VARIABLE INTEREST ENTITY ARRANGEMENTS
|12 Months Ended|
Dec. 31, 2019
|VARIABLE INTEREST ENTITY ARRANGEMENTS|
|NOTE 4. VARIABLE INTEREST ENTITY ARRANGEMENTS||
On October 26, 2017, the Company entered into operating agreements with NuLeaf, Inc. and formed NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (collectively “NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements were subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. Under the terms of the agreements, the Company remitted to NuLeaf an upfront investment of $4.50 million in the form of convertible loans bearing an interest rate of 6% per annum. On June 28, 2018, the Company received approval from the State of Nevada. The remaining required approvals from local authorities were received in July 2018. As a result, the notes receivable balance was converted into a 50% ownership interest in NuLeaf. The investment in NuLeaf was recorded at cost and accounted for using the equity method as of December 31, 2018.
In February 2019, we amended and restated the NuLeaf agreements and obtained control of the operations of NuLeaf. The Company has determined these entities are variable interest entities in which the Company is the primary beneficiary by reference to the power and benefits criterion under ASC 810, “Consolidation.”The provisions within the amended agreement grant the Company the power to manage and make decisions that affect the operation of these entities. As the primary beneficiary of NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC, the Company began consolidating the accounts and operations of these entities as of March 1, 2019. All intercompany transactions are eliminated in the consolidated financial statements. On March 1, 2019, we remeasured our equity method investment in NuLeaf to fair value and consolidated the results of NuLeaf in our consolidated financial statements and report its results in our cannabis segment.
The Company finalized the accounting for the NuLeaf transaction in the fourth quarter of 2019 and now considers the measurement period to be closed. The aggregate carrying values of Sparks Cultivation, LLC and NuLeaf Reno Production, LLC assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows:
For fiscal year 2019, revenue and net loss attributed to NuLeaf was $4.08 million and $3.04 million, respectively. Additional pro forma information was omitted as amounts are not material.
Blum Desert Inn
On November 1, 2019, we entered into an agreement with Picksy, LLC (“Picksy”) to transfer all management responsibilities over the operations of our Blum Desert Inn retail dispensary. In consideration of the services to be performed by Picksy, the Company has conveyed the rights to 85% of all future net profits generated from the aforementioned store. In the event of a loss, Picksy has assumed responsibility to cover all future working capital shortfalls. The agreement will terminate upon the closing of the related asset purchase agreement, whereby the Company has agreed to sell all of the assets associated with the Blum Desert Inn location to Picksy. The Company’s 15% share of net profits are to be applied to the purchase price payable to the Company upon the closing of the asset purchase agreement. See Note 17 – “Discontinued Operations.”
As the agreement transferred the benefits and risks arising from the operations of the Desert Inn store, as well as complete managerial authority over the operations, management concluded that Picksy became the primary beneficiary of Blum Desert Inn upon execution of the agreement. As a result, the Company deconsolidated Desert Inn’s assets as of November 1, 2019.