Notes
to the Condensed Consolidated Financial Statements
June
30, 2022 and 2021
(Unaudited)
Note
1 – Organization and Operations
History
On
March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange
agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”),
and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company
to continue as the surviving corporation in the merger.
Business
Operations
The
Company leases real estate to licensed marijuana operators, providing complete turnkey growing space, processing space, recreational
and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store
operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry, as well as
offering for wholesale distribution branded non-marijuana clothing and accessories.
The
properties generating rents in 2022 and 2021 are as follows:
| Purpose |
|
Size |
|
City |
|
State |
| Retail
store (recreational and medical) |
|
3,300
sq. |
|
Denver |
|
CO |
| Cultivation
warehouse |
|
14,800
sq. |
|
Denver |
|
CO |
The
Company’s two properties in Denver, CO are leased to Royal Asset Management, LLC (“RAM”). RAM opened the Diego
Denver branded flagship store in February 2017. This store is known as “Diego Colorado”. The retail facilities have
shown steady growth in sales since opening. For the two properties subleased, RAM uses these properties for its cultivation facilities
in Denver, CO. Production at these facilities began in late 2016. On July 27, 2021, the Company filed a lawsuit against Royal
Asset Management, LLC (“RAM”) and Neil Demers (“Demers”) in the District Court, City and County of Denver,
State of Colorado, alleging breach of contract on four subleases for which RAM has failed to make the required payments to the
Company pursuant to the respective sublease agreements (see Note 4).
In
August 2021, the master lease and sublease associated with the 14,800 sq. cultivation warehouse were extended through July 31,
2024 (see Note 9). On June 6, 2022, the Company, the lessor and the sublessee entered into termination agreements to terminate
the master lease and the sublease for the cultivation warehouse property. The termination agreements are conditioned upon the closing
of the sublessee’s sale of its assets at the location. The closing is expected to be in the second half of 2022, upon approval
by the Colorado Marijuana Enforcement Division. Upon closing, the Company will receive either $625,000 or $650,000, depending upon
the closing date.
Note
2 – Significant and Critical Accounting Policies and Practices
The
management of the Company is responsible for the selection and use of appropriate accounting policies and for the appropriateness
of accounting policies and their application. Critical accounting policies and practices are those that are both most important
to the portrayal of the Company’s financial condition and results of operations and that require management’s most
difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are
inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below, as required
by generally accepted accounting principles.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”) and presented in accordance with accounting
principles generally accepted in the United States of America (US GAAP).
The
accompanying consolidated balance sheet at December 31, 2021, has been derived from audited consolidated financial statements,
but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements
as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 have been prepared in accordance with U.S. GAAP
for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in
conjunction with the audited consolidated financial statements and related notes to the financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC. In the opinion of management, all material
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been made to the condensed
consolidated financial statements. The condensed consolidated financial statements include all material adjustments (consisting
of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by
Regulation S-X Rule 10-01. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2022 or any future periods.
Principles
of Consolidation
The
financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide
1, Inc. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the financial statements in conformity with U.S. GAAP 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 dates of the
financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ
from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued
in financing transactions and share based payment arrangements, the collectability of accounts receivable and other receivables
(see Note 4), valuation of right of use assets and lease liabilities and deferred taxes and related valuation allowances.
Certain
estimates, including evaluating the collectability of accounts receivable and notes receivable, could be affected by external
conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors
could influence our estimates and could cause actual results to differ from our estimates. The Company intends to re-evaluate
all its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Accounts
Receivable
Accounts
receivable consist of rents receivable from the Company’s sublessee as disclosed in Note 4. Management periodically assesses
the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts
determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require
collateral. We have not recorded an allowance for doubtful accounts as of June 30, 2022 and December 31, 2021.
Fair
Value Measurements
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Fair
Value of Financial Instruments
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of June 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, accounts receivable, prepaid expenses, notes receivable, accounts
payable and notes payable. Fair values were assumed to approximate carrying values for cash, receivables, notes receivable, payables
and notes payable because they are short term in nature and their carrying amounts approximate fair values or they are payable
on demand.
The
following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
| | |
|
|
|
|
|
|
|
|
|
| | |
| |
| As of June 30, 2022 | |
Fair Value Measurement Using | | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Derivative liabilities | |
$ | — | | |
$ | — | | |
$ | 5,801 | | |
$ | 5,801 | |
| Stock warrant liabilities | |
| — | | |
| — | | |
| — | | |
| — | |
| Total | |
$ | — | | |
$ | — | | |
$ | 5,801 | | |
$ | 5,801 | |
| | |
|
|
|
|
|
|
|
|
|
| | |
| |
| As of December 31, 2021 | |
Fair Value Measurement Using | | |
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Derivative Liabilities | |
$ | — | | |
$ | — | | |
$ | 2,734 | | |
$ | 2,734 | |
| Stock warrant Liabilities | |
| — | | |
| — | | |
| 1 | | |
| 1 | |
| Total | |
$ | — | | |
$ | — | | |
$ | 2,735 | | |
$ | 2,735 | |
Derivative
liabilities and stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion
features for the three and six months ended June 30, 2022 and the year ended December 31, 2021.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these
institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts. There
were no uninsured balances at June 30, 2022 and December 31, 2021.
Revenue
recognition
In
accordance with ASC 842, Leases, the Company recognizes rent income on a straight-line basis over the lease term to
the extent that collection is considered probable. As a result, the Company has been recognizing rents as they become payable.
During
the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility to
assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating
revenue to be recognized.
When
management concludes that the Company is the owner of tenant improvements, the Company records the cost to construct the tenant
improvements as a capital asset. In addition, the Company records the cost of certain tenant improvements paid for or reimbursed
by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant
improvements, the Company records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional
rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements
for accounting purposes, we record the Company’s contribution towards those improvements as a lease incentive, which is
amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.
The
Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate
amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and
services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract;
(ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in
the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv)
allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue
when (or as) the Company satisfies each performance obligation.
Leases
We
have elected the practical expedient provided by ASC 842 that allows lessees to choose to not separate lease and non-lease components
by class of underlying asset and are applying this expedient to all relevant asset classes. We have also elected the practical
expedient package to not reassess at adoption (i) expired or existing contracts for whether they are or contain a lease,
(ii) the lease classification of any existing leases or (iii) initial indirect costs for existing leases.
Advertising
Advertising
expense was $4,471 and $7,928 for the three months ended June 30, 2022 and 2021, respectively, and was $12,936 and $17,809 for
the six months ended June 30, 2022 and 2021, respectively.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of
net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts
are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company
classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle
the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement
or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between assets and liabilities is required.
Stock-Based
Compensation
The
Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our
common stock for common shares; the expense is recognized over the service period for awards expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Income
(loss) per common share
The
Company utilizes ASC 260, “Earnings per Share” for calculating the basic and diluted loss per share. In accordance
with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that
the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities
were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted
loss per share if their effect would be anti-dilutive. The Company has 1,385,640,469 and 231,135,631 common stock equivalents
at June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, these potential shares were excluded from the
shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share. There are 840,000,000
shares authorized resulting in 806,973,395 insufficient shares as of June 30, 2022. Substantially all of these excess shares are
included in the derivative liability calculations for convertible notes payable and warrants and are therefore accounted for at
fair value.
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations and, while no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
The
Company believes recently issued accounting pronouncements and other authoritative guidance for which the effective date is in
the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial
position, results of operations and cash flows when implemented.
Note
3 – Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
incurred losses since inception, its current liabilities exceed its current assets by $11,638,959 at June 30, 2022, and it has
an accumulated deficit of $55,414,976 at June 30, 2022. These factors raise substantial doubt about its ability to continue as
a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The
Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that
management and board members continue to agree to be paid company stock in exchange for accrued compensation. There are other
future noncash charges in connection with financings such as a change in derivative liability that will affect income but have
no effect on cash flow.
Although
the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares
of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect
on its financial position, results of operations, and its ability to continue in existence. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future
success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional
financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares
of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient
to cover operating expenses.
Note
4 – Accounts Receivables and Other Receivables
As
disclosed in Note 1, the Company subleases two properties in Colorado to Royal Asset Management at June 30, 2022. At June 30,
2022 and December 31, 2021, the Company had outstanding receivables from the subleases totaling $748,724 and $598,667, respectively,
and during the three and six months ended June 30, 2022 and 2021 the Company’s subleases with RAM accounted for 100% of
the Company’s revenues.
In
addition to the receivables from the subleases, the Company has agreed to provide RAM and affiliates of RAM up to an aggregate
amount of $1,030,000 in financing. These notes accrue interest at the rates ranging from 12% to 18% per annum. As of June 30,
2022 and December 31, 2021, the outstanding balance of these notes receivable total $650,481 and $620,781, respectively, including
accrued interest of $320,481 and $290,781, respectively. The notes are secured by a UCC filing and also $400,000 of the balance
was personally guaranteed by the managing member of RAM. Our position was subordinate to the CEO’s note described in Note
5. We have recorded interest income of $14,850 and $27,579 during the three months ended June 30, 2022 and 2021, respectively.
We have recorded interest income of $29,700 and $54,429 during the six months ended June 30, 2022 and 2021, respectively. In April
2021, we received a payment of $400,000 of note principal and $93,770 of related accrued interest.
On
September 9, 2020, we closed on a Membership Interest Purchase Agreement dated September 4, 2020, and obtained the right to acquire
a 15.13% membership interest in Blue Bronco, LLC. The purchase of the 15.13% interest in Blue Bronco LLC is subject to the approval
of the Colorado Marijuana Enforcement Division. Necessary approval by governing authorities is expected to be received in the
third or fourth quarter of 2022 pending the resolution of a lawsuit between the RAM and other parties related to the transaction.
Accrued interest receivable of approximately $68,000 will be applied to the purchase of the membership interest upon approval
of the purchase by the Colorado Marijuana Enforcement Division.
Lease
Termination
On
October 1, 2020, the master and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated. In connection
with that termination, we entered into a Sublease Termination Agreement (“Termination Agreement”) with RAM and an
affiliate of RAM Venture Product Consulting, LLC (“VPC”). Pursuant to this agreement, RAM acknowledged a debt of deferred
rent to the Company in the amount of $1,418,480 and VPC acknowledged a debt of deferred rent to the Company in the amount of $64,344.
RAM and VPC executed promissory notes for these amounts, respectively. The notes accrue interest on the unpaid balance at a rate
equal to the Applicable Federal Rate for mid-term obligations as published by the Internal Revenue Service. No payment under the
promissory notes will be due to the Company until the earlier of (i) the date on which RAM and the Company consummate a change
of control event, which is defined as: the acquisition of RAM by the Company or an affiliated entity by means of any transaction
or series of related transactions to which RAM is a party (including, without limitation, any membership interest acquisition,
reorganization, merger or consolidation, (generally, a “Merger”), or, (ii) the date one (1) business day following
the earlier of (x) at any time, receipt by the Company from RAM or VPC of a written notice stating such party no longer desires
to pursue the Merger, or (y) beginning eighteen (18) months after the date of this Agreement, receipt by RAM or VPC from the Company
of a written notice stating that the Company no longer desires to pursue the Merger (the “Maturity Date”).
We
have recorded the promissory notes as long term notes receivable of $1,482,824 at June 30, 2022 and December 31, 2021. Due to
the uncertainty of the collectability, we have also recorded a long term deferred credit in the same amount. We will record income
under the deferred rent notes as payments are received or deemed collectible. This asset and related credit have been netted on
the accompanying condensed consolidated balance sheet.
Additionally,
in connection with the termination of the sublease, RAM will continue to pay the remaining future sublease premium payments due
to the company on the Denver sublease (the “Future Rent Debt”) beginning on the termination date, and until the earlier
of the Maturity Date or June 30, 2024, notwithstanding the termination of the Subleases. However, no payment under the Future
Rent Debt agreement will be due to the Company until the Maturity Date, at which time the entire Future Rent Debt shall be due
and payable in full, except for any month in which RAM earns $725,000 of gross sales revenue, including taxes, at its Alameda
location, in which case RAM shall pay the Future Rent Debt for the following month to the Company on or before the 5th day of
the following month, and such amount will not accrue as a Future Rent Debt. RAM shall continue to accrue debt to the company,
assessed on the first day of each month, according to the schedule below:
| Monthly
Payments Accrued |
|
|
|
| October
1, 2020 to June 30, 2021 |
|
$ |
11,284 |
|
| July 1, 2021 to
June 30, 2022 |
|
|
11,622 |
|
| July 1, 2022 to
June 30, 2023 |
|
|
11,971 |
|
| July 1, 2023 to
June 30, 2024 |
|
|
12,330 |
|
We
will record income pursuant to the Future Rent Debt as payments are received based on the Company’s analysis of collectability
including, but not limited to, the potential application toward the purchase price. We have recorded $34,866 and $33,852 as Lease
Termination Payments in the Statement of Operations for the three months ended June 30, 2022 and 2021, respectively, and $69,732
and $67,703 as Lease Termination Payments for the six months ended June 30, 2022 and 2021, respectively.
Notes
Receivable
During
2022 and 2021, the Company entered into four promissory notes with an unrelated party, aggregating $244,000 (see Note 9). The
notes all mature 11 months after issuance and have an effective interest rate of 8.33%. Payments of principal and interest are
due monthly, beginning 30 days after the date of issuance. Principal repayments of $67,238 were received during the six months
ended June 30, 2022. Payments on the notes are in arrears at June 30, 2022, and we have recorded an allowance for uncollectable
notes receivables of $82,781 at June 30, 2022.
Note
5 – Related Party Transactions
As
of June 30, 2022 and December 31, 2021, the Company has accrued compensation to its CEO and director and to its CFO aggregating
$305,789 and $263,289, respectively. As of June 30, 2022 and December 31, 2021, accrued payable due to former officers was $916,986
and $946,986, respectively. For each of the six months ended June 30, 2022 and 2021, total cash-based compensation to related
parties was $180,000. For the three months ended June 30, 2022 and 2021, total share-based compensation to related parties was
$5,041 and $60,811, respectively. For the six months ended June 30, 2022 and 2021, total share-based compensation to related parties
was $13,224 and $85,654, respectively. These amounts are included in general and administrative expenses in the accompanying financial
statements.
From
2017 to 2019, Mr. Gonfiantini, CEO, personally and through his Company, Crystal Bay Financial LLC, loaned an aggregate amount
of $1,020,000 to Royal Asset Management. These notes accrued interest at 17% - 18% per annum, and required monthly payments of
approximately $5,000 to $20,000. These notes were personally guaranteed by the managing member of Royal Asset Management, and
were secured by certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 was also
secured by the medical marijuana licenses held by Royal Asset Management. As of October 20, 2021 these notes were fully paid by
Royal Asset Management and the security was released.
At
June 30, 2022 and December 31, 2021, the Company owed Mr. Throgmartin, former CEO (See Note 9), $140,958 pursuant to a promissory
note dated August 12, 2016. This note accrues interest at the rate of 8% per annum and was past the maturity date, however the
Company has not yet received a default notice. The balance of related party note was $140,958 at June 30, 2022 and December 31,
2021 and accrued interest on the note was $66,269 and $60,677 at June 30, 2022 and December 31, 2021, respectively.
The
Company leases its office space from an entity controlled by its CEO. The lease may be terminated by either party with 30 days’
notice. Rent expense pursuant to the lease was $4,500 for each of the three month periods ended June 30, 2022 and 2021 and was
$9,000 for each of the six month periods ended June 30, 2022 and 2021.
Note
6 – Notes Payable
On
August 31, 2015, the Company issued a note in the amount of $126,000 to a third party for use as operating capital. The note was
amended to include accrued interest on October 31, 2016 and extend the maturity date to October 31, 2018. As of June 30, 2022
and December 31, 2021, the outstanding principal balance of the note was $133,403, and accrued interest on the note was $80,079
and $76,772 at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 the note was past the maturity date, however
the Company has not yet received a default notice.
On
April 22, 2020, the Company was granted a loan from Numerica Credit Union, in the aggregate amount of $56,444, pursuant to the
Paycheck Protection Program, (the “PPP”) under Division A, Title I of the CARES Act. The loan, which was in the form
of a note dated April 22, 2020 issued by the Borrower, was scheduled to mature on April 22, 2022 and bore interest at a rate of
1.0% per annum, payable monthly commencing October 22, 2020. No payments made towards this loan, as the full amount of the loan
and accrued interest was forgiven in full during February 2021 and the Company recorded income of $56,908.
On
June 30, 2020, the Company was granted a loan from the Small Business Association, in the aggregate amount of $150,000, pursuant
to the Economic Injury Disaster Loan, (the “EIDL”) under Division A, Title I of the CARES Act. The loan, which is
in the form of a note dated June 30, 2020 issued by the Borrower, matures on June 30, 2050 and bears interest at a rate of 3.75%
per annum, payable monthly commencing July 1, 2023.
Note
7 – Convertible Notes Payable
The
Company has issued several convertible notes which are outstanding. The note holders have the right to convert principal and accrued
interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion
features were recognized as embedded derivatives and are valued using a Binomial Option Pricing Model that resulted in a derivative
liability of $5,800,562 and $2,733,803 at June 30, 2022 and December 31, 2021, respectively. The notes accrue interest at 8% -
10% and the majority of the notes had matured at June 30, 2022.
Several
convertible note holders elected to convert their notes to stock during the six months ended June 30, 2021. The tables below provide
the note payable activity for the six months ended June 30, 2022 and 2021, and also a reconciliation of the beginning and ending
balances for the derivative liabilities measured using fair significant unobservable inputs (Level 3) for the six months ended
June 30, 2022 and 2021:
| |
|
Convertible
Notes |
|
|
Discount |
|
|
Convertible
Notes, Net of
Discount |
|
|
Derivative
Liabilities |
|
| Balance,
December 31, 2021 |
|
$ |
2,941,274 |
|
|
$ |
— |
|
|
$ |
2,941,274 |
|
|
$ |
2,733,803 |
|
| Issuance
of convertible notes |
|
|
495,000 |
|
|
|
495,000 |
|
|
|
— |
|
|
|
914,819 |
|
| Conversion
of convertible notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Repayment
of convertible notes |
|
|
(64,888 |
) |
|
|
(36,850 |
) |
|
|
(28,038 |
) |
|
|
(81,194 |
) |
| Change
in fair value of derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,233,134 |
|
| Amortization |
|
|
— |
|
|
|
(149,092 |
) |
|
|
149,092 |
|
|
|
— |
|
| Balance
June 30, 2022 |
|
$ |
3,371,386 |
|
|
$ |
309,058 |
|
|
$ |
3,062,328 |
|
|
$ |
5,800,562 |
|
| |
|
Convertible
Notes |
|
|
Discount |
|
|
Convertible
Notes, Net of
Discount |
|
|
Derivative
Liabilities |
|
| Balance,
December 31, 2020 |
|
$ |
3,239,274 |
|
|
$ |
— |
|
|
$ |
3,239,274 |
|
|
$ |
5,997,865 |
|
| Issuance
of convertible notes |
|
|
2,000 |
|
|
|
— |
|
|
|
2,000 |
|
|
|
200,147 |
|
| Conversion
of convertible notes |
|
|
(100,000 |
) |
|
|
— |
|
|
|
(100,000 |
) |
|
|
(661,087 |
) |
| Repayment
of convertible notes |
|
|
(200,000 |
) |
|
|
— |
|
|
|
(200,000 |
) |
|
|
(302,452 |
) |
| Change
in fair value of derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(865,710 |
) |
| Amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Balance
June 30, 2021 |
|
$ |
2,941,274 |
|
|
$ |
— |
|
|
$ |
2,941,274 |
|
|
$ |
4,368,763 |
|
During
the six months ended June 30, 2022, the Company entered into three convertible promissory notes with an investor in the aggregate
amount of $495,000, and received aggregate proceeds of $465,000, after deducting OID and costs. The notes mature one year from
issue and bear interest at 8% per year. Upon a default, the holder shall have the right from time to time, and at any time following
an event of default, and ending on the date of payment of the default amount (as defined), to convert all or any part of the outstanding
and unpaid principal, interest, penalties, and all other amounts under the notes into fully paid and non-assessable shares of
common stock at a conversion price equal to 65% of the three lowest trading prices of the Company common stock for the 15 trading
days immediately preceding the delivery of a notice of conversion resulting from such default, for two of the notes, and at 65%
of the lowest price for the preceding 15 days for the third note. The Company issued a total of 3,400,000 shares of common stock,
valued at $29,580, to the investor in connection with the issuance of two of the notes, and the Company is to issue 2,500,000
shares of common stock, valued at $16,500, for the third note (these shares were issued in July 2022 and are recorded as shares
to be issued at June 30, 2022) . The Company recorded a derivative liability associated with the notes of $699,488, valued using
a Binomial Option Pricing Model, of which $418,920 was recorded as debt discount and $280,568 was charged to expense. We have
recorded a total debt discount of $495,000 related to the notes, which will be amortized over the one year term of each note.
During the three and six months ended June 30, 2022, we amortized $91,681 and $149,092, respectively, of debt discount to interest
expense.
As
of June 30, 2022, convertible notes in the aggregate principal amount of $2,941,274 were past their maturity dates; however, the
Company has not yet received any default notices. No default or penalty was paid or required to be paid.
During
the six months ended June 30, 2022, we repaid an aggregate of $64,888 of note principal and $5,112 of accrued interest. A gain
on extinguishment of debt of $44,344 and reduction of derivative liabilities of $81,194 and reduction of discount of $36,850 have
been recorded related to these payments.
During
the six months ended June 30, 2021, $100,000 of notes was converted into 4,444,444 shares of common stock with a value of $697,779.
A gain on extinguishment of debt of $59,999 and reduction of derivative liabilities of $657,778 have been recorded related to
these conversions.
During
the six months ended June 30, 2021, $6,256 of accrued interest was converted into 581,969 shares of common stock with a value
of $7,856. A gain on extinguishment of debt of $1,709 and reduction of derivative liabilities of $3,309 have been recorded related
to these conversions.
During
the six months ended June 30, 2021, we repaid an aggregate of $200,000 of note principal. A gain on extinguishment of debt of
$177,116 and reduction of derivative liabilities of $177,116 have been recorded related to these payments.
During
the six months ended June 30, 2021, we paid an aggregate of $70,000 in settlement of accrued interest in the amount of $95,390.
A gain on extinguishment of debt of $150,726 and reduction of derivative liabilities of $125,336 have been recorded related to
these payments.
During
the six months ended June 30, 2021, we recorded noncash additions to convertible notes aggregating $2,000.
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the three months ended June 30, 2022 and 2021:
| |
|
June
30,
2022 |
|
|
June
30,
2021 |
|
| Risk-free interest
rates |
|
0.52
– 2.8 |
% |
|
0.02
– 0.09 |
% |
| Expected life (years) |
|
0.25
– 1.0 |
|
|
0.25 |
|
| Expected dividends |
|
0 |
% |
|
0 |
% |
| Expected volatility |
|
133
- 196 |
% |
|
154
- 544 |
% |
Note
8 – Stockholders’ Equity (Deficit)
Series
C Preferred Stock
On
February 24, 2021, the Company sold 179,850 of its Series C Convertible Preferred Shares, with an annual accruing dividend of
8%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $163,500 pursuant to a Series C Preferred Purchase Agreement
with Geneva. The Company may redeem the Series C Shares at various increased prices at time intervals up to the 6-month anniversary
of the closing and must redeem any outstanding shares on the 24-month anniversary. Geneva may convert the Series C Shares into
our common shares, commencing on the 6-month anniversary of the closing at a 25% discount to the public market price. The Company
recorded a derivative liability associated with Series C Preferred Shares of $1,208,971, valued using a Binomial Option Pricing
Model. On March 16, 2021, the Company sold an additional 113,850 shares for $103,500 and recorded a derivative of $165,142. The
Series C Preferred Stock is classified as temporary equity due to the fact that the shares are redeemable at the option of the
holder. The holder converted the entire amount of $293,700 of the February and March preferred shares plus accrued dividends of
$11,748 into 26,159,396 shares of common stock during the year ended December 31, 2021. As of June 30, 2022 and December 31, 2021,
there were no shares of Series C Convertible Preferred Stock outstanding.
The
table below provides the preferred stock activity for the six months ended June 30, 2021 (there was no preferred stock activity
during the six months ended June 30, 2022), and also a reconciliation of the beginning and ending balances for the derivative
liabilities measured using Level 3 fair value inputs for the six months ended June 30, 2021.
| |
|
Preferred
Stock and
Accrued
Dividends |
|
|
Discount |
|
|
Preferred
Stock and
Accrued
Dividends,
Net of
Discount |
|
|
Derivative
Liabilities |
|
| Balance
, December 31, 2020 |
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Issuance
of Series C Preferred shares |
|
|
293,700 |
|
|
|
293,700 |
|
|
|
— |
|
|
|
1,259,672 |
|
| Accretion
of discount |
|
|
— |
|
|
|
(47,574 |
) |
|
|
47,574 |
|
|
|
— |
|
| Accretion
of dividend on Series C preferred stock |
|
|
9,515 |
|
|
|
— |
|
|
|
9,515 |
|
|
|
12,714 |
|
| Change
in fair value of derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(864,574 |
) |
| Balance
June 30, 2021 |
|
$ |
303,215 |
|
|
$ |
246,126 |
|
|
$ |
57,089 |
|
|
$ |
407,812 |
|
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the six months ended June 30, 2021:
| | |
2021 | |
| Risk-free interest rates | |
| 0.12 – 0.25 | % |
| Expected life (years) | |
| 1.7 – 2.0 | |
| Expected dividends | |
| 0 | % |
| Expected volatility | |
| 188 - 196 | % |
Common
Stock
2022
Transactions
During
the six months ended June 30, 2022, we issued 3,400,000 shares of common stock, valued at $29,580, in connection with the issuance
of convertible notes payable.
During
the six months ended June 30, 2022, 463,637 shares of common stock, valued at $13,224, were accrued for related party service,
and 671,805 shares of common stock, valued at $6,833, were issued. At June 30, 2022 and December 31, 2021, shares to be issued
for related party services were 386,364 and 594,532, respectively, and the value of shares to be issued at June 30, 2022 and December
31, 2021 was $9,977 and $3,586, respectively.
During
the six ended June 30, 2022, 482,163 shares of common stock, valued at $4,000, were accrued for services. At June 30, 2022 and
December 31, 2021, shares to be issued for services were 977,279 and 495,116, respectively, and the value of shares to be issued
at June 30, 2022 and December 31, 2021 was $10,000 and $6,000, respectively.
During
the six ended June 30, 2022, 2,500,000 shares of common stock, valued at $16,500, were accrued for financing cost. At June 30,
2022 and December 31, 2021, shares to be issued for financing cost were 2,500,000 and 0, respectively, and the value of shares
to be issued at June 30, 2022 and December 31, 2021 was $16,500 and $0, respectively.
At
June 30, 2022 and December 31, 2021, shares to be issued for debt conversions were 31,960, and the value of shares to be issued
was $21,861.
2021
Transactions
During
the six months ended June 30, 2021, $100,000 of notes and $6,256 of accrued interest and fees were converted into 5,026,413 shares
of common stock with a value of $705,635.
During
the six months ended June 30, 2021, 2,931,647 shares of common stock, valued at $85,654, were accrued for related party services,
and 1,967,714 shares of common stock, valued at $30,976, were issued. At June 30, 2021 and December 31, 2020, shares to be issued
for related party services were 2,695,620 and 1,731,687, respectively, and the value of shares to be issued at June 30, 2021 and
December 31, 2020 was $68,042 and $13,364, respectively.
During
the six months ended June 30, 2021, 87,252 shares of common stock, valued at $4,000, were accrued for services, and 1,137,553
shares of common stock, valued at $16,000, were issued. At June 30, 2021 and December 31, 2020, shares to be issued for services
were 55,556 and 1,105,857, respectively, and the value of shares to be issued at June 30, 2021 and December 31, 2020 was $2,000
and $14,000, respectively.
At
June 30, 2021 and December 31, 2020, shares to be issued for debt conversions were 31,960, and the value of shares to be issued
was $21,861.
During
the six months ended June 30, 2021, we issued 30,000 shares of common stock, valued at $1,915, for consulting services.
Common
stock warrant activity:
The
Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation
of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3)
for the six months ended June 30, 2022 and 2021:
| |
|
|
|
|
|
|
|
|
| |
|
Six
Months ended June 30, |
|
| |
|
2022 |
|
|
2021 |
|
| Balance at beginning
of period |
|
$ |
438 |
|
|
$ |
476 |
|
| Additions to derivative
instruments |
|
|
— |
|
|
|
— |
|
| Loss (gain) on
change in fair value of derivative liability |
|
|
(27 |
) |
|
|
2,065 |
|
| Balance at end
of period |
|
$ |
411 |
|
|
$ |
2,541 |
|
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the six months ended June 30, 2022 and 2021:
Schedule of assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities
| |
|
June
30, 2022 |
|
|
June
30, 2021 |
|
| Annual
dividend yield |
|
|
0 |
% |
|
|
0 |
% |
| Expected life (years) |
|
|
0.50
– 5.13 |
|
|
|
1.5
– 5.88 |
|
| Risk-free interest
rate |
|
|
1.35
– 3.01 |
% |
|
|
0.16
– 1.16 |
% |
| Expected volatility |
|
|
136
– 217 |
% |
|
|
195
– 243 |
% |
Note
9 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and
lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance
and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of
the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred.
In
August 2021, the master lease and sublease associated with the 14,800 sq. cultivation warehouse were extended through July 31,
2024. Monthly base rent payments range from $20,000 to $21,118. Monthly sublease base rent payments range from $26,300 to $28,622.
The
Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically
do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement
to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2022 was 12%.
Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination
of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that
collection is considered probable. As a result the Company been recognizing rents as they become payable. Our weighted-average
remaining lease term is 2.42 years.
As
of June 30, 2022, the maturities of operating leases liabilities are as follows (in thousands):
| |
|
|
Operating
Leases |
|
| 2022
(Six months) |
|
|
$ |
258 |
|
| 2023 |
|
|
|
520 |
|
| 2024 |
|
|
|
419 |
|
| 2025 |
|
|
|
45 |
|
| Total |
|
|
|
1,242 |
|
| Less:
amount representing interest |
|
|
|
(159 |
) |
| Present
value of future minimum lease payments |
|
|
|
1,083 |
|
| Less:
current obligations under leases |
|
|
|
414 |
|
| Long-term
lease obligations |
|
|
$ |
669 |
|
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
| |
|
|
|
|
|
|
| |
|
Six
Months ended June 30, |
|
| |
|
2022 |
|
|
2021 |
|
| Operating
lease costs |
|
$ |
190,082 |
|
|
$ |
225,713 |
|
| Variable rent costs |
|
|
106,709 |
|
|
|
92,342 |
|
| Total rent
expense |
|
$ |
296,791 |
|
|
$ |
318,055 |
|
As
of June 30, 2022, the aggregate remaining minimal annual lease payments under these operating leases plus NNN were as follows: (in
thousands):
| |
|
|
|
|
| 2022
(Six months) |
|
|
$ |
200 |
|
| 2023 |
|
|
|
443 |
|
| 2024 |
|
|
|
395 |
|
| 2025 |
|
|
|
45 |
|
| Total |
|
|
$ |
1,083 |
|
Other
information related to leases is as follows:
| |
|
Six
Months ended
June 30,
2022 |
|
|
Six
Months ended
June 30,
2021 |
|
| Other
information: |
|
|
|
|
|
|
|
|
| Cash paid for amounts
included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
| Operating cash
flows from operating leases |
|
$ |
185,978 |
|
|
$ |
212,863 |
|
| Weighted-average
remaining lease term - operating leases |
|
|
2.42 |
yr |
|
|
3.47 |
yr |
| Weighted-average
discount rate - operating leases |
|
|
12 |
% |
|
|
12 |
% |
The
Company recognized sublease income of $186,506 and $191,752 during the three months ended June 30, 2022 and 2021, respectively.
The Company recognized sublease income of $373,012 and $383,505 during the six months ended June 30, 2022 and 2021, respectively.
These
two leases have 2.1 year and 2.7 year terms with optional extensions, expiration dates range from July 2024 to February 2025,
and monthly base rent of approximately $20,000-$22,500 plus variable NNN.
As
of June 30, 2022, the maturities of expected base sublease income are as follows (in thousands):
| |
|
|
Operating
Leases |
|
| 2022
(Six months) |
|
|
$ |
343 |
|
| 2023 |
|
|
|
693 |
|
| 2024 |
|
|
|
555 |
|
| 2025 |
|
|
|
59 |
|
| Total |
|
|
$ |
1,650 |
|
Legal
Proceedings
On
May 10, 2021, a lawsuit was filed against the Company, along with other defendants, by plaintiff Erin Turoff in the District Court,
City and County of Denver, State of Colorado. The specific allegations against the Company include civil theft and civil conspiracy
and the plaintiff is seeking actual and compensatory damages. No specific monetary amount was demanded in the lawsuit. On July
8, 2021, the Company filed an answer to the complaint, denying the allegations. The proceedings are ongoing and the Company believes
that the suit is without merit and that it will ultimately prevail in any litigation.
On
July 27, 2021, the Company filed a lawsuit against Royal Asset Management, LLC (“RAM”) and Neil Demers (“Demers”)
in the District Court, City and County of Denver, State of Colorado, alleging breach of contract on subleases for which RAM has
failed to make the required payments to the Company pursuant to the respective sublease agreements. The alleged damages under
the sublease terms and other ancillary agreements amount to $1,480,881, $377,568, $1,027,635, and $1,418,480, respectively. In
addition, the lawsuit alleges that RAM failed to make payments pursuant to a promissory note (the “Note”) in which
the Company and RAM entered into on April 3, 2018. The Note was for the principal amount of $330,000 with interest at 18% per
annum. The Note had a maturity date of April 2, 2019. The lawsuit seeks payment from RAM and Demers for the total balance due
on the Note of $330,000 plus the interest due therein. On October 8, 2021, RAM and Demers filed a joint answer to the lawsuit,
and the parties are now engaged in the discovery process.
Equity
Purchase Agreement
On
February 8, 2022, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”), with Hemp Choice
Distribution, LLC, a Colorado limited liability company (“HCD”), its owners (the “Sellers”), and Gabriela
Vergara (the “Sellers’ Representative”), pursuant to which Purchaser has agreed to acquire all of the issued
and outstanding equity interests of HCD (“Membership Interests”). On April 22, 2022, the Company sent a termination
notice of the Purchase Agreement to HCD, the Sellers and the Sellers' Representative pursuant to the terms of the Purchase Agreement.
The Company has made loans to HCD in the aggregate original amount of $244,000, as described in Note 4. The balance due to
the Company on the loans is $165,561 at June 30, 2022. Payments on the notes are in arrears at June 30, 2022, and we have recorded
an allowance for uncollectable notes receivables of $82,781 at June 30, 2022.
COVID-19
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain
of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic
based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date
of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial
condition, liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its
spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition,
or liquidity for fiscal year 2022. However, if the pandemic continues, it may have a material adverse effect on the Company’s
results of future operations, financial position, and liquidity in fiscal year 2022.
Employment
Agreements
As
a condition of their employment, the Board of Directors approved employment agreements with three key executives. These agreements
provided that additional shares will be granted each year over the term of the agreements should their shares as a percentage
of the total shares outstanding fall below prescribed ownership percentages. Nello Gonfiantini III, who became the Company’s
CEO in October 2019 receives an annual grant of additional shares each year to maintain his ownership percentage at 10% of the
outstanding stock. The Company’s CFO received a similar grant each to maintain his ownership percentage at 2% of the
outstanding stock. During the six months ended June 30, 2022, the Company accrued compensation expense of approximately $13,000
on 463,637 shares of common stock under these agreements. During the six months ended June 30, 2021, the Company accrued compensation
expense of approximately $86,000 on 2,931,647 shares of common stock. As of June 30, 2022 and December 31, 2021, the ending
balance of accrued compensation was $9,977 and $3,586, respectively. The number of shares accrued to be issued was 386,364 at
June 30, 2022.
Departure
of Executive Officer
On
January 30, 2019, the Company executed a Separation Agreement and Release with David Thompson, its former Senior Vice President-
Finance, finalizing his departure from the Company as an employee. During the six months ended June 30, 2022 and 2021, $0 and
$26,904, respectively, was paid under this agreement. As of June 30, 2022 and December 31, 2021, the outstanding balance was $126,389,
and is included in Accrued payable – related party in the accompanying condensed consolidated balance sheet.
On
October 29, 2019, the Company accepted the resignation of Ron Throgmartin from his positions as CEO, President and Director. Mr.
Throgmartin signed a 5-year
term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended. On the date of the Separation
Agreement, the Company
acknowledged it owed Mr. Throgmartin the amount of $517,252 in principal and accrued interest of note payable, salary and fees,
accrued during the 5 years of his employment. In addition, the Corporation further acknowledged that it will pay Mr. Throgmartin
fifty (50%) percent of his compensation due under the remaining Employment Agreement, or $614,583 under certain conditions, which
the Company accrued in full as the date of Mr. Throgmartin’s separation. This agreement provides that the Registrant
will pay him $5,000
monthly against his accrued salary/fees and 50% of future compensation due under his terminated Employment Agreement, with certain
accelerated payments in the event Registrant’s financial results attain certain EBITA benchmarks. The Company shall have the
right to require Mr. Throgmartin to provide consulting services to the Company for a per diem fee of $500.
During the six months ended June 30, 2022 and 2021, $30,000
and $30,000,
respectively, was paid under this agreement. As of June 30, 2022 and December 31, 2021, the outstanding balance was $790,597
and $820,597,
respectively, and is included in Accrued payable – related party in the accompanying condensed consolidated balance
sheet.
Note
10 – Subsequent Events
The
Company evaluated subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated
financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that
the consolidated financial statements were available for issuance are disclosed as subsequent events, while the consolidated financial
statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as disclosed
within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated financial statements.
During
the period from July 1, 2022 through August 12, 2022:
On
July 29, 2022 the Company entered into a securities purchase agreement with an investor pursuant to which the investor purchased
a promissory note (the “Note”) from the Company in the aggregate principal amount of $165,000. The Company intends
to use the net proceeds ($160,000) from the Note for general working capital purposes.
The
maturity date of the Note is July 29, 2023 (the “Maturity Date”). The Note shall bear interest at a rate of 8% per
annum. Principal payments shall be made in ten (10) installments each in the amount of US$17,800 commencing on the ninetieth (90th)
day anniversary following the issue date and continuing thereafter each thirty (30) days for ten months. Notwithstanding the forgoing,
the final payment of principal and interest shall be due on the Maturity Date.
In
the event of a default, the investor has the option to convert all or any amount of the principal face amount of the Note at the
then-applicable conversion price. The conversion price for the Note shall be equal to the Variable Conversion Price (as defined
herein). The “Variable Conversion Price” shall mean 65% multiplied by the Market Price (as defined herein) (representing
a discount rate of 35%). “Market Price” means the average of the lowest three trading prices for the Common Stock
during the fifteen-trading day period ending on the latest complete trading day prior to the Conversion Date. Notwithstanding
the foregoing, the investor shall be restricted from effecting a conversion if such conversion, along with other shares of the
Company’s common stock beneficially owned by the investor and its affiliates, exceeds 4.99% of the outstanding shares of
the Company’s common stock. The Note may be prepaid by the Company.
Pursuant to the terms of the
Purchase Agreement, the Company paid the investor’s legal fees in the aggregate amount of $5,000. The Note also contains
an original issue discount of $5,000. The Company will also issue 4,500,000 shares of the Company’s common stock to
the investor as additional consideration for the purchase of the Note.