Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND OTHER ASSETS

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INVESTMENTS AND OTHER ASSETS
9 Months Ended
Sep. 30, 2021
INVESTMENTS & OTHER ASSETS  
INVESTMENTS & OTHER ASSETS

NOTE 5. – INVESTMENTS & OTHER ASSETS

The total carrying value of the Company’s investments and other assets at September 30, 2021 and December 31, 2020 consisted of the following:

September 30, 

December 31, 

2021

2020

Aurora stock warrants

    

$

18

    

$

239

Panacea preferred stock

5,173

Panacea stock warrant

1,124

Exactus common stock

7,282

Total Investments

$

7,300

$

6,536

Convertible note receivable

$

$

5,876

Promissory note receivable

$

3,713

$

Investment in Panacea Life Sciences, Inc.

Initial Investment:

On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc. (“Panacea”) for consideration valued at $13,297 ($12,000 cash and $1,297 of the Company’s shares of common stock valued at $1 per share) in exchange for a 15.8% ownership interest. The Company’s investment consisted of three instruments: shares of Series B preferred stock (“preferred stock”); a convertible note receivable with a $7,000 face value; and a warrant (“stock warrant”) to purchase additional shares of Series B preferred stock, to obtain 51% ownership of Panacea, at an exercise price of $2.344 per share. The convertible note receivable had a term of five years, interest of 10% per annum, and could be converted to shares of Series B preferred stock at the Company’s discretion. The embedded conversion option was not considered a derivative instrument for accounting purposes. The preferred stock carried an annual 10% cumulative dividend, compounded annually, and had an implicit put option after

the fifth anniversary date so long that the stock warrants had not been exercised. The put option was not considered a derivative instrument for accounting purposes. The stock warrant was exercisable at any time after the fifth anniversary date and would be accelerated if Panacea achieved certain sales targets for two consecutive years. The Series B preferred stock also included first priority equity preferences in the event of a liquidation, sale, or transfer of Panacea assets. These rights entitled the Company to the original Series B issuance price of $7,000 plus any unpaid accrued dividends.

To allocate the cost of the stock warrant, the Company calculated a fair value based on the following assumptions: volatility of 70%, discount of 25% for lack of marketability, and a risk-free rate of 2%. The value of the stock warrant was allocated to the preferred stock and the convertible note receivable, equally, at a discount to the acquisition price. The discount on the preferred stock was determined to be for lack of control and the discount on the convertible note receivable was determined to be for issuing the note at a below market interest rate for similar instruments.

The convertible note receivable and the preferred stock investment were considered available for sale debt securities with a private company that was not traded in active markets. Since observable price quotations were not available at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition. The discount of each instrument is accreted into interest income over the respective term as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 6 for additional information on these fair value measurements. The stock warrant was recorded at its cost basis in accordance with the practicability exception under ASU 2016-01.

Impairment of Panacea Investment:

As a result of increased competition and other macroeconomic factors, the Company recognized an impairment of $1,062 on the Panacea stock warrant during the second quarter of 2020. The impairment is recorded within the Consolidated Statements of Operations and Comprehensive Loss as “Impairment of Panacea Investment.” During the fourth quarter of 2020, the Company entered into a non-binding agreement with Panacea to potentially restructure the investment and business relationship—including the transfer of an agricultural facility and other assets. As of December 31, 2020, the Company adjusted certain assets to represent the fair value outlined in the non-binding agreement.

Conversion of Panacea Investment:

On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc. (“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders. Pursuant to the Securities Exchange Agreement, Exactus fully acquired Panacea. These transactions effected the (i) conversion of all of the Company’s Series B Preferred Stock in Panacea into 91,016,026 shares of common stock in Exactus valued at $9,102 as of June 30, 2021 and (ii) the conversion of the Company’s existing debt in Panacea by converting the outstanding $7,000 principal balance convertible note receivable and all accrued but unpaid interest thereon for fee simple ownership of Needle Rock Farms (224 acres in Delta County, Colorado) and equipment valued at $2,248, $500 in Panacea’s Series B Preferred Stock (which was subsequently converted to Exactus common stock under the Securities Exchange Agreement), and a new $4,300 promissory note (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0% interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado. All other rights and obligations of the Company in Panacea and Panacea’s affiliate, Quintel-MC Incorporated, were terminated by this transaction—including all warrant rights and obligations for future investment. The conversion was recorded as a non-monetary transaction, based on the fair value of the assets received, and resulted in a gain of $2,548 which is included within the Consolidated Statements of Operations and Comprehensive Loss as “Gain on Panacea investment conversion.”

The Promissory note receivable was valued at $3,684 ($4,300 face value less $616 discount) and is included within the Consolidated Balance Sheets as “Other Assets.” The Company intends to hold the Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note. The ownership of Needle Rock Farms and related equipment is included within “Property, plant, and equipment, net” on the Consolidated Balance Sheets. The common shares of Exactus, Inc. are considered equity securities in accordance with ASC 321 and are recorded at fair value—changes in fair value will be included within the statement of operations. See Note 6 for additional information on the fair value measurements.

On October 28, 2021, Exactus announced the completion of a 1 for 28 reverse stock split as well as an entity name change to Panacea Life Sciences Holdings, Inc (OTCQB: PLSH). Panacea Life Sciences Holdings, Inc. has been assigned a temporary stock

symbol of “EXDID” which will formally change to “PLSH” after twenty business days. As a result of the reverse stock split, our 91,016,026 shares were adjusted to 3,250,573 shares.

Investment in Aurora Cannabis, Inc.

The Company has an investment in Aurora Cannabis Inc. (“Aurora”) stock warrants that are considered equity securities under ASC 321 – Investments – Equity Securities and a derivative instrument under ASC 815 – Derivatives and Hedging. The stock warrants are not designated as a hedging instrument, and in accordance with ASC 815, the Company’s investment in stock warrants are recorded at fair value with changes in fair value recorded to unrealized gain/loss as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 6 for additional information on the fair value measurements.