NOTE

LEASES,

COMMITMENTS AND CONTINGENCIES

Officer Employment Agreement.

March 25, 2014,

the Company entered into an employment agreement with Mr. Keogh. The agreement: (i) has an initial term of

three

years; (ii) required Mr. Keogh to devote at least

50%

of his time to the Company and; (iii) provided that the Company will pay Mr. Keogh

$12,000

per month during the term of the agreement. In connection with this employment agreement the Company granted Mr. Keogh shares of common stock and options. This agreement has expired but the terms are continuing on a month to month basis.

MCC.

January 14, 2015,

we entered into an agreement to purchase a

52.6

acre parcel of undeveloped land in Freetown, Massachusetts. The property is located approximately

miles southeast of Boston. We plan to develop the property as the MCC. Plans for the MCC include the construction of sustainable greenhouse cultivation and processing facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program. We paid the seller

$100,000

upon the signing of the agreement which amount was applied toward the purchase price at the closing.

Between

August 2015

and

September 2016,

there were several amendments to the Agreement to extend the closing date to

October 14, 2016.

As consideration for the extensions, the Company, agreed to increase the purchase price to

$4,325,000

and paid the seller

$725,000,

which was applied to the purchase price of the land. As of

September 30, 2016,

the Company had paid

$925,000

that was applied to the purchase price of the land at closing. On

October 17, 2016,

the Company closed on the land purchase via a sales-leaseback transaction. See ‘Operating Leases’ section below for additional information.

Operating Leases

Land

October 17, 2016,

the Company closed the previously announced acquisition of a

52.6

-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of

$925,000

previously paid by the Company to the seller, Boston Beer Company (“BBC”), were credited against the total purchase price of

$4,475,000.

The remaining balance of

$3,550,000

was paid to BBC by Massachusetts MMP. The property is located approximately

miles southeast of Boston. The Company plans to develop the property as the MCC. Plans for the MCC include the construction of sustainable greenhouse cultivation, processing, and infused product facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program.

As part of a simultaneous transaction, the Company assigned the property rights to MMP for a nominal fee and entered a lease agreement pursuant to which MMP agreed to lease the property to the Company for an initial term of

fifty

(

) years. The Company has the option to extend the term of the lease for

four

(

) additional

ten

(

) year periods. The lease is a triple net lease, with the Company paying all real estate taxes, repairs, maintenance and insurance.

The lease payments will be the greater of (a)

$30,000

per month; (b)

$0.38

per square foot per month of any structure built on the property; or (c)

1.5%

of all gross monthly sales of products sold by the Company, any assignee of the Company, or any subtenant of the Company. The lease payments will be adjusted up (but

not

down) every

five

(

) years by any increase in the Consumer Price Index.

Between

October 17, 2016

and

April 17, 2017,

the monthly lease payments accrued, with all accrued lease payments paid to MMP on

April 17, 2017.

April 17, 2017,

the Company reimbursed MMP’s costs and expenses associated with the acquisition of the property, the lease, and the acquisition of the shares and the warrant from the Company (as further described below).

Under the terms of the lease, the Company had

six

(

) months to obtain

$2.6

million in capital funding for the construction of the

first

phase building. In the event that the Company was unable to raise these funds within the

six

(

) month period, the Company had an additional

six

(

) month period to do so; provided, that the Company has paid accrued lease payments and closing costs. If the Company was then unable to raise these funds on or before

twelve

(

) months from

October 17, 2016,

the lease would terminate. On

October 17, 2017,

the lease agreement was amended to provide that the Company will have until

months from

October 17, 2016

to raise

$2.6

million in capital funding. In addition to extending the funding deadline, this amendment granted MMP warrants to purchase up to

100,000

shares of Common Stock at an exercise price of

$1.50

per share. The warrant can be exercised at any time on or after

October 17, 2017

and on or before

October 17, 2022.

February

and

April, 2018,

the lease agreement was amended to provide that the Company will have until

months from

October 17, 2016

to raise

$2.6

million in capital funding. In addition to extending the funding deadline, this amendment granted MMP a warrant to purchase up to

100,000

shares of the Company’s common stock at an exercise price of

$1.50

per share. The warrant can be exercised at any time on or before

October 17, 2022.

The Company recognized an expense of

during the

three

months ended

December 31, 2018

related to those warrants. In

July 2018,

the Company fulfilled the

$2.6

million capital funding commitment.

The Company received a credit for the

$925,000

paid towards the purchase price of the land in the form of discounted lease payments. For the initial

fifty

(

) year term of the lease, the lease payments will be reduced by

$1,542

each month

In connection with the sale of the property to MMP and the lease, the Company and MMP entered into a Share Purchase Agreement pursuant to which the Company issued to MMP

100,000

shares of its common stock at par value of

$0.0001

(“Common Stock”), and a warrant to purchase up to

3,640,000

shares of Common Stock at an exercise price of

$1.00

per share. The warrant can be exercised at any time on or after

October 17, 2018

and on or before

October 17, 2020.

The warrant does

not

contain a cashless exercise provision. The fair value of the warrant was established using the Black Scholes option pricing model using the following assumptions:

	●	Risk-free interest rate – 1.12 percent
	●	Expected term – 4.0 years
	●	Volatility – 115 percent

The Company allocated

$1,899,966

to the warrant which is reflected in additional paid-in-capital and was initially allocated to prepaid land lease. The fair value of the common stock on the date of the agreement was

$73,000,

which is also reflected in additional paid-in-capital and was also initially allocated to prepaid land lease. On

June 26, 2019

the expiration date of warrants to purchase

3,640,000

shares of common stock was extended to

October 17, 2021.

August 2019,

the Company completed construction of Building

at MCC and on

September 1

2019,

Bask, Inc commenced its

-year lease of Building

which includes a base rent plus

15%

of BASK’s gross revenue. The Company has the option to extend the term of the land lease for

four

(

) additional

ten

(

) year periods.

Effective

October 1, 2019,

the Company adopted Topic

842

and recorded ROU assets and lease liabilities of

$6,980,957

and

$4,256,869,

respectively. As part of the adoption, prepaid land lease balance of

$2,724,088

was classified as a component of the Company’s ROU assets.

The Company constructed Building

on the leased land and on

September 1, 2019,

Bask, Inc. commenced its

-year sublease of Building

which includes a base rent plus

15%

of BASK’s gross revenues. This sublease income is recorded as Rental income - related party on the Company’s consolidated statement of operations.

As of

December 31, 2019,

the Company’s right-of-use assets were

$6,964,302,

the Company’s current maturities of operating lease liabilities were

$9,093,

and the Company’s noncurrent lease liabilities were

$4,245,612.

During the

three

months ended

December 31, 2019,

the Company had operating cash flows from operating leases of

85,375.

The table below presents lease related terms and discount rates as of

December 31, 2019.

	As of December 31, 2019

Weighted average remaining lease term
Operating leases (in years)		47.0
Weighted average discount rate
Operating leases		7.9	%

The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Balance Sheet as of

December 31, 2019

are as follows:

2020	$	256,125
2021		341,500
2022		341,500
2023		341,500
2024		341,500
Thereafter		14,343,000
Total lease payments		15,965,125
Less: Present value discount		(11,710,420	)
		4,254,705
Less: operating lease liability, short term		(9,093	)
Operating lease liability, long term	$	4,245,612

Office space

January 2018

the Company's offices moved to

1550

Wewatta St, Denver, CO

80202.

The office space lease is a month-to-month lease with an original term of less than

months. The leases require the Company to pay all taxes, maintenance, insurance, and other operating expenses. Lease expense for office space was

$3,801

for the

three

months ended

December 31, 2019

and

December 31, 2018.

Aggregate rental expense under all leases totaled approximately

$103,666

and

$103,615

for the

three

months ended

December

31,

2019

and

2018,

respectively.