NOTE
2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the accompanying financial statements for nine months ended September 30, 2019, the Company
had a net loss of $10,878,622 and used cash in operations of $1,884,004. These factors among others may indicate that the Company
will be unable to continue as a going concern for a reasonable period of time.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
The Company's primary source of operating funds
in 2019 has been from funds generated from proceeds from the issuance of convertible and other debt and issuance of stock through
private placements. With the exception of the current quarter, the Company has experienced net losses from operations since inception,
but expects these conditions to improve as its business develops. The Company has stockholders' deficiencies at September 30, 2019
and requires additional financing to fund future operations.
The Company’s
existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources.
There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of
the Company’s liquidity problems discussed in this filing. The accompanying statements do not include any adjustments that
might result, should the Company be unable to continue as a going concern.
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
For annual reporting periods after December
15, 2017, the Financial Accounting Standards Board (“FASB”) made effective ASU 2014-09 “Revenue from Contracts
with Customers,” to supersede previous revenue recognition guidance under current U.S. GAAP. Revenue is now recognized in
accordance with FASB ASC Topic 606, Revenue Recognition. The objective of the guidance is to establish the principles that an entity
shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer. The core principal is to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled
in exchange for those goods or services. Two options were made available for implementation of the standard: the full retrospective
approach or modified retrospective approach. The guidance became effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period, with early adoption permitted. We adopted FASB ASC Topic 606
for our reporting period as of the year ended December 31, 2017, which made our implementation of FASB ASC Topic 606 effective
in the first quarter of 2018. We decided to implement the modified retrospective transition method to implement FASB ASC Topic
606, with no restatement of the comparative periods presented. Using this transition method, we applied the new standards to all
new contracts initiated on/after the effective date. We also decided to apply this method to any incomplete contracts we determine
are subject to FASB ASC Topic 606 prospectively. For the year ended December 31, 2018, and for the quarter ended September 30,
2019, there were no incomplete contracts. As is more fully discussed below, we are of the opinion that none of our contracts for
services or products contain significant financing components that require revenue adjustment under FASB ASC Topic 606.
Identification of Our
Contracts with Our Customers.
Contracts included
in our application of FASB ASC Topic 606, consist completely of sales contracts between us and our customers that create
enforceable rights and obligations. For the year ended December 31, 2018, and for the three and nine months ended September
30, 2019, our sales contracts included the following parties: us, our sales associates and our customers. Our sales contracts
were offered by us and our sales associates to our customers directly through our web site. Our sales contracts, and those
formalized by our sales associates, are represented by an electronic order form, which contains the contractual elements of
offer for sale, acceptance and the provision of consideration consisting of the buyer’s payment, and the concurrent
delivery of our hempSMART™ product. Since our hempSMART™ product sales contracts are consummated upon (i) receipt
of the customer’s acceptance of our offer; (ii) our concurrent receipt of our customers payment; and, (iii) our
delivery of the agreed to hempSMART™ product, all parties are equally committed to fulfilling their respective
obligations under the sales contracts. Further, the sales contracts specifically identify (i) parties; (ii) quantity and type
of hempSMART™ product ordered; (iii) price; and, (iv) subject, and so each respective party’s rights are
identifiable and the payment terms are defined. Since the sales contracts are consummated concurrent with offer, acceptance,
payment and delivery of the hempSMART™ product ordered, we recognize principal revenue and cash flows as the respective
sales contract transactions are completed. Further, because our sales contracts are offered, accepted and consummated
concurrently, our ability to collect revenue is immediate. We receive no payments for agreements that do not qualify as a
contract. If customers agree to multiple sales contracts when they are entered into at or near the same time, our policy is
to combine those contracts if: (i) the sales contracts are negotiated as a single package; (ii) the payment amount of one
sales contract is dependent upon another sales contract; (iii) our performance obligations of delivering
multiple hempSMART™ products can be determined to be part of a single transaction. Since the nature of the entry into
and consummation of our sales contracts occurs concurrently, there are no changes or modifications to the terms of the sales
contracts that would modify the enforceable rights and performance obligations of the parties, and/or materially alter the
timing of our receipt of revenue from our sales contracts.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Identifying the Performance
Obligations in Our Sales Contracts.
In analyzing our sales
contracts, our policy is to identify the distinct performance obligations in a sales contract arrangement. In determining our performance
obligations under our sales contracts, we consider that the terms and conditions of sales are explicitly outlined in our sales
contracts, and are so distinct and identifiable within the context of each sales contract, and so are not integrated with other
goods, or constitute a modification or customization of other goods in our contracts, or are highly dependent or highly integrated
with other goods in our sales contracts. Thus, our performance obligations are singularly related to our promise to provide the
hempSMART™ products upon receipt of payment. We offer an assurance warranty on our hempSMART™ products that allows
a customer to return any hempSMART™ products within thirty days if not satisfied for any reason. Assurance warranties are
not identifiable performance obligations, since they are electable at the whim of the customer for any reason. However, we do account
for returns of purchase prices if made.
Determination of the
Price in Our Sales Contracts.
The transaction prices
in our sales contract is the amount of consideration we expect to be entitled to for transferring promised hempSMART™ products.
The consideration amount is fixed and not variable. The transaction price is allocated to the identified performance obligations
in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled, which
is concurrently upon receipt of payment. There are no future options for a contract when considering and determining the transaction
price. We exclude amounts third parties will eventually collect, such as sales tax, when determining the transaction price. Since
the timing between receiving consideration and transferring goods or services is immediate, our sales contracts do not have significant
financing components, i.e., recognizing revenue at the amount that reflects the cash payment that the customer would have made
at the time the goods or services were transferred to them (cash selling price), rather than significantly before or after the
goods or services are provided.
Allocation of the Transaction
Price of Our Sales Contracts.
Our sales contracts are
not considered multi-element arrangements which require the fulfillment of multiple performance obligations. Rather, our sales
contracts include one performance obligation in each contract. As such, from the outset, we allocate the total consideration to
each performance obligation based on the fixed and determinable standalone selling price, which we believe is an accurate representation
of what the price is in each transaction.
Recognition of Revenue
when the Performance Obligation is Satisfied.
A performance
obligation is satisfied when or as control of the good or service is transferred to the customer. The standard defines
control as “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the
asset.” (ASC 606-10-20). For performance obligations that are fulfilled at a point in time, revenue is recognized at
the fulfillment of the performance obligation. As noted above, our single performance obligation sales contracts are
singularly related to our promises to provide the hempSMART™ products to the customer upon receipt of payment, which
occurs concurrently and when completed, allows us under our revenue recognition policy to realize revenue.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Product Sales
Revenue from product
sales, including delivery fees, is recognized when (i) an order is placed by the customer; (ii) the price is fixed and determinable
when the order is placed; (iii) the customer is required to and concurrently pays for the product upon order; and, (iv) the product
is shipped. The evaluation of our recognition of revenue after the adoption of FASB ASC 606 did not include any judgments or changes
to judgments that affected our reporting of revenues, since our product sales, both pre and post adoption of FASB ASC 606, were
evaluated using the same standards as noted above, reflecting revenue recognition upon order, payment and shipment, which all occurs
concurrently when the order is placed and paid for by the customer, and the product is shipped. Further, given the facts that (i)
our customers exercise discretion in determining the timing of when they place their product order; and, (ii) the price negotiated
in our product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, we
are of the opinion that our product sales do not indicate or involve any significant customer financing that would materially change
the amount of revenue recognized under the sales transaction, or would otherwise contain a significant financing component for
us or the customer under FASB ASC Topic 606.
Consulting Services
We also offer professional
services for financial accounting, bookkeeping or real property management consulting services based on consulting agreements.
As of the date of this filing, we have not entered into any contracts for any financial accounting, bookkeeping and/or real property
management consulting services that have generated reportable revenues as of the years ended 2017 and 2018 or the three and nine
months ended September 30, 2019. We intend and expect these arrangements to be entered into on an hourly fixed fee basis.
For hourly based fixed
fee service contracts, we intend to utilize and rely upon the proportional performance method, which recognizes revenue as services
are performed. Under this method, in order to determine the amount of revenue to be recognized, we will calculate the amount of
completed work in comparison to the total services to be provided under the arrangement or deliverable. We will only recognize
revenues as we incur and charge billable hours. Because our hourly fees for services are fixed and determinable and are only earned
and recognized as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor
or customer based significant financing, that would materially change the amount of revenue we recognize under the contract or
would otherwise contain a significant financing component under FASB ASC Topic 606.
The Company determined that upon adoption of
ASC 606 there were no quantitative adjustments converting from ASC 605 to ASC 606 respecting the timing of our revenue recognition
because product sales revenue is recognized upon customer order, payment and shipment, which occurs concurrently, and our consulting
services offered are fixed and determinable and are only earned and recognized as revenue upon actual performance.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates
include the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative
liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these
estimates.
Cash
The Company
considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily
convertible into cash.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Concentrations
of credit risk
The Company’s
financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s
cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions
is periodically reviewed by senior management.
Accounts
Receivable
Trade
receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus,
trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit
history with customers and their current financial condition.
Allowance
for Doubtful Accounts
Any charges
to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain
the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines
the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts
receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of September
30, 2019, and December 31, 2018, allowance for doubtful accounts was $0, respectively.
Inventories
Inventories are stated at the lower of cost
or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.
Cost of sales
Cost of sales is comprised of cost of product
sold, packaging, and shipping costs.
Stock Based Compensation
The Company measures the cost of services received
in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value
of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting
dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over
the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based
compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such
amounts were paid in cash.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Net
Loss per Common Share, basic and diluted
The Company
computes earnings (loss) per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”).
Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share, if presented, would include the dilution that would occur upon the
exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if
converted” methods as applicable.
The computation
of basic and diluted income (loss) per share as of September 30, 2019 and 2018 excludes potentially dilutive securities when their
inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during
the period.
Potentially
dilutive securities excluded from the computation of basic and diluted net loss per share are as follows (September 30, 2018, figures
adjusted to reflect the 1:60 reverse stock split effective September 3, 2019):
|
|
September 30,
2019
|
|
September 30,
2018
|
Convertible notes payable
|
|
|
52,346,160
|
|
|
|
1,059,202
|
|
Options to purchase common stock
|
|
|
—
|
|
|
|
16,666,667
|
|
Warrants to purchase common stock
|
|
|
3,602,160
|
|
|
|
1,983,712
|
|
Restricted stock units
|
|
|
—
|
|
|
|
166,667
|
|
Total
|
|
|
55,948,320
|
|
|
|
19,876,248
|
|
Property and Equipment
Property
and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are
removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over
their estimated useful lives of 3 to 5 years.
Investments
The
Company follows Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10”) which
requires the accounting for equity security to be measured at fair value with changes in unrealized gains and losses are included
in current period operations. Where an equity security is without a readily determinable fair value, the Company may elect to
estimate its fair value at cost minus impairment plus or minus changes resulting from observable price changes.
As a smaller
reporting company, the company is subject to provisions of Rule 8-03(b)(3) of Regulation S-X which requires the disclosure of
certain financial information for equity investees that constitute 20% of more of the Company’s consolidated net income
(loss). For the three months ended September 30, 2019, income allocations from the Company’s stock purchase agreement in
Natural Plant Extract accounted for under the equity method, exceeded more than 20% of the Company’s consolidated net loss.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Natural Plant Extract of California, Inc.
The standalone unaudited
financial statements of Natural Plant Extract of California, Inc. for the third quarter ended September 30, 2019 and the year ended
December 31, 2018 were as follows:
Natural Plant Extract
("NPE")
|
|
For
the three months ended
|
|
For
the nine months ended
|
|
|
September
30, 2019
|
|
September
30, 2019
|
Revenues
|
|
$
|
11,081
|
|
|
$
|
326,019
|
|
Cost of Sales
|
|
|
60,757
|
|
|
|
407,022
|
|
Gross Margin
|
|
|
(49,676
|
)
|
|
|
(81,003
|
)
|
Expenses
|
|
|
95,870
|
|
|
|
426,984
|
|
Net Loss
|
|
|
(145,546
|
)
|
|
|
(507,987
|
)
|
|
|
|
|
|
|
|
|
|
Equity in net loss
of unconsolidated joint venture reflected in the accompanying Consolidated Statement of Operations
|
|
$
|
(29,109
|
)
|
|
$
|
(101,597
|
)
|
Summarized
Balance Sheet
|
|
September
30, 2019
|
|
December
31, 2018
|
Cash
|
|
$
|
29,961
|
|
|
$
|
1,794
|
|
Total Current Assets
|
|
|
2,983,993
|
|
|
|
—
|
|
Total Fixed assets
|
|
|
56,202
|
|
|
|
98,282
|
|
Notes receivable
and other non-current assets
|
|
|
1,578,229
|
|
|
|
312,004
|
|
TOTAL ASSETS
|
|
|
4,648,385
|
|
|
|
412,080
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
2,657,381
|
|
|
|
616,264
|
|
Equity
|
|
|
1,991,004
|
|
|
|
(204,184
|
)
|
Total Liabilities
and equity
|
|
$
|
4,648,385
|
|
|
$
|
412,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the third Quarter
ended
|
|
|
|
For the Year ended
|
|
|
|
|
September
30, 2019
|
|
|
|
December
31, 2018
|
|
Summarized Income Statement
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
11,081
|
|
|
|
—
|
|
Total
expenses
|
|
|
156,627
|
|
|
$
|
204,184
|
|
Net
Losses
|
|
$
|
(145,546
|
)
|
|
$
|
(204,184
|
|
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
On April 15, 2019, the
Company entered into a material definitive agreement with Natural Plant Extract of California, Inc., a California corporation,
and its wholly owned subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all California
limited liability companies (collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated
in California under the name Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant
to California law legalizing cannabis for recreational and medicinal use.
Pursuant to the material
definitive agreement, the Company agreed to acquire twenty percent (equal to 200,000) of NPE’s authorized shares in exchange
for Registrant’s payment of two million dollars and one million dollars’ worth of common stock, or approximately 1,173,709
shares of the Company’s restricted common stock, after the effects of the reverse stock split effective September 3, 2019.
The shares were issued on July 3, 2019. The Company’s payment obligations are governed by a stock purchase agreement which
required the Company to the following payment schedule:
a. Deposit of $350,000
within 5 days of the execution of the material definitive agreement;
b. Deposit of $250,000
payable within 30 days;
c. Deposit of $400,000
within 60 days;
d. Deposit of $500,000
within 75 days;
e. Deposit of $500,000
within 90 days
The Company made its
initial deposit pursuant to this schedule. However, the Company failed to make the other scheduled payments and is now in default.
As of the date of this filing, the Company and NPE are in negotiations to restructure the payment plan.
Derivative
Financial Instruments
The
Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company
with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that
such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the
Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement
or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between equity and liabilities is required.
The
Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants
with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance
sheet using the applicable classification criteria enumerated under GAAP. The Company determined that certain conversion
and exercise options do not contain fixed settlement provisions. The convertible notes contain a conversion feature and warrants
have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion
demands.
As
such, the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions
as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.
The Company
has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception
date first. Thus, any available shares are allocated first to contracts with the most recent inception dates.
MARIJUANA
COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Fair Value of Financial
Instruments
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of September 30, 2019 and December 31, 2018.
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial
instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash, accounts payables
and short-term notes, as they are short term in nature.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $159,428 and $550,544 for the three and nine
months ended September 30, 2019 and $273,219 and $343,964 for the three and nine months ended September 30, 2018, respectively;
as advertising costs.
Income Taxes
Deferred income tax assets and liabilities
are determined based on the estimated future tax effects of net operating loss and credit carry forwards and temporary differences
between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted
tax rates. The Company records an estimated valuation allowance on its deferred income tax assets if it is not more likely than
not that these deferred income tax assets will be realized.
The Company recognizes a tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a
position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
As of September 30, 2019, and 2018, the Company has not recorded any unrecognized tax benefits.
Segment Information
Accounting Standards Codification subtopic
Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding operating segments
in annual financial statements and requires selected information for those segments to be presented in interim financial reports
issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources
and assess performance. The information disclosed herein materially represents all of the financial information related to the
Company's only material principal operating segment.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
The following table represents the Company’s
hempSMART business, which is its sole operating segment as of September 30, 2019:
hempSMART
|
|
|
|
|
|
|
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
FOR THE THREE AND NINE
MONTHS ENDED
SEPTEMBER 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three months ended September 30,
|
|
For
the Nine months ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
229,371
|
|
|
$
|
90,276
|
|
|
$
|
552,761
|
|
|
$
|
137,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
90,843
|
|
|
|
28,437
|
|
|
|
159,860
|
|
|
|
43,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
138,528
|
|
|
|
61,839
|
|
|
|
382,901
|
|
|
|
94,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
1,696
|
|
|
|
1,524
|
|
|
|
5,087
|
|
|
|
4,442
|
|
Selling
and general expenses
|
|
|
399,662
|
|
|
|
251,786
|
|
|
|
1,611,581
|
|
|
|
617,294
|
|
Total
Expenses
|
|
|
401,358
|
|
|
|
253,310
|
|
|
|
1,616,668
|
|
|
|
621,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Operations
|
|
$
|
(262,830
|
)
|
|
$
|
(191,471
|
)
|
|
$
|
(1,223,767
|
)
|
|
$
|
(527,062
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for
substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842), which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using
either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at
the beginning of the period in which it is adopted.
We adopted this standard
using a modified retrospective approach on January 1, 2019. The modified retrospective approach includes a number of optional practical
expedients relating to the identification and classification of leases that commenced before the adoption date; initial direct
costs for leases that commenced before the adoption date; and, the ability to use hindsight in evaluating lessee options to extend
or terminate a lease or to purchase the underlying asset.
The Company elected
the package of practical expedients permitted under ASC 842 allowing it to account for its existing operating lease that
commenced before the adoption date as an operating lease under the new guidance without reassessing (i) whether the contract
contains a lease; (ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC 842.
The Company negotiated a 2 year extension on its current office lease.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
On July 1, 2019, the
Company entered into an amendment and extension of its one applicable lease for office space until June 30, 2021. The extension
requires the Company to pay monthly rent of $1,308.88 from July 1, 2019 to June 30, 2020; and, $1,348.14 from July 1, 2020 to June
30, 2021. In considering its qualitative disclosure obligations under ASC 842-20-50-3, the Company examined its one lease for office
space that has a fixed monthly rent with no variable lease payments. The lease is for an office space with no right of use assets.
The lease does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants
imposed by the lease for dividends or incurring additional financial obligations by the Company. The Company also elected a short-term
lease exception policy and an accounting policy to not separate non-lease components from lease components for our facility lease,
as we determined our right of use asset to be zero.
Consistent with ASC
842-20-50-4, for the Company's September 30, 2019, quarterly financial statements, the Company calculated its total lease cost
based solely on its monthly rent obligation. The Company had no cash flows arising from its lease, no finance lease cost, short
term lease cost, or variable lease costs. Our office lease does not produce any sublease income, or any net gain or loss recognized
from sale and leaseback transactions. As a result, the Company did not need to segregate amounts between finance and operating
leases for cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing
cash flows; supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets; weighted-average
calculations for the remaining lease term; or the weighted-average discount rate.
The adoption of this guidance resulted in
no significant impact to our results of operations or cash flows.
Subsequent Events
The Company
evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon
the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment
or disclosure in the financial statements, except as disclosed.
NOTE 4 – PROPERTY
AND EQUIPMENT
Property and equipment as
of September 30, 2019 and December 31, 2018 is summarized as follows:
|
|
September
30,
2019
|
|
December
31,
2018
|
Computer
equipment
|
|
$
|
17,809
|
|
|
$
|
15,207
|
|
Furniture
and fixtures
|
|
|
5,140
|
|
|
|
5,140
|
|
Subtotal
|
|
|
22,949
|
|
|
|
20,347
|
|
Less
accumulated depreciation
|
|
|
(12,903
|
)
|
|
|
(7,917
|
)
|
Property and equipment,
net
|
|
$
|
10,046
|
|
|
$
|
12,430
|
|
Property
and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 years. When
retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts
and the net difference less any amount realized from disposition, is reflected in earnings.
Depreciation expense was $1,696 and $5,087 for the three and nine
months ended September 30, 2019; and $1,524 and $4,442 for the three and nine months ended September 30, 2018, respectively.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
NOTE 5 – INVESTMENTS
On March 13, 2017, the Company entered into
a stock purchase agreement to acquire up to 150,000,000 common shares of MoneyTrac Technology, Inc., a corporation organized and
operating under the laws of the state of California, for a total purchase price of $250,000 representing approximately 15% ownership
at the time of the agreement. As of December 31, 2017, the Company had acquired 150,000,000 common shares for $250,000 representing
approximately 15% ownership. In connection with the investment, Donald Steinberg, the Company’s President and Chief Executive
Officer and Director, was appointed as a board member to MoneyTrac.
The Company accounts for its investment in
MoneyTrac Technology, Inc. at estimated market fair value using the market price for the publicly traded shares under the ticker
symbol “GOHE” as listed on OTC Markets as an indicator of fair market value. As of September 30, 2019, and December
31, 2018, the balance of this investment was $120,708 and $810,000 and was classified as a short-term investment.
On July 19, 2019, MoneyTrac completed a 1:100
reverse split of its common stock, which reduced the number of shares beneficially owned by the Company to 1,500,000 shares.
Benihemp
On June 16, 2017, the
Company entered into a Loan Agreement (“Agreement”) with Conveniant Hemp Mart, LLC (“Benihemp”), a limited
liability company formed and operating under the laws of the State of Wyoming. Pursuant to the Agreement, Benihemp executed a promissory
note for a principal loan amount of $50,000, accruing interest at the rate of 4% per annum and payable in one year, subject to
one-time six- month repayment extension. The Agreement also provided that the Company with the option to waive repayment of the
note and pay Benihemp an additional $50,000 payment in exchange for a 25% membership interest in Benihemp’s limited liability
company. As of December 31, 2018, the balance of this investment reported on the balance sheet for the year ended December 31,
2018 was $0.00 as a result of the investment being deemed fully impaired.
Global Hemp Group Joint Ventures
We currently have two
ongoing joint ventures with Global Hemp Group, Inc., a Canadian corporation. Each is a related party transaction in that Global
Hemp Group’s director, Charles Larsen, is a beneficial owner of more than 10% of our common stock, and a former director
of the Company. Further, our President and Chief Executive Officer Donald Steinberg is a shareholder in Global Hemp Group. The
two Global Hemp Group joint ventures are discussed together due to the common ownership of the joint venture partners in each project,
and the fact that both joint ventures share a common purpose of growing, cultivating and performing research and development of
industrial hemp.
Global Hemp Group New Brunswick Joint Venture
On August 31, 2017, the
Company entered into a Joint Venture Agreement (“Agreement”) with Global Hemp Group, Inc., a Canadian corporation (“Global
Hemp Group”). The Company agreed to assist Global Hemp Group in developing commercial hemp production in New Brunswick, Canada.
In the first year of the Agreement, the Company will share the costs of the ongoing hemp trial in New Brunswick; provide its expertise
in developing hemp cultivation going forward; and, be granted a right of first refusal as Global Hemp Group’s primary off-taker
of any raw materials produced from the project. The Company’s joint venture partner, Global Hemp Group, also partnered with
Collège Communautaire du Nouveau Brunswick (CCNB) in Bathurst, New Brunswick, to assist in conducting research with the
hemp trials. The trials are taking place on the Acadian peninsula of New Brunswick, and the initial trials to establish commercial
cultivation pursuant to the Agreement are expected to be completed during 2019. As of September 30, 2019, we have fully impaired our investment in this joint venture.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
Global Hemp Group JV – Scio Oregon
On May
8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation, and TTO Enterprises, Ltd., an Oregon corporation entered
into a Joint Venture Agreement. The purpose of the joint venture is to develop a project to commercialize the cultivation of industrial
hemp on a 109 acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating under the
Oregon corporation Covered Bridges, Ltd. The joint venture is in the development stage. On May 30, 2018, the joint venture purchased
TTO’s 15% interest in the joint venture for $30,000. The Company and Global Hemp Group, Inc. now have an equal 50-50 interest
in the joint venture. The joint venture agreement committed the Company to a cash contribution of $600,000 payable on the following
funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018;
and, $34,775 by January 31, 2019. The Company complied with its payments. The 2018 crop of hemp grown on the joint venture’s
real property consisted of 33 acres of high yielding CBD hemp grown in an orchard style cultivation on the property. The 2018 harvest
consisted of approximately 37,000 high yielding CBD hemp plants producing 24 tons of biomass that produced 48,000 pounds of dried
biomass. The joint venture partners prepared processing samples ranging in size from 100 lbs. to 2,000 lbs. for sample offers to
extraction companies. The biomass is being processed into CBD crude oil with the option to refine it further into isolate, or full
spectrum oil, in order to increase its value on the market. Results from the current extraction test batches were received in May,
2019 and will serve as a basis for the final terms of the sale of the biomass by the Partners. In August of 2019, the JV sold 10,000
lbs. of shucked biomass to an Oregon extraction facility for US$400,000. On October 29, 2019, the partners announced the completion
of the 2019 harvest and subject to drying, shucking, processing and weighing for expected sale the fourth quarter 2019.
Bougainville Ventures, Inc. Joint Venture
On March 16, 2017, we entered into a joint
venture agreement with Bougainville Ventures, Inc., a Canadian corporation. The purpose of the joint venture was for the Company
and Bougainville to jointly engage in the development and promotion of products in the legalized cannabis industry in Washington
State; (ii) utilize Bougainville’s high quality cannabis grow operations in the State of Washington, where it claimed to
have an ownership interest in real property for use within the legalized cannabis industry; (iii) leverage Bougainville’s
agreement with a I502 Tier 3 license holder to grow cannabis on the site; provide technical and management services and resources
including, but not limited to: sales and marketing, agricultural procedures, operations security and monitoring, processing and
delivery, branding, capital resources and financial management; and, (iv) optimize collaborative business opportunities. The Company
and Bougainville agreed to operate through a Washington State Limited Liability Company, and BV-MCOA Management, LLC was organized
in the State of Washington on May 16, 2017.
As our contribution to the joint venture, the
Company committed to raise not less than $1 million dollars to fund joint venture operations based upon a funding schedule. The
Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised
of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.
Bougainville represented that it had an ownership
interest in real property located in Washington State used for growing cannabis, and possessed information primarily related to
the management and control of cannabis grow operations as conducted in Washington State that included research, development and
know how in the cannabis industry. Bougainville also represented that it had an agreement with a I502 Tier 3 license holder in
Washington State to operate on the land. The Company and Bougainville's agreement provided that funding provided by the Company
would go, in part, towards the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan
County, Washington, for joint venture operations.
MARIJUANA
COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
As disclosed on Form 8-K on December 11, 2017,
the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended
the joint venture agreement to reduce the amount of the Company's commitment to $800,000 and also required the Company to issue
Bougainville 250,000 shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended
agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The
amended agreement provided that Bougainville would deed the real property to the joint venture within thirty days of its receipt
of payment.
Thereafter, the Company determined that Bougainville
had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property
that was in breach for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 license holder to grow Marijuana
on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green
Ventures Capital Corp., purchased the land. The land is currently pending the payment of delinquent property taxes that would allow
for the Okanogan County Assessor to sub-divide the property, so that the appropriate portion could be deeded to the joint venture.
Although Bougainville represented it would pay the delinquent taxes, it has not. To date, the property has not been deeded to the
joint venture.
To clarify the respective contributions and
roles of the parties, the Company also offered to enter into good faith negotiations to revise and restate the joint venture agreement
with Bougainville. The Company diligently attempted to communicate with Bougainville in good faith to accomplish a revised and
restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the
Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to
pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint
venture.
On August 10, 2018, the Company advised its
independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information
concerning the audit of Bougainville’s receipt and expenditures of funds contributed by the Company in the joint venture
agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of
the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally,
the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but
not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded
to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property;
and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture
thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit
against Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington
Superior Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract,
fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property
in the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville,
and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on
the real property. The case is currently in litigation. The trial is set for January 26-28, 2021.
In connection with the agreement, the
Company recorded a cash investment of $1,188,500 to the Joint Venture during 2017. This was comprised of 49.5% ownership of
BV-MCOA Management LLC, and was accounted for using the equity method of accounting. The Company recorded an annual
impairment in 2017 of $792,500, reflecting the Company’s percentage of ownership of the net book value of the
investment. During 2018, the Company recorded equity losses of $37,673 and $11,043 for the first and second quarters
respectively, and recorded an annual impairment of $285,986 for the year ended December 31, 2018, at which time the Company
determined the investment to be fully impaired due to Bougainville’s breach of contract, including: (i) its failure to
communicate and cooperate regarding the Company’s audit; (ii) its misrepresentations concerning its ownership interest
in the real property in Okanogan County Washington; (iii) its failure to deed the property to the joint venture within thirty
days of payment pursuant to the amended joint venture agreement; and, (iv) its misrepresentation that it possessed an
agreement with a Tier 3 license holder to operate on the property.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
The Company was able to obtain general loans
from St. George Investments LLC, not specific to any of the company’s joint ventures. Therefore, accordingly, the impairment
of this investment did not create any defaults to the loan agreements and covenants. The loan agreement established the lender’s
option to convert the loans to common shares of the Company.
GateC Joint Venture
On March 17, 2017, the
Company and GateC Research, Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”) whereby
the Company committed to raise up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum commitment
of five hundred thousand dollars ($500,000) within a three (3) month period; and, information establishing brands and systems for
the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies,
including but not limited to its affiliate marketing program, directly tailored to the cannabis industry.
GateC agreed to contribute
its management and control services and systems related to cannabis grow operations in Adelanto County, California, and its permit
to grow marijuana in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto
County, California, and GateC’s permit to grow cannabis did not contain a conditional use permit.
On or about November
28, 2017, GateC and the Registrant orally agreed to suspend the Company’s funding commitment, pending the finalization of
California State regulations governing the growth, cultivation and distribution of cannabis, which were expected to be completed
in 2018.
On March 19, 2018, the
Company and GateC rescinded the Agreement and concurrently released each other from any all any and all losses, claims, debts,
liabilities, demands, obligations, promises, acts, omissions, agreements, costs and expenses, damages, injuries, suits, actions
and causes of action, of whatever kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, that
they may have against each other and their Affiliates, arising out of the Agreement.
The Registrant incurred
no termination penalties as the result of its entry into the Recession and Mutual Release Agreement.
In 2017, the Company
recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year
ended December 31, 2017. Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on
settlement of debt obligation of $1,500,000 during the six months ended June 30, 2018.
Natural Plant Extract (“NPE”)
Pursuant to a material definitive agreement,
the Company agreed to acquire twenty percent of NPE’s authorized shares, totaling 200,000 shares, in exchange for Registrant’s
payment of $2,000,000 (two million dollars) and $1,000,000 worth or approximately 1,173,709 shares of the Company’s restricted
common stock, after the effects of the reverse stock split. As of the date of this filing, the shares have been issued. The Company’s
payment obligations are governed by a stock purchase agreement which required the Company to the following payment schedule:
a. Deposit of $350,000 within
5 days of the execution of the material definitive agreement;
b. Deposit of $250,000 payable
within 30 days;
c. Deposit of $400,000 within
60 days;
d. Deposit of $500,000 within
75 days;
e. Deposit of $500,000 within
90 days.’
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
The Company accounted this transaction as an
investment and a liability - “debt obligation of Joint Venture”. The Company follows Accounting Standards Codification
subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the accounting for equity security to be measured
at fair value with changes in unrealized gains and losses are included in current period operations. Where an equity security is
without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus impairment plus or minus
changes resulting from observable price changes.
The Company made its initial deposit pursuant
to this schedule. However, the Company failed to make the other scheduled payments and is now in default. As of the date of this
filing, the Company and NPE are in negotiations to restructure the payment plan.
The standalone unaudited
financial statements of Natural Plant Extract of California, Inc. for the third quarter ended September 30, 2019 and the year
ended December 31, 2018 were as follows:
Natural Plant Extract ("NPE")
|
|
|
|
|
|
|
|
|
|
Summarized Balance Sheet
|
|
|
September 30, 2019
|
|
|
|
December 31, 2018
|
|
Cash
|
|
$
|
29,961
|
|
|
$
|
1,794
|
|
Total Current Assets
|
|
|
2,983,993
|
|
|
|
—
|
|
Total Fixed assets
|
|
|
56,202
|
|
|
|
98,282
|
|
Notes receivable and other non-current assets
|
|
|
1,578,229
|
|
|
|
312,004
|
|
TOTAL ASSETS
|
|
|
4,648,385
|
|
|
|
412,080
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
2,657,381
|
|
|
|
616,264
|
|
Equity
|
|
|
1,991,004
|
|
|
|
(204,184
|
)
|
Total Liabilities and equity
|
|
$
|
4,648,385
|
|
|
$
|
412,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the third Quarter
ended
|
|
|
|
For the Year ended
|
|
|
|
|
September
30, 2019
|
|
|
|
December
31, 2018
|
|
Summarized Income Statement
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
11,081
|
|
|
|
—
|
|
Total expenses
|
|
|
156,627
|
|
|
$
|
204,184
|
|
Net Losses
|
|
$
|
(145,546
|
)
|
|
$
|
(204,184
|
)
|
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
MARIJUANA
COMPANY OF AMERICA, INC.
|
|
|
|
|
|
|
|
|
|
INVESTMENT
ROLL-FORWARD
|
|
|
|
|
|
|
|
AS
OF SEPTEMBER 30, 2019
|
|
INVESTMENTS
|
|
|
|
|
|
SHORT-TERM
INVESTMENTS
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
Natural
|
|
|
|
TOTAL
|
|
|
|
|
TOTAL
|
|
Hemp
|
|
|
|
|
|
Bougainville
|
|
Gate
C
|
|
Plant
|
|
|
|
Short-Term
|
|
|
|
|
INVESTMENTS
|
|
Group
|
|
Benihemp
|
|
MoneyTrac
|
|
Ventues,
Inc.
|
|
Research
Inc.
|
|
Extract
|
|
Vivabuds
|
|
Investments
|
|
MoneyTrac
|
Beginning
balance @12-31-16
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Investments
made during 2017
|
|
|
3,049,275
|
|
|
|
10,775
|
|
|
|
100,000
|
|
|
|
250,000
|
|
|
|
1,188,500
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-17 equity method Loss
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
06-30-17 equity method Loss
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-17 equity method Loss
|
|
|
(375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
12-31-17 equity method accounting
|
|
|
313,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of Investment in 2017
|
|
|
(2,292,500
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
(792,500
|
)
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
Balances
as of 12/31/17
|
|
|
695,477
|
|
|
|
10,775
|
|
|
|
100,000
|
|
|
|
250,000
|
|
|
|
334,702
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
made during 2018
|
|
|
986,654
|
|
|
|
986,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-18 equity method Loss
|
|
|
(37,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
06-30-18 equity method Loss
|
|
|
(11,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-18 equity method Loss
|
|
|
(10,422
|
)
|
|
|
|
|
|
|
(10,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
12-31-18 equity method Loss
|
|
|
(31,721
|
)
|
|
|
(31,721
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moneytrac
investment reclassified to Short-Term investments
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on trading securities - 2018
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560,000
|
|
|
|
560,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of investment in 2018
|
|
|
(933,195
|
)
|
|
|
(557,631
|
)
|
|
|
(89,578
|
)
|
|
|
|
|
|
|
(285,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Balance
@12-31-18
|
|
$
|
408,077
|
|
|
$
|
408,077
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
810,000
|
|
|
$
|
810,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
made during quarter ended 03-31-19
|
|
|
129,040
|
|
|
|
129,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-19 equity method Loss
|
|
|
(59,541
|
)
|
|
|
(59,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on trading securities - quarter ended 03-31-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135,000
|
)
|
|
$
|
(135,000
|
)
|
Balance
@03-31-19
|
|
$
|
477,576
|
|
|
$
|
477,576
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
675,000
|
|
|
$
|
675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
made during quarter ended 06-30-19
|
|
$
|
3,157,234
|
|
|
$
|
83,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,000,000
|
|
|
$
|
73,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
06-30-19 equity method Income (Loss)
|
|
($
|
171,284
|
)
|
|
($
|
141,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,291
|
)
|
|
$
|
(23,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on trading securities - quarter ended 06-30-19
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,000
|
|
|
$
|
(150,000
|
)
|
Balance
@06-30-19
|
|
$
|
3,463,526
|
|
|
$
|
419,352
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,993,709
|
|
|
$
|
50,465
|
|
|
$
|
525,000
|
|
|
$
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
made during quarter ended 09-30-19
|
|
$
|
186,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-19 equity method Income (Loss)
|
|
$
|
122,863
|
|
|
$
|
262,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(94,987
|
)
|
|
$
|
(44,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of trading securities during quarter ended 09-30-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(41,667
|
)
|
Unrealized
gains on trading securities - quarter ended 09-30-19
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362,625
|
)
|
|
$
|
(362,625
|
)
|
Balance
@09-30-19
|
|
$
|
3,772,652
|
|
|
$
|
682,141
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,898,722
|
|
|
$
|
191,789
|
|
|
$
|
120,708
|
|
|
$
|
120,708
|
|
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
Loan
Payable
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
|
|
|
|
|
|
|
|
General
|
|
|
|
|
TOTAL
|
|
|
|
Hemp
|
|
|
|
|
|
|
|
|
|
|
|
Bougainville
|
|
|
|
Gate
C
|
|
|
|
Plant
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
JV
Debt
|
|
|
|
Group
|
|
|
|
Benihemp
|
|
|
|
MoneyTrac
|
|
|
|
Ventues,
Inc.
|
|
|
|
Research
Inc.
|
|
|
|
Extract
|
|
|
|
Vivabuds
|
|
|
|
Expense
|
|
Beginning
balance @12-31-16
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-17 loan borrowings
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
06-30-17 loan activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-17 loan borrowings
|
|
|
725,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
12-31-17 loan repayments
|
|
|
(330,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
operational expense
|
|
|
172,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,856
|
|
Balances
as of 12/31/17 (a)
|
|
|
2,067,411
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
394,555
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
172,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-18 loan borrowings (payments)
|
|
|
376,472
|
|
|
|
447,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
06-30-18 cancellation of JV debt obligation
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
06-30-18 loan repayments
|
|
|
(101,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-18 loan activity
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
12-31-18 loan borrowings
|
|
|
580,425
|
|
|
|
580,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
@12-31-18 (b)
|
|
$
|
1,422,410
|
|
|
$
|
1,027,855
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-19 loan borrowings
|
|
|
649,575
|
|
|
|
649,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-19 debt conversion to equity
|
|
|
(407,192
|
)
|
|
|
(407,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
@03-31-19 ©
|
|
$
|
1,664,793
|
|
|
$
|
1,270,238
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-19 loan borrowings
|
|
|
3,836,220
|
|
|
$
|
161,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,000,000
|
|
|
$
|
0
|
|
|
$
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
03-31-19 debt conversion to equity
|
|
|
(1,572,971
|
)
|
|
$
|
(161,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(349,650
|
)
|
|
|
|
|
|
$
|
(1,062,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
@06-30-19 (d)
|
|
$
|
3,928,042
|
|
|
$
|
1,270,238
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
$
|
1,650,350
|
|
|
$
|
0
|
|
|
$
|
612,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-19 loan borrowings
|
|
|
582,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
582,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
09-30-19 debt conversion to equity
|
|
|
(187,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(187,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
@09-30-19 (e)
|
|
$
|
4,322,427
|
|
|
$
|
1,270,238
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
$
|
1,650,350
|
|
|
$
|
0
|
|
|
$
|
1,007,284
|
|
|
09-30-19
|
06-30-19
|
03-31-19
|
12-31-18
|
12-31-17
|
This
includes balances for:
|
Note
(e)
|
Note
(d)
|
Note
(c)
|
Note
(b)
|
Note
(a)
|
-
Debt obligation of JV
|
1,633,872
|
1,778,872
|
128,522
|
289,742
|
1,500,000
|
-
Convertible NP, net of discount
|
2,688,555
|
2,149,170
|
1,536,271
|
1,132,668
|
394,555
|
-
Longterm debt
|
0
|
0
|
0
|
0
|
172,856
|
Total
Debt balance
|
4,322,427
|
3,928,042
|
1,664,793
|
1,422,410
|
2,067,411
|
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
Concerning our
investment loans for general operation for the quarter ended September 30, 2019, the Company accounted these transactions as an
investment and a liability - “debt obligation of Joint Venture”. The Company follows Accounting Standards Codification
subtopic 321-10, Investments-Equity Securities (“ASC 321-10”) which requires the accounting for equity security to be measured
at fair value with changes in unrealized gains and losses are included in current period operations. Where an equity security
is without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus impairment plus or
minus changes resulting from observable price changes.
NOTE
6 – NOTES PAYABLE, RELATED PARTY
As
of September 30, 2019, and December 31, 2018, the Company’s officers and directors have provided advances and incurred expenses
on behalf of the Company. The issued notes are unsecured, due on demand and bear 5% interest. At September 30, 2019 and, December
31, 2018 there were an aggregate of $360,418 and $741,456 notes payable due to officers. The notes are at 5% per annum and non-interest
bearing, respectively, and are due on demand.
During the nine months ended September 30, 2019, the Company issued an aggregate
of 2,394,565 shares of its common stock in settlement of outstanding related party notes payable of $1,732,513.
NOTE
7 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable are comprised of the following:
|
|
September
30,
2019
|
|
December
31,
2018
|
Convertible
notes payable-St George-due from September 10, 2018 through January 24, 2020 ($1,246,408 and $967,890 in default)
|
|
$
|
3,232,890
|
|
|
$
|
1,887,889
|
|
Convertible note payable
John Fife-due October 27, 2018
|
|
|
—
|
|
|
|
150,959
|
|
Convertible
notes payable-Power Up Lending-due from July 1, 2020 through September 12, 2020
|
|
|
294,000
|
|
|
|
|
|
Total
|
|
|
3,526,890
|
|
|
|
2,028,848
|
|
Less
debt discounts
|
|
|
(838,335
|
)
|
|
|
(896,180
|
)
|
Net
|
|
|
2,688,555
|
|
|
|
1,132,688
|
|
Less
current portion
|
|
|
(2,688,555
|
)
|
|
|
(1,132,688
|
)
|
Long term portion
|
|
$
|
—
|
|
|
$
|
—
|
|
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
Convertible
notes payable-St George Investments
Effective
November 1, 2017, the Company issued a secured convertible promissory note in aggregate of $601,420 to St George Investments LLC
(“St George”). The promissory note bears interest at 10% compounded daily, was due upon maturity on September 10,
2018 and includes an original issue discount (“OID”) of $59,220. The promissory note was funded on November 11, 2017
for $542,200, net of OID and transaction costs. As of September 30, 2019, the Company owed $417,890 of principal and $38,378 of
accrued interest on this convertible promissory note. As of September 30, 2019, this note was in default, but the lender has not
enforced the default interest rate.
Effective
December 20, 2017, the Company issued a secured convertible promissory note in aggregate of $1,655,000 to St George Investments
LLC (“St George”). The promissory note bears interest at 10% compounded daily, was due upon maturity on October 27,
2018 and includes an original issue discount (“OID”) of $155,000. In addition, the Company agreed to pay $5,000 for
legal, accounting and other transaction costs of the lender. The promissory note was funded in nine tranches of $300,000; $200,000;
$200,000; $400,000; $75,000; $150,000; $85,000; $120,000 and $70,000, resulting in aggregate net proceeds of $1,500,000. The Company
received aggregate net proceeds of $1,200,000 and $300,000 during the years ended December 31, 2018 and 2017, respectively. As
an investment incentive, the Company issued 1,100,000 five-year warrants, exercisable at $2.40 per share, with certain reset provisions.
The
promissory notes are convertible, at any time at the lender’s option, at $2.40 per share. However, in the event the Company’s
market capitalization (as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due
the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as defined. In addition, the
promissory note includes certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents
at an effective price less than the lender conversion price.
The
Company has a right to prepayment of the note, subject to a 20% prepayment premium and is secured by a trust deed of certain assets
of the Company.
On
November 5, 2018, $250,000 of principal and accrued interest was assigned to John Fife as an individual with all the terms and
conditions of the original note issued to St George. On March 21, 2019, $150,959 of principal and $4,963 of accrued interest along
with $160,454 of derivative liabilities valued as of the respective conversion date were converted into 394,460 shares of common
stock.
During
the nine months ended September 30, 2019, $550,000 of principal, $122,694 of accrued interest and $441,394 of derivative liabilities
valued as of the respective conversion dates were converted into 1,710,897 shares of common stock, resulting in a gain on debt
settlement of $21,586. As of September 30, 2019, the Company owed $0 of principal and $0 of accrued interest on this convertible
promissory note. Although this note was in default until it was repaid, the lender did not enforce the default interest rate.
Effective
August 28, 2018, the Company issued a secured convertible promissory note in aggregate of $1,128,518 (includes overfunding of
$23,518) to St George Investments LLC (“St George”). The promissory note bears interest at 10% compounded daily, was
due upon maturity on June 30, 2019 and includes an original issue discount (“OID”) of $100,000. In addition, the Company
agreed to pay $5,000 for legal, accounting and other transaction costs of the lender. During the year ended December 31, 2018,
the Company received aggregate net proceeds of $825,000. During the nine months ended September 30, 2019, an additional $218,518
was funded under this note resulting in net proceeds of $198,518. As an investment incentive, the Company issued 750,000 five-year
warrants, exercisable at $2.40 per share, with certain reset provisions. The aggregate fair value of the issued warrants was $1,588,493.
The face value of the debt was then allocated, on a relative fair value basis, between the debt and the warrants. The portion
allocated to warrants has been added to the debt discount with a resulting increase in additional paid-in capital. As of the
funding date of each tranche of this note, the Company determined the fair value of the embedded derivative associated with the
convertibility of this note. The fair value of the embedded derivative has been added to the debt discount (total debt discount
is limited to the face value of the debt) with any excess of the derivative liability recognized as interest expense. The aggregate
debt discount of $1,114,698 is being amortized to interest expense over the respective term of each tranche.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
The
promissory notes are convertible, at any time at the lender’s option, at $2.40 per share. However, in the event the Company’s
market capitalization (as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due
the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as defined. In addition, the
promissory note includes certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents
at an effective price less than the lender conversion price.
The
Company has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets
of the Company.
During
the nine months ended September 30, 2019, $1,000,859 of principal and $840,299 of derivative liabilities valued as of the respective
conversion dates were converted into 4,475,543 shares of common stock, resulting in a loss on debt settlement of $612,034. As of
September 30, 2019, the Company owed $828,518 of principal and $28,138 of accrued interest on this convertible promissory note.
As of September 30, 2019, this note was in default, but the lender has not enforced the default interest rate.
Effective
January 29, 2019, the Company issued a secured convertible promissory note in aggregate of $2,205,000 to St George Investments
LLC (“St George”). The promissory note bears interest at 10% compounded daily, is due upon maturity on December 5,
2019 and includes an original issue discount (“OID”) of $200,000. In addition, the Company agreed to pay $5,000 for
legal, accounting and other transaction costs of the lender. During the nine months ended September 30, 2019, the promissory note
was funded in eight tranches totaling $1,406,482 resulting in aggregate net proceeds of $1,276,482 under this note. As an investment
incentive, the Company issued 1,500,000 5-year warrants, exercisable at $2.40 per share, with certain reset provisions. The aggregate
fair value of the issued warrants was $999,838. The face value of the debt was then allocated, on a relative fair value basis,
between the debt and the warrants. The portion allocated to warrants has been added to the debt discount with a resulting increase
in additional paid-in capital. As of the funding date of each tranche of this note, the Company determined the fair value of the
embedded derivative associated with the convertibility of this note. The fair value of the embedded derivative has been added
to the debt discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability
recognized as interest expense. The aggregate debt discount of $1,118,606 is being amortized to interest expense over the respective
term of each tranche.
The
promissory notes are convertible, at any time at the lender’s option, at $2.40 per share. However, in the event the Company’s
market capitalization (as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due
the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as defined. In addition, the
promissory note includes certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents
at an effective price less than the lender conversion price.
The
Company has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets
of the Company.
As
of September 30, 2019, the Company owed $1,406,482 of principal and $61,131 of accrued interest on this convertible promissory
note.
Effective
March 25, 2019, the Company issued a secured convertible promissory note in the amount of $580,000 to St George Investments LLC
(“St George”). The promissory note bears interest at 10% compounded daily, is due upon maturity on January 24, 2020
and includes an original issue discount (“OID”) of $75,000. In addition, the Company agreed
to pay $5,000 for legal, accounting and other transaction costs of the lender. During the nine months ended September 30, 2019,
the promissory note was funded in the amount of $580,000 resulting in net proceeds of $500,000 under this note. As an investment
incentive, the Company issued 375,000 five-year warrants, exercisable at $2.40 per share, with certain reset provisions. The aggregate
fair value of the issued warrants was $258,701. The face value of the debt was then allocated, on a relative fair value basis,
between the debt and the warrants. The portion allocated to warrants has been added to the debt discount with a resulting increase
in additional paid-in capital. As of the funding date of this note, the Company determined the fair value of the embedded derivative
associated with the convertibility of this note. The fair value of the embedded derivative has been added to the debt discount
(total debt discount is limited to the face value of the debt) with any excess of the derivative liability recognized as interest
expense. The aggregate debt discount of $483,966 is being amortized to interest expense over the term of the note.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
The
promissory notes are convertible, at any time at the lender’s option, at $2.40 per share. However, in the event the Company’s
market capitalization (as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due
the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as defined. In addition, the
promissory note includes certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents
at an effective price less than the lender conversion price.
The
Company has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets
of the Company.
As
of September 30, 2019, the Company owed $580,000 of principal and $31,089 of accrued interest on this convertible promissory note.
Convertible
notes payable-Power Up Lending
From July 1 through
September 12, 2019, the Company issued four convertible promissory notes in the aggregate principal amount of $294,000 to Power
Up Lending (“Power Up”). The promissory notes bear interest at 10% per annum, are due one year from the respective
issuance date and include an original issuance discount (“OID”) in aggregate of $12,000. Interest shall accrue from
the issuance date, but interest shall not become payable until the notes becomes payable. The notes are convertible at any time
at a conversion rate equal to 61% of the Market Price (defined as the lowest trading price during the 15-trading-day period prior
to the conversion date). Upon the issuance of these convertible notes, the Company determined that the features associated with
the embedded conversion option embedded in the debentures, should be accounted for at fair value, as a derivative liability, as
the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.
As of the funding date of each note, the Company determined the fair value of the embedded
derivative associated with the convertibility of each note. The fair value of the embedded derivative has been added to the debt
discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability recognized
as interest expense. The aggregate debt discount of $294,000 is being amortized to interest expense over the respective terms
of the notes.
The
Company shall have the right to prepay the notes for an amount ranging from 125% - 140% multiplied by the outstanding balance
(all principal and accrued interest) depending on the Prepayment Period (ranging from 1 to 180 days following the issuance date).
The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor,
together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock
outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note.
As
of September 30, 2019, the Company owed an aggregate of $294,000 of principal and $5,104 of accrued interest on these convertible
promissory notes.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
Summary:
The
Company has identified the embedded derivatives related to the aforementioned convertible notes and warrants. These embedded derivatives
included certain conversion and reset features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the note and to adjust to fair value as of each subsequent
reporting date.
At
September 30, 2019, the Company determined the embedded derivatives had an aggregate fair value $5,118,563. The fair values were
determined using the Black-Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 250.87%, (3) weighted average risk-free interest rate ranging from 1.75% - 1.91%, (4) expected life ranging from
0.08 to 0.95 years, (5) estimated fair value of the Company's common stock of $0.155 per share, and (6) conversion prices ranging
from $0.0713 to $0.0791 per share.
For
the three months ended September 30, 2019, the Company recorded a loss on change in fair value of derivative liabilities of $1,668,112
and recorded amortization of debt discounts of $864,385 as a charge to interest expense, respectively. For the nine months ended
September 30, 2019, the Company recorded a loss on change in fair value of derivative liabilities of $2,148,262 and recorded amortization
of debt discounts of $2,172,935 as a charge to interest expense, respectively.
NOTE
8 – DERIVATIVE LIABILITIES
As
described in Note 7, the Company issued convertible notes and warrants that contained conversion features and a reset provisions.
The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as
of the inception date and to fair value as of each subsequent reporting date.
NOTE
9 – STOCKHOLDERS’ DEFICIT
Preferred
stock
The
Company is authorized to issue 50,000,000 shares of $0.001 par value preferred stock as of September 30, 2019 and December 31,
2018. As of September 30, 2019, and December 31, 2018, the Company designated and issued 10,000,000 shares of Class A Preferred
Stock.
Each
share of Class A Preferred Stock is entitled to 100 votes on all matters submitted to a vote to the stockholders of the Company,
does not have conversion, dividend or distribution upon liquidation rights.
On October 28,
2019, Donald Steinberg, Charles Larsen and the Company agreed, in exchange for a mutual release of all claims, to cancel and return
to treasury Messrs. Steinberg and Larsen’s respective 5,000,000 shares of Preferred Class A common stock. The Board of Directors
subsequently issued pro rata, 10 million Class A Preferred shares of common stock to directors Robert Coale, Edward Manolos and
Jesus Quintero.
On July 18, 2019,
the Company designated Class B Preferred shares in the amount of 5,000,000 shares authorized, par value $0.001 per share. As
of September 30, 2019, and December 31, 2018, the Company has 0 shares of Class B Preferred shares issued and outstanding. Holders
of Series B Preferred stock shall have one thousand times that number of votes on all matters submitted to the shareholders that
is equal to the number of shares of common stock, at the record date for the determination of the shareholders entitled to vote
such matters.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
Common
stock
The Company is authorized to issue
5,000,000,000 shares of $0.001 par value common stock as of September 30, 2019 and December 31, 2018. As of September 30,
2019, and December 31, 2018, the Company had 52,029,238 and 42,687,301 shares issued and outstanding, respectively. All
references to our common stock in this filing reflect a 1:60 reverse stock split effective September 3, 2019.
During
the nine months ended September 30, 2019, the Company issued an aggregate of 552,054 shares of its common stock for services rendered
with an estimated fair value of $554,367.
During
the nine months ended September 30, 2019, the Company issued an aggregate of 2,394,565 shares of its common stock, in settlement
of outstanding related party notes payable, for a total aggregate value of $1,732,513.
During
the nine months ended September 30, 2019, the Company issued 5,208,063 shares of its common stock in settlement of convertible
notes payable, accrued interest and embedded derivative liabilities of $4,019,537.
During
the nine months ended September 30, 2019, the company issued 655,556 shares of its common stock in exchange for exercise of warrants
on a cashless basis with an aggregate value of $55,823.
During
the nine months ended September 30, 2019, the Company sold an aggregate of 531,699 shares of its common stock for net proceeds
of $154,054.
Warrants
The
following table summarizes the stock warrant activity for the nine months ended September 30, 2019:
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2018
|
|
|
|
1,847,447
|
|
|
$
|
2.31
|
|
|
|
4.18
|
|
|
$
|
10,297
|
|
|
Granted
|
|
|
|
1,947,222
|
|
|
$
|
2.36
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(192,521
|
)
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2019
|
|
|
|
3,602,148
|
|
|
$
|
2.37
|
|
|
|
3.93
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2019
|
|
|
|
3,602,148
|
|
|
$
|
2.37
|
|
|
|
3.93
|
|
|
$
|
—
|
|
The
aggregate intrinsic value in the preceding tables represents the total pretax intrinsic value, based on options with an exercise
price less than the Company’s stock price of $0.155 as of September 30, 2019, which would have been received by the option
holders had those option holders exercised their options as of that date.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
The following
table presents information related to warrants at September 30, 2019:
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Remaining
Life
In Years
|
|
|
Exercisable
Number
of
Options
|
$.01-1.00
|
|
|
61,111
|
|
|
2.18
|
|
|
61,111
|
$1.01-2.00
|
|
|
41,891
|
|
|
1.86
|
|
|
41,891
|
$2.01-3.00
|
|
|
3,499,146
|
|
|
3.99
|
|
|
3,499,146
|
|
|
|
3,602,148
|
|
|
|
|
|
3,602,148
|
NOTE 10 — FAIR VALUE MEASUREMENT
The
Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”)
on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements
for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability,
such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC
825-10 establishes three levels of inputs that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or
liabilities.
All
items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy
within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to
the fair value measurement.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
Upon
adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial
statements.
The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings
(including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term
maturity.
As
of September 30, 2019, and December 31, 2018, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The
Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in note 7. While
the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in
a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values
using the methods discussed in Note 6 are that of volatility and market price of the underlying common stock of the Company.
As
of September 30, 2019, and December 31, 2018, the Company did not have any derivative instruments that were designated as hedges.
The derivative
liability as of September 30, 2019 and December 31, 2018, in the amount of $5,118,562 and $2,256,631, respectively, have a level
3 classification.
The following
table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the two years ended
September 30, 2019:
|
|
|
Debt Derivative
|
|
|
Balance, December 31, 2018
|
|
$
|
2,256,631
|
|
|
Increase resulting from initial issuances of additional convertible notes payable
|
|
|
1,553,968
|
|
|
Decreases resulting from conversion or payoff of convertible notes payable
|
|
|
(840,299
|
)
|
|
Mark-to-market at September 30, 2019
|
|
|
2,148,262
|
|
|
Balance, September 30, 2019
|
|
$
|
5,118,562
|
|
|
Net change in fair value included in earnings related to derivative liabilities during the nine months ended September 30, 2019
|
|
$
|
2,148,262
|
|
|
Fluctuations
in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period.
During the period ended September 30, 2019, the Company’s stock price decreased significantly
from initial valuations. As the stock price decreases for each of the related derivative instruments, the value to the holder
of the instrument generally decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement
of each of the Company’s derivative instruments.
MARIJUANA COMPANY
OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2019
(unaudited)
NOTE
11 — RELATED PARTY TRANSACTIONS
The
Company’s current officers and stockholders advanced funds to the Company for travel related and working capital purposes.
As of September 30, 2019, and December 31, 2018, there were no related party advances outstanding.
As
of September 30, 2019, and December 31, 2018, accrued compensation due officers and executives included as accrued compensation
was $270,000 and $454,316, respectively.
During
the nine months ended September 30, 2019, the Company issued an aggregate of 75,928,246 shares of its common stock in settlement
of outstanding related party notes payable of $564,279 and accrued compensation of $195,000.
On
August 31, 2017, the Company entered into a joint venture agreement with Global Hemp Group, Inc., a Canadian corporation. The
Company’s Director, Charles Larsen, is the President, Director and shareholder of Global Hemp Group, Inc. The Company’s
Director, President and Chief Executive Officer, Donald Steinberg, is a shareholder of Global Hemp Group, Inc.
On
May 8, 2018, the Company entered into a joint venture agreement with Global Hemp Group, Inc., a Canadian corporation, and TTO
Enterprises, Ltd., an Oregon corporation. The Company’s Director, Charles Larsen, is the President, Director and shareholder
of Global Hemp Group, Inc. The Company’s Director, President and Chief Executive Officer, Donald Steinberg, is a shareholder
of Global Hemp Group, Inc.
The
joint venture will operate and has acquired a 109 acre agricultural property in Scio, Oregon (the “Property”) for
the cultivation of high CBD yielding hemp for the upcoming 2018 growing season. The joint venture acquired the property on May
1, 2018. The total capital commitment for the project will be $1,380,000. The Company’s portion of the capital commitment
is to raise $600,000 based upon the following funding schedule: $200,000 upon execution of this Agreement; $238,780 on or before
July 31, 2018; $126,445 on or before October 31, 2018; and $34,775 on or before January 31, 2019. As of September 30, 2019, the
complete $600,000 has been funded.
NOTE
12 – SUBSEQUENT EVENTS
On October 9, 2019,
the registrant appointed Jesus Quintero as a member of its board of directors. There was no arrangement or understanding between
the registrant and Mr. Quintero and any other person pursuant to which Mr. Quintero was selected as a director. Mr. Quintero is
currently our Principal Financial Officer. The registrant does not expect to name Mr. Quintero to any board committees. The registrant
and Mr. Quintero entered into an amended agreement whereby the registrant agreed to compensate Mr. Quintero by increasing his
monthly salary from $5,000 to $6,500.
On October 28,
2019, Donald Steinberg, Charles Larsen and the Company agreed, in exchange for a mutual release of all claims, to cancel and return
to treasury Messrs. Steinberg and Larsen’s respective 5,000,000 shares of Preferred Class A common stock. The Board of Directors
subsequently issued pro rata, 10 million Class A Preferred shares of common stock to directors Robert Coale, Edward Manolos and
Jesus Quintero.
On November
10, 2019, Natural Plant Extract of California (NPE) notified the Company, pursuant to the stock purchase agreement associated
with the Company’s acquisition of a 20% in NPE, that an additional issuance of 3,371,746 shares of Company common stock
was required. The Company agreed in the stock purchase agreement to issue NPE additional shares of common stock, if the aggregate
value of the shares issued to NPE on April 15, 2019 was less than the closing price of the Company’s common stock on October
15, 2019, as reported on OTC Markets. The Company have not issued the true up shares as of the date of this filing.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking
statements that reflect Management’s current views with respect to future events and financial performance. You can identify
these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,”
“believe,” “estimate” and “continue,” or similar words. Those statements include statements
regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which
such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by
such forward-looking statements.
Readers
are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with
the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially
from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that
our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made
that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors
that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing
for materials, and competition.
Business
Overview
Plan
of Operations – Marijuana Company of America and subsidiaries is a publicly listed company quoted on the OTCQB tier
Exchange under the symbol “MCOA”. We are based in Escondido, California. Our business plan and operation focuses in
part on the development, manufacturing, marketing and sale of non-psychoactive industrial hemp, and hemp-derived consumer products
containing CBD. Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial
uses of hemp and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and
harvesting of different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and
soil; (5) different industrial hemp derived CBD, and the possible health benefits thereof; (6) new and improved methods of hemp
CBD extraction omitting or eliminating the delta-9 tetrahydrocannabinol “THC” molecule; and, (7) through its joint
venture with Natural Plant Extract of California, a premium cannabis delivery service under the name “Viva Buds” which
will initially deliver cannabis to the San Fernando Valley, located in Los Angeles, California. Although legal under California
State law, cannabis remains an illegal Schedule 1 drug under the federal Controlled Substances Act, which views cannabis as a
highly addictive drug with no medical value. In the event the U.S. federal government were to enforce the Controlled Substances
Act regarding cannabis, the Company’s Viva Buds operations discussed below would be materially impacted (See Government
Regulation of Cannabis on page 47 and Risk Factors in Section 1A).
hempSMART,™
Inc.
The
Company operates two distinct and separate business divisions related to its two wholly owned subsidiaries, H Smart, Inc. and
MCOA CA, Inc.
Through
our wholly owned subsidiary H Smart, Inc., we develop consumer products that include industrial hemp derived, non-psychoactive
CBD as an ingredient, under the brand name “hempSMART™.
Our industrial hemp-based products are specifically developed with an enriched CBD molecular composition with a THC concentration
of three-tenths of one percent or less by dry weight. We market and sell our hempSMART™
products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use
a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts
for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates, and calculates and accounts
for loyalty and rewards benefits for returning customers. We also retained a full-service marketing company that uses a multi-channel
transactional marketing campaign focused on digital advertising, infographics, content marketing, customer incentives and acquisition,
a broad social media presence, as well as search engine marketing and optimization that includes comprehensive research and analytics
and order fulfillment in order to boost direct sales.
Viva
Buds
On April 15, 2019,
the Company entered into a material definitive agreement with Natural Plant Extract of California, Inc., a California corporation,
and its wholly owned subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all California
limited liability companies (collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated
in California under the name Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant
to California law legalizing cannabis for recreational and medicinal use.
Although
legal under California State law, cannabis remains an illegal Schedule 1 drug under the federal Controlled Substances Act, which
views cannabis as a highly addictive drug with no medical value. In the event the U.S. federal government were to enforce the Controlled
Substances Act regarding cannabis, the Company’s Viva Buds operations discussed below would be materially impacted (See Government
Regulation of Cannabis on page 47 and Risk Factors in Section 1A).
On August 8, 2019,
the Company announced its launch of Viva Buds, its premium cannabis delivery service, which will initially deliver cannabis to
the San Fernando Valley, located in Los Angeles, California.
Our
business also includes making selected investments in other related new businesses. Currently, we have made investments in startup
ventures, including:
Conveniant
Hemp Mart, LLC; Conveniant Hemp Mart, LLC is a Wyoming limited liability company whose business plan includes the development,
manufacture and sale of consumer products containing CBD that are intended for marketing and sales at convenience stores, gas
stations and markets. On July 19, 2017, we agreed to lend fifty thousand dollars ($50,000) to Conveniant based on a promissory
note. The note provided that in lieu of receiving repayment, we could elect to exercise a right to convert the loaned amount into
a payment towards the purchase of a 25% interest in Conveniant, subject to our payment of an additional fifty thousand dollars
$50,000 equaling a total purchase price of $100,000. The Company exercised this option on November 20, 2017 and made payment to
Conveniant on November 21, 2017. On May 1, 2019, the Company and Conveniant agreed to cancel the Company’s 25% interest
in Conveniant. Conveniant issued to the Company a credit memo equal to the Company’s $100,000 investment, The Company determined
that as of September 30, 2019, approximately $41,000 of this credit was impaired.
MoneyTrac
Technology, Inc.; MoneyTrac Technology, Inc. is a developer of an integrated and streamlined electronic payment processing
system containing E-Wallet and mobile applications, that allows for the management and processing of prepaid cards, debit cards,
and credit card payments. We entered into a stock purchase agreement with MoneyTrac on March 13, 2017 to purchase a 15% equity
position in MoneyTrac. On July 27, 2017 we completed tender of the purchase price of $250,000. MoneyTrac’s business and
banking software solutions offer firms the ability to deposit funds directly into a “MoneyTrac Merchant Wallet,” created
and controlled by the firm, from which the firm can manage and provide inventory management, payroll processing, and audit tracking;
and, the creation of “Customer Wallets,” by anyone who wants to engage in cashless transactions, by loading money
into their “MoneyTrac Customer Wallet” from a bank account or through a MoneyTrac kiosk, which also accepts debit
and credit card transactions. MoneyTrac’s kiosks are marketed to businesses that wish to offer cashless transactions to
its customers, who can choose to either have funds loaded directly into their “Customer Wallet” or onto a pre-paid
debit card. MoneyTrac’s system provides for a secure, managed and auditable record of cashless transactions that is designed
to be marketed to firms who want an alternative payment and management method for transacting business, including those firms
in the legalized cannabis business in those states where cannabis has been legalized for recreational and/or medicinal use.
Global
Hemp Group, Inc. Joint Venture/New Brunswick Hemp Project; On September 5, 2017, we announced our agreement to participate
in a joint venture with Global Hemp Group Inc., a Canadian corporation, in a multi-phase industrial hemp project on the Acadian
peninsula of New Brunswick, Canada. The joint venture’s goal is to develop a “Hemp Agro-Industrial Zone”, a
concept that promotes and engages farmers, processors and manufacturers to collaboratively produce and process 100% of the hemp
plant into a number of wholesale materials that can be manufactured into healthy and sustainable products. The “HAIZ”
will be surrounded by hemp production thereby minimizing the cost of expensive transportation to distant processing facilities.
The “Hemp Agro-Industrial Zone” has a goal of producing social and environmental benefits to the communities where
they operate. These zones are envisioned to prospectively create jobs for farmers, foster rural development, provide the opportunity
to develop more sustainable products of superior quality and help support Global Hemp Group’s commitment to creating a carbon
free economy. The first phase of the project involved lab testing in 2017 in support of the trials. The objective of phase one
was to re-introduce hemp into the area and ensure that it could be productive under New Brunswick growing conditions prior to
significantly increasing cultivation acreage and building a hemp processing facility in the region, in future phases of the project.
The Collège Communautaire du Nouveau Brunswick (CCNB) in Bathurst, New Brunswick (“CCNB”) assisted Global Hemp
Group in research on its ongoing industrial hemp trials in the region, and to perform laboratory tests in support of the trials.
These tests provided information validating agronomic and key yield data in preparation of a large scale industrial development
project involving the processing of the full plant: grain, straw, flowers and leaves, that began
on a 125 acre parcel in 2018. The Company’s 2017 participation included providing one-half, or $10,775 of the funding for
the phase one work. On June 15, 2018, the Company entered into a Joint Venture Agreement with Global Hemp Group, Inc. Aside from
assisting Global Hemp Group in developing and cultivating commercial hemp production in New Brunswick, the Company was granted
a right of first refusal as Global Hemp Group’s primary off-taker of any raw materials produced from the project, and the
Company will share in the ownership of research and development of hemp and CBD related studies produced by the New Brunswick
Project. In the event Canadian laws governing the growing, harvesting, manufacturing and production of products containing hemp
and CBD change (as expected, but not guaranteed) in 2018, the Company would benefit from possible preferred pricing and terms
for the purchase of hemp and CBD that would enable us to further conduct its business and research and development into hemp and
CBD products. As noted, the joint venture began commercial cultivation activities in 2018. The joint venture agreement required
the Company to make an initial payment of $115,000 on June 15, 2018. The Company made this payment.
Global
Hemp Group Joint Venture/Scio Oregon Hemp Project; On May 8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation,
and TTO Enterprises, Ltd., an Oregon corporation entered into a Joint Venture Agreement. The purpose of the joint venture is to
develop a project to commercialize the cultivation of industrial hemp on a 109 acre parcel of real property owned by the Company
and Global Hemp Group in Scio, Oregon, and operating under the Oregon corporation Covered Bridges, Ltd. The joint venture is in
the development stage. On May 30, 2018, the joint venture purchased TTO’s 15% interest in the joint venture for $30,000.
The Company and Global Hemp Group, Inc. now have an equal 50-50 interest in the joint venture. The joint venture agreement commits
the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint
venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company has
complied with its payments on schedule.
Natural Plant
Extract (“NPE”)
Pursuant to a material definitive agreement,
the Company agreed to acquire twenty percent of NPE’s authorized shares, totaling 200,000 shares, in exchange for Registrant’s
payment of $2,000,000 (two million dollars) and $1,000,000 worth or approximately 1,173,709 shares of the Company’s restricted
common stock, after the effects of the reverse stock split. The shares were issued on July 3, 2019. The Company’s payment
obligations are governed by a stock purchase agreement which required the Company to the following payment schedule:
a.
Deposit of $350,000 within 5 days of the execution of the material definitive agreement;
b.
Deposit of $250,000 payable within 30 days;
c.
Deposit of $400,000 within 60 days;
d.
Deposit of $500,000 within 75 days;
e.
Deposit of $500,000 within 90 days.’
The Company accounted
this transaction as an investment and a liability - “debt obligation of Joint Venture”. The Company follows Accounting
Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the accounting for equity
security to be measured at fair value with changes in unrealized gains and losses are included in current period operations. Where
an equity security is without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus
impairment plus or minus changes resulting from observable price changes.
The Company made its initial deposit
pursuant to this schedule. However, the Company failed to make the other scheduled payments and is now in default. As of the date
of this filing, the Company and NPE are in negotiations to restructure the payment plan.
VivaBuds:
On August 8, 2019, the Company announced its launch of VivaBuds, its premium cannabis delivery service, which will initially
deliver cannabis to the San Fernando Valley, located in Los Angeles, California. As previously disclosed on Form 8-K on April
17, 2019, the Company entered into a material definitive agreement with Natural Plant Extract of California, Inc., a California
corporation, and its wholly owned subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all
California limited liability companies (collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated
in California under the name Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant
to California law legalizing cannabis for recreational and medicinal use.
Pursuant to the material definitive agreement,
the Company agreed to acquire twenty percent of NPE’s authorized shares, totaling 200,000 shares, in exchange for Registrant’s
payment of $2,000,000 (two million dollars) and $1,000,000 worth or approximately 1,173,709 shares of the Company’s restricted
common stock, after the effects of the reverse stock split. The shares were issued on July 3, 2019. The Company’s payment
obligations are governed by a stock purchase agreement which required the Company to the following payment schedule:
a.
Deposit of $350,000 within 5 days of the execution of the material definitive agreement;
b.
Deposit of $250,000 payable within 30 days;
c.
Deposit of $400,000 within 60 days;
d.
Deposit of $500,000 within 75 days;
e.
Deposit of $500,000 within 90 days.’
The
Company accounted this transaction as an investment and a liability - “debt obligation of Joint Venture”. The Company
follows Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the
accounting for equity security to be measured at fair value with changes in unrealized gains and losses are included in current
period operations. Where an equity security is without a readily determinable fair value, the Company may elect to estimate its
fair value at cost minus impairment plus or minus changes resulting from observable price changes.
The
Company made its initial deposit pursuant to this schedule. However, the Company failed to make the other scheduled payments and
is now in default. As of the date of this filing, the Company and NPE are in negotiations to restructure the payment plan.
Results
of Operations
We
anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, such as the progress
of our hempSMART™ product sales and research and development
efforts. Due to these uncertainties, accurate predictions of future operations are difficult or impossible to make.
Three
Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
Results
of Operations - The Company generated revenue of $229,371 and $90,276 for the three months ended September 30, 2019 and 2018,
respectively. This increase is due to the Company’s initial deployment of its hempSMART marketing and sales efforts. Since
the Company’s sales efforts were launched approximately one year ago, no currently known or previous matters are expected
to have a material impact on current or future operations, with the exception of the Company’s need for additional funding
(See Note 2 to the Financial Statements). For the three months ended September 30, 2019, the Company had a net loss of $6,226,621
as compared to net income of $2,144,126 for the three months ended September 30, 2018. This change is due primarily to the company
experiencing a loss on changes in fair value of derivative liabilities of $1,668,112 as compared to a gain of $3,072,345 for 2018.
Also, the company had income on equity investment for the three months ended September 30, 2019 of $122,864 as compared to a loss
of $107,982 for 2018.
Revenues/Cost
of sales
Total
Revenues - Total revenues were $229,371 for the three months ended September 30, 2019 as compared to $90,276 for the three ended
September 30, 2018. The reported revenues for each period reflect the Company’s initial steps towards marketing and selling
its hempSMART™ products. Management plans to expand its marketing and selling efforts in 2019 and expects revenues to increase
in the coming months.
|
|
For
the Three months
|
|
|
|
|
ended
September 30,
|
|
|
Sales
Product
|
|
2019
|
|
2018
|
|
|
Body
Lotion
|
|
$
|
7,299
|
|
|
|
—
|
|
|
New
product in 2019
|
Brain
Capsules
|
|
|
20,569
|
|
|
$
|
16,657
|
|
|
Due
to growth and new UK business
|
Comfort
Cream
|
|
|
12,678
|
|
|
|
—
|
|
|
New
product in 2019
|
Drops
|
|
|
92,236
|
|
|
|
51,078
|
|
|
Due
to growth and new UK business
|
Face
Moisturizer
|
|
|
8,848
|
|
|
|
4,164
|
|
|
Due
to growth and new UK business
|
Leaflets
and Accessories
|
|
|
20,106
|
|
|
|
—
|
|
|
New
product in 2019
|
Membership
Fees
|
|
|
4,649
|
|
|
|
—
|
|
|
Due
to sales growth
|
Pain
Capsules
|
|
|
9,840
|
|
|
|
—
|
|
|
New
product in 2019
|
Pain
Cream
|
|
|
30,665
|
|
|
|
18,377
|
|
|
Due
to growth and new UK business
|
Pet
Drops
|
|
|
22,481
|
|
|
|
—
|
|
|
New
product in 2019
|
TOTALS
|
|
$
|
229,371
|
|
|
$
|
90,276
|
|
|
|
Costs
and Expenses - Costs of sales, include the costs of product development, manufacturing, testing, packaging, storage and sale.
For the three months ended September 30, 2019, costs of sales were $90,843 as compared to $28,437 for the three months ended September
30, 2018. The reported costs of sales for each period reflect the Company’s initial steps towards marketing and selling
its hempSMART™ products.
General
and administrative expenses
Other
general and administrative expenses increased to $761,454 for the three months ended September 30, 2019 compared to $728,254 the
three months ended September 30, 2018. General and administrative expenses include selling and marketing, research and development,
building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase is attributed primarily
to increase increases in service providers and other operating costs in the current period. Below is a variance analysis of expenses
for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018:
For the 3 months ended
September 30,
|
|
|
EXPENSE
|
|
2019
|
|
2018
|
|
Variance
|
|
Explanation
|
Board of Director fees
|
|
$
|
14,000
|
|
|
$
|
4,000
|
|
|
$
|
10,000
|
|
|
Increase in Directors in Q3 2019 vs Q3 2018
|
Travel Expenses
|
|
|
21,639
|
|
|
|
874
|
|
|
|
20,765
|
|
|
Increase in travel expenses due to increase in HempSMART sales
|
Investor Relations
|
|
|
9,098
|
|
|
|
83,435
|
|
|
|
(74,337
|
)
|
|
Company terminated several Investor Media contracts in Q3 2019 vs Q3 2018
|
Consulting fees
|
|
|
81,260
|
|
|
|
137,356
|
|
|
|
(56,097
|
)
|
|
Reduction in contractual commitments to help reduce company expenses during Q3 2019 vs Q3
2018
|
Accounting fees
|
|
|
28,328
|
|
|
|
12,507
|
|
|
|
15,821
|
|
|
New CFO hired during Q3 2018 and other accounting services incurred during Q3 2019
|
Officers Compensation
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
0
|
|
|
|
Filing Agent fees (Edgar)
|
|
|
6,437
|
|
|
|
2,137
|
|
|
|
4,300
|
|
|
Due to additional services related to SEC filings in Q3 2019 for 8ks and multiple amendment
filings
|
UK Contract Compensation
|
|
|
67,706
|
|
|
|
13,071
|
|
|
|
54,635
|
|
|
New Hempsmart UK Sales Manager hired late in 2018
|
Admin Compensation
|
|
|
92,523
|
|
|
|
124,686
|
|
|
|
(32,164
|
)
|
|
Reduction in staff during Q3 2019 vs Q3 2018 for Logistics, Sales and administrative.
|
Audit Fees
|
|
|
11,500
|
|
|
|
5,500
|
|
|
|
6,000
|
|
|
Increase due to company growth in documentation and accounting and SEC reporting activities
|
Commissions expense
|
|
|
73,892
|
|
|
|
15,064
|
|
|
|
58,829
|
|
|
Commissions paid based on sales volume at Q3 2019 vs Q3 2018
|
Marketing expense
|
|
|
137,024
|
|
|
|
104,971
|
|
|
|
32,053
|
|
|
Increase in product and marketing events during Q3 2019 vs Q3 2018 related to sales growth
|
Stock based compensation
|
|
|
0
|
|
|
|
106,850
|
|
|
|
(106,850
|
)
|
|
Decrease due to cancellation of stock options in 2019
|
Import duties and taxes
|
|
|
5,165
|
|
|
|
0
|
|
|
|
5,165
|
|
|
Expenses incurred during Q3 2019 for new UK business which begain in 2019
|
Legal fees
|
|
|
51,800
|
|
|
|
2,579
|
|
|
|
49,221
|
|
|
Increase in Q3 2019 due to additional legal work for SEC inquiries, new patents
and costs related to Bougeanville lawsuit
|
Bank wire transfer fees expense
|
|
|
21,454.12
|
|
|
|
5,317
|
|
|
|
16,137
|
|
|
Wire transfer costs incurred to send monies to Hempsmart UK operations
|
Others, net
|
|
|
49,628
|
|
|
|
19,907
|
|
|
|
29,721
|
|
|
|
TOTALS
|
|
$
|
761,454
|
|
|
$
|
728,254
|
|
|
$
|
33,200
|
|
|
|
(Loss)
Gain on change in fair value of derivative liabilities
During
2019 and 2018, we issued convertible promissory notes and warrants with an embedded derivative, all requiring us to fair value
the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations. This resulted
in a loss of $1,668,112 and a gain of $3,072,345 change in fair value of derivative liabilities for the three months ended September
30, 2019 and 2018, respectively.
Legal
Contingency Expense
On
June 25, 2018, DTTO Funding filed a complaint against the Company for breach of contract related to the Company’s April
20, 2017 convertible promissory note in which DTTO lent the Company $111,111. Principal and interest in the note were, at the
election of DTTO, convertible into common shares of the Company. On November 30, 2017, DTTO
notified the Company of an election to convert a portion of the note to common shares, but the Company failed to process the conversion.
The Company failed to repay principal and interest otherwise due on the maturity date of April 20, 2018. DTTO’s action seeks
damages against the Company including principal, default interest, liquidated damages, attorney fees and costs in an amount with
an alleged present cash value of $1,787,981.10. On September 6, 2018 the company issued, pursuant to a court approved and ordered
settlement, 57,676,810 common stock shares in settlement of the litigation with prejudice for at a total value of $1,701,466 and
thus eliminating the contingent liability. Pursuant to the stipulation and court order the Company agreed to issue to DTTO additional
shares of common stock if, one year following the September 6, 2018 issuance date, the value of the shares issued in settlement
decreased from the value on the issuance date. The Company received notice from DTTO and demand for the additional issuance on
September 6, 2019, and issued DTTO 2,082,398 shares of common stock.
Interest
Expense
Interest
expense during the three months ended September 30, 2019 was $1,559,720 compared to $1,422,231 for the three months ended September
30, 2018. Interest expense primarily consists of interest incurred on our convertible and other debt. The debt discounts amortization
incurred during the three months ended September 30, 2019 and 2018 was $864,386 and $608,642, respectively. In addition, we incurred
non-cash interest of $1,886,837 and $2,827,419 in connection with convertible notes in 2019 and 2018 respectively.
Nine
Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Results
of Operations - The Company generated revenue of $552,761 and $137,721 for the nine months ended September 30, 2019 and 2018,
respectively. This increase is due to the Company’s initial deployment of its hempSMART marketing and sales efforts. Since
the Company’s sales efforts were launched approximately one year ago, no currently known or previous matters are expected
to have a material impact on current or future operations, with the exception of the Company’s need for additional funding
(See Note 2 to the Financial Statements). For the nine months ended September 30, 2019, the Company had a net loss of $10,878,622
compared to a net loss of $1,350,480 for the nine months ended September 30, 2018. This change is due primarily to the Company’s
changes in our derivative and warrant liabilities and non-cash interest related to our convertible debt.
Revenues/Cost
of sales
Total
Revenues - Total revenues were $552,761 for the nine months ended September 30, 2019 as compared to $137,721 for the
nine months ended September 30, 2018. The reported revenues for each period reflect the Company’s initial steps towards
marketing and selling its hempSMART™ products. Management plans to expand its marketing and selling efforts in 2019 and
expects revenues to increase in the coming months.
The following table identifies our product
offerings and the revenues related to these products for the nine months ended September 30, 2019 and 2018, respectively:
|
|
For the Nine months
|
|
|
|
|
ended
September 30,
|
|
|
Sales Product
|
|
2019
|
|
2018
|
|
|
Body Lotion
|
|
$
|
7,294
|
|
|
|
|
|
|
New product in 2019
|
Brain Capsules
|
|
|
55,564
|
|
|
$
|
16,005
|
|
|
Due to growth and new UK business
|
Comfort Cream
|
|
|
22,394
|
|
|
|
|
|
|
New product in 2019
|
Drops
|
|
|
207,744
|
|
|
|
58,224
|
|
|
Due to growth and new UK business
|
Face Moisturizer
|
|
|
29,486
|
|
|
|
7,450
|
|
|
Due to growth and new UK business
|
Leaflets and Accessories
|
|
|
37,278
|
|
|
|
|
|
|
Due to growth and new UK business
|
Membership Fees
|
|
|
15,410
|
|
|
|
|
|
|
Due to growth and new UK business
|
Pain Capsules
|
|
|
37,612
|
|
|
|
11,866
|
|
|
Due to growth and new UK business
|
Pain Cream
|
|
|
91,924
|
|
|
|
30,241
|
|
|
Due to growth and new UK business
|
Pet Drops
|
|
|
48,055
|
|
|
|
13,935
|
|
|
Due to growth and new UK business
|
TOTALS
|
|
$
|
552,761
|
|
|
$
|
137,721
|
|
|
|
Costs
and Expenses - Costs of sales, include the costs of product development, manufacturing, testing, packaging, storage and sale.
For the nine months ended September 30, 2019, costs of sales were $159,860 as compared to $43,047 for the nine months ended September
30, 2018. The reported costs of sales for each period reflect the Company’s initial steps towards marketing and selling
its hempSMART™ products.
General
and administrative expenses
Selling,
general and administrative expenses increased to $3,226,210 for the nine months ended September 30, 2019 compared to $1,891,619
for the nine months ended September 30, 2018. General and administrative expenses include selling and marketing, research and
development, building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase of $1,334,591
is attributed is attributed primarily to the growth in sales of its hempSMART™ products on a global basis. Below is a variance
analysis of expenses for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018:
For the 9 months ended September
30,
|
|
|
EXPENSE
|
|
2019
|
|
2018
|
|
Variance
|
|
Explanation
|
Board of Director fees
|
|
$
|
32,000
|
|
|
$
|
4,000
|
|
|
$
|
28,000
|
|
|
Increase in Board of Director members in 2019 vs 2018
|
Travel Expenses
|
|
|
80,486
|
|
|
|
16,936
|
|
|
|
63,550
|
|
|
Increase in travel expenses for 9 months 2019 vs 9 months 2018
|
Investor Relations
|
|
|
96,924
|
|
|
|
216,205
|
|
|
|
(119,281
|
)
|
|
Company terminated several Investor Media contracts in Q3 2019 vs Q3 2018
|
Consulting fees
|
|
|
654,902
|
|
|
|
379,576
|
|
|
|
275,326
|
|
|
Increase in fees for funding services, Advisory services, product development
services and Medical advisory services related to Sales growth 9 months 2019 vs 2018
|
Accounting fees
|
|
|
63,035
|
|
|
|
2,967
|
|
|
|
60,068
|
|
|
New CFO hired during Q3 2018 and other accounting services incurred during
Q3 2019
|
Officers Compensation
|
|
|
310,000
|
|
|
|
390,000
|
|
|
|
(80,000
|
)
|
|
Compensation for CEO only during 2019 vs Compensation for CEO and 2
executives during 2018
|
Filing Agent fees (Edgar)
|
|
|
19,107
|
|
|
|
11,206
|
|
|
|
7,901
|
|
|
Due to additional services related to SEC filings in 2019 for 8ks and multiple
amendment filings vs 2018
|
UK Contract Compensation
|
|
|
244,081
|
|
|
|
13,071
|
|
|
|
231,010
|
|
|
New Hempsmart UK Sales Manager hired late in 2018
|
Admin Compensation
|
|
|
316,042
|
|
|
|
82,603
|
|
|
|
233,439
|
|
|
Reduction in staff during Q3 2019 vs Q3 2018 for Logistics, Sales and administrative.
|
Audit Fees
|
|
|
34,782
|
|
|
|
20,884
|
|
|
|
13,899
|
|
|
Increase due to company growth in documentation and accounting and SEC reporting
activities
|
Commissions expense
|
|
|
198,450
|
|
|
|
22,000
|
|
|
|
176,449
|
|
|
Commissions paid based on sales volume for 9 months 2019 vs 9 months 2018
|
Marketing expense
|
|
|
723,721
|
|
|
|
360,170
|
|
|
|
363,552
|
|
|
Increase in product and marketing events during Q3 2019 vs Q3 2018 related
to sales growth
|
Stock based compensation
|
|
|
100,350
|
|
|
|
73,255
|
|
|
|
27,095
|
|
|
Stock compensation issued for Marketing and Medical advisory services 9 months
2019; 9 months 2018 includes accretion of vesting options recorded
|
Import duties and taxes
|
|
|
27,429
|
|
|
|
4,245
|
|
|
|
23,185
|
|
|
Expenses incurred during 9 months 2019 for new UK business which began in
2019
|
Legal fees
|
|
|
158,755
|
|
|
|
163,106
|
|
|
|
(4,351
|
)
|
|
Immaterial variance for basic legal work performed for SEC inquiries, new
patents and Bougainville lawsuit during 2019 and 2018
|
Bank wire transfer fees expense
|
|
|
75,775
|
|
|
|
11,017
|
|
|
|
64,757
|
|
|
Wire transfer costs incurred to send monies to HempSMART UK operations
|
Rent expense
|
|
|
23,200
|
|
|
|
17,111
|
|
|
|
6,089
|
|
|
Increase due to new lease agreement during 2019 vs 2018
|
Others, net
|
|
|
67,171
|
|
|
|
103,268
|
|
|
|
(36,097
|
)
|
|
|
TOTALS
|
|
$
|
3,226,210
|
|
|
$
|
1,891,619
|
|
|
$
|
1,334,591
|
|
|
|
During
2019 and 2018, we issued convertible promissory notes and warrants with an embedded derivative, all requiring us to fair value
the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations. This resulted
in a loss of $2,148,262 and a gain of $4,658,074 change in fair value of derivative liabilities for the nine months ended September
30, 2019 and 2018, respectively.
Legal
Contingency Expense
On
September 25, 2018, DTTO Funding filed a complaint against the Company for breach of contract related to the Company’s April
20, 2017 convertible promissory note in which DTTO lent the Company $111,111. Principal and interest in the note were, at the
election of DTTO, convertible into common shares of the Company. On November 30, 2017, DTTO notified the Company of an election
to convert a portion of the note to common shares, but the Company failed to process the conversion. The Company failed to repay
principal and interest otherwise due on the maturity date of April 20, 2018. DTTO’s action seeks damages against the Company
including principal, default interest, liquidated damages, attorney fees and costs in an amount with an alleged present cash value
of $1,787,981.10. On September 6, 2018 the company issued 57,676,810 common stock shares in settlement of this case for at a total
value of $1,701,466 and thus eliminating the contingent liability. Pursuant to the stipulation and court order the Company agreed
to issue to DTTO additional shares of common stock if, one year following the September 6, 2018 issuance date, the value of the
shares issued in settlement decreased from the value on the issuance date. The Company received notice from DTTO and demand for
the additional issuance on September 6, 2019, and issued DTTO 2,082,398 shares of common stock.
Interest
Expense
Interest
expense during the nine months ended September 30, 2019 and 2018 was $3,001,972 and $3,503,610, respectively. Interest expense
primarily consists of interest incurred on our convertible and other debt. The debt discounts amortization incurred during the
nine months ended September 30, 2019 and 2018 was $2,172,936 and $1,171,549, respectively. In addition, we incurred a non-cash
interest of $1,886,837 and $2,827,419 non-cash interest in connection with convertible notes in 2019 and 2018.
Liquidity
and Capital Resources – The Company has generated a net loss from continuing operations for the nine months ended September
30, 2019 of $10,878,622, however used $1,884,004 cash for operations. As of September 30, 2019, the Company had total assets of
$4,329,281, which included inventory of $204,041, short-term investments of $120,708 and investments of $3,772,652.
During
the nine months ended September 30, 2019 and 2018, the Company has met its capital requirements through a combination of loans
and convertible debt instruments. The Company will need to secure additional external funding in order to continue its operations.
Our primary internal sources of liquidity were provided by an increase in proceeds from the issuance of note payables of $2,257,000
for September 30, 2019, as compared to $1,080,186 for September 30, 2018, and an increase in proceeds from the sale of note payables
to a related party of $194,881 for September 30, 2018. We have during the period ended September 30, 2019, relied upon external
financing arrangements to fund our operations. As of September 30, 2019, we had financing arrangements with St. George Investments,
LLC, a Utah limited liability company, in which we made borrowings, the principal of which is convertible into shares of our common
stock (see Note 6, Convertible Note Payable). Our ability to rely upon external financing arrangements to fund operations is not
certain, and this may limit our ability to secure future funding from external sources without changes in terms requested by counterparties,
changes in the valuation of collateral, and associated risk, each of which is reasonably likely to result in our liquidity decreasing
in a material way. We intend to utilize cash on hand, loans and other forms of financing such as the sale of additional equity
and debt securities and other credit facilities to conduct our ongoing business, and to also
conduct strategic business development and implementation of our business plans generally.
Operating
Activities - For the nine months ended September 30, 2019, the Company used cash in operating activities of $1,884,004 as
compared to $1,010,520 for the nine months ended September 30, 2018. This increase is due primarily to the implementation of our
new business plan, operations, management, personnel and professional services, and the resulting increases in operating expenses.
Investing
Activities - During the nine months ended September 30, 2019, the Company spent cash of $687,752 in investing activities related
to its purchase of equipment of $2,703 and investments in joint ventures of $685,049. During the nine months ended September 30,
2018, we spent $7,119 on equipment purchases and $624,767 investment in joint ventures.
Financing
Activities - During the nine months ended September 30, 2019, net cash provided through financing activities were $2,257,000,
which were primarily through its receipt of funds from the issuance of notes payable from St. George and Power Up lending. For
the nine months ended September 30, 2018 the Company, primarily through its receipts of funds from the issuance of notes payable,
notes payable to related parties and sale of common stock, resulted in financing activity of $1,460,067.
The
Company’s business plans have not generated significant revenues and as of the date of this filing are not sufficient to
generate adequate amounts of cash to meet its needs for cash. The Company's primary source of operating funds in 2019 and 2018
have been from revenue generated from proceeds from the sale of common stock and the issuance of convertible and other debt. The
Company has experienced net losses from operations since inception, but expects these conditions to improve for the remainder
of 2019 and beyond as it develops its affiliate marketing program and other direct sales and marketing programs. The Company has
stockholders' deficiencies at September 30, 2019 and requires additional financing to fund future operations. As of the date of
this filing, and due to the early stages of operations, the Company has insufficient sales data to evaluate the amounts and certainties
of cash flows, as well as whether there has been material variability in historical cash flows.
We
currently do not have sufficient cash and liquidity to meet our anticipated working capital for the next twelve months. Historically,
we have financed our operations primarily through private sales of our common stock and. If our sales goals for our hempSMART™
products do not materialize as planned, and we are not able to achieve profitable operations at some point in the future,
we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion,
marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable
terms, or at all.
Off
Balance Sheet Arrangements
As
of September 30, 2019, and December 31, 2018, we did not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Government
Regulations of Cannabis
Federal
Law
Our
business includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp and hemp
derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of different
species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different industrial
hemp derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of hemp CBD extraction omitting
or eliminating the delta-9 tetrahydrocannabinol “THC” molecule.
On April 15, 2019, the Company entered into
a material definitive agreement with Natural Plant Extract of California, Inc., a California corporation, and its wholly owned
subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all California limited liability companies
(collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated in California under the name
Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant to California law legalizing
cannabis for recreational and medicinal use. Although legal under California State law, cannabis
remains an illegal Schedule 1 drug under the federal Controlled Substances Act, which views cannabis as a highly addictive drug
with no medical value. In the event the U.S. federal government were to enforce the Controlled Substances Act regarding cannabis,
the Company’s Viva Buds operations discussed below would be materially impacted (See Government Regulation of Cannabis on
page 47 and Risk Factors in Section 1A).
The
criminal penalty structure in the Controlled Substances Act is determined based on the specific predicate violations, including
but not limited to: simple possession, drug trafficking, attempt and conspiracy, distribution to minors, trafficking in drug paraphernalia,
money laundering, racketeering, environmental damage from illegal manufacturing, continuing criminal enterprise, and smuggling.
A first conviction under the Controlled Substances Act can generally result in possible fines from $250,000 to $50 million dollars,
and incarceration for periods generally from five and up to forty years. For a second conviction, fines increase generally from
$500,000 to $75 million dollars, and incarceration for periods generally from ten years to twenty years to life.
The
federal government recently issued guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances
Act (CSA). On January 4, 2018, Attorney General Jeff Sessions issued a memorandum for all United States Attorneys concerning federal
cannabis enforcement generally. Mr. Sessions rescinded all previous prosecutorial guidance issued by the Department of Justice
regarding cannabis, including the August 29, 2013 memorandum by James Cole, Deputy Attorney General (the “Cole Memorandum”).
The
Cole Memorandum previously set out the Department of Justice’s prosecutorial priorities in light of various states legalizing
cannabis for medicinal and/or recreational use. The Cole Memorandum provided that when states have implemented strong and effective
regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance
with those laws and regulations is less likely to threaten the federal priorities. Indeed, a robust system may affirmatively address
those priorities by, for example, implementing effective measures to prevent diversion of cannabis outside of the regulated system
and to other states, prohibiting access to cannabis by minors, and replacing an illicit cannabis trade that funds criminal enterprises
with a tightly regulated market in which revenues are tracked and accounted for. In those circumstances, consistent with the traditional
allocation of federal-state efforts in this area, the Cole Memorandum provided that enforcement of state law by state and local
law enforcement and regulatory bodies should remain the primary means of addressing cannabis-related activity. If state enforcement
efforts are not sufficiently robust to protect against the harms set forth above, the federal government may seek to challenge
the regulatory structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions,
focused on those harms.
By
rescinding the Cole Memorandum, Mr. Sessions injected material uncertainty as it relates to how the Department of Justice will
evaluate cannabis cases for prosecution, and risk into the Company’s business as it relates to the research, development,
marketing and sale of its products containing industrial hemp derived CBD (see Risk Factors, Item 1A).
Mr.
Sessions stated that U.S. Attorneys must decide whether or not to pursue prosecution of cannabis activity based upon factors including:
the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on
the community. Mr. Sessions reiterated that the cultivation, distribution and possession of cannabis continues to be a crime under
the U.S. Controlled Substances Act.
On
March 23, 2018, President Donald J. Trump signed into law a $1.3 trillion-dollar spending bill that included an amendment known
as “Rohrabacher-Blumenauer,” which prohibits the Justice Department from using federal funds to prevent certain states
“from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana.”
The
United States Food & Drug Administration (“FDA”) is generally responsible for protecting the public health by
ensuring the safety, efficacy, and security of (1) prescription and over the counter drugs; (2) biologics including vaccines,
blood & blood products, and cellular and gene therapies; (3) foodstuffs including dietary supplements, bottled water, and
baby formula; and, (4) medical devices including heart pacemakers, surgical implants, prosthetics, and dental devices.
Regarding
its regulation of drugs, the FDA process requires a review that begins with the filing of an “Investigational New Drug”
(IND) application, with follow on clinical studies and clinical trials that the FDA uses to determine whether a drug is safe and
effective, and therefore subject to approval for human use by the FDA.
Aside
from the FDA’s mandate to regulate drugs, the FDA also regulates dietary supplement products and dietary ingredients under
the Dietary Supplement Health and Education Act of 1994. This law prohibits manufacturers and distributors of dietary supplements
and dietary ingredients from marketing products that are adulterated or misbranded. This means that these firms are responsible
for evaluating the safety and labeling of their products before marketing to ensure that they meet all the requirements of the
law and FDA regulations, including, but not limited to the following labeling requirements: (1) identifying the supplement; (2)
nutrition labeling; (3) ingredient labeling; (4) claims; and, (5) daily use information.
The
FDA has not approved cannabis, hemp or CBD derived from industrial hemp as a safe and effective drug for any indication. As of
the date of this filing, we have not, and do not intend to file an IND with the FDA, concerning any of our consumer products that
contain CBD derived from industrial hemp.
The
FDA has concluded that products containing industrial hemp derived CBD are excluded from the dietary supplement definition under
sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. The FDA’s position is that products
containing industrial hemp derived CBD are Schedule 1 drugs under the Controlled Substances Act, and so are illegal drugs that
are under the purview of the U.S. Drug Enforcement Agency and U.S. Justice Dept., who are charged with enforcing the Controlled
Substances Act. However, at some indeterminate future time, the FDA may choose to change its position concerning cannabis generally,
and specifically products containing industrial hemp derived CBD, and may choose to enact regulations that are applicable to such
products as either drugs or supplements. In this event, our industrial hemp-based products containing CBD may be subject to regulation
(See Risk Factors, Item IA).
In
addition to strict compliance with state laws and regulations in those jurisdictions where cannabis is legal for recreational
or medical use, the Company’s research and development activities intend to comply with the parameters of a recent 9th Cir.
Federal Appellate Court decision, United States v. McIntosh, 2016 DJDAR 8484 (Aug. 16, 2016), which held: “the U.S. Department
of Justice cannot spend money to prosecute federal marijuana cases if the defendants comply with state guidelines that permit
the drug's sale for medical purposes”. The Court reasoned that “if the DOJ punishes individuals for engaging in activities
permitted under state law (such as the use, cultivation, distribution and possession of medical marijuana), then the DOJ is preventing
state law from being implemented as a practical matter.” “By officially permitting certain conduct, state law provides
for non-prosecution of individuals who engage in such conduct. If the federal government prosecutes such individuals, it has prevented
the state from giving practical effect to its law providing for non-prosecution of individuals who engage in the permitted conduct."
This ruling is consistent with Congress’s passing of its current budget law, that included an amendment known as “Rohrabacher-Blumenauer,”
which prohibits the Justice Department from using federal funds to prevent certain states “from implementing their own State
laws that authorize the use, distribution, possession or cultivation of medical marijuana.”
We also
offer and provide financial consulting and property management services to licensed, lawful and compliant operator(s) engaged
within legalized states where cannabis strains containing the THC molecule is regulated and/or has been de-criminalized for personal
and/or medicinal use.
Critical
Accounting Policies - The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant
accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but
not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial
Statements.
Stock-Based
Compensation - The Company also issues restricted shares of its common stock for share-based compensation programs to
employees and non-employees. The Company measures the compensation cost with respect to restricted shares to employees based upon
the estimated fair value at the date of the grant, and is recognized as expense over the period which an employee is required
to provide services in exchange for the award. For non- employees, the Company measures the
compensation cost with respect to restricted shares based upon the estimated fair value at measurement date which is either a)
the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity
instruments is complete.
Recent
Accounting Pronouncements - See Note 3 of the condensed consolidated financial statements for discussion of recent accounting
pronouncements.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
Not
applicable to Smaller Reporting Companies.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
Management
is responsible for establishing and maintaining adequate disclosure controls and procedures that are designed to ensure that information
required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as appropriate, to allow for timely and reliable financial
reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America.
As of the quarter
ended September 30, 2019, our principal executive officer and principal financial officer completed an assessment of the effectiveness
of our disclosure controls and procedures, to determine the existence of any material weaknesses or significant deficiencies.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of the registrant's financial reporting.
Management identified
the following material weakness which has caused management to conclude that, as of September 30, 2019, our disclosure controls
and procedures were not effective:
(1) a lack of organizational
controls designed to allow us to gather and provide our auditor timely documentation concerning our joint ventures’ financial
records. This material weakness causes us to not be able to provide reasonable assurances that transactions are recorded as necessary
to permit preparation of financial statements in accordance with US GAAP, and effectively close our books in a timely fashion
and report to the Commission consistent with its rules and forms.
Changes
in Internal Control over Financial Reporting.
In
order to address the material weakness and significant deficiency, we made the following changes to our internal control over
financial reporting:
(1)
After our year ended December 31, 2018, we considered and approved on May 28, 2019, an internal audit sub-committee, led by independent
director Robert Coale, to obtain timely information on a weekly basis on the status of our joint ventures, the respective budgets
and expenses and variances on balances. Mr. Jesus Quintero, our Chief Financial Officer, has monitored, reviewed and to the extent
he deemed prudent, tested Mr. Coale’s work since inception of the internal audit sub-committee. Mr. Coale has reported to
the Board of Directors on the status of each joint venture on a weekly basis, along with a discussion of the ability to sell and
liquidate inventory and to also advised concerning funding. Although we believe our implementation of this framework will provide
an effective preventative control that will allow us to provide our auditor timely information about our joint ventures so that
we can close our books in a timely fashion and file our reports to the Commission consistent with its rules and forms, our internal
sub-committee has been operational for approximately six months, and so our evaluation of its effectiveness is not complete and
will require further review, assessment and disclosure. This material weakness remains unremedied.