NOTE 7 – DEBENTURES RECEIVABLE

During 2018, in a series of transactions, the Company purchased $30 million of subordinated secured convertible debentures (the “GC Debentures”) of GenCanna Global, Inc., a producer and distributor of agricultural hemp, cannabidiol (CBD) formulations, hemp genetics, and hemp products (“GenCanna”). The GC Debentures bear interest at a compounded rate of 9% per annum and mature three years from issuance.

The GC Debentures are convertible into the common stock of GenCanna, at the Company’s option, (i) upon the occurrence of a Liquidity Event, as defined in the GC Debentures, or (ii) after December 31, 2018, upon ten days prior written notice to GenCanna. Conversion of the Company’s entire $30 million investment shall equate to at least a 33.3% ownership interest in GenCanna on a fully diluted basis. The conversion price is equal to the lesser of a 20% discount to the price of the Liquidity Event, or the price based on a defined post-money valuation of GenCanna. If a Liquidity Event does not occur on or before June 30, 2020, the Company shall have the option to be redeemed in cash for the principal amount of the GC Debenture plus all accrued and unpaid interest thereon.

Among other provisions of the subscription agreement governing this series of transactions, the Company was given the right to appoint a director to GenCanna’s board, and agree to fund a $10 million employee bonus pool should GenCanna meet certain 2019 operating targets.

Concurrent with the completion of the GC Debenture purchases, the parties executed a security and pledge agreement whereby the Company was granted a senior security interest on certain assets of GenCanna equal in value to 100% or more of the principal and accrued interest on the GC Debentures until such time the GC Debentures are paid down, redeemed or converted. Additionally, the Company was granted certain other rights, pursuant to a rights agreement, including rights of inspection, financial information, and participation in future security offerings of GenCanna.

For the year ended December 31, 2018, the Company earned and received interest income of approximately $502,000 on the GC Debentures. In February 2019, the Company converted the GC Debentures plus accrued interest through the conversion date into a 33.5% ownership interest in GenCanna on a fully diluted basis, as disclosed in Note 20 – Subsequent Events.