Annual report pursuant to Section 13 and 15(d)

SUBSEQUENT EVENTS

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SUBSEQUENT EVENTS
12 Months Ended
Dec. 31, 2015
Notes to Financial Statements  
Note 17. SUBSEQUENT EVENTS

Issuances and Sales of Common Stock:

 

During the first quarter of 2016, senior secured convertible promissory notes and accrued interest in the amount of $961,740 was converted into 13,906,149 shares of common stock.

 

In the first quarter of 2016, the Company sold 25,715,674 shares of common stock for the net amount of $3,208,134 pursuant to an equity financing facility with Magna Equities II, LLC.

 

In the first quarter of 2016, the Company adopted the 2016 Equity Incentive Plan. The Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 6.7 million shares of the Company's common stock. The options have an exercise price of $0.09, and vest quarterly over a three-year period.

  

Amendment to Certificate of Designation of Series B Preferred Stock; Designation of New Series of Preferred Stock:

 

The Company filed an Amended and Restated Certificate of Designation of Series B Preferred Stock (the "Amended Series B Certificate") with the Secretary of State of the State of Nevada, effective March 29, 2016. The Amended Series B Certificate decreased the number of authorized shares of Series B Preferred Stock, specified a liquidation preference, clarified the provisions related to adjustments to the conversion rate upon certain events, and made such other amendments as the Company's Board of Directors deemed necessary.

 

Effective March 29, 2016, the Company also designated two additional series of preferred stock: (i) Series Z Preferred Stock and (ii) Series Q Preferred Stock, by filing Certificate of Designations with the Secretary of State of the State of Nevada. The Certificate of Designation of Series Z Preferred Stock (the "Series Z Certificate") designates 8,300 shares as Series Z Preferred Stock and is intended to mirror the rights of the holders of the Series B Preferred Stock. Each share of Series Z Preferred Stock is convertible into 1,857 shares of Series B Preferred Stock immediately upon the Company filing with the Secretary of State of the State of Nevada an Amendment to its Articles of Incorporation to increase its authorized capital for, among other reasons, satisfaction of the terms of the potential acquisition of Black Oak, as discussed in more detail below. The holders of the Series Z Preferred Stock are entitled to a liquidation preference equal to $10.00 per share (subject to appropriate adjustment in the event of any stock dividend, forward stock split, or other similar recapitalization). Such liquidation preference is in preference (but equal with the holders of the Company's Series B Preferred Stock) to the holders of the common stock, but subordinate in preference to any sum to which the holders of the Company's Series A Preferred Stock are entitled.

 

The Certificate of Designation of Series Q Preferred Stock (the "Series Q Certificate") designates 21,600 shares as Series Q Preferred Stock. Each share of Series Q Preferred Stock is convertible into 5,000 shares of the Company's common stock immediately upon the Company filing with the Secretary of State of the State of Nevada an Amendment to its Articles of Incorporation to increase its authorized capital for, among other reasons, satisfaction of the terms of the potential acquisition of Black Oak, as discussed in more detail below. The holders of the Series Q Preferred Stock are entitled to a liquidation preference equal to $0.001 per share (subject to appropriate adjustment in the event of any stock dividend, forward stock split, or other similar recapitalization). Such liquidation preference is in preference to the holders of the common stock, but subordinate in preference to any sum to which the holders of any shares of any other series of the Corporation's preferred stock are entitled.

 

Copies of the Series B Certificate, Series Z Certificate, and Series Q Certificate are attached as exhibits to this Annual Report on Form 10-K.

 

Acquisition of Blüm:

 

On January 12, 2016, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission, in which it disclosed that it had entered into an Agreement and Plan of Merger, dated December 23, 2015 (the "Merger Agreement"), with Generic Merger Sub, Inc., a California corporation and wholly-owned subsidiary of the Company (the "Merger Sub"), and Black Oak Gallery, a California corporation that operates a medical marijuana dispensary in Oakland, California under the name, Blüm ("Black Oak"). On March 1, 2016, the Company filed an amendment to its Current Report to disclose that the parties entered into a First Amendment to the Agreement and Plan of Merger, dated February 29, 2016 (the "First Amendment"), as described below. Pursuant to the Merger Agreement, among other things, and subject to the satisfaction or waiver of the closing conditions set forth in the Merger Agreement, Merger Sub will merge with and into Black Oak, with Black Oak as the surviving corporation, and becoming a wholly-owned subsidiary of the Company (the "Merger"). The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

 

Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, the outstanding shares of common stock of Black Oak held by (i) three of the current shareholders of Black Oak (the "Group A Shareholders") will be converted into the right to receive approximately 8,172 shares of the Company's Series Z Preferred Stock, of which approximately 1,178 shares of Series Z Preferred Stock will be issued and paid at closing, and approximately 8,668,703 shares of the Company's Series B Preferred Stock, of which approximately 1,248,302 shares of Series B Preferred Stock will be issued and paid at closing and (ii) the remaining shareholders of Black Oak (the "Group B Shareholders") will be converted into the right to receive approximately 21,395 shares of the Company's Series Q Preferred Stock, of which approximately 3,700 shares of Series Q Preferred Stock will be issued and paid at closing. The shares of Series Z Preferred Stock, Series B Preferred Stock, and Series Q Preferred Stock that are issued but not paid to the Black Oak shareholders at closing will be subject to certain holdback and lock-up provisions, and held in an escrow account as security for the satisfaction of any post-closing adjustments or indemnification claims, as provided for in the Merger Agreement. Each share of Series Q Preferred Stock is to be converted into 5,000 shares of the Company's common stock and each share of Series Z Preferred Stock is to be converted into 1,857 shares of the Company's Series B Preferred Stock, in each case immediately upon the Company filing with the Secretary of State of the State of Nevada an Amendment to its Articles of Incorporation to increase its authorized capital for, among other reasons, satisfaction of the terms of this potential transaction. Accordingly, the approximately 21,395 shares of Series Q Preferred Stock to be issued to the Group B Shareholders is convertible into approximately 106,975,000 shares of common stock and the approximately 8,172 shares of Series Z Preferred Stock to be issued to the Group A Shareholders is convertible into approximately 15,175,404 shares of Series B Preferred Stock. Each share of Series B Preferred Stock remains convertible into 5.384325537 shares of common stock. Immediately following the effectiveness of the Merger, the current Black Oak shareholders (both the Group A Shareholders and the Group B Shareholders) are expected to own approximately 33.37% of the Company's common stock on a fully "as-converted basis," which percentage does not include certain shares of common stock, Series A Preferred Stock that may be converted into shares of common stock, or Series B Preferred Stock that may be converted into shares of common stock, as applicable, each as currently held by the Group A Shareholders. Derek Peterson, the Company's President and Chief Executive Officer, is one of the Group A Shareholders. The Group B Shareholders may also receive cash consideration equal to approximately $2,088,000.

 

The securities paid to the Group A Shareholders and the Group B Shareholders are subject to certain post-closing adjustments that are based on certain performance indicators as of the first anniversary of the closing date of the Merger. The first indicator is based on the performance of the volume-weighted average price of the Company's common stock on the first anniversary of the closing date of the Merger compared to the price of the Company's common stock on the date of the Merger Agreement. The second indicator is based on the Company's revenues for the twelve-month period following the closing date of the Merger. A portion of the securities that the Group A Shareholders and the Group B Shareholders are entitled to receive at closing of the Merger will be held in an escrow until the first anniversary of the closing date of the Merger and the post-closing adjustments are complete.

 

Consummation of the Merger is subject to certain closing conditions, including, among other things, receipt of all necessary approvals under federal and state securities laws, receipt of all authorizations required relating to the issuance of the Company's securities and transfer of all the shares pursuant to the terms of the Merger Agreement. The Company and Black Oak originally agreed that the closing of the Merger shall be as soon as reasonably practicable (but in any event, no later than the second business day) after the day on which the final closing conditions have been satisfied or validly waived, which satisfaction or waiver date shall not be prior to March 1, 2016 (the "Original Commitment Date"). On February 29, 2016, the parties executed the First Amendment to extend the Original Commitment Date to March 25, 2016. As a result of the First Amendment, the Company's right to terminate the Merger Agreement for any reason, in its discretion, was extended to March 25, 2016. The Company did not exercise its termination right. Accordingly, the Company can only terminate the Merger Agreement: (i) upon mutual written consent of all the parties, (ii) if there is a material breach of any covenant or obligation of Black Oak that is incapable of being cured prior to the closing date of the Merger or is not cured within 10 days Black Oak receives written notice of such breach, or (iii) the Company determines that the timely satisfaction of any of the closing conditions becomes impossible or impractical.

 

Further, Black Oak committed to use commercially reasonable efforts to assist the Company in its preparation of Black Oak's financial statements, which statements are to be reasonably capable of being audited under GAAP and which audit is to be completed not later than June 8, 2016 (75 days after March 25, 2016). The Company will file a Current Report on Form 8-K to disclose these financial statements not later than June 8, 2016.

 

The Company expects to close the Merger on March 31, 2016.

 

Asset Purchase Agreement:

 

On March 10, 2016, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") with Therapeutics Medical, LLC (the "Seller"), pursuant to which the Company acquired from the Seller certain assets (the "Assets") related to a business engaged in the research, development, and marketing of nutraceutical supplements. The Purchase Agreement provides that the Company will issue a Convertible Promissory Note (the "Convertible Promissory Note") due September 10, 2017, to the Seller in the principal amount of $1.25 million for the purchase of the Assets. The Convertible Promissory Note accrues interest at the rate of one percent per annum, and is convertible into shares of the Company's common stock at a conversion price equal to 90% of the average of the lowest three (3) volume-weighted average prices of one share of common stock for the five (5) consecutive trading days prior to the conversion date.

 

In addition, the Company may be required to issue an additional Convertible Promissory Note to the Seller based on the following calculation:

 

  (i) if the total revenue ("Total Revenue") generated by the Assets for the period beginning on April 1, 2016 and ending on March 31, 2017 (the "Applicable Period") is greater than $1.6 million but less than $3.2 million, the Company will issue to the Seller an additional Convertible Promissory Note in the principal amount equal to fifty (50%) of the Total Revenue in excess of $1.6 million; or
     
  (ii) if the Total Revenue generated by the Assets for the Applicable Period is greater than $3.2 million, the Company will issue to the Seller an additional Convertible Promissory Note in the principal amount equal to the sum of: (a) $800,000 (which equals 50% of the Total Revenue in excess of $1.6 million up to $3.2 million), plus (b) twenty five (25%) percent of the Total Revenue for the Applicable Period in excess of $3.2 million.