UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
☑
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended:
March 31,
2021
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
transition period from _____________ to _____________
Commission
File Number:
001-38190
Exactus, Inc.
(Exact name of registrant as specified in its charter)
|
Nevada
|
27-1085858
|
|
(State or other jurisdiction of
|
(I.R.S. Employer
|
|
incorporation or organization)
|
Identification No.)
|
80 NE 4th Avenue, Suite 28, Delray Beach, FL 33483
(Address of principal executive offices, Zip Code)
(800) 881-9352
(Registrant's telephone number, including area code)
________________________________________________________
(Former Name, Former Address and Former Fiscal Year if Changed
Since Last Report)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
|
Trading Symbol(s)
|
|
Name of each exchange on which registered
|
|
N/A
|
|
N/A
|
|
N/A
|
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. Yes
☑
No
☐
Indicate
by check mark whether the registrant has submitted electronically,
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such
files). Yes
☑
No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large
Accelerated Filer
☐
Non-Accelerated
Filer
☐
|
Accelerated
Filer
☐
Smaller
reporting company
☑
|
|
|
|
Emerging
growth company
☑
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
☐
No
☑
State
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date: ###
shares of common stock, par value $0.0001 per share, outstanding as
of May 15, 2021.
TA
B
LE OF CONTENTS
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Page
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PART I – FINANCIAL INFORMATION
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1
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17
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21
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21
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22
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22
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22
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22
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22
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22
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23
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24
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Item 1. Financial Statements.
Exactus, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
March
31,
2021
|
December
31,
2020
|
|
|
|
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
19,721
|
$
25,139
|
|
Inventory,
net
|
10,712
|
10,712
|
|
Prepaid
expenses and other current assets
|
10,556
|
15,258
|
|
Total
current assets
|
40,989
|
51,109
|
|
Property
and equipment, net
|
17,069
|
20,159
|
|
Total
Assets
|
$
58,058
|
$
71,268
|
|
|
|
|
|
LIABILITIES AND (DEFICIT)
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$
1,388,871
|
$
2,027,507
|
|
Accounts
payable - related parties
|
506,585
|
506,585
|
|
Accrued
expenses
|
579,990
|
620,391
|
|
Notes
payable - current portion
|
130,344
|
130,344
|
|
Note
payable - related parties
|
135,517
|
115,517
|
|
Subscription
payable
|
250,000
|
250,000
|
|
Convertible
notes, net of discounts
|
100,000
|
646,036
|
|
Convertible
notes – related party
|
-
|
50,250
|
|
Derivative
liability
|
-
|
237,022
|
|
Interest
payable
|
51,789
|
52,051
|
|
Operating
lease liabilities, current portion
|
269,115
|
269,115
|
|
Total
current liabilities
|
3,412,211
|
4,904,818
|
|
|
|
|
|
Notes
payable - long term
|
205,166
|
205,166
|
|
Total
Liabilities
|
3,617,377
|
5,109,984
|
|
Commitment and contingencies (see Note7)
|
|
|
|
|
|
|
|
Preferred
stock Series A: 1,000 shares designated; $0.0001 par value, 500 and
0 shares issued and outstanding, respectively
|
-
|
-
|
|
Exactus, Inc. Stockholders' (Deficit)
|
|
|
|
Preferred stock: 50,000,000 shares authorized;
$0.0001 par value, 7,999,000 undesignated
shares
|
|
|
|
Preferred
stock Series A: 1,000,000 shares designated; $0.0001 par value, 0
and 353,109 shares issued and outstanding,
respectively
|
-
|
32
|
|
Preferred
stock Series B-1: 32,000,000 shares designated; $0.0001 par value,
1,500,000 and 1,650,000, shares issued and outstanding,
respectively
|
150
|
165
|
|
Preferred
stock Series B-2: 10,000,000 shares designated; $0.0001 par value,
6,000,000 and 7,516,000 shares issued and outstanding,
respectively
|
600
|
752
|
|
Preferred
stock Series C: 1,733,334 shares designated; $0.0001 par value, 0
shares issued and outstanding
|
-
|
-
|
|
Preferred
stock Series D: 200 shares designated; $0.0001 par value, 0 and 18
shares issued and outstanding, respectively
|
-
|
-
|
|
Preferred
stock Series E: 10,000 shares designated; $0.0001 par value, 0 and
10,000 shares issued and outstanding
|
-
|
1
|
|
Common stock: 650,000,000 shares authorized;
$0.0001 par value,
99,724,710
and 56,356,431 shares issued and outstanding,
respectively
|
9,975
|
5,636
|
|
Common
stock to be issued (100,000 shares to be issued )
|
10
|
10
|
|
Additional
paid-in capital
|
33,967,970
|
27,485,796
|
|
Due
from related party
|
(128,489
)
|
(128,489
)
|
|
Accumulated
deficit
|
(35,391,296
)
|
(30,384,380
)
|
|
Total
Exactus Inc. Stockholders' (Deficit)
|
(1,541,080
)
|
(3,020,477
)
|
|
|
|
|
|
Non-controlling
interest in subsidiary
|
(2,018,239
)
|
(2,018,239
)
|
|
|
|
|
|
Total (Deficit)
|
(3,559,319
)
|
(5,038,716
)
|
|
|
|
|
|
Total Liabilities and (Deficit)
|
$
58,058
|
$
71,268
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Exa
ctus, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
2020
|
|
|
(Unaudited)
|
(Unaudited)
|
|
|
|
|
|
Net
revenues
|
$
-
|
$
520,200
|
|
Net
revenues - related party
|
-
|
315,800
|
|
|
|
|
|
Total net revenues
|
-
|
836,000
|
|
|
|
|
|
Cost
of sales
|
-
|
1,042,473
|
|
Cost
of sales - related party
|
-
|
357,783
|
|
|
|
|
|
Total cost of sales
|
-
|
1,400,256
|
|
|
|
|
|
Gross
profit (loss)
|
-
|
(564,256
)
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
General
and administration
|
3,457,728
|
1,060,587
|
|
Selling
and marketing expense
|
26,097
|
280,890
|
|
Professional
and consulting
|
69,207
|
727,871
|
|
|
|
|
|
Total
Operating Expenses
|
3,553,032
|
2,069,348
|
|
|
|
|
|
Loss
from Operations
|
(3,553,032
)
|
(2,633,604
)
|
|
|
|
|
|
Other
Income (expenses):
|
|
|
|
Derivative
(loss) gain
|
(1,407,062
)
|
106,486
|
|
Gain
(loss) on extinguishment of debt, net
|
153,931
|
(6,500
)
|
|
Interest
expense
|
(200,753
)
|
(288,466
)
|
|
|
|
|
|
Total
Other Income (Expenses), net
|
(1,453,884
)
|
(188,480
)
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
(5,006,916
)
|
(2,822,084
)
|
|
|
|
|
|
Provision
for income taxes
|
-
|
-
|
|
|
|
|
|
Net
Loss
|
(5,006,916
)
|
(2,822,084
)
|
|
|
|
|
|
Net
Loss attributable to non-controlling interest
|
-
|
155,819
|
|
|
|
|
|
Net
Loss Attributable to Exactus, Inc.
|
(5,006,916
)
|
(2,666,265
)
|
|
|
|
|
|
Deemed
dividend on preferred stock
|
(1,927,343
)
|
-
|
|
|
|
|
|
Net
Loss available to Exactus, Inc. common stockholders
|
$
(3,079,573
)
|
$
(2,666,265
)
|
|
|
|
|
|
Net
Loss per Common Share - Basic and Diluted
|
$
(0.06
)
|
$
(0.06
)
|
|
Net
Loss attributable to non-controlling interest per Common Share -
Basic and Diluted
|
$
-
|
$
-
|
|
Net
Loss available to Exactus, Inc. common stockholders per Common
Share - Basic and Diluted
|
$
(0.04
)
|
$
(0.06
)
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
Basic
and Diluted
|
84,321,861
|
45,293,865
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Exa
ctus, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' (Deficit)
Equity
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Preferred
Stock
|
Common
Stock - Issued
|
Common
Stock -Unissued
|
Paid
in
|
Accumulated
|
Non-controlling
|
||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
43,819,32
|
$
4,382
|
664,580
|
$
66
|
$
25,343,293
|
$
(20,923,681
)
|
$
(537,469
)
|
$
3,887,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for private placement
|
|
|
500,000
|
50
|
-
|
-
|
99,950
|
-
|
-
|
100,000
|
|
Common
stock issued for unissued common stock
|
|
|
287,500
|
29
|
(287,500
)
|
(29
)
|
-
|
-
|
-
|
-
|
|
Conversion
of Series A Preferred Stock to Common Stock
|
|
|
150,450
|
15
|
-
|
-
|
(12
)
|
-
|
-
|
-
|
|
Common
stock issued for services
|
|
|
765,000
|
77
|
-
|
-
|
378,446
|
-
|
-
|
378,523
|
|
Stock-based
compensation in connection with restricted common stock award
grants - Q1 2020
|
|
|
209,727
|
21
|
(68,750
)
|
(7
)
|
117,889
|
-
|
-
|
117,903
|
|
Stock
options granted for services
|
|
|
-
|
-
|
-
|
-
|
140,866
|
-
|
-
|
140,866
|
|
Net
Loss for the period
|
|
|
-
|
-
|
-
|
-
|
|
(2,666,265
)
|
(155,819
)
|
(2,822,084
)
|
|
Balance, March 31, 2020
|
|
|
45,732,00
|
$
4,574
|
308,330
|
$
30
|
$
26,080,432
|
$
(23,589,946
)
|
$
(693,288
)
|
$
1,802,752
|
|
|
Preferred
Stock
|
Common
Stock - Issued
|
Common
Stock - Unissued
|
Additional
Paid
in
|
Due
from related
|
Accumulated
|
Non-controlling
|
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
party
|
Deficit
|
Interest
|
Total
|
|
Balance, December 31, 2020
|
9,499,037
|
950
|
56,356,431
|
5,636
|
100,000
|
10
|
27,485,796
|
(128,489
)
|
(30,384,380
)
|
(2,018,239
)
|
(5,038,716
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for settlement of accounts payable
|
-
|
-
|
10,605,240
|
1,061
|
-
|
-
|
1,723,046
|
-
|
-
|
-
|
1,724,107
|
|
Common
stock issued for settlement of convertible notes payables - related
party
|
-
|
-
|
2,383,841
|
238
|
-
|
-
|
443,156
|
-
|
-
|
-
|
443,394
|
|
Stock-based
compensation in connection with equity awards
|
-
|
-
|
10,345,538
|
1,035
|
-
|
-
|
2,032,527
|
-
|
-
|
-
|
2,033,562
|
|
Conversion
of Preferred Stock to Common Stock
|
(1,999,037
)
|
(200
)
|
20,033,660
|
2,005
|
-
|
-
|
784,445
|
-
|
-
|
-
|
786,250
|
|
Conversion
of convertible note into Preferred
|
500
|
-
|
-
|
-
|
-
|
-
|
1,499,000
|
-
|
-
|
-
|
1,499,000
|
|
Conversion of
convertible note into Preferred
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,006,916
)
|
-
|
(5,006,916
)
|
|
|
7,500,500
|
750
|
99,724,710
|
9,975
|
100,000
|
10
|
33,967,970
|
(128,489
)
|
(35,391,296
)
|
(2,018,239
)
|
(3,559,319
)
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Exactus, Inc. and
Su
bsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
2020
|
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
loss
|
(5,006,916
)
|
$
(2,945,503
)
|
|
Adjustments to
reconcile net loss to cash used in operating
activities:
|
|
|
|
Depreciation
|
(3,090
)
|
26,727
|
|
Derivative (gain)
loss
|
1,407,062
|
(106,486
)
|
|
Stock-based
compensation
|
3,385,038
|
637,292
|
|
Bad debt
expense
|
-
|
18,592
|
|
Inventory
reserve
|
-
|
553,440
|
|
Amortization of
prepaid stock-based expenses
|
-
|
195,299
|
|
Amortization of
discount and debt issuance costs for convertible notes
|
-
|
268,350
|
|
Amortization of
intangible assets
|
-
|
246,250
|
|
Deferred
rent
|
-
|
3,418
|
|
Loss (gain) on
settlement of debt
|
(153,931
)
|
6,500
|
|
Non-cash interest
expense
|
186,692
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
(Increase) decrease
in operating assets:
|
|
|
|
Accounts
receivable
|
-
|
(236,360
)
|
|
Accounts receivable
related party
|
-
|
(88,800
)
|
|
Inventory
|
-
|
387,271
|
|
Advance to supplier
related party
|
-
|
|
|
Prepaid expenses
and other current assets - current
|
(4,702
)
|
88,240
|
|
Prepaid expenses
and other current assets - long term
|
-
|
(15,959
)
|
|
Deposit
|
-
|
40,000
|
|
Increase (decrease)
in operating liabilities:
|
|
|
|
Accounts
payable
|
25,423
|
552,292
|
|
Accounts payable -
related party
|
-
|
-
|
|
Accrued
expenses
|
(110,231
)
|
411,149
|
|
Unearned
revenues
|
-
|
(215,000
)
|
|
Interest
payable
|
(13,191
)
|
9,005
|
|
Net
Cash Used In Operating Activities
|
(25,418
)
|
(164,283
)
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
Net
Cash Used in Investing Activities
|
-
|
-
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Advances from
related party
|
-
|
85,000
|
|
Proceeds from sale
of common stock
|
-
|
100,000
|
|
Proceeds from
issuance of notes payable
|
20,000
|
20,419
|
|
Payments of
principal on convertible notes
|
-
|
(50,000
)
|
|
Net
Cash Provided By Financing Activities
|
-
|
155,419
|
|
|
|
|
|
Net
(decrease) in cash and cash equivalents
|
(5,418
)
|
(8,864
)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
25,139
|
18,405
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
19,721
|
$
9,541
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
Cash paid for
interest and finance charges
|
-
|
$
11,111
|
|
Cash paid for
taxes
|
-
|
$
-
|
|
|
|
|
|
Non-Cash
investing and financing activities:
|
|
|
|
Conversion of
preferred stock to common stock
|
$
2,005
|
$
-
|
|
Convertible notes
and interest payable settled by common stock issued
|
$
50,250
|
$
-
|
|
Accounts payable,
accrued expense and interest payable settled by common stock
issued
|
$
828,144
|
$
-
|
|
Reduction of
operating lease right-of-use asset and operating lease
liabilities
|
$
-
|
$
116,887
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
EXACTUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2021
NOTE 1 -
NATURE OF
ORGANIZATION
Organization and Business Description
Exactus,
Inc. (the “Company”
,
“we”, “us”, “our”
) was
incorporated on January 18, 2008 as an alternative energy research
and development company. During much of its history the Company had
designed solar monitoring and charging systems which were
discontinued in 2016 to focus on developing point-of-care
diagnostic devices. In January 2019, the Company added to the scope
of its business activities, efforts to produce, market and sell
products made from industrial hemp containing cannabidiol
(“CBD”).
The
Company operates in one segment.
NOTE 2 –
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The Company’s unaudited condensed consolidated financial
statements include the financial statements of its 50.1%
subsidiary,
Exactus One World, LLC (“EOW”)
and 51% subsidiary, Paradise Medlife.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and
the rules and regulations of the United States Securities and
Exchange Commission for interim financial information, which
includes consolidated unaudited interim financial statements and
present the consolidated unaudited interim financial statements of
the Company and its majority-owned subsidiary as of March 31, 2021.
All intercompany transactions and balances have been eliminated. In
the opinion of management, all adjustments necessary to present
fairly our financial position, results of operations,
stockholders’ equity (deficit) and cash flows as of March 31,
2021 and 2020, and for the periods then ended, have been made.
Those adjustments consist of normal and recurring adjustments.
Certain information and note disclosures normally included in our
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
unaudited condensed consolidated financial statements should be
read in conjunction with the audited financial statements as of and
for the year ended December 31, 2020 and footnotes thereto included
in the Company’s Report on Form 10K filed with the SEC on
April 23, 2020. The results of operations for the three months
ended March 31, 2021 are not necessarily indicative of the results
to be expected for the full year.
Going concern
The
accompanying consolidated financial statements are presented on the
basis that the Company will continue as a going concern. The going
concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. As reflected in
the accompanying condensed consolidated financial statements, the
Company had a net loss attributable to Exactus Inc. common
stockholders of $3.1 million as of March 31, 2021. The net
cash used in operating activities was approximately $25,000 for the
three months ended March 31, 2021. Additionally, the Company had an
accumulated deficit of $35.4 million and working capital deficit of
$3.4 million as of March 31, 2021. These factors raise substantial
doubt about the Company’s ability to continue as a going
concern for a period of twelve months from the issuance date of
this report. Management cannot provide assurance that the Company
will ultimately achieve profitable operations or become cash flow
positive or raise additional debt and/or equity capital. The
Company is seeking to raise capital through additional debt and/or
equity financings to fund its operations in the future. Although
the Company has historically raised capital from sales of common
and preferred shares and from the issuance of convertible
promissory notes, there is no assurance that it will be able to
continue to do so. If the Company is unable to raise additional
capital or secure additional lending soon, management expects that
the Company will need to further curtail its operations. The
accompanying condensed consolidated financial statements do not
include any adjustments related to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
The
Company expects to realize revenue through its efforts, if
successful, to sell wholesale and retail products to third parties.
However, as the Company is in a start-up phase, in a new business
venture, in a rapidly evolving industry, many of its costs and
challenges are new and unknown. In order to fund the
Company’s activities, the Company will need to raise
additional capital either through the issuance of equity and/or the
issuance of debt.
The
COVID-19 pandemic has resulted in a global slowdown of economic
activity which is likely to continue to reduce the future demand
for a broad variety of goods and services, while also disrupting
sales channels, marketing activities and supply chains for an
unknown period of time until the virus is fully contained. The
Company’s business operations have been negatively impacted
by the COVID-19 pandemic and related events and the Company expects
this disruption to continue to have a negative impact on its
revenue and results of operations, the size and duration of which
is currently difficult to predict. The impact to date has included
a decline in product and sales demand. Although the Company is
unable to predict the full impact and duration of COVID-19 on its
business, the Company is actively managing its financial
expenditures in response to the current uncertainty.
The
impact of the COVID-19 pandemic and related events, including
actions taken by various government authorities in response, have
increased market volatility and make the estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes more difficult. As of the date of issuance of
the financial statements, the Company is not aware of any specific
event or circumstance that would require it to update its
estimates, judgments or revise the carrying value of its assets or
liabilities. These estimates may change, as new events occur and
additional information is obtained, and are recognized in the
condensed consolidated financial statements as soon as they become
known.
Use of Estimates
The
Company prepares its condensed consolidated financial statements in
conformity with GAAP which requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. In preparing the
condensed consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the condensed
consolidated balance sheet, and revenues and expenses for the
period then ended. Actual results may differ significantly from
those estimates. Significant estimates made by management include
but are not limited to the fair value of derivative liabilities,
useful life of property and equipment, fair value of right of use
assets, assumptions used in assessing impairment of long-term
assets, income taxes, contingent liabilities, and fair value of
non-cash equity transactions.
Recently Adopted Accounting Pronouncements
There
have been no changes to the Company’s accounting policies or
recent accounting pronouncement as disclosed in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2020 as
filed on April 23, 2021 with the exception of the adoption of ASU
2020-06 Debt – Debt with Conversion and Other Options and
Derivatives and Hedging.
ASU 2020-06 Debt – Debt with Conversion and Other Options and
Derivatives and Hedging
In August 2020, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2020-06, Debt — Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging —
Contracts in Entity’s Own Equity (Subtopic 815-40)
(“ASU 2020-06”) to simplify accounting for certain
financial instruments. ASU 2020-06 eliminates the current models
that require separation of beneficial conversion and cash
conversion features from convertible instruments and simplifies the
derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity. The
new standard also introduces additional disclosures for convertible
debt and freestanding instruments that are indexed to and settled
in an entity’s own equity. ASU 2020-06 amends the diluted
earnings per share guidance, including the requirement to use the
if-converted method for all convertible instruments. ASU 2020-06 is
effective January 1, 2022 and should be applied on a full or
modified retrospective basis, with early adoption permitted
beginning on January 1, 2021. The Company early adopted ASU
2020-06 on January 1, 2021. The adoption of ASU 2020-06 did
not have an impact on the Company’s financial
statements.
Fair Value Measurements
The
Company adopted the provisions of Accounting Standard Codification
(“ASC”) Topic 820, “Fair Value Measurements and
Disclosures”, which defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value, and expands disclosure of fair value
measurements. The guidance prioritizes the inputs used in measuring
fair value and establishes a three-tier value hierarchy that
distinguishes among the following:
|
●
|
Level
1—Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access.
|
|
●
|
Level
2—Valuations based on quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
models for which all significant inputs are observable, either
directly or indirectly.
|
|
●
|
Level
3—Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
|
The
Company measures certain financial instruments at fair value on a
recurring basis. Assets and liabilities measured at fair value on a
recurring basis are as follows at March 31, 2021 and December 31,
2020:
|
|
At
March 31, 2021
|
At
December 31, 2020
|
||||
|
Description
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
|
Derivative
liabilities
|
—
|
—
|
$
—
|
—
|
—
|
$
237,022
|
A roll
forward of the level 3 valuation financial instruments is as
follows:
|
|
March 31,
2021
|
|
Balance at
beginning of year
|
$
237,022
|
|
Transfers out due
to conversions of convertible notes
|
(1,644,084
)
|
|
Change in fair
value included in derivative
|
1,407,062
|
|
Balance at end of
year
|
$
—
|
As of
March 31, 2021, the Company has no assets that are re-measured at
fair value.
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other assets consisted of the following:
|
|
March
31,
2021
|
December
31,
2020
|
|
Prepaid
insurance
|
7,556
|
9,288
|
|
Other
assets
|
6,000
|
6,000
|
|
|
$
10,556
|
$
15,258
|
Earnings per Share
The
Company computes basic and diluted earnings per share amounts in
accordance with ASC Topic 260, “
Earnings per Share
”. Basic
earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of
common shares outstanding during the reporting period. Diluted
earnings per share reflects the potential dilution that could occur
if preferred stock converted to Common Stock and warrants are
exercised. Stock options, stock warrants, restricted
stock to be issued upon vesting, convertible preferred stock and
convertible debt are excluded from the diluted earnings per share
calculation if their effect is anti-dilutive.
For the
three months ended March 31, 2021 and 2020, the following
potentially dilutive shares were excluded from the computation of
diluted earnings per shares because their impact was
anti-dilutive:
|
|
March
31,
|
|
|
|
2021
|
2020
|
|
Stock
options
|
7,236,124
|
3,751,749
|
|
Stock
warrants
|
1,578,549
|
1,578,549
|
|
Restricted
stock to be issued upon vesting
|
2,457,348
|
2,960,810
|
|
Convertible
preferred stock
|
7,500,500
|
9,460,845
|
|
Convertible debt
|
290,000
|
14,145,825
|
|
Total
|
19,062,521
|
31,897,778
|
Troubled Debt Restructuring
In
February 2021, the Company agreed to settle certain debt
instruments through the issuance of Series A Preferred Shares. Due
to the Company financial condition and the relative value of the
Series A Preferred Shares in relation to the debt, we determined
the transaction to be a troubled debt restructuring. See Note 5 for
further discussion.
Preferred share exchange offering
In
January 2021, the Company offered a modification to the terms of
the Series A Preferred Shares, Series B-1 Preferred Shares and
Series B-2 Preferred Shares with the intention of inducing
conversion to common shares (collectively the “Inducement
Securities”. In accordance with ASC 470,
Debt
a modification of an instruments
that modifies a conversion option for the purposes of inducing a
conversion that both 1) is exercisable for a limited period of time
and 2) includes the issuance of all of the equity securities
issuable pursuant to the conversion privileges. The modification of
the Inducement Securities qualifies of such accounting treatment.
As a result, the Company will report the impact of such changes as
a charge against additional paid in capital and reflect the amount
as a reconciling item between net income and income available to
common shareholders.
NOTE 3 –
INVENTORY
Inventory,
net consisted of the following:
|
|
March
31,
2021
|
December
31,
2020
|
|
Finished goods
– CBD
|
$
10,712
|
$
10,712
|
During the three months ended March 31, 2020, the Company recorded
a reserve or inventory write-off related to damaged inventory of
$553,440 due to mold and is included in cost of sales as reflected
in the accompanying unaudited condensed consolidated statements of
operations.
NOTE 4 -
OPERATING LEASE
RIGHT-OF-USE ASSETS AND OPERATING LEASE
LIABILITIES
On January 22, 2021, the Company entered into a Settlement and
Release Agreement (Settlement and Release Agreement) with Ceed2Med,
LLC (C2M), a former affiliate of the company. Over the course of
2018-2019 the Company entered into a series of agreements for
product and funding with C2M in connection with the seed-to-sale
strategy for our hemp-derived CBD business, to secure farming
rights and expertise, and to secure product, distribution, and
funding. The Company previously issued 10,000 shares of Series E
Preferred Stock convertible into 6,250,000 shares of common stock
to C2M. Pursuant to the Settlement and Release Agreement, C2M
permitted the Company to transfer all outstanding shares of Series
E Preferred stock to settle various third-party claims and
obligations, avoiding dilution in furtherance of ongoing
restructuring efforts. The Company issued 3,000,000 common shares
to a vendor to settle $575,000 of commercial accounts payable with
a vendor resulting in the Company recognizing a $20,000 gain on the
settlement of debt. The Company issued an officer of the Company
1,250,000 as compensation in negotiating the settlement. As as
result, the Company recognized approximately $231,000 of
stock-based compensation. Under the Settlement and Release
Agreement with Ceed2Med, all existing agreements, obligations and
claims have been cancelled and rescinded, the parties exchanged
full mutual releases. and the Company is to receive a cash payment
of $200,000, of which $54,737 has been paid as of March 31, 2021.
If the remaining balance is not paid, the agreement with C2M may
not be effectuated.
NOTE 5 -
Debt
The
Company’s debt obligations are summarized as
follows:
U.S. Small Business Administration Loan
On May 28, 2020, the Company received a Secured Disaster Loan in
the amount of $99,100 from the U.S. Small Business Administration.
The loan carries interest at a rate of 3.75% per year, requires
monthly payments of principal and interest, and matures in thirty
(30) years. Installment payments, including principal and interest,
of $483 monthly, will begin twelve (12) months from the date of the
promissory Note. The SBA loan is secured by a security interest in
the Company's tangible and intangible assets. The loan proceeds are
to be used as working capital to alleviate economic injury caused
by the Covid-19 disaster occurring in the month of January 31, 2020
and continuing thereafter. As of March 31, 2021, the principal
balance of this note amounted to $99,100 and accrued interest was
approximately $2,047
Paycheck Protection Program Funding
On May 22, 2020, the Company received federal funding in the amount
of $236,410 through the Paycheck Protection Program (the
“PPP”). PPP funds have certain restrictions on use of
the funding proceeds, and generally must be repaid within two (2)
years at 1% interest. The PPP loan may, under circumstances, be
forgiven. There shall be no payment due by the Company during the
six months period beginning on the date of this note
(“Deferral Period”). Commencing one month after the
expiration of the Deferral Period, the Company was to pay the
lender monthly payments of principal and interest, each in equal
amount required to fully amortize by the maturity date. As no
payment has been made, the lender shall charge a late fee of up to
5% of the unpaid portion of the regularly scheduled payment. As of
March 31, 2021, the principal balance of this note amounted to
$236,410 and accrued interest was approximately $3,146. The Company
has formally applied for forgiveness of this PPP loan.
Notes payable to unrelated parties is summarized
below:
|
|
March
31, 2021
|
December
31, 2020
|
|
|
|
|
|
Principal
amount
|
$
335,510
|
$
335,510
|
|
Less: current
portion
|
(130,344
)
|
(130,344
|
|
Notes payable -
long term portion
|
$
205,166
|
$
205,166
|
Minimum principal payments under notes payable to unrelated parties
at March 31, 2021 are as follows:
|
Year ended December
31, 2021
|
$
11,859
|
|
Year ended December
31, 2022
|
155,501
|
|
Year ended December
31, 2023
|
68,392
|
|
Year ended December
31, 2024
|
2,091
|
|
Year ended December
31, 2025 and thereafter
|
97,667
|
|
Total principal
payments
|
$
335,510
|
Notes payable – related party
During the fourth quarter 2020, the Company received $37,000 in
cash proceeds from the former Chief Executive Officer and
stockholder of the Company as an unsecured obligation with no term
or stated interest. The Company is currently negotiating to settle
the outstanding obligation with the issuance of the Company’s
common stock. As of March 31, 2021, and December 31, 2020, the
principal balance due is $37,000 and is currently in
default.
During February 2020, the Company entered a short-term promissory
note for principal amount of $22,461 and gross cash proceeds of
$20,419 (original issue discount of $2,042) with a stockholder of
the Company. The note became due and payable on March 8, 2020 and
bore interest at a rate of eighteen (18%) percent per annum prior
to the maturity date, and eighteen (18%) per annum if unpaid
following the maturity date. The note is an unsecured obligation of
the Company. In addition, the note carries a 10% original issue
discount of $2,042 which have been amortized and recorded in
interest expense on the accompanying statements of operations. The
Company is currently negotiating to extend the maturity date of the
related party note. As of March 31, 2021, and December 31, 2020,
the principal balance of this note amounted to $22,461 and is
currently in default.
During
October 2019, the Company entered a short-term promissory notes
with an officer of the Company, for an aggregate principal amount
of $55,556. The note originally became due and payable between
October 18, 2019 and December 16, 2019 and bore interest at a rate
of twelve (12%) percent per annum prior to the maturity date, and
eighteen (18%) per annum if unpaid following the maturity date. The
current interest rate is 18%. The note is an unsecured obligations
of the Company. The notes carry a 10% original issue discount of
$5,556 which has been amortized and recorded in interest expense on
the accompanying condensed consolidated statements of operations.
As of March 31, 2021, and December 31, 2020, the principal balance
under the note was $55,556. The Company is currently
negotiating on extending the maturity date of the related party
note.
During
February 2021, the Company entered a short-term promissory note for
principal amount of $20,000 with a stockholder of the Company. The
note is payable on demand and bears interest at a rate of eight
(8%) percent per annum. The note is unsecured obligation of the
Company. As of March 31, 2021, the principal balance of this note
amounted to $20,000 and accrued interest was $340.
Convertible notes payable
Convertible
Notes in the aggregate amount of $100,000 were issued on March 22,
2018. The Notes bear interest at a rate of 5% per annum and mature
on February 1, 2023. If a qualified financing from which at least
$5 million of gross proceeds are raised occurs prior to the
maturity date, then the outstanding principal balance of the notes,
together with all accrued and unpaid interest thereon, shall be
automatically converted into a number of shares of the
Company’s Common Stock at $0.40 per Share. The Notes offers
registration rights wherein the Company agrees that within 45 days
of a Qualified Offering, prior to the Maturity Date, the Company
shall file a registration statement with the SEC registering for
resale of the shares of Company’s Common Stock into which the
Notes are convertible. The Company shall send a written conversion
notice to the lender pursuant to the note agreement and as such the
principal balance of the convertible note remains outstanding as of
December 31, 2020 and 2019. The Company reclassed the
principal balance to current portion as of December 31, 2020.
During the second quarter 2021, the Company notified the holders
the shares will be converted into common as the Company met the
conversion requirements in 2019.
The
following is a summary of the carrying amounts of all convertible
notes as of March 31, 2021 and December 31, 2020:
|
|
March
31, 2021
|
December
31, 2020
|
|
Principal
Amount
|
$
100,000
|
$
933,333
|
|
Add: additional
principal
|
|
50,250
|
|
Add: amortization
of redemption premium
|
|
88,889
|
|
Less: redemption
premium payments
|
|
(20,800
)
|
|
Less: principal
payments and conversions
|
|
(356,186
)
|
|
Less: unamortized
debt discount and debt issuance costs
|
|
-
|
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$
100,000
|
$
696,286
|
Sale of Convertible Note
The Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with a single institutional
investor (the “Purchaser”), pursuant to which the
Company agreed to sell to Purchaser in a series of 3 closings up to
$1,944,444 in aggregate principal amount of the Company’s
senior secured convertible promissory notes (the
“Notes”) and warrants to purchase shares of the
Company’s Common Stock (the “Warrants”). On
November 27, 2019 (the “Initial Closing Date”), the
Company issued a Note in the principal amount of $833,333, and a
two-year Warrant to purchase 275,612 shares of Common Stock at an
exercise price of $0.756 per share. The Notes were issued at a 10%
original issue discount and bear an interest rate of 8%. The Notes
matured one year after their issuance unless accelerated due to an
event of default. The Notes were redeemable, in whole or in part,
at any time at the discretion of the Company. At the Initial
Closing Date, the Company received net proceeds, after the original
issue discount and the Purchaser’s counsel fees, of $730,000.
Each note was convertible at the option of the note holder at any
time into shares of common stock at the fixed conversion rate of
$0.50 per share subject to adjustments.
On November 12, 2020, 3i provided notice of default to the Company,
accelerating its obligations to pay the entire remaining principal
balance of the Note, plus interest. Under the terms of the Note,
upon an “Event of Default,” Exactus is required to pay
to 3i an “Event of Default Redemption Amount” equal to
135% of the sum of the outstanding principal and accrued pre- and
post-default interest under the Note. On February 8, 2021, 3i sold
the Note to FFG. In connection with the sale of the Note to FFG,
Exactus agreed to repurchase said Note and the related warrants in
exchange for 500 shares of Series A Preferred Shares. The Series A
Preferred Shares are convertible into 10,000,000 common shares at
the option of the holder.
In
February 2021, the Company settled convertible debt with a carrying
value of $732,728 and a derivative liability with a balance of
$1,644,084 with 500 shares of Series A Preferred Shares, valued at
$1,499,000. This transaction was accounted for as a troubled debt
restructuring and resulted in the recognition of a gain on
settlement of $0.9 million or $0.00 per share.
The sale of the notes were accounted for as an extinguishment of
debt in recognition of the revisions of the note agreement and
transfer of value to the Company. Under the extinguishment model, a
deemed dividend was recognized within additional paid in capital
which represented the fair value of issued Preferred Stock plus the
incremental fair value of repricing the Preferred Stock held by the
Investor, less the fair value of the consideration transferred,
less the carrying value of the outstanding Preferred Stock, and
warrants to purchase Common Stock. The amount of the deemed
dividend totaled approximately $1.9 million.
The changes in convertible debt for the quarter ended March 31,
2021 are:
Beginning
balance
$696,286
Cash payments
-
Stock
settlement
596,286*
Ending
balance
100,000
*excludes accrued interest and penalties of $136,442, which
was reported in the interest payable
NOTE 6 -
STOCKHOLDERS’ EQUITY
(DEFICIT)
Common Stock
The
Company’s authorized Common Stock consists of 650,000,000
shares with a par value of $0.0001 per share.
During
the first quarter 2021, the Company issued 8,186,240 shares of
common stock to an officer of the Company in settlement of $26,995
of payables due, $150,632 of accrued payroll, and $11,946 of
interest due on a note with the officer. The fair value of the
common shares amounted to approximately $1,310,000 resulting in the
Company recognizing approximately $1,120,00 of additional
stock-based compensation.
During
the first quarter 2021, the Company issued 2,419,000 shares of
common stock to various vendors in settlement of $62,063 of
commercial accounts payables. The fair value of the common shares
amounted to approximately $414,000 resulting in the Company
recognizing approximately $352,000 of loss on settlement of
debt.
During
the first quarter 2021, the Company issued 2,383,841 shares of
common stock to a related party in settlement of a convertible note
payable with a principal balance of $50,250 and accrued interest of
$1,508. The fair value of the common shares amounted to
approximately $444,000 resulting in the Company recognizing
approximately $391,000 of loss on settlement of debt.
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.
A
summary of the stock option activity is presented
below:
|
|
Options Outstanding
|
|||
|
|
|
Weighted
|
Weighted
|
|
|
|
|
Average
|
Average
|
|
|
|
Number of
|
Exercise
|
Remaining
|
Aggregate
|
|
|
Shares Subject
|
Price Per
|
Contractual
|
Intrinsic
|
|
|
to Options
|
Share
|
Life (in years)
|
Value
|
|
Balance at December 31, 2020
|
3,751,749
|
$
0.41
|
8.0
|
|
|
Options
granted
|
3,500,000
|
$
0.025
|
|
|
|
Options
exercised
|
—
|
|
|
|
|
Options
canceled / expired
|
—
|
|
|
|
|
Balance at March 31, 2021
|
7,251,749
|
$
0.13
|
4.89
|
$667,500
|
|
Vested and exercisable at March 31, 2021
|
5,220,499
|
$
0.17
|
5.76
|
$373,750
|
Restricted Common Stock
A
summary of the restricted stock activity is presented
below:
|
|
Restricted Stock Common Stock
|
Weighted Average Grant-Date Fair Value Per Share
|
|
Balance
at December 31, 2020
|
2,023,486
|
$
0.41
|
|
Granted
|
—
|
—
|
|
Vested
|
351,813
|
—
|
|
Forfeited
|
—
|
—
|
|
Balance
at December 31, 2020
|
2,375,299
|
$
0.72
|
As of
March 31, 2021, unamortized or unvested stock-based compensation
costs related to restricted share arrangements was approximately
$.2 million and will be recognized over a weighted average period
of 0.72 years.
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001.
|
|
Preferred
Stock
|
|||||||||||||
|
|
Series
A
|
Series
A
|
Series
B-1
|
Series
B-2
|
Series
C
|
Series
D
|
Series
E
|
|||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Balance, December 31, 2019
|
353,109
|
$
35
|
-
|
-
|
1,650,000
|
$
165
|
7,516,000
|
$
752
|
-
|
$
-
|
18
|
$
-
|
10,000
|
$
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
Series A Preferred Stock to Common Stock
|
(3,090
)
|
(3
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Balance, March 31, 2020
|
350,019
|
$
32
|
-
|
-
|
1,650,000
|
$
165
|
7,516,000
|
$
752
|
-
|
$
-
|
18
|
$
-
|
10,000
|
$
1
|
|
|
Preferred
Stock
|
|||||||||||||
|
|
Series
A
|
Series
A
|
Series
B-1
|
Series
B-2
|
Series
C
|
Series
D
|
Series
E
|
|||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Balance, December 31, 2020
|
323,019
|
$
32
|
-
|
$
-
|
1,650,000
|
$
165
|
7,516,000
|
$
752
|
-
|
$
-
|
18
|
$
-
|
10,000
|
$
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Preferred Stock to Common Stock
|
(323,019
)
|
(32
)
|
500
|
|
(150,000
)
|
(15
)
|
(1,516,000
)
|
(152
)
|
-
|
-
|
(18
)
|
-
|
(10,000
)
|
(1
)
|
|
Balance, March 31, 2021
|
-
|
$
-
|
500
|
$
-
|
1,500,000
|
$
150
|
6,000,000
|
$
600
|
-
|
$
-
|
-
|
|
$
-
|
$
-
|
During
the quarter ended March 31, 2021, the Company offered to modify the
conversion price of the outstanding Series A Preferred Shares (from
$0.20 to $0.025), Series B-1 Preferred Shares and Series B-2
Preferred Shares (from 0.25 to 0.125) the “Exchange
Offering”). As a result of the Exchange offering, the
holders
converted
323,019 Series A Preferred Stock into 12,917,160 shares of common
stock, 150,000 Series B-1 Preferred Stock into 37,500 shares of
common stock, 1,516,000 Series B-2 Preferred Stock into 379,000
shares of common stock. This resulted in a gain of conversion
of $1,923,343, The gain was reported as a credit to additional paid
in capital and reflected as a deemed dividend in reporting earnings
available to common shareholders. In addition to the Exchange
Offering, 18 Series D Preferred Stock converted into 450,000 shares
of common stock, and 10,000 Series E Preferred Stock converted into
6,250,000 shares of common stock.
On February 16, 2021, the Company entered into a Securities
Purchase Agreement with 3i, LP (“
3i
”) and an institutional investor
(“
Investor
”)
under which the Investor agreed to purchase and 3i agreed to sell
certain 8% senior secured convertible note dated November 27, 2019
(the “
Note
”)
and all of our warrants previously issued to 3i and 3i agreed
settle and release all claims asserted against the Company. As a
result, 3i agreed to dismiss all pending litigation against the
Company. Furthermore, the Subsidiary Guaranty, IP Security
Agreement and Registration Rights Agreement with 3i were also
terminated.
In addition, the Company entered into an Exchange Agreement with
the Investor and filed with the Secretary of State of the State of
Nevada a Certificate of Designation of Preferences, Rights and
Limitations for Series A Preferred Stock under which the Note
in the original principal amount of $750,000 would be exchanged for
500 shares of a new series of our preferred stock designated 0%
Series A Convertible Preferred Stock (the
“
Series
A Preferred
”) with a
stated value of $1,000 per share (the “
Stated
Value
”).
The Company authorized the issuance of a total of 1,000
($1,000,000) of Series A Preferred for issuance. Each share of
Series A Preferred is convertible at the option of the Holder, into
that number of shares of our common stock, par value $0.0001 per
share) (the “
Common
Stock
”) (subject to
certain limitations on beneficial ownership) determined by dividing
the Stated Value by $0.05 per share (the “
Conversion
Price
”), subject to
adjustment in the event of stock dividends, stock splits, stock
combinations, reclassifications or similar transactions that
proportionately decrease or increase the Common
Stock.
The Company is prohibited from effecting the conversion of the
Series A 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 to the
Company), in the aggregate, of the issued and outstanding shares of
the Common Stock calculated immediately after giving effect to the
issuance of shares of Common Stock upon the conversion of the
Series A Preferred. Holders of the Series A Preferred shall be
entitled to vote on all matters submitted to the Company’s
stockholders and shall be entitled to the number of votes equal to
the number of shares of Common Stock into which the shares of
Series A Preferred Stock are convertible, subject to applicable
beneficial ownership limitations. The Series A Preferred Stock
provides a liquidation preference equal to the Stated Value, plus
any accrued and unpaid dividends, fees or liquidated
damages.
The Series A Preferred can be redeemed at the Company’s
option upon payment of a redemption premium between 120% to 135% of
the Stated Value of the outstanding Series A Preferred redeemed.
The Company is not obligated to file a registration statement under
the Securities Act of 1933, as amended (the
“
Act
”), with respect to the shares of Common
Stock into which Series A Preferred may be converted however the
Investor will be deemed to have held the Series A Preferred on the
original issue date to 3i for the purposes of the availability of
an exemption from registration provided by Rule 144 under the
Act.
On February 16, 2021 the Company offered to our prior Series A
preferred stock enhanced conversion inducements to voluntarily
convert preferred shares into our Common Stock and filed a
Certificate of Cancellation and Withdrawal with the Secretary of
State of the State of Nevada cancelling our prior Certificate
of Designation of Preferences, Rights and Limitations for
Series A Preferred Stock, all of which has been converted to Common
Stock, in order to issue the new Series A Preferred stock described
herein.
On April 7, 2021 the Company filed a Certificate of Cancellation
and Withdrawal with the Secretary of State of the State of Nevada
cancelling our prior Certificate of Designation of
Preferences, Rights and Limitations for Series C Preferred Stock,
Series D Preferred Stock, and Series E Preferred Stock, all of
which has been cancelled or converted into Common
Stock.
On February 16, 2021, the Company offered to our Series E preferred
stock accelerated vesting to voluntarily convert preferred shares
into our Common Stock.
NOTE 7 -
COMMITMENTS AND
CONTINGENCIES
Legal Matters
In the ordinary course of business, the Company enters into
agreements with third parties that include indemnification
provisions which, in its judgment, are normal and customary for
companies in the Company’s industry sector. These agreements
are typically with business partners, clinical sites, and
suppliers. Pursuant to these agreements, the Company generally
agrees to indemnify, hold harmless, and reimburse indemnified
parties for losses suffered or incurred by the indemnified parties
with respect to the Company’s product candidates, use of such
product candidates, or other actions taken or omitted by us. The
maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is
unlimited. The Company has not incurred material costs to defend
lawsuits or settle claims related to these indemnification
provisions. As a result, the estimated fair value of liabilities
relating to these provisions is minimal. Accordingly, the Company
has no liabilities recorded for these provisions as of December 31,
2020 or 2019.
On February 26, 2020 a complaint was filed against the Company in
the Circuit Court, Palm Beach County, Florida on behalf of two
former employees of the Company. The case is entitled Ryan
Borcherds and Miriam Martinez vs. Exactus, Inc. (Case No.
103978709). These former employees were hired in January
2020. The complaint alleged the Company failed to pay wages
and compensation to 2 employees under the Fair Labor Standards Act,
breach of contract and violation of various Florida statutes,
including allegations on behalf of other similarly situated
persons. On May 8, 2020, an amended complaint was filed
against the Company in the Circuit Court, Palm Beach County,
Florida on behalf of six former employees, with one additional
employee added to the suit in June 2020. The amended case is
entitled Ryan Bocherds, Marc Reiss, Jeannine Boffa, Benjamin Blair,
Miriam Martinez and Michael Amoroso vs. Exactus, Inc, (Case No.
50-2020-CA-002274-MB). The other four former employees were hired
between April 2019 and December 2019. As of December 31, 2019, the
Company has recorded total accrued salaries of $26,494 related to
these former employees. On September 8, 2020, the Company entered
into settlement agreements and mutual releases with all plaintiffs.
Under the settlement agreements, the Company is obligated to pay a
total of $131,130 (including $16,000 in legal fees and excluding
any applicable payroll taxes) to the plaintiffs. Under the
settlement agreements, the Company paid each plaintiff 50% of the
settlement amount at the time of signing and are obligated to pay
the remaining settlement amounts in six monthly
installments.
The 50% amount as well as the first monthly installment for each
plaintiff was paid and we are in default for the remaining 5
monthly payments.
On October 26, 2020 two complaints were filed in the Circuit Court,
Palm Beach County, Florida on behalf of a former vendors of the
Company. The cases entitled SEP COMMUNICATIONS LLC V EXACTUS INC.
50-2020-CA-011680-XXXX-MB and SOUTHEASTERN PRINTING COMPANY V
EXACTUS INC 50-2020-CC-009475-XXXX-SB seeks approximately
$54,612.80 & $19,528.36 respectively, plus interests and court
costs.
NOTE 8 -
RELATED PARTY
CONSIDERATIONS
Some of the officers and directors of the Company are involved in
other business activities and may, in the future, become involved
in other business opportunities that become available. They may
face a conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On January 8, 2019, the Company entered into a Master Product
Development and Supply Agreement with C2M. As of December 31,
2020, C2M is a majority stockholder of the
Company.
On January 21, 2021, the Company entered into a Settlement
Agreement with Ceed2Med, LLC and certain of its principals
cancelling all agreements, obligations and claims and providing
full mutual releases of the Company and such persons, see note 4
for additional details.
NOTE 9 –
CONCENTRATION OF REVENUE AND
SUPPLIERS
During the three months ended March 31, 2020, total sale of CBD
products and hemp flowers to two customers represented
approximately 89% (51%, and 38% - related party) of the
Company’s net sales.
As of December 31, 2020, total accounts payable with one vendor was
approximately 27% of total accounts
payable.
NOTE 10 -
SUBSEQUENT
EVENTS
On April 26, 2021, we received a loan in the principal amount of
$236,410 from the U.S. Small Business Administration under the
Paycheck Protection Program. The loan, which is documented by a
Note and Loan Agreement, bears interest at a rate of 1% per year
and is due in five (5) years. No payments under the Note are due
during the time that payments are deferred under the Coronavirus
Aid, Relief, and Economic Security Act, Paycheck Protection Program
Flexibility Act of 2020, and the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act (the “Act”). One
month after the deferral period provided under the Act expires, we
will be required to make monthly payments of principal and interest
in such equal amounts as are required to fully amortize the loan by
the maturity date. The Note may be prepaid at any time without
penalty. Upon fulfillment of conditions for forgiveness provided by
the Paycheck Protection Program under the Act, the loan may be
forgiven in whole or in part.
On March 31, 2021, a majority of our shareholders approved a
reverse split of our common stock by written consent. The
consenting shareholders approved a reverse split of our common
stock, par value $0.001 per share, at by a ratio of not less than
one-for-twenty five and not more than one-for-one hundred to take
effect at any time prior to December 31, 2021, with the exact ratio
to be set at a whole number within this range as determined by the
Company’s board of directors in its sole discretion. The
effective date of the reverse split, if undertaken in the
discretion of the board of directors, will be as determined by the
board in coordination with FINRA.
ITEM 2. M
A
NAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward-Looking Statements
Cautionary Statement Regarding Forward-Looking
Statements
The following discussion should be read in conjunction with the
attached unaudited condensed consolidated financial statements and
notes thereto, and with our audited financial statements and notes
thereto for the year ended December 31, 2020 found in the Form
10-K (the “Form 10-K”).
This Quarterly Report contains forward-looking statements, which
are subject to the safe harbor provisions created by the Private
Securities Litigation Reform Act of 1995. Words such as
“expects,” “anticipates,”
“plans,” “believes,” “seeks,”
“estimates,” “could,” “would,”
“may,” “intends,” “targets” and
similar expressions or variations of such words are intended to
identify forward-looking statements, but are not the exclusive
means of identifying forward-looking statements in this Quarterly
Report. The identification of certain statements as
“forward-looking” is not intended to mean that other
statements not specifically identified are not forward-looking. All
statements other than statements about historical facts are
statements that could be deemed forward-looking
statements.
Although forward-looking statements in this Quarterly Report
reflect the good faith judgment of our management, such statements
can only be based on facts and factors currently known by us.
Consequently, forward-looking statements are inherently subject to
risks, uncertainties, and changes in condition, significance, value
and effect, including those discussed under the heading “Risk
Factors” in our annual report on Form 10-K and other
documents we file from time to time with the Securities and
Exchange Commission (the “SEC”), such as our quarterly
reports on Form 10-Q and our current reports on Form 8-K. Such
risks, uncertainties and changes in condition, significance, value
and effect could cause our actual results to differ materially from
those expressed herein and in ways not readily foreseeable. Readers
are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Quarterly
Report and are based on information currently and reasonably known
to us. We undertake no obligation to revise or update any
forward-looking statements to reflect any event or circumstance
that may arise after the date of this Quarterly Report, other than
as required by law. Readers are urged to carefully review and
consider the various disclosures made in this Quarterly Report,
which attempt to advise interested parties of the risks and factors
that may affect our business, financial condition, results of
operations and prospects.
As used herein, the “Company,” “we,”
“us” and “our” refer to Exactus, Inc.
Unless specified otherwise, the financial results in this Quarterly
Report are those of the Company and its subsidiaries on a
consolidated basis.
Business Overview
We
are a Nevada corporation organized under the name Solid Solar
Energy, Inc in 2008 and renamed Exactus, Inc. in 2016. We have
pursued opportunities in Cannabidiol, which we refer to as CBD,
since 2019.
In
December 2018, we expanded our focus to pursue opportunities in
hemp-derived CBD. This decision was based in part on the passing of
the 2018 Farm Bill, known as the Agriculture Improvement Act of
2018, which will remain in force through 2023. The 2018 Farm Bill
authorized the production of hemp and removed hemp and hemp seeds
from the Drug Enforcement Administration’s, or the
DEA’s, schedule of Controlled Substances. It also directed
the U.S. Department of Agriculture, or the USDA, to issue
regulations and guidance to implement a program to create a
consistent regulatory framework around production of hemp
throughout the United states. On October 31, 2019, the USDA,
Agricultural Marketing Services, issued an interim final rule (with
request for comments). The rule outlines provisions for the USDA to
approve plans submitted by states and Indian tribes. The U.S.
Domestic Hemp Production Program establishes federal regulatory
oversight of the production of hemp in the U.S. The program
authorizes the USDA to approve plans submitted by states and Indian
tribes for the domestic production of hemp and establishes a
federal plan for producers in states or territories that choose not
to administer a state or tribe specific plan, provide the state or
tribe does not ban hemp production.
Our
principal executive offices were located at 80 NE 4th Avenue, Suite
28 Delray Beach, FL 33483 until mid-2020 when we commenced remote
operations due to Covid-19, and our telephone number is (800)
881-9352.
Industrial Hemp
We
seek to take advantage of an emerging worldwide trend to utilize
the production of cannabinoids derived from industrial hemp, such
as CBD, CBG and CBN, to produce consumer products. Hemp is being
used in cosmetics, nutritional supplements, and animal feed, where
we also intend to focus our efforts. The market for hemp-derived
products is expected to increase substantially over the next five
years.
The therapeutic potential of cannabinoids is
attributable to the valuable overlap between phyto-cannabinoids
(i.e. plant-derived cannabinoids) and the endogenous cannabinoid
system in humans, termed a “therapeutic handshake”.
Clinical trials demonstrate few adverse effects from oral CBD doses
of up to 1,500 mg/day or up to 30 mg IV. The scientific
understanding of CBD’s clinical effects is based mostly on
studies in specific indications, like epilepsy. One company, GW
Pharmaceuticals pls, a leading company developing pharmaceutical
drugs and cannabinoid-based medicines, has sought and obtained US
and foreign approvals since 2018.
EPIDIOLEX®/EPIDYOLEX® (cannabidiol), the
first prescription, plant-derived cannabis-based medicine approved
by the U.S. Food and Drug Administration (FDA) for use in the U.S.
and the European Commission (EC) for use in Europe, is an oral
solution which contains highly purified cannabidiol (CBD). In the
U.S., EPIDIOLEX® is indicated for the treatment of seizures
associated with Lennox-Gastaut syndrome (LGS), Dravet syndrome or
Tuberous Sclerosis Complex (TSC) in patients one year of age and
older. EPIDIOLEX® has received approval in the European Union
under the tradename EPIDYOLEX® for adjunctive use in
conjunction with clobazam to treat seizures associated with LGS and
Dravet syndrome in patients two years and older. In September 2020,
EPIDYOLEX® was approved by the Australian Therapeutic Goods
Administration (TGA) for use in Australia for the treatment of
seizures associated with LGS or Dravet syndrome in patients two
years of age and older. EPIDYOLEX® has received Orphan Drug
Designation from the European Medicines Agency (EMA) for the
treatment of seizures associated TSC.
Healthcare
Currently,
CBD products are not a covered benefit, or an extra benefit, under
managed care, insurance, Medicare, Medicaid or any state programs.
This will likely continue to be the case for the intermediate term.
Legal issues and confusion concerning legality, lack of FDA
regulation and availability as an OTC medication will likely
continue for an indefinite period impeding adoption and payor
acceptance.
Competition
We
believe a multitude (hundreds) of companies, large and small, have
launched or intend to launch retail brands and white label products
containing cannabinoids like CBD. Many of these are dependent upon
third parties to provide raw material inventory for sale. We
believe this makes many of the participants in the industry
vulnerable to shortages, quality issues, reliability, and pricing
variability. Our industry relationships may allow us to build an
efficient supply chain that will put us among the few companies
that maintain a competitive pricing and supply
advantage.
The
CBD-based consumer product industry is highly fragmented with
numerous companies, many of which are under-capitalized. There are
also large, well-funded companies that currently do not offer
hemp-based consumer products including large agribusiness companies
such as Cargill and Tyson Foods, but may do so in the future and
become significant competitors.
Our goal is to rapidly establish one or more principal sources of
supply and to develop wholesale and retail sales channels for
end-products, such as nutraceuticals, supplements and pet and farm
products.
Environmental Matters
Compliance
with federal, state and local requirements regulating the discharge
of materials into the environment, or otherwise relating to the
protection of the environment, have not had, nor are they expected
to have, any direct material effect on our capital expenditures,
earnings or competitive position, however such factors could
indirectly affect us as well as participants in the supply chain
for our products, and our business, operations, vendors or
suppliers.
Recent Developments
Expected Changes in Number of Employees, Plant, and
Equipment
We do
not currently plan to purchase specific additional physical plant
and significant equipment within the immediate future.
Results of Operations
Three months ended March 31, 2021 and 2020:
Net Revenues
The
Company is principally engaged in the business production and
selling of products made from industrial hemp.
During
the three months ended March 31, 2021, we generated no revenue due
to limited capital resources.
During the three months ended March 31, 2020, we generated total
revenues of $836,000 from the sale of CBD products and hemp
flowers, including revenues of $315,800 from a related party, C2M,
who was a majority stockholder of the Company,
Cost of Sales
The primary components of cost of sales include the cost of the CBD
product. For the three months ended March 31, 2020, the
Company’s cost of sales amounted to $1,400,256 which
primarily represents cost of CBD products and hemp flowers sold
including cost of hemp flowers sold to C2M for a total of $357,783
and inventory write-off of hemp flowers of $553,440 due to damages
from mold.
Operating Expenses
General and administrative expenses
increased by $2.4
million from $1,060,587 to 3,457,728 during the three months ended
March 31, 2021
. The increase is mainly
as a result of reduced operating activity related to lack of
available capital to operate the business. The majority of the
current period expense is related to non-cash stock-based
compensation related to compensation of employees and the
settlement of outstanding liabilities.
Selling and marketing expenses
decreased by $254,793 from
$280,890 to $26,097 for the three months ended March 31, 2021,
primarily due to decrease in sales activity related to limited
capital resources.
Professional and consulting fees
decreased by $658,664 from
$727,871 to $69,207 for the three months ended March 31, 2021,
primarily due to due to decrease in sales activity related to
limited capital resources.
Other Expenses, net
Change in Fair Value of Derivative Liability
increases by
$1,513,548 for the three months ended March 31, 2021 primarily due
to the adjustments to fair value and reflects the increase of our
stock price at quarter end. The underlying derivative was settled
during the quarter when the convertible note was converted to
common stock.
Gain on extinguishment of debt
increased by $160,431 for the
three months ended March 31, 2021 primarily due to the conversion
of notes and interest into common stock offset by the settlement of
accounts payable, accrued expenses, accrued payroll and convertible
notes payable – related party with common stock.
Interest expense
increased by $87,713 for the three months
ended March 31, 2021 primarily due to conversation of the
convertible note.
Liquidity and Capital Resources
These
unaudited condensed consolidated financial statements are presented
on the basis that the Company will continue as a going concern. The
going concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. Since our
inception in 2008, we have generated losses from operations. As of
March 31, 2021, our accumulated deficit was $35.1 million, we had
$19,721 in cash and working capital deficit of $3.4 million. These
factors raise substantial doubt about the Company’s ability
to continue as a going concern for a period of twelve months from
the issuance date of this report. Management cannot provide
assurance that the Company will ultimately achieve profitable
operations or become cash flow positive or raise additional debt
and/or equity capital. In addition, due to insufficient revenue, we
will need to obtain further funding through public or private
equity offerings, debt financing, collaboration arrangements or
other sources in order to maintain active business operations. We
currently do not have sufficient cash flow to pay our ongoing
financial obligations on a consistent basis. The issuance of any
additional shares of Common Stock, preferred stock or convertible
securities could be substantially dilutive to our shareholders. In
addition, adequate additional funding may not be available to us on
acceptable terms, or at all. If we are unable to raise capital, we
will be forced to delay, reduce or eliminate our research and
development programs, we may not be able to continue as a going
concern, and we may be forced to discontinue operations. These
unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
At
March 31, 2021, the Company had various outstanding payables and
debts totaling $4.2 million and approximately $19,721 in
cash.
Net
cash used in operating activities for the three months ended March
31, 2021 was $25,418, due to our net loss of $4.7 million offset by
non-cash stock based compensation of $3.4 million, non-cash
derivative liability of $1.4 million, and non-cash interest of
$186,692.
No cash
was used in investing activity for the three months ended March 31,
2021.
Net
cash provided by financing activities for the three months ended
March 31, 2021 30, 2020 was $20,000 related to proceeds from a note
payable with a shareholder.
Currently,
we do not expect our financing activities to be a significant
source of cash in 2021.
Off Balance Sheet Arrangements
As of
March 31, 2021, we had no material off-balance sheet
arrangements.
In the
normal course of business, we may be confronted with issues or
events that may result in a contingent liability. These generally
relate to lawsuits, claims or the actions of various regulatory
agencies. We consult with counsel and other appropriate experts to
assess the claim. If, in our opinion, we have incurred a probable
loss as set forth by accounting principles generally accepted in
the United States, an estimate is made of the loss and the
appropriate accounting entries are reflected in our financial
statements. After consultation with legal counsel, we do not
anticipate that liabilities arising out of currently pending or
threatened lawsuits and claims will have a material adverse effect
on our financial position, results of operations or cash
flows.
Potential Impacts of the COVID-19 Pandemic on Our Business and
Operations
In
March 2020, the outbreak of COVID-19 (coronavirus) caused by a
novel strain of the coronavirus was recognized as a pandemic by the
World Health Organization, and the outbreak has become increasingly
widespread in the United States, including in each of the areas in
which we operate. The COVID-19 (coronavirus) outbreak has had a
notable impact on general economic conditions, including but not
limited to the temporary closures of many businesses,
“shelter in place” and other governmental regulations,
reduced business and consumer spending due to both job losses and
reduced investing activity, among many other effects attributable
to the COVID-19 (coronavirus), and there continue to be many
unknowns. While to date we have not been required to stop
operating, management has utilized virtual meetings and will likely
not return to an office setting. The Company’s operations may
have been impacted by the COVID-19 shutdown; however, our operating
efforts have continued. We continue to monitor the impact of the
COVID-19 (coronavirus) outbreak closely. The extent to which the
COVID-19 (coronavirus) outbreak will impact our ability to obtain
financing or future financial results is uncertain.
Critical Accounting Estimates and New Accounting
Pronouncements
Critical Accounting Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported
amounts and related disclosures in the financial statements.
Management considers an accounting estimate to be critical if it
requires assumptions to be made that were uncertain at the time the
estimate was made, and changes in the estimate or different
estimates that could have been selected could have a material
impact on our results of operations or financial
condition.
Recent Accounting Pronouncements
ASU 2020-06 Debt – Debt with Conversion and Other Options and
Derivatives and Hedging
In August 2020, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2020-06, Debt — Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging —
Contracts in Entity’s Own Equity (Subtopic 815-40)
(“ASU 2020-06”) to simplify accounting for certain
financial instruments. ASU 2020-06 eliminates the current models
that require separation of beneficial conversion and cash
conversion features from convertible instruments and simplifies the
derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity. The
new standard also introduces additional disclosures for convertible
debt and freestanding instruments that are indexed to and settled
in an entity’s own equity. ASU 2020-06 amends the diluted
earnings per share guidance, including the requirement to use the
if-converted method for all convertible instruments. ASU 2020-06 is
effective January 1, 2022 and should be applied on a full or
modified retrospective basis, with early adoption permitted
beginning on January 1, 2021. The Company early adopted ASU
2020-06 on January 1, 2021. The adoption of ASU 2020-06 did
not have an impact on the Company’s financial
statements.
ITEM 3. QUA
N
TITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A
smaller reporting company is not required to provide the
information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act are
recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our
management, including our principal executive and financial
officers, as appropriate to allow timely decisions regarding
required disclosure.
Our
Interim Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), the Company’s
principal executive and financial officers, have conducted an
evaluation of the design and effectiveness of our disclosure
controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
of the Exchange Act as of the end of the period covered by this
report. Our management’s evaluation of our internal control
over financial reporting was based on the framework in Internal
Control-Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In designing
and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design
of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to
apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
Our CEO
and CFO believe that as of March 31, 2021, our disclosure controls
and procedures are not designed at a reasonable assurance level and
are ineffective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms, and that
such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure. The conclusion was due to
the presence of the following material weaknesses in disclosure
controls and procedures due to our small size and limited
resources: (i) inadequate segregation of duties and effective risk
assessment; (ii) insufficient written policies and procedures for
accounting and financial reporting with respect to the requirements
and application of both U.S. GAAP and SEC Guidelines; (iii)
inadequate security and restricted access to computer systems
including insufficient disaster recovery plans; and (iv) no written
whistleblower policy.
Our CEO
and CFO plan to review and implement appropriate disclosure
controls and procedures to remediate these material weaknesses,
including (i) appointing additional qualified personnel to address
inadequate segregation of duties and ineffective risk management;
(ii) adopting sufficient written policies and procedures for
accounting and financial reporting and a whistle blower policy; and
(iii) implementing sufficient security and restricted access
measures regarding our computer systems and implement a disaster
recovery plan.
Changes in Internal Controls over Financial Reporting
There
have been no changes in the internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended March 31, 2021,
that have materially affected, or is reasonably likely to
materially affect, our internal over financial
reporting.
PA
R
T II—OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From
time to time, we may become involved in legal proceedings arising
in the ordinary course of business. We are unable to predict the
outcome of any such matters or the ultimate legal and financial
liability, and at this time cannot reasonably estimate the possible
loss or range of loss and accordingly have not accrued a related
liability.
On February 26, 2020 a complaint was filed against the Company in
the Circuit Court, Palm Beach County, Florida on behalf of two
former employees of the Company. The case is entitled Ryan
Borcherds and Miriam Martinez vs. Exactus, Inc. (Case No.
103978709). These former employees were hired in January
2020. The complaint alleged the Company failed to pay wages
and compensation to 2 employees under the Fair Labor Standards Act,
breach of contract and violation of various Florida statutes,
including allegations on behalf of other similarly situated
persons. On May 8, 2020, an amended complaint was filed
against the Company in the Circuit Court, Palm Beach County,
Florida on behalf of six former employees, with one additional
employee added to the suit in June 2020. The amended case is
entitled Ryan Bocherds, Marc Reiss, Jeannine Boffa, Benjamin Blair,
Miriam Martinez and Michael Amoroso vs. Exactus, Inc, (Case No.
50-2020-CA-002274-MB). The other four former employees were hired
between April 2019 and December 2019. As of December 31, 2019, the
Company has recorded total accrued salaries of $26,494 related to
these former employees. On September 8, 2020, the Company entered
into settlement agreements and mutual releases with all plaintiffs.
Under the settlement agreements, the Company is obligated to pay a
total of $131,130 (including $16,000 in legal fees and excluding
any applicable payroll taxes) to the plaintiffs. Under the
settlement agreements, the Company paid each plaintiff 50% of the
settlement amount at the time of signing and are obligated to pay
the remaining settlement amounts in six monthly
installments.
The 50% amount as well as the first monthly installment for each
plaintiff was paid and we are in default for the remaining 5
monthly payments.
On October 26, 2020 two complaints were filed in the Circuit Court,
Palm Beach County, Florida on behalf of a former vendors of the
Company. The cases entitled SEP COMMUNICATIONS LLC V EXACTUS INC.
50-2020-CA-011680-XXXX-MB and SOUTHEASTERN PRINTING COMPANY V
EXACTUS INC 50-2020-CC-009475-XXXX-SB seeks approximately
$54,612.80 & $19,528.36 respectively, plus interests and court
costs.
ITEM 1A. RISK FACTORS.
A
smaller reporting company is not required to provide the
information required by this Item. For our most recent risk
factors, please consult our Annual Report on Form 10-K/A filed
April 23, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES OR USE OF
PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EX
H
IBITS.
|
Exhibit
Number
|
|
Description of Exhibit
|
|
|
|
|
|
10.1
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
101
|
|
Materials
from the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2021 formatted in Extensible Business
Reporting Language (XBRL)
|
SIG
N
ATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
Exactus, Inc.
|
|
|
|
|
May 24,
2021
|
/s/
Daniel Albertis
|
|
|
Daniel
Albertis
|
|
|
Principal Executive Officer
|
|
|
/s/
John Price
|
|
|
John
Price
|
|
|
Principal Financial and Accounting Officer
|
-24-
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 - Nature Of OrganizationNote 2 Summary Of Significant Accounting PoliciesNote 3 InventoryNote 4 - Operating Lease Right-of-use Assets and Operating Lease LiabilitiesNote 5 - DebtNote 6 - Stockholders Equity (deficit)Note 7 - Commitments and ContingenciesNote 8 - Related Party ConsiderationsNote 9 Concentration Of Revenue and SuppliersNote 10 - Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities Or Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits