Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

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Commitments and Contingencies
9 Months Ended
Sep. 30, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

9. Commitments and Contingencies

 

Long Term Supply Agreement

 

On April 18, 2017 the Company entered into a long term supply agreement (“Supply Agreement”) to purchase flower and manufactured products for the dispensaries upon approval of the appropriate licensing by the Department of Health of Puerto Rico. Pursuant to the terms of the Supply Agreement, the Company agreed to purchase at least 50% of all flower and manufactured products to be sold in the dispensaries owned by the Company or its affiliates. The Supply Agreement has a term of ten years from the moment of its coming into effect. If neither party announces termination of the Supply Agreement at least thirty (30) days before its stated expiration, the Supply Agreement shall automatically extend for a period of one year, and renewing until such time as either party provides notice of termination in accordance with the terms and conditions of the Supply Agreement.

 

Option to Purchase Building

 

On May 14, 2018, Andalucia 511, LLC, through its parent company, Project 1493, LLC remitted $50,000 in the form of an option to purchase a building located at 1022 Ashford Avenue in Santuree, Puerto Rico. The option gives the Company an exclusive ninety day option to purchase the building for $1,150,000, which can be executed by written consent, specifying the closing date. The Company will also pay $5,000 rent for the duration of the option agreement. On October 26, 2018, the Company extended its option to purchase the building to March 15, 2019.

 

Letter of Intent – Progressive Collectives, LLC

 

On January 26, 2018, the Company entered into a binding letter of intent with Progressive Collectives, LLC (“Progressive”), pursuant to which Progressive would sell and transfer the assets of a cannabis dispensary business, and the Company would purchase and assume the assets of such cannabis dispensary business, subject to the terms and conditions of the letter of intent with Progressive. Subject to a satisfactory due diligence investigation by the Company, and entry into a definitive agreement by and among the parties, the anticipated closing date of the proposed transaction shall be on or before February 2, 2018, subject to the right of the Company to extend such time for a period of forty-five days thereafter in the event the Company requires additional time to conduct its due diligence investigation. The Company and Progressive have signed extensions of time to complete the due diligence, the most recent one on March 23, 2018, extending the period for due diligence until ten days after Progressive files its 2017 Federal income tax return. As of the date of this statement, Progressive has not filed its Federal income tax return. On October 12, 2018 the Company terminated the LOI with Progressive.

 

Letter of Intent – Dispensarios 420

 

On August 22, 2018, Project 1493, LLC, the Company’s wholly-owned subsidiary, entered into a Final Purchasing Agreement (the “Agreement”) with Dispensarios 420, LLC, a limited liability company established under the laws of the Commonwealth of Puerto Rico (the “Seller”), pursuant to which the Seller agreed to sell and the Company agreed to purchase substantially all of the assets pertaining to a medical cannabis dispensary, including but not limited to all of the legal rights, permits, licenses, leasing contracts and other assets (the “420 Dispensary”), in exchange for $156,000 cash consideration (the “Cash Payment”) and 46,000 shares of restricted common stock, par value $0.001 per share, of the Company (the “Shares” and, together with the Cash Payment, the “Purchase Price”). The Agreement provides that the Cash Payment shall be deposited into an escrow account until all transactions contemplated by the Agreement are finalized, and all corresponding permits to operate the medical dispensary are approved and issued by the Department of Health of Puerto Rico; provided, however, that the Cash Payment shall be disbursed to the Seller no later than 45 days from the date on which the DHPR authorizes the transfer of the 420 Dispensary and all assignments contemplated by the Agreement is completed. The Agreement contains customary representations and considerations of each of the parties. The acquisition of the 420 Dispensary is expected to close during the third quarter of 2018; however, there can be no assurance that the Company will complete the transaction during this time, if at all.

 

The Company terminated the Agreement relating to 420 Dispensary on October 22, 2018.

 

Letter of Intent – So-Cal MM Patients Association, LLC

 

On September 19, 2018, the Company entered into a binding letter of intent (the “LOI”) with So-Cal MM Patients Association, LLC, a California limited liability company, dba The Coughy Shop (the “Seller”), pursuant to which the Company and the Seller have agreed to execute a purchase agreement in which the Company would acquire all of the assets relating to a licensed retail cannabis dispensary currently operating in Desert Hot Springs, California (the “Business”). The LOI provides that the Company shall purchase from the Seller all assets used in the Business, both tangible and intangible, including licenses and permits covering medical and adult-use cannabis sales, leases, equipment, inventory, and other assets (the “Proposed Transaction”) in exchange for total cash consideration of $1,500,000 (the “Purchase Price”). In consideration of the LOI, on September 24, 2018, the Company deposited into escrow a one-time, refundable security deposit of $100,000 (the “Deposit”), to secure the Company’s exclusivity over the Proposed Transaction during the due diligence period as set forth in the LOI. The Company has thirty (30) days to conduct its due diligence investigation, which shall begin upon receipt of all requested information from the Seller, and which shall be extended as required to allow the Company to complete its due diligence investigation. In the event the Proposed Transaction closes, the Deposit shall be applied to the Purchase Price. However, in the event that the Company elects not to proceed with the Proposed Transaction as a result of its due diligence investigation, the Deposit shall be returned to the Company as soon as reasonably practicable.

 

The Proposed Transaction is subject to customary closing conditions more fully described in the LOI, including: the Company’s satisfactory due diligence investigation by the Company; the Company’s receipt of all necessary regulatory approvals from the relevant city and/or state authority of the Proposed Transaction, specifically approval by the City of Desert Hot Springs and State Bureau of Cannabis Control to conduct retail cannabis operations at the location in which the Business operations; and the negotiation, execution, and delivery of the Definitive Agreement.

  

Risk of Prosecution for Cannabis-Related Companies

 

A company that is connected to the cannabis industry must be aware that cannabis-related companies may be at risk of federal, and perhaps state, criminal prosecution. The Department of Treasury recently issued guidance noting: “The Controlled Substances Act” (“CSA”) makes it illegal under federal law to manufacture, distribute, or dispense cannabis. Many states impose and enforce similar prohibitions. As of September 30, 2018 and October 30, 2018, the Company has not been notified of any pending investigations regarding its planned business activities, and is not currently involved in any such investigations with any regulators.

 

California Operating Licenses

 

Effective January 1, 2018 the State of California commenced licensing for both medical and adult use commercial cannabis activity under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”). Beginning on January 1, 2018, the State began issuing temporary licenses for medical and adult use cannabis activity. Temporary licenses were initially issued for 120 days, but can be extended for additional 90 day periods if the applicant submits an annual license application during the initial 120 day window. The temporary licensing program expires on December 31, 2018, after which time applicants must apply for annual licenses only. The key requirement for temporary and annual state license approval is confirmation of local authorization to operate from the operator’s local jurisdiction. The Company’s current local San Francisco temporary permit to operate a manufacturing business was issued on April 27, 2018 and allowed Spirulinex to conduct manufacturing operations at its prior facility and subsequently at its new facility in San Francisco. The permit expired on August 25, 2018 due to the need to move the facility to the current San Francisco location and recognize the Company’s investment in Spirulinex, both issues that complicated the San Francisco permitting process. The Company has actively engaged with San Francisco’s Office of Cannabis Control and Board of Supervisors to resolve these issues by ordinance amendment, a process that is currently pending and may, if successful, result in the reinstatement of Spirulinex’s local authorization. The Company’s current state temporary licenses issued by the California Department of Public Health’s Manufactured Cannabis Safety Branch (MCSB) expired on September 28, 2018. Additionally, the Company submitted a new cannabis manufacturing application under San Francisco’s social equity program on September 5, 2018, which application is under review. Although the Company believes it will receive the necessary licenses from the City of San Francisco and the State to conduct its business in a timely fashion, there is no guarantee the Company will be able to do so and any failure to do so may have a negative effect on its business and results of operations.

 

Although the possession, cultivation and distribution of cannabis for medical and adult use is permitted in California, cannabis is a Schedule-I controlled substance and its use remains a violation of federal law. Since federal law criminalizing the use of cannabis preempts state laws that legalize its use, strict enforcement of federal law regarding cannabis would likely result in our inability to proceed with our business plan, especially in respect of our cannabis cultivation, production and dispensaries. In addition, our assets, including real property, cash, equipment and other goods, could be subject to asset forfeiture because cannabis is still federally illegal.