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EX-10.7 - EXACTUS, INC. 2019 EQUITY INCENTIVE PLAN - Exactus, Inc. | ex10-7.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
8-K
Amendment No. 1
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of Report
(Date of earliest event reported): January 8, 2019
EXACTUS, INC.
(Exact name of the
registrant as specified in its charter)
Nevada
|
|
000-55828
|
|
27-1085858
|
(State or other
jurisdiction of incorporation)
|
|
(Commission File
Number)
|
|
(IRS Employer
Identification No.)
|
4870 Sadler Road, Suite 300, Glen Allen, Virginia
23060
(Address of
principle executive offices) (Zip code)
Registrant’s
telephone number, including area code: (804) 205-5036
______________________________________________________
(Former name or
address if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the Registrant
under any of the following provisions (see General Instruction A.2
below):
[ ] Written
communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425).
[ ] Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12).
[ ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b)).
[ ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c)).
Indicate by check
mark whether the registrant is an emerging growth company as
defined in as defined in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the Securities
Exchange Act of 1934 (§240.12b-2 of this
chapter).
[ ] Emerging growth
company
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
Explanatory Note: This Amendment No. 1 to our Current Report
on Form 8-K filed January 14, 2019 (the “Original 8-K”)
is being filed to: (i) correct an error regarding the number of
options awarded to our newly-appointed directors as discussed in
Item 5.02; (ii) correct the shareholder voting totals and related
figures in Item 5.07; and (iii) to replace Exhibit 10.7, which
contained an incorrect version of our 2019 Equity Incentive Plan.
All other aspects of the Original 8-K remain
unchanged.
SECTION 1 – REGISTRANT’S BUSINESS AND
OPERATIONS
Item 1.01 Entry into a Material Definitive
Agreement.
Exactus, Inc.
Exactus,
Inc. (the “Company”, “Exactus”,
“we”, “our” or “us”) is a life
sciences company pursuing opportunities in two distinct business
segments, point of care diagnostics and Cannabidiol
(“CBD”).
Cannabidiol (CBD) Products
Background.
Cannabidiol (CBD)
is a phyto-cannabinoid discovered in 1940 and initially thought not
to be psychoactive. It is one of at least 113 cannabinoids
identified in hemp plants, accounting for up to 40% of the plant's
extract. Our U.S. based activities will be organized through our
largest shareholder, Ceed2Med, LLC (“C2M”), who will
oversee raw material supply chain, raw material processing, product
development, manufacturing, testing, sales and marketing. We will
continue to scale-up our sourcing and marketing capability to
accommodate new products in our pipeline. As a result, maintaining
a strong relationship with C2M, our largest shareholder, is a
material factor in our efforts to successfully establish ourselves
in this segment.
Since
December 2018 our efforts have been focused on identifying
relationships and pursuing opportunities to develop a business in
marketing and selling hemp-based CBD in a variety of forms to a
range of market sectors. The Company has no prior experience in
this rapidly evolving segment. CBD is derived from industrial hemp
and because of its low THC content is lawful in the United States
and has no measurable psychoactive effects. High quality raw
materials made from hemp are essential to produce the isolates and
distillates used to produce CBD products. Industrial hemp is
defined as plants with less than 0.3% of the psychoactive compound
THC found in cannabis plants.
Our
goal is to establish relationships that will provide availability
of supply of raw materials and finished products and to expand our
skills by aligning with committed partners who have the requisite
expertise to allow us to rapidly launch a business in hemp-based
CBD products. As we develop this business, we perceive there to be
many challenges to our success. One of the early challenges to
success is procuring adequate supply of precursor materials to
support wholesale and retail demand. Since we believe access to
supply or quality products for human and animal consumption will be
highly regulated, production to Current Good Manufacturing Practice
(cGMP) standards is of the utmost importance as regulation
increases. cGMP refers to the Current Good Manufacturing
Practice regulations enforced by the FDA. cGMP standards provide
for systems that assure proper design, monitoring, and control of
manufacturing processes and facilities. cGMP is and will be a major
challenge as the industry matures. Since shortages and uncertainty
over reliable raw material availability are paramount to becoming a
reliable provider, our initial focus is on establishing
relationships with cGMP vendors.
-2-
Ceed2Med Master
Product Development and Supply Agreement. On January 8, 2019 we entered into a Master
Product Development and Supply Agreement (the “Development
Agreement”) with C2M. C2M owns and operates cGMP facilities
located in the State of Florida and elsewhere and has the
expertise, resources, skills and experience suitable for active
phyto-cannabinoid (CBD) rich ingredients including isolates,
distillates, water soluble, and proprietary formulations. Under the
Agreement, we have been allotted a minimum of 50 and up to 300
kilograms per month, and up to 2,500 kilograms annually, of active
phyto-cannabinoid (CBD) rich ingredients for resale. We expect to
be able to offer tinctures, edibles, capsules, topical solutions
and animal health products manufactured for us by C2M to satisfy
demand for branded and white-label products that we intend to offer
to sell in the future. We expect to begin marketing during the
first quarter of 2019. C2M is seeking to continually advance CBD
technology and has established relationships in order to be able to
continue to provide innovative new solutions, including water
soluble solutions intended to be offered in the future. The
founders of C2M established their first CBD business in 2014. C2M
was issued 67,085,523 shares of our common stock, or approximately
fifty-one (51%) percent of our issued and outstanding shares of
common stock on a fully-diluted basis, on January 8, 2019 upon
effectiveness of the Development Agreement. As a result, C2M is our
largest shareholder.
Our
relationship with, and majority ownership by, C2M provides us with
access to the skills and experience of seasoned advisors with over
four years of experience with industrial hemp. C2M has
well-established relationships with leading companies in genetics
(seed), farming, processing, manufacturing, testing, and
distribution and directly leases, owns and operates several
warehouse and processing facilities within this supply chain. C2M
has farmed industrial hemp in Oregon and Kentucky, among other
places.
Initially,
because we have entered into the Development Agreement, we do not
anticipate that we will make direct investment in biomass,
processing or farming, nor in isolate, distillate, or finished
product inventory, in order to commence our CBD operations.
Currently, through C2M, we are in negotiation to establish
relationships that may permit us to commence our own farming during
2019 which will be overseen by C2M personnel. Farming and
processing industrial hemp to finished product entails significant
lead time, delay, cost and uncertainty.
Industrial
Hemp. We seek to take advantage
of an emerging worldwide trend to utilize the production of
industrial hemp in consumer products. Hemp is being used today in
cosmetics, nutritional supplements, and animal feed, where we also
intend to focus our efforts. The market for hemp-derived products
is expected to increase substantially over the next five years, and
we are endeavoring to prepare the Company to be positioned as a
significant player in the industry.
We
expect to realize revenue through our efforts, if successful, to
sell wholesale and retail finished products to third parties.
However, as we are in a start-up phase in a new business venture in
a rapidly evolving industry many of our costs and challenges are
new and unknown. In order to fund our activities, we will need to
raise additional capital either through the issuance of equity
and/or the issuance of debt. In the event we are unsuccessful in
raising sufficient additional capital to fund our efforts, we may
need to curtail, abandon or delay our plans to enter into this
segment.
-3-
Competition.
We believe a multitude (hundreds) of companies, large and small,
including mom and pops, have launched or intend to launch retail
brands and white label products containing CBD. Many of these are
offering CBD and are dependent upon third parties to provide raw
material inventory for sale. We believe this makes many of the
participants in the industry vulnerable to shortages, quality
issues, reliability and pricing variability. While we also intend
to pursue retail and white label strategies, we believe our
relationship with C2M may provide supply chain efficiencies that
will put us among the few companies that maintain a a competitive
pricing and supply advantage, poised for revenue growth during 2019
and beyond. We also intend to pursue FDA approval for all of our
activities.
The
CBD-based consumer product industry is highly fragmented with
numerous companies, many of which are under-capitalized. There are
also large, well-funded companies that currently do not offer
hemp-based consumer products including large agribusiness companies
such as Cargill and Tyson Foods, but may do so in the future and
become significant competitors.
Our
goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for CBD
end-products to be sold to humans and for animal health, such as
nutraceuticals, supplements and pet and farm products. We intend to
follow regulatorily compliant pathways by adopting practices
established by the FDA for CBD. Companies such as CV Sciences, Inc.
(OTCQB: CVSI) and recent acquisitions by TerrAscend Corp. (CSE:
TER; OTCQX: TRSSF) are considered by us to be competitors for our
planned CBD product offerings.
Non-CBD
Competition. We do not intend
to offer and do not compete with companies that offer cannabis
products containing psychoactive THC levels, such as is legal in
Canada and elsewhere, or on a state by state basis in the United
States. We may offer our products in dispensaries, but will not
compete with any medical or recreational marijuana sellers due to
legal and regulatory restrictions and uncertainty in the United
States. There are several companies developing cannabinoid
therapeutics for a range of medical indications. The cannabinoid
therapeutic area currently includes formulated extracts of the
cannabis plant and synthetic formulations. These formulations
include CBD and THC, or a combination of CBD/THC as the active
pharmaceutical ingredient. Certain companies such as GW
Pharmaceuticals, PLC have focused on plant-based CBD formulations
while other companies such as Zynerba Pharmaceuticals Inc. and
Insys Therapeutics Inc. have focused on synthetic CBD formulations.
Many of our competitors are private companies and as a result,
little or no reliable information is available. Of the publicly
reporting companies, we believe many of the CBD companies are
principally focused on high THC content marijuana. Because of
regulatory challenges facing marijuana companies in the United
States the vast majority of the companies focused on THC are
Canadian and foreign, although several have begun to pursue
domestic activities in states that permit marijuana sales. Federal
law does not generally recognize marijuana (or Hemp that exceeds
0.3% THC) as lawful, although that may change in the future.
Because of these factors our competitors that have focused on CBD
are limited.
-4-
Retail
Strategy. Our focus will
include establishing wholesale and retail distribution by
developing our own brands, selling white label branded products to
others and making acquisitions of existing businesses engaged in
marketing or sales, in both online and retail channels. We may
supply to wholesalers, retailers, and distribution centers as we
seek to launch our retail strategy. We intend to initially focus on
developing products to reach medical and health communities sold or
promoted by or through medical professionals such as internists,
dermatologists, osteopaths, chiropractors, pharmacists, and other
holistic or natural products purveyors, but will not be limited to
such efforts. We intend to focus on higher margin opportunities
utilizing online sales and sales in stores, offices or
pharmacies.
Source and
Availability of Raw Materials. C2M has historically sourced raw materials from
well-established and well-recognized hemp growers in the United
States. We have established access to C2M for their raw material
supply, and continue to explore and develop other options to ensure
that we can meet the expected demand for bulk hemp products well
into the future. Accordingly, we are heavily reliant upon the
continued success of C2M and our ability to maintain good relations
with C2M in order to have a source of raw materials and
opportunities to pursue our plans in the future. C2M is a recently
formed privately-owned limited liability company and as a result
limited information about C2M is available.
Environmental
Matters. Compliance with
federal, state and local requirements regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, have not had, nor are they expected
to have, any direct material effect on our capital expenditures,
earnings or competitive position however such factors could
indirectly affect us should they affect C2M, its business,
operations, vendors or suppliers.
Point of Care Diagnostics -
As
previously reported under “Business” in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2017,
which is incorporated herein by reference, the second segment of
our business is the development of point of care diagnostic
devices. We have since February 2016 been developing devices for
measuring proteolytic enzymes in the blood, known as the FibriLyzer
and collagenase levels in the blood, known as the MatriLyzer. We
are considering evaluating technology that could be useful as in
testing for CBD and THC levels for use in the manufacture of CBD
products. We believe our diagnostic business has been severely
hampered by a shortage of capital for development and as a result
our licenses for the underlying technology FibriLyzer and
MatriLyzer technology may be discontinued since we have received
notice of termination of certain of our licenses for non-payment of
fees. For the past 9 months we have been engaged in discussions
with third-parties regarding funding and possible third-party
merger candidate to develop our diagnostic business. We have
obtained a third-party valuation for our FibriLyzer business that
concludes the business could be worth as much as $60 million in a
merger or sale, although there can be no assurance that such value
can be realized. Accordingly, we have determined to continue to
look for partners or buyers of this business segment. If successful
we could sell or license our rights to third parties with
substantially greater resources than us.
-5-
Corporate History
We
were incorporated under the name Solid Solar Energy, Inc. in the
State of Nevada on January 18, 2008. and changed our name to Spiral
Energy Tech., Inc. in 2013. Through 2016 our Company’s
management expertise was in the field of alternative energy. We
were engaged in the business of design and development of patented
remote monitoring systems for solar and other renewable energy
systems, as well as development of solar skyports, energy demand
networks and provisioning systems for electric drones. During 2014,
we sold our patents to a third party patent assertion entity. Our
skyport, energy demand networks and provisioning systems under
development were designed to allow for charging via remotely
located solar enabled skyports facilitating drone recharging and
operation away from home ports, including seeking patent protection
for certain technology. During 2016 we exited these business to
focus on point of care diagnostics due to a lack of funds to
support further development efforts.
Advisory Board
On
January 9, 2019, we adopted an Advisory Board Charter and
established our advisory board and adopted a Code of
Ethics.
On
January 9, 2019, Emiliano Aloi was appointed to our recently
established Board of Advisors. Mr. Aloi is a co-founder of C2M and
previously served as Vice President and Director of Strategic
Development for GenCanna Global, Inc. Previously, Mr. Aloi was a
director of UY Grow and Managing Partner of Santa Maria Investment,
and Cleanenergy Group and held positions with Beverage Metrics. Mr.
Aloi is an agrobusiness expert skilled in supply and market
development.
We also plan to expand our board of advisors with additional
experts that will assist us with CBD, FDA regulatory and product
development and marketing.
No Planned Name Change
We
do not plan to change our name or adopt a new trading symbol at the
present time. The Company’s common stock is presently quoted
on OTC Markets under the symbol
“EXDI”.
RISK
FACTORS
Investing
in our securities involves a high degree of risk. Before making an
investment decision, you should carefully consider the risks,
uncertainties and forward-looking statements described under "Risk
Factors" in Item 1A of our most recent Annual Report on Form 10-K
for the fiscal year ended December 31, 2017 filed with the
Securities and Exchange Commission (the "SEC") on April 2, 2018, as
well as information incorporated by reference into this Current
Report on Form 8-K. If any of these risks were to occur, our
business, financial condition or results of operations would likely
suffer. In that event, the value of our securities could decline,
and you could lose part or all of your investment. The risks and
uncertainties we describe are not the only ones facing us.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. In
addition, our past financial performance may not be a reliable
indicator of future performance, and historical trends should not
be used to anticipate results in the future. See "Forward-Looking
Statements" below.
-6-
FORWARD-LOOKING
STATEMENTS
This
current report on Form 8-K, including the documents that we
incorporate by reference, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange
Act. Such forward-looking statements include those that express
plans, anticipation, intent, contingency, goals, targets or future
development and/or otherwise are not statements of historical fact.
These forward-looking statements are based on our current
expectations and projections about future events and they are
subject to risks and uncertainties known and unknown that could
cause actual results and developments to differ materially from
those expressed or implied in such statements.
In
some cases, you can identify forward-looking statements by
terminology, such as "expects," "anticipates," "intends,"
"estimates," "plans," "believes," "seeks," "may," "should", "could"
or the negative of such terms or other similar expressions.
Accordingly, these statements involve estimates, assumptions and
uncertainties that could cause actual results to differ materially
from those expressed in them. Any forward-looking statements are
qualified in their entirety by reference to the factors discussed
throughout this prospectus.
You
should read this current report on Form 8-K and the documents that
we reference herein and therein and have filed as exhibits
completely and with the understanding that our actual future
results may be materially different from what we expect. You should
assume that the information appearing in this current report on
Form 8-K is accurate as of the date hereof only. Because the risk
factors referred to above, as well as the risk factors incorporated
herein by reference, could cause actual results or outcomes to
differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue
reliance on any forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which it is
made, and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which factors will arise. In
addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements. We qualify all of the
information presented in this prospectus and any accompanying
prospectus supplement, and particularly our forward-looking
statements, by these cautionary statements.
An investment in the Company’s common stock involves a high
degree of risk. In determining whether to purchase the
Company’s common stock, an investor should carefully consider
all of the material risks described below, together with the other
information contained in this report and the Company’s other
public filings before making a decision to purchase the
Company’s securities. An investor should only purchase the
Company’s securities if he or she can afford to suffer the
loss of his or her entire investment.
-7-
The following risk factors are intended to supplement and should be
read along with the “Risk Factors” Under Item 1A
contained in our Annual Report on Form 10-K filed
with the SEC on April 2, 2018, and our other filings and reports
with the SEC, which risk factors are incorporated herein by
reference.
Risks Related to Our Business
We may need additional capital in the future, which could dilute
the ownership of current shareholders or we may be unable to secure
additional funding in the future or to obtain such funding on
favorable terms.
Historically,
we have raised equity capital to support and expand our operations.
To the extent that we raise additional equity capital, existing
shareholders will experience a dilution in the voting power and
ownership of their common stock, and earnings per share, if any,
would be negatively impacted. Our inability to use our equity
securities to finance our operations could materially limit our
growth. Any borrowings made to finance operations could make us
more vulnerable to a downturn in our operating results, a downturn
in economic conditions, or increases in interest rates on
borrowings that are subject to interest rate fluctuations. The
amount and timing of such additional financing needs will vary
principally depending on the timing of new product launches,
investments and/or acquisitions, and the amount of cash flow from
our operations. If our resources are insufficient to satisfy our
cash requirements, we may seek to issue additional equity or debt
securities or obtain a credit facility. If our cash flow from
operations is insufficient to meet our debt service requirements,
we could be required to sell additional equity securities,
refinance our obligations, or dispose of assets in order to meet
debt service requirements. There can be no assurance that any
financing will be available to us when needed or will be available
on terms acceptable to us. Our failure to obtain sufficient
financing on favorable terms and conditions could have a material
adverse effect on the business, prospects results of operations or
financial condition of the Company.
Even if we obtain customers, there is no assurance that we will
continue to make a profit.
Even
if we obtain customers, there is no guarantee that we will be able
to generate a profit. Because we are a small company and have
limited capital, we must limit our products and services. Further,
we are subject to raw material pricing which can erode the
profitability of our products and put additional negative pressure
on profitability. If we cannot operate profitably, we may
have to suspend or cease operations.
FDA regulation could negatively affect the hemp industry, which
would directly affect our financial condition.
The
U.S. Food and Drug Administration ("FDA") may seek expanded
regulation of hemp under the Food, Drug and Cosmetics Act of 1938.
Additionally, the FDA may issue rules and regulations including
certified good manufacturing practices, or cGMPs, related to the
growth, cultivation, harvesting and processing of hemp. Clinical
trials may be needed to verify efficacy and safety. It is also
possible that the FDA would require that facilities where hemp is
grown register with the FDA and comply with certain federally
prescribed regulations. In the event that some or all of these
regulations are imposed, we do not know what the impact would be on
the hemp industry, including what costs, requirements and possible
prohibitions may be enforced. If we or our partners are unable to
comply with the regulations or registration as prescribed by the
FDA, we and or our partners (including C2M) may be unable to
continue to operate their and our business in its current or
planned form or at all.
-8-
Changes in the Law and Development Programs
For
the first time since 1937, industrial hemp has been decriminalized
at the federal level and can be grown legally in the United States,
but on a limited basis. A landmark provision passed in the
Agricultural Act of 2014 recognizes hemp as distinct from its
genetic cousin, marijuana. Federal law now exempts industrial hemp
from U.S. drug laws to allow for crop research by universities,
colleges and state agriculture departments. The new Federal law
allows for agricultural programs for industrial hemp “in
states that permit the growth or cultivation of
hemp.”
Cannabis remains illegal under federal law, and therefore, strict
enforcement of federal laws regarding cannabis would likely result
in our inability and the inability of our customers to execute our
respective business plans.
Although
we intend to conduct our business in a manner intended to comply
with federal law by utilizing low THC industrial hemp (less than
0.3%), cannabis has historically been a Schedule I controlled
substance under the Controlled Substances Act of 1970 (the
“CSA”). On December 20, 2018 President Trump signed the
2018 Farm Bill which removed low THC hemp from Schedule I
controlled substance listing.
Even in those jurisdictions in which the
manufacture and use of medical cannabis has been legalized at the
state level, the possession, use and cultivation of cannabis all
remain violations of federal law that are punishable by
imprisonment, substantial fines and forfeiture. Moreover,
individuals and entities may violate federal law if they
intentionally aid and abet another in violating these federal
controlled substance laws, or conspire with another to violate
them. The U.S. 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
the sale, possession and use of cannabis, even for medical
purposes. We would likely be unable to execute our business plan if
the federal government were to enforce federal law regarding
cannabis and applied such laws to low THC containing hemp, or other
federal or state laws were to be extended to our business. For this
reason, we continue to believe cannabis legislation and the
enforcement of laws should be considered a significant risk factor
to our business. Confusion surrounding the nature of our products,
inaccurate or incomplete testing, farming practices and law
enforcement vigilance or lack of education could result in
confusion and our products could be intercepted and our business
interrupted, or we could be required to undertake processes that
could delay shipments, impede sales or result in seizures, proper
or not, that would be costly to rectify or remove and which could
have a material adverse effect on the business, prospects, results
of operations or financial condition of the
Company.
In
January 2018, the Department of Justice (the “DOJ”)
rescinded certain memoranda, including the so-called “Cole
Memo” issued on August 29, 2013 under the Obama
Administration, which had characterized enforcement of federal
cannabis prohibitions under the CSA to prosecute those complying
with state regulatory systems allowing the use, manufacture and
distribution of medical cannabis as an inefficient use of federal
investigative and prosecutorial resources when state regulatory and
enforcement efforts are effective with respect to enumerated
federal enforcement priorities under the CSA. The impact of the
DOJ's rescission of the Cole Memo and related memoranda is unclear,
but may result in the DOJ increasing its enforcement actions
against the state-regulated cannabis industry
generally.
-9-
Congress previously enacted an omnibus spending
bill that includes a provision prohibiting the DOJ (which includes
the Drug Enforcement Agency (the “DEA”)) from using
funds appropriated by that bill to prevent states from implementing
their medical-use cannabis laws. This provision, however, expired
on December 7, 2018, and must be renewed by Congress.
In USA
vs. McIntosh, the U.S. Court of
Appeals for the Ninth Circuit held that this provision prohibits
the DOJ from spending funds from relevant appropriations acts to
prosecute individuals who engage in conduct permitted by state
medical-use cannabis laws and who strictly comply with such laws.
However, the Ninth Circuit's opinion, which only applies to the
states of Alaska, Arizona, California, Hawaii, and Idaho, also held
that persons who do not strictly comply with all state laws and
regulations regarding the distribution, possession and cultivation
of medical-use cannabis have engaged in conduct that is
unauthorized, and in such instances the DOJ may prosecute those
individuals.
Additionally,
financial transactions involving proceeds generated by
cannabis-related conduct can form the basis for prosecution under
the federal money laundering statutes, unlicensed money transmitter
statutes and the Bank Secrecy Act. The penalties for violation of
these laws include imprisonment, substantial fines and forfeiture.
Prior to the DOJ's rescission of the “Cole Memo”,
supplemental guidance from the DOJ issued under the Obama
administration directed federal prosecutors to consider the federal
enforcement priorities enumerated in the “Cole Memo”
when determining whether to charge institutions or individuals with
any of the financial crimes described above based upon
cannabis-related activity. With the rescission of the “Cole
Memo,” there is increased uncertainty and added risk that
federal law enforcement authorities could seek to pursue money
laundering charges against entities or individuals engaged in
supporting the cannabis industry.
Federal
prosecutors have significant discretion and no assurance can be
given that the federal prosecutor in each judicial district where
we operate will not choose to strictly enforce the federal laws
governing cannabis production or distribution. Any change in the
federal government's enforcement posture with respect to
state-licensed cultivation of cannabis, including the enforcement
postures of individual federal prosecutors in judicial districts
where we operate, would result in our inability to execute our
business plan, and we would likely suffer significant losses, which
would adversely affect the trading price of our securities. We have
not requested or obtained any opinion of counsel or ruling from any
authority to determine if our operations are in compliance with or
violate any state or federal laws or whether we are assisting
others to violate a state or federal law. In the event that our
operations are deemed to violate any laws or if we are deemed to be
assisting others to violate a state or federal law, any resulting
liability could cause us to modify or cease our
operations.
Although
we believe the foregoing will be applicable to business other than
hemp-based CBD businesses there is risk that confusion or
uncertainty surrounding our products with regulated cannabis could
occur on the state or federal level and impact us. We may have
difficulty with establishing banking relationships, working with
investment banks and brokers who would be willing to offer and sell
our securities or accept deposits from shareholders, and auditors
willing to certify our financial statements if we are confused with
businesses that are in the cannabis business. Any of these
additional factors, should they occur, could also affect our
business, prospects, assets or results of operation could have a
material adverse effect on the business, prospects, results of
operations or financial condition of the Company.
-10-
Our inability to effectively manage our growth could harm our
business and materially and adversely affect our operating results
and financial condition.
Our
strategy envisions growing our business. We are actively launching
and expect to expand our product, sales, administrative and
marketing operations. Any growth in or expansion of our business is
likely to continue to place a strain on our management and
administrative resources, infrastructure and systems. As with other
growing businesses, we expect that we will need to further refine
and expand our business development capabilities, our systems and
processes and our access to financing sources. We also continue to
hire, train, supervise, and manage a significant number of new
employees. These processes are time consuming and expensive, will
increase management responsibilities and will divert management
attention. We cannot assure that we will be able to:
☐
|
expand our products
effectively or efficiently or in a timely manner;
|
☐
|
allocate our human
resources optimally;
|
☐
|
meet our capital
needs;
|
☐
|
identify and hire
qualified employees or retain valued employees; or
|
☐
|
effectively
incorporate the components of any business or product line that we
may acquire in our effort to achieve growth.
|
Our
inability or failure to manage our growth and expansion effectively
could harm our business and materially and adversely affect our
operating results and financial condition.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
processes of identifying and commercializing new products is
complex and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging trends, our business
could be harmed. We have already and may have to continue to commit
significant resources to commercializing new products before
knowing whether our investments will result in products the market
will accept. Furthermore, we may not execute successfully on
commercializing those products because of errors in product
planning or timing, technical hurdles that we fail to overcome in a
timely fashion, or a lack of appropriate resources. This could
result in competitors providing those solutions before we do and a
reduction in net sales and earnings.
-11-
The
success of new products depends on several factors, including
proper new product definition, timely completion, and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify additional new
product opportunities, develop and bring new products to market in
a timely manner, or achieve market acceptance of our products or
that products and technologies developed by others will not render
our products or technologies obsolete or
noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or expansion
could materially harm our business.
To
date, our revenue growth plans have been derived from projected
sales of our products, not actual sales or historical experience.
Our success and the planned growth and expansion of our business
depends on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
Our suppliers could fail to fulfill our orders for parts used to
assemble our products, which would disrupt our business, increase
our costs, harm our reputation, and potentially cause us to lose
our market.
We
depend on third party suppliers for materials used to assemble our
products. These suppliers could fail to produce products to our
specifications or in a workmanlike manner and may not deliver the
material or products on a timely basis. Our suppliers may also have
to obtain inventories of the necessary parts and tools for
production. Any change in our suppliers’ approach to
resolving production issues could disrupt our ability to fulfill
orders and could also disrupt our business due to delays in finding
new suppliers, providing specifications and testing initial
production. Such disruptions in our business and/or delays in
fulfilling orders could harm our reputation and could potentially
cause us to lose our market.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition, and our results of
operations.
We
may be unable to obtain intellectual property rights to effectively
protect our branding, products, and other intangible assets. Our
ability to compete effectively may be affected by the nature and
breadth of our intellectual property rights. While we intend to
defend against any threats to our intellectual property rights,
there can be no assurance that any such actions will adequately
protect our interests. If we are unable to secure intellectual
property rights to effectively protect our branding, products, and
other intangible assets, our revenue and earnings, financial
condition, or results of operations could be adversely
affected.
We
also rely on non-disclosure and non-competition agreements to
protect portions of our intellectual property portfolio. There can
be no assurance that these agreements will not be breached, that we
will have adequate remedies for any breach, that third parties will
not otherwise gain access to our trade secrets or proprietary
knowledge, or that third parties will not independently develop
competitive products with similar intellectual
property.
-12-
We will be required to attract and retain top quality talent to
compete in the marketplace.
We
believe our future growth and success will depend in part on our
ability to attract and retain highly skilled managerial, product
development, sales and marketing, and finance personnel. There can
be no assurance of success in attracting and retaining such
personnel. Shortages in qualified personnel could limit our ability
to increase sales of existing products and services and launch new
product and service offerings.
If we fail to retain key personnel and hire, train and retain
qualified employees, we may not be able to compete effectively,
which could result in reduced revenue or increased
costs.
Our
success is highly dependent on the continued services of key
management and technical personnel. Our management and other
employees may voluntarily terminate their employment at any time
upon short notice. The loss of the services of any member of the
senior management team or any of the managerial or technical staff
or members of our Advisory Board on which we principally rely for
expertise on our CBD segment may significantly delay or prevent the
achievement of product development, our growth strategies and other
business objectives. Our future success will also depend on our
ability to identify, recruit and retain additional qualified
technical and managerial personnel. We operate in several
geographic locations where labor markets are particularly
competitive, where demand for personnel with these skills is
extremely high and is likely to remain high. As a result,
competition for qualified personnel is intense, particularly in the
areas of general management, finance, engineering and science, and
the process of hiring suitably qualified personnel is often lengthy
and expensive, and may become more expensive in the future. If we
are unable to hire and retain a sufficient number of qualified
employees, our ability to conduct and expand our business could be
seriously reduced.
We face risks associated with strategic acquisitions.
As
an important part of our business strategy, we have strategically
acquired several businesses, and plan to continue strategic
acquisitions, some of which may be material. These acquisitions may
involve a number of financial, accounting, managerial, operational,
legal, compliance and other risks and challenges, including the
following, any of which could adversely affect our results of
operations:
☐
|
Any acquired
business could under-perform relative to our expectations and the
price that we paid for it, or not perform in accordance with our
anticipated timetable;
|
☐
|
We may incur or
assume significant debt in connection with our
acquisitions;
|
☐
|
Acquisitions could
cause our results of operations to differ from our own or the
investment community’s expectations in any given period, or
over the long term; and
|
☐
|
Acquisitions could
create demands on our management that we may be unable to
effectively address, or for which we may incur additional
costs.
|
-13-
Additionally,
following any business acquisition, we could experience difficulty
in integrating personnel, operations, financial and other systems,
and in retaining key employees and customers.
We
may record goodwill and other intangible assets on our consolidated
balance sheet in connection with our acquisitions. If we are not
able to realize the value of these assets, we may be required to
incur charges relating to the impairment of these assets, which
could materially impact our results of
operations.
If product liability lawsuits are successfully brought against us,
we will incur substantial liabilities.
We
face an inherent risk of product liability. For example, we may be
sued if any product we sell allegedly causes injury or is found to
be otherwise unsuitable during product testing, manufacturing,
marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing, defects in design, a
failure to warn of dangers inherent in the product, negligence,
strict liability and a breach of warranties. Claims could also be
asserted under state consumer protection acts. If we cannot
successfully defend ourselves against product liability claims, we
may incur substantial liabilities or be required to limit sales of
our products. Even successful defense would require significant
financial and management resources. Regardless of the merits or
eventual outcome, liability claims may result in:
☐
|
decreased demand
for our products;
|
☐
|
injury to our
reputation;
|
☐
|
costs to defend the
related litigation;
|
☐
|
a diversion of
management's time and our resources;
|
☐
|
substantial
monetary awards to users of our products;
|
☐
|
product recalls or
withdrawals;
|
☐
|
loss of revenue;
and
|
☐
|
a decline in our
stock price.
|
In
addition, while we continue to take what we believe are appropriate
precautions, we may be unable to avoid significant liability if any
product liability lawsuit is brought against us.
-14-
We are subject to cyber-security risks, including those related to
customer, employee, vendor or other company data and including in
connection with integration of acquired businesses and
operations.
We
use information technologies to securely manage operations and
various business functions. We rely on various technologies, some
of which are managed by third parties, to process, transmit and
store electronic information, and to manage or support a variety of
business processes and activities, including reporting on our
business and interacting with customers, vendors and employees. In
addition, we collect and store certain data, including proprietary
business information, and may have access to confidential or
personal information that is subject to privacy and security laws,
regulations and customer-imposed controls. Our systems are subject
to repeated attempts by third parties to access information or to
disrupt our systems. Despite our security design and controls, and
those of our third-party providers, we may become subject to system
damage, disruptions or shutdowns due to any number of causes,
including cyber-attacks, breaches, employee error or malfeasance,
power outages, computer viruses, telecommunication or utility
failures, systems failures, service providers, natural disasters or
other catastrophic events. It is possible for such vulnerabilities
to remain undetected for an extended period. We may face other
challenges and risks as we upgrade and standardize our information
technology systems as part of our integration of acquired
businesses and operations. We do not have contingency plans in
place to prevent or mitigate the impact of these events, and these
events could result in operational disruptions or the
misappropriation of sensitive data, and depending on their nature
and scope, could lead to the compromise of confidential
information, improper use of our systems and networks, manipulation
and destruction of data, defective products, production downtimes
and operational disruptions and exposure to liability. Such
disruptions or misappropriations and the resulting repercussions,
including reputational damage and legal claims or proceedings, may
adversely affect our results of operations, cash flows and
financial condition, and the trading price of our common
stock.
Our operating results, including net sales, gross margin and net
income (loss), as well as our stock price have varied in the past,
and our future operating results will continue to be subject to
quarterly and annual fluctuations based upon numerous factors,
including those discussed in this Item 1A and throughout this
report. Our stock price will continue to be subject to daily
variations as well. Our future operating results and stock price
may not follow any past trends or meet our guidance and
expectations.
Our
net sales and operating results, net income (loss) and operating
expenses, and our stock price have varied in the past and may vary
significantly from quarter to quarter and from year to year in the
future. We believe a number of factors, many of which are outside
of our control, could cause these variations and make them
difficult to predict, including:
☐
|
fluctuations in
demand for our products or downturns in the industries that we
serve;
|
☐
|
the ability of our
suppliers, both internal and external, to produce and deliver
products including sole or limited source components, in a timely
manner, in the quantity, quality and prices desired;
|
☐
|
the timing of
receipt of bookings and the timing of and our ability to ultimately
convert bookings to net sales;
|
☐
|
rescheduling of
shipments or cancellation of orders by our customers;
|
☐
|
fluctuations in our
product mix;
|
-15-
☐
|
the ability of our
customers' other suppliers to provide sufficient material to
support our customers' products;
|
☐
|
currency
fluctuations and stability, in particular the U.S. dollar as
compared to ,other currencies;
|
☐
|
introductions of
new products and product enhancements by our competitors, entry of
new competitors into our markets, pricing pressures and other
competitive factors;
|
☐
|
our ability to
develop, introduce, manufacture and ship new and enhanced products
in a timely manner without defects;
|
☐
|
our ability to
manage our manufacturing capacity across our diverse product lines
and that of our suppliers, including our ability to successfully
expand our manufacturing capacity in various locations around the
world;
|
☐
|
our ability to
successfully and fully integrate acquisitions, into our operations
and management;
|
☐
|
our ability to
successfully internally transfer products as part of our
integration efforts;
|
☐
|
our reliance on
contract manufacturing;
|
☐
|
our customers'
ability to manage their susceptibility to adverse economic
conditions;
|
☐
|
the rate of market
acceptance of our new products;
|
☐
|
the ability of our
customers to pay for our products;
|
☐
|
expenses associated
with acquisition-related activities;
|
☐
|
access to
applicable credit markets by us and our customers;
|
-16-
☐
|
our ability to
control expenses;
|
☐
|
potential excess
and/or obsolescence of our inventory;
|
☐
|
impairment of
goodwill, intangible assets and other long-lived
assets;
|
☐
|
our ability to meet
our expectations and forecasts and those of public market analysts
and investors;
|
☐
|
our ability and the
ability of our contractual counterparts to comply with the terms of
our contracts;
|
☐
|
damage to our
reputation as a result of coverage in social media, Internet blogs
or other media outlets;
|
☐
|
managing our
internal and third party sales representatives and distributors,
including compliance with all applicable laws;
|
☐
|
costs, expenses and
damages arising from litigation;
|
☐
|
individual
employees intentionally or negligently failing to comply with our
internal controls; and
|
☐
|
distraction of
management related to acquisition, integration or divestment
activities.
|
Our
expenses for any given quarter are typically based on expected
sales and if sales are below expectations in any given quarter, the
adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust spending quickly enough to
compensate for the shortfall. We also base our inventory levels on
our forecasted product mix for the quarter. If the actual product
mix varies significantly from our forecast, we may not be able to
fill some orders during that quarter, which would result in delays
in the shipment of our products. Accordingly, variations in timing
of sales, particularly for our higher priced, higher margin
products, can cause significant fluctuations in quarterly operating
results.
Due
to these and other factors, such as varying product mix,
quarter-to-quarter and year-to-year comparisons of our historical
operating results may not be meaningful. You should not rely on our
results for any quarter or year as an indication of our future
performance. Our operating results in future quarters and years may
be below public market analysts' or investors' expectations, which
would likely cause the price of our stock to fall. In addition,
over the past several years, U.S. and global equity markets have
experienced significant price and volume fluctuations that have
affected the stock prices of many companies involved in the
cannabis industry as well as in and outside our industry. There has
not always been a direct correlation between this volatility and
the performance of particular companies subject to these stock
price fluctuations. These factors, as well as general economic and
political conditions may have a material adverse effect on the
market price of our stock in the future.
-17-
Reliance on C2M and other Manufacturers.
The
ability of the Company to compete and grow will be dependent on it
having access, at a reasonable cost and in a timely manner, to
skilled labor, equipment, parts and CBD components. No assurances
can be given that the Company will be successful in maintaining its
required supply of skilled labor, equipment, parts and
components.
The Company relies on third parties to supply the
materials for and manufacturer the research and development of the
product candidates, principally C2M. The Company cannot provide
assurance that access to C2M for supply or expertise materials will
not be limited, interrupted, restricted in certain geographic
regions, be of satisfactory quality or be delivered in a timely
manner. In this regard, C2M will require continued access to Good
Manufacturing Practices (“GMP”) manufacturer facilities. If the Company
is unable to obtain access to a GMP manufacturer, the Company may
be restricted from operations which would have a materially adverse
effect on the business and operations of the
Company.
Transportation Risks
The
Company’s shipments, and the active ingredients used to
manufacture, requires transportation, principally across state
lines. The process may require the issuance of bills of lading or.
The issuance of bills of lading and granting and maintenance of
licenses is uncertain. Any failure in the ability to transport
product or ship finished goods via overnight delivery service or
the mail would have a material adverse effect on the business,
results of operations or financial condition of the
Company.
In the event licenses are granted, the Company may
depend on fast and efficient courier services to distribute its
product, and specific restrictions might be placed on distribution
methods and logistics due to the regulated nature of cannabinoid
based products or confusion that could occur with high THC
containing products. Any prolonged disruption of this courier
service may result in the product batches being stored outside
required temperature ranges. Inappropriate storage may damage the
product shipment resulting in delays, upon commercialization, a
partial or total loss of revenue from one or more shipments or
product delays. A partial or total loss of revenue from delays in
shipment could have a
material adverse effect on the business, results of operations or
financial condition of the Company. Rising costs associated with
the courier services used by the Company to ship its products may
also adversely impact the business of the Company and its ability
to operate profitably.
The
Company’s success may also be impacted by interstate trade
barriers to the transportation and marketing of products. If the
Company is unsuccessful in obtaining authorization to transport or
market the product candidates across interstate lines it will
materially adversely affect the Company’s business and
operations.
Employees
As
of January 9, 2019, we had a total of 4 employees. In addition to
our employees, we contract with third-parties for assistance as
consultants, advisors and independent contractors. We have no
collective bargaining agreements with our employees and none are
represented by labor unions. Management believes the Company has
good relationships with its employees.
-18-
SECTION 3 – SECURITIES AND TRADING MARKETS
Item
3.02 Unregistered
Sales of Equity Securities.
Issuance of Common Stock and Options under the Development
Agreement with C2M
As
discussed in Item 1.01, above, we issued a total of 67,085,523
shares of common stock to C2M under the terms of the Development
Agreement. In addition, pursuant to the Development Agreement and
under the terms of our 2019 Equity Incentive Plan, we issued
options to purchase a total of 6,000,000 shares of our common stock
at a price of $0.04 per share to the principals of C2M. These
options, which are exercisable for a period of 10 years, were
issued as follows:
Name
|
10 yr. options exercisable at $0.04 per share
|
Emiliano
Aloi, founder C2M
|
2,000,000
|
Jamie
Goldstein, founder C2M
|
2,000,000
|
Vladislav
Yampolsky, founder C2M
|
2,000,000
|
Total
|
6,000,000
|
The
issuance of the shares and options pursuant to the Development
Agreement is intended to be exempt under Section 4(a)(1) of the
Securities Act of 1933, as amended (the “Securities
Act”).
Note Restructuring/Exchange Agreements; Issuance New Series A
Convertible Preferred Stock
We
entered into a series of exchange agreements (the “Exchange
Agreements”) with certain holders (each a
“Holder”, and collectively the “Holders”)
of convertible debentures and promissory notes (each a
“Note”, collectively, the “Notes”)
previously issued by the Company, with various interest rates,
maturity dates and conversion prices between 2018 and 2019. We have
agreed with the Note purchasers to exchange the Notes for the
purchase price thereof (including principal, interest, default
interest, penalties and costs) in the amount of approximately
$46,840 (including waiver of any and all defaults) and relinquished
any and all other rights they may have pursuant to the Notes in
exchange for an equal amount of stated value of our newly
designated Series A Convertible Preferred Stock (the “Series
A Preferred”). Such exchange is intended to be
subject to the exemption provided by Section 3(a)(9) of the
Securities Act.
On
December 21, 2018, we filed a Certificate of Cancellation of our
previously filed Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock in order to designate
1,000,000 shares as a new Series of Preferred Stock for issuance to
former Holders of our Notes under the Exchange Agreements, and
filed a new Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock as required by
the Exchange Agreements.
-19-
Series A Convertible Preferred Stock
Pursuant
to the Series A Preferred Certificate of Designation, the Company
issued shares of Series A Preferred. Each share of Series A
Preferred has a stated value of $1.00 per share. In the
event of a liquidation, dissolution or winding up of the Company,
each share of Series A Preferred Stock will be entitled to a
payment as set forth in the Certificate of Designation. The Series
A Preferred is convertible into such number of shares of the
Company’s common stock, par value $0.0001 per share (the
“Common Stock”) equal to the Stated Value as defined in
the Certificate of Designation, divided by $0.025 per
share. Pursuant to the Exchange Agreements each holder
of Notes shall be issued Series A Preferred in the amount of the
purchase price paid for such Notes by the buyer under the Exchange
Agreement, including any penalty, interest and premium payments.
Each share of Series A Preferred entitles the holder to vote on all
matters voted on by holders of Common Stock as a single class. With
respect to any such vote, each share of Series A Preferred entitles
the holder to cast such number of votes equal to the number of
shares of Common Stock such share of Series A Preferred is
convertible into at such time, but not in excess of the conversion
limitations set forth in the Series A Preferred Certificate of
Designation. The Series A Preferred will be entitled to dividends
to the extent declared by the Company.
The
Company is prohibited from effecting the conversion of the Series A
Preferred Stock to the extent that, as a result of such conversion,
the holder would beneficially own more than 4.99%, in the
aggregate, of the issued and outstanding shares of the
Company’s common stock calculated immediately after giving
effect to the issuance of shares of common stock upon the
conversion of the Series A Preferred Stock (the “Beneficial
Ownership Limitation”). The Beneficial Ownership Limitation
may be increased by the holder up to, but not exceeding,
9.99%. Each share of Series A Preferred Stock entitles the
holder to vote on all matters voted on by holders of common stock.
With respect to any such vote, each share of Series A Preferred
Stock entitles the holder to cast such number of votes equal to the
number of shares of common stock such shares of Series A Preferred
Stock are convertible into at such time, but not in excess of the
Beneficial Ownership Limitation.
Issuance of New Convertible Promissory Note
On January 11, 2019, we issued a new Convertible
Promissory Note (the “Note”) to Harvey Kesner in
consideration for debt funding in the amount of $206,909.67. The
Note, which features an original issue discount of 10%, was issued
in the amount of $229,899.63. The Note bears interest at a rate of
8% per year, and is due 12 months from the date of issue. Beginning
on the 170th
day after issue, the Note is
convertible to our common stock at price equal to the lesser of
$0.25 per share, or a the variable conversion price. The variable
conversion price is defined as 60% of the average of our 3 lowest
trading prices in the 20 trading days prior to the conversion.
Conversions are limited such that no conversion will be allowed to
the extent that the number of shares of common stock
issuable upon the any conversion of the Note would result in
beneficial ownership by the holder and its affiliates of more than
4.99% of the outstanding shares of our common stock.
The foregoing is a
summary of the material terms of the Note. The Note, which is
attached as Exhibit 10.9 hereto, contains additional terms and
conditions and should be reviewed in its entirety.
Capitalization
Pending Reverse Split
On January 11, 2019, our shareholders authorized a reverse
split of our common stock on the basis of 1 share for every 8
shares of Common Stock (the “Reverse Split”), effective
20 days following our mailing of an Information Statement on Form
14C to our shareholders, as required by the Securities Exchange Act
of 1934, as amended (the “1934 Act”). The
capitalization amounts set forth below are prior to giving effect
to such Reverse Split.
-20-
Current Capitalization Prior to Effectiveness of Reverse
Split
As
of December 22, 2018 we had 44,275,689 shares of Common Stock
outstanding and 27,559,001 shares of common stock equivalents, such
amount taking into account all conversions of options, warrants and
preferred stock outstanding on such date (71,834,690 shares of
Common Stock on a fully-diluted basis). On January 11, 2019 we
agreed to issue approximately 4,592,500 shares of Common Stock to
settle certain claims plus 67,085,523 shares of Common Stock to
C2M. On a fully diluted basis, our capitalization consists of
143,512,713 shares of Common Stock. Such amount excludes any shares
of Common Stock issuable upon the conversion of any outstanding
Notes not converted prior to such date. The Notes are convertible
at different conversion prices and are incapable of calculation
until converted.
Upon giving effect to the Exchange Agreements,
Notes in the amount of $46,840 will be exchanged for Series A
Preferred is convertible into 1,873,600 shares of our Common
Stock. Excludes shares issued
and issuable under our 2018 Executive Incentive Plan and 2019
Executive Incentive Plan.
After
giving effect to the Reverse Split the below table reflects our
capitalization (after giving effect to the Exchange Agreements) on
a pro forma basis:
Common Stock and Equivalents1
|
|
9,094,024
|
Ceed2Med2
|
|
9,135,691
|
Issuable
under Preferred A Note Exchange Agreements
|
|
234,200
|
Total
issued and outstanding (fully-diluted)
|
|
18,463,915
|
1 Includes shares issuable
under Series B-1, B-1, C, and D Preferred Stock pursuant to the
original terms of issuance. Excludes $100,000 of 5% convertible
notes due February 2023. Excludes shares issued and issuable under
our 2018 Executive Incentive Plan and 2019 Executive Incentive
Plan.
SECTION
5 – CORPORATE GOVERNANCE AND MANAGEMENT
Item
5.01
Changes
in Control of Registrant
Following the
effectiveness of the Development Agreement, a change in control of
the Company has occurred effective January 8, 2019. In
consideration for its entry into the Development Agreement, C2M was
issued 67,085,523 shares of common stock, which constitutes
approximately 51% of our issued and outstanding common
stock.
-21-
There are no
arrangements, known to us, the operation of which may at a
subsequent date result in a further change in control of the
Company.
Item
5.02
Departure
of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of
Certain Officers
Appointment of New Directors
On January 9, 2019,
Kevin Esval, Jeffrey Thompson and Ken Puzder were appointed to the
Board of Directors of the Company. Each of such persons (other than
Ken Puzder) meets the definition of “independent”
director under SEC rules and the rules and regulations promulgated
by NASDAQ. Such persons were deemed by the board of directors to be
appointed to our board because of their expertise in capital
markets, finance, and public company governance and management and
in the case of Mr. Esval, skills and experience in life science,
pharmaceutical and drug industries. In connection with their
appointment the Company adopted a compensation arrangement for
directors under which upon initial appointment, each new
independent director will receive 2,000,000 of 10 year options
under the 2019 Equity Incentive Plan, exercisable at $0.025 per
share ($0.20 following the Reverse Split) vesting 1/24 on the date
of award and 1/24 on the first day of each calendar month
thereafter until fully vested.
Kevin J. Esval has served as Executive
Managing Director and CCO of VelocityHealth Securities since
founding the company in 2000. Mr. Esval has significant industry
and investment banking experienced in most sectors of health care
including specialty pharmaceuticals & generics, health care
services, health care IT, diagnostics, biotechnology, and other
sectors. With his extensive transactional and financing experience
serving as a valuable resource, Mr. Esval takes an active role with
all clients. Additionally, through his prior operating experience
as an executive in growth oriented health care companies and active
roles on boards of directors, Mr. Esval has developed a keen
understanding of the challenges faced by middle market and growth
companies. Mr. Esval has negotiated, structured, and executed
various types of transactions including mergers, acquisitions,
divestitures, and licensings; corporate and transactional
financings, including equity, mezzanine and debt
financings.
Previously, Mr.
Esval served as a divisional SVP and COO for UnitedHealth Group
(NYSE: UNH), one of the largest health care services companies in
the world with annual revenues exceeding $200 billion. As one of
the original startup executives of his division, Mr. Esval was
instrumental in taking it from $0 to $400 million as of his
departure. His career in health care began with a venture-backed
startup Complete Health Services, Inc. This firm was one of Inc.
Magazine’s “Fastest Growing Private Companies” in
1994. During this period, Mr. Esval was this company’s top
sales executive, and managed the startup of two new
divisions.
Additionally, Mr.
Esval spent 5 years in sales, financial analysis, and trading roles
at several financial derivatives companies, including Chicago based
Rosenthal-Collins Group and R. J. O’Brien. During this
period, his roles included working on the floor of the Chicago
Board of Trade (CBOT) and the Chicago Mercantile Exchange
(CME).
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Mr. Esval has
served on the Board of Directors of multiple health care companies,
and currently serves on the Board of Directors on several specialty
pharmaceutical companies.
Mr. Esval received
his BA degree from Furman University while on a football
scholarship. Additionally, he studied internationally in Lausanne,
Switzerland. Mr. Esval is a dual citizen of the USA and the
Republic of Ireland.
Mr. Esval holds
Series 24, 7 & 63 Licenses.
Jeffrey
Thompson founded Red Cat Propware Inc., a provider of
cloud-based analytics, storage, and services for drone aircraft, in
2016 and is currently its CEO and sole Director. In December 1999
he founded Towerstream Corp. Towerstream Corp. became a publicly
traded company on the NASDAQ in June 2007, when Mr. Thompson was
president, chief executive officer and a director. In 1994, Mr.
Thompson founded EdgeNet Inc., a privately held Internet service
provider (which was sold to Citadel Broadcasting Corporation in
1997) and became eFortress through 1999. Mr. Thompson holds a B.S.
degree from the University of Massachusetts.
Kenneth E. Puzder serves as Chief
Financial Officer of C2M. In addition, from December of 2014 to the
present, he has served as the co-founder, Managing Member, and CFO
of the Lukens Group, LLC, a behavioral therapy firm that focuses on
a variety of behavioral struggles including alcoholism, drug abuse,
depression and anxiety with a special emphasis on PTSD. Previously,
from January of 2007 to December of 2017, Mr. Puzder was president
of his own consulting firm, Kenneth E. Puzder Consulting. As a
seasoned financial executive, Mr. Puzder specialized in debtor side
representations in financial leadership, mergers and acquisitions,
restructuring and turnaround, and personal and partnership tax
returns. From July of 2003 through December of 2006, he served in
various positions with the Arby’s Restaurant Group
(“ARG”) family of companies, including as Chief
Financial Officer of AFA Service Corporation (a sister company to
ARG), VP for Accounting and Finance or Arby’s Restaurant
Group, Inc., and Regional Controller or RTM, Inc. (a subsidiary of
ARG). From August of 2000 through April of 2003, Mr. Puzder was
with Panera Bread Company. From January of 1999 through August of
2000, he served as Vice President and Secretary of the Linder
Funds, a series of mutual funds. Prior to serving that position,
from March of 1998 through August of 2000, he was Financial
Operations Principal and Assistant Secretary of Lindner Asset
Management, the asset management firm for the Linder Funds. From
February of 1996 until March of 1998, he was an audit manager with
KPMG Peat Marwick, LLP, a Big 4 accounting firm. From June of 1990
through February of 1996, Mr. Puzder was with Mills Group, Inc.,
serving as its Chief Financial Officer and Treasurer of Mills
Group, Inc. from July 1991 to February 1996.
Mr. Puzder holds a
B.S. in Accounting from the University of Missouri, St. Louis and
is a Certified Public Accountant in the state of
Missouri.
New Employment Agreements with Management
On January 11,
2019, we entered into new employment agreement with our CEO, Philp
J. Young, our Executive Vice President, Timothy Ryan, and our CFO
Kelley Wendt, (the “Employment Agreements”). Under the
new Employment Agreements, each executive agreed to their service
for a period of two (2) years, subject to renewal, respectively.
Mr. Young’s annual salary will be $150,000 per annum. Mr.
Ryan and Ms. Wendt’s annual salaries will each be $120,000
per annum. Additionally, the executives shall
be entitled to an annual cash bonus in an amount as determined
by the board of directors, if the Company meets or exceeds criteria
adopted by the Compensation Committee of the Board of
Directors. The executives shall also be eligible for grants of
awards under stock option or other equity incentive plans of the
Company as the Company’s Compensation Committee or, in the
absence thereof, the Company’s Board of Directors may from
time to time determine and shall be entitled to participate in all
benefits plans the Company provides to its senior
executives. The Company shall reimburse the executives
for all reasonable expenses incurred in the course of
employment. In the event employment is terminated
without Cause or by the executives with Good Reason (as such terms
are defined in the Employment Agreement), the Executives shall be
entitled to receive severance benefits equal to the greater of the
Base Salary (as then in effect) for the remaining balance of the
Employment Agreement or six months, continued coverage under the
Company’s benefit plans and payment of her pro-rated earned
annual bonus, provided certain conditions are met. The executives
are subject to a one (1) year non-competition and non-solicitation
provision.
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The
foregoing description of the Employment Agreements does not purport
to be complete and is qualified in its entirety by reference to the
complete text of the Employment Agreements, which are filed as
Exhibits hereto, and which are incorporated herein by
reference.
Adoption of 2019 Equity Incentive Plan
On January 11,
2019, our shareholders approved the Exactus, Inc. 2019 Equity
Incentive Plan (the “Plan”). The purpose of the Plan is
to provide a means for the Company to continue to attract, motivate
and retain management, key employees, consultants and other
independent contractors, and to provide these individuals with
greater incentive for their service to the Company by linking their
interests in the Company’s success with those of the Company
and its shareholders. The Plan is limited such that the maximum
number of shares of Common Stock that may be delivered pursuant to
awards granted under the Plan may not exceed fifteen percent (15%)
of the total of: (a) the issued and outstanding shares of our
Common Stock, and (b) all shares common stock issuable upon
conversion or exercise of any of our outstanding securities which
are convertible or exercisable into shares of Common Stock under
the terms thereof.
The foregoing
description of the Plan is not complete and is qualified in its
entirety by reference to the full text of the Plan, a copy of which
is filed as Exhibit 10.8 to this Form 8-K and is incorporated by
reference herein.
Item
5.03
Amendments to Articles of Incorporation of Bylaws; Change in Fiscal
Year
Designation of New Series A Convertible Preferred
Stock
As
discussed above, on December 21, 2018, we filed a Certificate of
Cancellation of our previously filed Certificate of Designation of
Preferences, Rights and Limitations of Series A Preferred Stock. On
January 9, 2019, our board of directors approved the designation of
1,000,000 shares of our blank check preferred stock as a new Series
of Preferred Stock for issuance to former Holders of our Notes
under the Exchange Agreements to be designated Series A Convertible
Preferred Stock, and filed a new Certificate of Designation of
Preferences, Rights and Limitations of Series A Convertible
Preferred Stock as required by the Exchange
Agreements.
Each
share of Series A Preferred has a stated value of $1.00 per
share. In the event of a liquidation, dissolution or
winding up of the Company, each share of Series A Preferred Stock
will be entitled to a payment as set forth in the Certificate of
Designation. The Series A Preferred is convertible into such number
of shares of the Company’s common stock, par value $0.0001
per share (the “Common Stock”) equal to such number of
shares of Series A Preferred being converted and divided by $0.025
per share. Each share of Series A Preferred entitles the
holder to vote on all matters voted on by holders of Common Stock
as a single class. With respect to any such vote, each share of
Series A Preferred entitles the holder to cast such number of votes
equal to the number of shares of Common Stock such share of Series
A Preferred is convertible into at such time, but not in excess of
the conversion limitations set forth in the Series A Preferred
Certificate of Designation. The Series A Preferred will be entitled
to dividends to the extent declared by the Company.
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The
Company is prohibited from effecting the conversion of the Series A
Preferred Stock to the extent that, as a result of such conversion,
the holder would beneficially own more than 4.99%, in the
aggregate, of the issued and outstanding shares of the
Company’s common stock calculated immediately after giving
effect to the issuance of shares of common stock upon the
conversion of the Series A Preferred Stock (the “Beneficial
Ownership Limitation”). The Beneficial Ownership Limitation
may be increased by the holder up to, but not exceeding,
9.99%. Each share of Series A Preferred Stock entitles the
holder to vote on all matters voted on by holders of common stock.
With respect to any such vote, each share of Series A Preferred
Stock entitles the holder to cast such number of votes equal to the
number of shares of common stock such shares of Series A Preferred
Stock are convertible into at such time, but not in excess of the
Beneficial Ownership Limitation.
Item
5.05
Amendments to the Registrant’s Code of Ethics, or Waiver of a
Provision of the Code of Ethics
Adoption of Code of Ethics and Insider Trading Policy
As
discussed above, on January 9, 2019, our board of directors adopted
a Code of Business Conduct and Ethics applicable to all directors,
executive officers, and employees of the Company. Our newly-adopted
Code of Ethics is furnished herewith as Exhibit 14.1. In addition,
our board of directors adopted an Insider Trading Policy applicable
to all directors, executive officers, and employees of the Company.
Our newly-adopted Insider Trading Policy is furnished herewith as
Exhibit 14.1
Item
5.07
Submission of Matters to a Vote of Security Holders
Approval of 1 for 8 Reverse Split of Common Stock
On January 11,
2019, a majority of our shareholders acted by written consent, in
lieu of a meeting of shareholders, to authorize a reverse split of
our common stock on the basis of 1 share for every 8 shares of
Common Stock held, effective 20 days following our mailing of an
Information Statement on Form 14C to our shareholders, as required
by the Securities Exchange Act of 1934
The consenting
shareholders held 86,463,932 shares of Common Stock, or
approximately 73.93% of the outstanding shares of Common Stock,
together with 600,000 shares of B-1 Preferred Stock, 456,000 shares
of Series B-2 Preferred Stock, and 34 shares of Series D Preferred
Stock. In total, the reverse split was approved by consenting
shareholders casting 94,319,932 votes, representing approximately
67.77% of the total voting power of the
Company.
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Section
9 – FINANCIAL STATEMENTS AND EXHIBITS
Item
9.01
Financial
Statements and Exhibits
Exhibit
No.
|
Description
|
Certificate of
Cancellation of Prior Certificate of Designation for Series A
Preferred Stock
(1)
|
|
Certificate of
Designation for Series A Convertible Preferred Stock
(1)
|
|
Advisory Board
Charter
(1)
|
|
Master Product
Development and Supply Agreement with Ceed2Med, LLC dated January
8, 2019
(1)
|
|
Form of
Subscription Agreement for Common Stock
(1)
|
|
Form of Exchange
Agreement for Series A Preferred Stock
(1)
|
|
Employment
Agreement with Philip Young dated January 9, 2019
(1)
|
|
Employment
Agreement with Timothy Ryan dated January 9, 2019
(1)
|
|
Employment
Agreement with Kelley Wendt dated January 9, 2019
(1)
|
|
Exactus, Inc. 2019
Equity Incentive Plan*
|
|
Form of 2019
Incentive Plan Non-Qualified Option Award Certificate
(1)
|
|
Convertible
Promissory Note issued January 11, 2019
(1)
|
|
Code of Business
Conduct and Ethics
(1)
|
|
Insider Trading
Policy
(1)
|
(1) Incorporated by reference to Current
Report on Form 8-K filed January 14, 2019
* Filed
herewith
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SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on behalf of the
undersigned hereunto duly authorized.
|
EXACTUS,
INC.
|
|
|
|
|
|
|
January 22,
2019
|
By:
|
/s/ Philip J.
Young
|
|
|
|
Philip J.
Young
|
|
|
|
President and Chief
Executive Officer
|
|