Annual report pursuant to Section 13 and 15(d)

STOCKHOLDERS' EQUITY (DEFICIT)

v3.20.1
STOCKHOLDERS' EQUITY (DEFICIT)
12 Months Ended
Dec. 31, 2019
Stockholders' Equity (Deficit):  
STOCKHOLDERS' EQUITY (DEFICIT)

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 the accompanying consolidated financial statements are retroactively restated for the effect of the Reverse Stock Split.

 

In January 2019, the Company approved the 2019 Equity Incentive Plan (the “2019 Plan”) which provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards. The 2019 Plan provides for a share limit equal to 15% of the total of the number of the issued and outstanding shares of the Company’s Common Stock and all shares of Common Stock issuable upon conversion or exercise of any outstanding securities of the Company.

 

Preferred Stock

 

The Company’s authorized preferred stock consists of 50,000,000 shares with a par value of $0.0001.  

 

Series A - On February 17, 2016, the Board of Directors voted to designate a class of preferred stock entitled Series A Preferred Stock, consisting of up to five million (5,000,000) shares, par value $0.0001 per share.  

 

On December 21, 2018, we filed a Certificate of Cancellation of our previously filed Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock in order to designate 1,000,000 shares as a new Series of Preferred Stock for issuance to former Holders of our Notes under the Exchange Agreements (see Note 9), and filed a new Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Series A Preferred Certificate of Designation”).

 

Pursuant to the Series A Preferred Certificate of Designation, the Company issued shares of Series A Preferred. Each share of Series A Preferred has a stated value of $1.00 per share.  In the event of a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock will be entitled to a payment as set forth in the Certificate of Designation. The Series A Preferred is convertible into such number of shares of the Company’s Common Stock, par value $0.0001 per share equal to the Stated Value of $1.00, divided by $0.20, subject to adjustment in the event of stock split, stock dividends, and recapitalization or otherwise.  Pursuant to the Exchange Agreements each holder of Notes shall be issued Series A Preferred in the amount of the purchase price paid for such Notes by the buyer under the Exchange Agreement, including any penalty, interest and premium payments. Each share of Series A Preferred entitles the holder to vote on all matters voted on by holders of Common Stock as a single class. With respect to any such vote, each share of Series A Preferred entitles the holder to cast such number of votes equal to the number of shares of Common Stock such share of Series A Preferred is convertible into at such time, but not in excess of the conversion limitations set forth in the Series A Preferred Certificate of Designation. The Series A Preferred will be entitled to dividends to the extent declared by the Company.

 

During the year ended December 31, 2019, the Company issued an aggregate of 849,360 shares of Series A Preferred Stock to various note holders and also sold an aggregate of 55,090 shares of Series A preferred stock for $55,090 in a private placement, which was used to repay and convert a total of $842,791 of principal amount (includes penalty fees of $149,313 during the year ended December 31, 2019) and accrued interest of $61,569 pursuant to Exchange Agreements. Accordingly, the Company recognized a deemed dividend of $904,450 during the year ended December 31, 2019 in connection with the issuance of these Series A Preferred Stock.

  

During the year ended December 31, 2019, the Company converted 551,341 Series A Preferred Stock into 2,756,705 shares of Common Stock. There are 353,109 and 0 shares of Series A Preferred Stock outstanding as of December 31, 2019 and 2018, respectively.

 

Series B-1 - On February 29, 2016, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B-1 Convertible Preferred Stock (“Series B-1 Preferred Stock”), consisting of up to 32,000,000 shares, par value $0.0001 per share.  With respect to rights on liquidation, winding up and dissolution, the Series B-1 Preferred Stock ranks pari passu to the class of Common Stock. Shares of Series B-1 Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Shares of Series B-1 Preferred Stock are convertible, at the option of the holder, into shares of Common Stock at a conversion rate of 0.125 shares for 1 share basis. Holders of Series B-1 Preferred Stock have the right to vote as-if-converted to Common Stock on all matters submitted to a vote of holders of the Company’s Common Stock. On February 29, 2016, the Company issued 30,000,000 shares of Series B-1 Preferred Stock.

  

During the year ended December 31, 2019, the Company converted 1,150,000 Series B-1 Preferred Stock into 143,750 shares of Common Stock.   There are 1,650,000 and 2,800,000 shares of Series B-1 preferred stock outstanding, which are convertible into 206,250 and 350,000 shares of common stock, as of December 31, 2019 and 2018, respectively.

 

Series B-2 - On February 17, 2016, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B-2 Convertible Preferred Stock (“Series B-2 Preferred Stock”), consisting of up to 10,000,000 shares, par value $0.0001 per share, with a stated value of $0.25 per share.  With respect to rights on liquidation, winding up and dissolution, holders of Series B-2 Preferred Stock will be paid in cash in full, before any distribution is made to any holder of common or other classes of capital stock, an amount of $0.25 per share. Shares of Series B-2 Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Shares of Series B-2 Preferred Stock are convertible, at the option of the holder, into shares of Common Stock at a conversion rate of 0.125 shares for 1 share basis.  Holders of Series B-2 Preferred Stock have the right to vote as-if-converted to Common Stock on all matters submitted to a vote of the holders of the Company’s Common Stock. For so long as any shares of Series B-2 Preferred Stock are issued and outstanding, the Corporation shall not issue any notes, bonds, debentures, shares of preferred stock, or any other securities that are convertible to Common Stock unless such conversion rights are at a fixed ratio or a fixed monetary price (Note 9). On February 29, 2016, the Company issued 2,084,000 shares of Series B-2 Preferred Stock.

 

During the year ended December 31, 2019, the Company converted 1,168,000 Series B-2 Preferred Stock into 146,000 shares of Common Stock.   There are 7,516,000 and 8,684,000 shares of Series B-1 preferred stock outstanding, which were convertible into 939,500 and 1,085,500 shares of common stock as of December 31, 2019 and 2018, respectively.

 

Series C - On June 30, 2016, the Company’s Board of Directors approved a Certificate of Designation authorizing 1,733,334 shares of new Series C Preferred Stock, par value $0.0001 per share.  The Series C Preferred Stock ranks equally with the Company’s Common Stock with respect to liquidation rights and is convertible to Common Stock at a conversion rate of 0.125 shares for 1 share basis.  The conversion rights of holders of the Series C Preferred Stock are limited such that no holder may convert any shares of preferred stock to the extent that such holder, immediately following the conversion, would own in excess of 4.99% of the Company’s issued and outstanding shares of common stock.  This limitation may be increased to 9.99% upon 61 days written notice by a holder of the Series C Preferred Stock to the Company.  

 

Due to the Company had been unable to proceed with the clinical trials and research, on July 31, 2019, the Company entered into a Surrender and Mutual Release Agreement (the “Cancellation Agreement”) to terminate the agreements and to cancel all issued and outstanding shares of Series C Preferred. Accordingly, the Company cancelled 1,733,334 shares of Series C Preferred Stock which was recorded at par value.

 

As of December 31, 2019 and 2018, there were 0 and 1,733,334 shares of Series C Preferred Stock issued and outstanding which were convertible into 0 and 216,667 shares of common stock, respectively.

 

Series D - On March 1, 2018, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series D Convertible Preferred Stock consisting of up to 200 shares, par value $0.0001 per share, to offer for sale to certain accredited investors, including affiliates of the Company, with a maximum offering amount of $2,200,000. Pursuant to the terms of the Series D Subscription Agreement, immediately following the consummation of an offering of the Company’s Common Stock for which the gross proceeds of the offering exceed $5,000,000, each share of Series D automatically converts into 25,000 shares of Common Stock. Upon the liquidation, dissolution or winding up of the Company, each holder of Series D Convertible Preferred Stock shall be entitled to receive, for each share of Series D Convertible Preferred Stock held, $10,000 per share payable pari passu with the Company’s Series B-2 Convertible Preferred Stock.    Shares of Series D Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Holders of Series D Preferred Stock have the right to vote as-if-converted to Common Stock on all matters submitted to a vote of holders of the Company’s Common Stock. At no time may shares of Series D Convertible Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of our issued and outstanding Common Stock, subject to an increase in such limitation up to 9.99% of the issued and outstanding Common Stock on 61 days’ written notice to the Company. 

 

On March 28, 2018, the Company issued 45 shares of Series D Preferred Stock. The Company received $550,000 in connection with the Offering including $50,000 in cash for 5 shares of Series D Preferred Stock and $500,000 in debt re-payment to officers and directors for 2016 and 2017 bonuses for 40 shares of Series D Preferred Stock. During the year ended December 31, 2019, the Company converted 27 shares of Series D Preferred Stock into 675,000 shares of Common Stock.  There are 18 and 45 shares of Series D preferred stock outstanding which were convertible into 450,000 and 1,125,000 shares of common stock as of December 31, 2019 and 2018, respectively.

 

Series E - On August 1, 2019 the Company issued 10,000 shares of newly designated Series E 0% Convertible Preferred Stock, par value $0.0001 per share (the “Series E Preferred”) to C2M pursuant to the MSA. Under the terms of the Series E Preferred, C2M may only convert such shares of Series E Preferred into shares of the Company’s Common Stock, if the closing price of Common Stock on the principal trading market, shall exceed $2.00 per share for 5 consecutive trading days. Once vested, the shares of Series E Preferred held by C2M are intended to either be converted at $1.60 per share of Common Stock or optionally redeemed out of the proceeds of future financings, at the option of C2M.

 

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

  

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

 

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

 

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

 

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

 

The shares of Series E Preferred are convertible into Common Stock, once vested, at a price of $1.60 per share. The Company is not obligated to file a registration statement with respect to the shares of Common Stock into which Series E Preferred shares may be converted. The Company believes that the occurrence of the Fundamental Transaction is considered a conditional event and as a result the instrument does not meet the definition of mandatorily redeemable financial instrument based from ASC 480-10-25, “Distinguishing Liabilities from Equity”. This financial instrument was assessed at each reporting period to determine whether circumstances have changed such that the instrument met the definition of a mandatorily redeemable instrument (that is, the event is no longer conditional). If the event has occurred, the condition is resolved, or the event has become certain to occur, the financial instrument will be reclassified as a liability.

 

On July 31, 2019, the Company granted 10,000 Series E Preferred in connection with a Management and Services Agreement (the “MSA”) with C2M, the Company’s largest shareholder (see Note 11). The Company valued the 10,000 Series E Preferred shares which is equivalent into 6,250,000 common shares at a fair value of $0.54 per common share or $3,375,000 based on the sales of common stock on recent private placements on the dates of grant. During the year ended December 31, 2019, the Company recorded stock-based compensation of $260,795 and prepaid expense – related party of $3,114,204 to be amortized over the term of the MSA.

 

As of December 31, 2019 and 2018, there were 10,000 and 0 shares of Series E Preferred Stock issued and outstanding which were convertible into 6,250,000 and 0 shares of common stock, respectively.

 

Common Stock

 

The Company’s authorized Common Stock consists of 650,000,000 shares with a par value of $0.0001 per share. 

 

The following were transaction during the year ended December 31, 2018:

 

Common stock issued for the settlement of accounts payable

 

During the year ended December 31, 2018, the Company issued 214,834 post-split shares (1,718,675 pre-split shares) of its common stock with a fair value of $343,735 to settle $85,934 of accounts payable and the balance of $257,801 recorded as loss on stock settlement.

 

Common stock issued for the service

During the year ended December 31, 2018, the Company issued 250,000 post-split shares (2,000,000 pre-split shares) of its common stock with a fair value of $18,000 recorded as expenses.

 

Common stock upon conversion of convertible debt

 

During the year ended December 31, 2018, the Company issued 685,644 post-split shares (5,485,152 pre-split shares) of common stock upon the conversion of convertible notes and interest of $46,295. The fair value of shares on conversion was $400,480 having a derivative value on date of conversion of $90,855 and balance $263,330 was recorded as loss on stock settlement.

 

 Common stock issued for services

 

During the year ended December 31, 2018, the Company issued 125,000 post-split shares (1,000,000 pre-split shares) of common stock, with a fair value of $8,000 for services rendered.

 

Common stock issued for settlement of Preferred B-2

 

During the year ended December 31, 2018, the Company issued 574,063 post-split shares (4,592,500 pre-split shares) of common stock, with a fair value of $86,798 in settlement with two holders of our Series B-2 Preferred Stock in exchange for their agreement to convert their shares of Series B-2 Preferred Stock into Common Stock, an additional further investment or agreement to purchase and thereafter restructure certain outstanding notes of the Company by cancelling such notes in exchange for shares of newly-designated Series A Preferred Stock of the Company, and release of any and all claims in connection with their prior investments.

 

The following were transaction during the year ended December 31, 2019:

 

Sale of Common Stock for private placement

 

During the year ended December 31, 2019, the Company sold an aggregate of 22,187,007 shares of Common Stock for total proceeds of $7,215,380.

 

Common Stock issued for Development Agreement

 

In consideration for the Development Agreement (see Note 11), C2M was issued 8,385,691 shares of our Common Stock on January 8, 2019. Additionally, the Company granted immediately vested 10-year options to purchase 750,000 shares of Common Stock, with exercise price of $0.32 per share to certain C2M founders. As a result, C2M became the Company’s largest shareholder holding (inclusive of the vested options held by its founders) approximately 51% of the Company’s outstanding Common Stock as of the date of the Development Agreement. Consequently, such transaction resulted in a change of control whereby, C2M obtained majority control through its Common Stock ownership (See Note 11). Therefore, the Company accounted for the 8,385,691 shares of Common Stock under ASC 845-10-S99 “Transfer of Nonmonetary Assets by Promoters or Shareholders” whereby the transfer of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the company's initial public offering normally should be recorded at the transferors' historical cost basis determined under GAAP. The Company determined that the value of the Development Agreement is $0 and recording it in a step-up basis would not be appropriate since C2M is considered a promoter, majority shareholder and also a related party having an ownership interest of 51% in the Company on the execution date of the Development Agreement. Accordingly, the Company recorded the issuance of 8,385,691 shares of Common Stock at par value. The 750,000 options were valued on the grant date at approximately $0.13 per option for a total of $96,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.13 per share (based on the quoted trading price on the dates of grants), volatility of 296%, expected term of 10 year, and a risk free interest rate of 2.74%. During the year ended December 31, 2019, the Company recorded stock-based compensation of $96,000.

 

Common Stock issued for settlement of debt

 

During the year ended December 31, 2019, the Company issued 250,000 shares of Common Stock to note holders upon the conversion of $4,000 of accrued interest. The fair value of shares on conversion was $196,000 having a derivative value on date of conversion of $18,000 and the balance of $178,000 was recorded as loss on settlement of debt. Additionally, in March 2019, the Company issued an aggregate of 203,080 shares of Common Stock to a noteholder upon the conversion of $27,000 of principal amount, accrued interest of $3,267 and $10,349 of accrued expenses.

 

Common Stock for membership interest in subsidiary

 

On March 11, 2019, with the assistance of C2M and assignment of rights, under the term of the Purchase Agreement, the Company acquired additional 20.1% from existing members in consideration for payment of 937,500 shares of Common Stock (see Note 3).  The 937,500 shares of Common Stock were valued at the fair value of $1.056 per common share or $990,000 based on the quoted trading price on the date of grant. Additionally, on June 10, 2019, the Company was required to issue the existing members an additional $450,000 of shares of Common Stock of the Company based upon the 20 day volume weighted average price per share on the date of issue which was equivalent to $0.89 per share or 503,298 shares of the Company’s Common Stock and was issued in August 2019.

  

Common Stock for services

 

In April 2019, the Company entered into a consulting agreement for investor relations services. The consultant shall receive compensation of 50,000 shares of the Company’s Common Stock and shall vest over one year with 4,174 common stock to vest on the date of this agreement and 4,166 common shares on the first day of each month thereafter. During the year ended December 31, 2019, the Company granted 50,000 shares of Common Stock and valued the shares of Common Stock at the fair value of $1.55 per common share or $77,500 based on the quoted trading price on the date of grant. The Company recorded stock-based compensation of $58,128 during the year ended December 31, 2019. In connection with this transaction, there were 20,830 shares of Common Stock to be issued as of December 31, 2019. 

 

In May 2019, the Company entered into a 6-month consulting agreement for investor relations services. The consultant shall receive compensation of 10,000 shares of the Company’s Common Stock per month or a total of 60,000 shares of Common Stock. During the year ended December 31, 2019, the Company issued an aggregate of 60,000 shares of Common Stock and valued the shares of Common Stock at the average fair value of $0.72 per common share or $43,000 based on the sales of common stock on recent private placements on the dates of grants at the end of each month. The Company recorded stock-based compensation of $43,000 during the year ended December 31, 2019.

 

Between August 2019 and November 2019, the Company entered into various consulting agreements with terms from 6 months to 2 years. The Consultants shall receive compensation in aggregate of 150,000 shares of the Company’s Common Stock. During the year ended December 31, 2019, the Company issued 50,000 shares of Common Stock and 100,000 shares remains to be unissued as of December 31, 2019 and valued the shares of Common Stock at the fair value ranging from approximately $0.50 to $0.61 per common share or $80,500 based on the sales of common stock on recent private placements on the dates of grants. During the year ended December 31, 2019, the Company recorded stock-based compensation of $24,699 and prepaid expense of $55,801 to be amortized over the term of this agreement.

 

In December 2019, the Company issued 100,000 shares of Common Stock for legal services to be rendered and valued the shares of Common Stock at the fair value of approximately $0.40 per common share or $39,880 based on the based on the quoted trading price on the date of grant. During the year ended December 31, 2019, the Company recorded prepaid expense of $39,880 to be amortized over the term of this agreement.

 

On October 23, 2019, the Amended and Restated Operating Agreement (the “Amended Operating Agreement”) of EOW was amended. Under the terms of the Amended Operating Agreement, the minority members of EOW conveyed their rights to distributions related to the current 2019 hemp crop. As a result, the Company shall receive 100% of the distributions of net profit from the 2019 hemp crop on approximately 226 acres of farmland currently growing in Oregon. The minority EOW members acknowledge and agree that each is waiving their right to participate, to the extent of their respective percentage interest, in distributions arising from the profits generated from the harvest of the 2019 hemp crop. Thereafter, the distributions shall continue as set forth in Section 5.02(a) of the Operating Agreement. Since March 2019, the Company has owned 50.1% of the limited liability membership interests in EOW. In addition, the members amended the payment schedule under which farm costs are required to be made by the Company. As consideration for the amendment, the Company agreed to issue 1,223,320 shares of its common stock, par value $0.0001 per share, to the minority members of EOW (“EOW Members”). The Company determined that the 1,223,320 shares of common stock is deemed compensation to the EOW Members in exchange for their right to receive their respective membership distribution which is considered income to them. As such the Company valued the shares of Common Stock at the fair value of $0.69 per common share or $844,091 based on the quoted trading price on the date of grant. The Company recorded stock-based compensation of $844,091 during the year ended December 31, 2019.

 

Common Stock in connection with Asset Purchase Agreements

 

On July 31, 2019, under the terms of the Green Goddess Purchase Agreement the Company agreed to issue 250,000 shares of the Company’s Common Stock to the Founder (see Note 3). In accordance with ASC 805-10, the 250,000 shares of common stock and the Additional Stock Consideration are tied to continued employment of the Company and as such are recognized as compensation expenses in the post combination period under Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively, the vesting period). During the year ended December 31, 2019, the Company recorded stock-based compensation of $33,750 in connection with this agreement. In connection with this transaction, the Company issued 62,500 shares of commons stock which represents the vested shares and there remains 187,500 unvested shares as of December 31, 2019. 

 

On September 30, 2019, pursuant to the terms of an asset purchase agreement with Levor, LLC, the Company granted 100,000 shares of its Common Stock valued at $70,000, or $0.70 per share, the fair value of the Company’s Common Stock based on the sale of common stock in the recent private placement (see Note 3). In connection with this transaction, there were 100,000 shares of Common Stock to be issued as of December 31, 2019. 

 

Common Stock grants under the 2019 Plan 

 

On September 13, 2019, the board of directors (the “Board”) of the Company appointed Vladislav “Bobby” Yampolsky to serve as its Interim Executive Chairman. Prior to his appointment, Mr. Yampolsky served as a member of the Board. In addition, the Board also appointed the Company’s current President, Emiliano Aloi, to serve as the Company’s Interim Chief Executive Officer. The appointments were made following the departure of the Company’s Chairman and CEO in August 2019. Vladislav (Bobby) Yampolsky is the founder, manager and controlling member of C2M, the Company’s largest stockholder.

 

On September 13, 2019, the Board delegated authority to the Chairman of the Board and/or the CEO to issue restricted stock and options under the 2019 Equity Incentive Plan (the “2019 Plan”) to non-executive employees and consultants. The aggregate number of shares of common stock of the Company, par value $0.0001 (“Common Stock”), issuable under delegated authority may not exceed 500,000 shares, and no individual award may exceed 100,000 shares, provided, further, that the minimum exercise price of awards made shall be the fair market value of the Common Stock determined in accordance with the 2019 Plan.

 

On September 13, 2019, the Board approved additional awards to officers, directors and consultants under the 2019 Plan as follows:

 

Name Amount of Grant Vesting Period Vesting Commencement Date
Bobby Yampolsky - Director 1,000,000 shares of restricted Common Stock. 1/48th per month. Vests October 1, 2019.
Emiliano Aloi - CEO 1,000,000 shares of restricted Common Stock. 1/48th per month.

Vests on the first day of calendar month following:

(A) the date that the 2019 Exactus One World agriculture total yield is at least 400,000 pounds of total biomass for production and held for sale or processing (including top flower harvest) and (B) the date that the Company has reported at least $5 million of revenue on a consolidated basis.

 

Consultant – Legal and consulting services

 

100,000 shares of restricted Common Stock. 1/48th per month. Vests October 1, 2019.
Consultant – consulting services 1,000,000 shares of restricted Common Stock. 1/48th per month.

Vests on the first day of calendar month following:

(A) the date that the 2019 Exactus One World agriculture total yield is at least 400,000 pounds of total biomass for production and held for sale or processing (including top flower harvest) and (B) the date that the Company has reported at least $5 million of revenue on a consolidated basis.

 

   

The Company valued the shares of Common Stock at the average fair value of $0.70 per common share or $2,170,000 based on the sales of common stock on recent private placements on the dates of grants. During the year ended December 31, 2019, the Company recorded stock-based compensation of $48,125 in connection with these restricted common stock grants. In connection with this transaction, there were an aggregate of 68,750 shares of Common Stock to be issued as of December 31, 2019 which represents the vested shares and there remains 3,031,250 unvested shares as of December 31, 2019. 

 

Approval of Director Compensation Plan

 

On September 13, 2019, the Board established a new Director Compensation Plan (the “Director Plan”) to be administered under the 2019 Plan applicable to each non-employee/non-executive director, which Director Plan replaces the prior compensation arrangements previously applicable to non-employee/non-executive directors. The material terms of the Director Plan are set forth below:

 

Timing Amount Vesting

Initial appointment

(non-employee/non-executive directors)

$100,000 of the Company’s Common Stock issued on and priced at fair market value of the Common Stock on the last calendar date prior to appointment. 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director.

Directors continuing after initial appointment

(non-employee/non-executive directors)

$25,000 of Common Stock issued annually on the first day of September and priced at fair market value of the Common Stock as of the calendar date prior to the issuance for each continuing director that has served a minimum of 9 consecutive months as of the first day of September each year. 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director.

 

In June 2019, the Company granted 100,000 shares of restricted common stock to a former director who resigned in December 2019. The vesting period was 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director. In December 2019, the Company issued the 27,778 vested shares of Common Stock and was valued at the fair value of $1.05 per common share or $29,167 based on the quoted trading price on the date of grant. During the year ended December 31, 2019, the Company recorded stock-based compensation of $29,167 in connection with these restricted common stock grants.

 

In December 2019, the Company granted an aggregate of 300,000 shares of restricted common stock to three directors of the Company. The vesting periods are 1/24th vests upon date of grant and 1/24th vests on the first calendar date of each calendar month following appointment until fully vested as long as continuing as a director. The Company valued the shares of Common Stock at the fair value of $0.54 per common share or $162,000 based on the quoted trading price on the date of grant. During the year ended December 31, 2019, the Company recorded stock-based compensation of $13,500 in connection with these restricted common stock grants. In connection with this transaction, there were an aggregate of 25,002 shares of Common Stock issued as of December 31, 2019 which represents the vested shares and there remains 274,998 unvested shares as of December 31, 2019. 

 

Cancellation of Common Stock

 

On July 31, 2019, the Company entered into a Surrender and Mutual Release Agreement (the “Cancellation Agreement”) to terminate the agreements and to cancel all issued and outstanding shares of Series C Preferred and 180,000 shares of Common Stock, and all warrants issued under these arrangements. Accordingly, the Company cancelled 180,000 shares of Common Stock which was recorded at par value.

 

Common Stock Warrants

 

A summary of the Company’s outstanding stock warrants as of December 31, 2019 and 2018 and changes during the period ended are presented below:  

    Number of Warrants    

Weighted

Average

Exercise

Price

   

 

Weighted

Average

Remaining

Contractual

Life

(Years)

 
Balance at December 31, 2017     208,333     $ 4.80        1.50   
Granted     435,750       0.32        1.79   
Balance at December 31, 2018     644,083       1.77       1.38  
Granted     1,578,549       0.45       5.00  
Cancelled                  
Exercised                  
Forfeited     (208,333 )     4.80        
Balance at December 31, 2019     2,014,299     $ 0.45       3.31  
                         
Warrants exercisable at December 31, 2019           $ 0.45       3.31  
                         
Weighted average fair value of warrants granted during the period           $ 1.05          

 

As of December 31, 2019, aggregate intrinsic value in connection with exercisable warrants amounted to $178,610. 

 

On October 15, 2018, the Company issued 435,750 warrants with an exercise price of $0.32 per share and exercisable for two years to a Series B-2 Holder. These warrants have a grant date fair value of $0.32 per warrant, determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 2.54%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 396.30%; and (4) an expected life of the warrants of 2 years. The Company recorded an expense on these warrants of $138,679.

 

On March 21, 2019, the Company issued 718,750 warrants to purchase shares of the Company’s Common Stock in connection with a consulting agreement in exchange for corporate development and advisory services. The warrants have a term of 5 years from the date of grant and are exercisable at an exercise price of $0.20. The 718,750 warrants were valued on the grant date at approximately $1.55 per warrant for a total of $1,114,062 using a Black-Scholes option pricing model with the following assumptions: stock price of $1.55 per share (based on the quoted trading price on the dates of grants), volatility of 602%, expected term of 5 year, and a risk free interest rate of 2.35%. During the year ended December 31, 2019, the Company recorded stock-based compensation of $1,114,062.

 

On November 13, 2019, the Company issued 500,000 warrants to purchase shares of the Company’s Common Stock in connection with a consulting agreement in exchange for corporate development and advisory services. The warrants have a term of 5 years from the date of grant and are exercisable at an exercise price of $0.70. The 500,000 warrants were valued on the grant date at approximately $0.63 per warrant for a total of $314,181 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.63 per share (based on the quoted trading price on the dates of grants), volatility of 270%, expected term of 5 year, and a risk free interest rate of 1.69%. During the year ended December 31, 2019, the Company recorded stock-based compensation of $314,181.

 

On November 27, 2019, the Company issued a convertible note in the principal amount of $833,333, and a warrant to purchase 275,612 shares of Common Stock (see Note 9). The Company granted the note holder warrants in connection with the issuance of this note. The warrants had a term of 2 years from the date of grant. The warrants are exercisable at an exercise price of $0.756 per share of Common Stock at any time before the close of business on the day two years after their issuance subject to adjustment in the event of stock dividends, splits, fundamental transactions, or other changes in capital structure, and contain provisions that permit cashless exercise if a registration statement covering the resale of the shares issuable pursuant to the warrants is not filed within 180 days of their issuance.  The Company accounted for the warrants by using the relative fair value method and recorded debt discount from the relative fair value of the warrants of $140,243 using the Binomial Lattice method and is being amortized over the term of the note. Additionally, the Company issued 84,187 warrants to purchase shares of the Company’s common stock to a certain FINRA broker-dealer who acted on behalf of the Company in connection with the issuance of this convertible note. The warrants had a term of 4 years from the date of grant and was exercisable at an exercise price of approximately $0.08. The 84,187 warrants were valued on the grant date at approximately $0.64 per warrant for a total of $54,145 using a Binomial Lattice method with the following assumptions: stock price of $0.65 per share (based on the quoted trading price on the date of grant), volatility of 270%, expected term of 4 years, and a risk free interest rate of 1.63%. The Company recorded these warrants as debt discount which is being amortized over the term of the note. The Company assessed the classification of its common stock purchase warrants as of the date of each equity offering and determined that such instruments met the criteria for equity classification under the guidance in ASU 2017-11 “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Feature”. The Company has no warrants that contain a ‘round down’ feature under Topic 815 of ASU 2017-11.

 

Common Stock Options

 

Stock Option Plan

 

In September 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, and restricted stock unit awards. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. The incentive awards shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board or Compensation Committee may specify. Stock options expire no later than ten years from the date of grant. The aggregate number of shares of Common Stock which may be issued pursuant to the Plan is 9,500,000. Unless sooner terminated, the Plan shall terminate in 10 years.  

 

Stock option activity for the year ended December 31, 2019 and 2018 is summarized as follows:

 

    Number of Options     Weighted Average ExercisePrice     Weighted Average Remaining Contractual Life(Years)  
Balance at December 31, 2017     -     $ -       -  
Granted     959,375       0.41       9.00  
Balance at December 31, 2018     959,375       0.41       8.79  
Granted     4,753,572       0.21       8.54  
Exercise     (375,000 )     0.01       9.12  
Forfeited     (666,667 )     0.05       8.56  
Balance at December 31, 2019     4,671,280       0.29       7.29  
Options exercisable at December 31, 2019     3,798,888     $ 0.31       6.88  

 

Weighted average fair value of options granted during the period $0.55

 

As of December 31, 2019, aggregate intrinsic value in connection with exercisable options amounted to $726,371.

The following were transactions during the year ended December 31, 2018:

 

On September 4, 2018, the Company granted a total of 209,375 five-year non-qualified stock options to the Company’s former officers exercisable at $0.712 per share, of which 138,844 vested immediately, 11,179 vest monthly in equal increments over a 16-month period beginning on September 1, 2018, and 57,812 vest monthly in equal increments over a 28-month period beginning on September 1, 2018. As part of the employment agreements with three of the Company’s former officers, 18,750 of their remaining unvested options on December 1, 2018 vested immediately. As of December 31, 2019, there were a total of 167,708 vested stock options to these former officers which are exercisable one year from the date of terminations.

 

On October 22, 2018, the Company granted 250,000 ten-year non-qualified stock options to a consultant exercisable at $0.32 per share, all of which vested immediately.

 

On December 28, 2018, the Company granted 500,000 ten-year non-qualified stock options to a consultant exercisable at $0.32 per share, all of which vested immediately.

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the requisite service period. The assumptions used in the Black-Scholes model for the options granted during the year ended December 31, 2018 are presented below:

 

Risk-free interest rate     2.72 – 3.20 %
Expected volatility     343.72 – 412.31 %
Expected term (in years)     5-10  
Expected dividend yield     0 %

 

The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Expected volatility is based on the historical volatility of the Company’s common stock. The expected term assumption for stock options granted is the contractual term of the option award. The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur. 

 

The Company recognized $227,394 of compensation expense relate to the vesting of stock options for the year ended December 31, 2018. These amounts are included in general and administrative expenses on the accompanying consolidated statement of operations.

 

The following were transactions during the year ended December 31, 2019:

 

Between January 2019 and March 2019, the Company granted 4,003,572 options to purchase shares of the Company’s Common Stock to various members of the Board of Directors of the company and consultants with vesting terms pursuant to their respective sock option agreements. The options have a term of 10 years from the date of grant and were exercisable at an exercise price ranging from $0.01 to $0.96. The Company recognized $1,276,637 of compensation expense related to the vesting of stock options for the year ended December 31, 2019. These amounts are included in general and administrative expenses on the accompanying consolidated statement of operations.

  

In February 2019 and April 2019, the Company granted an aggregate of 750,000 options to purchase shares of the Company’s Common Stock to an investor in connection with the sale of Common Stock. The options have a nine-month term from the date of grant and was exercisable at an exercise price of $0.50 per share. The fair value of the options granted amounted to $0.92 per option or $688,674.

 

Pursuant to the Settlement and General Release Agreement dated in January 2020, the Company recorded the issuance of 375,000 shares at par value upon the exercise of the 375,000 stock options and shall cancel the remaining 625,000 stock options as of December 31, 2019 (see Note 11).

As of December 31, 2019, aggregate intrinsic value in connection with exercisable options amounted to $726,371. As of December 31, 2019, 872,392 outstanding options are unvested and there was $337,863 unrecognized compensation expense in connection with unvested stock options (see Note 11).

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the requisite service period. The assumptions used in the Black-Scholes model for the options granted during the year ended December 31, 2019 are presented below: 

 

Risk-free interest rate   2.43 – 2.7495%
Expected volatility   293 – 296%
Expected term (in years)   10
Expected dividend yield   0%

 

Restricted Common Stock

 

A summary of the status of the restricted common stock and changes during the year ended December 31, 2019 is as follows. There was no activity during the year ended December 31, 2018.

    Restricted Stock Common Stock     Weighted Average Grant-Date Fair Value Per Share  
Balance at December 31, 2018     -     $ -  
Granted     3,727,778       0.69  
Vested and issued     (144,450 )     (0.84 )
Forfeited     -       -  
Balance at December 31, 2019     3,583,328     $ 0.68  

 

As of December 31, 2019, unamortized or unvested stock-based compensation costs related to restricted share arrangements was $2,390,997 and will be recognized over a weighted average period of 1.34 years.