Quarterly report pursuant to Section 13 or 15(d)

SUBSEQUENT EVENTS

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SUBSEQUENT EVENTS
6 Months Ended
Jun. 30, 2019
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS

In accordance with authoritative guidance, the Company has evaluated any events or transactions occurring after June 30, 2019, the balance sheet date, through the date of filing of this report and note that there have been no such events or transactions that would require recognition or disclosure in the consolidated financial statements as of and for the quarter ended June 30, 2019, except as disclosed below.

 

Sale of Common Stock

 

Subsequent to the reporting period, and up through August 13, 2019, the Company accepted shareholder subscriptions in the total amount of $848,408 in exchange for issuance of 1,532,871 shares of Common Stock in an offering exempt under Rule 506 of Regulation D.

 

Green Goddess Extracts, LLC Acquisition

 

On July 31, 2019 the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Green Goddess Extracts, LLC (“Green Goddess”), a Florida contract manufacturer and formulator of hemp and vape products. Under the Purchase Agreement the Company acquired the assets of Green Goddess consisting principally of inventory, equipment, trademarks and a leased location, entered into an option to acquire the seller’s vape assets, and entered into an employment agreement with the founder of Green Goddess. Green Goddess manufactures and distributes a premium line of hemp-derived products sold through distributors and online at www.greengoddessextracts.com . Green Goddess has been a contract manufacturer for C2M and the Company.

 

Under the terms of the Purchase Agreement the Company agreed to issue 250,000 shares of the Company’s Common Stock and pay $250,000 cash for the acquisition. The shares vest at a rate of 1/24 per month until fully vested. In addition, the Company entered into an agreement under which the Company may become obligated to issue up to an additional $250,000 of Common Stock based upon the volume weighted average price per share (“VWAP”) for the 20 days prior to issuance, in the event that sales of products utilizing seller’s flavored products exceed $500,000 monthly for a three month average period.

 

Additionally, on July 1, 2019, the Company entered into an Executive Employment Agreement (the “Employment Agreement”) with Alejandro De La Espriella (the “Executive”) who is the managing member of Green Goddess Extracts, LLC. The term of the Employment Agreement shall be for two years and shall be automatically renewed for successive one year periods unless either party provides a written notice of non-renewal. The Company agrees to pay the Executive an initial base salary of $120,000 per year subject to annual adjustments determined by the board of directors of the Company and such Executive shall also be eligible for annual bonus, performance bonus and equity awards as defined in the Employment Agreement.

 

Paradise Medlife, LLC

 

The Company entered into an Operating Agreement (the “Operating Agreement”) with Paradise Medlife, LLC (“Paradise Medlife”) and Paradise CBD, LLC. Paradise Medlife is a Florida Limited Liability Company, organized on April 12, 2019 with no operations since inception. The Company contributed capital of $50,000 in the form of CBD products in exchange for 51% ownership of Paradise Medlife. Consequently, Paradise Medlife became a majority owned subsidiary of the Company.

 

Management and Services Agreement

 

As previously disclosed, on March 11, 2019, the Company acquired, through our majority-owned subsidiary, EOW, from our largest shareholder, C2M, certain rights to a 50.1% limited liability membership interest in certain farm leases and operations in Oregon in order to enter into the business of hemp farming for the 2019 grow season. During May 2019, the Company appointed Emiliano Aloi, the President of the Company, to the additional position of co-manager of EOW. The Company currently is farming approximately 200 acres of hemp for harvest and production during 2019. 

 

On July 31, 2019, the Company finalized and entered into a Management and Services Agreement (the “MSA”) in order to provide us project management and various other benefits associated with the farming rights, operations and opportunities with C2M, including assignment by C2M of C2M’s agreements and rights to acquire approximately 200 acres of hemp farming. Under the terms of the MSA, C2M agreed to provide further access to the opportunities and know-how of C2M, consented to the appointment of Emiliano Aloi, a seasoned hemp veteran previously an advisor and currently the Company’s President, and to provide the Company and EOW additional services consisting of, among other things:

 

● right of participation for further investment and business opportunities in order to rapidly expand our business and operations in hemp-derived CBD;

 

● executive, sourcing, vendor, product, production and other expertise and resources;

 

● appointment of Aloi to the position of President;

 

● introductions to farming and other financing;

 

● designs for international “Hemp-Café” store design and franchise opportunities including plans, drawings, approvals and authorizations, leads and contacts;

 

● access to leasing of prime real estate in Delray Beach Florida with an option to purchase, and the continuing assistance of the founder of C2M in connection with management, design, and promotion of the project;

 

● drawings, designs and specifications for extraction, production and manufacturing facilities and resources;

 

● brand development and support services.

 

The Company finalized the compensation arrangements for C2M as contemplated in connection with the March 2019 transactions and the additional agreements with C2M under the MSA following tax, accounting and legal review including the treatment of the issuance of preferred stock in connection with the transactions. While the assignment initially contemplated a $9 million payment from us to C2M, the parties agreed to payment in a new class of preferred stock, convertible above market, as more fully described below. As a further condition to payment of the consideration, the value of the 50.1% interest in EOW was required to be not less than $25 million, with a third-party valuation and fairness opinion from a third-party prior to payment. On April 29, 2019, the Company received an independent fairness opinion from Scalar, LLC (“Scalar Report”) that concluded the transaction, including the consideration to be paid consisting of $10 million of Series E Preferred (as defined below), was fair from a financial point of view. The Scalar Report estimated the enterprise value, taking account of the 2019 harvest, to be between $55 and $74 million, based upon certain assumptions relied upon in connection with preparation of the Scalar Report. 

  

Series E 0% Convertible Preferred Stock

 

On August 1, 2019 the Company issued 1,000 shares of newly designated Series E 0% Convertible Preferred Stock, par value $0.0001 per share (the “Series E Preferred”) to C2M pursuant to the MSA. Under the terms of the Series E Preferred, C2M may only convert such shares of Series E Preferred into shares of the Company’s Common Stock, if the closing price of Common Stock on the principal trading market, shall exceed $2.00 per share for 5 consecutive trading days. Once vested, the shares of Series E Preferred held by C2M are intended to either be converted at $1.60 per share of Common Stock or optionally redeemed out of the proceeds of future financings, at the option of C2M.

 

Each share of Series E Preferred is convertible into 625 shares of the Company’s Common Stock and have a stated value of $1,000 per share. The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company is prohibited from effecting conversions of the Series E Preferred to the extent that, as a result of such conversion, the holder beneficially owns more than 4.99% (which may be increased to 9.99% upon 61 days’ written notice), in the aggregate, of the issued and outstanding shares of Common Stock calculated immediately after giving effect to the issuance of shares of Common Stock upon the conversion of the Series E Preferred. Holders of the Series E Preferred shall be entitled to vote on all matters submitted to shareholders and shall be entitled to the number of votes equal to the number of shares of Common Stock into which the shares of Series E Preferred Stock are convertible, subject to applicable beneficial ownership limitations. The Series E Preferred Stock provides a liquidation preference equal to par value.

  

The Series E Preferred has a no mandatory redemption rights however, in the event that we raise $5,000,000 from a capital raising transaction involving any equity or equity-linked financing during any fiscal quarter in an amount which would cause the Company’s cash or cash equivalents to exceed $5,000,000 (a “Fundamental Transaction”), the Company is required from the proceeds of such offering, to offer C2M a right to redeem Series E Preferred then outstanding as follows:

 

(A) 0% percent of the net proceeds of the Fundamental Transaction, after deduction of the amount of net proceeds required to leave the Company (together with our existing cash on hand immediately prior to the completion of the Fundamental Transaction) with cash on hand of $5,000,000; plus

 

(B) 10% percent of the next $5,000,000 of net proceeds of the Fundamental Transaction; plus

 

(C) 100% of the net proceeds of the Fundamental Transaction thereafter (until the Series E Preferred is redeemed in full).

 

The shares of Series E Preferred are convertible into Common Stock, once vested, at a price of $1.60 per share. The Company is not obligated to file a registration statement with respect to the shares of Common Stock into which Series E Preferred shares may be converted.

 

Cancellation of Series C Preferred Stock

 

On June 30, 2016, the Board of Directors approved a Certificate of Designation authorizing a new class of Series C Preferred Stock, par value $0.0001 per share (the “Series C Preferred”) convertible into 216,667 shares of Common Stock. The Series C Preferred, 200,000 shares of Common Stock, and three-year warrants to purchase 208,333 shares of Common Stock at $4.80 per share were all issued in connection with plans to conduct clinical trials and to perform clinical research in support of the development of diagnostic devices. The Company had been unable to proceed with the clinical trials and research. On July 31, 2019, the Company entered into a Surrender and Mutual Release Agreement (the “Cancellation Agreement”) to terminate the agreements and to cancel all issued and outstanding shares of Series C Preferred, all but 20,000 shares of the 200,000 shares of Common Stock, and all warrants issued under these arrangements.

 

Lease Agreement  

 

On July 9, 2019, the Company entered into a Commercial Lease Agreement (the “Lease”) with Skybar Holdings, LLC, a Florida limited liability company. Pursuant to the Lease, the Company will rent the entire first floor (consisting of approximately 4,000 square feet) of a property located in Delray Beach, Florida (the “Premises”). The Company plans to develop the Premises to create a hemp oriented health and wellness retail venue, including education, clothing and cosmetics, and explore franchise opportunities. The initial term of the Lease is 5 years commencing August 1, 2019, with two 5 year extension options. The Lease includes a right of first refusal in favor of the Company to lease any space that becomes available on the 2nd and 3rd floor of the Premises and a right of first refusal to purchase the Premises. Pursuant to the Lease, the Company will pay rent equal to forty thousand dollars per month in advance in addition to all applicable Florida sales and/or federal taxes. Effective one year from the lease commencement date and each year thereafter, the rent shall increase at least three percent (3%) per year. The lessor of the Premises is a limited liability company owned or controlled by Vladislav (Bobby) Yampolsky, a member of the Board and the founder, manager and controlling member of C2M, the Company’s largest stockholder.

 

Appointment of Officer

 

On July 10, 2019, the Board of Directors of the Company appointed Kenneth E. Puzder to the position of Chief Financial Officer of the Company. Mr. Puzder is also a member of the Board of directors of the Company following the resignation of Kelley Wendt, the Company’s prior Chief financial Officer. Mr. Puzder currently also serves as President and Chief Financial Officer of C2M, the Company’s largest stockholder. The Company entered into an agreement with Mr. Puzder in the form of an offer letter which states that Mr. Puzder will receive an annual base salary of $120,000 and will be eligible to receive a $20,000 signing bonus within 90 days of his start date, which will be netted against future bonus payments, if any. He will also be eligible to participate in the Company’s benefit plans. Mr. Puzder will also receive an equity award, which will be determined and approved by the Board. The offer letter has no set term and may be terminated by Mr. Puzder or the Company on two weeks written notice.