On March 1, 2013, the Company issued a Promissory Note (the “Note”) to Roen Ventures, LLC, a Nevada limited liability company (“Roen Ventures”), in exchange for loans provided and to be provided in the future in an amount of up to $2,000,000, subsequently increased to $6,000,000. As of December 31, 2013, the principal balance of the Note was $6,092,069. On January 27, 2014, the Company converted $6,000,000 of the Note balance into 10,000,000 shares of common stock of the Company pursuant to the terms of the Note, as amended. On January 28, 2014, the Company repaid Roen Ventures accrued interest on the Note in the amount of $187,453 and principal under the Note in the amount of $92,069.

The Company had determined that the conversion feature of the Note was considered a beneficial conversion feature and determined its value on July 25, 2013, the date of the amendment increasing the principal amount of the Note to $6,000,000, to be $800,000. The Company calculated the beneficial conversion feature at its intrinsic value. Accordingly, the beneficial conversion feature was accounted for as a debt discount to the Note and was to be amortized using the effective interest method as interest expense over the remaining life of the Note or upon conversion, if sooner. Upon conversion of the Note, the remaining balance of the debt discount totaling $589,474 was amortized to interest expense in the accompanying condensed consolidated financial statements.

At September 30, 2014 and December 31, 2013, the Company’s accounts receivable totaling $650,785 and $1,430,202, respectively, of which 25% and 100%, respectively, were from subsidiary companies of Medical Marijuana, Inc. (“MJNA”), a stockholder of the Company. For the three and nine months ended September 30, 2014, the Company recognized revenues of $1,859,961 and $7,497,616, respectively, of which approximately 2% and 70%, respectively, related to sales to affiliated companies of MJNA.

On January 10, 2014, MJNA agreed to assume $725,000 of the Company’s accounts receivable from Red Dice Holdings, LLC and write-off $11,496 of such accounts receivable. MJNA paid the Company $125,000 on January 17, 2014 towards this balance. The remaining $600,000 is subject to a Secured Promissory Note (the “Note Receivable”) issued by MJNA to the Company, whereby MJNA will make monthly payments to the Company, including interest at 7% per annum, over a two-year period. This note is secured by shares of common stock of the Company owned indirectly by MJNA through MJNA’s subsidiary, PhytoSPHERE, valued at two times the principal amount of the note based on the five-day average closing price of the Company’s common stock at the time of determination. Such determination shall occur every 60 days, at which time the number of shares pledged shall be increased or decreased, accordingly. At September 30, 2014, $303,032 of the Note Receivable was classified as a current asset and $105,875 of the Note Receivable was classified as a non-current asset.

On June 2, 2014, the Company sold its 24.97% equity investment in KannaLife to PhytoSPHERE in exchange for 500,000 shares of Company common stock held by PhytoSPHERE, an affiliate of KannaLife. Accordingly, the Company recognized a gain on sale of equity investment of $7,899,306 based on the number of shares of Company common stock received at the closing trading price of Company common stock on June 2, 2014 of $16.60 per share.