Quarterly report pursuant to Section 13 or 15(d)

OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES

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OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
3 Months Ended
Mar. 31, 2020
Leases [Abstract]  
OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES

On March 1, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consists of approximately 100 acres. The lease requires the Company to pay 5% of the net income realized by the Company from the operation of the lease farm. Accordingly, the Company recognized $0 Right-of-use asset (“ROU”) and lease liabilities on this farm lease as the Company has not determined when it will generate net income from this lease. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination. The Company has not paid any lease payments under this agreement for the three months ended March 31, 2020 and for fiscal 2019. EOW is in the process of arranging a sub-lease agreement with the affiliated company.

 

On March 1, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Grants Pass, Oregon and consists of approximately 100 acres. The lease requires the Company to pay $120,000 per year, whereby $50,000 was payable upon execution and $70,000 shall be payable prior to planting for agricultural use or related purposes. The lease shall continue in effect from year to year except for at least a 30-day written notice of termination. EOW is in the process of arranging a sub-lease agreement with the affiliated company.

 

On April 30, 2019, the Company, through its majority-owned subsidiary, EOW, entered into a farm lease agreement for a lease term of one year. The lease premise is located in Cave Junction, Oregon and consists of approximately 38 acres. The lease requires the Company to pay $76,000 per year, whereby $38,000 was payable upon execution and $38,000 shall be payable on September 15, 2019 and 2% of the net income realized by the Company from the operation of the leased farm. The lease shall continue in effect from year to year for five years except for at least a 30-day written notice of termination. The Company has paid the initial payment of $26,000 and the remaining $12,000 was paid directly to the landlord by an affiliated company who is renting the portion of the lease property from the Company. The affiliated company is owned by two managing members of EOW. EOW is in the process of arranging a sub-lease agreement with the affiliated company.

 

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 $40,000 per month in advance in addition to all applicable Florida sales and/or federal taxes and security deposit of $40,000. 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, the manager and controlling member of C2M, the Company’s largest stockholder. As of March 31, 2020, no rent payments have been made. As of March 31, 2020, the Company recorded accrued expense of $200,000 in connection with this lease agreement.

 

In adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. The Company is reasonably certain that it will exercise its option to extend the three farm leases for a period of three years and the Company used 5 years lease term for the commercial lease.

 

The Company adopted ASC Topic 842 on January 1, 2019. Between March 2019 and August 2019 which are the execution dates of various lease agreements, the Company recorded right-of-use assets totaling $2,431,362 and total lease liabilities of $2,431,362 based on an incremental borrowing rate of 10%. The Company recorded lease expense of $166,619 and $10,000 for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, lease expenses of $0 was included in cost of sales and $166,619 was included in general and administrative expenses as reflected in the accompanying unaudited condensed consolidated statements of operations.

 

The cash outflows from operating leases for the three months ended March 31, 2020 was $169,000. The weighted average remaining lease term and the incremental borrowing rate for operating leases at March 31, 2020 were 2.56 years and 10%, respectively.

 

Right of Use (“ROU”) Asset is summarized below:

 

   

As of

March 31, 2020

   

As of

 December 31, 2019

 
    (Unaudited)        
Farm lease, ROU Asset   $ 506,506     $ 506,506  
Commercial lease ROU     1,924,856       1,924,856  
Less: Accumulated amortization     (374,996 )     (258,109 )
Balance of ROU asset   $ 2,056,366     $ 2,173,253  

 

Operating lease right-of-use assets consisted of the following:

 

   

March 31,

2020

   

December 31,

2019

 
    (Unaudited)         
Operating lease right-of-use assets – related party   $ 1,705,115     $ 1,782,443  
Operating lease right-of-use assets – unrelated party     351,251       390,810  
Operating lease right-of-use assets, net   $ 2,056,366     $ 2,173,253  

 

Operating lease liability related to the ROU asset is summarized below:

 

   

As of

March 31, 2020

   

As of

 December 31, 2019

 
    (Unaudited)        
Farm lease   $ 506,506     $ 506,506  
Commercial lease     1,924,856       1,924,856  
Total lease liability     2,431,362       2,431,362  
Reduction of lease liability     (285,879 )     (172,410 )
Total     2,145,483       2,258,952  
Less: current portion     (498,778 )     (432,065 )
Long term portion of lease liability   $ 1,646,705     $ 1,826,887  

 

Operating lease liabilities, current portion consisted of the following:

   

March 31,

2020

   

December 31,

2019

 
    (Unaudited)         
Operating lease liabilities – related party   $ 324,628     $ 262,196  
Operating lease liabilities – unrelated party     174,150       169,869  
Operating lease liabilities   $ 498,778     $ 432,065  

 

Operating lease liabilities, long-term portion consisted of the following:

   

March 31,

2020

   

December 31,

2019

 
    (Unaudited)         
Operating lease liabilities – related party   $ 1,469,604     $ 1,605,945  
Operating lease liabilities – unrelated party     177,101       220,942  
Operating lease liabilities   $ 1,646,705     $ 1,826,887  

 

Minimum lease payments under non-cancelable operating lease at March 31, 2020 are as follows:

 

Year ended December 31, 2020   $ 682,000  
Year ended December 31, 2021     696,580  
Year ended December 31, 2022     560,933  
Year ended December 31, 2023     531,063  
Year ended December 31, 2024     315,140  
Total     2,785,716  
Less: undiscounted payments during the three months ended March 31, 2020     (169,000 )
Total undiscounted future minimum lease payments due as of March 31, 2020     2,616,716  
Imputed interest     (471,233 )
Total operating lease liability   $ 2,145,483