Forward-Looking Statements
Information in this Quarterly Report on Form 10-Q may contain forward-looking
statements. This information may involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different than the future results, performance or achievements
expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe our future plans, strategies
and expectations, are generally identifiable by use of the words "may,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negative of these words or other variations on these words or comparable
terminology.
Examples of forward-looking statements include, but are not limited to,
statements regarding our proposed services, market opportunities and acceptance,
expectations for revenues, cash flows and financial performance, and intentions
for the future. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" in the
Company's Form 10K for the year ended December 31, 2015, filed with the
Securities and Exchange Commission (the "SEC") on April 13, 2016. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this Quarterly Report on Form 10-Q will
in fact be accurate. Further, we do not undertake any obligation to publicly
update any forward-looking statements, except as may be required under
applicable securities laws. As a result, you should not place undue reliance on
these forward-looking statements.
Overview
Notis Global entered into joint ventures and operating and management agreements
with its partners and acted as a distributor of hemp products processed by our
contract partners. As of September 30, 2016, the Company has exited all these
arrangements. Presently we own and manage real estate used for cultivation of
hemp.
We are building a consistent, predictable and valuable revenue model as we
refocus the Company to create a sustainable business model to grow crops and
manufacture products from hemp farmland and to market, sell and distribute CBD
oil. State and local laws regarding farming and growing marijuana and
cultivation centers for marijuana vary.
With an eye focused on the future-and ultimately anticipated FDA approval of
hemp and CBD oil production and sales in the United States-we are honing our
focus to controlling our supply chain. From "Seed to Sale," Notis Global will
influence its own destiny by controlling our ecosystem. We intend to oversee and
execute everything from growing and cultivating the highest quality plants to
managing extraction and production of our products. We believe this tight
control of our supply chain will eventually be mandated by the Federal
Government as a condition of legalizing hemp and CBD oil production,
manufacturing and distribution in the United States. We have elected to take
action now, and intend to lead our industry by doing so. As we continue to
navigate the emerging world of hemp and CBD growing, cultivation, production and
sales, it is clear that controlling all aspects of the business is the best
strategy to meet our goals.
In August 2015, we purchased a 320 acre farm located outside of Pueblo, CO, in
order to cultivate hemp for our products.
Whole Hemp Agreement
In December 2015, we entered into a Farming Agreement with Whole Hemp Company
("Whole Hemp"), now known as Folium Biosciences, pursuant to which Whole Hemp
would manufacture products from hemp and cannabis crops that it would grow on
our farm, and the Company would build greenhouses for such activities up to an
aggregate size of 200,000 square feet. Whole Hemp would pay all preapproved
costs of such construction on or before September 2017 as partial consideration
for a revocable license to use the greenhouses and a separate 10-acre plot of
our farmland. We would retain ownership of the greenhouses. Under the 10 year
amended agreement with Whole Hemp, Notis Global would receive a percentage of
gross sales of all Whole Hemp products paid on a monthly basis. The Farming
Agreement was amended and restated in March 2016.
46
Since May 7, 2016, we believe Whole Hemp has been in default, principally
because they abandoned their obligation to perform farming activities under the
First Amended and Restated Farming Agreement. On May 13, 2016, EWSD notified
Whole Hemp of its defaults under the First Amended and Restated Farming
Agreement and EWSD's election to terminate the First Amended and Restated
Farming Agreement.
By its terms, the First Amended and Restated Farming Agreement may be terminated
at any time by either party, if the other party was in material breach of any
obligation under the First Amended and Restated Farming Agreement, which breach
continued uncured for 30 days following written notice thereof.
47
In addition, in December 2015, we entered into a Grower's Distributor Agreement
with Whole Hemp, pursuant to which we would provide marketing, sales, and
related services on behalf of Whole Hemp in connection with the sale of its
Cannabidoil oil product, and pursuant to which the Company would receive a
percentage of gross revenues. The Grower's Distributor Agreement was effective
until September 30, 2025. The Grower's Distributor Agreement was amended and
restated in March 2016.
Because we believe Whole Hemp has been in default, principally because they
abandoned their obligation to perform farming activities under the First Amended
and Restated Farming Agreement since May 7, 2016, EWSD notified Whole Hemp on
May 13, 2016 of its election to terminate the Restated Grower's Distributor
Agreement.
By its terms, the Restated Grower's Distributor Agreement could be terminated at
any time by either party, if the other party was in material breach of any
obligation under the Restated Grower's Distributor Agreement, which breach
continued uncured for 30 days following written notice thereof.
Whole Hemp complaint
A complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences
("Whole Hemp") on June 1, 2016, naming Notis Global, Inc. and EWSD
(collectively, "Notis"), as defendants in Pueblo County, CO district court. The
complaint alleges five causes of action against Notis: misappropriation of trade
secrets, civil theft, intentional interference with prospective business
advantage, civil conspiracy, and breach of contract. All claims concern
contracts between Whole Hemp and Notis for the Farming Agreement and the
Distributor Agreement.
The court entered an ex parte temporary restraining order on June 2, 2016, and a
modified temporary restraining order on July 14, 2016, enjoining Notis from
disclosing, using, copying, conveying, transferring, or transmitting Whole
Hemp's trade secrets, including Whole Hemp's plants. On June 13, 2016, the court
ordered that all claims be submitted to arbitration, except for the disposition
of the temporary restraining order.
On August 12, 2016, the court ordered that all of Whole Hemp's plants in Notis'
possession be destroyed, which occurred by August 24, 2016, at which time the
temporary restraining order was dissolved and the parties will soon file a
motion to dismiss the district court action.
Notis commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive
relief and alleging breaches of the contracts between the parties. Whole Hemp
filed is Answer and counterclaims on September 6, 2016, asserting similar
allegations that were asserted to the court.
On September 30, 2016, the arbitrator held an initial status conference and
agreed to allow EWSD and Notis to file a motion to dismiss some or all of Whole
Hemp's claims by no later than October 28, 2016. The parties were also ordered
to make initial disclosures of relevant documents and persons with knowledge of
relevant information by October 21, 2016.
In light of the court order to destroy all Whole Hemp plants, the Company has
immediately expensed all Capitalized agricultural costs as of June 30, 2016, as
all costs as of that date related to Whole Hemp plants.
As noted above, our long term strategy is to maintain tight control of our
supply chain. The continuing default by Whole Hemp was conductive to our efforts
to eliminate outside vendors in the supply chain and control production from
"Seed to Sale." Our decision to terminate the Whole Hemp Agreements comports
with our long term strategy to maintain tight control of our supply chain.
Dispensaries
Historically, we generated revenue from various sources on a "one-time basis"
for services that we provided to clients in helping them obtain licenses, build
out and open dispensaries and cultivation centers. During this period we
obtained five licenses or registrations in the States of Oregon, Illinois,
Washington and California for or on behalf of clients or for potential clients.
Most of the current dispensary and cultivation sites that are opening under
these licenses began conducting business in 2015. As of the second quarter of
2016, we have sold all of our interests and rights as concerns the dispensaries.
In the second quarter of 2015, we contracted with an independent operator to
operate a dispensary in Portland, Oregon. In December 2015, we terminated the
operator due to low sales volume and entered an operating agreement with a new
partner to operate the Portland dispensary. Under the management of our new
partner, the dispensary reached expected sales volume levels in December 2015
through March 2016 and is rated as the top dispensary in Portland, Oregon
according to Leafly.com. On June 30, 2016, we entered into an assignment
agreement whereby we sold and assigned all of our rights in the operating
agreement, including but not limited to the assets and liabilities we held in
relation to the Portland dispensary, resulting in a net loss of $178,000 on sale
of assets.
On December 31, 2015, our operating partner made a matching investment to close
on our escrow for a dispensary site in San Diego, CA. Notis Global, through an
affiliated company, holds the approved conditional use permit to operate a
dispensary on this site. In two transactions in February and April 2016 we sold
our interest in the operating entity for approximately $299,000 and our interest
in the underlying real estate for $335,000 to our operating partner and other
third parties along with a forgiveness of $65,000 owed by Notis for improvements
on the property, recognizing a gain of approximately $631,000. After the April
6, 2016 transaction, we have no further interest in the dispensary in San Diego,
CA.
48
In the State of Washington, we held two licenses to operate dispensaries. These
two dispensaries were to be operated by an independent operating partner, with
whom we had entered into operating contracts as of August 31, 2015. We also held
the underlying real estate for one of the two dispensaries, for which we
received monthly rental income of $2,500. On July 25, 2016, we were notified
that we are in default on the Note payable related to the underlying property,
and are incurring interest at the default rate of 18%. On September 27, 2016 the
Company entered into a default settlement with the note holder where by the note
was settled by conveying the property to the note holder recognizing the loss on
default settlement of approximately 168,000.
During January and February 2016, we were selling a line of portable vaporizers
and accessories under the brand name Vaporfection. In January 2016, we decided
to exit the portable vaporizer business in 2016 so that the Company can more
aggressively pursue additional business opportunities in its core business. On
March 28, 2016 we sold our assets in Vaporfection for $70,000, which was payable
$35,000 upon the sale and $35,000 was loaned to the buyer under a 6% note
payable due September 30, 2016. As of September 30, 2016, the Company collected
approximately $19,000 and determined that the remainder was not collectable and
recognized a reserve of approximately $51,000.
Comparison of the three months ended September 30, 2016 and 2015
The Company reported consolidated net loss of approximately $5,735,000 for the
three months ended September 30, 2016 as compared to a net loss of approximately
$9,292,000, for the three months ended September 30, 2015. The decrease of
approximately $3,557,000 was due significantly to the decrease in general and
administrative expenses by approximately $1,840,000, a smaller expense
recognized from the change in fair value of the derivative liability of
$1,231,000, as well as decreases in amortization of debt discount by
approximately $558,000, offset by an increase in financing costs of
approximately $542,000.
Revenue
Total revenue consisted of deferred revenue which was recognized in the current
period for consulting agreements, sale of territory rights to a related party
and in 2015 the revenue from sales of vaporizers and rental income.
The decrease of approximately $273,000 in total revenue is due to in part to a
decrease in the recognition of deferred revenue of $176,000 for the three months
ended September 30, 2016, as compared to the same period of 2015, as a result of
the completion of obligations to certain clients in the third quarter of 2015.
Additionally, due to the sale of the Vaporfection assets at the end of the first
quarter of 2016, there was a decrease in the sales of vaporizers of
approximately $82,000 for the three months ended September 30, 2016, compared to
the same period of 2015.
Costs of revenue
Costs of revenues decreased by approximately $532,000 for the three months ended
September 30, 2016 as compared to the same period of 2015.
In light of the court order to destroy all Whole Hemp plants (Note 3), during
the three months ended September 30, 2016, the Company immediately expensed all
Capitalized agricultural costs of approximately $124,000 to Costs of revenue.
During the three months ended September 30, 3015, the manufacturing partner of
the Company announced that they had filed for restructuring and court protection
under Chapter 11 of the United States Bankruptcy Code. The Company had Inventory
and deposits on dispensing machines connected to this manufacturing partner. As
a result, the Company wrote down both the inventory of the dispensing machines
and deposits, for a total charge to Costs of revenues of approximately $14,300.
There were no similar transactions during the same period of 2016.
New market development costs decreased by approximately $361,000 during the
three months ended September 30, 2016 as compared to the same period of 2015.
New market development costs consist of costs incurred in new markets prior to
securing a location and obtaining a license for new dispensary or cultivation
facilities in the state. The Company was not active in developing new market
areas in the second quarter of 2016, leading to the aforementioned decrease.
During the second quarter of 2015, the Company forfeited $40,000 in earnest
money due to unfavorable terms demanded by the sellers to extend the escrow and
closing date. There were no corresponding charges in the second quarter of 2016.
The cost of sales related to vaporizers in the three months ended September 30,
2015 was approximately $59,000. There were no corresponding costs in the same
period of 2016 as the Company sold the Vaporfection assets at the end of the
first quarter of 2016.
49
Operating Expenses
Operating expenses consist of all other costs incurred during the period other
than cost of revenue. The Company incurred approximately $1,688,000 in operating
expenses for the three months ended September 30, 2016 compared to approximately
$3,610,000 for the three months ended September 30, 2015. The decrease of
approximately $1,922,000 was primarily due to the decrease in general and
administrative expenses of $1,840,000.
Sales and Marketing expenses
Sales and marketing expenses include employee costs, outside services for sales
and marketing consultants, travel and entertainment and sales lead generation.
The Company incurred approximately $22,000 and $104,000 in sales and marketing
expenses for the three months ended September 30, 2016 and 2015, respectively.
The decrease was a result of the Company's effort to decrease expenses in these
areas.
General and administrative
General and administrative expenses include salary costs, including stock based
compensation, professional costs, including the costs associated with being a
public company and consultants, rent and other costs. The expenses incurred
during the three months ended September 30, 2016 and 2015 are summarized and
described below:
Salary costs
Employee costs increased by approximately $ 87,000 for the three months ended
September 30, 2016, as compared to the same period in 2015. This was mostly the
result of combination of the addition of the Farm employees offset by the
departure of the Company's CFO at the end of May 2016.
The Company's stock based compensation decreased by approximately $987,000 due
to lower cost for director's fees in the second year of their term. The
director's retention agreements specify higher stock grants in their first year
of service (two Directors commenced service in the middle of 2014 and received
inducement grants for their first year of service; their related costs were
expensed over the year that included the first quarter of 2015). Additionally,
the new grants expensed in 2016, were valued at a significantly lower share
price.
Professional costs
Professional costs decreased approximately $859,000 for the three months ended
September 30, 2016, as compared to the same period of 2015.
Legal costs decreased by $222,000 during the three months ended September 30,
2016, as compared to the three months ended September 30, 2015. In the three
months ended September 30, 2015, the Company's attorneys were actively involved
in defending the Company in the stockholders' class action and derivative
lawsuit. A memorandum of understanding of settlement was reached on October 16,
2015. Presently the attorneys are representing the Company in attempting to gain
approval of the settlement agreements (see legal section). Therefore, there has
been a reduction in legal expenses in the third quarter of 2016 as compared to
the same period of 2015.
The costs of being public include legal fees for our corporate securities
counsel, filing fees, independent directors' fees and bonuses and investor
relations costs. A portion of the period's decrease in 2016 as compared to 2015,
was due to the fact the Company incurred additional costs of approximately
$284,000 in the third quarter of 2015 in relation to the Company's filing of a
registration statement on Form S-1, and the issuance of independent director's
bonuses of approximately $297,000. There were no similar costs incurred in the
third quarter of the current year.
Independent contractor's costs decreased in the third quarter of 2016, as
compared to the same period of 2015, by approximately $152,000 due to the
expiration of certain independent contractor's agreements.
During the three months ended September 30, 2016 the Company accrued $135,000
per the terms of the settlement agreement regarding the Merritt's action (see
legal section).
Farm maintenance
Farm maintenance costs consist of utilities, maintenance and repairs and
security costs. These costs totaled approximately $62,000 for the three months
ended September 30, 2016. There were no similar costs for the same period of
2015.
50
Rent
The decrease in rent of approximately $74,000 during the three months ended
September 30, 2016, as compared to the same period of 2015, is due to the
Company recognizing in the third quarter of 2015 the remaining lease liability
through the end of lease term on the Company's previous headquarters in West
Hollywood, California., reflecting a continuing dispute with the landlord after
the Company moved out of the location (see Notes 11 and 12).
Other costs
Insurance costs decreased by approximately $113,000 for the three months ended
September 30, 2016, as compared to the same period of 2015, as the Company
reduced their coverage to control expenses.
As discussed in above the company recognized approximately $54,000 in bad debt
through an increase in the reserve against collections related to the sale of
the Vaporfection assets at the end of March 2016.
51
Other Income (Expense)
Other income (expense) includes the financing costs associated with our
financing activities, including the amortization of the debt discount and the
change in fair value of the derivative liability. As disclosed in Note 7 of the
Company's financial statements, the reset provision for the subsequent sale of
any dilutive issuance at a lower sale or exercise price than the then current
conversion price results for accounting purposes as a liability being recognized
for the fair value of the derivative. This derivative is re-measured each period
end, with the net change in fair value for the three months ended September 30,
2016 and 2015 of loss of approximately $1,313,000 and $2,544,000, respectively,
being recognized in Other income (expense). This derivative feature results in a
debt discount for the initial fair value recognized for the derivative. The debt
discount also includes the fair value of any warrants issued with the
convertible debentures, as well as the discounts offered to the face value of
the notes payable. This debt discount is amortized as "other expense" over the
life of the convertible debenture, or until conversion, if earlier, which
amounted in approximately $1,514,000 for the three months ended September 30,
2016 and $2,072,000 for the same period of 2015. Additionally, the current
period closings of the convertible debentures resulted in the calculated fair
value of the discount being greater than the face amount of the debt by
approximately $779,000 as compared to approximately $522,000 for the third
quarter of 2015, with this excess amount being immediately expensed as Financing
costs. Financing costs also includes the amortization of $280,000 relating to a
note issued as an incentive to amend the terms of certain convertible debentures
(Note 7). As the Company determined there is not sufficient authorized shares at
quarter-end for conversion of all the convertible debentures and exercise of the
warrants, under their sequencing policy (Note 7), the Company has recognized a
warrant liability. The warrant liability is remeasured to its fair value at the
end of every period, which resulted in the Company recognizing a net gain from
the change in fair value of the warrant liability of approximately $86,000 for
three months ended September 30, 2016. There was no warrant liability in 2015.
Interest expense related to the stated interest on our convertible debentures
and notes payable incurred during the three months ended September 30, 2016,
amounted to approximately $267,000. In addition to the foregoing, the Company
incurred approximately $71,000 related to the notes for the purchase of the land
in Colorado. All of the above resulted in interest expense of approximately
$334,000 for the three months ended September 30, 2016. Interest expense related
to our convertible debentures and notes payable incurred in the three months
ended September 30, 2015, amounted to approximately $138,000, additionally
approximately $35,000 was incurred on notes related to the purchase of the land
in Colorado, and approximately $22,000 for in relation to note issued for the
purchase of property in the state of Washington.
On September 27, 2016 the Company entered into a default settlement regarding
the note related to the Washington property, whereby the note was settled by
conveying the property to the note holder resulting in the recognition of a loss
on default settlement of approximately $168,000.
Net Income (Loss)
As a result of the factors set forth above, our net loss decreased approximately
$3,557,000 for the three months ended September 30, 2016, resulting in a net
loss of approximately $5,735,000 for the three months ended September 30, 2016.
Comparison of the nine months ended September 30, 2016 and 2015
The Company reported a consolidated net income of approximately $2,062,000 for
the nine months ended September 30, 2016 and consolidated net loss of
approximately $25,120,000, for the nine months ended September 30, 2015. The
fluctuation of approximately $27,182,000 was significantly due to the positive
change in fair value of the derivative liabilities of approximately $16,998,000,
decrease in amortization of debt discount of approximately $3,994,000, as well
as an increase in gross profit by approximately $1,443,000 offset by various
decreases in expenses. These expenses primarily include decreases in general and
administrative expenses of approximately $4,729,000.
Revenue
Total revenue consisted of revenue from CBD oil sales generated from our
Grower's Distribution agreement, deferred revenue which was recognized in the
current period for consulting agreements, sale of territory rights to a related
party, rental income, Company's share of dispensary revenue and in 2015 the
revenue from sales of vaporizers. During the first quarter of 2016, the Company
launched its CBD oil sales program under the Grower's Distribution agreement. As
noted under the Overview above, this agreement was terminated in May 2016. The
Company is currently planning to extract CBD oil from their own hemp plants
cultivated on the Farm, as well as process CBD oil from other farmers.
The increase by approximately $100,000 in total revenue was due to an increase
of approximately $239,000 from CBD oil sales generated from our Grower's
Distribution agreement and an increase of approximately $31,000 from rental
income and Company's share of dispensary revenue earned our Oregon and
Washington operations compared to $32,000 in rental income for the same period
of 2015. The Company will no longer recognize any revenue related to the Oregon
and Washington operations, as they have exited both locations, as described
previously. This increase was offset by a decrease of approximately $186,000 in
deferred consulting revenue, as a result of the completion of obligations to
certain clients in the third quarter of 2015. Furthermore, there was a decrease
of $98,000 in vaporizer sales and accessories due to the Company exiting the
business as of March 31, 2016.
52
Costs of revenue
Costs of revenues decreased by approximately $1,343,000 for the nine months
ended September 30, 2016, as compared to the same period of 2015.
New market development costs decreased by approximately $899,000 during the nine
months ended September 30, 2016, as compared to the same period of 2015. New
market development costs consist of costs incurred in new markets prior to
securing a location and obtaining a license for new dispensary or cultivation
facilities in the state. The Company was not active in developing new market
areas in 2016, leading to the aforementioned decrease.
During the nine months ended September 30, 2015, the manufacturing partner of
the Company announced that they had filed for restructuring and court protection
under Chapter 11 of the United States Bankruptcy Code. The Company had Inventory
and deposits on dispensing machines connected to this manufacturing partner. As
a result, the Company wrote down both the inventory of the dispensing machines
and deposits, for a total charge to Costs of revenues of approximately $497,000.
There were no similar transactions during the same period of 2016.
During the nine months ended September 30, 2015, the Company forfeited $280,000
in earnest money due to unfavorable terms demanded by the sellers of real
property to extend the escrow and closing date on the sale of the property.
There were no corresponding charges during the nine months ended September 30,
2016.
The reduction of the above three categories of costs of revenue are the cause of
the increase in our gross profit for the nine months ended September 30, 2016.
As result of our CBD oil sale program launched in the first quarter of 2016, the
Company incurred cost of revenue related to procurement of CBD oils in the
amount of approximately $195,000 during the nine months ended September 30,
2016. There were no corresponding costs for the same period of 2015. The gross
profit on our CBD oil sales is approximately $44,000 or 18.5%.
In light of the court order to destroy all Whole Hemp plants, the Company has
immediately expensed all Capitalized agricultural costs of $197,000 as of
September 30, 2016, as all costs as of that date related to Whole Hemp plants.
Rental expenses on the master lease and tenant improvement amortization related
to the Oregon rental income was approximately $46,000 and $37,000 for the nine
months ended September 30, 2016 and 2015, respectively.
The cost of sales related to vaporizers in the nine months ended September 30,
2015 was approximately $67,000 as compared to the approximately $16,000 for the
nine months ended September 30, 2016.
Operating Expenses
Operating expenses consist of all other costs incurred during the period, other
than cost of revenue. The Company incurred approximately $8,144,000 in operating
expenses for the nine months ended September 30, 2016, compared to approximately
$13,070,000 for the nine months ended September 30, 2015. The decrease of
approximately $4,926,000 was primarily due to the decrease in general and
administrative expenses of $4,729,000.
Sales and Marketing expenses
Sales and marketing expenses include employee costs, outside services for sales
and marketing consultants, travel and entertainment and sales lead generation.
The Company incurred approximately $245,000 and $442,000 in sales and marketing
expenses for the nine months ended September 30, 2016 and 2015, respectively.
The decrease was a result of the Company's effort to cut back on expenses.
General and administrative
General and administrative expenses include salary costs, including stock based
compensation, professional costs, including the costs associated with being a
public company and consultants, rent and other costs. The expenses incurred
during the nine months ended September 30, 2016 and 2015 are summarized and
described below:
Salary costs
Employee costs and bonuses increased by approximately $410,000 for the nine
months ended September 30, 2016, as compared to the same period in 2015
primarily due to the addition of our Chief Executive Officer in May 2015
(beginning as the Chief Operating Officer), Chief Operating Officer in July 2015
(beginning as the Senior VP of Operations and Government relations), Vice
President of Operations in January 2016 and the addition of the Farm employees.
This increase is offset by the departure of the Company's CFO at the end of May
2016.
53
The Company's stock based compensation decreased by approximately $4,635,000 due
to lower cost for director's fees in the second year of their term. The
director's retention agreements specify higher stock grants in their first year
of service (two Directors commenced service in the middle of 2014 and received
inducement grants for their first year of service; their related costs were
expensed over the year that included the first quarter of 2015). Additionally,
the new grants expensed in 2016, were valued at a significantly lower share
price.
Professional costs
Professional costs decreased approximately $956,000 for the nine months ended
September 30, 2016, as compared to the same period of 2015.
54
Legal costs are fairly consistent for nine months ended September 30, 2016, as
compared to the same period of 2015, however the attorneys focus changed from
mostly defense of the Company in relation to the class action and derivative
lawsuits in 2015, to legal support with operations in 2016. These endeavors
included costs related to new financing agreements, preparation of a Private
Placement Memorandum that was to be offered by the Company's subsidiary EWSD I
and legal expenses related to the sale of our interest in the operating entity
and our interest in the underlying real estate in San Diego and Oregon. The
costs in 2015 also included the recognition of a liability of $430,000 to
indemnify the Company's former CEO Dr. Bruce Bedrick for legal expenses,
principally in connection with stockholders law suits.
A portion of the period's decrease in professional fees in 2016, as compared to
2015, was due to the fact the Company incurred higher costs of being a public
company of approximately $259,000 for the nine months of 2015 in relation to the
Company's filing of a registration statement on Forms S-1. The costs of being
public include legal fees for our corporate securities counsel, filing fees,
independent directors' fees and bonuses and investor relations costs. Also
adding to the decrease were professional accounting and audit services, which
decreased by approximately $151,000, and independent director's bonuses, which
decreased by approximately $119,000.
Farm maintenance
Farm maintenance costs consist of utilities, maintenance and repairs and
security costs. These costs totaled approximately $197,000 for the nine months
ended September 30, 2016. There were no similar costs for the same period of
2015.
Rent
The increase in rent of approximately $128,000 during the nine months of 2016,
as compared to the same period of 2015, is due to the recognition of the current
office lease as well as the recognition of the lease liability through the end
of lease term for the Company's previous headquarters in West Hollywood,
California., reflecting a dispute with the landlord (see Notes 11 and 12).
Other costs
Included in other costs is the settlement expense related to the severance
payments and related costs payable to Guy Marsala, former CEO of the Company, of
approximately $515,000, recognized in the nine months ended September 30, 2015,
There were no similar expenses during the same period of 2016.
During the nine months ended September 30, 2016, settlement expenses increased
by approximately $97,000 due to the Company's accrual of $135,000 per the terms
of the settlement agreement regarding the Merritt's action in the third quarter
of 2016.
Due to the Company's development of the farm in Colorado, fund raising
activities and exploration and development of international markets travel and
related expenses increased by approximately $229,000.
In addition, as a part of the Company's sale of our interest in the operating
entity and our interest in the underlying real estate in San Diego, the Company
wrote off $70,000 of uncollectable notes receivable from a previously associated
partner of San Diego operating entity. Furthermore, as discussed above, the
Company recognized approximately $54,000 in bad debt through an increase in the
reserve against collections related to the sale of Vaporfection assets at the
end of March 2016.
Insurance costs decreased by approximately $254,000 for the nine months ended
September 30, 2016, as compared to the same period of 2015, as the Company
reduced their coverage to control expenses.
As part of the transactions with Whole Hemp (Note 3), the Company issued a
warrant to purchase 4,000,000 shares of Company common stock valued at $76,000.
The fair value of the warrants was included in deferred costs and due to the
termination of the Farming and Growers Distribution Agreements this amount has
been fully amortized during the nine months ended September 30, 2016.
55
Other Income (Expense)
Other income (expense) includes the financing costs associated with our
financing activities, including the amortization of the debt discount and the
change in fair value of the derivative liability. As disclosed in Note 7 of the
Company's financial statements, the reset provision for the subsequent sale of
any dilutive issuance at a lower sale or exercise price than the then current
conversion price results for accounting purposes as a liability being recognized
for the fair value of the derivative. This derivative is re-measured each period
end, with the net change in fair value for the nine months ended September 30,
2016 and 2015 of gains of approximately $17,507,000 and $509,000, respectively,
being recognized in Other income (expense). This gain is a result of the
decrease in the fair value of the derivative liability created by the drop in
our stock price. This derivative feature results in a debt discount for the
initial fair value recognized for the derivative. The debt discount also
includes the fair value of the warrants issued with the convertible debentures,
as well as the discounts offered to the face value of the notes payable. This
debt discount is amortized as "other expense" over the life of the convertible
debenture, or until conversion, if earlier, which amounted in approximately
$4,127,000 for the nine months ended September 30, 2016 and $8,122,000 for the
same period of 2015. Additionally, when the debt discount is greater than the
face amount of the debenture, the effective interest method gives rise to the
amortization being immediately amortized in full. The fundings during both the
nine months ended September 30, 2016 and 2015 were immediately amortized under
this guidance. The approximately $3,994,000 reduction in amortization is the
result of there being less external financing in 2016, and therefore less
discounts being immediately amortized. Additionally, the current period closings
of the convertible debentures resulted in the calculated fair value of the
discount being greater than the face amount of the debt by approximately
$3,425,000, with this excess amount being immediately expensed as Financing
costs. Financing costs also includes the amortization of $700,000 relating to a
note issued as an incentive to amend the terms of certain convertible debentures
(Note 7). Additionally, the Company determined there is not sufficient
authorized shares at quarter-end for conversion of all the convertible
debentures and exercise of the warrants, under their sequencing policy (Note 7),
the Company has recognized a warrant liability. The warrant liability is
remeasured to its fair value at the end of every period, which resulted in the
Company recognizing a gain from the change in fair value of the warrant
liability of approximately $912,000 for nine months ended September 30, 2016.
56
The change in fair value of the derivative liability for the nine months ended
September 30, 2015 was approximately $509,000. The debt discount amounted to
approximately $8,122,000 for the nine months ended September 30, 2015.
Additionally, the period closings to the July 2014 and September 2014
convertible debentures in the nine months ended September 30, 2015, resulted in
the calculated fair value of the debt being greater than the face amounts of the
debt by approximately $2,822,000 with this excess amount being immediately
expensed as Financing costs.
Interest expense for the stated interest on our convertible debentures and notes
payable incurred during the nine months ended September 30, 2016, amounted to
approximately $665,000. In addition to the foregoing, the Company incurred
approximately $26,000 in interest offset by $17,000 of premium amortization on
the promissory note issued in relation to the purchase of the property in the
State of Washington and approximately $182,000 related to notes for the purchase
of the land in Colorado. All of the above resulted in interest expense of
approximately $856,000 for the nine months ended September 30, 2016.
Interest expense for the stated interest on our July 2014 and September 2014
convertible debentures incurred in the nine months ended September 30, 2015
amounted to approximately $302,000. The Company incurred approximately $43,000
interest on the promissory note issued in relation to the purchase of property
in Washington State and approximately $35,000 of interest related to notes for
the purchase of the land in Colorado. All of the above resulted in interest
expense (including immaterial other amounts of interest expense) of
approximately $289,000 for the nine months ended September 30, 2015..
As result of the Company's sale of its interest in the operating entity and its
interest in the underlying real estate in San Diego, the Company recorded a net
gain of approximately $631,000. In addition, on September 30, 2016, the Company
entered into an assignment agreement whereby we sold and assigned all of our
rights in the operating agreement, including but not limited to the assets and
liabilities we held in relation to the Portland dispensary, resulting in a net
loss of $178,000 on sale of assets.
On September 27, 2016 the Company entered into a default settlement regarding
the note related to the Washington property, whereby the note was settled by
conveying the property to the note holder resulting in the recogniton of a loss
on default settlement of approximately $168,000.
Net Income (Loss)
As a result of the factors set forth above, our net loss decreased by
approximately $27,182,000 for the nine months ended September 30, 2016,
resulting in net income of approximately $2,062,000 for the nine months ended
September 30, 2016.
Liquidity and Capital Resources
As of September 30, 2016, the Company had cash on hand of approximately $205,000
compared to approximately $347,000 at September 30, 2015.
Cash Flow
During the nine months ended September 30, 2016, cash was primarily used to fund
operations of the Company, as well as operations and development of the Farm.
For the nine
months ended September 30,
Cash flow 2016 2015
Net cash used in operating activities $ (4,141,773 ) $ (6,124,372 )
Net cash used in investing activities 149,337 (583,754 )
Net cash provided by financing activities 4,077,991 6,953,705
Net increase in cash $ 85,555 $ 245,579
57
Cash Flows - Operating Activities
During the nine months ended September 30, 2016, cash flows used in operating
activities were approximately $4,142,000, consisting primarily of the net income
for the nine months ended September 30, 2016 of approximately $ $2,062,000,
increased for non-cash financing costs of approximately $3,839,000, amortization
of the debt discount of approximately $4,111,000, stock based compensation of
approximately $696,000, and reduced for non-cash adjustments for the change in
fair value of the derivative liability of approximately $17,507,000 and change
in fair value of the warrant liability of approximately $912,000. Additional
significant components of cash used in operating activities included the accrued
settlement expenses for rental expense under the lease for the previous office
in West Hollywood of approximately $227,000, offset by an increase of
approximately $4,172,000 due to the timing and deferral of the payment of trade
payables, and an increase in accrued interest of approximately $656,000.
Cash Flows - Investing Activities
During the nine months ended September 30, 2016, cash flows used in investing
activities was approximately $149,000, consisting primarily of the $617,000 in
costs related to construction in progress for the build out of greenhouses on
the Farm, offset by approximately $631,000 in proceeds from the sale of the
Company's interest in San Diego Sunset, as well as the proceeds from the sale of
the assets of Varporfection, and approximately $92,000 in proceeds for the sale
of the rights and assets of the Portland dispensary.
Cash Flows - Financing Activities
During the nine months ended September 30, 2016, cash flows provided by
financing activities were approximately $4,078,000, consisting primarily of
approximately $2,901,000 of net proceeds from the issuance of convertible notes
payable, approximately $1,017,012 notes payable, net and $105,000 from the
issuance of convertible debentures to two of the Company's Directors.
58
Future Liquidity and Cash Flows
Management believes that the Company's cash balances on hand, cash flows
expected to be generated from operations, proceeds from current and future
expected debt issuances and proceeds from future share capital issuances, if
any, may not be sufficient to fund the Company's net cash requirements through
January 2018. As noted in the footnotes to the accompanying condensed
consolidated financial statements, the Company recently received a Notice of
Default from a creditor following non-payment of the balance under a certain
promissory note at maturity thereof, pursuant to which the Company will incur
penalties and an increased interest rate as well as potential legal expenses
associated with the creditor's legal actions. (See Item 1A. Risk Factors
elsewhere in this document) As of the date of this filing, the Company is in
technical default on all notes outstanding. The Company is unable to predict the
outcome of these matters, however, legal action taken by the Company's lenders
could have a material adverse effect on the financial condition, results of
operations and/or cash flows of the Company and their ability to raise funds in
the future. In order to execute the Company's long-term growth strategy, which
may include selected acquisitions of businesses or facilities that may bolster
the Company's CBD oil extraction business or real estate for the cultivation of
hemp, the Company will need to raise additional funds through public or private
equity offerings, debt financings, or other means.
The Company's financial statements were prepared on a going concern basis. The
going concern basis assumes that the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of business. During the nine months ended
September 30, 2016, the Company had a net loss from operations of approximately
$8.1 million, negative cash flow from operations of $4.1 million and negative
working capital of $22.5 million. The Company will need to raise capital in
order to fund its operations. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The ability to
continue as a going concern is dependent on the Company's ability to raise
additional capital and implement a business plan. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
On July 24, 2015, the Company entered into an Agreement of Purchase and Sale of
Membership Interest with East West Secured Development, LLC to purchase 100% of
the membership interest of EWSD I, LLC which has entered into an agreement with
Southwest Farms, Inc. to purchase certain real property comprised of 320-acres
of agricultural land in Pueblo, Colorado (the "Farm"). The Farm is expected to
yield revenue and profits for the Company in future years, through farming hemp,
extracting CBD oil and controlling the full production cycle to ensure
consistent quality.
With an eye focused on the future - and ultimately anticipated FDA approval of
hemp and CBD oil production and sales in the United States - we are honing our
focus to controlling our supply chain initially through our production on the
Farm in Pueblo, Colorado. From "Seed to Sale" - Notis Global will influence its
own destiny by controlling our ecosystem. We intend to oversee and execute
everything from growing and cultivating the highest quality plants to managing
extraction and production of our products. We believe this tight control of our
supply chain will eventually be mandated by the Federal Government as a
condition of legalizing hemp and CBD Oil production, manufacturing and
distribution in the United States. We have elected to take action now - and
intend to lead our industry by doing so. Our decision to terminate the Whole
Hemp Agreement comports with our long term strategy to maintain tight control of
our supply chain.
Financing Plans:
During the nine months ended September 30, 2016, we received approximately $2.9
million in net financing from our lenders.
Subsequent to September 30, 2016, the Company has received approximately $1.9
million in additional closings under the September 30, 2016 financing with our
largest creditor (Note 8).
Additionally, subsequent to September 30, 2016, the Company entered into senior
secured convertible promissory notes with a new investor and received aggregate
proceeds of $200,000. (Note 12).
We are actively seeking additional financing over the next few months to fund
operations.
On May 24, 2016, the Company received a notice from the OTC that the company's
bid price is below $0.01 and does not meet the Standards for Continued
Eligibility for OTCQB as per the OTCQB Standards . If the bid price has not
closed at or above $.01 for ten consecutive trading days by November 20, 2016,
the company will be moved to the OTC Pink marketplace. Additionally, on
September 9, 2016, the Company received notice from the OTC that OTC Markets
would move the Company's listing from the OTCQB market to OTC Pink Sheets
market, if the Company had not filed this Quarterly Report on Form 10-Q for the
period ended June 30, 2016 by September 30, 2016. On or about October 1, 2016,
the Company moved to the OTC Pink Sheets market. These actions might impact the
Company's ability to obtain funding.
59
Special Meeting of the Stockholders to Increase Authorized Common Stock
On April 15, 2016, at a special meeting of the stockholders of the Company, the
stockholders of the Company holding a majority of the total shares of
outstanding common stock of the Company voted to amend the Company's Articles of
Incorporation to increase the number of authorized shares of common stock of the
Company from 400,000,000 to 10,000,000,000 (the "Certificate of Amendment"). The
Certificate of Amendment was filed with the Nevada Secretary of State and was
declared effective on April 18, 2016.
Additionally, management is actively seeking additional financing and expects to
complete additional financing arrangements in the next few months. The Company
expects that these plans will provide it the necessary liquidity to continue
operations for the next 12 months.
The Company will continue to execute on its business model by attempting to
raise additional capital through the sales of debt or equity securities or other
means. However, there is no guarantee that such financing will be available on
terms acceptable to the Company, or at all. If the Company is unable to obtain
adequate debt or equity financing, it may be forced to slow or reduce the scope
of operations and expansion, and its business would be materially affected.
It is uncertain whether the Company can obtain financing to fund operating
deficits until profitability is achieved or until revenues increase. This need
may be adversely impacted by: unavailability of financing, uncertain market
conditions, the success of the crop growing season, the demand for CBD oil, the
ability of the Company to obtain financing for the equipment and labor needed to
cultivate hemp and extract the CBD oil, and adverse operating results. The
outcome of these matters cannot be predicted at this time.
Off Balance Sheet Transactions
We do not have any off-balance sheet credit exposure related to our customers.
© Edgar Online, source Glimpses
NOTIS GLOBAL, INC. 
