| Commitments and Contingencies | NOTE
9 – COMMITMENTS AND CONTINGENCIES The
Company previously leased property for its day-to-day operations and facilities for possible retail dispensary locations and cultivation
locations as part of the process of applying for retail dispensary and cultivation licenses. Entry
into Agreement to Acquire Real Property On
June 17, 2016, EWSD entered into a Contract to Buy and Sell Real Estate (the “Acquisition Agreement”) with Tammy J.
Sciumbato and Donnie J. Sciumbato (collectively, the “Sellers”) to purchase certain real property comprised of 116
acres of agricultural land, a barn and a farmhouse in Pueblo, Colorado (the “Property”). The closing of the Acquisition
Agreement was scheduled to occur on or about September 22, 2016 (the “Closing”), with possession of the land and barn
occurring 12 days after the Closing and possession of the farm house occurring on or before January 1, 2017. The Sellers were
to rent back the farm house from the Company until January 1, 2017. The purchase price to acquire the Property is $650,000, including
$10,000 paid by the Company as a deposit into the escrow for the Property. During the third quarter of 2017 the Acquisition Agreement
was cancelled and the deposit was forfeited. Office
Leases On
August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through June
30, 2017 at a current monthly rate of $14,828 per month. The Company moved to different offices in Los Angeles, CA in April 2015.
The sublease on the office has a term of 18 months with monthly rent of $7,486. The
landlord for the West Hollywood space has filed a suit against the Company and independent guarantors on the West Hollywood lease.
The Company has expensed all lease payments due under the West Hollywood lease. The Company’s liability for the West Hollywood
lease will be adjusted, if required, upon settlement of the suit with the landlord. On September 8, 2016, the court approved the
landlord’s application for writ of attachment in the State of California in the amount of $374,402 against Prescription
Vending Machines, Inc. (“PVM”). A trial date has been set for May 2017 (Note 11). On July 18, 2017, plaintiff
filed a Request for Dismissal with Prejudice of the litigation in respect of PVM. Total
rent expense under operating leases for the three months ended March 31, 2017 and 2016 was $9,261 and $289,000 respectively. Consulting
Agreements On
December 7, 2015, the Company entered into a consulting agreement for marketing and PR services, for a term of six months, which
was subsequently extended through August 30, 2016. Compensation under this agreement through May 30, 2016 was $25,000 per month,
with twenty percent, or $5,000, of this amount to be paid in shares of Common Stock. Pursuant to the terms of the agreement, the
number of shares issued is determined at the end of each quarter. Upon extension, the terms were adjusted to $15,000 per month
for services, with $5,000 to be paid in shares of Common Stock. On November 30, 2017, the Court granted plaintiff’s request
for a Default Judgment in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses,
attorney’s fees, and interest at a rate of 6.25%. Litigation On
May 22, 2013, the Company, then known as Medbox , Inc., initiated litigation in the United States District Court in the District
of Arizona against three stockholders of MedVend Holdings LLC (“MedVend”) in connection with a contemplated transaction
that Medbox entered into for the purchase of an approximate 50% ownership stake in MedVend for $4.1 million. The lawsuit alleges
fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. The litigation is
pending and Medbox has sought cancellation due to a fraudulent sale of the stock because the selling stockholders lacked the power
or authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the
agreement. On November 19, 2013, the litigation was transferred to United States District Court for the Eastern District of Michigan.
MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the litigation,
the selling stockholder defendants and MedVend seek to have the transaction performed, or alternatively be awarded damages for
the alleged breach of the agreement by the Company. MedVend and the stockholder defendants seek $4.55 million in damages, plus
costs and attorneys’ fees. The Company denied liability with respect to all such claims. On June 5, 2014, the Company entered
into a purchase and sale agreement (the “MedVend PSA”) with PVM International, Inc. (“PVMI”) concerning
this matter. Pursuant to the MedVend PSA, the Company sold to PVMI the Company’s rights and claims attributable to or controlled
by the Company against those three certain stockholders of MedVend, known as Kaplan, Tartaglia and Kovan (the “MedVend Rights
and Claims”), in exchange for the return by PVMI to the Company of 30,000 shares of Common Stock. PVMI is owned by Pejman
Vincent Mehdizadeh, formerly the Company’s largest stockholder. On December 17, 2015, the Company entered into a revocation
of the MedVend PSA, which provided that from that date forward, the Company would take over the litigation and be responsible
for the costs and attorneys’ fees associated with the MedVend Litigation from December 17, 2015 forward. All costs and attorneys’
fees through December 16, 2015 will be borne by PVMI. After the filing of a motion for substitution of the Company for PVMI, Defendants
agreed, via a stipulated order, to permit the substitution. The Court entered the order substituting Notis Global, Inc. for PVMI
on February 17, 2016. A new litigation schedule was recently issued which resulted in an adjournment of the trial. A new trial
date will be set by the court following its ruling on a motion for summary judgment filed by Defendants and MedVend, which is
set for hearing on November 16, 2016. At this time, the Company cannot determine whether the likelihood of an unfavorable outcome
of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable.
In January 2017, the Company entered into a Settlement Agreement with the three stockholders, pursuant to which we agreed to pay
to them $375,000 in six payments commencing August 2017 and concluding on or before February 2020. In connection with the settlement,
the Company executed a Consent Judgment in the amount of $937,000 in their favor. The Company did not make the first payment and
the Consent Judgment was recorded against it on August 25, 2017. Plaintiffs have attempted to collect on the judgment and, in
November 2017, garnished approximately $10,000 from the Company’s bank account. Class
Settlement On
December 1, 2015, Medbox and the class plaintiffs in Josh Crystal v. Medbox, Inc., et al.
● a
cash payment to a settlement escrow account in the amount of $1,850,000 of which $150,000 will be paid by the Company and
$1,700,000 will be paid by the Company’s insurers;
● a
transfer of 2,300,000 shares of Common Stock to the settlement escrow account, of which 2,000,000 shares would be contributed
by the Company and 300,000 shares of Common Stock by Bruce Bedrick;
● the
net proceeds of the settlement escrow, after deduction of Court-approved administrative costs and any Court-approved attorneys’
fees and costs would be distributed to the Class; and
● releases
of claims and dismissal of the action. By
entering into the settlement, the settling parties have resolved the class claims to their mutual satisfaction. Defendants have not admitted the validity of any claims or allegations
and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation. If the global settlement
does not receive final court approval, it could have a material adverse effect on the financial condition, results of operations
and/or cash flows of the Company and its ability to raise funds in the future. As
of March 31, 2017, all obligations have been settled in connection with this class settlement. Derivative
Settlements As
previously announced on October 22, 2015, on October 16, 2015, the Company, in its capacity as a nominal defendant, entered into
a memorandum of understanding of settlement (the “Settlements”) in the following stockholder derivative actions: (1)
Mike Jones v. Guy Marsala, et al Jennifer Scheffer
v. P. Vincent Mehdizadeh, et al. Kimberly Y. Freeman v. Pejman Vincent
Mehdizadeh, et al Tyler Gray v. Pejman Vincent Mehdizadeh, et al. Robert J. Calabrese v. Ned L. Siegel, et al. Patricia des Groseilliers v. Pejman Vincent Mehdizadeh, et al. Michael A. Glinter v. Pejman Vincent Mehdizadeh, et al. On
December 3, 2015, the parties in the Jones v. Marsala By
entering into the Settlements, the settling parties have resolved the derivative claims to their mutual satisfaction. The Individual
Defendants have not admitted the validity of any claims or allegations and the settling plaintiffs have not admitted that any
claims or allegations lack merit or foundation. Under
the terms of the Settlements, the Company agrees to adopt and adhere to certain corporate governance processes in the future.
In addition to these corporate governance measures, the Company’s insurers, on behalf of the Individual Defendants, will
make a payment of $300,000 into the settlement escrow account and Messrs. Mehdizadeh and Bedrick will deliver 2,000,000 and 300,000
shares, respectively, of their shares of Common Stock into the Settlement escrow account. The funds and Common Stock in the Settlement
escrow account will be paid as attorneys’ fees and expenses, or as service awards to plaintiffs. On
September 16, 2016, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties entered into a settlement
regarding the Merritts Action. The settlement provides, among other things, for the release and dismissal of all asserted claims.
Under the terms of the settlement, the Company agrees to adopt and to adhere to certain corporate governance processes in the
future. In addition to these corporate governance measures, the Company will make a payment of $135,000 in cash to be used to
pay Merritts’ counsel for any attorneys’ fees and expenses, or as service awards to Merritts, that are approved and
awarded by the Court. The Settlements have been approved by the court. As of March 31, 2017, all obligations have
been settled in connection with this derivative settlement. SEC
Investigation In
October 2014, the Board appointed a special committee (the “Special Committee”) to investigate issues arising from
a federal grand jury subpoena pertaining to the Company’s financial reporting which was served upon the Company’s
predecessor independent registered public accounting firm as well as certain alleged wrongdoing raised by a former employee of
the Company. The Company was subsequently served with two SEC subpoenas in early November 2014. The Company is fully cooperating
with the grand jury and SEC investigations. In connection with its investigation of these matters, the Special Committee in conjunction
with the Audit Committee initiated an internal review by management and by an outside professional advisor of certain prior period
financial reporting of the Company. The outside professional advisor reviewed the Company’s revenue recognition methodology
for certain contracts for the third and fourth quarters of 2013. As a result of certain errors discovered in connection with the
review by management and its professional advisor, the Audit Committee, upon management’s recommendation, concluded on December
24, 2014 that the Condensed Consolidated Financial Statements for the year ended December 31, 2013 and for the third and fourth
quarters therein, as well as for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, should no longer be
relied upon and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the Condensed Consolidated
Financial Statements for the year ended December 31, 2012, together with all three, six and nine month financial information contained
therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated. On March 11,
2015, the Company filed its restated Form 10 Registration Statement with the SEC with restated financial information for the years
ended December 31, 2012 and December 31, 2013, and on March 16, 2015, the Company filed amended and restated quarterly reports
on Form 10-Q, with restated financial information for the periods ended March 31, June 30 and September 30, 2014, respectively. In
March 2016, the staff of the Los Angeles Regional Office of the U.S. Securities and Exchange Commission advised counsel for the
Company in a telephone conversation, followed by a written “Wells” notice, that it is has made a preliminary determination
to recommend that the Commission file an enforcement action against the Company in connection with misstatements by prior management
in the Company’s financial statements for 2012, 2013 and the first three quarters of 2014. A Wells Notice is neither a formal
allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides the Company with an opportunity
to respond to issues raised by the Staff and offer its perspective prior to any SEC decision to institute proceedings. In
March 2017, the SEC and the Company settled this matter. The Company consented to the entry of a final judgment permanently enjoining
it from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a),
13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-11, and 13a-13
thereunder. In connection with the settlement, the Company did not have any monetary sanctions or penalties assessed against it. Other
litigation Whole
Hemp complaint A
complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming Notis
Global, Inc. and EWSD (collectively, “Notis”), as defendants in Pueblo County, CO district court. The complaint alleges
five causes of action against Notis: misappropriation of trade secrets, civil theft, intentional interference with prospective
business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and Notis for the
Farming Agreement and the Distributor Agreement. The
court entered an ex parte On
August 12, 2016, the court ordered that all of Whole Hemp’s plants in Notis’ possession be destroyed, which occurred
by August 24, 2016, at which time the temporary restraining order was dissolved and the parties will soon file a motion to dismiss
the district court action. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with
prejudice. Notis
commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between
the parties. Whole Hemp filed is Answer and counterclaims on September 6, 2016, asserting similar allegations that were asserted
to the court. On
September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss
some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures
of relevant documents and persons with knowledge of relevant information by October 21, 2016. In
light of the court order to destroy all Whole Hemp plants, the Company has immediately expensed all Capitalized agricultural costs
of $73,345 related to Whole Hemp plants. As of December 31, 2016, the Company capitalized $160,131 that related to Whole Hemp
plants. As
noted above, the Company’s long-term strategy is to maintain tight control of its supply chain. The continuing default by
Whole Hemp was conductive to the Company’s efforts to eliminate outside vendors in the supply chain and control production
from “Seed to Sale.” The Company’s decision to terminate the Whole Hemp Agreements comports with its long-term
strategy to maintain tight control of its supply chain. West
Hollywood Lease The
lease for the former office at 8439 West Sunset Blvd. in West Hollywood, CA has been partially subleased. The Company plans to
sublease the remainder of the office in West Hollywood, CA and continues to incur rent expense while the space is being marketed.
The landlord for the prior lease filed a suit in Los Angeles Superior Court in April 2015 against the Company for damages they
allege have been incurred from unpaid rent and otherwise. In January 2016, the landlord filed a first amended complaint adding
the independent guarantors under the lease as co-defendants and specifying damages claim of approximately $300,000. On September
8, 2016, the court approved Mani Brothers’ application for writ of attachment in the State of California in the amount of
$374,402 against PVM. A trial date was set in May 2017. On March 16, 2017, the Company and Mani Brothers agree to settle the amount
owed if the Company paid $40,000 before July 2017. The Company paid the $40,000 in four monthly payments commencing in April 2017.
On July 24, 2017, the case was dismissed against the Company. Los
Angeles Lease The
Company’s former landlord, Bank Leumi, filed an action against the Company in Los Angeles Superior Court for breach of lease
on August 31, 2016, seeking $29,977 plus fees and interest, in addition to rent payment for September 2016. The Company filed
a response to the complaint on September 21, 2016, and a case management conference is scheduled for December 9, 2016. In November
2016, the parties entered into a Settlement Agreement and General Release, pursuant to which the Company agreed to an eight-payment
plan in favor of the Bank, commencing December 2016 and terminating July 2017. All of the payments, which aggregated $46,522 for
rent, fees, and costs, have been made. Jeffery
Goh We
are a party to certain litigation that was filed by Jeff Goh, one of our former directors and executive officers in Superior Court
for the state of California, County of Orange, styled JEFF GOH, an individual, Plaintiff, vs. MEDBOX HOLDINGS, INC., a Nevada
corporation; NOTIS GLOBAL, INC., a Nevada corporation; and DOES 1 through 100, inclusive, |
