NOTE 19 – RELATED PARTY TRANSACTIONS

Effective July 1, 2021, the Company entered into employment agreements with its CEO, CFO, and COO, expiring in June 2024, that provide for an annual base salary of $350,000, $325,000, and $300,000, respectively, and the ability to receive annual bonuses of up to 75% of the executive’s annual base salary for each year during the term, based on reaching certain performance goals established by the Company.

Pursuant to the agreements, the CEO, CFO, and COO were granted (i) on the effective date, options to purchase up to 5,000,000, 5,000,000, and 1,250,000 shares, respectively, of the Company’s common stock, at an exercise price of $0.88 per share, that vest over one year and expire in July 2026, and (ii) in October 2021, options to purchase up to 5,000,000, 5,000,000, and 1,250,000 shares, respectively, of the Company’s common stock, at an exercise price of $0.90 per share, that vest over one year and expire in September 2026.

Additionally, the agreements (i) provide these officers with additional grants on each anniversary of the effective date of the agreements in the sole discretion of the Company’s Compensation Committee, and contain covenants not to compete, non-solicitation provisions, and termination obligations, among other terms and conditions.

In July 2021, the Company granted five-year options to purchase up to 100,000 shares of common stock to each of the Company’s three independent board members at an exercise price of $0.88 per share.

In April 2020, the Company issued options to purchase up to 50,000 shares of common stock to its COO, with an exercise price of $0.30 per share and expiring three years from grant date. The fair value of these options of approximately $6,000 was charged to compensation expense over the annual vesting period. No options were issued to related parties in 2021.

In 2020, options to purchase an aggregate of 550,000 shares of common stock were exercised by the Company’s CEO, CFO, and an independent board member at exercise prices of $0.13 and $0.14 per share. No options were exercised by related parties in 2021.

The Company’s corporate offices are leased from an entity in which the Company’s CFO has an investment interest. This lease expires in October 2028 and contains a five-year extension option. In each of the nine-month periods ended September 30, 2021 and 2020, expenses incurred under this lease approximated $117,000.

The Company procures nutrients, lab equipment, cultivation supplies, furniture, and tools from an entity owned by the family of the Company’s COO. The aggregate purchases from this entity in the nine months ended September 30, 2021 and 2020 approximated $3.8 million and $1.8 million, respectively.

The Company pays royalties on the revenue generated from its Betty’s Eddies® product line to an entity owned by the Company’s COO and its SVP of Sales under a royalty agreement. This agreement was amended effective January 1, 2021 whereby, among other modifications, the royalty percentage changed from 2.5% on all sales of Betty’s Eddies® products to (i) 3.0% and 10.0% of wholesale sales of existing products within the product line if sold directly by the Company, or licensed by the Company for sale by third-parties, respectively, and (ii) 0.5% and 1.0% of wholesale sales of future developed products within the product line if sold directly by the Company, or licensed by the Company for sale by third-parties, respectively. The aggregate royalties due to this entity in the nine months ended September 30, 2021 and 2020 approximated $210,000 and $275,000, respectively.

In the nine months ended September 30, 2021 and 2020, one of the Company’s majority owned subsidiaries paid aggregate distributions of approximately $34,000 and $40,000, respectively, to the Company’s CEO and CFO, who own minority equity interests in such subsidiary. In the nine months ended September 30, 2021, another of the Company’s majority owned subsidiaries paid distributions of approximately $4,000 to a current employee who owns a minority equity interest in such subsidiary.

In the nine months ended September 30, 2021 and 2020, the Company purchased fixed assets and consulting services of approximately $723,000 and $455,000, respectively, in the aggregate from two entities owned by two of the Company’s general managers.

In the nine months ended September 30, 2021 and 2020, the Company purchased fixed assets of approximately $438,000 and $176,000 from an entity owned by an employee.

The balance of Due To Related Parties at December 31, 2020 of approximately $1.2 million was comprised of amounts owed of approximately (i) $460,000 to the Company’s CEO, (ii) $653,000 to entities owned by the Company’s CEO and CFO, and (iii) $45,000 to a stockholder of the Company. All amounts owed were repaid in March 2021.

The Company’s mortgages with Bank of New England, DuQuoin State Bank, and South Porte Bank are personally guaranteed by the Company’s CEO and CFO.