Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
February 13, 2020
To the Board of Directors and Members of Critical Mass Industries, LLC
Report on the Financial Statements
We have audited the accompanying financial statements of Critical Mass Industries, LLC which comprise the Balance sheets as of December 31, 2018 and 2017, and the related Statement of Operations, Statement of Members’ Deficit and Cash Flows for the years then ended and the related notes to the financial statements.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s lack of liquidity and operating losses raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Critical Mass Industries, LLC as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Certified Public Accountants
Lakewood, Colorado
CRITICAL MASS INDUSTRIES, LLC
BALANCE SHEETS
| | | December 31, | |
| | | 2018 | | | 2017 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 119,853 | | | $ | 25,630 | |
| Accounts receivable | | | 23,640 | | | | 18,442 | |
| Inventories | | | 704,971 | | | | 657,438 | |
| Other current assets | | | 1,929 | | | | 875 | |
| Total current assets | | | 850,393 | | | | 702,385 | |
| Property and equipment, net | | | 2,127,781 | | | | 2,393,276 | |
| Deposits | | | 8,424 | | | | 13,933 | |
| Total assets | | $ | 2,986,598 | | | $ | 3,109,594 | |
| LIABILITIES AND MEMBERS’ DEFICIT | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,059,991 | | | $ | 1,063,175 | |
| Accrued expenses | | | 505,509 | | | | 497,637 | |
| Deferred rent | | | 88,332 | | | | 43,717 | |
| Notes payable | | | 494,928 | | | | 1,556,529 | |
| Notes payable, related parties | | | 830,926 | | | | 363,442 | |
| Convertible notes payable | | | 40,000 | | | | 40,000 | |
| Taxes payable | | | 48,811 | | | | 41,275 | |
| Total liabilities | | | 3,068,497 | | | | 3,605,775 | |
| Commitments and contingencies (Note 9) | | | | | | | | |
| Members’ deficit: | | | | | | | | |
| Members’ units | | | 50,500 | | | | 50,500 | |
| Accumulated deficit | | | (132,399 | ) | | | (546,681 | ) |
| Total members’ deficit | | | (81,899 | ) | | | (496,181 | ) |
| Total liabilities and members’ deficit | | $ | 2,986,598 | | | $ | 3,109,594 | |
The accompanying notes are an integral part of these financial statements.
CRITICAL MASS INDUSTRIES, LLC
STATEMENTS OF OPERATIONS
| | | Year Ended |
| | | December 31, |
| | | 2018 | | 2017 |
| Net sales | | $ | 6,367,118 | | | $ | 7,003,700 | |
| Cost of goods sold, net of depreciation and amortization | | | 4,354,789 | | | | 5,106,015 | |
| Gross profit | | | 2,012,329 | | | | 1,897,685 | |
| Operating expenses: | | | | | | | | |
| Personnel costs | | | 451,312 | | | | 904,618 | |
| Sales and marketing | | | 610,639 | | | | 535,695 | |
| General and administrative | | | 402,145 | | | | 492,644 | |
| Legal and professional fees | | | 288,856 | | | | 452,455 | |
| Depreciation and amortization | | | 7,815 | | | | 8,403 | |
| Bad debt expense | | | 24,745 | | | | — | |
| Total operating expenses | | | 1,785,512 | | | | 2,393,815 | |
| Income (loss) from operations | | | 226,817 | | | | (496,130 | ) |
| Other income (expense): | | | | | | | | |
| Other income | | | 418,151 | | | | 11,035 | |
| Interest expense | | | (230,686 | ) | | | (314,538 | ) |
| Total other income (expense), net | | | 187,466 | | | | (303,503 | ) |
| Net income (loss) | | $ | 414,282 | | | $ | (799,633 | ) |
The accompanying notes are an integral part of these financial statements.
CRITICAL MASS INDUSTRIES, LLC
STATEMENTS OF MEMBERS’ DEFICIT
| | | | | | | | | | |
| | | | | | | | | Total | |
| | | Members’ | | | Accumulated | | | Members’ | |
| | | Units | | | Deficit | | | Deficit | |
| Balances at January 1, 2017 | | $ | 50,500 | | | $ | 252,952 | | | $ | 303,452 | |
| Net loss | | | — | | | | (799,633 | ) | | | (799,633 | ) |
| Balances at December 31, 2017 | | | 50,500 | | | | (546,681 | ) | | | (496,181 | ) |
| Net income | | | — | | | | 414,282 | | | | 414,282 | |
| Balances at December 31, 2018 | | $ | 50,500 | | | $ | (132,399 | ) | | $ | (81,899 | ) |
The accompanying notes are an integral part of these financial statements.
CRITICAL MASS INDUSTRIES, LLC
STATEMENTS OF CASH FLOWS
| | | Year Ended | |
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Cash flows from operating activities: | | | | | | | | |
| Net income (loss) | | $ | 414,282 | | | $ | (799,633 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization expense | | | 7,815 | | | | 8,403 | |
| Depreciation and amortization - cost of goods sold | | | 246,325 | | | | 253,655 | |
| Bad debt expense | | | 24,745 | | | | — | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (29,943 | ) | | | (2,742 | ) |
| Inventories | | | (47,533 | ) | | | (140,236 | ) |
| Other current assets | | | (1,054 | ) | | | 3,412 | |
| Accounts payable | | | (3,185 | ) | | | 798,460 | |
| Accrued expenses | | | 7,872 | | | | 401,622 | |
| Deferred rent | | | 44,615 | | | | 26,766 | |
| Taxes payable | | | 7,538 | | | | 7,370 | |
| Net cash provided by operating activities | | | 671,477 | | | | 557,077 | |
| Cash flows from investing activities: | | | | | | | | |
| Purchases of property and equipment | | | — | | | | (306,947 | ) |
| Disposals of property and equipment | | | 11,354 | | | | — | |
| Deposits | | | 5,509 | | | | — | |
| Net cash provided by (used in) investing activities | | | 16,863 | | | | (306,947 | ) |
| Cash flows from financing activities: | | | | | | | | |
| Repayments of notes payable | | | (1,061,601 | ) | | | (438,783 | ) |
| Proceeds from notes payable, related parties | | | 467,484 | | | | 58,268 | |
| Net cash used in financing activities | | | (594,117 | ) | | | (380,515 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 94,223 | | | | (130,385 | ) |
| Cash and cash equivalents at beginning of year | | | 25,630 | | | | 156,015 | |
| Cash and cash equivalents at end of year | | $ | 119,853 | | | $ | 25,630 | |
The accompanying notes are an integral part of these financial statements.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
| 1. | Nature of the Business and Basis of Presentation |
Critical Mass Industries, LLCDBA Good Meds (“the Company”, “CMI” and/or “Good Meds”) was incorporated in State of Colorado in 2009. The Company’s business objectives are to provide quality grown and manufactured THC products for primarily the medical cannabis market. The Company is licensed by the Marijuana Enforcement Division of Colorado to produce cannabis and cannabis products under its six licenses. These licenses allow for cultivation, manufacturing of infused products and retail distribution.
Good Meds has approximately 65 employees with the majority employed in the cultivation segment. Good Meds has two retail locations just outside of Denver in the Lakewood and Englewood markets, which carry Good Meds medical cannabis products including marijuana flower, edibles, concentrates, tinctures, topical salves, joints and vaporizer cartridges. All of the Good Meds concentrates and many infused products are made with Good Meds strains cultivated and processed in its state-of-the-art, 90,000-SF cultivation facility in Denver, growing over 100 premium flower varieties. The facility also houses a state-of-the-art extraction lab that utilizes a variety of extraction methods.
In addition to the retail and cultivation presence, the Company owns and operates BOSM Labs, a medical and recreational cannabis extract brand. While BOSM Labs has developed several processing methods, its initial objective was to perfect one genre of concentrate extraction, hydrocarbon. BOSM Labs cultivates and sells its own source material, as well as offering toll processing services for clients across the state. The brand has grown and due to the quality and consistency of the products, establishing a wholesale presence being sold across the state.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Going Concern
In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt and the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
Since its inception, the Company has funded its operations primarily with proceeds from member loans and notes payable. As of December 31, 2018, the Company had a working capital deficit of $2,218,104. The continuing viability of the Company and its ability to continue as a going concern is dependent upon the Company being successful in its continuing efforts in growing its revenue base and/or accessing additional sources of capital.
If the Company is unable to obtain future funding, the Company will be forced to delay its growth and commercialization efforts. Management believes that the actions presently being taken by the Company will provide sufficient liquidity for the Company to continue to execute its business plan. However, there can be no assurances that management’s plans will be achieved.
The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
| 2. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to the recognition of inventory, cost of goods sold, and the Company’s various debt obligations. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. At December 31, 2018 and 2017, all of the Company’s cash was held at one accredited financial institution.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.
Fair Value Measurements
Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
| ● | Level 1—Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The carrying values reported in the consolidated balance sheets for cash, accounts receivable, accounts payable and notes payable approximate fair values because of the immediate or short-term maturities of these financial instruments. There were no other assets or liabilities that require fair value to be recalculated on a recurring basis.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. Revenue was considered realized or realizable and earned when all of the following criteria were met: (1) persuasive evidence of an arrangement exists, (2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and the customer has taken ownership and assumed risk of loss.
Revenue is derived from cannabis sales, primarily through the retail market, but also bolstered by a growing wholesale market. The company reduces revenues for realized discounts and potential loyalty point exposure, presenting revenues net of taxes collected from customers and remitted to governmental authorities.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
Cost of Goods Sold
Cost of goods sold includes the costs directly attributable to production of inventory such as cultivation costs, extraction costs, packaging costs, security, and allocated overhead. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.
Accounts receivable
Accounts receivable are recorded at the invoiced amount. Past due balances are determined based on the contractual terms of the arrangements. Accounts receivable are accrued against when management determines, after considering economic and business conditions and collection efforts, that the collection of receivables is doubtful. Uncollectible accounts previously recorded as receivables are recognized as bad debt expense, with a corresponding decrease to accounts receivable. Bad debt expense for the years December 31, 2018 and December 31, 2017 are $24,745 and $0, respectively.
Inventories
Inventories consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories are stated at lower of cost or net realizable value, management considers such factors as inventories in hand, estimated time to sell such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management, the value of specific inventory items has been impaired.
Property, Plant and Equipment
Purchase of property, plant and equipment are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the consolidated statements of operations. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset, as follows:
| | | Estimated Useful Life |
| Computer equipment | | 3 - 5 years |
| Furniture and fixtures | | 5 - 7 years |
| Machinery and equipment | | 5 - 8 years |
| Leasehold improvements | | Shorter of lease term or 15 years |
Impairment of Long-Lived Assets
Management evaluates its long-lived assets for financial impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated undiscounted future cash flows from the assets are less than the carrying value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value, less the cost to sell.
Advertising
All advertising costs are recognized as an expense the first time that the advertising takes place.
Income Taxes
The Company is a Colorado limited liability company treated as a S corporation for federal income tax purposes with all income tax liabilities and/or benefits of the Company being passed through to the member. As such, no recognition of federal income taxes for the Company has been provided for in the accompanying financial statements. Any uncertain tax position taken by the member is not an uncertain position of the Company.
Recent Accounting Pronouncements
In February 2016, the FASB issued guidance on the recognition and measurement of leases. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement, and presentation of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued an alternative method that permits application of the new guidance at the beginning of the year of adoption. This is in addition to the method of applying the new guidance retrospectively to each prior reporting period presented. The guidance will be effective for us at the beginning of our first quarter of fiscal 2021, with optional practical expedients. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
In May 2014, the FASB issued guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance may be applied retrospectively to each prior period presented or prospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”). This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its financial statements.
Inventories consist of three major components. Retail goods consist of both inventories recorded at cost and self-produced finished goods at their calculated cost per gram. Infused products inventory is all extracted cannabis products that are in process, or prepared for store or wholesale transfer. An internal trim cost is attached to product after harvest and a calculated cost per gram of extraction and packaging is applied. Work-in-process inventory grow applies to all plants not yet harvested and ready for their next step in the life cycle as either a raw material in the infused products life cycle or as a finished good sold through the store or wholesale channels. Inventories consisted of the following:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Retail goods | | $ | 98,225 | | | $ | 92,563 | |
| Infused products | | | 289,909 | | | | 99,781 | |
| Work-in-process | | | 316,837 | | | | 465,094 | |
| | | $ | 704,971 | | | $ | 657,438 | |
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
| 4. | Property and Equipment, Net |
Property and equipment, net consisted of the following:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Leasehold improvements | | $ | 2,223,609 | | | $ | 2,233,609 | |
| Machinery and equipment | | | 857,800 | | | | 857,800 | |
| Furniture and fixtures | | | 43,330 | | | | 37,355 | |
| Computer equipment | | | 4,569 | | | | 4,569 | |
| | | | 3,129,308 | | | | 3,133,333 | |
| Less: Accumulated depreciation | | | (1,001,527 | ) | | | (740,057 | ) |
| | | $ | 2,127,781 | | | $ | 2,393,276 | |
Depreciation expense for the years ended December 31, 2018 and 2017 were $254,140 and $262,058, respectively. $246,325 and $253,655 of which were absorbed into cost of goods sold for the years ended December 31, 2018 and 2017, respectively.
Accrued expenses consisted of the following:
| | | December 31, | |
| | | 2018 | | | 2017 | |
| Accrued personnel costs | | $ | 115,658 | | | $ | 160,593 | |
| Payroll tax liability | | | 308,843 | | | | 295,895 | |
| Gift certificates and loyalty points | | | 81,008 | | | | 41,149 | |
| | | $ | 505,509 | | | $ | 497,637 | |
The balance of loyalty points is comprised of all potentially useable credits. Management does not expect this liability to be utilized and will develop a retirement program reducing the exposure of the existing liability.
As of December 31, 2018, the payroll tax liability includes approximately $110,000 in penalties and interest.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
| 6. | Notes Payable and Notes Payable, Related Parties |
Due to the nature of the cannabis industry, institutional loans were unavailable and the Company utilized the private market for short term financing. Historically, the company entered in lines of credit with various individuals in order to help fund operations. The following is a summary of all debt as of December 31, 2018 and 2017:
| | | | | | | | | | | Outstanding as of | | | |
| | | Original | | | Origination | | Interest | | | December 31, | | | |
| Type | | Principal | | | Date | | Rate | | | 2018 | | | 2017 | | | Date Repaid |
| Line of credit 2*** | | $ | 40,000 | | | 3/8/2010 | | | 30.0 | % | | $ | 97,693 | | | $ | 80,073 | | | 8/9/2019 |
| Line of credit - settlement 1 | | | 22,000 | | | 10/16/2012 | | | 5.0 | % | | | 129,244 | | | | 380,994 | | | 2/15/2019 |
| Line of credit 5** | | | 45,875 | | | 12/31/2012 | | | 15.0 | % | | | 6,576 | | | | 10,192 | | | 3/22/2019 |
| Line of credit 4* | | | 250,000 | | | 7/19/2016 | | | 20.0 | % | | | 261,415 | | | | 269,338 | | | 8/9/2019 |
| Line of credit - settlement 2 | | | 60,000 | | | 9/1/2016 | | | 15.0 | % | | | - | | | | 500,000 | | | 2018 |
| Line of credit 3 | | | 500,000 | | | 4/11/2017 | | | 20.0 | % | | | - | | | | 315,932 | | | 2018 |
| | | | | | | | | | | | | $ | 494,928 | | | $ | 1,556,529 | | | |
| Member line of credit 1*** | | | 20,000 | | | 2/25/2014 | | | 25.0 | % | | | 546,542 | | | | 132,194 | | | N/A |
| Line of credit 1* | | | 100,000 | | | 9/25/2014 | | | 25.0 | % | | | 141,584 | | | | 119,000 | | | 8/9/2019 |
| Member line of credit 2 | | | 47,000 | | | 7/13/2015 | | | 20.0 | % | | | 92,558 | | | | 62,248 | | | 8/9/2019 |
| Member line of credit 3* | | | 40,000 | | | 2/10/2017 | | | 12.5 | % | | | 50,242 | | | | 50,000 | | | 8/9/2019 |
| | | | | | | | | | | | | $ | 830,926 | | | $ | 363,442 | | | |
| Convertible note** | | $ | 40,000 | | | 2/10/2014 | | | 0.0 | % | | $ | 40,000 | | | $ | 40,000 | | | 8/9/2019 |
| * | The remaining unpaid balance was converted into shares of First Colombia in 2019 |
| ** | Principal was in default in reporting period |
| *** | $250,000 of outstanding balance was converted into shares of First Colombia in 2019 |
All notes payable are unsecured in regards to company assets. The balances above include accrued and unpaid interest.
Settlement # 1 was finalized in March 2017 and the above total reflects agreed upon future payments inclusive of interest. The final payment was made February 15, 2019. Settlement # 2 was finalized in October 2018 and the above total represents the balance prior to a settlement of 300,000 paid on December 18, 2018 which relieved the entirety of the debt.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
The Company has outstanding a single class of membership interests. Members’ contributed capital was $50,500 as of December 31, 2018 and 2017.
| 8. | Related Party Transactions |
The Company had various lines of credit agreements with related parties. The following is a summary of related party notes payable as of December 31, 2018 and 2017:
| | | | | | | | | | | | | Outstanding as of | |
| | | Noteholder Relationship | | Original | | | Origination | | Interest | | | December 31, | |
| Name | | to Company | | Principal | | | Date | | Rate | | | 2018 | | | 2017 | |
| Member line of credit 1 | | Member of Company | | $ | 20,000 | | | 2/25/2014 | | | 25.0 | % | | $ | 546,542 | | | $ | 132,194 | |
| Line of credit 1 | | Family of member | | | 100,000 | | | 9/25/2014 | | | 25.0 | % | | | 141,584 | | | | 119,000 | |
| Member line of credit 2 | | Common ownership to member | | | 47,000 | | | 7/13/2015 | | | 20.0 | % | | | 92,558 | | | | 62,248 | |
| Member line of credit 3* | | Member of Company | | | 40,000 | | | 2/10/2017 | | | 12.5 | % | | | 50,242 | | | | 50,000 | |
| | | | | | | | | | | | | | | $ | 830,926 | | | $ | 363,442 | |
Interest expense on related party notes payables were approximately $35,000 and $81,000 during the years ended December 31, 2018 and 2017.
The majority member of the business was paid $75,000 annual salary in both 2017 and 2018. John Knapp also owns Gro – Quip which sold approximately $241,000 and $177,000 worth of cultivation supplies to the Company in 2017 and 2018, respectively. Gro – Quip purchased wholesale materials from vendors wary of associating with cannabis businesses.
A Member accrued $37,500 worth of consulting fees in both 2017 and 2018, paid in 2019.
CRITICAL MASS INDUSTRIES, LLC
NOTES TO FINANCIAL STATEMENTS
| 9. | Commitments & Contingencies |
Future minimum lease commitments under operating leases as of December 31, 2018 are as follows:
| Year Ending December 31, | | | | |
| 2019 | | $ | 639,070 | |
| 2020 | | | 602,944 | |
| 2021 | | | 593,086 | |
| 2022 | | | 198,168 | |
| Total | | $ | 2,033,268 | |
Between April 2016 and May 2018, the Company extended the lease agreements for their retail locations and production facility. These agreements continue the leases through option years or extensions currently ending in 2022. Base rents range from $2,250 to $44,708 with annual escalators.
The company recognizes rent expense on a straight-line basis.
No unsettled litigations were reported as of December 31, 2018 and December 31, 2017. The liabilities originating from litigation were reported at face value of existing debt until determination of settlement. Once determinable, the note payable value was carried as a settlement payable inclusive of all future payment obligations. All settlements have subsequently been satisfied.
Acquisition of Holdco and IPco
On July 15, 2019, (the “Purchase Date”) Redwood Green Corp (“Redwood Green”), through its wholly owned subsidiary Good Acquisition Co., entered into a Membership Interest Purchase Agreement (the “Agreement”) to acquire cannabis brands and other assets of Good Meds. As of the Purchase Date, Colorado law prohibited public companies, including Redwood Green, from owning cannabis licenses. Therefore, in conjunction with the Agreement, Good Meds spun off assets acquired by Redwood Green, into two new entities named Good Holdco, LLC (“Holdco”) and Good IPCo, LLC (“IPCo). Under the terms of the Agreement, Good Meds still retained the cannabis license, inventory and accounts receivable (the “Cannabis License Assets”) and will continue to operate the cannabis business related to the brands under license from Redwood Green, paying royalties and related fees until 2020 when Colorado law will permit public ownership of cannabis licenses. In consideration of the sale and transfer of the acquired assets, Redwood Green delivered 13,553,233 shares of Redwood Green common stock, in addition to $1,999,770 in cash to Good Meds. An additional 1,500,000 shares of Redwood Green common stock were held and retained by Redwood Green until the cannabis license can be purchased.
14
