FASB ASU No. 2016-02 (Topic 842), “Leases” – Issued in February 2016, ASU No. 2016-02 will require entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new standard also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The new standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.

FASB ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers” – Issued in May 2014, ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016- 08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” and 2016-12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. We are currently in the process of evaluating all revenue streams, accounting policies, practices and reporting to identify and understand any impact on our consolidated financial statements.

NOTE 3 – CONCENTRATIONS OF BUSINESS AND CREDIT RISK

The Company maintains cash balancessources cannabis products for retail, cultivation and production from various vendors. However, as a result of the new regulations in several financial institutions that are insuredthe State of California, the Company’s California retail, cultivation and production operations must use vendors licensed by the Federal Deposit Insurance Corporation upState effective January 1, 2018. As a result, the Company will be dependent upon the licensed vendors in California to certain federal limitations. At times,supply products as of that date. If the Company’s cash balance exceeds these federal limitations.

The Company provides creditis unable to enter into a relationship with sufficient members of properly licensed vendors, the Company's sales may be impacted. During the three months ended March 31, 2018 and 2017, we did not have any concentration of vendors for inventory purchases. However, this may change depending on the number of vendors who receive appropriate licenses to operate in the normal courseState of business to customers located throughout the U.S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.California.

NOTE 4 – INVENTORYVARIABLE INTEREST ENTITY ARRANGEMENTS

Raw materials consistThe Company has shared interest in the two entities, MediFarm I and MediFarm I RE, with another investor for the operation of Edible Garden’s herb product linesa cultivation operation and IVXX’s line of cannabis pure concentrates. Work-in-progress consists of live plants grown for Edible Garden’s herb product lines, live plants grown at Black Oak, and IVXX’s line of cannabis pure concentrates. Finished goods consists of IVXX’s line of cannabis packaged productsdispensary in Nevada. The entities are considered to be sold into dispensaries,VIE’s and Edible Gardens productsthe Company is considered to be sold via food, drug,the primary beneficiary by reference to the power and mass channels.benefits criterion under ASC 810, “Consolidation.” The Company has reviewed the provisions within the operating agreements and other factors which would grant the Company the power to manage and make decisions that affect the operation of these VIEs.

CostAs the primary beneficiary of goods sold is calculated usingMediFarm I and MediFarm I RE, the average costing method. The Company reviews its inventory periodically to determine net realizable value. The Company writes down inventory, if required, based on forecasted demand. These factorsconsolidates the accounts and operations of these entities. All intercompany transactions are impacted by market and economic conditions, new products introductions, and require estimates that may include uncertain elements.eliminated in the unaudited consolidated financial statements.

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NOTE 4 – INVENTORY (Continued)The aggregate carrying values of MediFarm I and MediFarm I RE assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows (in thousands):

		March 31,				December 31,
		2018				2017
Current Assets:
Cash		$	536,175			$	409,029
Accounts Receivable, Net			5,707				-
Inventory			478,972				232,231
Prepaid Expenses and Other Current Assets			267,842				302,186
Total Current Assets			1,288,696				943,446
Property, Equipment and Leasehold Improvements, Net			1,906,395				1,965,103
TOTAL ASSETS		$	3,195,091			$	2,908,549
Current Liabilities:
Accounts Payable and Accrued Expenses			231,845				319,853
TOTAL LIABILITIES		$	231,845			$	319,853

  

NOTE 5 – NOTES RECEIVABLE

On October 26, 2017, the Company entered into agreements with NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (“NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements are subject to approval by the State of Nevada. As part of the agreements the Company made convertible loans at the time of the agreement of $4.5 million in aggregate to the NuLeaf entities bearing an interest rate of 6% per annum. If the agreements are not approved by May 2018, the notes receivable are due in equal quarterly payments beginning August 2018. See Note 16 – “Subsequent Events” for amendment to the maturity date of the note. The convertible loans will automatically convert into a 50% ownership in the NuLeaf entities upon approval by the State of Nevada which is expected to be in the second quarter of 2018. The notes receivable, including accrued interest, due to the Company as of March 31, 20172018 and December 31, 2016, inventory consisted of the following:2017 is $5,964,204 and $5,010,143, respectively.

NOTE 56 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

As of March 31, 2017 and December 31, 2016, property,Property, equipment, and leasehold improvements, at cost, less accumulated depreciation, consistednet consists of the following:

Depreciation expense related to property, equipment and leasehold improvements for the three months ended March 31, 2018 and 2017 was $530,570 and 2016 was $463,073, and $150,729, respectively.

NOTE 6 – INTANGIBLE ASSETS

As of March 31, 2017 and December 31, 2016, intangible assets consisted of the following:

Intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $429,525 and $10,620 for the three months ended March 31, 2017 and 2016, respectively.

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NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

As of March 31, 2017 and December 31, 2016, accounts payable and accrued expenses consisted of the following:

NOTE 8 – NOTES PAYABLE

AsNotes payable consists of the following: 

		March 31,				December 31,
		2018				2017
Senior convertible promissory note dated August 21, 2017, issued to accredited investors, which matures February 21, 2019 and bears interest at a rate of 12% per annum. The conversion price is $4.50, subject to adjustment. The balance of the note and accrued interest was converted into common stock in January 2018.		$	-			$	640,010
Senior convertible promissory note dated December 26, 2017, issued to accredited investors, which matures June 26, 2019 and bears interest at a rate of 12% per annum. The conversion price is $4.50, subject to adjustment. The balance of the note and accrued interest was converted into common stock in January 2018.			-				1,469,388
Promissory note dated November 22, 2017, issued for the purchase of real property. Matures December 1, 2020, with an option to extend the maturity date 1 year. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%.			4,500,000				4,500,000
Promissory note dated January 18, 2018, issued for the purchase of real property. Matures February 1, 2021, with an option to extend the maturity date 1 year. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%.			6,160,001				-
Senior convertible promissory note dated January 25, 2018, issued to accredited investors under the 2017 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures July 25, 2019 and bears interest at a rate of 12% per annum. The conversion price is $6.00, subject to adjustment.			916,867				-
Senior convertible promissory note dated March 12, 2018, issued to accredited investors under the 2018 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures September 12, 2019 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50, subject to adjustment.			1,655,950				-
Long-Term Debt, Net of Discounts		$	13,232,818			$	6,609,398

Total debt as of March 31, 20172018 and December 31, 2016, notes payable consisted2017 was $13,232,818 and $6,609,398, respectively, net of the following:

As of March 31, 2017 and December 31, 2016, total debt was $2,211,378 and $1,918,676, respectively, which included unamortized debt discount of $3,443,622$5,267,182 and $4,295,648,$4,790,601, respectively. The senior securedconvertible promissory notes are secured by shares of common stock. There was accrued interest payable of $124,827$41,459 and $96,633$21,767 as of March 31, 20172018 and December 31, 2016,2017, respectively. See “Note 16 – Subsequent Events” for additional disclosure regarding changes in notes payable subsequent to March 31, 2018.

Securities Purchase Agreement Dated February 22, 2017 and 12% Senior Convertible

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Scheduled Maturities of Long-Term Debt

Scheduled maturities of long-term debt, including the unamortized debt discounts of $5,267,182, are as follows:

		Nine Months Ending December 2018				Year Ending December 31,
						2019				2020				2021				2022				2023 and thereafter				Total
Total Debt		$	-			$	2,572,817			$	4,500,000			$	6,160,001			$	-			$	-			$	13,232,818

Promissory Note Due August 22, 2018Notes

On January 18, 2018, the Company entered into a $6,500,000 promissory note for the purchase of land and a building in California with a third-party creditor. As part of the closing of the purchase of land, the Company issued warrants with a value of approximately $164,000 and paid a cash fee of $195,000. The unamortized balance as of March 31, 2018 was $339,999. The warrants and cash fee were recorded as a debt discount. The promissory note is collateralized by the land and building purchased and matures on February 22, 2017,1, 2021. The interest rate for the first year is 12.0% and increases 0.5% per year, up to 13.5%, through 2021. Payments of interest only are due monthly. The full principle balance and accrued interest are due at maturity.

2018 Master Securities Purchase and Convertible Promissory Notes Agreement

In March 2018, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an accredited investor (the “Purchaser”) pursuant to which the Company soldsells to the Purchaser a 12%accredited investor Senior Convertible Promissory Note due August 22,Notes. During the period ended March 31, 2018, (the “Note”) in the principal amountCompany issued one 7.5% convertible note for an aggregate value of $3,000,000 for a purchase price$5,000,000. As of $3,000,000 (the “Offering”).March 31, 2018, $5,000,000 gross of the unamortized debt discount of $3,344,050 remains due. There were no fees or expenses deducted from the net proceeds received by the Company in the Offering.offerings. The NoteCompany paid $150,000 in cash and issued approximately $116,000 of warrants in connection with the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) issuable upon conversion of the Note (the “Conversion Shares”) are collectively referred to hereinnotes. The cash fee and warrant was recorded as the “Securities.”a debt discount.

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NOTE 8 – NOTES PAYABLE (Continued)

AllFor each note issued under the Master Securities Purchase Agreement, the principal and interest due and owingowed under the Notenote is convertible into shares of Common Stock at any time at the election of the holder at a conversion price per share equal to the lower of (i) $0.2495the original conversion price as defined in each note issuance or (ii) 85%87% of the average of the two lowest daily volume weighted average price of the Common Stock in the fifteen (15)thirteen (13) trading days prior to the conversion date (the “Conversion(“Conversion Price”), which Conversion Price is subject to adjustment for (i) stock splits, stock dividends, combinations, or similar events and (ii) full ratchet anti-dilution protection. The Company accounts for debt discount according to ASC 470-20 Debt With Conversion And Other Options. Debt discount in the amount of $2,243,000 associated with the Convertible Note was recorded and will be amortized over the term of the note. Upon certain events of default, the conversion price of the Note will automatically become 70% of the average of the three (3) lowest volume weighted average prices of the Common Stock in the twenty (20) consecutive trading days prior to the conversion date for so long as such event of default remains in effect. All interest payments under the Note are payable, at the Company’s option, in cash or shares of Common Stock.

In addition, at any time that (i) the daily volume weighted average price of the Common Stock for the prior ten (10) consecutive trading days is $0.70$10.50 or more and (ii) the average daily trading value of the Common Stock is greater than $2,500,000 for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) day’s notice, that the holder convert the Notenotes at the Conversion Price.

The Company may prepay in cash any portion of the outstanding principal amount of the Notenotes and any accrued and unpaid interest by, upon ten (10) days’ written notice to the holder, paying an amount equal to (i) 110% of the sum of the then-outstanding principal amount of the Notenotes plus accrued but unpaid interest, if the prepayment date is within 90 days of the issuance date of the Note;notes; (ii) 115% of the sum of the then-outstanding principal amount of the Note plus accrued but unpaid interest, if the prepayment date is between 91 days and 180 days of the issuance date of the Note;notes; or (iii) 125% of the sum of the then-outstanding principal amount of the Notenotes plus accrued but unpaid interest, if the prepayment date is after 180 days of the issuance date of the Note.

NOTE 9 – CONTINGENT CONSIDERATION LIABILITY

The Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction.

In the acquisition of Black Oak Gallery, the Company valued the contingent consideration based on an analysis using a cash flow model to determine the expected contingent consideration payment, which model determined that the aggregate expected contingent consideration liability was $15,305,463 and the present value of the contingent consideration liability was $12,754,553. Accordingly, the Company recognized at April 1, 2016, the closing date of the Black Oak merger, a $12,754,553 contingent consideration liability associated with the contingent consideration paid pursuant to the Merger Agreement.

On April 1, 2017, the anniversary date of the acquisition, as well as the settlement date of the contingent consideration, the final contingent consideration was $16,434,620, or approximately $1.1 million greater than the expected contingent consideration liability of $15,305,463 which the Company estimated on April 1, 2016, the closing date of the Black Oak acquisition.

At March 31, 2017 and December 31, 2016, the total contingent consideration based upon the analysis using the cash flow model to determine the expected contingent consideration payment was $16,434,620 and $12,085,858, respectively, a difference of approximately $4.3 million. The increase was primarily due to i.) revisions in the estimated probability that the upper threshold of $16,667,000 of the revenue target component of the contingent consideration would be met, which revenue target was met as of April 1, 2017, and ii.) the change in the quoted price of the underlying shares of the Company’s common stock which change affected the number of shares to be issued pursuant to the contingent consideration.

Changes in the fair market valuation of contingent consideration are recognized in the consolidated statements of operations. For the three months ended March 31, 2017, the change in the fair market valuation of contingent consideration was $4,348,761 which amount reflects the final settlement of the change in fair value of the Contingent Consideration liability.

See “Note 10 – Fair Value Measurements” for further information.

See “Note 16 – Subsequent Events” for further information on the final settlement of the contingent consideration liability during the month ended April 2017.notes.

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2017 Master Securities Purchase and Convertible Promissory Notes Agreement

The Company has a Securities Purchase Agreement with an accredited investor pursuant to which the Company sells to the accredited investor Senior Convertible Promissory Notes. During the year ended December 31, 2017, the Company issued five 12% convertible notes for an aggregate value of $20,000,000 due at various dates through June 2019. Of the $20,000,000 convertible notes issued during 2017, the Company converted $13,100,000 of the convertible notes into shares of the Company’s common stock during the year ended December 31, 2017. As of December 31, 2017, $6,900,000 gross of the unamortized debt discount of $4,790,602 remained due. During the period ended March 31, 2018, the convertible notes outstanding as of December 31, 2017 were all converted in January 2018. During the period ended March 31, 2018, the Company issued one 12% convertible note for an aggregate value of $5,000,000. Of the $5,000,000 convertible note issued during 2018, the Company converted $2,500,000 of the convertible note during the period ended March 31, 2018. As of March 31, 2018, $2,500,000 gross of the unamortized debt discount of $1,583,133 remains due. There were no fees or expenses deducted from the net proceeds received by the Company in the offerings. The Company paid $150,000 in cash and issued approximately $196,000 of warrants in connection with the notes. The cash fee and warrants issued were recorded as a debt discount.

Conversion of Notes Payable and Related Loss on Extinguishment of Debt

During the three months ended March 31, 2018 and 2017, the Company converted debt and accrued interest into 3,133,025 and 1,805,406 shares of the Company’s common stock, respectively. The value of the common stock issued in conversion of debt are detailed below.

The table below details the conversion of the notes payable into equity and the loss on extinguishment of debt for the three months ended March 31, 2018 and 2017:

		Three Months Ended March 31,
		2018				2017
Fair market value of common stock issued upon conversion		$	17,180,837			$	5,014,661
Principal amount of debt converted			(9,400,000	)			(3,559,324	)
Accrued interest converted			(84,612	)			(129,639	)
Fair value of derivative at conversion date			(9,431,000	)			(2,770,650	)
Debt discount value at conversion date			6,466,021				2,484,410
Loss on extinguishment of debt		$	4,731,246			$	1,039,458

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NOTE 108 – FAIR VALUE MEASUREMENTS

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of the dates indicated:

		Fair Value at March 31,				Fair Value Measurement Using
Description		2018				Level 1				Level 2				Level 3
Derivative Liabilities – Conversion Feature		$	4,059,400			$	-			$	-			$	4,059,400
		$	4,059,400			$	-			$	-			$	4,059,400

		Fair Value at March 31,				Fair Value Measurement Using
Description		2017				Level 1				Level 2				Level 3
Derivative Liabilities – Conversion Feature		$	4,848,600			$	–			$	–			$	4,848,600
Liability – Contingent Consideration			16,434,620				–				–				16,434,620
		$	21,283,220			$	–			$	–			$	21,283,220

 

		Fair Value at December 31,				Fair Value Measurement Using
Description		2016				Level 1				Level 2				Level 3
Derivative Liabilities – Conversion Feature		$	6,987,000			$	–			$	–			$	6,987,000
Liability – Contingent Consideration			12,085,859				–				–				12,085,859
		$	19,072,859			$	–			$	–			$	19,072,859

 

No financial assets were measured on a recurring basis as of March 31, 2017 and December 31, 2016.

		Fair Value at December 31,				Fair Value Measurement Using
Description		2017				Level 1				Level 2				Level 3
Derivative Liabilities – Conversion Feature		$	9,331,400			$	-			$	-			$	9,331,400
		$	9,331,400			$	-			$	-			$	9,331,400