and then converted into common stock and retired and of which 5,000,000 remain unissued and undesignated. The Company may also be obligated to issue an additional 114,889,067,758 shares of common stock including shares of common stock issuable upon exercise of options and warrants and excluding shares of common stock issuable upon conversion of convertible notes. There is no assurance that the Company will ever have enough authorized shares of common stock to honor the exercise and conversion requests of its options and warrants.
We can sell additional shares of common stock or securities convertible into shares of common stock, without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in our company and could depress our stock price.
Our Board of Directors is authorized to issue our common stock and preferred stock, up to the amount authorized. 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.
In order to raise capital to fund our business plan, including developing and operating the farm in Pueblo, CO, and the operating expenses of the Company, we have issued convertible debentures to our lenders that are convertible into shares of our common stock at a discount to the current market prices, upon conversion by the lenders. Conversion of these debentures by the lenders leads to immediate and substantial dilution to holders of our common stock and could depress the price of our stock, having a material effect on the market value of the shares.
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Our stock price has been extremely volatile.
The market price of our common stock as has been extremely volatile and could be subject to further significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects, among other factors.
Among the factors that could affect our stock price are:
| ● | our announcements regarding our Restatements and the status of the ongoing SEC investigation and related stockholder litigation; | |
| ● | industry trends; | |
| ● | actual or anticipated fluctuations in our quarterly financial and operating results and operating results that vary from the expectations of our management or of securities analysts and investors; | |
| ● | our failure to meet the expectations of the investment community and changes in investment community; | |
| ● | recommendations or estimates of our future operating results; | |
| ● | announcements of strategic developments, acquisitions, dispositions, financings, product developments and other materials events by us or our competitors; | |
| ● | regulatory and legislative developments; | |
| ● | litigation; | |
| ● | general market conditions; | |
| ● | other domestic and international macroeconomic factors unrelated to our performance; and | |
| ● | additions or departures of key personnel. |
Because our common stock is not listed on any national securities exchange, investors may find it difficult to buy and sell our shares.
Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our common stock is traded on the OTC markets, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchanges. These factors may have an adverse impact on the trading and price of our common stock.
Sales by our stockholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.
A substantial portion of our total outstanding shares of common stock may be sold into the market under Rule 144 promulgated under the Securities Act. Such sales could cause the market price of our common stock to drop, even if our business is doing well. Such sales may include sales by officers and directors of the Company, who have entered into pre-arranged stock trading plans to sell shares of the Company’s common stock beneficially owned by them, established under Rule 10b-5-1 of the Securities Exchange Act of 1934, as amended.
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Furthermore, the market price of our common stock could decline as a result of the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate.
Our preferred stock may have rights senior to those of our common stock which could adversely affect holders of common stock.
Our Articles of Incorporation give our Board of Directors the authority to issue additional series of preferred stock without a vote or action by our stockholders. The Board of Directors also has the authority to determine the terms of preferred stock, including price, preferences and voting rights. The rights granted to holders of preferred stock in the future may adversely affect the rights of holders of our common stock. Any such authorized class of preferred stock may have a liquidation preference – a pre-set distribution in the event of a liquidation – that would reduce the amount available for distribution to holders of common stock or superior dividend rights that would reduce the amount of dividends that could be distributed to common stockholders. In addition, an authorized class of preferred stock may have voting rights that are superior to the voting right of the holders of our common stock. There are no shares of preferred stock presently outstanding.
We do not expect to pay any cash dividends in the foreseeable future.
We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, and such other factors as our Board of Directors deems relevant. Accordingly, investors may need to sell their shares of our common stock to realize a return on their investment, and they may not be able to sell such shares at or above the price paid for them.
Risks Related to Our Business
Our continued success is dependent on legalizing industrial hemp.
Continued development of the industrial hemp market is dependent upon continued legislative authorization of industrial hemp at the both the federal and the state level. The Farm Bill was signed into law in December 2018, which legalizes hemp cultivation broadly and the transfer of hemp-derived products across state lines. Pursuant to the Farm Bill, there will be significant shared state-federal regulatory power over hemp cultivation and production. See “Government Regulations.” In certain states, such as Colorado, based on the specifics of the legislation passed in that state, and on local governments authorizing a sufficient number of dispensaries. Any number of factors could slow or halt the progress. Furthermore, progress, while encouraging, is not assured, and the process normally encounters set-backs before achieving success. While there may be ample public support for legislative proposal, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of these factors could slow or halt the progress of hemp legalization, which would limit the market for our products and negatively impact our business and revenues.
We have a limited operating history and operate in a new industry, and we may not succeed.
We have a limited operating history and may not succeed. We are subject to all risks inherent in a developing business enterprise. Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with manufacturing specialty products and the competitive and regulatory environment in which we operate. For example, the industrial hemp industry is a new industry that, as a whole, may not succeed, particularly if the Federal government changes course and decides to prosecute those dealing in industrial hemp under Federal law. If that happens, there may not be an adequate market for our products. As a new industry, there are not established players on whose business models we can follow or build upon. Similarly, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in our company. Furthermore, as the industrial hemp industry is a new market, it is ripe for technological advancements that could limit or eliminate the need for our products.
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Furthermore, unanticipated expenses, problems, and technical difficulties may occur and they may result in material delays in the operation of our business, in particular with respect to our new products. We may not be able to successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, such failure could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.
There is no track record for companies pursuing our strategy and if our strategy is unsuccessful, we will not be profitable and our stockholders could lose their investments.
There is no track record for companies pursuing our business strategy, and there is no guarantee that our business strategy will be successful or profitable. If our strategy is unsuccessful, we may fail to meet our objectives and not realize the revenues or profits from the business we pursue, which may cause our value to decrease, thereby potentially causing our stockholders to lose their investments. The success of our strategy will depend on numerous factors including:
| ● | the success of our cultivation operations; | |
| ● | our ability to build our brand; | |
| ● | our ability to establish and develop our distribution network; and | |
| ● | our ability to obtain adequate financing to continue carry out our business plan. |
Our growth will depend upon a series of factors including , the successful cultivation and harvest of the industrial hemp we grow on our property or through the third party contractor farmers who grow on our behalf, the ability to process the harvested hemp raw material either through our own processing plant or though a toll processor, the ability to continue to build a broader sales pipeline and the ability to acquire additional acreage to expand our cultivation operation and we may be unable to consummate acquisitions on advantageous terms.
Our growth strategy is focused on the acquisition of specialized real estate assets on favorable terms as opportunities arise. Our ability to acquire these real estate assets on favorable terms is subject to the following risks:
| ● | competition from other potential acquirers may significantly increase the purchase price of a desired property; | |
| ● | we may not successfully purchase and lease our properties to meet our expectations; | |
| ● | we may be unable to obtain the necessary equity or debt financing to consummate an acquisition on satisfactory terms or at all; | |
| ● | agreements for the acquisition of properties are typically subject to closing conditions, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate; and | |
| ● | we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, against the former owners of the properties. |
We may acquire a property or properties “as-is,” which increases the risk of an investment that requires us to remedy defects or costs without recourse against the prior owner.
We may acquire properties “as is” with only limited representations and warranties from the seller regarding matters affecting the condition, use and ownership of the property. There may also be environmental conditions associated with properties we acquire of which we are unaware despite our diligence efforts, and for which we could be liable. In particular, cannabis facilities may present environmental concerns of which we are not currently aware. If environmental contamination exists on properties we acquire or develops after acquisition, we could become subject to liability for the contamination. As a result, if defects on any of our properties (including any building on such properties) or other matters adversely affecting the properties are discovered, including, but not limited to, environmental matters, we may not be able to pursue a claim for any or all damages against the seller, which could harm our business, financial condition, liquidity and results of operations.
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Currently, industrial hemp remains illegal under federal law.
In June, 2018, the Senate passed the Farm Bill which contains provisions to legalize the cultivation, processing and sale of industrial hemp. However, industrial hemp remains illegal under federal law as of the date of this report. It is a Schedule-I controlled substance. Even in those jurisdictions in which the use of hemp has been legalized at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of hemp preempts state laws that legalize its use for medicinal purposes. Presently, despite federal law, many states are maintaining existing laws and passing new ones in this area. This may be because the Trump Administration has made a policy decision to allow states to implement these laws and not prosecute anyone operating in accordance with applicable state law.
Regardless of the Trump Administration’s policy decision, the federal government may at any time choose to enforce the federal law, and, in the past, it has investigated hemp businesses in the various states in which we do business. Moreover, a change in the federal attitude towards enforcement could cripple the industry.
Adverse actions taken by the federal government may lead to delays on our business operations, disruptions to our revenue streams, losses of substantial assets, and substantial litigation expenses.
We and people and businesses that we do business with may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.
As discussed above, the use of hemp is illegal under federal law. Therefore, there is a compelling argument that banks cannot accept for deposit funds from the drug trade and therefore cannot do business with our clients that traffic in hemp, and clinic operators often have trouble finding a bank willing to accept their business. On February 14, 2014, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks “clarifying Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to hemp-related businesses.” In addition, U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized hemp businesses. While these are positive developments, there can be no assurance this legislation will be successful, or that, even with the FinCEN guidance, banks will decide to do business with hemp retailers, or that, in the absence of actual legislation, state and federal banking regulators will not strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal law. The inability of potential clients in our target markets to open accounts and otherwise use the services of banks may make it difficult for such potential clients to purchase our products and services and could materially harm our business.
We may have difficulty accessing bankruptcy courts.
As discussed above, the use of hemp is illegal under federal law. Therefore, there is a compelling argument that the federal bankruptcy courts cannot provide relief for parties who engage in the hemp or hemp-related businesses. Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute hemp assets as such action would violate the Controlled Substances Act. Therefore, we may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability to obtain credit.
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State and municipal governments in which we do business or seek to do business may have, or may adopt laws that adversely affect our ability to do business.
While the federal government has the right to regulate and criminalize hemp, which it has in fact done, state and municipal governments may adopt additional laws and regulations that further criminalize or negatively affect hemp businesses. States that currently have laws that decriminalize or legalize certain aspects of hemp could in the future, reverse course and adopt new laws that further criminalize or negatively affect hemp businesses. Additionally, municipal governments in these states may have laws that adversely affect hemp businesses, even though there are no such laws at the state level. For example, municipal governments may have zoning laws that restrict where hemp operations can be located and the manner and size of which they can expand and operate. These municipal laws, like the federal laws, may adversely affect our ability to do business, and adverse enforcement actions under these laws may lead to costly litigation and a closure of our businesses with which we have contracts or royalty-fee structures in place, in turn, affecting our own business. Moreover, if additional states do not adopt laws that legalize certain aspects of the hemp industry, we may not be able to expand our business in the manner in which we prefer.
Also, given the complexity and rapid change of the federal, state and local laws pertaining to hemp, the Company may incur substantial legal costs associated with complying with these laws and in acquiring the necessary state and local licenses required by our business endeavors. For example, some states permit entities to enter into joint venture relationships with individual license holders that provide for revenue sharing arrangements. In other states, revenue sharing is not permitted, and we accept fixed fees for our services. State and municipal governments may also limit the number of specialized licenses available or apply stringent compliance requirements necessary to maintain the license. These developments may limit our ability to expand our negatively affect our business model.
Our auditors have raised concerns about our ability to continue operations as a “going concern.” Investors may lose all of their investment if we are unable to continue operations and generate revenues.
Our independent registered public accounting firm has included a “going concern” explanatory paragraph in its report on our financial statements for the year ended December 31, 2016, indicating that we have sustained substantial losses from continuing operations and have used, rather than provided, cash in our continuing operations, and that these factors raise substantial doubt about our ability to continue as a going concern. Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the near future and thereafter, and there are no assurances that such funding will be available at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. Without additional funds from generation of revenues through execution of our business plan, debt or equity financings, sales of assets, or other transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our stockholders would likely lose most or all of their investment in us. See “Liquidity and Capital Resources” under “Item 7. Management’s Discussion and Analysis” below for further information regarding the Company’s efforts to secure liquidity and future cash flows.
The Company received an event of default regarding a promissory note and is unable to predict the outcome of this matter.
On September 22, 2016, the Company received notice of an Event of Default and Acceleration from one of its lenders regarding a Promissory Note issued on March 14, 2016. (See Item 1A. Risk Factors). As of the date of this filing, the Company is in technical default on all notes outstanding. On October 31, 2018, the Company and the affiliates of YA PN, LTD., entered into a Forbearance Agreement regarding the notes, Security Agreement, related documents and the financing arrangements described within the Forbearance Agreement pursuant to which the affiliates of YA PN, LTD. agreed not to enforce certain of its claims. The Company is unable to predict the outcome of these matters, however, legal action taken by the Company’s lenders could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan.
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We will require additional capital to finance our operations in the future, but that capital may not be available when it is needed and could be dilutive to existing stockholders.
We will require additional capital for future operations. We plan to finance anticipated ongoing expenses and capital requirements with funds generated from the following sources:
| ● | cash provided by operating activities; | |
| ● | available cash and cash investments; and | |
| ● | capital raised through debt and equity offerings. |
Current conditions in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. Our ability to raise additional capital will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you that we will be able to successfully raise additional capital at all or on terms that are acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our liquidity, financial condition, results of operations and prospects. Furthermore, if we raise capital by issuing stock, the holdings of our existing stockholders will be diluted and the market price of our common stock could decline.
If we raise capital by issuing debt securities, such debt securities would rank senior to our common stock upon our bankruptcy or liquidation. If we raise capital by issuing equity securities, they may be senior to our common stock for the purposes of dividend and liquidating distributions, which may adversely affect the market price of our common stock. Finally, upon dissolution or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.
The Company and some of its subsidiaries are currently delinquent with their respective federal and applicable state tax returns filings for the years ending December 31, 2016 and December 31, 2017. Therefore, we may incur additional taxes and costs. At this time, we are unable to determine whether or not such additional taxes or costs would have a material adverse effect on the company or its net operating losses, as discussed below.
Although we have been experiencing recurring losses, we are obligated to file tax returns for compliance with IRS regulations and that of applicable state jurisdictions. Our subsidiary, EWSD I, LLC, has approximately $1,618,129 of net operating losses during the year ended December 31, 2016. This net operating loss will be eligible to be carried forward for tax purposes at federal and applicable states level, but the use of such net operating losses may be subject to restrictions under applicable tax law. A full valuation allowance has been recorded related to the deferred tax assets generated from the net operating losses. The Company is currently delinquent on filing their tax returns.
We have material weaknesses in our internal control over financial reporting. In addition, because of our status as an emerging growth company, our independent registered public accountant is not required to provide an attestation report as to our internal control over financial reporting for the foreseeable future.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements for the years ended December 31, 2016 and 2015, we determined that our disclosure controls and procedures were ineffective, and that there was a material weakness in our internal controls over financial reporting, due to insufficient segregation of duties in our finance and accounting function because of our limited personnel. We currently have no employees and rely (and anticipate continuing to rely) heavily on third-party contractors for the provision of professional and other services. This resulted in not ensuring appropriate segregation of duties between incompatible functions, and made it more difficult to ensure that financial information is adequately analyzed and reviewed on a timely basis to detect misstatements. These above deficiencies represent a material weakness in our internal control over financial reporting given that they result in a reasonable possibility that a material misstatement to the annual or interim financial statements would not have been prevented or detected.
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We have begun evaluating and implementing additional procedures to improve the segregation of duties, however, because of our limited resources we cannot assure that these or other measures will fully remediate the deficiencies or material weakness described above in a timely manner. We intend to address the weakness identified above by increasing the oversight and review procedures of the board of directors with regard to financial reporting, financial processes and procedures and internal control procedures; and when funding is available, hiring additional finance and accounting personnel.
Nevertheless, there can be no assurances that we will have enough financial resources to remedy our current material weaknesses and significant deficiencies. If we are unable to remediate the material weakness, or otherwise maintain effective internal control over financial reporting, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner. We cannot assure you that we have identified all of our existing significant deficiencies and material weaknesses, or that we will not in the future have additional significant deficiencies or material weaknesses.
Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an “emerging growth company” as defined in the recently enacted JOBS Act, if we take advantage (as we expect to do) of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” until the fifth anniversary of the date of the first sale of common equity securities pursuant to the registration statement that went effective on December 11, 2014, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future.
Any of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our company, which could have a negative impact on our stock price.
The success of our new and existing products and services is uncertain.
We have committed, and expect to continue to commit, significant resources and capital to develop and market existing product and service enhancements and new products and services. These products and services are relatively untested, and we cannot assure you that we will achieve market acceptance for these products and services, or other new products and services that we may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business of dispensing regulated pharmaceutical products. In addition, new products, services and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services or enhancements or to hire qualified employees could seriously harm our business, financial condition and results of operations.
If we are able to expand our operations, we may be unable to successfully manage our future growth.
If we are able to expand our operations in the United States and in other countries where we believe our products will be successful, as planned, we may experience periods of rapid growth, which will require additional resources. Any such growth could place increased strain on our management, operational, financial and other resources, and we will need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.
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Our business may expose us to product liability claims for damages resulting from the design or manufacture of our products. Product liability claims, whether or not we are ultimately held liable for them, could have a material adverse effect on our business and results of operations.
We may be subject to product liability claims if any of our products are alleged to be defective or cause harmful effects. Product liability claims or other claims related to our products, regardless of their outcome, could require us to spend significant time and money in litigation, divert management time and attention, require us to pay significant damages, harm our reputation or hinder acceptance of our products. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products.
Our prior operating results may not be indicative of our future results.
You should not consider prior operating results with respect to revenues, net income or any other measure to be indicative of our future operating results. In 2016, we transitioned to a new business model. The timing and amount of future revenues will depend almost entirely the success of our new model and our ability to service new customers. Our future operating results will depend upon many other factors, including:
| ● | state and local regulation; | |
| ● | our ability to successfully implement our new business model,; | |
| ● | our success in expanding our business network and managing our growth; | |
| ● | our ability to develop and market our products; | |
| ● | the ability to hire additional qualified employees; and | |
| ● | the timing of such hiring and our ability to control costs. |
Our lack of adequate D&O insurance may also make it difficult for us to retain and attract talented and skilled directors and officers.
We are and may in the future be subject to additional litigation, including potential class action and stockholder derivative actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. Although we have obtained directors and officers liability (“D&O”) insurance to cover such risk exposure for our directors and officers, the amount of D&O insurance we have obtained is lower than customary for public companies. Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines, and expenses including attorneys’ fees) of officers and directors who are the subject of a lawsuit as a result of their service to the Company. The amount of D&O insurance we have obtained may not be adequate to cover such expenses should such a lawsuit occur, and our deductibles are higher than we may be able to pay. While neither Nevada law nor our Articles of Incorporation or bylaws require us to indemnify or advance expenses to our officers and directors involved in such a legal action, we have agreed to indemnify our officers and directors and may agree to indemnify other officers and directors in the future. Without adequate D&O insurance, the amounts we would pay to indemnify our officers and directors should they be subject to legal action based on their service to the Company could have a material adverse effect on our financial condition, results of operations and liquidity. Furthermore, our lack of adequate D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers, which could adversely affect our business.
If we are unable to maintain effective internal control over our financial reporting, the reputational effects could materially adversely affect our business.
Under the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002, as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted rules requiring public companies to perform an evaluation of Internal Control over Financial Reporting (Internal Controls) and to report on our evaluation in our Annual Report on Form 10-K. Our Internal Controls constitute a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. However, as discussed in greater detail in Item 9A of this Form 10-K, the Company identified a material weakness in its Internal Controls resulting in restatement of its consolidated financial statements. If our remediation of such reported material weakness is ineffective, or if in the future we are unable to maintain effective Internal Controls, additional resulting material restatements could occur, regulatory actions could be taken, and a resulting loss of investor confidence in the reliability of our financial statements could materially adversely affect the value of our common stock. We may be required to expend substantial funds and resources in order to rectify any deficiencies in our Internal Controls. Further, if lenders lose confidence in the reliability of our financial statements it could have a material adverse effect on our ability to fund our operations.
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We depend upon key personnel, the loss of which could seriously harm our business.
Our operating performance is substantially dependent on the continued services of our executive officers and key employees. The unexpected loss of the services of any of the key employees could have a material adverse effect on our business, operations, financial condition and operating results, as well as the value of our common stock.
Laws and regulations affecting the cannabis industry are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us.
Local, state and federal cannabis laws and regulations are broad in scope and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition.
In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our company and our products. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. These potential effects could include, however, requirements for the revisions to our products to meet new standards, the recall or discontinuance of certain products, or additional record keeping and reporting requirements. Any or all of these requirements could have a material adverse effect on our business, financial condition, and results of operations.
| ITEM 2. | PROPERTIES |
On August 7, 2015, we purchased certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (“Farm”), pursuant to an Agreement of Purchase and Sale of Membership Interest, where we plan to farm hemp plants. As consideration, we, among other things, issued a secured promissory in the principal amount of $3,670,000. The note is secured by a deed of trust and assignment of rents encumbering the acquired property.
The transaction was structured as a purchase, pursuant to a certain Agreement of Purchase and Sale of Membership Interest (the “Acquisition Agreement”) entered into July 23, 2015 between East West Secured Development, LLC (the “Seller”) and the Company, of 100% of the membership interest of EWSD I, LLC (“EWSD”) upon EWSD’s simultaneous purchase from Southwest Farms, Inc. (“Southwest”) of the Farm. The closing occurred on August 7, 2015, as a result of which the Company, through its new, wholly-owned subsidiary, EWSD, became the owner of the Acquired Property.
In connection with EWSD’s purchase of the Acquired Property, EWSD entered into a secured promissory note with Southwest in the principal amount of $3,670,000. Interest on the outstanding principal balance of the Note shall accrue at the rate of five percent (5.0%) per annum. The note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. The note is secured by a deed of trust and assignment of rents encumbering the Acquired Property.
In connection with the Closing, EWSD also entered into an unsecured promissory note with the Seller, in respect of payments previously made by Seller to Southwest, in the principal amount of $830,000. Interest on the outstanding principal balance of the Unsecured Note shall accrue at the rate of six percent (6.0%) per annum. The unsecured note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018.
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The purchase price to acquire EWSD (subject to the note and the unsecured note) consisted of (i) $500,000 paid by the Company in cash as a deposit into the escrow for the Acquired Property, and (ii) the Company’s agreement to pay Seller a royalty of 3% of the adjusted gross revenue, if any, from operation of the Acquired Property (including sale of any portion of or interest in the Acquired Property less any applicable expenses) for the three-year period beginning on January 1, 2016 payable 50% in cash and 50% in the Company’s common stock. The number of shares due in connection with any such payment shall be determined by dividing the dollar amount of such payment by the volume-weighted average price of the Company’s common shares for the thirty trading days prior to the due date of the payment.
In June 2018, we extended the maturity date of the note to August 20, 2019. In consideration for the extension, we agreed to make a payment of $250,000 by May 31, 2019 in addition to the regularly scheduled payments under the note. We also agreed to a loan extension fee of $40,000 payable by July 16, 2018 and $2,500 as reimbursement for seller’s costs and expenses.
On September 30, 2016, EWSD granted a junior lender (the “Junior Lender”) a Second Deed of Trust, Security Agreement and Financing Statement (the “Second Trust Deed”) and an Assignment of Rents and Leases (the “Assignment of Rents”). The Second Trust Deed and the Assignment of Rents encumber the Farm, and the rents payable by tenants under any current and future leases of and from the Farm. The Second Trust Deed and the Assignment of Rents secure the payment of all obligations of EWSD pursuant to any debentures issued to the Junior Lender in accordance with the Securities Purchase Agreement dated June 30, 2016 by and among EWSD, Junior Lender, and Company.
The security granted to the Junior Lender pursuant to the Second Trust Deed and the Assignment of Rents is subordinate to the rights of Southwest as set forth in the Deed of Trust, Security Agreement and Financing Statement dated as of August 7, 2015 granted by EWSD in favor of Senior Lender and the Assignment of Rents and Leases by and between EWSD and Southwest dated as of August 7, 2015. Such subordination is documented in a Subordination Agreement dated as of August 23, 2016 by and among Southwest, Junior Lender, Company, EWSD, and Pueblo Agriculture Supply and Equipment, LLC, another wholly-owned subsidiary of the Company, as amended by a First Amendment to Subordination Agreement dated as of September 19, 2016 (collectively, the “Subordination Agreement”) pursuant to which Southwest consented to the Second Trust Deed and the Assignment of Rents. The Subordination Agreement also provides that the Junior Lender may not increase the principal amount of indebtedness pursuant to the Securities Purchase Agreement beyond $1,500,000.
| ITEM 3. | LEGAL PROCEEDINGS |
Medvend
On May 22, 2013, Medbox initiated litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings LLC (“Medvend”) in connection with a contemplated transaction that Medbox entered into for the purchase of an approximate 50% ownership stake in Medvend for $4.1 million. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. In January 2017, we settled the litigation and agreed to pay the original shareholders of Medvend an aggregate of $375,000 in 6 installments over three years. We defaulted on the original settlement agreement and are currently in negotiation with Medvend for a payment plan and settlement agreement.
SEC Investigation and Wells Notice
In 2014, a federal grand jury subpoena pertaining to the Company’s financial reporting which was served upon the Company’s predecessor independent registered public accounting firm as well as certain alleged wrongdoing raised by a former employee of the Company. The Company was subsequently served with two SEC subpoenas in early November 2014. The Company established a Special Committee of the Board of Directors and fully cooperated with the grand jury and SEC investigations. As a result of certain errors discovered in connection with the review by management and its professional advisor, the audit committee, upon management’s recommendation, concluded on December 24, 2014 that the consolidated financial statements for the year ended December 31, 2013 and for the third and fourth quarters therein, as well as for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, should no longer be relied upon and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the consolidated financial statements for the year ended December 31, 2012, together with all three, six and nine month financial information contained therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated.
In March 2016, the staff of the U.S. Securities and Exchange Commission advised counsel for the Company in a telephone conversation, followed by a written “Wells” notice, that it is has made a preliminary determination to recommend that the Commission file an enforcement action against the Company in connection with misstatements by prior management in the Company’s financial statements for 2012, 2013 and the first three quarters of 2014. According to the final judgement entered into in March 2017, The Company agreed to be permanently enjoined from violating Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 15(a)(1) of the Exchange Act and Sections 5 and 17(a) of the Securities Act.
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Derivative Lawsuits and Class Action
On February 20, 2015, Michael A. Glinter, derivatively and on behalf of nominal defendants Medbox the Board and certain executive officers filed a suit in the Superior Court of the State of California for the County of Los Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015.
From January to October, 2015, there were various shareholder derivative lawsuits and class actions against the Company and certain past and present members of the Board, alleging that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. On October 16, 2015, the parties to the class actions and derivative lawsuits entered into settlements that collectively effect a global settlement of all claims asserted in the class actions and the derivative actions. Under the terms of the settlement, we agreed to adopt and adhere to certain corporate governance processes in the future. In addition, our insurers made a payment of $300,000 into the settlement escrow account and Messrs. Mehdizadeh and Bedrick delivered 2,000,000 and 300,000 shares, respectively, of their Medbox common stock into the settlement escrow account. The funds and common stock in the settlement escrow account will be paid as attorneys’ fees and expenses, or as service awards to plaintiffs.
On October 27, 2015, separate from the above lawsuits and settlement, Richard Merritts, derivatively and on behalf of nominal defendant Medbox, filed a suit in the Superior Court of the State of California for the County of Los Angeles against the Board and certain executive officers, alleging breach of fiduciary duties by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. On September 16, 2016, the parties entered into a settlement regarding Merritts’ claims. Under the terms of the settlement, we agreed to adopt and to adhere to certain corporate governance processes in the future. In addition, we made a payment of $135,000 in cash to be used to pay Merritts’ counsel for any attorneys’ fees and expenses, or as service awards to plaintiff Merritts. The settlement has been approved by the court.
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Other Litigations
Whole Hemp
A complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming the Company as defendants in Pueblo County, CO district court. The complaint alleges five causes of action against the Company: misappropriation of trade secrets, civil theft, intentional interference with prospective business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and the Company for the Farming Agreement and the Distributor Agreement. On August 12, 2016, the court ordered that all of Whole Hemp’s plants in the Company’s possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties filed a motion to dismiss the district court action. The Company commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between the parties. Whole Hemp filed its answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted to the court. On September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. On September 30, 2016, the arbitrator held an initial status conference and agreed to allow Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with prejudice.
Mani Brothers
The lease for the former office at 8439 West Sunset Blvd. in West Hollywood, CA has been partially subleased. The Company plans to sublease the remainder of the office in West Hollywood, CA and continues to incur rent expense while the space is being marketed. The landlord for the prior lease filed a suit in Los Angeles Superior Court in April 2015 against the Company for damages they allege have been incurred from unpaid rent and otherwise. In January 2016, the landlord filed a first amended complaint adding the independent guarantors under the lease as co-defendants and specifying damages claim of approximately $300,000. On September 8, 2016, the court approved Mani Brothers’ application for writ of attachment in the State of California in the amount of $374,402 against Prescription Vending Machines, Inc. (“PVM”). On March 1, 2017 the Company paid $40,000. On March 16, 2017 the Company and Mani Brothers agree to settle the amount owed if the Company pays $40,000 before July 2017. The Company did not pay the $40,000. A trial date has been set in May 2017. On July 24, 2017, the case was dismissed against the Company.
Bank Leumi
The Company’s former landlord, Bank Leumi, filed an action against the Company in Los Angeles Superior Court for breach of lease on August 31, 2016, seeking $29,977 plus fees and interest, in addition to rent payment for September 2016. In November 2016, the parties entered into a Settlement Agreement and General Release, pursuant to which the Company agreed to an eight-payment plan in favor of Bank Leumi, commencing December 2016 and terminating July 2017. All of the payments, which aggregated $46,521.65 for rent, fees, and costs, have been made as of the date of this Report.
Creaxion
On August 23, 2017, Creaxion Corporation filed a Complaint in the Superior Court of Fulton County, Georgia, styled Creaxion Corporation, Plaintiff, v. Notis Global, Inc., Defendant, Civil Action No. 2017CV294453. Plaintiff plead counts for (1) Breach of Contract in the amount of $89,000, (2) Prejudgment interest, and (3) Attorney’s fees. The Company was served on September 26, 2017, and did not respond to the Complaint. On November 30, 2017, the Court granted plaintiff’s request for a Default Judgment in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses, attorney’s fees, and interest at a rate of 6.25%. On December 14, 2017, the court entered into default judgement for the plaintiff for $89,000 and pre judgement interest at a rate of 6.25%.
Sheppard Mullin
On October 27, 2017, Sheppard Mullin filed a Complaint in the Superior Court of the State of California for the County of Los Angeles, styled Sheppard, Mullin, Richter & Hampton LLP, a California limited liability partnership, plaintiff v. Notis Global, Inc., a Nevada corporation, formerly known as Medbox, Inc.; and Does 1-10, inclusive, Defendants, Case No. BC681382. Plaintiff plead causes of action for (1) Breach of Contract; (2) Account Stated; and (3) and Unjust Enrichment, seeking approximately $240,000. The Company accepted service on November 10, 2017, and, as of the date of this Report, has not responded to the complaint. On May 17, 2018, the court entered judgement in favor of Sheppard Mullin in the amount of $277,998.77. On June 25, 2018, we entered into a settlement agreement with Sheppard Mullin pursuant to which we agreed to pay $50,000 due by June 29, 2018 and $25,000 due by June 28, 2019.
| ITEM 4. | MINE SAFETY DISCLOSURE |
Not applicable.
| 20 |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Securities
Our common stock is quoted on the OTCQB under the symbol “MDBX” through March 20, 2016. Beginning March 21, 2016, the Company’s common stock is quoted on the OTCQB under the symbol “NGBL”. As of January 4, 2018, the Company’s common stock is quoted on the OTC pink sheet due to delinquent SEC reporting.
The following table sets forth, for the periods indicated, the range of high and low intraday closing bid information per share of our common stock.
| High Sale | Low Sale | |||||||
| Fiscal Quarters | Price | Price | ||||||
| First Quarter 2016 | $ | 0.0415 | $ | 0.0071 | ||||
| Second Quarter 2016 | $ | 0.0125 | $ | 0.0001 | ||||
| Third Quarter 2016 | $ | 0.0020 | $ | 0.0001 | ||||
| Fourth Quarter 2016 | $ | 0.0025 | $ | 0.0002 | ||||
| First Quarter 2017 | $ | 0.0004 | $ | 0.0002 | ||||
| Second Quarter 2017 | $ | 0.0003 | $ | 0.0001 | ||||
| Third Quarter 2017 | $ | 0.0004 | $ | 0.0001 | ||||
| Fourth Quarter 2017 | $ | 0.0003 | $ | 0.0001 | ||||
| First Quarter 2018 | $ | 0.0003 | $ | 0.0001 | ||||
| Second Quarter 2018 | $ | 0.0003 | $ | 0.0001 | ||||
| Third Quarter 2018 | $ | 0.0003 | $ | 0.0001 | ||||
| Fourth Quarter 2018 | $ | 0.0003 | $ | 0.0001 | ||||
| First Quarter 2019 (through January 4, 2018) | $ | 0.0002 | $ | 0.0001 | ||||
The above prices reflect representative inter-dealer quotations, without retail markup, markdown or other fees or commissions, and may not represent actual transactions.
As of January 7, 2019, there were approximately 1,407 holders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on its common stock. We intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
All sales of unregistered securities during the period covered by this Report have been reported on a Current Report on Form 8-K or Quarterly Report on Form 10-Q.
| ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
| 21 |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. For cautions about relying on such forward looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to Item 1.
Overview
Notis Global entered into joint ventures and operating and management agreements with its partners and acted as a distributor of hemp products processed by our contract partners. As of December 31, 2016, the Company has exited all these arrangements. Presently we own and manage real estate used for cultivation of hemp.
We are building a consistent, predictable and valuable revenue model as we refocus the Company to create a sustainable business model to grow crops and manufacture products from hemp farmland and to market, sell and distribute CBD oil. State and local laws regarding farming and growing marijuana and cultivation centers for marijuana vary.
With an eye focused on the future-and ultimately anticipated FDA approval of hemp and CBD oil production and sales in the United States-we are honing our focus to controlling our supply chain. From “Seed to Sale,” Notis Global will influence its own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products. We believe this tight control of our supply chain will eventually be mandated by the Federal Government as a condition of legalizing hemp and CBD oil production, manufacturing and distribution in the United States. We have elected to take action now, and intend to lead our industry by doing so. As we continue to navigate the emerging world of hemp and CBD growing, cultivation, production and sales, it is clear that controlling all aspects of the business is the best strategy to meet our goals.
In August 2015, we purchased a 320 acre farm located outside of Pueblo, CO, in order to cultivate hemp for our products.
During December of 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 12 to our consolidated financial statements.)
Whole Hemp Agreement
In December 2015, we entered into a Farming Agreement with Whole Hemp Company (“Whole Hemp”), now known as Folium Biosciences, pursuant to which Whole Hemp would manufacture products from hemp and cannabis crops that it would grow on our farm, and the Company would build greenhouses for such activities up to an aggregate size of 200,000 square feet. Whole Hemp would pay all preapproved costs of such construction on or before September 2017 as partial consideration for a revocable license to use the greenhouses and a separate 10-acre plot of our farmland. We would retain ownership of the greenhouses. Under the 10 year amended agreement with Whole Hemp, Notis Global would receive a percentage of gross sales of all Whole Hemp products paid on a monthly basis. The Farming Agreement was amended and restated in March 2016.
Since May 12, 2016, we believe Whole Hemp has been in default, principally because they abandoned their obligation to perform farming activities under the First Amended and Restated Farming Agreement. On May 12, 2016, EWSD notified Whole Hemp of its defaults under the First Amended and Restated Farming Agreement and EWSD’s election to terminate the First Amended and Restated Farming Agreement.
By its terms, the First Amended and Restated Farming Agreement may be terminated at any time by either party, if the other party was in material breach of any obligation under the First Amended and Restated Farming Agreement, which breach continued uncured for 30 days following written notice thereof.
In addition, in December 2015, we entered into a Grower’s Distributor Agreement with Whole Hemp, pursuant to which we would provide marketing, sales, and related services on behalf of Whole Hemp in connection with the sale of its Cannabidiol oil product, and pursuant to which the Company would receive a percentage of gross revenues. The Grower’s Distributor Agreement was effective until September 30, 2025. The Grower’s Distributor Agreement was amended and restated in March 2016.
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Because we believe Whole Hemp has been in default, principally because they abandoned their obligation to perform farming activities under the First Amended and Restated Farming Agreement since May 12, 2016, EWSD notified Whole Hemp on May 12, 2016 of its election to terminate the Restated Grower’s Distributor Agreement.
By its terms, the Restated Grower’s Distributor Agreement could be terminated at any time by either party, if the other party was in material breach of any obligation under the Restated Grower’s Distributor Agreement, which breach continued uncured for 30 days following written notice thereof.
Whole Hemp complaint
A complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming Notis Global, Inc. and EWSD (collectively, “Notis”), as defendants in Pueblo County, CO district court. The complaint alleges five causes of action against Notis: misappropriation of trade secrets, civil theft, intentional interference with prospective business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and Notis for the Farming Agreement and the Distributor Agreement.
The court entered an ex parte temporary restraining order on June 2, 2016, and a modified temporary restraining order on July 14, 2016, enjoining Notis from disclosing, using, copying, conveying, transferring, or transmitting Whole Hemp’s trade secrets, including Whole Hemp’s plants. On June 13, 2016, the court ordered that all claims be submitted to arbitration, except for the disposition of the temporary restraining order.
On August 12, 2016, the court ordered that all of Whole Hemp’s plants in Notis’ possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties will soon file a motion to dismiss the district court action. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with prejudice.
Notis commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between the parties. Whole Hemp filed is Answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted to the court.
On September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016.
In light of the court order to destroy all Whole Hemp plants, the Company has immediately expensed all Capitalized agricultural costs of $73,345 related to Whole Hemp plants.
As noted above, our long-term strategy is to maintain tight control of our supply chain. The continuing default by Whole Hemp was conductive to our efforts to eliminate outside vendors in the supply chain and control production from “Seed to Sale.” Our decision to terminate the Whole Hemp Agreements comports with our long-term strategy to maintain tight control of our supply chain.
Dispensaries
Historically, we generated revenue from various sources on a “one-time basis” for services that we provided to clients in helping them obtain licenses, build out and open dispensaries and cultivation centers. During this period we obtained five licenses or registrations in the States of Oregon, Illinois, Washington and California for or on behalf of clients or for potential clients. Most of the current dispensary and cultivation sites that are opening under these licenses began conducting business in 2015. As of the second quarter of 2016, we have sold all of our interests and rights as concerns the dispensaries.
In the second quarter of 2015, we contracted with an independent operator to operate a dispensary in Portland, Oregon. In December 2015, we terminated the operator due to low sales volume and entered an operating agreement with a new partner to operate the Portland dispensary. Under the management of our new partner, the dispensary reached expected sales volume levels in December 2015 through March 2016 and is rated as the top dispensary in Portland, Oregon according to Leafly.com. On June 30, 2016, we entered into an assignment agreement whereby we sold and assigned all of our rights in the operating agreement, including but not limited to the assets and liabilities we held in relation to the Portland dispensary, resulting in a net loss of $178,000 on sale of assets.
| 23 |
On December 31, 2015, our operating partner made a matching investment to close on our escrow for a dispensary site in San Diego, CA. Notis Global, through an affiliated company, holds the approved conditional use permit to operate a dispensary on this site. In two transactions in February and April 2016 we sold our interest in the operating entity for approximately $299,000 and our interest in the underlying real estate for $335,000 to our operating partner and other third parties along with a forgiveness of $65,000 owed by Notis for improvements on the property, recognizing a gain of approximately $631,000. After the April 6, 2016 transaction, we have no further interest in the dispensary in San Diego, CA.
In the State of Washington, we held two licenses to operate dispensaries. These two dispensaries were to be operated by an independent operating partner, with whom we had entered into operating contracts as of August 31, 2015. We also held the underlying real estate for one of the two dispensaries, for which we received monthly rental income of $2,500. On August 2, 2016, we were notified that we are in default on the Note payable related to the underlying property and are incurring interest at the default rate of 18%. On September 27, 2016 the Company entered into a default settlement with the note holder where by the note was settled by conveying the property to the note holder recognizing the loss on default settlement of approximately 168,000.
During January and February 2016, we were selling a line of portable vaporizers and accessories under the brand name Vaporfection. In January 2016, we decided to exit the portable vaporizer business in 2016 so that the Company can more aggressively pursue additional business opportunities in its core business. On March 25, 2016 we sold our assets in Vaporfection for $70,000, which was payable $35,000 upon the sale and $35,000 was loaned to the buyer under a 6% note payable due September 30, 2016. As of September 30, 2016, the Company collected approximately $19,000 and determined that the remainder was not collectable and recognized a reserve of approximately $51,000.
Comparison of the year ended December 31, 2016 and 2015
The Company reported a consolidated net loss of approximately $17.7 million for the year ended December 31, 2016 and consolidated net loss of approximately $50.4 million for the year ended December 31, 2015. The fluctuation of approximately $33 million was due to an increase in the change in fair value of the derivative liabilities of approximately $24 million, increase in amortization of debt discount of approximately $8.3 million. These expenses primarily include decreases in general and administrative expenses of approximately $6 million.
Revenue
During the first quarter of 2016, the Company launched its CBD oil sales program under the Grower’s Distribution agreement. As noted under the Overview above, this agreement was terminated in May 2016. The Company is currently planning to extract CBD oil from their own hemp plants cultivated on the Farm, as well as process CBD oil from other farmers.
The increase of approximately $258,000 in total revenue was due to a change in the company’s business plan. During 2015 revenue was mostly based on consulting compared to the 2016 revenue from CBD Oil sales. The Company will no longer recognize any revenue related to the Oregon and Washington operations, as they have exited both locations, as described previously.
Costs of revenue
Costs of revenues increased by approximately $456,000 for the year ended December 31, 2016, as compared to the same period of 2015. Our CBD oil sale program launched in the first quarter of 2016, the Company incurred cost of revenue related to procurement of CBD oils in the amount of approximately $220,000 during the year ended December 31, 2016. There were no corresponding costs for the same period of 2015.
The incurred cost of Crops Cultivation for December 31, 2016 in the amount of approximately $230,000 as compared to $0 for December 31, 2015 impacted the increase in cost of revenue.
In light of the court order to destroy all Whole Hemp plants, the Company has immediately expensed all Capitalized agricultural costs of $73,345 as of December 31, 2016, as all costs as of that date related to Whole Hemp plants.
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Operating Expenses
Operating expenses consist of all other costs incurred during the period, other than cost of revenue. The Company incurred approximately $10 million in operating expenses for the year ended December 31, 2016, compared to approximately $16 million for the year ended December 31, 2015. The decrease of approximately $6 million was primarily due to the decrease in general and administrative expenses of $6 million.
General and administrative
General and administrative expenses consist primarily of salary costs, including stock - based compensation, professional costs, including the costs associated with being a public company and consultants, rent and other costs. For the year ended December 31, 2016, the company expended $9,944,022 as compared to $15,867,799 for the year ended December 31, 2015. The decrease of $5,923,777, resulted primarily from a decrease in miscellaneous general administrative expenses.
Other Expense
Other expense decreased by approximately $22.7 million, primarily from the decrease in gain on change in fair value of warrant liability, gain on sale of interest in subsidiary, gain on debt forgiveness and gain on extinguishment of debt.
Net Loss
The net loss for December 31, 2016 was approximately $17.7 million compared to $50.4 million for December 31, 2015. The decrease of approximately $32.7 million was primarily due to the increase in total other income (expense) and increase in net income from discontinued operations.
Liquidity and Capital Resources
As of December 31, 2016, the Company had cash on hand of approximately $24,000 compared to approximately $53,000 at December 31, 2015.
Cash Flow
During the year ended December 31, 2016, cash was primarily used to fund operations of the Company, as well as operations and development of the Farm.
| For the year ended December 31, | ||||||||
| Cash flow | 2016 | 2015 | ||||||
| Net cash used in operating activities | $ | (3,552,099 | ) | $ | (4,617,019 | ) | ||
| Net cash used in investing activities | (638,048 | ) | (1,188,173 | ) | ||||
| Net cash provided by financing activities | 4,179,138 | 10,789,122 | ||||||
| Cash Flows from discontinued operations | (17,858 | ) | (5,032,278 | ) | ||||
Net decrease in cash | $ | (28,867 | ) | $ | (48,348 | ) | ||
| 25 |
Cash Flows - Operating Activities
During the year ended December 31, 2016, cash flows used in operating activities were approximately $3.6 million, consisting primarily of an increase in change in fair value of derivative liability, gain on extinguishment of debt, a decrease in financing costs.
Cash Flows - Investing Activities
During the year ended December 31, 2016, cash flows used in investing activities was approximately $640,000, consisting primarily of the $617,207 in costs related to construction in progress for the build out of greenhouses on the Farm.
Cash Flows - Financing Activities
During the year ended December 31, 2016, cash flows provided by financing activities were approximately $4.2 million, consisting primarily of approximately $3,166,500 of net proceeds from the issuance of convertible notes payable.
Future Liquidity and Cash Flows
Management believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, proceeds from current and future expected debt issuances and proceeds from future share capital issuances, if any, may not be sufficient to fund the Company’s net cash requirements through January 2018. As noted in the footnotes to the accompanying condensed consolidated financial statements, the Company recently received a Notice of Default from a creditor following non-payment of the balance under a certain promissory note at maturity thereof, pursuant to which the Company will incur penalties and an increased interest rate as well as potential legal expenses associated with the creditor’s legal actions. (See Item 1A. Risk Factors elsewhere in this document) As of the date of this filing, the Company is in technical default on all notes outstanding. The Company is unable to predict the outcome of these matters, however, legal action taken by the Company’s lenders could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future. In order to execute the Company’s long-term growth strategy, which may include selected acquisitions of businesses or facilities that may bolster the Company’s CBD oil extraction business or real estate for the cultivation of hemp, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.
The Company’s financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2016, the Company had a net loss of approximately $17.7 million, negative cash flow from operations of $3.6 million and negative working capital of $37 million. The Company will need to raise capital in order to fund its operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement a business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
On July 24, 2015, the Company entered into an Agreement of Purchase and Sale of Membership Interest with East West Secured Development, LLC to purchase 100% of the membership interest of EWSD I, LLC which has entered into an agreement with Southwest Farms, Inc. to purchase certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (the “Farm”). The Farm is expected to yield revenue and profits for the Company in future years, through farming hemp, extracting CBD oil and controlling the full production cycle to ensure consistent quality.
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With an eye focused on the future - and ultimately anticipated FDA approval of hemp and CBD oil production and sales in the United States - we are honing our focus to controlling our supply chain initially through our production on the Farm in Pueblo, Colorado. From “Seed to Sale” - Notis Global will influence its own destiny by controlling our ecosystem. We intend to oversee and execute everything from growing and cultivating the highest quality plants to managing extraction and production of our products. We believe this tight control of our supply chain will eventually be mandated by the Federal Government as a condition of legalizing hemp and CBD Oil production, manufacturing and distribution in the United States. We have elected to take action now - and intend to lead our industry by doing so. Our decision to terminate the Whole Hemp Agreement comports with our long-term strategy to maintain tight control of our supply chain.
Special Meeting of the Stockholders to Increase Authorized Common Stock
On April 15, 2016, at a special meeting of the stockholders of the Company, the stockholders of the Company holding a majority of the total shares of outstanding common stock of the Company voted to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock of the Company from 400,000,000 to 10,000,000,000 (the “Certificate of Amendment”). The Certificate of Amendment was filed with the Nevada Secretary of State and was declared effective on April 18, 2016.
Additionally, management is actively seeking additional financing and expects to complete additional financing arrangements in the next few months. The Company expects that these plans will provide it the necessary liquidity to continue operations for the next 12 months.
The Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means. However, there is no guarantee that such financing will be available on terms acceptable to the Company, or at all. If the Company is unable to obtain adequate debt or equity financing, it may be forced to slow or reduce the scope of operations and expansion, and its business would be materially affected.
It is uncertain whether the Company can obtain financing to fund operating deficits until profitability is achieved or until revenues increase. This need may be adversely impacted by: unavailability of financing, uncertain market conditions, the success of the crop growing season, the demand for CBD oil, the ability of the Company to obtain financing for the equipment and labor needed to cultivate hemp and extract the CBD oil, and adverse operating results. The outcome of these matters cannot be predicted at this time.
Off Balance Sheet Transactions
We do not have any off-balance sheet credit exposure related to our customers
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable
| 27 |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| 28 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Notis Global, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Notis Global, Inc. (“the Company”) as of December 31, 2016, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2016 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 security laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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 consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
| /s/ Sadler, Gibb & Associates, LLC |
We have served as the Company’s auditor since 2017.
Salt Lake City, UT
January 7, 2019
| 29 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Shareholders of
Notis Global, Inc.
We have audited the accompanying consolidated balance sheet of Notis Global, Inc. and Subsidiaries (the “Company”) as of December 31, 2015, and the related consolidated statements of comprehensive loss, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 its internal control over financial reporting. Our audit 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Notis Global, Inc. and Subsidiaries, as of December 31, 2015, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a significant working capital deficit and an accumulated deficit as of December 31, 2015, and has incurred a significant net loss and negative cash flows from operations for the year ended December 31, 2015. The foregoing matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. These consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
| /s/ Marcum LLP |
Marcum llp
Chicago, IL
April 13, 2016, except for Note 12 as to which the date is January 7, 2019
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NOTIS GLOBAL, INC.
| December 31, 2016 | December 31, 2015 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 23,967 | $ | 52,834 | ||||
| Notes receivable, net of allowances | - | 60,000 | ||||||
| Inventory, net | - | 68,889 | ||||||
| Capitalized agricultural costs | 160,131 | - | ||||||
| Prepaid expenses and other current assets | 92,976 | 155,428 | ||||||
| Current assets – Discontinued operations | 2,522 | 189,508 | ||||||
| Total current assets | 279,596 | 526,659 | ||||||
| Property and equipment, net | 6,712,369 | 5,640,398 | ||||||
| Deferred Costs | - | 76,000 | ||||||
| Deposits and other assets, net of reserve | - | 7,487 | ||||||
| Non current assets – Discontinued operations | - | 741,097 | ||||||
| Total assets | $ | 6,991,965 | $ | 6,991,641 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 6,009,827 | $ | 2,671,444 | ||||
| Other accrued expenses | 2,187,393 | 1,475,234 | ||||||
| Accounts payable and other accrued expenses – related parties | 727,893 | 362,648 | ||||||
| Current liabilities – Discontinued operations | 1,020,127 | 2,385,524 | ||||||
| Notes payable, net of debt discount | 3,367,478 | 41,230 | ||||||
| Related party notes payable, net of discount | 289,866 | - | ||||||
| Convertible notes payable, net of discount | 8,645,442 | 6,667,523 | ||||||
| Convertible notes payable, directors | 105,000 | - | ||||||
| Derivative Liability | 15,635,947 | 19,246,594 | ||||||
| Warrant Liability | 14,430 | 940,000 | ||||||
| Total current liabilities | 38,003,403 | 33,790,197 | ||||||
| Notes Payable, less current portion | 4,093,272 | 4,288,631 | ||||||
| Total liabilities | 42,096,675 | 38,078,828 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, $0.001 par value: 10,000,000 authorized; 0 issued and outstanding as of December 31, 2016 and 2015, respectively | - | - | ||||||
| Common stock, $0.001 par value: 10,000,000,000 authorized, 9,942,223,868 issued and 9,942,163,868 outstanding as of December 31, 2016 and 240,971,727 issued and 240,911,727 outstanding as of December 31, 2015, respectively | 9,942,224 | 240,972 | ||||||
| Additional paid-in capital | 46,606,283 | 42,600,089 | ||||||
| Treasury stock | (1,209,600 | ) | (1,209,600 | ) | ||||
| Accumulated deficit | (90,443,617 | ) | (72,524,893 | ) | ||||
| Accumulated other comprehensive loss | - | (193,755 | ) | |||||
| Total stockholders’ deficit | (35,104,710 | ) | (31,087,187 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 6,991,965 | $ | 6,991,641 | ||||
See notes to consolidated financial statements.
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NOTIS GLOBAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the years ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenue | $ | 253,835 | $ | 4,000 | ||||
| Service revenue | 8,000 | - | ||||||
| Operating expenses | ||||||||
| Cost of revenues | 463,315 | 7,354 | ||||||
| General and administrative | 9,944,022 | 15,867,799 | ||||||
| Total operating expenses | 10,407,337 | 15,875,153 | ||||||
| Loss from operations | (10,145,502 | ) | (15,871,153 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense, net | (6,066,598 | ) | (21,320,736 | ) | ||||
| Change in fair value of derivative liabilities | (33,271,611 | ) | (9,088,003 | ) | ||||
| Change in fair value of warrant liability | 998,764 | - | ||||||
| Gain on sale of interest in subsidiary | 630,571 | - | ||||||
| Loss on sale of rights and assets | (32,300 | ) | - | |||||
| Gain on debt forgiveness | 486,857 | - | ||||||
| Gain on extinguishment of debt | 29,646,079 | - | ||||||
| Other expenses | (65,468 | ) | (16,050 | ) | ||||
| Total other income (expense) | (7,673,706 | ) | (30,424,789 | ) | ||||
Loss from continuing operations | (17,819,208 | ) | (46,295,942 | ) | ||||
| Discontinued operations | ||||||||
Income (loss) from discontinued operations, net of taxes | 87,638 | (4,150,758 | ) | |||||
| Income (loss) before provision for taxes | (17,731,570 | ) | (50,446,700 | ) | ||||
| Provision for taxes | - | - | ||||||
| Net loss | $ | (17,731,570 | ) | $ | (50,446,700 | ) | ||
| Loss per share attributable to common stockholders | ||||||||
| Basic and diluted income (loss) per share – continuing operations | (0.01 | ) | (0.66 | ) | ||||
| Basic and diluted income (loss) per share from discontinued operations | 0.00 | (0.06 | ) | |||||
| Basic and diluted income (loss) per share | $ | (0.01 | ) | $ | (0.72 | ) | ||
| Weighted average shares outstanding | ||||||||
| Basic and diluted | 4,364,487,739 | 69,746,872 | ||||||
| Other comprehensive loss | ||||||||
| Net loss | (17,731,570 | ) | (50,446,700 | ) | ||||
| Realized loss on discontinued operations | (187,154 | ) | - | |||||
| Unrealized loss on discontinued operations | - | (85,367 | ) | |||||
| Comprehensive loss | $ | (17,918,724 | ) | $ | (50,532,067 | ) | ||
See notes to consolidated financial statements.
| 32 |
NOTIS GLOBAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Treasury Stock | Paid-In | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Deficit | |||||||||||||||||||||||||||||||
| Balances at December 31, 2014 | 3,000,000 | $ | 3,000 | 30,496,909 | $ | 30,497 | (60,000 | ) | $ | (1,209,600 | ) | $ | 15,315,110 | $ | (22,078,193 | ) | $ | (108,388 | ) | $ | (8,047,574 | ) | ||||||||||||||||||
| Sale of common stock | - | - | 7,455,669 | 7,456 | - | - | 137,044 | - | - | 144,500 | ||||||||||||||||||||||||||||||
| Stock-based compensation and bonuses | - | - | 2,879,791 | 2,880 | - | - | 6,053,447 | - | - | 6,056,327 | ||||||||||||||||||||||||||||||
| Exercise of warrants | - | - | 206,480 | 206 | - | - | 278,745 | - | - | 278,951 | ||||||||||||||||||||||||||||||
| Issuance of shares to settle accounts payable | - | - | 3,015,671 | 3,016 | - | - | 413,712 | - | - | 416,728 | ||||||||||||||||||||||||||||||
| Conversions of convertible notes payable | - | - | 192,625,375 | 192,625 | - | - | 15,978,617 | - | - | 16,171,242 | ||||||||||||||||||||||||||||||
| Issuance of warrants in connection with convertible notes payable | - | - | - | - | - | - | 5,151,196 | - | - | 5,151,196 | ||||||||||||||||||||||||||||||
| Reclassification of warrant liability out of equity | - | - | - | - | - | - | (940,000 | ) | - | - | (940,000 | ) | ||||||||||||||||||||||||||||
| Exercise of warrants in connection with convertible notes payable | - | - | 2,291,832 | 2,292 | - | - | 135,218 | - | - | 137,510 | ||||||||||||||||||||||||||||||
| Warrants issued in connection with Farming agreement | - | - | - | - | 76,000 | - | - | 76,000 | ||||||||||||||||||||||||||||||||
| Share cancelation | (2,000,000 | ) | (2,000 | ) | (3,000,000 | ) | (3,000 | ) | - | - | 5,000 | - | - | - | ||||||||||||||||||||||||||
| Conversion of preferred stock series A into common stock | (1,000,000 | ) | (1,000 | ) | 5,000,000 | 5,000 | - | - | (4,000 | ) | - | - | - | |||||||||||||||||||||||||||
| Unrealized loss from marketable securities | - | - | - | - | - | - | - | - | (85,367 | ) | (85,367 | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (50,446,700 | ) | - | (50,446,700 | ) | ||||||||||||||||||||||||||||
| Balances at December 31, 2015 | - | - | 240,971,727 | 240,972 | (60,000 | ) | (1,209,600 | ) | 42,600,089 | (72,524,893 | ) | (193,755 | ) | (31,087,187 | ) | |||||||||||||||||||||||||
| Sale of common stock | - | - | 851,063 | 851 | - | - | 15,149 | - | - | 16,000 | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 28,778,831 | 28,779 | - | - | 780,645 | - | - | 809,424 | ||||||||||||||||||||||||||||||
| Investor contribution | - | - | - | - | - | - | 324,754 | - | - | 324,754 | ||||||||||||||||||||||||||||||
| Issuance of shares to consultants | - | - | 144,042,308 | 144,042 | - | - | (47,252 | ) | - | - | 96,790 | |||||||||||||||||||||||||||||
| Shares cancelation | - | - | (1,633,652 | ) | (1,634 | ) | - | - | (485,223 | ) | - | - | (486,857 | ) | ||||||||||||||||||||||||||
| Conversions of convertible notes payable | - | - | 9,529,213,591 | 9,529,214 | - | - | 3,418,121 | - | - | 12,947,335 | ||||||||||||||||||||||||||||||
| Unrealized gain from marketable securities | - | - | - | - | - | - | - | - | 193,755 | 193,755 | ||||||||||||||||||||||||||||||
| Realized loss from marketable securities | - | - | - | - | - | - | - | (187,154 | ) | - | (187,154 | ) | ||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | (17,731,570 | ) | - | (17,731,570 | ) | ||||||||||||||||||||||||||||
| Balances at December 31, 2016 | - | $ | - | 9,942,223,868 | $ | 9,942,224 | (60,000 | ) | $ | (1,209,600 | ) | $ | 46,606,283 | $ | (90,443,617 | ) | $ | - | $ | (35,104,710 | ) | |||||||||||||||||||
See notes to consolidated financial statements.
| 33 |
NOTIS GLOBAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | (17,819,208 | ) | (46,295,942 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 17,362 | 196,394 | ||||||
| Provisions and allowances | 120,841 | - | ||||||
| Gain on debt forgiveness | (486,857 | ) | - | |||||
| Charges from escrow deposits | - | 300,400 | ||||||
| Inventory valuation reserve | (5,000 | ) | 549,663 | |||||
| Change in fair value of derivative liability | 33,271,611 | 9,088,003 | ||||||
| Change in fair value of warrant liability | (918,969 | ) | - | |||||
| Amortization of debt discount | 4,162,769 | 11,691,883 | ||||||
| Financing costs | 581,817 | 9,201,050 | ||||||
| Gain on extinguishment of debt | (29,646,079 | ) | - | |||||
| Stock based compensation | 906,214 | 6,056,327 | ||||||
| Impairment of Goodwill | - | 1,260,037 | ||||||
| Deferred tax liability | - | (160,000 | ) | |||||
| Impairment of Intangible Assets | - | 655,103 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | - | (21,225 | ) | |||||
| Inventory | 68,889 | (38,268 | ) | |||||
| Capitalized agricultural costs | (160,131 | ) | - | |||||
| Deposits in escrow | - | 50,076 | ||||||
| Prepaid insurance | 46,875 | (42,264 | ) | |||||
| Prepaid expenses and other current assets | 15,577 | 5,580 | ||||||
| Advances for machinery | (310,725 | ) | - | |||||
| Deferred costs | 76,000 | - | ||||||
| Accounts payable and other accrued expenses | 4,024,890 | 2,644,754 | ||||||
| Other accrued expenses | 707,611 | - | ||||||
| Accrued expenses directors | 1,786,928 | 241,410 | ||||||
| Customer deposits | 7,486 | - | ||||||
| Net cash used in operating activities | (3,552,099 | ) | (4,617,019 | ) | ||||
| Changes related to discontinued operations | (17,858 | ) | (5,032,278 | ) | ||||
| Cash flows from investing activities | ||||||||
| Issuance of note receivable | (10,000 | ) | (60,000 | ) | ||||
| Repayment of note receivable | 19,159 | - | ||||||
| Purchase of property and equipment | - | (59,000 | ) | |||||
| Purchase of real estate | - | (445,000 | ) | |||||
| Proceeds received for sale of rights and assets | (30,000 | ) | - | |||||
| Construction in progress | (617,207 | ) | (624,173 | ) | ||||
| Net cash provided by (used in) by investing activities | (638,048 | ) | (1,188,173 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of notes payable | 1,453,599 | - | ||||||
| Payments on notes payable | (509,461 | ) | (215,906 | ) | ||||
| Payments on related party notes payable | - | (624,888 | ) | |||||
| Exercise of employee stock options | 16,000 | 144,500 | ||||||
| Proceeds from issuance of convertible notes payable, net of fees | 3,166,500 | 11,335,416 | ||||||
| Proceeds from issuance of convertible notes payable from directors, net | 52,500 | 150,000 | ||||||
| Net cash provided by financing activities | 4,179,138 | 10,789,122 | ||||||
| Net increase in cash and cash equivalents | (28,867 | ) | (48,348 | ) | ||||
| Cash, beginning of year | 52,834 | 101,182 | ||||||
| Cash, end of year | $ | 23,967 | $ | 52,834 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 38,595 | $ | 1,151 | ||||
| Cash paid for income tax | $ | - | $ | - | ||||
| Non- cash investing and financing activities: | ||||||||
| Common stock issued upon debt conversion | $ | 12,947,334 | $ | 16,171,242 | ||||
| Common stock issued to consultants | $ | - | $ | 416,728 | ||||
| Account payable assigned to note payable – related party | $ | 292,366 | $ | - | ||||
| Account payable assigned to convertible note payable – related party | $ | 50,000 | $ | - | ||||
| Account payable assigned to convertible notes payable | $ | 576,250 | $ | - | ||||
| Advances on machinery paid directly by lender | $ | 161,401 | $ | - | ||||
| Exchange of notes payable and accrued interest to convertible notes | $ | 753,122 | $ | - | ||||
| Exchange of convertible notes payable and accrued interest to convertible notes | $ | 5,970,910 | $ | - | ||||
| OID – notes payable | $ | 239,496 | $ | - | ||||
| OID – convertible notes payable | $ | 157,487 | $ | - | ||||
| Convertible notes payable assigned to notes payable | $ | 1,431,401 | $ | - | ||||
| Cancellation of notes payable for land | $ | 208,605 | $ | - | ||||
| Debt discount additions for convertible debt | $ | 3,615,351 | $ | - | ||||
| Exchange of notes payable to related party to convertible notes payable related party | $ | 2,500 | $ | - | ||||
| Investor contribution | $ | 324,754 | $ | - | ||||
| Unrealized gain on marketable securities | $ | 6,601 | $ | - | ||||
| Purchase of land with notes payable | $ | - | $ | 4,500,000 | ||||
| Issuance of warrants in connection with convertible debentures | $ | - | $ | 5,151,196 | ||||
| Issuance of warrants in connection with Farming agreement | $ | - | $ | 76,000 | ||||
See notes to consolidated financial statements.
| 34 |
NOTIS GLOBAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS
Business Description
Notis Global, Inc., (formerly Medbox, Inc.) which is incorporated in the state of Nevada (the “Company”), provides specialized services to the hemp and marijuana industry, distributes hemp product processed by contractual partners and through December 31, 2016, owned independently and through affiliates, real property and licenses that it leased and assigned or sublicensed to partner cultivators and operators in return for a percentage of revenues or profits from sales and operations (Note 5). Prior to 2016, through its consulting services, Company worked with clients who sought to enter the medical and cultivation marijuana markets in those states where approved. In 2015, the Company expanded into hemp cultivation with the acquisition of a 320 acre farm in Colorado by the Company’s wholly owned subsidiary, EWSD 1, LLC. The farm was operated by an independent farming partner until the relationship was terminated in May 2016 (Note 3). In addition, through its wholly owned subsidiary, Vaporfection International, Inc. (“VII”), the Company sold a line of vaporizer and accessory products online and through distribution partners. On March 28, 2016, the Company sold the assets of VII and exited the vaporizer and accessory business. As of December 31. 2016, the Company was headquartered in Los Angeles, California. As of the date of filing of this Annual Report, the Company was headquartered in Middletown, New Jersey.
Effective January 28, 2016, the Company changed its legal corporate name from Medbox, Inc., to Notis Global, Inc. The name change was effected through a parent/subsidiary short-form merger pursuant to Section 92A.180 of the Nevada Revised Statutes. Notis Global, Inc., the Company’s wholly-owned Nevada subsidiary formed solely for the purpose of the name change, was merged with and into the Company, with Notis Global, Inc. as the surviving entity. The merger had the effect of amending the Company’s Certificate of Incorporation to reflect the new legal name of the Company. There were no other changes to the Company’s Articles of Incorporation. The Company’s Board of Directors approved the merger.
Notis Global, Inc. operates the business directly and through the utilization of 7 primary operating subsidiaries, as follows:
| ● | EWSD I, LLC, a Delaware corporation that owns property in Colorado. |
| ● | Pueblo Agriculture Supply and Equipment, LLC, a Delaware corporation that was established to own extraction equipment |
| ● | Prescription Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (“MDS”), which previously distributed our Medbox product and provided related consulting services. |
| ● | Vaporfection International, Inc., a Florida corporation through which we distributed our medical vaporizing products and accessories. (All the assets of which were sold during the three months ended March 31, 2016). (See Note 6) |
| 35 |
| ● | Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers. This corporation currently owns no real property. |
| ● | MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington. This corporation currently owns no real property. (See Note 5) |
| ● | San Diego Sunrise, LLC, a California corporation to hold San Diego, California dispensary operations. (as of June 30, 2016, the Company has sold its interest in San Diego Sunrise, LLC, see Note 5) |
During December of 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor and medical cannabis dispensing line. (See Note 12)
On March 3, 2014, in order to obtain the license for one of the Company’s clients, the Company registered an affiliated nonprofit corporation Allied Patient Care, Inc., in the State of Oregon. Additionally, on April 21, 2014, the Company registered an affiliated nonprofit corporation Alternative Health Cooperative, Inc. in the State of California. As a result of our sale of the Sunset and Portland dispensaries and related rights and assets, the Company no longer owns the rights to these nonprofit corporations. (Note 5)
On April 15, 2016, at a special meeting of the stockholders of the Company, the stockholders of the Company holding a majority of the total shares of outstanding common stock of the Company voted to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock of the Company from 400,000,000 to 10,000,000,000 (the “Certificate of Amendment”). The Certificate of Amendment was filed with the Nevada Secretary of State and was declared effective on April 18, 2016.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The consolidated financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2016, the Company had a net loss from operations of approximately $17.7 million, negative cash flow from operations of $3.5 million and negative working capital of $38 million. During the year ended December 31, 2015, the Company had a net loss of approximately $50.4 million, negative cash flow from operations of $4.6 million and negative working capital of $33.3 million. The Company will need to raise capital in order to fund its operations. On September 22, 2016, the Company received notice of an Event of Default and Acceleration from one of its lenders regarding a Promissory Note issued on March 14, 2016. (See Item 1A. Risk Factors elsewhere in this document). As of the date of this filing, the Company is in technical default on all notes outstanding. The Company is unable to predict the outcome of these matters, however, legal action taken by the Company’s lenders could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management’s plans include:
The Company expects that the acquisition of EWSD I, LLC (“EWSD”) (Note 3), who owns a 320-acre farm in Pueblo, Colorado, will generate recurring revenues for the Company through farming hemp, extracting and selling CBD oil, and collecting fees from production related to extracting CBD oil for other farmers, while controlling the full production cycle to ensure consistent quality. Lastly, management is actively seeking additional financing over the next few months to fund operations.
| 36 |
The Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means. However, there is no guarantee that such financing will be available on terms acceptable to the Company, or at all. It is uncertain whether the Company can obtain financing to fund operating deficits until profitability is achieved. This need may be adversely impacted by: unavailability of financing, uncertain market conditions, the success of the crop growing season, the demand for CBD oil, the ability of the Company to obtain financing for the equipment and labor needed to cultivate hemp and extract the CBD oil, and adverse operating results. The outcome of these matters cannot be predicted at this time.
On May 24, 2016, the Company received a notice from the OTC Markets Group, Inc. (“OTC Markets”) that the Company’s bid price is below $0.01 and does not meet the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards. If the bid price has not closed at or above $0.01 for ten consecutive trading days by November 20, 2016, the Company will be moved to the OTC Pink marketplace. Additionally, on September 9, 2016, the Company received notice from the OTC that OTC Markets would move the Company’s listing from the OTCQB market to OTC Pink Sheets market, if the Company had not filed a Quarterly Report on Form 10-Q for the period ended June 30, 2016 by September 30, 2016. On or about October 1, 2016, the Company moved to the OTC Pink Sheets market. These actions might also impact the Company’s ability to obtain funding.
Principles of Consolidation
The consolidated financial statements include the accounts of Notis Global, Inc. and its wholly owned subsidiaries, as named in Note 1 above. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements as well as the reported expenses during the reporting periods. The Company’s significant estimates and assumptions include accounts receivable and note receivable collectability, inventory reserves, advances on investments, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of capitalized patent costs and useful lives and recoverability of long-lived assets, the derivative liability, and income tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from these estimates.
Reclassification
The Company has reclassified certain prior fiscal year amounts in the accompanying consolidated financial statements to be consistent with the current fiscal year presentation. See note 12.
Discontinued Operations
US GAAP requires the results of operations of a component of an equity that either has been disposed of or is classified as held for sale to be reported as discontinued operations in the consolidated financial statements if the sale or disposition represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
Concentrations of Credit Risk
The Company maintains cash balances at several financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.
| 37 |
Fair Value of Financial Instruments
Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses, notes payable, related party notes payable, customer deposits, provision for customer refunds and short term loans payable approximate their fair value due to the short period to maturity of these instruments.
Embedded derivative - The Company’s convertible notes payable include embedded features that require bifurcation due to a reset provision and are accounted for as a separate embedded derivative (see Note 8).
As of December 31, 2015, and for new issuances of convertible debentures during the fourth quarter of fiscal 2015, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on a Monte Carlo Simulation model (“MCS”). The MCS model was used to simulate the stock price of the Company from the valuation date through to the maturity date of the related debenture and to better estimate the fair value of the derivative liability due to the complex nature of the convertible debentures and embedded instruments. Management believes that the use of the MCS model compared to the black Scholes model as previously used would provide a better estimate of the fair value of these instruments. Beginning in the fourth quarter of 2015, using the MCS model, the Company valued these embedded derivatives using a “with-and-without method,” where the value of the Convertible Debentures including the embedded derivatives, is defined as the “with”, and the value of the Convertible Debentures excluding the embedded derivatives, is defined as the “without.” This method estimates the value of the embedded derivatives by observing the difference between the value of the Convertible Debentures with the embedded derivatives and the value of the Convertible Debentures without the embedded derivatives. The Company believes the “with-and-without method” results in a measurement that is more representative of the fair value of the embedded derivatives.
For each simulation path, the Company used the Geometric Brownian Motion (“GBM”) model to determine future stock prices at the maturity date. The inputs utilized in the application of the GBM model included a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate.
For the year ended December 31, 2016, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on an internally calculated adjustment to the MCS valuation determined at December 31, 2016. This adjustment took into consideration the changes in the assumptions, such as market value and expected volatility of the Company’s common stock, and the discount rate used in the December 31, 2015 valuation as compared to December 31, 2016. The Company believes this methodology results in a reasonable fair value of the embedded derivatives for the interim period.
For the year ended December 31, 2015, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, a risk free interest rate based on the average yield of a Treasury note and expected volatility of the Company’s common stock all as of the measurement dates, and the various estimated reset exercise prices weighted by probability.
Warrants
The Company reexamined the determination made as of December 31, 2015 that they did not have sufficient authorized shares available for all of their outstanding warrants to be classified in equity at December 31, 2016, and concluded there still were insufficient authorized shares (Note 8). Therefore, the Company recognized a Warrant liability as of December 31, 2016. The Company estimated the fair value of the warrant liability based on a Black Scholes valuation model. The key assumptions used consist of the price of the Company’s stock, a risk free interest rate based on the average yield of a two or three year Treasury note (based on remaining term of the related warrants), and expected volatility of the Company’s common stock over the remaining life of the warrants.
| 38 |
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
| Level 1 | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. |
| Level 3 | Significant unobservable inputs that cannot be corroborated by market data. |
The assets or liabilities’ fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis:
| December 31, 2016 | Total | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Warrant liability | 14,430 | 14,430 | ||||||||||||||
| Derivative liability | 15,635,947 | — | — | 15,635,947 | ||||||||||||
| Total liabilities | $ | 15,650,377 | $ | — | $ | — | $ | 15,650,377 | ||||||||
| Total | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| December 31, 2015 | ||||||||||||||||
| Marketable securities | $ | 9,410 | $ | 5,629 | $ | — | $ | 3,781 | ||||||||
| Total assets | $ | 9,410 | $ | 5,629 | $ | — | $ | 3,781 | ||||||||
| Warrant liability | 940,000 | 940,000 | ||||||||||||||
| Derivative liability | 19,246,594 | — | — | 19,246,594 | ||||||||||||
| Total liabilities | $ | 20,186,594 | $ | — | $ | — | $ | 20,186,594 | ||||||||
| 39 |
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
For the year ended December 31, 2015 | ||||
| Total | ||||
| January 1, 2015 | $ | 3,691,853 | ||
| Initial recognition of conversion feature | 14,391,066 | |||
| Reclassified to/from equity, including conversion | (6,984,328 | ) | ||
| Change in fair value of conversion feature | 9,088,003 | |||
| December 31, 2015 | 20,186,594 | |||
For the year ended December 31, 2016 | ||||
| Total | ||||
| January 1, 2016 | 20,186,594 | |||
| Initial recognition of conversion feature | 581,817 | |||
| Change in fair value of conversion feature | 33,271,611 | |||
| Gain on extinguishment of debt | (37,464,075 | ) | ||
| Change in fair value of warrant liability | (918,969 | ) | ||
| Unrealized loss on marketable securities | (6,601 | ) | ||
| Ending Balance, December 31, 2016 | $ | 15,650,377 | ||
Revenue Recognition
Revenues from Cannabidiol oil product
The Company recognizes revenue from the sale of Cannabidiol oil products (“CBD oil”) upon shipment, when title passes, and when collectability is reasonably assured.
Cost of Revenue
Cost of revenue consists primarily of expenses associated with the delivery and distribution of our products and services. Under our prior business model, we only began capitalizing costs when we have obtained a license and a site for operation of a customer dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in excess of the projected net realizable value of the sale of the licenses, then the excess cost above net realizable value is written off to cost of revenues. Cost of revenues also includes the rent expense on master leases held in the Company’s name, which are subleased to the Company’s operators. In addition, cost of revenue related to our vaporizer line of products consists of direct procurement cost of the products along with costs associated with order fulfillment, shipping, inventory storage and inventory management costs.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined on a cost basis that approximates the first-in, first-out (FIFO) method. During the year ended December 31, 2016 the Company recorded an impairment of $32,300 that was recorded to cost of revenues.
Capitalized agricultural costs
Pre-harvest agricultural costs, including irrigation, fertilization, seeding, laboring, and other ongoing crop and land maintenance activities, are accumulated and capitalized as inventory and cease to be accumulated when the crops reach maturity and is ready to be harvested. All costs incurred subsequent to the crops reaching maturity will be expensed as incurred. The Company has reflected the capitalized agriculture costs as a current asset as the growing cycle of the crops are estimated to be approximately six months.
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Basic and Diluted Net Income/Loss Per Share
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the years ended December 31, 2016 and 2015 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The Company had the following common stock equivalents at December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||||||
| Warrants | 69,757,748 | 40,870,000 | ||||||
| Convertible notes - related party | 10,500,000 | - | ||||||
| Convertible notes | 114,808,810,010 | 6,820,000 | ||||||
| Totals | 114,889,067,758 | 47,690,000 | ||||||
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses accelerated depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
| Vehicles | 5 years | |
| Furniture and Fixtures | 3 - 5 years | |
| Office equipment | 3 years | |
| Machinery | 2 years | |
| Buildings | 10 - 39 years |
Income Taxes
The Company accounts for income taxes under the asset and liability method. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. 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.
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In addition, the Company’s management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing the Company’s income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorities. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes.
Commitments and Contingencies
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
The Company accrues all legal costs expected to be incurred per event. For legal matters covered by insurance, the Company accrues all legal costs expected to be incurred per event up to the amount of the deductible.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting.
On July 22, 2015, the Financial Accounting Standards Board (“FASB”) issued a new standard that requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. The new standard will be effective for fiscal years beginning after December 15, 2016, and interim periods in fiscal years beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.
In April 2015, the FASB issued a new standard that requires an entity to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the entity would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The new standard will be effective for fiscal years beginning after December 15, 2015, and interim periods in fiscal years beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.
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In February 2016, the FASB issued “Leases (Topic 842)” (ASU 2016-02). This update amends leasing accounting requirements. The most significant change will result in the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current guidance. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, which for the Company is December 31, 2018, the first day of its 2019 fiscal year. Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted, and a number of optional practical expedients may be elected to simplify the impact of adoption. The Company is currently evaluating the impact of adopting this guidance. The overall impact is that assets and liabilities arising from leases are expected to increase based on the present value of remaining estimated lease payments at the time of adoption.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation - Stock Compensation . ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date of December 31, 2016, through the date which the consolidated financial statements were issued. Based upon the review, other than described in Note 15 - Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
NOTE 3 - ASSET ACQUISITION
On July 24, 2015, the Company entered into an Agreement of Purchase and Sale of Membership Interest (the “Acquisition Agreement”) with East West Secured Development, LLC (the “Seller”) to purchase 100% of the membership interest of EWSD I, LLC (“EWSD”) which has entered into an agreement with Southwest Farms, Inc. (“Southwest”) to purchase certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (the “Acquired Property” or “the Farm”).
The purchase price to acquire EWSD consisted of (i) $500,000 paid by the Company as a deposit into the escrow for the Acquired Property, and (ii) the Company’s future payments to Seller of a royalty of 3% of the adjusted gross revenue, if any, from operation of the Acquired Property (including sale of any portion of or interest in the Acquired Property less any applicable expenses) for the three-year period beginning on January 1, 2016. Such royalty payments shall be payable 50% in cash and 50% in the Company’s common stock (the “Royalty Payment”). The Company determined that the royalty payments could not be estimated at the time of acquisition, and, therefore, the contingent payments have not been recognized as part of the acquisition price. The contingent consideration will be re-measured to fair value each subsequent period until the contingency is resolved, in this case, for the three year period beginning on January 1, 2016, with any changes in fair value recognized in earnings. Per the terms of the agreement, the closing is deemed to have occurred when the Special Warranty Deed is recorded (which occurred on August 7, 2015) and all terms of the purchase agreement for the Farm have been complied with, including the Farm closing, which also took place on August 7, 2015. Therefore, the acquisition date has been determined to be August 7, 2015. There were no assets or liabilities of EWSD on the acquisition date.
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In connection with EWSD’s purchase of the Acquired Property, EWSD entered into a secured promissory note (the “Note”) with Southwest in the principal amount of $3,670,000 (Note 8). Interest on the outstanding principal balance of the Note shall accrue at the rate of five percent per annum. The Note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. The Note is secured by a deed of trust, security agreement, assignment of rents and financing statement encumbering the Acquired Property.
EWSD also entered into an unsecured promissory note (the “Unsecured Note”) in the principal amount of $830,000 with the Seller (Note 8), in respect of payments previously made by Seller to Southwest in connection with acquiring the Farm. Interest on the outstanding principal balance of the Unsecured Note shall accrue at the rate of six percent per annum. The Unsecured Note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018.
Farming Agreement
On December 18, 2015, the Company and its subsidiary EWSD I, LLC (“EWSD”), entered into a Farming Agreement (the “Farming Agreement”) with Whole Hemp Company (“Whole Hemp” now known as “Folium Biosciences”), pursuant to which Folium Biosciences would manufacture products from hemp and cannabis crops it would grow on EWSD farmland, and the Company would build greenhouses for such activities up to an aggregate size of 200,000 square feet. Folium Biosciences would pay all preapproved costs of such construction on or before September 30, 2017 as partial consideration for a revocable license to use the greenhouses and a separate 10 acre plot of EWSD farmland (the “10 Acres”). EWSD would retain ownership of the greenhouses. For the first growing season commencing October 1, 2016, the Company would receive a percentage of gross sales of all Folium Bioscience’s products on a monthly basis, and the Company’s share would increase incrementally based on the extent of crops planted on EWSD farmland according to a mutually agreed schedule. In addition, the Company would receive 50% of Folium Biosciences gross profits from the farming activities on the 10 Acres. The Company planned to recognize all revenue from the Farming Agreement at the net amount received when it has been earned and determined collectable.
Pursuant to the Farming Agreement, the Company also granted Folium Biosciences a warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $0.50 per share, exercisable at any time within 5 years. The warrants were valued at $76,000, using a Black Scholes Merton Model, with key valuation assumptions used that consist of the price of the Company’s stock at settlement date, a risk free interest rate based on the average yield of a 5 year Treasury note and expected volatility of the Company’s common stock all as of the measurement date. The fair value of the warrants is included in deferred costs and will be recognized over the life of the Farming Agreement. Due to the termination of the Farming and Growers Distribution Agreements, as discussed below, as of September 30, 2016, this amount has been fully amortized.
On March 11, 2016, the Company and EWSD entered into a First Amended and Restated Farming Agreement with Whole Hemp, amending and restating in certain respects the Farming Agreement. The First Amended and Restated Farming Agreement clarifies that EWSD, rather than the Company, would be responsible for the building of greenhouses to be utilized by Whole Hemp for growing hemp and cannabis crops pursuant to the agreement, and that EWSD would be the recipient of all payments by Whole Hemp (including all revenue sharing arrangements) under the agreement.
On or about May 7, 2016, the Company determined that Folium Biosciences was in default of the Farming Agreement, principally because they abandoned their obligation to provide farming activities under the First Amended and Restated Farming Agreement. On May 13, 2016, EWSD notified Folium Biosciences of its defaults under the First Amended and Restated Farming Agreement and EWSD’s election to terminate the First Amended and Restated Farming Agreement.
By its terms, the First Amended and Restated Farming Agreement may be terminated at any time by either party, if the other party was in material breach of any obligation under the First Amended and Restated Farming Agreement, which breach continued uncured for 30 days following written notice thereof.
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On June 1, 2016, a complaint was filed by Whole Hemp on this matter, naming Notis Global, Inc. and EWSD I, LLC, as defendants. See Whole Hemp Complaint, below.
Growers’ Distributor Agreement
On December 18, 2015, the Company also entered into a Growers’ Agent Agreement with Folium Biosciences, which was amended on March 11, 2016, to change the name of the agreement to Growers’ Distributor Agreement, (“Distributor Agreement”) and to clarify some terms. Pursuant to the Distributor Agreement, the Company would provide marketing, sales, and related services on behalf of Folium Biosciences in connection with the sale of its Cannabidiol oil product (“CBD oil”), from which the Company would receive a percentage of gross revenues (other than the sale of such product generated from the EWSD 10 Acres and the Folium Biosciences 40 acre plot subject to the Farming Agreement). The Growers’ Agent Agreement was effective until September 30, 2025. The Company would sell the product on behalf of Folium Biosciences on a commission basis. The Company may not act as agent of any other grower, distributor or manufacturer of the same product unless such other party agrees.
On March 11, 2016, the Company and EWSD entered into a First Amended and Restated Grower’s Distributor Agreement with Whole Hemp, amending and restating in certain respects the Grower’s Agent Agreement, including by substituting EWSD as a party in-place of the Company.
Because the Company believes Folium Biosciences is in default, principally because they abandoned their obligation to provide farming activities under the First Amended and Restated Farming Agreement since May 7, 2016, EWSD notified Whole Hemp on May 13, 2016 of its election to terminate the Restated Grower’s Distributor Agreement.
By its terms, the Restated Grower’s Distributor Agreement could be terminated at any time by either party, if the other party was in material breach of any obligation under the Restated Grower’s Distributor Agreement, which breach continued uncured for 30 days following written notice thereof.
As the Company continued to navigate the nascent world of hemp and CBD growing, cultivation, production and sales, it became clear that controlling all aspects of the business is the best strategy to ensure that the Company’s goals are met. Again, the Company is taking action now to protect the investment all the stakeholders have made in Notis Global.
Whole Hemp complaint
A complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming Notis Global, Inc. and EWSD I, LLC (collectively, “Notis”), as defendants in Pueblo County, CO district court. The complaint alleges five causes of action against Notis: misappropriation of trade secrets, civil theft, intentional interference with prospective business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and Notis for the Farming Agreement and the Distributor Agreement.
The court entered an ex parte temporary restraining order on June 2, 2016, and a modified temporary restraining order on July 14, 2016, enjoining Notis from disclosing, using, copying, conveying, transferring, or transmitting Whole Hemp’s trade secrets, including Whole Hemp’s plants. On June 13, 2016, the court ordered that all claims be submitted to arbitration, except for the disposition of the temporary restraining order.
On August 12, 2016, the court ordered that all of Whole Hemp’s plants in Notis’ possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties were expected to file a motion to dismiss the district court action.
In light of the Whole Hemp plants all being destroyed per the court order, the Company has immediately expensed all Capitalized agricultural costs as of June 30, 2016, as all costs as of that date related to Whole Hemp plants.
Notis commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between the parties. Whole Hemp filed an Answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted to the court.
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On September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016.
On or about July 19, 2016, EWSD initiated arbitration before JAMS (Case ID: 18657). Effective June 20, 2017, as a result of a mediation held in Colorado, the parties entered into a Confidential Settlement and Mutual Release Agreement (the “Release Agreement”), pursuant to which we and Whole Hemp dismissed with prejudice all of our respective claims or counterclaims against each other, as asserted in the Arbitration, and we mutually released each other from all claims. The Release Agreement specifically provides that neither its execution nor implementation is, or will be deemed to be or construed as, an admission by any party of any liability, act, or matter.
NOTE 4 - INVENTORY
Inventory at December 31, 2016 and 2015 consisted of the following:
| December 31, 2016 | December 31, 2015 | |||||||
| Vaporizers and accessories | $ | — | $ | 81,934 | ||||
| CBD Oil | — | 35,889 | ||||||
| Light Bulbs for cultivation centers | — | 33,000 | ||||||
| Less Discontinued Operations | (81,934 | ) | ||||||
| Total inventory, net | $ | — | $ | 68,899 | ||||
The Company recorded a markdown of $32,300 and $52,224 as of December 31, 2016 and 2015, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2016 and 2015 consists of:
| Property and Equipment | December 31, 2016 | December 31, 2015 | ||||||
| Advances | 472,126 | — | ||||||
| Office equipment | - | 4,250 | ||||||
| Land | 4,945,000 | 4,945,000 | ||||||
| Construction in progress | 1,241,380 | 624,173 | ||||||
| Buildings and structures | 59,250 | 55,000 | ||||||
| Machinery | 21,600 | 21,600 | ||||||
| 6,739,356 | 5,650,023 | |||||||
| Less accumulated depreciation | (26,988 | ) | (9,625 | ) | ||||
| Property and equipment, net | $ | 6,712,368 | $ | 5,640,398 | ||||
Product tooling costs are related to the tooling of a new product by VII and were written off in the fourth quarter of 2015.
Depreciation expense for the years ended December 31, 2016 and 2015, was $17,363 and $142,345, respectively.
NOTE 6 - DISPENSARIES
Portland
The Company held a license to operate a dispensary in Portland, Oregon, and a master lease on the property in which the dispensary is located. In April 2015, the Company entered into an Operating Agreement (“Original Agreement”) with an unrelated party (the “Operator”) in which the Operator was to manage and operate the Dispensary. The Original Agreement also included an annual Licensor Fee of 5% of the annual Gross Revenues, which would have begun after the additional fees related to the startup of the new venture had been paid in full.
On December 3, 2015 the Company replaced the original operator of the Portland dispensary with another operator under a new Operator Agreement (the “Agreement”). Per the terms of the Agreement, the Dispensary was “under the exclusive supervision and control of Operator, which shall be responsible for the proper and efficient operation of the Dispensary”. The term of the Agreement includes an initial term of five years, and a renewal term for an additional five years. The renewal term is at the discretion of the Operator. There is a License fee, which is based on a flat 10% of Gross Revenues. The Company’s management has determined that under this Agreement they do not hold the controlling financial interest in the Dispensary and are not the primary beneficiary, and therefore did not consolidate the Dispensary in their consolidated financial statements.
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On June 30, 2016, the Company entered into an Assignment Agreement whereby they sold and assigned all of their rights in the Operating Agreement, including but not limited to the assets and liabilities the Company held in relation to the Portland Dispensary, including the license to operate a dispensary in Portland, Oregon. The assets consisted mainly of tenant improvements and other capitalized costs incurred in connection with the Portland dispensary, categorized as Deferred Costs on the Company’s consolidated Balance Sheet, at a carrying value of approximately $270,000. The gross consideration paid for the assets and liabilities as stated in the agreement was $150,000, with approximately $58,000 of this amount paid to the State of Oregon for outstanding sales taxes, resulting in net proceeds of approximately $92,000, providing for a net loss of $178,000 on sale of assets.
Sunrise Property Investments, LLC
On December 3, 2015, the Company entered into an Operating Agreement with PSM Investment Group, LLC (“PSM”), for the governance of Sunrise Property Investments, LLC (“Sunrise”). Pursuant to the agreement, each of the two members contributed 50% of the capital of Sunrise. The Company’s contribution to the investment was the conditional use permit for the location, which was determined to have a zero cost basis, based on its carrying value in the Company’s financial statements. Sunrise acquired the property on which a dispensary will be located in San Diego on December 31, 2015. The Company has determined it should not consolidate the financial position and results of operations in its consolidated financial statements as it does not hold greater than 50% voting interest or is able to exercise influence over the operations and management in Sunrise. Instead, the Company accounts for Sunrise as an equity method investment. No income or loss has been recognized from Sunrise for the year ending December 31, 2015.
Alternative Health Cooperative, Inc. (“Alternative”) is a not-for-profit corporation, managed by an employee of Notis Global, which holds the conditional user permit (“CUP”) to run the dispensary. On January 1, 2016, Sunrise entered into an Operator Agreement with Alternative for Sunrise to operate the dispensary located on the Sunrise property. The Operator Agreement engages Sunrise to “supervise, direct and control the management of the dispensary”. The Agreement also states that the operation of the dispensary shall be under the exclusive supervision and control of Sunrise which shall be responsible for the proper and efficient operation of the dispensary. The Company had determined that under the operating agreement neither it nor Alternative hold the controlling financial interest in the dispensary, but that Sunrise is the controlling entity. Therefore, the Company did not consolidate the dispensary in its consolidated financial statements.
The Company incorporated a new wholly owned subsidiary, San Diego Sunrise, LLC (“San Diego Sunrise”), on February 22, 2016, in order to enter into a partnership agreement with PSM Investments to create an entity which would control the dispensary operations. Thereafter, Sunrise Dispensary LLC (“Dispensary”) was incorporated by PSM Investments and San Diego Sunrise on February 24, 2016, with each party holding a 50% ownership interest in the new entity. Immediately after which, Sunrise assigned the Operating Agreement with Alternative to Dispensary. The Company therefore indirectly held a 50% interest in the Sunrise Dispensary, through its subsidiary, San Diego Sunrise.
In February 2016, the Company sold 70% of its ownership interest in San Diego Sunrise for approximately $299,000. As of September 30, 2016, the Company owned 50% of Sunrise and 30% of San Diego Sunrise. These investments are accounted for under the equity method, with the Company’s proportionate share of the income or losses of the investments reflected in the Company’s financial statements.
On April 6, 2016, the Company sold its remaining 30% interest in San Diego Sunrise, as well as all of its interest in Sunrise Property Investments, LLC, the entity that owns underlying real estate related to the San Diego dispensary, for net proceeds of $331,000. There had been no activity, in these investees, aside from the sale of the Company’s ownership interests, while held by the Company.
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Sunrise Delivery
On November 24, 2015, the Company entered into a Management Agreement (“the Agreement”) with Rise Industries (“the Operator”) for a delivery service to be called Sunrise Delivery, operating under the conditional use permit awarded to the Sunrise Dispensary. The delivery service began operations on December 19, 2015 and, due to the short period between commencement of operations and the year end, the results of operations were not material for the year ended December 31, 2015.
Under the Agreement, the Operator is fully and solely responsible to collect all revenue and pay all expenses arising from the delivery service, including acquisition of inventory. The Company’s name is not being used in connection with any advertising, marketing, product or delivery services provided by the Operator. The Company determined that under the Agreement they do not hold the controlling financial interest in the delivery service and the Operator is the controlling entity. Therefore, the Company did not consolidate Sunrise Delivery in their financial statements. The Company also evaluated whether the revenue earned from the delivery service should be recognized at the gross or net amount. As the Company meets the three indicators of being an agent, the Company will report the earnings or losses from the delivery service on a net basis, under the equity method of accounting.
On December 9, 2015, the Company provided a $60,000 loan to Sunrise Delivery for working capital, with interest at prime and payable in one year and added an additional advance of $10,000 in the first quarter of 2016. In connection with the sale of their interests in the San Diego dispensary, the Company wrote off the loans totaling $70,000 as uncollectible at the end of the first quarter of 2016.
Washington
In the course of seeking licenses for new locations, the Company has to enter into real estate purchase agreements in order to secure the sites to be developed for clients’ dispensaries and cultivation centers. During the second quarter of 2014, one of the Company’s subsidiaries entered into a real estate purchase agreement for a property in the State of Washington. The purchase transaction was closed during the third quarter of 2014 for a total purchase price of $399,594, partially financed by a promissory note for $249,000. The note was due January 30, 2015 and bore interest at twelve percent (12%). The Company did not repay the note on its maturity date, and therefore began incurring interest at the default interest rate of eighteen percent (18%) per annum. On September 30, 2015, the Company, through its subsidiary MJ Property Investments, and the seller of the property entered into an amendment to the Note Payable, whereby the maturity date was extended to April 1, 2017, and the interest rate returned to twelve percent (12%) per annum (see Note 8). The Company did not make their May or June interest payments, and on July 26, 2016 they were notified they were in default on the note, which resulted in the Company incurring interest at the default interest rate of 18%, beginning in May 2016.
On September 27, 2016, the Company entered into a default settlement with the noteholder, whereby the note was settled by conveying the property to the noteholder, recognizing a loss on the default settlement of approximately $168,000.
NOTE 7 - VAPORFECTION INTERNATIONAL, INC.
The Company acquired certain intangible assets with its purchase of 100% of the outstanding common stock of Vaporfection International Inc. (“VII”) on April 1, 2013. The Company accounts for intangible assets acquired in a business combination, if any, under the purchase method of accounting at their estimated fair values at the date of acquisition. Intangibles are either amortized over their estimated lives, if a definite life is determined, or are not amortized if their life is considered indefinite.
On December 31, 2015, the Company re-evaluated the future value of the intangible assets and determined none of the carrying value of the intangible assets were recoverable, and its carrying value exceeded its fair value. Therefore, the Company recognized an impairment loss on Intangibles of $586,000.
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On December 31, 2015, the Company also performed the first step of the Goodwill impairment test, and, based on the same conclusions as above, determined there were indications of impairment of the Goodwill and they had to perform the second step of the impairment test, which compares the carrying value of the Goodwill to the implied Goodwill. The Company re-evaluated the fair value of all the associated assets of VII at December 31, 2015 and determined that there was no implied Goodwill. As there is no implied Goodwill, the impairment loss recognized was the entire carrying value of Goodwill, approximately $1,260,000.
In light of these impairments, as discussed above, the Company wrote down all other assets related to the business, such as fixed assets and costs to develop the website as of December 31, 2015, resulting in an impairment of approximately $80,000. The Company also wrote down the Inventory of VII to its estimated fair value of $82,000.
The Board made a decision the last week of January 2016, to sell the assets of Vaporfection and exit the vaporizer business and sell the remaining inventory and related assets during the first half of 2016. The Company analyzed if Vaporfection should be presented as a Discontinued Operation under the guidance of ASC 205, Presentation of Financial Statements, 20, Discontinued Operations, (“ASC 205-20”), and determined the decision to exit the Vaporfection business was a strategic shift in the Company’s business.
On March 28, 2016, the Company sold the assets of the subsidiary for $70,000, which was payable $35,000 at the closing and with a 6% Note Payable, due September 30, 2016. The Company recognized approximately $6,000 as a gain on sale of the assets of their subsidiary for the year ended December 31, 2016.
NOTE 8 - CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
July and September 2014 Debentures
On July 21, 2014, as amended on September 19, 2014 and October 20, 2014, the Company entered into a Securities Purchase Agreement with an Investor (“Investor #1”) whereby the Company agreed to issue convertible debentures (“July 2014 Debentures”) in the aggregate principal amount of $3,500,000, in five tranches. The July 2014 Debentures bore interest at the rate of 10% per year. The debt was due July 21, 2015.
Also on September 19, 2014, as amended on October 20, 2014, the Company entered into a securities purchase agreement with another investor (“Investor #2) pursuant to which it agreed to issue convertible debentures (“September 2014 Debentures”) in the aggregate principal amount of $2,500,000, in two tranches. The September 2014 Debentures bore interest at the rate of 5% per year. The debt was due September 19, 2015. All amounts due under the September 2014 Debentures have been fully converted.
Both the original July 2014 Purchase Agreement Debentures and September 2014 Debentures, prior to subsequent amendment, share the following significant terms:
All amounts are convertible at any time, in whole or in part, at the option of the holders into shares of the Company’s common stock at a conversion price. The Notes were initially convertible into shares of the Company’s common stock at the initial Fixed Conversion Price of $11.75 per share. The Fixed Conversion Price is subject to adjustment for stock splits, combinations or similar events. If the Company makes any subsequent equity sales (subject to certain exceptions), under which an effective price per share is lower than the Fixed Conversion Price, then the conversion price will be reduced to equal such price. The Company may make the amortization payments on the debt in cash, prompting a 30% premium or, subject to certain conditions, in shares of common stock valued at 70% of the lowest volume weighted average price of the common stock for the 20 prior trading days.
The conversion feature of the July 2014 Debenture and the September 2014 Debenture meets the definition of a derivative and due to the reset provision to occur upon subsequent sales of securities at a price lower than the fixed conversion price, requires bifurcation and is accounted for as a derivative liability, with a discount created on the Debentures that would be amortized over the life of the Debentures using the effective interest rate method. The fair value of the embedded derivative is measured and recognized at fair value each subsequent reporting period and the changes in fair value are recognized in the Statement of Operations as Change in fair value of derivative liability. See Note 2 Fair value of financial instruments for additional information on the fair value and gains or losses on the embedded derivative.
In connection with each of the purchase agreements, the Company entered into a registration rights agreement with the respective investors, pursuant to which the Company agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of, or payable as principal and interest on, the respective debentures, within 45 days of the initial closing date under each agreement, and to have such registration statements declared effective within 120 days of the initial closing dates of each purchase agreement. Through subsequent modifications of the July 2014 Debentures and September 2014 Debentures, the required date to file the registration statement and the effective date of the registration statement were modified, and the registration statement filed on April 9, 2015, and became effective on June 11, 2015.
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On January 30, 2015, the Company and Investor #1 entered into an Amendment, Modification and Supplement to the Purchase Agreement (the “Purchase Agreement Amendment” or the “Modification”) pursuant to which Investor #1 agreed to purchase an additional $1,800,000 in seven Modified Closings. The Modification also eliminated the amortization payments discussed above, and provided for accrued and unpaid interest to be payable upon conversion or maturity rather than on specified payment dates. The Company was also required to open a new dispensary in Portland, Oregon through a licensed operator during the first calendar quarter of 2015 (which was later modified to April 30, 2015). The Company also had to file the Registration Statement by March 8, 2015 (later amended), and it had to be declared effective by June 15, 2015 in order to avoid default and acceleration under the Amended and Restated Debenture. As noted above, the Registration Statement was filed on April 9, 2015, and became effective June 11, 2015.
As part of the January 30, 2015 Modification, the parties entered into a Modified Debenture Agreement for the $200,000 that was funded at the Closing and agreed to use the same form of Modified Debenture for each of the other foregoing Modified Closings (collectively, the “Modified Debentures”). The fixed conversion price of the Modified Debenture on January 30, 2015 was the lower of $5.00 or 51% of the lowest volume weighted average price for the 20 consecutive trading days prior to the applicable conversion date. This new fixed conversion price was a dilutive issuance to the outstanding July 2014 and September 2014 Debentures, thereby triggering a reset of the older fixed conversion price. As a result of the reset to the conversion price, at January 30, 2015, the derivative liability was re-measured to a fair value of approximately $2,690,000, using a weighted probability model as estimated by management. A decrease in fair value of the derivative liability of approximately $1,072,000 was recognized as a gain on the Statement of Consolidated Comprehensive Loss, in the three months ended March 31, 2015.
The additional Modified Debentures under the July 2014 Debentures as of closing dates had a fixed conversion price of the lower of $1.83 or 51% of the VWAP for the last 20 days prior to the conversion. This new fixed conversion price was a dilutive issuance to the outstanding July 2014 and September 2014 Debentures, thereby triggering a reset of the previous $5 fixed conversion price. This reset resulted in the derivative liability being revalued at February 27, 2015, using a weighted probability model for a fair value of $2,720,000.
The April 17, 2015 closing under the July 2014 Modified Debentures contained a fixed conversion price of the lower of $0.88 or 51% of the VWAP for the last 40 days prior to the conversion. This new fixed conversion price was a dilutive issuance to the outstanding July 2014 and September 2014 Debentures, thereby triggering a reset of the previous $1.83 fixed conversion price. This reset resulted in the derivative liability being revalued at April 17, 2015, using a weighted probability model for a fair value of $3,287,000, for an increase in fair value of approximately $1,764,000, recognized as a loss on the Statement of Consolidated Comprehensive Loss.
There was additional funding of $1,300,000 of the September 2014 Modified Debentures under the closing schedule detailed above. These Modified Debentures all have a fixed conversion price of the lower of $0.88 or 51% of the VWAP for the last 40 days prior to the conversion.
The Directors’ convertible debentures required under the March 23, 2015 Modification, issued in the first quarter of 2015, total $150,000, and have a three year term and an interest rate of 8% per annum. They were originally convertible at a fixed conversion price of the lower of $1.83 or 51% of the VWAP for the last 20 days prior to conversion. As with the Modified Debentures, the debentures included a reset provision, which resulted in the conversion feature being bifurcated and accounted for as a derivative liability, with an initial fair value of $132,175. The director’s convertible debentures also reset on February 27, 2015 and April 17, 2015, with the changes to fair value included in the amounts disclosed above. The Directors debentures were all converted during the third quarter of 2015.
The Modified Debentures also included a warrant instrument granting the Investor the right to purchase shares of common stock of the Company equal to the principal amount of the applicable Modified Debenture divided by a price equal to 120% of the last reported closing price of the common stock on the applicable closing date of the Modified Debenture, with a three year term.
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August 2015 Debentures
On August 14, 2015, the Company entered into a Securities Purchase Agreement whereby they agreed to issue convertible debentures in the aggregate principal amount of up to $3,979,877 to Investor #1. The initial closing in the aggregate principal amount of $650,000 occurred on August 14, 2015. An additional 11 payments were made in the total amount of $2,434,143 through December 31, 2015. The August 2015 Debentures bear interest at the rate of 10% per year.
On August 20, 2015, the Company also entered into a Securities Purchase Agreement with Investor #2 in the aggregate principal amount of up to $1,500,000 (collectively the “August 2015 Debentures”), which was amended on September 19, 2015, to increase the principal by an additional $200,000.
The August 2015 Debentures contain the following significant terms:
The debentures all mature in one year from the date of each individual closing.
All amounts are convertible at any time, in whole or in part, at the option of the holders into shares of the Company’s common stock at a fixed conversion price. The conversion price is the lower of (a) $0.75, or (b) a 49% discount to the lowest daily VWAP (as reported by Bloomberg) of the Common Stock during the 30 trading days prior to the conversion date. The Fixed Conversion Price is subject to adjustment for stock splits, combinations or similar events. If the Company makes any subsequent equity sales (subject to certain exceptions), under which an effective price per share is lower than the Fixed Conversion Price, then the conversion price will be reset to equal such price. The Company may prepay the Debentures in cash, prompting a 30% premium or, subject to certain conditions, in shares of common stock valued at 51% of the lowest volume weighted average price of the common stock of the Company for the 30 prior trading days. The premium will be recognized at such time as the Company may choose to prepay the Debentures.
In connection with each of the purchase agreements, the Company entered into a registration rights agreement with the respective Investors pursuant to which the Company agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of, or payable as principal and interest on, the respective debentures, within 45 days of the initial closing date under each agreement, and to have such registration statements declared effective within 120 days of the initial closing dates of each purchase agreement. The registration statement was deemed effective on December 15, 2015.
The conversion feature of the August 2015 Debenture meets the definition of a derivative and due to the reset provision to occur upon subsequent sales of securities at a price lower than the fixed conversion price, requires bifurcation and is accounted for as a derivative liability. The derivatives related to all closings on the August 2015 debentures were initially recognized at estimated fair values of approximately $11,205,000 and created a discount on the Debentures that will be amortized over the life of the Debentures using the effective interest rate method. The fair value of the embedded derivative is measured and recognized at fair value each subsequent reporting period and the changes in fair value are recognized in the Statement of Comprehensive Income (Loss) as Change in fair value of derivative liability. For the year ended December 31, 2014, and the interim periods through September 30, 2015, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on weighted probabilities of assumptions used in the Black Scholes pricing model. The key valuation assumptions used consists, in part, of the price of the Company’s common stock, ranging from $8.81 down to $0.05; a risk free interest rate ranging from 0.41% to 0.12% and expected volatility of the Company’s common stock, ranging from 196.78% to 106.38%, and the various estimated reset exercise prices weighted by probability.
As of December 31, 2015, and for new issuances of convertible debentures during the fourth quarter of fiscal 2015, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on a Monte Carlo Simulation model (“MCS”). The MCS model was used to simulate the stock price of the Company from the valuation date through to the maturity date of the related debenture and to better estimate the fair value of the derivative liability due to the complex nature of the convertible debentures and embedded instruments. Management believes that the use of the MCS model compared to the black Scholes model as previously used would provide a better estimate of the fair value of these instruments. Beginning in the fourth quarter of 2015, using the MCS model, the Company valued these embedded derivatives using a “with-and-without method,” where the value of the Convertible Debentures including the embedded derivatives, is defined as the “with”, and the value of the Convertible Debentures excluding the embedded derivatives, is defined as the “without.” This method estimates the value of the embedded derivatives by observing the difference between the value of the Convertible Debentures with the embedded derivatives and the value of the Convertible Debentures without the embedded derivatives. The Company believes the “with-and-without method” results in a measurement that is more representative of the fair value of the embedded derivatives.
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For each simulation path, the Company used the Geometric Brownian Motion (“GBM”) model to determine future stock prices at the maturity date. The inputs utilized in the application of the GBM model included a starting stock price ranging from $0.03 to $0.10, an expected term of each debenture remaining from the valuation date to maturity ranging from .24 years to 1.04 years, an estimated volatility of ranging from 193% to 219%, and a risk-free rate ranging from .20% to .70%. See Note 2 Fair value of financial instruments for additional information on the fair value and gains or losses on the embedded derivative.
For the year ended December 31, 2016, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on an internally calculated adjustment to the MCS valuation determined at December 31, 2015. This adjustment took into consideration the changes in the assumptions, such as market value and expected volatility of the Company’s common stock, and the discount rate used in the December 31, 2015 valuation as compared to December 31, 2016. The valuation also took into consideration the term in the debentures which limits the amounts converted to not result in the investor owning more than 4.99% of the outstanding common stock of the Company, after giving effect to the converted shares. The Company believes this methodology results in a reasonable fair value of the embedded derivatives for the interim period.
Entry into Security Agreement
In connection with entry into the August 20 Purchase Agreement and August 14 Purchase Agreement, the Investors and the Company entered into a Security Agreement, dated August 21, 2015, securing the amounts underlying the August 14 Debentures and the August 20 Debentures. The Security Agreement grants a security interest in all assets and personal property of the Company, subject to certain excluded real property assets. The security interests under the Security Agreement terminated following the date that the registration statement registering the shares underlying the Convertible Debentures was declared effective, which occurred on December 15, 2015.
July 2015 Debenture
On July 10, 2015, another accredited Investor and affiliate of the Investor #1 (the “July 2015 Investor”) purchased a separate Convertible Debenture (the “July 2015 Debenture”) in the aggregate principal amount of $500,000, that closed in five weekly tranches between July 10 and August 15, 2015. The July 2015 Debenture is in substantially the same form as the August 14 Debentures, and does not include issuance of warrants. As such, the conversion feature was also determined to require bifurcation and derivative accounting. All amounts related to the July 2015 derivative liability are included in amounts disclosed above for the August 2015 debentures.
On October 14, 2015, Investor #1 assigned the right to purchase August 2015 Debentures in the principal amount of $100,000 to the July 2015 Investor and the July 2015 Investor purchased such August 2015 Debentures on the same day. The outstanding balance of these Debentures were included in the consolidation agreements during 2016, discussed below.
October 2015 Debentures
On October 14, 2015, the Company issued seven debentures in the aggregate of $2,000,000 to a service provider (the “October 2015 Investor”) as consideration for services previously rendered to the Company on the same terms as the August 14 Debentures and August 14 Purchase Agreement (the “October 2015 Debentures” and “October 2015 Purchase Agreement”, respectively) except that the October 2015 Purchase Agreement does not provide for registration rights to the October 2015 Investor with regard to the shares underlying the October 2015 Debentures. The service provider has agreed with the Company not to convert the October 2015 Debentures for any amount in excess of fees payable for services previously rendered to the Company at the time of conversion. To the extent that the sale of shares underlying the October 2015 Debentures do not satisfy outstanding amounts payable to the service provider, such amounts will remain payable to the service provider by the Company. In the year ending December 31, 2016, funding closed on $525,000 of the October 2015 debentures. The outstanding balance of these Debentures were included in the consolidation agreements during 2016, discussed below.
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December 28, 2015 Amendment and Restriction Agreement
On December 28, 2015, the Company, Investor #1 (the “August 14 Investor”), and Investor #2 (the “August 20 Investor”) entered into a Debenture Amendment and Restriction Agreement (the “Agreement”), pursuant to which (1) the August 14 Investor agreed to be restricted from converting any of its convertible debentures into common stock until February 21, 2016, subject to certain limitations set forth below (the “Restriction”) and (2) the August 14 Investor agreed to assign, as of the effective date of the Agreement approximately $390,000 of its convertible debentures to the August 20 Investor in exchange for the amount of principal outstanding under such debenture plus a premium in cash from the August 20 Investor (the “Assigned Debentures”). The accrued and unpaid interest under the Assigned Debentures remained payable by the Company to the August 14 Investor.
The Investor #1 also agreed to amend the terms of each of its debentures (other than the debentures that were assigned) such that the debentures are convertible at a 40% discount to the lowest trading price of the Company’s common stock during the 30 consecutive prior trading days rather than at a 49% discount to the lowest ‘volume weighted-average price’ during the 30 consecutive prior trading days. This was not considered to be a modification of the terms of the conversion feature, requiring evaluation of the debenture to determine if it was modified or extinguished, as the conversion feature is separately accounted for as a derivative, and is outside of the scope of the guidance on debt modifications. The change in the conversion price will be reflected in its fair value under derivative accounting. The outstanding balance of these Debentures were included in the consolidation agreements during 2016, discussed below.
As consideration for entering into the Agreement, the August 14 Investor was issued a promissory note from the Company in the principal amount of $700,000 (the “Promissory Note”). The Promissory Note has a term of ten months, accrues interest at a rate of 10% per annum, and outstanding principal and accrued interest under the Promissory Note may be pre-paid at any time by the Company without penalty. The Promissory Note is not convertible other than in an event of default, in which case it is convertible on the terms of the other debentures held by the August 14 Investor. This conversion feature was considered to be a contingent conversion feature, and therefore the conversion feature would not be bifurcated and accounted for as a derivative, as are the conversion features of all other debentures, until such time as and if the Company is in an event of default. The Promissory Note is being accounted for as a finance expense of the December 28, 2015 transaction, similar to a debt discount, and will be amortized to financing expense over the ten month life of the note (Note 8). The outstanding balance of these Debentures were included in the consolidation agreements during 2016, discussed below.
The August 20 Investor also acquired from the August 14 Investor an additional $650,000 of the convertible debentures held by the August 14 Investor (1) upon the declaration of effectiveness of a post-effective amendment (the “POSAM”) to the Company’s Registration Statement on Form S-1 originally filed by the Company on October 16, 2015 and declared effective by the Securities and Exchange Commission on December 15, 2015 (the “Registration Statement”) reflecting the terms of the Agreement, or (2) at the option of the August 20 Investor (the “Option”), at an earlier time. The POSAM was declared effective on February 3, 2016. The outstanding balance of these Debentures were included in the consolidation agreements during 2016, discussed below.
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Conversions
During the year ended December 31, 2015, respectively, approximately $8,020,000 (plus $150,000 related to directors’ debentures) of principal and approximately $107,000 of accrued interest were converted into approximately 192,625,000 of the Company’s common stock.
Investor #1
During the year ended December 31, 2016 the company issued 30 convertible notes to third party lenders totaling $9,700,170. The company received cash of $2,695,000 and original issue discounts of $119,737 The leader also paid $161,401 on advancements on fixed assets and consolidated principal and interest of $6,818,744. These notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between July 13, 2016 through September 9, 2017. The notes convert at a fixed rate of $0.75 or a 49% to 40% discount with a lookback of 30 trading days.
Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of the Investor #1 notes during the year ended December 31, 2016, gave rise to a derivative liability of $12,259,532. $1,952,380 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note. $10,307,152 was recorded due to the consolidation of the principal and interest and was expense to loss on extinguishment.
During the year ended December 31, 2016 Investor #1 converted $802,926 of principal into 4,374,651,437 shares of the company’s common stock.
During the year ended December 31, 2016 Investor #1 converted $5,188,643 of principal and $686,827 of interest into the consolidation loan talked about in Investor #1 and Investor #3 elsewhere in this document. The company has recorded $36,071,697 a gain on extinguishment.
Investor #2
During the year ended December 31, 2016 the company issued 2 convertible notes to third party lenders totaling $278,000. The company received cash of $235,000 and the lender paid $43,000 on behalf of the company for vendor liabilities. These notes accrue interest at a rate of 5% per annum and mature with interest and principal both due between July 13, 2016 through April 30, 2017. The notes convert at a fixed rate of $0.75 or a 49% discount with a lookback of 20 trading days.
Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of the Investor #2 notes during the year ended December 31, 2016, gave rise to a derivative liability of $282,312. $265,917 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note. $16,395 was above the face value of the note and was recorded as interest expense.
During the year ended December 31, 2016 Investor #2 converted $1,450,661 of principal and $38,002 of interest into 4,949,130,904 shares of the company’s common stock.
At December 31, 2016, the Company was in default on all the convertible debentures with Investor #2.
Investor #3
During the year ended December 31, 2016 the company issued 2 convertible notes to third party lenders totaling $282,500. The company received cash of $236,500, original issue discounts of $34,750 and the lender paid $11,250 on behalf of the company for vendor liabilities. These notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between September 14, 2016 through August 20, 2017. These notes are convertible upon default at a rate of $0.75 or a 49% discount with a lookback of 30 trading days.
Due to the fact that these notes have an option to convert at a variable amount upon default, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of the Investor #3 notes during the year ended December 31, 2016, gave rise to a derivative liability of $672,335. $332,592 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note. $339,743 was above the face value of the note and was recorded as interest expense.
During the year ended December 31, 2016 Investor #3 converted $51,358 of principal into 205,431,250 shares of the company’s common stock.
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Related Party Financing
One of the directors on the Company’s Board entered into three separate subordinated convertible promissory notes convertible at $0.01 with the Company on March 4, 2016, March 10, 2016 and March 15, 2016, respectively, each in the principal amount of $25,000, for a total of $75,000. Also on March 15, 2016, another of the Company’s directors entered into a subordinated convertible promissory note convertible at $0.01 with the Company in the principal amount of $25,000, and two other of the Company’s directors each entered into a subordinated convertible promissory note convertible at $0.01 with the Company in the principal amount of $2,500. All of the foregoing convertible promissory notes have three year terms and an interest rate of 8% per annum. The debentures were evaluated to determine if the conversion feature fell within the guidance for derivative accounting, and as the debentures are convertible at a fixed conversion price, and do not include a the reset provision to occur upon subsequent sales of securities at a price lower than the fixed conversion price, the Company concluded the conversion feature did not qualify as a derivative.
In connection with their funding of the Notes (collectively the “Notes”), the directors each receive a warrant, exercisable for a period of three (3) years from the date of Notes, to purchase an amount of Company Common Stock equal to 50% of the principal sum under each of the director notes, at an exercise price equal to 200% of the applicable Conversion Price. The exercise price of the warrants is $0.02. The warrants were determined to have a fair value of $42,000, calculated with the Black Sholes Merton model, with the following key valuation assumptions: estimated term of three years, annual risk-free rate of 0.93%, and annualized expected volatility of 172%.
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NOTE 9 - NOTES PAYABLE
Notes payable consists of:
December 31, 2016 | December 31, 2015 | |||||||
| Southwest Farms (Note 3) | $ | 3,590,241 | $ | 3,645,163 | ||||
| East West Secured Development (Note 3) | 503,031 | 675,093 | ||||||
| Washington Property (Note 6) | — | 208,605 | ||||||
| Investor #2 (Note 8) | 275,000 | — | ||||||
| Investor #4 | 3,691,200 | — | ||||||
| 8,059,472 | 4,528,861 | |||||||
| Less discounts | (598,721 | ) | — | |||||
| Plus premium | — | 16,667 | ||||||
| 7,460,751 | 4,545,528 | |||||||
| Less current maturities | 3,367,479 | 256,897 | ||||||
| $ | 4,093,272 | $ | 4,288,631 | |||||
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Maturities on Notes Payable are as follows:
| Years ending: | ||||
| December 31, 2017 | 3,367,479 | |||
| December 31, 2018 | 4,093,272 | |||
| $ | 7,460,751 | |||
Investor #4
During the year ended December 31, 2016 the company issued 18 convertible notes to third party lenders totaling $3,691,199. The company received cash of $1,095,741, original issue discounts of $996,199 and the lender paid $145,000 on behalf of the company for vendor liabilities. These notes accrue interest at a rate between 5% to 10% per annum and mature with interest and principal both due between December 12, 2016 through November 18, 2017. These notes are convertible upon default at a rate of $0.75 or a 40% discount with a lookback of 20 trading days.
Due to the fact that these notes have an option to convert at a variable amount upon default, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature of the Investor #4 notes during the year ended December 31, 2016, gave rise to a derivative liability of $1,039,109. $710,993 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note. $328,116 was above the face value of the note and was recorded as interest expense.
The investor has waved all default provisions as of December 31, 2016.
Investor #5
On April 6, 2016, the Company entered into a Promissory note for $87,500, which was issued with a $2,500 premium, and bears interest at 0.0%. The proceeds were to be used by the Farm, to pay for water usage. Additionally, the Company issued 600,000 of the Company’s restricted common stock to the holder. The shares were valued at the market value of the common shares of the Company on the date of the issuance of the note. The payment terms called for $40,000 to be paid on or before April 21, 2016, $20,000 to be paid on or before May 6, 2016, and the final $27,500 to also be paid on or before May 6, 2016. The Note also allowed for the extension of the maturity date by 30 days, at the Company’s request, in exchange for an additional $2,500 payment. The note and the $2,500 extension payment were paid during July 2016.
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Notes payable, related parties, consists of:
December 31, 2016 | December 31, 2015 | |||||||
| Directors’ Notes | $ | 289,866 | $ | — | ||||
| Less discounts | — | — | ||||||
| $ | 289,866 | $ | — | |||||
On March 14, 2016, the Company issued Promissory Notes (the “Directors Notes”), in the amount of $41,667, to a director in exchange for various amounts outstanding for fees and reimbursements incurred during the year ended December 31, 2015. The Note is due on demand and bear interest at 8% until the note is paid in full.
On June 14, 2016, the Company issued Promissory Notes (the “Directors Notes”), in the amount of $250,700, to all the directors in exchange for various amounts outstanding for fees and reimbursements incurred during December 2015 and April 2016. The Notes have a term of six months and bear interest at 8% until the note is paid in full. The Directors Notes were each issued with a warrant for fifty percent of the face amount of the note, with an exercise price of $0.01 and exercisable for three years. The Company estimated the fair value of the warrants based on a Black Scholes valuation model. The warrants were determined to have a fair value of $12,000, calculated with the Black Sholes Merton model, with the following key valuation assumptions: estimated term of three years, annual risk-free rate of .93%, and annualized expected volatility of 172%. The $12,000 fair value was recognized as a debt discount and is being amortized over the six month term of the Directors Notes.
NOTE 10 - Stockholders’ Deficit
Preferred Stock
The Series A Preferred Stock has special voting rights when voting as a class with the Common Stock as follows: (i) the holders of Series A Preferred Stock shall have such number of votes as is determined by multiplying (a) the number of shares of Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of the Corporation’s Series A Preferred Stock and Common Stock (collectively, the “Common Stock”) on a Fully-Diluted Basis (as hereinafter defined), as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written consent of stockholders is solicited, and (c) 0.00000025; and (ii) the holders of Common Stock shall have one vote per share of Common Stock held as of such date. “Fully-Diluted Basis” mean that the total number of issued and outstanding shares of the Company’s Common Stock shall be calculated to include (a) the shares of Common Stock issuable upon exercise and/or conversion of all of the following securities (collectively, “Common Stock Equivalents”): all outstanding (a) securities convertible into or exchangeable for Common Stock, whether or not then convertible or exchangeable (collectively, “Convertible Securities”), (b) subscriptions, rights, options and warrants to purchase shares of Common Stock, whether or not then exercisable (collectively, “Options”), and (c) securities convertible into or exchangeable or exercisable for Options or Convertible Securities and any such underlying Options and/or Convertible Securities.
As of December 31, 2016 and 2015, there were no shares of Series A Preferred Stock outstanding.
Common Stock
During the year ended December 31, 2016 the Company received $16,000 for the sale of 851,063 shares of the Company’s common stock.
During the year ended December 31, 2016 the Company issued 144,042,308 shares of the Company’s common stock to consultants for services rendered. These shares had a fair value of 96,790
During the year ended December 31, 2016, $324,754 was contributed by a related party.
During the year ended the company issued 28,778,831 shares of the Company’s common stock to employees for services rendered. These shares had a fair value of $809,424.
During the year ended December 31, 2016 an investor cancelled 1,633,652 as part of the Derivative Settlements discussion below.
For common shares which were issued upon conversion of the convertible debentures during the years ended December 31, 2016 and 2015, see Note 8.
On June 30, 2015, the Board of Directors of the Company and the holders of a majority of the Company’s voting securities approved by written consent an amendment to the Company’s Articles of Incorporation to increase the authorized number of shares of the Company’s common stock from 100,000,000 shares to 400,000,000 shares, par value of $0.001 per share. The Company’s Board of Directors approved the increase of authorized capital so that it will have sufficient shares of common stock available for issuance upon the conversion or exercise of currently outstanding convertible debt securities and warrants and for future capital raises. The Company filed a Schedule 14C Information Statement regarding the matter submitted to a vote of their security holders with the Securities and Exchange Commission. The increase of authorized capital approved by the stockholders became effective on October 27, 2015.
During the year ended December 31, 2015 the Company issued 3,015,671 shares of its common stock, valued at approximately $417,000 as based on the market price of the common stock on the date of settlement, as a payment of certain accounts payables.
Share based awards, restricted stock and restricted stock units (“RSU’s”)
The Board resolved that, beginning with the fourth calendar quarter of 2015, the Company shall pay each member of the Company’s Board of Directors, who is not also an employee of the Company, for each calendar quarter during which such member continues to serve on the Board compensation in the amount of $15,000 in cash and 325,000 shares of the Company’s common stock. The 975,000 shares issued to all the directors for the three months ended March 31, 2016 were valued at the market price of the Company’s common stock on March 31, 2016, for total compensation expense of $9,750. On March 31, 2016, the Board awarded the Chairman a cash bonus of approximately $89,000 and, 2,230,000 shares of the Company’s common stock for his service in the three months ended March 31, 2016.
The Board authorized grants of approximately 2,761,000 shares of the Company’s common stock during the second quarter of 2016, which were valued at the market price of the Company’s common stock on date of grant, for total compensation expense of approximately $13,000. On June 8, 2016, the Board also awarded the Chairman a cash bonus of approximately $89,200 and 6,027,000 shares of the Company’s common stock, valued at approximately $8,000.
The Board also voted on June 8, 2016, to increase the shares available for grant under the 2014 Equity Incentive Plan to 125,000,000. The Company intends to file a Form S-8 regarding the increased shares available for grant now that the increase in authorized shares has been approved.
| 58 |
A summary of the activity related to RSUs for the years ended December 31, 2016 and 2015 is presented below:
| Restricted stock units (RSU’s) | Total shares | Grant date fair value | ||||||
| RSU’s non-vested at January 1, 2016 | 152,823 | $ | 0.51 - $1.88 | |||||
| RSU’s granted | 14,285,714 | $ | 0.007 | |||||
| RSU’s vested | (7,295,681 | ) | $ | 0.51- $1.88 | ||||
| RSU’s forfeited | — | $ | — | |||||
| RSU’s non-vested December 31, 2016 | 7,142,856 | $ | 0.51 - $1.88 | |||||
| Restricted stock units (RSU’s) | Total shares | Grant date fair value | ||||||
| RSU’s non-vested at January 1, 2015 | 199,584 | $ | 10.70 | |||||
| RSU’s granted | 698,521 | $ | 0.15 - $10.40 | |||||
| RSU’s vested | (670,282 | ) | $ | 0.15 - $10.40 | ||||
| RSU’s forfeited | (75,000 | ) | $ | 10.40 - 11.00 | ||||
| RSU’s non-vested December 31, 2015 | 152,823 | $ | 0.15 - $10.40 | |||||
A summary of the expense related to restricted stock, RSUs and stock option awards for the year ended December 31, 2016 and 2015 is presented below:
Year ended December 31, 2016 | ||||
| Restricted Stock | $ | - | ||
| RSU’s | 261,196 | |||
| Stock options | — | |||
| Common stock | 539,246 | |||
| Total | $ | 800,442 | ||
| Year
ended December 31, 2015 | ||||
| Restricted Stock | $ | 2,625,942 | ||
| RSU’s | 2,858,343 | |||
| Stock options | 335,117 | |||
| Common stock | 236,925 | |||
| Total | $ | 6,056,327 | ||
Warrant Activities
The Company applied fair value accounting for all share-based payments awards. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model.
| Date issued | Number of warrants | Exercise price | December
18, 2015 re-price | Fair
Value at issuance | ||||||||||||
| July 2014 Modified Debentures | ||||||||||||||||
| January 30, 2015 | 40,552 | 4.93 | .06 | $ | 159,601 | |||||||||||
| February 26, 2015 | 45,537 | 2.20 | .06 | 79,904 | ||||||||||||
| March 13, 2015 | 21,151 | 2.36 | .06 | 39,965 | ||||||||||||
| March 16, 2015 | 10,575 | 2.36 | .06 | 19,981 | ||||||||||||
| March 20, 2015 | 41,946 | 1.79 | .06 | 59,942 | ||||||||||||
| March 27, 2015 | 75,758 | 1.98 | .06 | 119,888 | ||||||||||||
| April 2, 2015 | 60,386 | 1.66 | .06 | 74,025 | ||||||||||||
| April 2, 2015 | 30,193 | 1.66 | .06 | 37,012 | ||||||||||||
| April 10, 2015 | 107,914 | 1.39 | .06 | 112,460 | ||||||||||||
| April 17, 2015 | 41,667 | 1.20 | .06 | 37,680 | ||||||||||||
| April 24, 2015 | 127,119 | 1.18 | .06 | 112,635 | ||||||||||||
| April 24, 2015 | 21,186 | 1.18 | .06 | 18,772 | ||||||||||||
| May 1, 2015 | 156,250 | .96 | .06 | 113,133 | ||||||||||||
| May 7, 2015 | 134,615 | .78 | .06 | 79,234 | ||||||||||||
| May 8, 2015 | 42,000 | .75 | .06 | 23,768 | ||||||||||||
| May 15, 2015 | 200,000 | .75 | .06 | 113,365 | ||||||||||||
| May 22, 2015 | 250,000 | .60 | .06 | 113,366 | ||||||||||||
| May 29, 2015 | 258,621 | .58 | .06 | 112,537 | ||||||||||||
| June 5, 2015 | 288,462 | .52 | .06 | 120,738 | ||||||||||||
| June 12, 2015 | 930,233 | .43 | .06 | 303,246 | ||||||||||||
| June 19, 2015 | 3,448,276 | .29 | .06 | 751,159 | ||||||||||||
| September 2014 Modified Debentures | ||||||||||||||||
| January 28, 2015 | 18,038 | 5.54 | .06 | 80,156 | ||||||||||||
| February 13, 2015 | 57,870 | 1.73 | .06 | 96,689 | ||||||||||||
| April 2, 2015 | 181,159 | 1.66 | .06 | 222,109 | ||||||||||||
| April 24, 2015 | 90,579 | 1.10 | .06 | 80,548 | ||||||||||||
| May 15, 2015 | 200,000 | .75 | .06 | 113,365 | ||||||||||||
| June 12, 2015 | 1,744,186 | .43 | .06 | 570,248 | ||||||||||||
| August 2015 Debentures | ||||||||||||||||
| August 24, 2015 | 6,666,667 | .06 | 321,757 | |||||||||||||
| September 18, 2015 | 588,235 | .17 | 82,804 | |||||||||||||
| October 28, 2015 | 4,166,667 | .12 | 363,306 | |||||||||||||
| November 16, 2015 | 1,785,714 | .07 | 92,798 | |||||||||||||
| November 23, 2015 | 2,083,333 | .06 | 68,988 | |||||||||||||
| November 30,2015 | 2,500,000 | .05 | 81,988 | |||||||||||||
| December 7, 2015 | 6,250,000 | .02 | 163,382 | |||||||||||||
| December 17, 2015 | 10,000,000 | .02 | 76,376 | |||||||||||||
| Directors | ||||||||||||||||
| January 5, 2015 | 129,305 | .40 | 39,901 | |||||||||||||
| January 30, 2015 | 129,250 | .40 | 39,916 | |||||||||||||
| February 2, 2015 | 237,778 | .22 | 16,619 | |||||||||||||
| March 4, 2016 | 1,250,000 | .02 | 10,000 | |||||||||||||
| March 10, 2016 | 1,250,000 | .02 | 10,000 | |||||||||||||
| March 15, 2016 | 1,250,000 | .02 | 10,000 | |||||||||||||
| March 15, 2016 | 1,250,000 | .02 | 10,000 | |||||||||||||
| March 15, 2016 | 125,000 | .02 | 1,000 | |||||||||||||
| March 15, 2016 | 125,000 | .02 | 1,000 | |||||||||||||
| April 20, 2016 | 1,041,663 | .02 | 4,000 | |||||||||||||
| June 14, 2016 | 5,000,000 | .01 | 4,425 | |||||||||||||
| June 14, 2016 | 2,691,250 | .01 | 2,381 | |||||||||||||
| June 14, 2016 | 1,500,000 | .01 | 1,327 | |||||||||||||
| June 14, 2016 | 3,343,750 | .01 | 2,959 | |||||||||||||
| Other Agreements | ||||||||||||||||
| April 13, 2016 | 500,000 | .03 | 3,869 | |||||||||||||
| May 5, 2016 | 590,625 | .01 | 3,477 | |||||||||||||
| June 8, 2016 | 2,678,571 | .01 | 2,265 | |||||||||||||
| Total | 65,757,081 | $ | 5,256,064 | |||||||||||||
At December 31, 2016, the aggregate intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
| 59 |
| December 31, 2016 | ||||
| Exercise price | $ | 0.02 | ||
| Expected dividends | 0 | % | ||
| Expected volatility | 289.97 | % | ||
| Risk free interest rate | 1.6 | % | ||
| Expected life of warrant | 3 years | |||
The assumptions used for warrants granted during the year ended December 31, 2016 are as follows:
The following is a summary of the Company’s warrant activity:
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Exercise | Remaining Days | |||||||||||
| Warrants | Price | Price | ||||||||||
| Outstanding – December 31, 2015 | 43,161,222 | $ | 0.16 | $ | 2.77 | |||||||
| Granted | 22,595,859 | 0.04 | 3.00 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited/Cancelled | - | - | - | |||||||||
| Outstanding and Exercisable – December 31, 2016 | 65,757,081 | $ | 0.11 | $ | 1.97 | |||||||
Effective September 18, 2015, the holder of the September 2014 Debentures and the Company agreed to amend its September 2014 Warrants, to reduce the exercise price of the warrants to purchase an aggregate of 2,291,832 shares of the Company’s common stock to six cents per share. Additionally, the holder of the July 2014 Debentures and the Company agreed to amend its July 2014 Warrants, to reduce the exercise price of the warrants to purchase an aggregate of 6,332,441 shares of Common Stock to six cents per share. As a result of the amendment, the fair value of the warrants was remeasured as of September 18, 2015, for an additional fair value of approximately $38,000 recognized as a financing expense. During the year ended December 31, 2015, approximately 2,292,000 warrants were exercised for cash proceeds of $137,510 at an average exercise price of $0.06.
During the year ended December 31, 2016, there were no warrants exercised.
The Company adopted a sequencing policy that reclassifies contracts, with the exception of stock options, from equity to assets or liabilities for those with the earliest inception date first. Any future issuance of securities, as well as period-end reevaluations, will be evaluated as to reclassification as a liability under the sequencing policy of earliest inception date first until all of the convertible debentures are either converted or settled.
For warrants issued in 2015, the Company determined that the warrants were properly classified in equity as there is no cash settlement provision and the warrants have a fixed exercise price and, therefore, result in an obligation to deliver a known number of shares.
The Company reevaluated the warrants as of December 31, 2016 and determined that they did not have a sufficient number of authorized and unissued shares to settle all existing commitments, and the fair value of the warrants for which there was insufficient authorized shares, were reclassified out of equity to a liability. Under the sequencing policy, of the approximately 67,757,081 warrants outstanding at December 31, 2016, it was determined during July 2015 there was not sufficient authorized shares for approximately 6,829,000 of the outstanding warrants. The fair value of these warrants was re-measured on December 31, 2016 using the Black Scholes Merton Model, with key valuation assumptions used that consist of the price of the Company’s stock on December 31, 2016, a risk free interest rate based on the average yield of a 2 or 3 year Treasury note and expected volatility of the Company’s common stock, resulting in the fair value for the Warrant liability of approximately $14,000. The resulting change in fair value of approximately $998,764 for the year ended December 31, 2016, was recognized as a gain/(loss) in the consolidated statement of comprehensive income(loss).
NOTE 11 - RELATED PARTY TRANSACTIONS
During the first quarter of 2015, the Company issued two convertible notes to one of its directors in the aggregate principal amount of $100,000 and one convertible note to another of its director in the aggregate principal amount of $50,000. These notes were all converted to common stock during the third quarter of 2015.
| 60 |
During the first quarter of 2016, the Company issued three convertible notes to one of its directors in the aggregate principal amount of $75,000 and one convertible note to another of its director in the aggregate principal amount of $25,000, plus a convertible note to each of its other two directors, in the amount of $2,500 each. See Note 8 for a description of these notes.
In the second quarter of 2016, the Company issued promissory notes to all of the directors, in exchange for past unpaid cash bonuses, board compensation and expenses. See Note 8 for a description of these notes
NOTE 12: DISCONTINUED OPERATIONS
Management deemed the vapor and medical cannabis dispensing line of operations discontinued in the 4th quarter of 2016. This determination was due to poor performance and decreasing gross profit of the Company businesses and resulted in an overall halt of operations of the Company in the 4th quarter of 2016. Upon analysis of the individual business lines, the Company’s newly formed special committee decided not to continue in the vapor and medical cannabis dispensing industries.
On March 28, 2016, the Company sold the assets of the vapor subsidiary for $70,000. At the time of the asset disposal, it was disclosed as not a strategic shift in operations; however, with the inclusion of the medical cannabis dispensing operations, the definition of a strategic shift was met. One definition of a strategic shift is a disposal of “80 percent interest in one of two product lines that account for 40 percent of total revenue”. The disposal of both operations meets the definition of a strategic shift and should therefore be shown as discontinued operations in the Company’s consolidated financial statements.
The following subsidiaries of the Company qualify as a discontinued operation for Notis Global.
● Prescription Vending Machines, Inc.,
● Medbox Management services, Inc.
● Medbox Rx, Inc.
● Vaporfection International, Inc.
● MJ Property Investments, Inc.
The income (loss) from discontinued operations presented in the income statement for the year ended December 31, 2016 and 2015, consisted of the following:
| For the year ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenue | $ | 243,965 | $ | 528,791 | ||||
| Revenue, related party | 99,946 | 99,946 | ||||||
| Net revenue | 343,911 | 628,737 | ||||||
| Cost of revenues | 99,411 | 2,061,944 | ||||||
| Gross profit (loss) | 244,500 | (1,433,207 | ) | |||||
| Operating expenses | ||||||||
| General and administrative | 65,647 | 2,829,684 | ||||||
| Total operating expenses | 65,647 | 2,829,684 | ||||||
| Loss from operations | 178,853 | (4,262,891 | ) | |||||
| Other income (expense) | ||||||||
| Interest expense, net | (8,858 | ) | (49,804 | ) | ||||
| Gain on sale of assets of subsidiary | 5,498 | - | ||||||
| Loss on sale of rights and assets | (178,833 | ) | - | |||||
| Loss on default settlement of a note | (168,092 | ) | - | |||||
| Other-than-temporary impairment of Marketable securities | (16,010 | ) | - | |||||
| Other income | 141,058 | 161,937 | ||||||
| Total other income (expense) | (225,237 | ) | 112,133 | |||||
| Net loss | (46,384 | ) | (4,150,758 | ) | ||||
| 61 |
As a result of the discontinued operations, the previously presented 2015 financial statements have been revised to present the financial statements of the continuing operations separate from the discontinued operations. Effects on respective financial statements are as noted below:
NOTIS GLOBAL, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, 2015 | ||||||||||||
| As Previously Reported | Adjustment | As Revised | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | 119,010 | 66,176 | $ | 52,834 | |||||||
| Marketable securities | 9,410 | 9,410 | - | |||||||||
| Accounts receivable, net | 29,999 | 29,999 | - | |||||||||
| Notes receivable, net of allowances | 60,000 | - | 60,000 | |||||||||
| Inventory, net | 150,823 | 81,934 | 68,889 | |||||||||
| Prepaid expenses and other current assets | 157,418 | 1,990 | 155,428 | |||||||||
| Current assets – Discontinued operations | - | (189,509 | ) | 189,508 | ||||||||
| Total current assets | 526,660 | - | 526,659 | |||||||||
| Property and equipment, net | 6,039,751 | 399,353 | 5,640,398 | |||||||||
| Deferred Costs | 375,018 | 299,018 | 76,000 | |||||||||
| Deposits and other assets, net of reserve | 50,212 | 42,726 | 7,487 | |||||||||
| Non current assets – Discontinued operations | (741,097 | ) | 741,097 | |||||||||
| Total assets | $ | 6,991,641 | - | $ | 6,991,641 | |||||||
| Liabilities and Stockholders’ Deficit | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payables | $ | 3,100,804 | 429,360 | $ | 2,671,444 | |||||||
Other accrued expenses | 1,732,660 | 257,426 | 1,475,234 | |||||||||
Accounts payable and other accrued expenses - related parties | 362,648 | - | 362,648 | |||||||||
| Current liabilities – Discontinued operations | - | (2,385,524 | ) | 2,385,524 | ||||||||
| Deferred revenue, current | 551,866 | 551,866 | - | |||||||||
| Notes payable, net of debt discount | 256,897 | 215,667 | 41,230 | |||||||||
| Convertible notes payable, net of discount | 6,667,523 | - | 6,667,523 | |||||||||
| Derivative Liability | 19,246,594 | - | 19,246,594 | |||||||||
| Warrant Liability | 940,000 | - | 940,000 | |||||||||
| Customer deposits | 931,205 | 931,205 | - | |||||||||
| Total current liabilities | 33,790,197 | - | 33,790,197 | |||||||||
| Notes Payable, less current portion | 4,288,631 | - | 4,288,631 | |||||||||
| Total liabilities | 38,078,828 | - | 38,078,828 | |||||||||
| Commitments and contingencies (Note 14) | ||||||||||||
| Stockholders’ Deficit | ||||||||||||
| Preferred stock, $0.001 par value: 10,000,000 authorized; | - | - | ||||||||||
| Common stock, $0.001 par value: 10,000,000,000 authorized, | 240,972 | - | 240,972 | |||||||||
| Additional paid-in capital | 42,600,089 | - | 42,600,089 | |||||||||
| Treasury stock | (1,209,600 | ) | - | (1,209,600 | ) | |||||||
| Accumulated deficit | (72,524,893 | ) | - | (72,524,893 | ) | |||||||
| Accumulated other comprehensive loss | (193,755 | ) | - | (193,755 | ) | |||||||
| Total stockholders’ deficit | (31,087,187 | ) | - | (31,087,187 | ) | |||||||
| Total liabilities and stockholders’ deficit | $ | 6,991,641 | - | $ | 6,991,641 | |||||||
| 62 |
NOTIS GLOBAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the year ended | ||||||||||||
| December 31, 2015 | ||||||||||||
| As Previously Reported | Adjustment | As Revised | ||||||||||
| Revenue | $ | 532,791 | (528,791 | ) | $ | 4,000 | ||||||
| Revenue, related party | 99,946 | (99,946 | ) | - | ||||||||
| Operating expenses | ||||||||||||
| Cost of revenues | 2,069,298 | (2,061,944 | ) | 7,354 | ||||||||
| General and administrative | 18,697,483 | (2,829,684 | ) | 15,867,799 | ||||||||
| Total operating expenses | 20,766,781 | (4,891,628 | ) | 15,875,153 | ||||||||
| Loss from operations | (20,134,044 | ) | 4,262,891 | (15,871,153 | ) | |||||||
| Other income (expense) | ||||||||||||
| Interest expense, net | (21,370,540 | ) | 49,804 | (21,320,736 | ) | |||||||
| Change in fair value of derivative liabilities | (9,088,003 | ) | - | (9,088,003 | ) | |||||||
| Other income | 145,887 | (161,937 | ) | (16,050 | ) | |||||||
| Total other income (expense) | (30,312,656 | ) | (112,133 | ) | (30,424,789 | ) | ||||||
| Net loss from continuing operations | (50,446,700 | ) | 4,150,758 | (46,295,942 | ) | |||||||
| Discontinued operations | ||||||||||||
| Net income (loss) from discontinued operations | - | (4,150,758 | ) | (4,150,758 | ) | |||||||
| Income (loss) before provision for taxes | (50,446,700 | ) | - | (50,446,700 | ) | |||||||
| Provision for taxes | - | - | - | |||||||||
| Net loss | $ | (50,446,700 | ) | - | $ | (50,446,700 | ) | |||||
| 63 |
NOTIS GLOBAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, 2015 | ||||||||||||
| As Previously Reported | Adjustment | As Revised | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income (loss) | $ | (50,446,700 | ) | 4,150,758 | $ | (46,295,942 | ) | |||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 196,394 | - | 196,394 | |||||||||
| Charges from escrow deposits | 300,400 | - | 300,400 | |||||||||
| Inventory valuation reserve | 549,663 | - | 549,663 | |||||||||
| Change in fair value of derivative liability | 9,088,003 | - | 9,088,003 | |||||||||
| Amortization of debt discount | 11,691,883 | - | 11,691,883 | |||||||||
| Financing costs | 9,201,050 | - | 9,201,050 | |||||||||
| Stock based compensation | 6,056,327 | - | 6,056,327 | |||||||||
| Impairment of Goodwill | 1,260,037 | - | 1,260,037 | |||||||||
| Deferred tax liability | (160,000 | ) | - | (160,000 | ) | |||||||
| Impairment of Intangible Assets | 655,103 | - | 655,103 | |||||||||
| Changes in operating assets and liabilities: | - | |||||||||||
| Accounts receivable | (21,225 | ) | - | (21,225 | ) | |||||||
| Inventory | (38,268 | ) | - | (38,268 | ) | |||||||
| Deposits in escrow | 50,076 | - | 50,076 | |||||||||
| Prepaid insurance | (42,264 | ) | - | (42,264 | ) | |||||||
| Prepaid expenses and other current assets | 5,580 | - | 5,580 | |||||||||
| Accounts payable | 2,274,514 | 370,240 | 2,644,754 | |||||||||
| Accrued interest payable | (257,235 | ) | 257,235 | - | ||||||||
| Other accrued expenses | (335,228 | ) | 335,228 | - | ||||||||
| Accrued expenses directors | 241,410 | - | 241,410 | |||||||||
| Accrued settlement and severance expenses | 962,703 | (962,703 | ) | - | ||||||||
| Customer deposits | (594,604 | ) | 594,604 | - | ||||||||
| Deferred revenue | (220,740 | ) | 220,740 | - | ||||||||
| Net cash used in operating activities | (9,583,121 | ) | 4,966,102 | (4,617,019 | ) | |||||||
| Changes related to discontinued operations | - | (5,032,278 | ) | (5,032,278 | ) | |||||||
| - | ||||||||||||
| Cash flows from investing activities | ||||||||||||
| Issuance of note receivable | (60,000 | ) | - | (60,000 | ) | |||||||
| Purchase of property and equipment | (59,000 | ) | - | (59,000 | ) | |||||||
| Purchase of real estate | (445,000 | ) | - | (445,000 | ) | |||||||
| Construction in progress | (624,173 | ) | - | (624,173 | ) | |||||||
| Net cash provided by (used in) by investing activities | (1,188,173 | ) | - | (1,188,173 | ) | |||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issuance of notes payable | ||||||||||||
| Payments on notes payable | (215,906 | ) | - | (215,906 | ) | |||||||
| Payments on related party notes payable | (624,888 | ) | - | (624,888 | ) | |||||||
| Exercise of employee stock options | 144,500 | - | 144,500 | |||||||||
| Proceeds from issuance of convertible notes payable, net of fees | 11,335,416 | - | 11,335,416 | |||||||||
| Proceeds from issuance of convertible notes payable from directors, net | 150,000 | - | 150,000 | |||||||||
| Net cash provided by financing activities | 10,789,122 | 10,789,122 | ||||||||||
| Net increase in cash and cash equivalents | 17,828 | (66,176 | ) | (48,348 | ) | |||||||
| Cash, beginning of year | 101,182 | - | 101,182 | |||||||||
| Cash, end of year | $ | 119,010 | (66,176 | ) | $ | 52,834 | ||||||
| 64 |
NOTE 13 - INCOME TAXES
The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.
Deferred income taxes are provided for temporary differences arising from using the straight-line depreciation method for financial statement purposes and accelerated methods of depreciation for income taxes, including differences between book and tax for amortizing organization expenses. In addition, deferred income taxes are recognized for certain expense accruals, allowances and net operating loss carry forwards available to offset future taxable income, net of valuation allowances for potential expiration and other contingencies that could impact the Company’s ability to recognize the benefit.
The Company is required to file federal and state income tax returns. Various taxing authorities may periodically audit the Company’s income tax returns. These audits would include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions.
Management has performed its evaluation of all other income tax positions taken on all open income tax returns and has determined that there were no positions taken that do not meet the “more likely than not” standard. Accordingly, there are no provisions for income taxes, penalties or interest receivable or payable relating to uncertain income tax provisions in the accompanying consolidated financial statements. The company is currently delinquent on filing their tax returns.
From time to time, the Company may be subject to interest and penalties assessed by various taxing authorities. These amounts have historically been insignificant and are classified as other expenses when they occur.
Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:
| 2016 | 2015 | |||||||
| Deferred tax assets: | ||||||||
| Customer deposits | $ | — | $ | 371,000 | ||||
| Deferred revenue | — | 220,000 | ||||||
| Share based compensation | 906,214 | 4,173,000 | ||||||
| NOL carryforward | 2,469,000 | 2,469,000 | ||||||
| Total deferred tax asset | 3,375,214 | 7,233,000 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangible asset amortization | — | — | ||||||
| 3,375,214 | 7,233,000 | |||||||
| Less: Valuation allowance | (3,375,214 | ) | (7,233,000 | ) | ||||
| $ | — | $ | — | |||||
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A valuation allowance has been recorded against the realizability of the net deferred tax asset such that no value is recorded for the asset in the accompanying consolidated financial statements. The valuation allowance decreased $3,857,786 between the year ended December 31, 2016 and 2015.
For the years ended December 31, 2016 and 2015, a reconciliation of the statutory rate and effective rate for the provisions for income taxes consists of the following:
| 2016 | 2015 | |||||||
| Federal tax statutory rate | 34.00 | % | 34.00 | % | ||||
| State tax statutory rate | 8.84 | % | 6.00 | % | ||||
| Permanent differences | 3.46 | % | (30.73 | )% | ||||
| Valuation allowance | (46.30 | )% | (9.27 | )% | ||||
| Effective rate | 0.00 | % | 0.00 | % | ||||
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company previously leased property for its day to day operations and facilities for possible retail dispensary locations and cultivation locations as part of the process of applying for retail dispensary and cultivation licenses.
Entry into Agreement to Acquire Real Property
On June 17, 2016, EWSD , a wholly owned subsidiary of the Company, entered into a Contract to Buy and Sell Real Estate (the “Acquisition Agreement”) with Tammy J. Sciumbato and Donnie J. Sciumbato (collectively, the “Sellers”) to purchase certain real property comprised of 116-acres of agricultural land, a barn and a farmhouse in Pueblo, Colorado (the “Property”). The closing of the Acquisition Agreement is scheduled to occur on or about September 22, 2016 (the “Closing”), with possession of the land and barn occurring twelve (12) days after the Closing and possession of the farm house occurring on or before January 1, 2017. The Sellers will were to rent back the farm house from the Company until January 1, 2017. The purchase price to acquire the Property is $650,000, including $10,000 paid by the Company as a deposit into the escrow for the Property. During the third quarter of 2017 the Acquisition Agreement was cancelled and the deposit was forfeited.
Office Leases
On August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through June 30, 2017 at a current monthly rate of $14,828 per month. The Company moved to new offices in Los Angeles, CA in April 2015. The sublease on the new office has a term of 18 months with monthly rent of $7,486.
The landlord for the West Hollywood space has filed a suit against the Company and independent guarantors on the West Hollywood lease. The Company has expensed all lease payments due under the West Hollywood lease. The Company’s liability for the West Hollywood lease will be adjusted, if required, upon settlement of the suit with the landlord. On September 8, 2016, the court approved the landlord’s application for writ of attachment in the State of California in the amount of $374,402 against Prescription Vending Machines, Inc. (“PVM”). A trial date has been set for May 2017 (Note 13). On July 18, 2017, plaintiff filed a Request for Dismissal with Prejudice of the litigation in respect of PVM.
Total rent expense under operating leases for the year ended December 31, 2016 and 2015 was $89,000 and $300,000 respectively.
Consulting Agreements
On December 7, 2015, the Company entered into a consulting agreement for marketing and PR services, for a term of six months, which was subsequently extended through August 30, 2016. Compensation under this agreement through May 30, 2016 was $25,000 per month, with twenty percent, or $5,000, of this amount to be paid in shares of the Company’s common stock. Per the terms of the agreement, the number of shares issued is determined at the end of each quarter. Upon extension, the terms were adjusted to $15,000 per month for services, with $5,000 to be paid in shares of the Company’s common stock. On November 30, 2017, the Court granted plaintiff’s request for a Default Judgment in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses, attorney’s fees, and interest at a rate of 6.25%.
On March 1, 2016, the Company entered into a consulting agreement for corporate financial advisory services, for a term of twelve months, which is cancellable anytime with thirty days written notice after the first ninety days. Compensation under this agreement consists of a retainer of $3,500 per month, plus 1,500,000 shares of common stock issuable in 375,000 share tranches on a quarterly basis. On September 9, 2016 this agreement was terminated and no more shares were issued.
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Litigation
On May 22, 2013, Medbox (now known as Notis Global, Inc.) initiated litigation in the United States District Court in the District of Arizona against three stockholders of MedVend Holdings LLC (“MedVend”) in connection with a contemplated transaction that Medbox entered into for the purchase of an approximate 50% ownership stake in MedVend for $4.1 million. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. The litigation is pending and Medbox has sought cancellation due to a fraudulent sale of the stock because the selling stockholders lacked the power or authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the agreement. On November 19, 2013 the litigation was transferred to United States District Court for the Eastern District of Michigan. MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the litigation, the selling stockholder defendants and MedVend seek to have the transaction performed, or alternatively be awarded damages for the alleged breach of the agreement by Medbox. MedVend and the stockholder defendants seek $4.55 million in damages, plus costs and attorneys’ fees. Medbox has denied liability with respect to all such claims. On June 5, 2014, the Company entered into a purchase and sale agreement (the “MedVend PSA”) with PVM International, Inc. (“PVMI”) concerning this matter. Pursuant to the MedVend PSA, the Company sold to PVMI the Company’s rights and claims attributable to or controlled by the Company against those three certain stockholders of MedVend, known as Kaplan, Tartaglia and Kovan (the “MedVend Rights and Claims”), in exchange for the return by PVMI to the Company of 30,000 shares of the Company’s common stock. PVMI is owned by Vincent Mehdizadeh, formerly the Company’s largest stockholder. On December 17, 2015, the Company entered into a revocation of the MedVend PSA, which provided that from that date forward, Medbox would take over the litigation and be responsible for the costs and attorneys’ fees associated with the MedVend Litigation from December 17, 2015 forward. All costs and attorneys’ fees through December 16, 2015 will be borne by PVMI. After the filing of a motion for substitution of Medbox n/k/a Notis Global, Inc. for PVMI, Defendants’ agreed, via a stipulated order, to permit the substitution. The Court entered the order substituting Notis Global, Inc. for PVMI on February 17, 2016. A new litigation schedule was recently issued which resulted in an adjournment of the trial. A new trial date will be set by the court following its ruling on a motion for summary judgment filed by Defendants and MedVend, which is set for hearing on November 16, 2016. At this time, the Company cannot determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable. In January 2017, we entered into a Settlement Agreement with the three stockholders, pursuant to which we agreed to pay to them $375,000 in six payments commencing August 2017 and concluding on or before February 2020. In connection with the settlement, we executed a Consent Judgment in the amount of $937,000 in their favor. We did not make the first payment and the Consent Judgment was recorded against us on August 25, 2017. Plaintiffs have attempted to collect on the judgment and, in November 2017, garnished approximately $10,000 from our bank account.
On February 20, 2015, Michael A. Glinter, derivatively and on behalf of nominal defendants Medbox, Inc. the Board and certain executive officers (Pejman Medizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer Love, and C. Douglas Mitchell), filed a suit in the Superior Court of the State of California for the County of Los Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On January 21, 2015, Josh Crystal on behalf of himself and of all others similarly situated filed a class action lawsuit in the U.S. District Court for Central District of California against Medbox, Inc., and certain past and present members of the Board (Pejman Medizadeh, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, and C. Douglas Mitchell). The suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief of compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015, Plaintiffs filed a Consolidated Amended Complaint. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Class Settlement.
On January 18, 2015, Ervin Gutierrez filed a class action lawsuit in the U.S. District Court for the Central District of California. The suit alleges violations of federal securities laws through public announcements and filings that were materially false and misleading when made because they misrepresented and failed to disclose that the Company was recognizing revenue in a manner that violated US GAAP. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015, Plaintiffs filed a Consolidated Amended Complaint. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Class Settlement.
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On January 29, 2015, Matthew Donnino filed a class action lawsuit in the U.S. District Court for Central District of California. The suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated Amended Complaint. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Class Settlement.
On February 12, 2015, Jennifer Scheffer, derivatively on behalf of Medbox, Guy Marsala, Ned Siegel, Mitchell Lowe and C. Douglas Mitchell filed a lawsuit in the Eighth Judicial District Court of Nevada seeking damages for breaches of fiduciary duty regarding the issuance and dissemination of false and misleading statements and regarding allegedly improper and unfair related party transactions, unjust enrichment and waste of corporate assets. On April 17, 2015, Ned Siegel and Mitchell Lowe filed a Motion to Dismiss. On April 20, 2015, the Company filed a Joinder in the Motion to Dismiss. On July 27, 2015, the Court held a hearing on and granted the Motion to Dismiss without prejudice. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On March 10, 2015, Robert J. Calabrese, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against certain Company officers and/or directors (Ned L. Siegel, Guy Marsala, J. Mitchell Lowe, Pejman Vincent Mehdizadeh, Bruce Bedrick, and Jennifer S. Love). The suit alleges breach of fiduciary duties and gross mismanagement by issuing materially false and misleading statements regarding the Company’s financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods. Specifically, the suit alleges that defendants caused the Company to overstate the Company’s revenues by recognizing revenue on customer contracts before it had been earned. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On March 27, 2015, Tyler Gray, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against the Company’s Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, and C. Douglas Mitchell). The suit alleges breach of fiduciary duties and abuse of control. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally, the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On May 20, 2015, Patricia des Groseilliers, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against the Company’s Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Ned Siegel, Guy Marsala, J. Mitchell Lowe, Bruce Bedrick, Jennifer S. Love, Matthew Feinstein, C. Douglas Mitchell, and Thomas Iwanski). The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally, the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
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On June 3, 2015, Mike Jones, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the U.S. District Court for Central District of California against the Company’s Board of Directors and certain executive officers (Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, C. Douglas Mitchell, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, and Thomas Iwanski). The suit alleges breach of fiduciary duties, abuse of control, and breach of duty of honest services. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. On July 20, 2015, the Court issued an Order consolidating this litigation with those previously consolidated in the Central District (Crystal, Gutierrez, and Donnino). On October 7, 2015, the Court issued an Order modifying the July 20, 2015 Order consolidating the litigation so that the matters remain consolidated for the purposes of pretrial only. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On July 20, 2015, Kimberly Freeman, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the Eighth Judicial District Court of Nevada against the Company’s Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Guy Marsala, Ned Siegel, J. Mitchell Lowe, Jennifer S. Love, C. Douglas Mitchell, and Bruce Bedrick). The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally, the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly, the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On October 16, 2015, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties to the class actions and derivative lawsuits named above entered into settlements that collectively effect a global settlement of all claims asserted in the class actions and the derivative actions. The global settlement provides, among other things, for the release and dismissal of all asserted claims. The global settlement is contingent on final court approval, respectively, of the settlements of the class actions and derivative actions. If the global settlement does not receive final court approval, it could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future.
On October 27, 2015, separate from the above lawsuits and settlement, Richard Merritts, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the Superior Court of the State of California for the County of Los Angeles against the Board and certain executive officers (Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, C. Douglas Mitchell, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Jeff Goh, and Thomas Iwanski). The suit titled Merritts v. Marsala, et al., Case No. BC599159 (the “Merritts Action”), alleges breach of fiduciary duties by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. On February 16, 2016, the court issued an order staying the litigation pending final court approval of the settlement of the other pending derivative actions involving Medbox, Inc., as nominal defendant, and former and current officers and directors. The settlement of the other derivative actions has been preliminarily approved by the court in Jones v. Marsala, et al., Case No. 15-cv-4170 BRO (JEMx), in the U.S. District Court for the Central District of California. On March 25, 2016, Merritts filed a Motion to Intervene in the case filed by Mike Jones in the U.S. District Court for the Central District of California. By his Motion, Merritts seeks limited intervention in the Jones stockholder derivative action in order to seek confirmatory information and discovery regarding the Stipulation and Agreement of Settlement preliminarily approved by the Court on February 3, 2016. On April 4, 2016, Plaintiff Jones and the Company separately filed oppositions to the Motion to Intervene. On April 22, 2016, the Court issued an Order granting, without a hearing, stockholder Richard Merritts’ Motion to Intervene in the lawsuit titled Mike Jones v. Guy Marsala, et al., in order to conduct limited discovery. On September 16, 2016, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties entered into a settlement regarding Merritts’ claims. See more detailed discussion below under Derivative Settlements.
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Class Settlement
On December 1, 2015, Medbox and the class plaintiffs in Josh Crystal v. Medbox, Inc., et al., Case No. 2:15-CV-00426-BRO (JEMx), pending before the United States District Court for the Central District of California (the “Court”) notified the Court of the settlement. The Court stayed the action pending the Court’s review of the settlement and directed the parties to file a stipulation of settlement. On December 18, 2015, plaintiffs filed the Motion for Preliminary Approval of Class Action Settlement that included the stipulation of settlement. On February 3, 2016, the Court issued an Order granting preliminary approval of the settlement. The settlement provides for notice to be given to the class, a period for opt outs and a final approval hearing. The Court originally scheduled the Final Settlement Approval Hearing to be held on May 16, 2016 at 1:30 p.m., but continued it to August 15, 2016 at 1:30 p.m. to be heard at the same time as the Final Settlement Approval Hearing for the derivative actions, discussed below. The principal terms of the settlement are:
| ● | a cash payment to a settlement escrow account in the amount of $1,850,000 of which $150,000 will be paid by the Company and $1,700,000 will be paid by the Company’s insurers; | |
| ● | a transfer of 2,300,000 shares of Medbox common stock to the settlement escrow account, of which 2,000,000 shares would be contributed by Medbox and 300,000 shares by Bruce Bedrick; | |
| ● | the net proceeds of the settlement escrow, after deduction of Court-approved administrative costs and any Court-approved attorneys’ fees and costs would be distributed to the Class; and | |
| ● | releases of claims and dismissal of the action. |
By entering into the settlement, the settling parties have resolved the class claims to their mutual satisfaction. However, the final determination is subject to approval by the Federal Courts. Defendants have not admitted the validity of any claims or allegations and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation. If the global settlement does not receive final court approval, it could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company and their ability to raise funds in the future.
Derivative Settlements
As previously announced on October 22, 2015, on October 16, 2015, the Company, in its capacity as a nominal defendant, entered into a memorandum of understanding of settlement (the “Settlement”) in the following stockholder derivative actions: (1) Mike Jones v. Guy Marsala, et al., in the U.S. District Court for Central District of California; (2) Jennifer Scheffer v. P. Vincent Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (3) Kimberly Y. Freeman v. Pejman Vincent Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (4) Tyler Gray v. Pejman Vincent Mehdizadeh, et al., in the U.S. District Court for the District of Nevada; (5) Robert J. Calabrese v. Ned L. Siegel, et al., in the U.S. District Court for the District of Nevada; (6) Patricia des Groseilliers v. Pejman Vincent Mehdizadeh, et al., in the U.S. District Court for the District of Nevada; (7) Michael A. Glinter v. Pejman Vincent Mehdizadeh, et al., in the Superior Court of the State of California for the County of Los Angeles (the “Stockholder Derivative Lawsuits”). In addition to the Company, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, and C. Douglas Mitchell were named as defendants in all of the lawsuits, and Jennifer S. Love was named in all of the lawsuits but the Scheffer action (the “Individual Defendants”).
On December 3, 2015, the parties in the Jones v. Marsala action advised the Court of the settlements in the Stockholder Derivative Lawsuits and that the parties would be submitting the settlement to the Court in the Jones action for approval. The Court thereafter issued an order vacating all pending dates in the action and ordered Plaintiff to file the Stipulation and Agreement of Settlement for the Court’s approval. On December 18, 2015, plaintiffs filed the Motion for Preliminary Approval of Derivative Settlement that included the Stipulation and Agreement of Settlement. On February 3, 2016, the Court issued an Order granting preliminary approval of the settlement.
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By entering into the Settlement, the settling parties have resolved the derivative claims to their mutual satisfaction. The Individual Defendants have not admitted the validity of any claims or allegations and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation.
Under the terms of the Settlement, the Company agrees to adopt and adhere to certain corporate governance processes in the future. In addition to these corporate governance measures, the Company’s insurers, on behalf of the Individual Defendants, will make a payment of $300,000 into the settlement escrow account and Messrs. Mehdizadeh and Bedrick will deliver 2,000,000 and 300,000 shares, respectively, of their Medbox, Inc. common stock into the settlement escrow account. The funds and common stock in the settlement escrow account will be paid as attorneys’ fees and expenses, or as service awards to plaintiffs.
On September 16, 2016, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties entered into a settlement regarding the Merritts Action. The settlement provides, among other things, for the release and dismissal of all asserted claims. Under the terms of the settlement, the Company agrees to adopt and to adhere to certain corporate governance processes in the future. In addition to these corporate governance measures, the Company will make a payment of $135,000 in cash to be used to pay Merritts’ counsel for any attorneys’ fees and expenses, or as service awards to plaintiff Merritts, that are approved and awarded by the Court. The settlement has been approved by the court.
SEC Investigation
In October 2014, the Board of Directors of the Company appointed a special board committee (the “Special Committee”) to investigate issues arising from a federal grand jury subpoena pertaining to the Company’s financial reporting which was served upon the Company’s predecessor independent registered public accounting firm as well as certain alleged wrongdoing raised by a former employee of the Company. The Company was subsequently served with two SEC subpoenas in early November 2014. The Company is fully cooperating with the grand jury and SEC investigations. In connection with its investigation of these matters, the Special Committee in conjunction with the Audit Committee initiated an internal review by management and by an outside professional advisor of certain prior period financial reporting of the Company. The outside professional advisor reviewed the Company’s revenue recognition methodology for certain contracts for the third and fourth quarters of 2013. As a result of certain errors discovered in connection with the review by management and its professional advisor, the Audit Committee, upon management’s recommendation, concluded on December 24, 2014 that the consolidated financial statements for the year ended December 31, 2013 and for the third and fourth quarters therein, as well as for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, should no longer be relied upon and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the consolidated financial statements for the year ended December 31, 2012, together with all three, six and nine month financial information contained therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated. On March 11, 2015, the Company filed its restated Form 10 Registration Statement with the SEC with restated financial information for the years ended December 31, 2012 and December 31, 2013, and on March 16, 2015, the Company filed amended and restated quarterly reports on Form 10-Q, with restated financial information for the periods ended March 31, June 30 and September 30, 2014, respectively.
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In March 2016, the staff of the Los Angeles Regional Office of the U.S. Securities and Exchange Commission advised counsel for the Company in a telephone conversation, followed by a written “Wells” notice, that it is has made a preliminary determination to recommend that the Commission file an enforcement action against the Company in connection with misstatements by prior management in the Company’s financial statements for 2012, 2013 and the first three quarters of 2014. A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides the Company with an opportunity to respond to issues raised by the Staff and offer its perspective prior to any SEC decision to institute proceedings.
In March 2017, the SEC and the Company settled this matter. The Company consented to the entry of a final judgment permanently enjoining it from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder. In connection with the settlement, the Company did not have any monetary sanctions or penalties assessed against it.
Other litigation
Whole Hemp complaint
A complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming Notis Global, Inc. and EWSD (collectively, “Notis”), as defendants in Pueblo County, CO district court. The complaint alleges five causes of action against Notis: misappropriation of trade secrets, civil theft, intentional interference with prospective business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and Notis for the Farming Agreement and the Distributor Agreement.
The court entered an ex parte temporary restraining order on June 2, 2016, and a modified temporary restraining order on July 14, 2016, enjoining Notis from disclosing, using, copying, conveying, transferring, or transmitting Whole Hemp’s trade secrets, including Whole Hemp’s plants. On June 13, 2016, the court ordered that all claims be submitted to arbitration, except for the disposition of the temporary restraining order.
On August 12, 2016, the court ordered that all of Whole Hemp’s plants in Notis’ possession be destroyed, which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties will soon file a motion to dismiss the district court action. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with prejudice.
Notis commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between the parties. Whole Hemp filed is Answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted to the court.
On September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016.
In light of the court order to destroy all Whole Hemp plants, the Company has immediately expensed all Capitalized agricultural costs of $73,345 related to Whole Hemp plants. As of December 31, 2016, the Company capitalized $160,131 that related to Whole Hemp plants.
As noted above, our long-term strategy is to maintain tight control of our supply chain. The continuing default by Whole Hemp was conductive to our efforts to eliminate outside vendors in the supply chain and control production from “Seed to Sale.” Our decision to terminate the Whole Hemp Agreements comports with our long-term strategy to maintain tight control of our supply chain.
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West Hollywood Lease
The lease for the former office at 8439 West Sunset Blvd. in West Hollywood, CA has been partially subleased. The Company plans to sublease the remainder of the office in West Hollywood, CA and continues to incur rent expense while the space is being marketed. The landlord for the prior lease filed a suit in Los Angeles Superior Court in April 2015 against the Company for damages they allege have been incurred from unpaid rent and otherwise. In January 2016, the landlord filed a first amended complaint adding the independent guarantors under the lease as co-defendants and specifying damages claim of approximately $300,000. On September 8, 2016, the court approved Mani Brothers’ application for writ of attachment in the State of California in the amount of $374,402 against Prescription Vending Machines, Inc. (“PVM”). On March 1, 2017 the Company paid $40,000. On March 16, 2017 the Company and Mani Brothers agree to settle the amount owed if the Company pays $40,000 before July 2017. The Company did not pay the $40,000. A trial date has been set in May 2017. On July 24, 2017, the case was dismissed against the Company.
Los Angeles Lease
The Company’s former landlord, Bank Leumi, filed an action against the Company in Los Angeles Superior Court for breach of lease on August 31, 2016, seeking $29,977 plus fees and interest, in addition to rent payment for September 2016. The Company filed a response to the complaint on September 21, 2016, and a case management conference is scheduled for December 9, 2016. In November 2016, the parties entered into a Settlement Agreement and General Release, pursuant to which the Company agreed to an eight-payment plan in favor of the Bank, commencing December 2016 and terminating July 2017. All of the payments, which aggregated $46,522 for rent, fees, and costs, have been made.
Creaxion
On August 23, 2017, Creaxion Corporation filed a Complaint in the Superior Court of Fulton County, Georgia, styled Creaxion Corporation, Plaintiff, v. Notis Global, Inc., Defendant, Civil Action No. 2017CV294453. Plaintiff plead counts for (1) Breach of Contract in the amount of $89,000, (2) Prejudgment interest, and (3) Attorney’s fees. The Company was served on September 26, 2017, and did not respond to the Complaint. On November 30, 2017, the Court granted plaintiff’s request for a Default Judgment in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses, attorney’s fees, and interest at a rate of 6.25%. On December 14, 2017, the court entered into default judgement for the plaintiff for $89,000 and pre judgement interest at a rate of 6.25%.
Sheppard, Mullin
On October 27, 2017, Sheppard Mullin filed a Complaint in the Superior Court of the State of California for the County of Los Angeles, styled Sheppard, Mullin, Richter & Hampton LLP, a California limited liability partnership, plaintiff v. Notis Global, Inc., a Nevada corporation, formerly known as Medbox, Inc.; and Does 1-10, inclusive, Defendants, Case No. BC681382. Plaintiff plead causes of action for (1) Breach of Contract; (2) Account Stated; and (3) and Unjust Enrichment, seeking approximately $240,000. The Company accepted service on November 10, 2017, and, as of the date of this Report, has not responded to the complaint. On May 17, 2018, the court entered judgement in favor of Sheppard Mullin in the amount of $277,998.77. On June 25, 2018, we entered into a settlement agreement with Sheppard Mullin pursuant to which we agreed to pay $50,000 due by June 29, 2018 and $25,000 due by June 28, 2019.
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to December 31, 2016 the company issued 33 convertible notes to third party lenders totaling $1,703,857. These notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between February 2017 through December 2019.
Subsequent to December 31, 2016 the company issued 16 notes to third party lenders totaling $622,317. These notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between February 2017 through July 2017.
On October 31, 2018 Investor #2 agreed to extend the maturity date of the outstanding notes to April 2019.
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Common stock issuances
On January 20, 2017, we issued 2,000,000 shares of our common stock to in connection with the settlement of the Crystal v. Medbox, Inc. litigation. We did not receive any proceeds from such issuance. We issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On August 24, 2017, we issued 38,700,000 shares of our common stock to one otherwise unrelated person in connection with the conversion of certain previously issued debt securities to such person. We did not receive any proceeds from such conversion. We had previously offered and sold the convertible debt securities in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder and offered and sold the above-referenced shares in accordance with the provisions of Section 3(a)(9) of the Securities Act.
OTC Markets
On September 9, 2016, the Company received notice from the OTC Markets that it would move the Company’s trading market from the OTCQB® to OTC Pink® market, if the Company did not file its Quarterly Report on Form 10-Q for the period ended June 30, 2016 by September 30, 2016. On or about October 1, 2016, the Company moved to the OTC Pink market. This might also impact the Company’s ability to obtain funding.
Entry into Note Purchase Agreement and Global Debenture Amendment
PCH Investment Group, Inc. – San Diego Project Investment
Effective as of March 21, 2017, through a series of related transactions, we indirectly acquired an aggregate of 459,999 of the then-issued and outstanding shares of capital stock (the “PCH Purchased Shares”) of PCH Investment Group, Inc., a California corporation (“PCH”) for a purchase price of $300,000.00 in cash and the issuance of shares of our common stock. The PCH Purchased Shares represented 51% of the outstanding capital stock of PCH. In connection with our then acquisition of the PCH Purchased Shares, we (or our affiliates) were also granted an indirect option to acquire the remaining 49% (the “PCH Optioned Shares”) of the capital stock of PCH. The option was to expire on February 10, 2019 (the “PCH Optioned Shares Expiry Date”).
Located in San Diego, California, PCH is a management services business that focuses on the management of cannabis production and manufacturing businesses. On November 1, 2016, PCH entered into a Management Services Agreement (the “PCH Management Agreement”) with California Cannabis Group (“CalCan”) and Devilish Delights, Inc. (“DDI”), both of which are California nonprofit corporations in the cannabis production and manufacturing business (“their business”). CalCan is licensed by the City of San Diego, California, to cultivate cannabis and manufacture cannabis products, as well as to sell, at wholesale, the cultivated and manufactured products at wholesale to legally operated medical marijuana dispensaries. The PCH Management Agreement provided that PCH was responsible for the day-to-day operations and business activities of their business. In that context, PCH is responsible for the payment of all operating expenses of their business (including the rent and related expenditures for CalCan and DDI) from the revenue generated by their business, or on an out-of-pocket basis if the revenue should be insufficient. In exchange for PCH’s services and payment obligations, PCH is entitled to 75% of the gross profits of their business. The PCH Management Agreement did not provide for any gross profit milestone during its first 12 months; thereafter, it provided for an annual $8 million gross profit milestone, with any amount in excess thereof to be carried forward to the next annual period. In the event that, during any annual period, the gross profit thereunder was less than $8 million (including any carry-forward amounts), then, on a one-time basis, PCH would have been permitted to carry-forward such deficit to the following annual period. If, in that following annual period, the gross profit were to exceed $6 million, then PCH was entitled to an additional “one-time basis” carry-forward of a subsequent deficit. The term of the PCH Management Agreement was for five years, subject to two extensions, each for an additional five-year period, in all cases subject to earlier termination for an uncured material breach by PCH of its obligations thereunder. Clint Pyatt, our then-current Chief Operating Officer and Senior Vice President, Government Affairs, was then a member of the Board of Directors of CalCan and DDI.
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Pursuant to a Securities Purchase Agreement, that was made and entered into as of March 16, 2017 (five days before the closing of the transaction), our wholly-owned subsidiary, Pueblo Agriculture Supply and Equipment, LLC, a Delaware limited liability company (“PASE”), acquired the PCH Purchased Shares from the three PCH shareholders: (i) Mystic, LLC, a California limited liability company that Jeff Goh, our then-Chief Executive Officer, formed and controlled for his investments in cannabis projects, (ii) Clint Pyatt, and (iii) Steve Kaller, the general manager of PCH (collectively, the “PCH Shareholders”).
As a condition to the Lender entering into the Note Purchase Agreement and the PCH-Related Note (both as noted below) and providing any additional funding to us in connection with our acquisition of the PCH Purchased Shares, our Board of Directors ratified the forms of employment agreements for Mr. Goh, as our then-Chief Executive Officer, and for Mr. Pyatt, as our then-prospective President. Once the agreements became effective, and following the second anniversary thereof, the terms were to have become “at-will.” In addition to payment of a base salary, the agreements provided for certain cash, option, and equity bonuses, in each case to become subject both to each individual and to us meeting certain performance goals to be acknowledged by them and to be approved by a disinterested majority of our Board of Directors.
Due to the nature of the PCH transaction, and the related parties involved with PCH, we formed a special committee of our Board of Directors to consider all of the aspects of the above-described transaction, as well as the related financing proposed to be provided by the Lender. The special committee consisted of three of our four directors: Ambassador Ned L. Siegel, Mitch Lowe, and Manual Flores. In the context of the special committee’s charge, it engaged an otherwise independent investment banking firm (the “Banker”) to analyze the potential acquisition of the PCH Purchased Shares through the Securities Purchase Agreement (noted above) and the Stock Purchase Option Agreement (noted below), the related financing agreements (all as noted below), other related business and financial arrangements, and the above-referenced employment agreements. After the Banker completed its full review of those agreements and its own competitive analysis, it provided its opinion that the consideration to be paid in connection with the acquisition of the PCH Purchased Shares and the terms of the PCH-Related Note were fair to us from a financial point of view. Following the Banker’s presentation of its analysis and opinion, and the special committee’s own analysis, the special committee unanimously recommended to our full Board of Directors that all of such transactions should be approved and that we should consummate the acquisition of the PCH Purchased Shares, accept the option to acquire the PCH Optioned Shares, enter into the PCH-Related Note, the documents ancillary thereto, and the Employment Agreements.
In connection with our acquisition of the PCH Purchased Shares and our option to acquire the PCH Optioned Shares, PASE, EWSD I, LLC, a Delaware limited liability company of which we own 98% of the equity (“EWSD”; the other two percent is owned by two individuals who provide consulting services to us), PCH, and we entered into a Convertible Note Purchase Agreement (the “Note Purchase Agreement”) with a third-party lender (the “PCH Lender”). Concurrently, PASE and we (with EWSD and PCH as co-obligors) entered into a related 10% Senior Secured Convertible Promissory Note (the “PCH-Related Note”) in favor of the PCH Lender. The initial principal sum under the PCH-Related Note is $1,000,000.00 and it bears interest at the rate of 10% per annum. Principal and interest are subject to certain conversion rights in favor of the Lender. So long as any principal is outstanding or any interest remains accrued, but unpaid, at any time and from time to time, at the option of the PCH Lender, any or all of such amounts may be converted into shares of our common stock. Notwithstanding such conversion right, and except in the circumstance described in the next sentence, the PCH Lender may not exercise its conversion rights if, in so doing, it would then own more than 4.99% of our issued and outstanding shares of common stock. However, upon not less than 61-days’ notice, the PCH Lender may increase its limitation percentage to a maximum of 9.99%. The PCH Lender’s conversion price is fixed at $0.0001 per share. Principal and accrued interest may be pre-paid from time to time or at any time, subject to 10 days’ written notice to the PCH Lender. Any prepayment of principal or interest shall be increased to be at the rate of 130% of the amount so to be prepaid and, during the 10-day notice period, the PCH Lender may exercise its conversion rights in respect of any or all of the amounts otherwise to be prepaid.
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In a series of other loan transactions prior to the closing of the acquisition of the PCH Purchased Shares, a different third party lender (the “Ongoing Lender”) had lent to us, in five separate tranches, an aggregate amount of approximately $414,000 (the “Pre-acquisition Loans”), that, in turn, we lent to PCH to use for its working capital obligations. Upon the closing of the acquisition of the PCH Purchased Shares and pursuant to the terms of the PCH-Related Note, the PCH Lender lent to us (i) approximately $86,000, that, in turn, we lent to PCH to use for its additional working capital obligations, (ii) $300,000 for the acquisition of the PCH Purchased Shares, and (iii) $90,000 for various transaction-related fees and expenses. Immediately subsequent to the closing of the acquisition of the PCH Purchased Shares, the PCH Lender lent to us (x) approximately $170,000 for our operational obligations and (y) approximately $114,000 for us partially to repay an equivalent amount of the Pre-acquisition Loans.
In connection with the Pre-acquisition Loans and the PCH-Related Note, the makers and co-obligors thereof entered into an Amended and Restated Security and Pledge Agreement in favor of the Lender, pursuant to which such parties, jointly and severally, granted to the Lender a security interest in all, or substantially all, of their respective property. Further, PCH entered into a Guarantee in favor of the PCH Lender in respect of the other parties’ obligations under the PCH-Related Note. PCH’s obligation to the PCH Lender under these agreements is limited to a maximum of $500,000.
As of the closing of the acquisition of the PCH Purchased Shares, we paid $300,000 to the PCH Shareholders. We were also obligated to issue to the PCH Shareholders 1,500,000,000 shares (the “Purchase Price Shares”) of our common stock. That number of issuable shares is subject to certain provisions detailed in the PCH-Related Note, which are summarized herein.
Notwithstanding the number of issuable shares referenced above, the number of issued Purchase Price Shares is to be equal to 15% of the then-issued and outstanding shares of our common stock at the time that we exercise our option to acquire the PCH Optioned Shares under the Stock Purchase Option Agreement (the “PCH Option Agreement”; the parties to which are PASE, PCH, the PCH Shareholders). Further, in the event that we issue additional equity securities prior to the date on which we issue the Purchase Price Shares at a price per share that is less than the value referenced above, the PCH Shareholders shall be entitled to “full ratchet” anti-dilution protection in the calculation of the number of Purchase Price Shares to be issued (with the exception of a recapitalization by the Lender to reduce our overall dilution).
If we did not exercise the option to acquire the PCH Optioned Shares prior to PCH Optioned Shares Expiry Date, the PCH Shareholders had the right to reacquire the PCH Purchased Shares from us for the same cash consideration ($300,000.00) that we paid to them for those shares. Further, if we are in default of our material obligations under the Securities Purchase Agreement, or if PASE is the subject of any bankruptcy proceedings, then the PCH Shareholders have the same reacquisition rights noted in the preceding sentence.
Pursuant the PCH Option Agreement, PASE was granted the option to purchase all 49%, but not less than all 49%, of the PCH Optioned Shares. The exercise price for the PCH Optioned Shares is an amount equivalent to five times PCH’s “EBITDA” for the 12-calendar month period, on a look-back basis, that concludes on the date of exercise of the Option, less $10.00 (which was the purchase price of the option). The calculation of the 12-month EBITDA is to be determined by PASE’s (or our) then-currently engaged independent auditors. If we exercise the option prior to the first anniversary of the closing of the acquisition of the PCH Purchased Shares, then the exercise price for the PCH Optioned Shares shall be based on the EBITDA for the entire 12-calendar month period that commenced with the effective date of the PCH Option Agreement.
PCH Investment Group, Inc. – San Diego Project Termination
On March 27, 2017, we filed a Current Report on Form 8-K to announce the above-described series of events, pursuant to which we indirectly acquired 51% of the then-issued and outstanding shares of capital stock of PCH. Subsequently, it became clear to us that the acquisition transaction and the then-prospective, anticipated benefits were not going to manifest themselves in a timely manner and in the magnitude that we had originally anticipated.
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Accordingly, through a Settlement Agreement and Mutual General Release, with an effective date of August 16, 2017, we “unwound” the acquisition and entered into a series of mutual releases with, among others, PCH, Mr. Pyatt, and Mr. Goh, but solely in connection with his status as an equity holder of PCH. See, also, Change of Officers and Directors in connection with the severance by each of Messrs. Pyatt and Goh of their respective employment and directorship relationships with us.
Pueblo Farm – Management Services Agreement
On May 31, 2017, we, and two of our subsidiaries, EWSD I, LLC (“EWSD”) and Pueblo Agriculture Supply and Equipment LLC, and Trava LLC, a Florida limited liability company that has lent various sums to us (“Trava”; referenced above as the “PCH Lender”), entered into a Management Services Agreement (the “MS Agreement”) in respect of our hemp grow-and-extraction operations located in Pueblo, Colorado (the “Pueblo Farm”). The MS Agreement has a 36-month term with two consecutive 12-month unilateral options exercisable in the sole discretion of Trava. Pursuant to the provisions of the MS Agreement, Trava shall collect all revenue generated by the Pueblo Farm operations. Further, Trava is to satisfy all of our Pueblo Farm-related past due expenses and, subject to certain limitations, to pay all current and future operational expenses of the Pueblo Farm operations. Finally, commencing October 2017, Trava is obligated to make the monthly mortgage payments on the Pueblo Farm, although we remain responsible for any and all “balloon payments” due under the mortgage. On a cumulative calendar monthly cash-on-cash basis, Trava is obligated to tender to us or, at our option, to either or both of our subsidiaries, an amount equivalent to 51% of the net cash for each such calendar month. Such monthly payments are on the 10th calendar day following the end of a calendar month for which such tender is required. At the end of the five-year term (assuming the exercise by Trava of each of the two above-referenced options), Trava has the unilateral right to purchase the Pueblo Farm operation at a four times multiple of its EBITDA (calculated at the mean average thereof for each of the two option years).
Commencing in September 2017 in connection with Trava monthly lending to us of funds sufficient for the Pueblo Farm’s monthly operational expenses of the Pueblo Farm operations, we amended the MA Agreement to provide that, from time to time, Trava may exercise its rights to convert some or all of the notes that evidence its lending of funds into shares of our common stock at a fixed conversion price of $.0001 pre-share. If Trava converts, in whole or in part, any one or more of such notes, then (unless (i) thereafter, we are unable to accommodate any future such conversions because of a lack of authorized, but unissued or unreserved, shares or (ii) the public market price for a share of our common stock become “no bid”), Trava shall continue to exercise its conversion rights in respect of all of such notes (to the 4.9% limitations set forth therein) and shall diligently sell the shares of common stock into which any or all of such notes may be converted (collectively, the “Underlying Shares”) in open market or other transactions (subject to any limitations imposed by the Federal securities laws and set forth in any “leak-out” type of arrangements in respect of the “underlying shares” to which Trava is a party).
Trava acknowledged that any proceeds derived by it from such sales of the underlying shares shall, on a dollar-for-dollar basis, reduce our financial obligations under the notes. Once Trava has received sufficient proceeds from such sales to reduce our aggregate obligations thereunder to nil (which reductions shall include any and all funds that Trava may have otherwise received in connection with the respective rights and obligations of the parties to the MSA), then the MSA shall be deemed to have been cancelled without any further economic obligations between Trava and us and Trava’s purchase right shall, accordingly, be extinguished.
Change of Officers and Directors
On May 16, 2017, we held a Special Meeting of our Board of Directors. At that Special Meeting, Messrs. Manuel Flores and Mitchel Lowe, each a director of ours, notified us that they would resign from our Board of Directors effective immediately. Mr. Flores and Mr. Lowe each made the decision to resign solely for personal reasons and time considerations and did not involve any disagreement with us, our management, or our Board of Directors.
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At the Special Meeting, Clinton Pyatt, then our Chief Operating Officer and Senior Vice President of Government Affairs accepted a position as a member of our Board of Directors and as our President. Clint’s Employment Agreement, which was approved by our Board of Directors on March 20, 2017, provided that he would join our Board of Directors and become our President upon his acceptance of such roles. Accordingly, he commenced his service as a director and our President at during the May 2017 Special Meeting.
With the resignations of Messrs. Flores and Lowe from the Board and the acceptance by Mr. Pyatt as a director, our Board had four vacancies. Accordingly, at the Special Meeting, our Board of Directors approved the nomination of the following nominees, to serve as directors, as noted:
Andrew Kantarzhi, 33, is a Sales and Marketing veteran, with over a decade in assisting multi-national corporations with developing new business and growing sales and revenue. Andrew previously acted as Director of Sales and Marketing at the International Management Group for one of its flagship properties in Central Asia. In 2010, Mr. Kantarzhi acted as Eurasian Natural Resource Company’s (LSE: ENRC; KASE: GB_ENRC) Sales Manager for ENRC’s Non-Core Materials Division, heading its Astana Sales Office. In 2011, he was promoted to Director of Sales and Marketing of ENRC’s Ferrosilicon Division in Moscow, Russia, where the division set record unit price sales and increased market share throughout the entire Russian Federation. Commencing in 2013, Mr. Kantarzhi has managed accounts for Traxys North America’s Base Metals Division at its Manhattan, NY headquarters. Traxys is a commodities trading firm and a member of the Carlyle Group. Since 2016, he has acted as Chief Commercial Officer for OC Testing, LLC, a New York-based company that invests in and develops Cannabis-related research and testing facilities. We believed that Andrew’s experience in sales and marketing, including experience in the cannabis industry, will provide a benefit to us, our stockholders, and our Board by his providing us with significant guidance as we enter the next phase of our sales and marketing development. Mr. Kantarzhi commenced his service as a director at the close of the May 2017 Special Meeting.
Charles K. Miller, 56, was the Chief Financial Officer of Tekmark Global Solutions from 1997 until June of 2017. He was elected to the Board of Directors of InterCloud Systems, Inc. (OTCQB: ICLD), in November 2012. InterCloud is a New Jersey-based global single-source provider of value-added services for both corporate enterprises and service providers. Mr. Miller received his B.S. in accounting and his M.B.A. from Rider College and is a Certified Public Accountant in New Jersey. We believed that Chuck’s more than 30 years of financial experience will provide a financial stability benefit to us, our stockholders, and our Board of Directors. Mr. Miller commenced his service as a director at the close of the May 2017 Special Meeting.
Thomas A. Gallo, 55, founded the Strategic Advisory Group (“SAG”) at Corinthian Partners L.L.C., a boutique investment bank headquartered in New York City in 2014. Working within the investment banking department, SAG provided capital formation advice, as well as raised capital for SAG’s client companies. In May, 2017, SAG and he joined the investment bank and brokerage firm, Spartan Capital Securities, LLC, located in the Wall Street area of New York City. In June 2015, SAG and he joined Newbridge Securities Corporation, an independent broker dealer and investment bank, where he currently serves as Senior Managing Director. Mr. Gallo, a FINRA-licensed professional, focuses on providing strategic, capital markets, and financial advice to micro-cap public and private companies. From July 2016 to April 2017, Tom served as a Director of Viatar CTC Solutions Inc., a Lowell, Massachusetts-based medical technology company. From 2010 to 2014, he worked with a select group of high net-worth investors as their Investment Advisor, as well as commencing to work with public companies as a Strategic Advisor and Investment Banker at GSS Capital. Mr. Gallo earned a B.S. in Business Management & Marketing from Fordham University College of Business Administration in 1983. We believed that Tom’s 25 years of Wall Street-based experience will provide a capital markets benefit to us, our stockholders, and our Board of Directors. Mr. Gallo commenced his service as a director on May 19, 2017, upon his receipt of approval from Spartan to serve as a director.
At a Special Meeting of our Board of Directors held on June 1, 2017, our Board of Directors approved the nomination of the Judith Hammerschmidt to fill a vacancy on our Board.
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Judith Hammerschmidt, 62, has spent the last 35 years as an international attorney. She began her career as a Special Assistant to the Attorney General of the United States, focusing on international matters of interest to the US government, including negotiating treaties and agreements with foreign governments. She then joined Dickstein, Shapiro & Morin, LLP, a Washington, DC firm, where she represented companies around the world as they expanded internationally in high regulated environments. Her clients included Guess? Inc., Pfizer Inc., Merck & Co., Inc., the Receiver for BCCI Bank of the United Arab Emirates, Recycled Paper Products, Inc., and Herbalife International Inc. She provided structuring, growth and regulatory advice for these and other companies. She joined Herbalife International as Vice President and General Counsel of Europe in 1994, becoming Executive Vice President and International Chief Counsel in 1996. In 2002, she was part of the management group that sold Herbalife. Since that time, she has served as outside counsel to a series of entrepreneurial companies looking to expand internationally, primarily in the food and drug/nutritional supplements space. In addition, Ms. Hammerschmidt was a Principal in JBT, LLC, a privately held company that owned “mindful dining” restaurants in the Washington, DC area. Those properties were sold in 2010. She continues to act as outside counsel for small companies while serving as a director.
At a Special Meeting of our Board of Directors held on June 14, 2017, our Board of Directors approved the following individuals to serve on various committees, all as noted below:
Compensation Committee
Thomas A. Gallo, Chair
Judith Hammerschmidt
Andrew Kantarzhi
Ned L. Siegel
Audit Committee
Charles K. Miller, Chair
Thomas A. Gallo
Ned L. Siegel
Nominating & Governance Committee
Judith Hammerschmidt, Chair
Andrew Kantarzhi
Ned L. Siegel
In anticipation of the possibility of certain changes in the composition of our board and our executive suite, our Board of Directors, at a Special Meeting held on July 28, 2017, named Ned Siegel, our long-standing, non-executive Chairman of the Board, as our Executive Chairman for the four-month period that expires on November 30, 2017. As of the date of this Report, we have extended Mr. Siegel’s term as our Executive Chairman.
On August 11, 2017, Jeff Goh, who served as our Chief Executive Officer and one of our directors, tendered his resignation. Mr. Goh is a former director and executive officer of PCH and, as of the date of his resignation, remained an owner of one-third of the outstanding capital stock of PCH. Prior to the tendering of his resignation, Mr. Goh and one of the members of our Board’s special committee had engaged in certain conversations in respect of Mr. Goh’s future with us or the methods by which he might exit from his positions with us. As a result of those conversations ultimately not coming to a mutually satisfactory conclusion, Mr. Goh tendered his resignation from all positions with us. We believe that Mr. Goh’s resignations as an executive officer and a director were caused, in whole or in part, by his belief that he was no longer permitted to fulfill his position as our chief executive officer and his concern that he was not being compensated in a manner consistent with his understandings of our obligations to him. As noted in the resignation letter that he provided us, Mr. Goh has filed a wage claim with the Department of Industrial Relations, Division of Labor Standards Enforcement.
Thereafter, effective August 16, 2017, Clint Pyatt, who served as our president and one of our directors, resigned from those positions in connection with our agreement of that date (the “Agreement”) with, among others, him, our then-51%-owned subsidiary, PCH Investment Group, Inc. (“PCH”), of which he was an executive officer, director, and a principal. For information concerning the Agreement, please see PCH Investment Group, Inc. – San Diego Project Termination, above. In connection with the Agreement and his resignation, there were no disagreements between Mr. Pyatt and us.
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Summaries
The foregoing descriptions of agreements are merely summaries thereof and, if any of such agreements are deemed to be material agreements, they shall be filed by the Company as exhibits to this Report, or incorporated by reference to previously filed Reports.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Executive Chairman, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our current Executive Chairman (our “Certifying Officer”), the effectiveness of our disclosure controls and procedures as of December 31, 2016, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of December 31, 2016, our disclosure controls and procedures were not effective.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Report on Internal Controls Over Financial Reporting
This Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
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| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Below are the names and certain information of the Company’s executive officers and directors.
| NAME | AGE | POSITION | ||||
| Ned L. Siegel | 67 | Executive Chairman | ||||
| Charles K. Miller | 57 | Director | ||||
| Andrew Kantarzhi | 35 | Director | ||||
| Judith Hammerschmidt | 64 | Director | ||||
| Thomas A. Gallo | 57 | Director | ||||
Ned L. Siegel
Ambassador Siegel has served on our Board of Directors since April 2014. He was appointed as Chairman of the Board on December 17, 2014 and Executive Chairman on July 28, 2017. Ambassador Siegel has served as President of The Siegel Group, Inc. a real estate development, management services and consulting company since September 1997. From October 2007 until January 2009, he served as the United States Ambassador to the Commonwealth of The Bahamas. Prior to his Ambassadorship, in 2006 he served with Ambassador John R. Bolton at the United Nations in New York, as the Senior Advisor to the U.S. Mission and as the United States Representative to the 61st Session of the United Nations General Assembly. From 2003-2007, he served on the Board of Directors of the Overseas Private Investment Corporation (OPIC), which was established to help U.S. businesses invest overseas, fostering economic development in new and emerging markets, complementing the private sector in managing the risk associated with foreign direct investment and supporting U.S. foreign policy. He received a BA from the University of Connecticut in 1973 and JD from the Dickinson School of Law in 1976. In December 2014, he received an honorary degree of Doctor of Business Administration from the University of South Carolina. Ambassador Siegel also serves on the Board of Directors of PositiveID Corp., Viscount Systems, Inc., and Gopher Protocol, Inc. He previously served on the Board of Directors of Healthwarehouse.com and Baltia Air Lines, Inc. dba USGlobal Airways. Ambassador Siegel’s managerial experience and contacts with government agencies qualifies him to serve on the Company’s Board of Directors. The Company believes that Ambassador Siegel is well-qualified to serve on our Board of Directors due to his management and leadership experience.
Charles K. Miller
Mr. Miller has served on our Board of Directors since May 16, 2017. He was the the Chief Financial Officer of Tekmark Global Solutions from September 1997 to June 2017. He was elected to the Board of Directors of InterCloud Systems, Inc. (OTCQB: ICLD), in November 2012. Intercloud is a New Jersey-based global single-source provider of value-added services for both corporate enterprises and service providers. Mr. Miller received his B.S. in accounting and his M.B.A. from Rider College and is a Certified Public Accountant in New Jersey. The Company believes that Mr. Miller’s 30+ years’ of financial experience will provide a financial stability benefit to the Company, its stockholders, and the Board of Directors.
Andrew Kantarzhi
Mr. Kantarzhi has served on our Board of Directors since May 16, 2017. He is a Sales and Marketing veteran, with over a decade in assisting multi-national corporations with developing new business and growing sales and revenue. Andrew previously acted as Director of Sales and Marketing at the International Management Group for one of its flagship properties in Central Asia. In 2010, Mr. Kantarzhi acted as Eurasian Natural Resource Company’s (LSE: ENRC; KASE: GB_ENRC) Sales Manager for ENRC’s Non-Core Materials Division, heading its Astana Sales Office. In 2011, he was promoted to Director of Sales and Marketing of ENRC’s Ferrosilicon Division in Moscow, Russia, where the division set record unit price sales and increased market share throughout the entire Russian Federation. Commencing in 2013, Mr. Kantarzhi has managed accounts for Traxys North America’s Base Metals Division at its Manhattan, NY headquarters. Traxys is a commodities trading firm and a member of the Carlyle Group. Since 2016, he has acted as Chief Commercial Officer for OC Testing, LLC, a New York-based company which invests in and develops Cannabis-related research and testing facilities. The Company believes that Mr. Kantarzhi’s experience in sales and marketing, including experience in the cannabis industry, will provide a benefit to the Company, its stockholders, and the Board by his providing the Company with significant guidance as it enters the next phase of its sales and marketing development.
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Judith Hammerschmidt
Ms. Hammerschmidt has served on our Board of Directors since June 1, 2017. She has spent the last 35 years as an international attorney. She began her career as a Special Assistant to the Attorney General of the United States, focusing on international matters of interest to the US government, including negotiating treaties and agreements with foreign governments. She then joined Dickstein, Shapiro & Morin, LLP, a Washington, DC firm, where she represented companies around the world as they expanded internationally in high regulated environments. Her clients included Guess? Inc., Pfizer, Merck, the Receiver for BCCI Bank of the United Arab Emirates, Recycled Paper Products, Inc., and Herbalife International. She provided structuring, growth and regulatory advice for these and other companies. She joined Herbalife International as Vice President and General Counsel of Europe in 1994, becoming Executive Vice President and International Chief Counsel in 1996. In 2002, she was part of the management group that sold Herbalife. Since that time, she has served as outside counsel to a series of entrepreneurial companies looking to expand internationally, primarily in the food and drug/nutritional supplements space. In addition, Ms. Hammerschmidt was a Principal in JBT, LLC, a privately held company that owned “mindful dining” restaurants in the Washington, DC area. Those properties were sold in 2010. She continues to act as outside counsel for small companies while serving on our board. The Company believes that Ms. Hammerschmidt’s legal experience will provide a benefit to the Company, its stockholders and the Board of Director.
Thomas A. Gallo
Mr.
Gallo has been serving on Notis’ Board of Directors since May 16, 2017. Mr. Gallo is an accomplished Wall Street executive
and entrepreneur with over 25 years of experience. Recently, Tom was the founder and Senior Managing Director of The Strategic
Advisory Group (“SAG”). For the past five years at SAG, Mr. Gallo has worked with CEO’s and
board members of public and private companies where he has advised on business development, strategic planning, change management,
team building, as well as investment banking and raising capital through his association with various broker-dealers. Prior to
that, he was a co-founder of Moneta Capital Advisors, a merchant bank that focused on investing and advising service industry
providers. From 1991 to 2001, Mr. Gallo was a co-founder of M.S. Farrell & Co., a Wall Street investment bank and brokerage
firm where he held various C-level positions including Chairman, CEO and President. Over his career, he has held a number of board
positions at both public and private companies in industries such as medical devices and motorsports. He earned his degree from
the College of Business Administration at Fordham University in the Bronx, NY. Notis believes that Mr. Gallo’s industry
experience will provide a benefit to Notis, its stockholders and the Board of Directors.
There are no family relationships between any of our executive officers and directors.
Board Leadership Structure and Role in Risk Oversight
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
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Terms of Office
The Company’s directors are elected to hold office until the next annual meeting of shareholders or until their successors have been duly elected and qualified.
The Company’s officers are appointed by the Company’s Board of Directors and hold office until removed by the Board.
Involvement in Certain Legal Proceedings
In June 2017, Mr. Gallo was contacted by FINRA regarding a customer complaint filed with FINRA through its website. The customer was an experienced accredited investor, who, in August 2014, invested in two bridge loans, losing approximately $33,000 in the last loan. The client has not made any demand of Mr. Gallo. Mr. Gallo has denied any wrongdoing, but FINRA is seeking a fine, suspension, and restitution to the customer. Mr. Gallo is cooperating with FINRA in its exam and working to resolve the matter.
To our knowledge, except as set forth above, our directors and executive officers have not been involved in any of the following events during the past ten years:
| 1. | any bankruptcy petition filed by or against such person or 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 or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; | |
| 4. | being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| 5. | being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| 6. | being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Audit Committee
Our Audit Committee consists of Charles K. Miller (Chair), Thomas A. Gallo and Ned L. Siegel. The Board of Directors has determined (1) that Charles K. Miller qualifies as an “audit committee financial expert,” as defined by the SEC in Item 407(d)(5) of Regulation S-K; and (2) that, other than Mr. Siegel, all members of the Audit Committee are “independent” under the independence requirements of Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc. and meet the criteria for independence as set forth in the Exchange Act. The committee monitors our compliance with our obligations under the assessment of internal control over financial reporting. There were no Audit Committee Meetings in 2016.
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Compensation Committee
Our Compensation Committee consists of Thomas A. Gallo (Chair), Judith Hammerschmidt, Andrew Kantarzhi and Ned L. Siegel. The Board of Directors has determined that, with the exception of Mr. Siegel, all members of the Compensation Committee are “independent” under the independence requirements of Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc. The committee reviews and approves the compensation of all of our other executive officers. There were no Compensation Committee Meetings in 2016.
Nominating & Governance Committee
Our Nominating & Governance Committee consists of Judith Hammerschmidt (Chair), Andrew Kantarzhi and Ned L. Siegel. The Board of Directors has determined that, with the exception of Mr. Siegel, all members of the Nominating & Governance Committee are “independent” under the independence requirements of Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc. The committee oversees the selection of persons to be nominated to serve on our Board of Directors. The nominating committee considers persons identified by its members, management, stockholders, investment bankers and others. There were no Nominating & Governance Committee Meetings in 2016.
Special Committee
Our Special Committee consists of Ned L. Siegel (Chair), Andrew Kantarzhi, Charles K. Miller and Tom Gallo, which oversees the general operation of the Company.
Code of Ethics
The Board has established a corporate Code of Ethics which qualifies as a “code of ethics” as defined by Item 406 of Regulation S-K of the Exchange Act and applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and all persons performing similar functions. Among other matters, the Code of Ethics is designed to deter wrongdoing and to promote:
| ● | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| ● | full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications; | |
| ● | compliance with applicable governmental laws, rules and regulations as well as the rules and regulations of any self-regulatory organizations of which the Company is a member; | |
| ● | prompt internal reporting of violations of the Code of Ethics to appropriate persons identified in the code; and | |
| ● | accountability for adherence to the Code of Ethics. |
If we amend our Code of Ethics as it applies to the principal executive officer, principal financial officer, principal accounting officer or controller (or persons performing similar functions) or grant a waiver from any provision of the Code of Ethics to any such person.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and significant stockholders (defined by statute as stockholders beneficially owning more than 10% of our common stock) to file with the SEC initial reports of beneficial ownership, and reports of changes in beneficial ownership, of our common stock. Directors, executive officers and significant stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of Forms 3, 4 and 5 (and amendments thereto) filed with the SEC and submitted to us, and on written representations by certain directors and executive officers received by us, we believe that all of our executive officers, directors and significant stockholders complied with all applicable filing requirements under Section 16(a) during 2015.
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| ITEM 11. | EXECUTIVE COMPENSATION |
Summary Compensation Table
The following sets forth the compensation paid by the Company during 2016 and 2015 to the named executive officers:
| Name and Principal Position | Year | Salary | Bonus | Stock Awards (3) | All
other Compensation | Total | ||||||||||||||||||
| Ned L. Siegel (1) | 2016 | 60,000 | 279,000 | 114,000 | - | 453,000 | ||||||||||||||||||
| Executive Chairman | 2015 | - | - | - | - | - | ||||||||||||||||||
| C. Douglas Mitchell | 2016 | - | - | 17,500 | - | 17,500 | ||||||||||||||||||
| Former Chief Financial Officer | 2015 | 197,500 | 43,916 | 137,754 | 11,250 | 390,420 | ||||||||||||||||||
| Jeffrey Goh | 2016 | 244,995 | 100,000 | 135,000 | 479,995 | |||||||||||||||||||
| Former President and Chief | 2015 | 200,000 | - | 240,973 | 80,000 | 520,973 | ||||||||||||||||||
| Executive Officer | ||||||||||||||||||||||||
| Mitch Lowe | 2016 | 60,000 | - | 65,000 | - | 125,000 | ||||||||||||||||||
| Manuel Flores | 2016 | 60,000 | - | 3,998 | - | 63,998 | ||||||||||||||||||
| Clint Pyatt (2) | 2016 | 150,000 | - | 120,000 | - | 270,000 | ||||||||||||||||||
| Former Chief Operating Officer | 2015 | - | - | - | - | - | ||||||||||||||||||
| (1) | Ambassador Siegel entered into a Director Retention Agreement with the Company and its majority shareholder on April 1, 2014. The term expires on March 31, 2016, unless Ambassador Siegel is elected to a subsequent term, which would cause the term of the agreement to extend until March 31, 2017. Pursuant to the agreement, Ambassador Siegel receives a fee of $4,000 per month during the term, which may be adjusted to $5,000 per month as determined by the CEO of the Company and Ambassador Siegel. Ambassador Siegel received the following award under the Company’s 2014 Equity Incentive Plan pursuant to the agreement: during the first year, Ambassador Siegel received 168,750 shares of restricted stock vested over a six month period beginning September 1, 2014 and 56,250 restricted stock units which vested over a six month period beginning September 1, 2014. For each of his second and third year of service (if elected for a third year), Ambassador Siegel will receive 100,000 shares of stock, comprising 75,000 shares of restricted stock vesting quarterly over a 12 month period, and 25,000 restricted stock units vesting quarterly over a 12 month period. in recognition of Ambassador Siegel’ additional extraordinary services during 2015, Ambassador Siegel also received an additional bonus in the amount of $371,666 with 20% of the bonus paid in the Company’s common stock at $.0621 per share (share price on the date of grant) for a total grant of 1,196,988 shares under the Company’s 2014 Equity Incentive Plan with the remainder paid in cash including $50,000 already paid with the remainder paid at $30,918 per month from August 2015 until March 2016. In December 2014, the Director Retention Agreement was amended so that if the director was removed prior to March 31, 2016, all his unvested securities shall immediately vest and all remaining director fees for the term of the Director Retention Agreement would be paid at the time of the removal. On January 6, 2016, the Company entered into a Second Amendment to the Director Retention Agreement pursuant to which Ambassador Siegel would be entitled to a quarterly director fee of $15,000 and 325,000 shares of the Company’s common stock for each quarter that he served on the Board. On December 31, 2017, the Board approved the consolidation of all unpaid compensation as follows: (i) reprice of 4,009,222 warrants at $0.0001 per share; (ii) 399,320,000 shares of common stock to be issued upon increasing of the Company’s authorized capital stock; (iii) $96,000 cash payment; and (iv) $330,000 of common stock (3,330,000,000 shares of common stock). |
| (2) | The amount listed in the Stock Awards column reflects the fair value of the stock awards granted in accordance with FASB ASC Topic 718, which calls for the stock or restricted stock units to be valued based on the market price of the Company’s common stock on the grant date. See Note 15 of our audited financial statements for the year ended December 31, 2015 included in this Annual Report on Form 10-K. |
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Outstanding Equity Awards at December 31, 2016
| Option Awards | ||||||||||||||||||||
| Name | Number
of securities underlying unexercised options(#) exercisable | Number
of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | |||||||||||||||
| Stock Awards | ||||||||||||||||
| Name | Number
of shares or units of stock that have not vested(#) | Market value of shares of units of stock that have not vested($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)(1) | ||||||||||||
| Jeff Goh | 7,142,858 | 2,143 | ||||||||||||||
| (1) | Value based on closing price of the Company’s common stock on December 31, 2016 |
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Except as set forth above there were no outstanding unexercised options; stock that has not vested, or equity incentive plan awards for named executive officers outstanding as of December 31, 2016.
Compensation of Directors
Ms. Hammerscmidt, Mr. Miller and Mr. Kantarzhi currently each receives $2,500 per month for their services. Ambassador Siegel receives $5,000 per month as Chairman and Executive Chairman. In addition, each director receives common stock of the Company equal to 1% of the total outstanding, subject to anti-dilution protections.
In August 2017, we entered into an engagement agreement for consulting services with Mr. Gallo, a member of our Board of Directors, pursuant to which Mr. Gallo will provide certain management services, including public company compliance and other C-level services as required by the Company. Under the engagement, Mr. Gallo is entitled to receive a monthly fee of $20,000 commencing August 1, 2017, $10,000 bonus when the Company is fully reporting, $100,000 of stock options on August 1, 2017, and $200,000 of stock options upon achieving certain milestones. The engagement was for a term of 4 months and was extended to August 31, 2018.
| 2016 Director Compensation Table | ||||||||||||||||
| Fees
earned |
Stock Awards (1) |
All
Other Compensation |
Total | |||||||||||||
| Clint Pyatt(2) | 150,000 | 120,000 | 270,000 | |||||||||||||
| J. Mitchell Lowe(4) | 60,000 | 65,000 | 125,000 | |||||||||||||
| Manuel Flores(4) | 60,000 | 3,998 | 63,998 | |||||||||||||
| Denis Dariev | 78,120 | 40,000 | 118,120 | |||||||||||||
| Colby Hunter | - | 40,000 | 40,000 | |||||||||||||
| (1) | The amounts listed in the Restricted Stock Awards and Restricted Stock Unit Awards column reflect the fair value of the stock awards granted in accordance with FASB ASC Topic 718, which calls for the restricted stock or restricted stock units to be valued based on the market price of the Company’s common stock based on the grant date. See Note [ ] of our audited financial statements for the year ended December 31, 2016 included in this Annual Report on Form 10-K. |
| (2) | On August 16, 2017, Messrs. Clint Pyatt and Jeff Goh, notified the Company that they would resign from the Company’s Board of Directors effective immediately. |
| (3) | On [ ], Mr. Douglas Mitchell, notified the Company that he would resign from the Company’s Board of Directors effective immediately. |
| (4) | On May 16, 2017, Messrs. Manuel Flores and Mitchel Lowe, notified the Company that they would resign from the Company’s Board of Directors effective immediately. |
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information, as of November 9, 2018 with respect to the beneficial ownership of the outstanding common stock of the Company by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, to our knowledge each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
The percentage of class beneficially owned is based on 10,000,000,000 shares of the Company’s commons stock issued and outstanding as of October 29, 2018. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants or the conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
| Name | Number
of Shares Beneficially Owned | Percentage
of Outstanding Shares Beneficially Owned | ||||||
| Ned L. Siegel (1) | 13,677,001 | * | ||||||
| Charles K. Miller (2) | - | - | ||||||
| Andrew Kantarzhi (3) | - | - | ||||||
| Judith Hammerschmidt (4) | - | - | ||||||
| Thomas A. Gallo (5) | - | - | ||||||
| All officers and directors as a group (5 persons) | - | - | ||||||
| * | Less than 1%. |
| (1) | Includes 13,994,788 share of the Company’s common stock and does not include 3,729,320,000 shares of Company’s common stock, warrants to purchase 4,009,222 shares of Company’s common stock that have been granted by the Board of Directors but have not been issued due to the lack of authorized Company’s common stock. Also excludes the Company’s common stock that Mr. Siegel is entitled to receive shares of Company’s common stock equal to 1% of the total outstanding Company’s common stock when the Company increases its authorized common stock. |
| (2) | Excludes the Company’s common stock that Mr. Miller is entitled to receive shares Company’s common stock equal to 1% of the total outstanding Company’s common stock when the Company increases its authorized common stock. |
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| (3) | Excludes the Company’s common stock that Mr. Kantarzhi is entitled to receive shares of Company’s common stock equal to 1% of the total outstanding Company’s common stock when the Company increases its authorized common stock. |
| (4) | Excludes the Company’s common stock that Ms. Hammerschmidt is entitled to receive shares of Company’s common stock equal to 1% of the total outstanding Company’s common stock when the Company increases its authorized common stock. |
| (5) | Excludes the Company’s common stock that Mr. Gallo is entitled to receive shares Company’s common stock equal to 1% of the total outstanding Company’s common stock when the Company increases its authorized common stock. |
The address of all persons listed is c/o Notis Global, Inc., 1715 Highway 35 North, Suite 101, Middletown, New Jersey 07748.
Equity Compensation Plan Information
In August 2014, the Company adopted the Notis Global, Inc. 2014 Equity Incentive Plan (the “Plan”), under which up to 2,000,000 shares of common stock are authorized for issuance to directors, officers, employees and consultants of the Company. On June 28, 2015, the Board of Directors amended the Plan to increase the aggregate number of shares that may be issued under the plan to 15,000,000 shares.
The following table sets forth information concerning our Notis Global, Inc. 2014 Equity Incentive Plan, and individual compensation arrangements with employees or consultants of the Company as of December 31, 2016.
| Plan Category | Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted- average exercise price of outstanding options, warrants and rights (b) | Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plan approved by security holders | — | $ | — | — | ||||||||
| Equity compensation plans not approved by security holders | ||||||||||||
| Notis Global 2014 Equity Incentive Plan | 7,346,090 | $ | 0.05 | 4,495,986 | ||||||||
| Total | 7,346,090 | $ | 0.05 | 4,495,986 | ||||||||
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
During the first quarter of 2015, the Company issued two convertible notes to one of its directors in the aggregate principal amount of $100,000 and one convertible note to another of its director in the aggregate principal amount of $50,000. These notes were all converted to common stock during the third quarter of 2015.
During the first quarter of 2016, the Company issued three convertible notes to one of its directors in the aggregate principal amount of $75,000 and one convertible note to another of its director in the aggregate principal amount of $25,000, plus a convertible note to each of its other two directors, in the amount of $2,500 each. See Note 8 for a description of these notes.
In the second quarter of 2016, the Company issued promissory notes to all of the directors, in exchange for past unpaid cash bonuses, board compensation and expenses. See Note 8 for a description of these notes.
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| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Audit Fees
During the fiscal year ending December 31, 2015, Marcum LLP was the Company’s independent registered public accounting firm and remained so through April 21, 2017. Effective April 21, 2017, the Company engaged Sadler, Gibb & Associates, LLC as its independent registered public accounting firm for the Company’s fiscal year ending December 31, 2016.
The following table sets forth fees billed to us by our independent registered public accounting firms for the fiscal years ended December 31, 2016 and December 31, 2015.
| Sadler, Gibb & Associates, LLC | 2016 | 2015 | ||||||
| Audit Fees | $ | 150,000 | $ | - | ||||
| Audit-Related Fees | $ | - | $ | - | ||||
| Tax Fees | $ | - | $ | - | ||||
| All Other Fees | $ | - | $ | - | ||||
| Marcum LLP | 2016 | 2015 | ||||||
| Audit Fees | $ | 397,105 | $ | 338,828 | ||||
| Audit-Related Fees | $ | - | $ | 145,507 | ||||
| Tax Fees | $ | - | $ | - | ||||
| All Other Fees | $ | - | $ | - | ||||
| (1) | Audit fees consist of fees for the audit of the Company’s financial statements and review of financial statements included in the Company’s quarterly reports. |
| (2) | Audit-related fees include costs incurred for reviews of registration statements and consultations on various accounting matters in support of the Company’s financial statements. |
| (3) | Tax fees consist of fees for tax compliance matters. |
| (4) | The Company incurred no additional fees for other products and services in the 2016 and 2015 fiscal years. |
Policy for Pre-Approval of Independent Auditor Services
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditor. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the specific service or category of service and is generally subject to a specific budget. The independent auditor and management are required to periodically communicate to the Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
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| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | The following documents are filed as part of this Report: | |
| (1) | Financial Statements | |
| (2) | Financial Statements Schedule | |
All financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required, or the required information is presented in the financial statements and notes thereto in is Item 15 of Part IV below.
| (3) | Exhibits |
We hereby file as part of this Report the exhibits listed in the attached Exhibit Index. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates or on the SEC website at www.sec.gov.
EXHIBIT INDEX
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| 92 |
| 93 |
| 94 |
| 95 |
| 96 |
| (1) | Incorporated by reference from the Registrant’s Registration Statement on Form 10 file no. 000-54928, originally filed on April 10, 2013. |
| (2) | Incorporated by reference from the Registrant’s Registration Statement on Form S-1, as amended, file no. 333-189993, originally filed on July 17, 2013. |
| (3) | Incorporated by reference from Amendment No. 1 to the Registrant’s Registration Statement on Form 10 file no. 000-54928, originally filed on May 13, 2014. |
| (5) | Incorporated by reference from Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on July 25, 2014. |
| (6) | Incorporated by reference from the Registrant’s Amendment to Current Report on Form 8-K/A (File No. 000-54928) filed with the Commission on July 29, 2014. |
| (7) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on July 29, 2014. |
| (8) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on August 22, 2014. |
| (9) | Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on September 24, 2014. |
| (10) | Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on December 22, 2014. |
| (11) | Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on December 30, 2014. |
| (12) | Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on January 26, 2015. |
| (13) | Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on February 2, 2015. |
| (14) | Incorporated by reference to the Amendment No. 1 to the Registrant’s Registration Statement on Form 10 File No. 000-54928, filed with the Commission on March 31, 2014. |
| (15) | Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-198441), filed with the Commission on August 28, 2014. |
| (16) | Incorporated by reference to Amendment No. 1 to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015. |
| (17) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on October 21, 2015. |
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| (18) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015. |
| (19) | Incorporated by reference to Amendment No. 2 to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015. |
| (20) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on February 6, 2015. |
| (21) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-54928) filed with the Commission on March 26, 2015. |
| (22) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on April 3, 2015. |
| (23) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on April 24, 2015. |
| (24) | Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-203299) filed with the Commission on May 11, 2015. |
| (25) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on August 14, 2015. |
| (26) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on July 7, 2015. |
| (27) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on August 19, 2015. |
| (28) | Incorporated by reference to the Registrant’s first Current Report on Form 8-K (File No. 000-54928) filed with the Commission on August 26, 2015. |
| (29) | Incorporated by reference to the Registrant’s second Current Report on Form 8-K (File No. 000-54928) filed with the Commission on August 26, 2015. |
| (30) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on September 11, 2015. |
| (31) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on September 18, 2015. |
| (32) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on September 28, 2015. |
| (33) | Incorporated by reference to the Registrant’s first Current Report on Form 8-K (File No. 000-54928) filed with the Commission on October 2, 2015. |
| (34) | Incorporated by reference to the Registrant’s second Current Report on Form 8-K (File No. 000-54928) filed with the Commission on October 2, 2015. |
| (35) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on November 12. 2015. |
| (36) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on November 17, 2015. |
| 98 |
| (37) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on December 29, 2015. |
| (38) | Incorporated by reference from Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-207464) filed with the Commission on January 20, 2016. |
| (39) | Incorporated by reference from the Registrant’s Amendment to Current Report on Form 8-K/A (File No. 000-54928) filed with the Commission on January 20, 2016. |
| (40) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on February 11 , 2016. |
| (41) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on February 23, 2016. |
| (42) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on March 18, 2016. |
| (43) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on March 22, 2016. |
| (44) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on January 28, 2016. |
| (45) | Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-207464) filed with the Commission on December 1, 2015. |
| (46) | Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-207464) filed with the Commission on October 16, 2015. |
| (47) | Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-207464) filed with the Commission on December 1, 2015. |
| (48) | Incorporated by reference to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-207464) filed with the Commission on December 10, 2015. |
| (49) | Incorporated by reference to Registrant’s Amendment No. 1 to Annual Report on Form 10-K (File No. 000-54928) filed with the Commission on April 29, 2016. |
| (50) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on May 3, 2016. |
| (51) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on May 20, 2016. |
| (52) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on October 21, 2016. |
| (53) | Incorporated by reference to Registrant’s Amendment No. 1 to the Current Report on Form 8-K (File No. 000-54928), filed with the Commission on May 5, 2017. |
| (54) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on August 23, 2017. |
| (55) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on December 21, 2017. |
| (56) | Incorporated by reference to the Registrant’s Annual report on Form 10-A (File No. 000-54928) filed with the Commission on April 13, 2016 |
| + | Management compensatory arrangement |
| ^ | Confidential treatment granted |
| *** | Furnished herewith |
| Item 16. | Form 10-K Summary |
Not applicable.
| 99 |
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.
| Notis Global, Inc. | ||
| Date: January 7, 2019 | By: | /s/ Ned L. Siegel |
| Ned L. Siegel | ||
| Executive Chairman | ||
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | ||
| 100 |
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ned L. Siegel, his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.
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.
| /s/ Ned L. Siegel | January 7, 2019 | |||
| Ned L. Siegel | Executive Chairman | |||
| /s/ Charles K. Miller | January 7, 2019 | |||
| Charles K. Miller | Director | |||
| /s/ Andrew Kantarzhi | January 7, 2019 | |||
| Andrew Kantarzhi | Director | |||
| /s/ Judith Hammerschmidt | January 7, 2019 | |||
| Judith Hammerschmidt | Director | |||
| /s/ Thomas Gallo | January 7, 2019 | |||
| Thomas Gallo | Director |
| 101 |