UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: March 31, 2020
 
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
 
Commission File Number: 001-38190
 
Exactus, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
27-1085858
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
80 NE 4th Avenue, Suite 28, Delray Beach, FL 33483
(Address of principal executive offices, Zip Code)
 
(800) 881-9352
(Registrant's telephone number, including area code)
 
________________________________________________________
(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report)
 
 Securities registered pursuant to Section 12(b) of the Act:  
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
N/A
 
N/A
 
N/A
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer ☐
Non-Accelerated Filer ☑
Accelerated Filer ☐
Smaller reporting company ☑
 
 
Emerging growth company ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
 
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 49,564,420 shares of common stock, par value $0.0001 per share, outstanding as of June 26, 2020.
 


 
 
 
TABLE OF CONTENTS
 
 
 
Page
                     
 
                     
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 1
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 37
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 47
Item 4.
Controls and Procedures
 47
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 48
Item 1A.
Risk Factors
 48
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 48
Item 3.
Defaults Upon Senior Securities
 48
Item 4.
Mine Safety Disclosures
 48
Item 5.
Other Information
 48
Item 6.
Exhibits
 
 
EXPLANATORY NOTE
 
On May 15, 2020, Exactus, Inc. (the “Company”) filed a Current Report on Form 8-K, and is filing this Quarterly Report on Form 10-Q (the “Quarterly Report”), in reliance on the Order of the Securities and Exchange Commission (the “SEC”), dated March 4, 2020, as updated March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934 modifying exemptions from the reporting and proxy delivery requirements for public companies (Release No. 34-22465).
 
As a result of “stay at home” orders and other restrictions imposed as a result of the COVID-19 pandemic, certain Company officers and management as well as professional staff and consultants have been hindered and delayed in conducting all of the work required to prepare the financial statements for the Quarterly Report. This has, in turn, impacted the Company’s ability to complete its audit and file this Quarterly Report by its original due date, May 15, 2020.
 
 
-i-
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
Our financial statements included in this Form 10-Q are as follows:
 

Condensed Consolidated Balance Sheets as March 31, 2020 (unaudited) and December 31, 2019;

Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited);

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the three months ended March 31, 2020 and 2019 (unaudited);

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited);

Notes to Unaudited Condensed Consolidated Financial Statements.
 
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended March 31, 2020 are not necessarily indicative of the results that can be expected for the full year.
 
 
-1-
 
  
 
Exactus, Inc. and Subsidiaries
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(Unaudited)
 
 
 
 
 
ASSETS
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 $9,541 
 $18,405 
Accounts receivable, net
  273,493 
  55,725 
Accounts receivable - related party
  107,660 
  18,860 
Inventory, net
  397,098 
  1,337,809 
Prepaid expenses and other current assets - current
  123,760 
  248,776 
Prepaid expenses and other current assets - related party - current
  622,159 
  622,160 
Due from related parties
  127,500 
  127,500 
Total current assets
  1,661,211 
  2,429,235 
 
    
    
Other Assets:
    
    
   Deposits
  40,000 
  80,000 
   Prepaid expenses and other current assets - long-term
  15,959 
  - 
   Prepaid expenses and other current assets - related party - long-term
  2,333,523 
  2,492,045 
   Property and equipment, net
  450,706 
  477,433 
   Intangible assets, net
  1,901,061 
  2,147,311 
   Operating lease right-of-use assets, net (see Note 7)
  2,056,366 
  2,173,253 
Total other assets
  6,797,615 
  7,370,042 
 
    
    
TOTAL ASSETS
 $8,458,826 
 $9,799,277 
 
    
    
 
LIABILITIES AND EQUITY
 
 
    
    
Current Liabilities:
    
    
Accounts payable
 $2,001,201 
 $1,442,409 
Accounts payable - related parties
  454,511 
  454,511 
Accrued expenses
  769,159 
  358,010 
Unearned revenue - related party
  - 
  215,000 
Note payable - related parties
  78,017 
  55,556 
Subscription payable
  250,000 
  250,000 
Convertible notes, net of discounts
  402,214 
  85,906 
Derivative liability
  773,924 
  880,410 
Interest payable
  25,682 
  16,677 
Due to related party
  85,000 
  - 
Operating lease liabilities, current portion (see Note 7)
  498,778 
  432,065 
Total current liabilities
  5,338,486 
  4,190,544 
 
    
    
Long Term Liabilities:
    
    
Convertible notes payable
  - 
  100,000 
Operating lease liabilities, long-term portion (see Note 7)
  1,646,705 
  1,826,887 
Total long term liabilities
  1,646,705 
  1,926,887 
 
    
    
TOTAL LIABILITIES
  6,985,191 
  6,117,431 
 
    
    
Commitment and contingencies (see Note 11)
    
    
 
    
    
Equity:
    
    
Exactus, Inc. Stockholders' Equity
    
    
Preferred stock: 50,000,000 shares authorized; $0.0001 par value, 5,266,466 undesignated shares issued and outstanding
  - 
  - 
Preferred stock Series A: 1,000,000 shares designated; $0.0001 par value, 350,019 and 353,109 shares issued and outstanding, respectively
  32 
  35 
Preferred stock Series B-1: 32,000,000 shares designated; $0.0001 par value, 1,650,000,and 1,650,000 shares issued and outstanding, respectively
  165 
  165 
Preferred stock Series B-2: 10,000,000 shares designated; $0.0001 par value, 7,516,000 and 7,516,000 shares issued and outstanding, respectively
  752 
  752 
Preferred stock Series C: 1,733,334 shares designated; $0.0001 par value, none shares issued and outstanding
  - 
  - 
Preferred stock Series D: 200 shares designated; $0.0001 par value, 18 shares issued and outstanding
  - 
  - 
Preferred stock Series E: 10,000 shares designated; $0.0001 par value, 10,000 shares issued and outstanding
  1 
  1 
Common stock: 650,000,000 shares authorized; $0.0001 par value, 45,732,002 and 43,819,325 shares issued and outstanding, respectively
  4,574 
  4,382 
Common stock to be issued (308,330 and 664,580 shares to be issued, respectively)
  30 
  66 
Additional paid-in capital
  26,080,432 
  25,343,293 
Accumulated deficit
  (23,919,063)
  (21,129,379)
Total Exactus Inc. Stockholders' Equity
  2,166,923 
  4,219,315 
 
    
    
        Non-controlling interest in subsidiary
  (693,288)
  (537,469)
 
    
    
        Total Stockholders' Equity
  1,473,635 
  3,681,846 
 
    
    
TOTAL LIABILITIES AND EQUITY
 $8,458,826 
 $9,799,277 
 
    
    
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 
-2-
 
 
 
 
Exactus, Inc. and Subsidiaries
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
 
(Unaudited)
 
 
(Unaudited)
 
 
 
 
 
 
 
 
Net revenues
 $520,200 
 $15,980 
Net revenues - related party
  315,800 
  - 
 
    
    
Total net revenues
  836,000 
  15,980 
 
    
    
Cost of sales
  1,042,473 
  12,600 
Cost of sales - related party
  357,783 
  - 
 
    
    
Total cost of sales
  1,400,256 
  12,600 
 
    
    
Gross profit (loss)
  (564,256)
  3,380 
 
    
    
Operating Expenses:
    
    
General and administration
  1,184,006 
  652,209 
Selling and marketing expenses
  280,890 
  51,878 
Professional and consulting
  727,871 
  1,880,147 
Research and development
  - 
  15,000 
 
    
    
Total Operating Expenses
  2,192,767 
  2,599,234 
 
    
    
Loss from Operations
  (2,757,023)
  (2,595,854)
 
    
    
Other Income (expenses):
    
    
Derivative gain (loss)
  106,486 
  (1,454,729)
(Loss) gain on settlement of debt, net
  (6,500)
  3,007,629 
Interest expense
  (288,466)
  (366,913)
 
    
    
Total Other Income (Expenses), net
  (188,480)
  1,185,987 
 
    
    
Loss Before Provision for Income Taxes
  (2,945,503)
  (1,409,867)
Provision for income taxes
  - 
  - 
 
    
    
Net Loss
  (2,945,503)
  (1,409,867)
 
    
    
Net Loss attributable to non-controlling interest
  155,819 
  35,604 
 
    
    
Net Loss Attributable to Exactus, Inc.
  (2,789,684)
  (1,374,263)
 
    
    
Deemed dividend on Preferred Stock
  - 
  (904,450)
 
    
    
Net Loss available to Exactus, Inc. common stockholders
 $(2,789,684)
 $(2,278,713)
 
    
    
Net Loss per Common Share - Basic and Diluted
 $(0.07)
 $(0.07)
Net Loss attributable to non-controlling interest per Common Share - Basic and Diluted
 $(0.00)
 $0.00 
Net Loss available to Exactus, Inc. common stockholders per Common Share - Basic and Diluted
 $(0.06)
 $(0.12)
 
    
    
Weighted Average Number of Common Shares Outstanding:
    
    
   Basic and Diluted
  45,293,865 
  19,485,557 
 
    
    
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 
-3-
 
 
 
  Exactus, Inc. and Subsidiaries                
  Condensed Consolidated Statements of Stockholders' Equity (Deficit)                
  For the Three Months Ended March 31, 2020 and 2019                
  (Unaudited)                
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock-
Series A
 
 
Preferred Stock-
Series B-1
 
 
Preferred Stock-
Series B-2
 
 
Preferred Stock-
Series C
 
 
Preferred Stock-
Series D
 
 
Preferred Stock-
Series E
 
 
Common Stock
 
 
Common Stock - Unissued
 
 
Additional Paid in
 
 
Accumulated
 
 
 Non-controlling
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
 Deficit
 
 
 Interest
 
 
 Total
 
Balance, December 31, 2019
  353,109 
 $35 
  1,650,000 
 $165 
  7,516,000 
 $752 
  - 
 $- 
  18 
 $- 
  10,000 
 $1 
  43,819,325 
 $4,382 
  664,580 
 $66 
 $25,343,293 
 $(21,129,379)
 $(537,469)
 $3,681,846 
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
Common stock issued for private placement
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  500,000 
  50 
  - 
  - 
  99,950 
  - 
  - 
  100,000 
Common stock issued for unissued common stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  287,500 
  29 
  (287,500)
  (29)
  - 
  - 
  - 
  - 
Conversion of Series A Preferred Stock to Common Stock
  (3,090)
  (3)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  150,450 
  15 
  - 
  - 
  (12)
  - 
  - 
  - 
Common stock issued for services
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  765,000 
  77 
  - 
  - 
  378,446 
  - 
  - 
  378,523 
Stock-based compensation in connection with restricted common stock award grants - Q1 2020
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  209,727 
  21 
  (68,750)
  (7)
  117,889 
  - 
  - 
  117,903 
Stock options granted for services
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  140,866 
  - 
  - 
  140,866 
Net Loss for the period
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
  (2,789,684)
  (155,819)
  (2,945,503)
Balance, March 31, 2020
  350,019 
 $32 
  1,650,000 
 $165 
  7,516,000 
 $752 
  - 
 $- 
  18 
 $- 
  10,000 
 $1 
  45,732,002 
 $4,574 
  308,330 
 $30 
 $26,080,432 
 $(23,919,063)
 $(693,288)
 $1,473,635 
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 
 
-4-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock-
Series A
 
 
Preferred Stock-
Series B-1
 
 
Preferred Stock-
Series B-2
 
 
Preferred Stock-
Series C
 
 
Preferred Stock-
Series D
 
 
Preferred Stock-
Series E
 
 
Common Stock
 
 
Common Stock - Unissued
 
 
Additioanl Paid in
 
 
Accumulated
 
 
 Non-controlling
 
 
 
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
 Deficit
 
 
 Interest
 
 
 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
  - 
 $- 
  2,800,000 
 $280 
  8,684,000 
 $868 
  1,733,334 
 $173 
  45 
 $1 
  - 
 $- 
  6,233,524 
 $623 
  - 
 $- 
 $7,111,445 
 $(10,537,892)
 $- 
 $(3,424,502)
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
Preferred stock issued upon convesion of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
convertible debt
  849,360 
  84 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  849,276 
  - 
  - 
  849,360 
Preferred stock issued for private placement
  55,090 
  6 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  55,084 
  - 
  - 
  55,090 
Common stock issued for private placement
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  15,382,090 
  1,538 
  - 
  - 
  3,308,115 
  - 
  - 
  3,309,653 
Common Stock issued for Master Supply
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  8,385,691 
  839 
  - 
  - 
  (839)
  - 
  - 
  - 
Common stock issued for debt settlement
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  203,080 
  20 
  - 
  - 
  40,596 
  - 
  - 
  40,616 
Common stock issued for purchase of membership interest in subsidiary
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  937,500 
  94 
  - 
  - 
  989,906 
  - 
  - 
  990,000 
Conversion of Series A Preferred Stock to Common Stock
  (296,441)
  (30)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  1,482,205 
  148 
  - 
  - 
  (118)
  - 
  - 
  - 
Conversion of Series B-1 Preferred Stock to Common Stock
  - 
  - 
  (400,000)
  (40)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  50,000 
  5 
  - 
  - 
  35 
  - 
  - 
  - 
Conversion of Series B-2 Preferred Stock to Common Stock
  - 
  - 
  - 
  - 
  (1,000,000)
  (100)
  - 
  - 
  - 
  - 
  - 
  - 
  125,000 
  13 
  - 
  - 
  87 
  - 
  - 
  - 
Conversion of Series D Prefered Stock to Common Stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (4)
  (1)
  - 
  - 
  100,000 
  10 
  - 
  - 
  (9)
  - 
  - 
  - 
Common stock issued upon convesion of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
convertible debt
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  250,000 
  25 
  - 
  - 
  195,975 
  - 
  - 
  196,000 
Stock warrants granted for services
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  1,114,062 
  - 
  - 
  1,114,062 
Stock options granted for services
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  891,799 
  - 
  - 
  891,799 
Deemed dividend on Preferred Stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  904,450 
  (904,450)
  - 
  - 
Net Loss for the period
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
    
  (1,374,263)
  (35,604)
  (1,409,867)
Balance, March 31, 2019
  608,009 
 $60 
  2,400,000 
 $240 
  7,684,000 
 $768 
  1,733,334 
 $173 
  41 
 $- 
  - 
 $- 
  33,149,090 
 $3,315 
  - 
 $- 
 $15,459,864 
 $(12,816,605)
 $(35,604)
 $2,612,211 
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 
 
-5-
 
 
Exactus, Inc. and Subsidiaries
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
Net loss
 $(2,945,503)
 $(1,409,867)
Adjustments to reconcile net loss to cash used in operating activities:
    
    
Depreciation
  26,727 
  - 
Derivative (gain) loss
  (106,486)
  1,454,729 
Stock-based compensation
  637,292 
  2,005,861 
Bad debt expense
  18,592 
  - 
Inventory reserve
  553,440 
  - 
Amortization of prepaid stock-based expenses
  195,299 
  - 
Amortization of discount and debt issuance costs for convertible notes
  268,350 
  339,806 
Amortization of intangible assets
  246,250 
  52,688 
Deferred rent
  3,418 
  - 
Loss (gain) on settlement of debt
  6,500 
  (3,007,629)
Changes in operating assets and liabilities:
    
    
(Increase) decrease in operating assets:
    
    
Accounts receivable
  (236,360)
  - 
Accounts receivable - related party
  (88,800)
  - 
Inventory
  387,271 
  (422,819)
Advance to supplier - related party
    
  (1,017,225)
Prepaid expenses and other current assets - current
  88,240 
  (46,250)
Prepaid expenses and other current assets - long term
  (15,959)
  - 
Deposit
  40,000 
  - 
Increase (decrease) in operating liabilities:
    
    
Accounts payable
  552,292 
  233,560 
Accounts payable - related party
  - 
  (21,561)
Accrued expenses
  411,149 
  - 
Unearned revenues
  (215,000)
  - 
Interest payable
  9,005 
  4,952 
Net Cash Used In Operating Activities
  (164,283)
  (1,833,755)
 
    
    
Cash Flows From Investing Activities:
    
    
 Purchase of membership interest in subsidiary
  - 
  (300,000)
 Purchase of property and equipment
  - 
  (28,500)
Net Cash Used in Investing Activities
  - 
  (328,500)
 
    
    
Cash Flows From Financing Activities:
    
    
Advances from related party
  85,000 
  - 
Proceeds from sale of common stock
  100,000 
  3,309,653 
Payments of principal on notes payable
  - 
  (11,129)
Proceeds from issuance of notes payable
  20,419 
  14,229 
Payments of principal on convertible notes
  (50,000)
  (186,443)
Proceeds from issuance of convertible notes, net of issuance cost
  - 
  206,900 
Net Cash Provided By Financing Activities
  155,419 
  3,333,210 
 
    
    
Net increase (decrease) in cash and cash equivalents
  (8,864)
  1,170,955 
 
    
    
Cash and cash equivalents at beginning of year
  18,405 
  1,960 
 
    
    
Cash and cash equivalents at end of period
 $9,541 
 $1,172,915 
 
    
    
Supplemental Cash Flow Information:
    
    
Cash paid for interest and finance charges
 $11,111 
 $22,166 
Cash paid for taxes
 $- 
 $- 
 
    
    
Non-Cash investing and financing activities:
    
    
Proceeds from sale of Series A preferred stock paid directly to settle debts
 $- 
 $55,090 
Convertible notes and interest payable settled by Series A preferred stock issued
 $- 
 $849,360 
Note payable, accrued expense and interest payable settled by common stock issued
 $- 
 $40,616 
Convertible notes settled by common stock issued
 $- 
 $196,000 
Common stock issued for purchase of membership interest in subsidiary
 $- 
 $990,000 
Increase in intangible assets for subscription payable
 $- 
 $1,650,000 
Initial beneficial conversion feature and debt discount on convertible notes
 $- 
 $206,910 
Preferred deemed dividend
 $- 
 $904,450 
   Operating lease right-of-use assets and operating lease liabilities
    
    
    recorded upon adoption of ASC 842
 $- 
 $310,093 
Reduction of operating lease right-of-use asset and operating lease liabilities
 $116,887 
 $7,416 
 
    
    
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
    
    
 
 
 
-6-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
NOTE 1 - NATURE OF ORGANIZATION  
 
Organization and Business Description
 
Exactus, Inc. (the “Company”) was incorporated on January 18, 2008 as an alternative energy research and development company. During much of its history the Company had designed solar monitoring and charging systems which were discontinued in 2016 to focus on developing point-of-care diagnostic devices. The Company has recently added to the scope of its activities efforts to produce, market and sell products made from industrial hemp containing cannabidiol (“CBD”).
   
On January 8, 2019 the Company began pursuing hemp-derived CBD as a new business segment after passage of the Agriculture Improvement Act of 2018, also known as the 2018 Farm Bill. The 2018 Farm Bill declassified industrial hemp as a Schedule I substance, shifted regulatory authority from the Drug Enforcement Administration to the Department of Agriculture, and provided autonomy for states to regulate the industry. The 2018 Farm Bill did not change the Food and Drug Administration’s oversight authority over CBD products. The 2018 Farm Bill defined industrial hemp as a variety of cannabis containing an amount equal to or lower than 0.3% tetra-hydrocannabinol (THC) and allowed farmers to grow and sell hemp under state regulation. Industry reports indicate that 41 states have set up cultivation and production programs to regulate the production of hemp.
 
Following passage of the 2018 Farm Bill, the Company entered into a Master Product Development and Supply Agreement (the “Development Agreement”) with Ceed2Med, LLC (“C2M”). Under the Master Agreement, C2M agreed to provide to the Company up to 2,500 kilograms of products (isolate or distillate) for manufacture into consumer products such as tinctures, edibles, capsules, topical solutions and animal health products. The Company believes manufacturing, testing and quality akin to pharmaceutical products is important when distributing hemp-based products. The Company’s products originate from third party manufacturers and farms at which the Company oversee all stages of plant growth and are manufactured under contract arrangements with third-parties.
 
The Company identified the rapidly growing hemp-based CBD market as a valuable target for a new company focus. On January 8, 2019, the Company entered into the Master Product Development and Supply Agreement with C2M. In consideration for the Development Agreement (see Note 11), C2M was issued 8,385,691 shares of our Common Stock. Additionally, the Company granted immediately vested 10-year options to purchase 750,000 shares of Common Stock, with exercise price of $0.32 per share to three C2M founders. As a result, C2M became the Company’s largest shareholder holding (inclusive of the vested options held by its founders) approximately 51% of the Company’s outstanding Common Stock as of the date of the Development Agreement which has subsequently been reduced to approximately 19% as of December 31, 2019. Consequently, such transaction resulted in a change of control whereby, C2M obtained majority control through its Common Stock ownership (See Note 11). In connection with this agreement, the Company received access to expertise, resources, skills and experience suitable for production of CBD rich ingredients including isolates, distillates, water soluble, and proprietary formulations. Under the Development Agreement, the Company was allotted a minimum of 50 and up to 300 kilograms per month, and up to 2,500 kilograms annually, of CBD rich ingredients for resale and had placed a $1 million purchase order for products in fiscal 2019. The Company currently offers products such as tinctures, edibles, capsules, topical solutions and animal health products manufactured for the Company as branded and white-label products.
 
On March 11, 2019, with the assistance of C2M and assignment of rights, the Company acquired a 50.1% limited liability membership interest in Exactus One World, LLC (“EOW”), an Oregon limited liability company formed on January 25, 2019, in order to farm industrial hemp for its own use. Prior to the acquisition, EOW had no operating activities. The Company acquired its 50.1% limited liability membership interest pursuant to a Subscription Agreement and a Membership Interest Purchase Agreement (See Note 3). Following the events described above, the Company entered into the business of production and selling of industrial hemp grown for its own use and for sale to third-parties.
 
On January 11, 2019, the Board of Directors of the Company approved a reverse stock split of the Company’s Common Stock at a ratio of 1-for-8 (the “Reverse Stock Split”) including shares issuable upon conversion of the Company’s outstanding convertible securities. All share and per share values of the Company’s Common Stock for all periods presented in this Report and in the accompanying unaudited condensed consolidated financial statements are retroactively restated for the effect of the Reverse Stock Split.
 
 
-7-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation and principles of consolidation
 
The Company’s unaudited condensed consolidated financial statements include the financial statements of its 50.1% subsidiary, EOW and 51% subsidiary, Paradise Medlife. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes consolidated unaudited interim financial statements and present the consolidated unaudited interim financial statements of the Company and its majority-owned subsidiary as of March 31, 2020. All intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, stockholders’ equity (deficit) and cash flows as of March 31, 2020 and 2019, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2019 and footnotes thereto included in the Company’s Report on Form 10K filed with the SEC on May 22, 2020. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
 
Going concern
 
These unaudited condensed consolidated financial statements are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. No adjustment has been made to the carrying amount and classification of the Company’s assets and the carrying amount of its liabilities based on the going concern uncertainty. As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had a net loss attributable to Exactus Inc. common stockholders of $2,789,684 for the three months ended March 31, 2020. The net cash used in operating activities was $164,283 for the three months ended March 31, 2020. Additionally, the Company had an accumulated deficit of $23,919,063 and working capital deficit of $3,677,275 at March 31, 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of common and preferred shares and from the issuance of convertible promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
Over the last several months the Company and its advisors have been evaluating numerous opportunities and relationships to increase shareholder value. The Company expects to realize revenue through its efforts, if successful, to sell wholesale and retail products to third parties. However, as the Company is in a start-up phase, in a new business venture, in a rapidly evolving industry, many of its costs and challenges are new and unknown. In order to fund the Company’s activities, the Company will need to raise additional capital either through the issuance of equity and/or the issuance of debt. During the three months ended March 31, 2020, the Company received proceeds from the sale of the Company’s Common Stock of approximately $100,000, related party advances of $85,000 and issuance of a note of $22,461.
 
In March 2020, the outbreak of COVID-19 (coronavirus) caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in each of the areas in which the Company operates. The COVID-19 (coronavirus) outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced business and consumer spending due to both job losses and reduced investing activity, among many other effects attributable to the COVID-19 (coronavirus), and there continue to be many unknowns. While to date the Company has not been required to stop operating, management is evaluating its use of its office space, virtual meetings and the like. The Company continues to monitor the impact of the COVID-19 (coronavirus) outbreak closely. The extent to which the COVID-19 (coronavirus) outbreak will impact the Company’s operations, ability to obtain financing or future financial results is uncertain.
 
 
-8-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
Use of Estimates  
 
The Company prepares its unaudited condensed consolidated financial statements in conformity with GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet, and revenues and expenses for the period then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to the fair value of derivative liabilities, useful life of property and equipment and intangible assets, fair value of right of use assets, assumptions used in assessing impairment of long-term assets, contingent liabilities, and fair value of non-cash equity transactions.
 
Fair Value Measurements
 
The Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value, and expands disclosure of fair value measurements. The guidance prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:
 
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
 
Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
 
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
The Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2020 and December 31, 2019:
 
   
 
At March 31, 2020                
 
 
At December 31, 2019                
 
Description
 
Level 1  
 
 
Level 2  
 
 
Level 3  
 
 
Level 1  
 
 
Level 2  
 
 
Level 3  
 
Derivative liabilities
   
   
 $773,924 
   
   
 $880,410 
 
A roll forward of the level 3 valuation financial instruments is as follows:
 
 
 
  For the Three Months Ended March 31, 2020
 
Balance at beginning of period
 $880,410 
Change in fair value included in derivative gain
  (106,486)
Balance at end of period
 $773,924 
 
As of March 31, 2020, the Company has no assets that are re-measured at fair value.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and do not believe the Company is exposed to any significant credit risk. The Company had $0 cash balances in excess of FDIC insured limits at March 31, 2020 and December 31, 2019, respectively. Cash and cash equivalents were $9,541 and $18,405 at March 31, 2020 and December 31, 2019, respectively.
 
Accounts receivable and allowance for doubtful accounts
 
The Company has a policy of providing an allowance for doubtful accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable.  The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt.  Account balances deemed to be uncollectible are charged to bad debt expense and included in the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of March 31, 2020 and December 31, 2019, allowance for doubtful accounts amounted to $32,583 and $13,991, respectively. Bad debt expense amounted $18,592 and $0 during the three months ended March 31, 2020 and 2019, respectively.
 
 
-9-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
Prepaid Expenses and Other Current Assets
 
Total prepaid expenses and other current assets - current amounted to $123,760 and $248,776 at March 31, 2020 and December 31, 2019, respectively. Total prepaid expenses and other current assets – long term amounted to $15,959 and $0 at March 31, 2020 and December 31, 2019, respectively. Prepaid expenses to C2M who is a related party, amounted to $622,159 – current portion and $2,333,523 – long-term portion at March 31, 2020. Prepaid expenses to C2M who is a related party, amounted to $622,160 – current portion and $2,492,045 – long-term portion at December 31, 2019. Prepaid expenses consist primarily of costs paid for future services which will occur within a year. Prepaid expenses may include prepayments in cash and equity instruments for an operating lease, consulting, and insurance fees which are being amortized over the terms of their respective agreements. 
 
Inventory
 
The Company values inventory, consisting of raw materials, growing plants and finished goods, at the lower of cost or net realizable value. Cost is determined on the first-in and first-out (“FIFO”) method. The Company reduces inventory for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated net realizable value. Factors utilized in the determination of the estimated net realizable value include (i) estimates of future demand, and (ii) competitive pricing pressures. In accordance with ASC 905, “Agriculture”, all direct and indirect costs of growing hemp are accumulated until the time of harvest and are reported at the lower of cost or net realizable value. Included in inventory is the Company’s hemp crop under cultivation on farm acreage leased by the Company. The cost of the hemp crop under cultivation is determined based upon costs to purchase industrial hemp seed and industrial hemp cuttings, plus farm labor, fertilizer, water and power, the cost to harvest and cost for drying services. The costs of planting, cultivating and harvesting the Company’s hemp crop are capitalized to hemp crop inventory under cultivation, when incurred. The Company determined the cost allocation of the hemp crop (hemp flowers and hemp cuttings) based upon a proforma Market Value Method. However, based upon current actual sales prices and after reviewing national sales trends, the Company established an inventory reserve to write down the inventory to net realizable value which is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation or shipping. The Company recorded impairment expense on inventory of it finished goods- hemp flowers of $553,440 (see Note 4) during the three months ended March 31, 2020 and was included in cost of sales as reflected in the accompanying unaudited condensed consolidated statements of operations.
 
Property and Equipment
 
Property and equipment are carried at cost less accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 3 to 10 years. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired, or disposed of, the cost and accumulated depreciation are removed, and any resulting gains or losses are included in the unaudited condensed consolidated statement of operations.
 
Impairment of long-lived assets
 
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
 
Derivatives and Hedging- Contracts in Entity’s Own Equity
 
In accordance with the provisions of ASC 815 “Derivatives and Hedging” the embedded conversion features in the convertible notes (see Note 9) are not considered to be indexed to the Company’s stock. As a result, these are required to be accounted for as derivative financial liabilities and have been recognized as liabilities on the accompanying consolidated balance sheets. The fair value of the derivative financial liabilities is determined using a binomial model with Monte Carlo simulation and is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, the expected term, and the risk-free interest rate. The derivative financial liabilities are subject to re-measurement at each balance sheet date and any changes in fair value is recognized as a component in other income (expenses).
 
 
-10-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
  
Revenue Recognition
 
On January 1, 2018, the Company adopted ASC Topic 606 and the related amendments, Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company recognizes revenue by applying the following steps:
 
Step 1: Identify the contract(s) with a customer.
 
Step 2: Identify the performance obligations in the contract.
 
Step 3: Determine the transaction price.
 
Step 4: Allocate the transaction price to the performance obligations in the contract.
 
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
 
The Company’s performance obligations are satisfied at the point in time when products are shipped or delivered to the customer, which is when the customer has title and the significant risks and rewards of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment of product). The Company primarily receives fixed consideration for sales of product. Payments received from customers that are related to unshipped or undelivered products are recorded as unearned revenue until the shipment of product.
 
Cost of Sales
 
The primary components of cost of sales include the cost of the product, and, indirect cost such as utilities, farm lease expenses, and depreciation expenses on farming equipment related to production and harvesting period.
 
Research and Development Expenses
 
The Company follows ASC 730-10, “Research and Development,” and expenses research and development costs when incurred.  Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development.   Research and development costs of $0 and $15,000 were incurred for the three months ended March 31, 2020 and 2019, respectively, and are included in operating expenses on the accompanying unaudited condensed consolidated statements of operations.
 
Advertising Costs 
 
The Company applies ASC 720 “Other Expenses” to account for advertising related costs. Pursuant to ASC 720-35-25-1, the Company expenses the advertising costs when the first time the advertising takes place. Advertising costs were $57,050 and $50,531 for the three months ended March 31, 2020 and 2019, respectively, and are included in selling and marketing expenses on the accompanying unaudited condensed consolidated statement of operations.
 
Shipping and Handling Costs
 
The Company accounts for shipping and handling fees in accordance with ASC 606. The amounts charged to customers for shipping products are recognized as revenues and the related costs of shipping products are classified in selling and marketing expenses as incurred. Shipping costs included in selling and marketing expenses were $16,588 and $548 for the three months ended March 31, 2020 and 2019, respectively.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations.
 
 
-11-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
Stock-Based Compensation
 
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
 
Through March 31, 2018, pursuant to ASC 505-50 - Equity-Based Payments to Non-Employees, all share-based payments to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company adoption did not have any material impact on its consolidated financial statements.
 
The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.
 
Related Parties
 
We follow ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions.  
 
Earnings per Share
 
We compute basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”. Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if preferred stock converted to Common Stock and warrants are exercised.  Preferred stock and warrants are excluded from the diluted earnings per share calculation if their effect is anti-dilutive.  For the three months ended March 31, 2020 and 2019, the following potentially dilutive shares were excluded from the computation of diluted earnings per shares because their impact was anti-dilutive:
 
 
 
2020
 
 
2019
 
Stock Options
  4,809,822 
  5,434,375 
Stock Warrants
  2,014,299 
  1,362,833 
Restricted stock to be issued upon vesting
  3,651,379 
  - 
Convertible Preferred Stock
  9,460,845 
  5,542,212 
Convertible Debt
  10,833,865 
  250,000 
Total
  30,770,210 
  12,589,420 
 
Income Taxes
 
The Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
 
 
-12-
 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
 
Tax positions that meet the more likely than not recognition threshold are measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all more likely than not to be upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
 
The Company has adopted ASC 740-10-25, “Definition of Settlement”, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open.  The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they are filed.
 
Non-controlling interests in consolidated financial statements
 
In December 2007, the FASB issued ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). This ASC clarifies that a non-controlling (minority) interest in subsidiaries is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, those losses attributable to the parent and the non-controlling interest in subsidiaries may exceed their interests in the subsidiary’s equity. The excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests even if that attribution results in a deficit non-controlling interest balance. On March 11, 2019, the Company acquired a 50.1% limited liability membership interest in EOW, pursuant to a Subscription Agreement and a Membership Interest Purchase Agreement (see Note 3) and has the right to appoint a manager of the limited liability company. Additionally, on July 5, 2019, the Company acquired a 51% limited liability membership interest in Paradise Medlife (see Note 3).
 
Gain (Loss) on Modification/Extinguishment of Debt
 
In accordance with ASC 470, “Gain (Loss) on Modification/Extinguishment of Debt”, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of the original instrument along with the recognition of a gain or loss. Additionally, under ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument along with the recognition of a gain/loss.
 
Leases
 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning after December 15, 2018.
 
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
 
 
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 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
 
Recent Accounting Pronouncements
 
In January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment” (ASU 2017-04). The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the calendar year ending December 31, 2020. The amendments require a prospective approach to adoption and early adoption is permitted for interim or annual goodwill impairment tests. The adoption of this guidance had no impact on the Company’s unaudited condensed consolidated financial statements.
 
The Company has reviewed the FASB issued ASU accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We have carefully considered the new pronouncements that alter previous generally accepted accounting principles and do not believe that any new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management.
 
Recent Accounting Updates Not Yet Effective
 
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this guidance.
  
NOTE 3 – ACQUISITION OF ASSETS AND OWNERSHIP
 
Exactus One World
 
On March 11, 2019, the Company acquired a 50.1% limited liability membership interest in Exactus One World, LLC (“EOW”), an Oregon limited liability company, formed on January 25, 2019 which since inception, had no operations.
 
The Company acquired 50.1% limited liability membership interest pursuant to a Subscription Agreement (the “Subscription Agreement”) and a Membership Interest Purchase Agreement (the “Purchase Agreement”). Under the terms of the Subscription Agreement, the Company acquired a 30% interest in EOW, and an additional 20.1% was acquired from existing members pursuant to the terms of the Purchase Agreement. The existing members are considered third parties. The Company has the right to appoint a Manager of the limited liability company and has appointed its President. Under the Operating Agreement for EOW, as amended, the Company has the right to appoint, and remove and replace, if desired, one of three managers of EOW, with each manager having the full rights to control the business and affairs of EOW. The Company appointed its Interim Chief Executive Officer, Emiliano Aloi, as its Manager of EOW.
 
 
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 EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
 
 
Under the term of the Subscription Agreement, the Company acquired 30% of membership interest in EOW in consideration for cash of $2,700,000 payable as follows:
 
$400,000 paid previously for purchase of Hemp Seeds;
$100,000 upon execution of the LLC Operating Agreement;
$500,000 on or before April 1, 2019;
$500,000 on or before May 1, 2019;
$300,000 on or before August 1, 2019;
$450,000 on or before September 1, 2019 and,
$450,000 on or before October 1, 2019
 
The acquisition of the 30% membership interest is deemed to be an investment in and capital contribution to EOW and shall be eliminated upon consolidation. The Company paid a total of approximately $2,344,000 between April 2019 and September 2019 fully paid the $2,700,000 purchase price during fiscal 2019.
 
Under the term of the Purchase Agreement, the Company acquired 20.1% of EOW from existing members for aggregate consideration of $2,940,000 consisting of total cash payments of $1,500,000, 937,500 shares of the Company’s Common Stock, and $450,000 worth of shares of Common Stock on June 14, 2019.  Pursuant to the terms of the Purchase Agreement, the Company issued 937,500 shares of its Common Stock valued at $990,000, or $1.056 per share, the fair value of the Company’s Common Stock based on the quoted trading price on the date of the Purchase Agreement. No goodwill was recorded since the Purchase Agreement was accounted for as an asset purchase.
 
During fiscal 2019, the Company fully paid the consideration and was paid to the sellers as follows:
 
$300,000 cash and 937,500 shares of the Company’s Common Stock to the sellers upon execution, which was paid during the year ended December 31, 2019;
$700,000 on April 20, 2019 which was paid on April 18, 2019;
On June 10, 2019, the Company was required to issue and issued the sellers an additional $450,000 of shares of Common Stock of the Company based upon the 20 day volume weighted average price per share on the date of issue which was equivalent to $0.89 per share or 503,298 shares of the Company’s Common Stock and was issued in August 2019; and
$500,000 on September 1, 2019 which was fully paid by November 2019.