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 during six months ended June 30, 2017, the Company
incurred net losses of $19,200,871 and used cash in operations of $433,841. These factors among others may indicate that the Company
will be unable to continue as a going concern for a reasonable period of time.
The Company's primary source of operating funds
in 2017 and 2016 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 in
the second half of 2017 and beyond as it develops its business model. The Company has stockholders' deficiencies at June 30, 2017
and requires additional financing to fund future operations.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
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. 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
The Company recognizes revenue in accordance
with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria
(3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered
and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are recorded.
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.
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 June 30, 2017 and December 31, 2016, allowance
for doubtful accounts was $-0-.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
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. As of June 30, 2017, there were outstanding stock options to purchase 1,000,000,000 shares of common
stock, 583,333,333 shares of which were vested. (See Note 9)
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 June 30, 2017 and 2016 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:
|
|
June 30,
2017
|
|
June 30,
2016
|
Convertible notes payable
|
|
|
74,991,778
|
|
|
|
—
|
|
Options to purchase common stock
|
|
|
1,000,000,000
|
|
|
|
1,000,000,000
|
|
Restricted stock units
|
|
|
10,000,000
|
|
|
|
—
|
|
Total
|
|
|
1,084,991,778
|
|
|
|
1,000,000,000
|
|
Fair Value of Financial Instruments
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of June 30, 2017 and December 31, 2016. 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 because they are short term in nature.
MARIJUANA COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
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 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 (See Note 5).
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. 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 options do not contain fixed settlement provisions. The convertible note contained
a conversion feature 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 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.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $10,419 and $32,381 for the three and six months
ended June 30, 2017 and $3,200 and $21,884 for the three and six months ended June 30, 2016, 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.
MARIJUANA COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
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 June 30, 2017 and 2016, 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.
Recent Accounting Pronouncements
There are various other updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company's financial position, 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 June 30, 2017 and December 31, 2016
is summarized as follows:
|
|
June 30,
2017
|
|
December 31,
2016
|
Computer equipment
|
|
$
|
1,010
|
|
|
$
|
—
|
|
Furniture and fixtures
|
|
|
3,850
|
|
|
|
—
|
|
Subtotal
|
|
|
4,860
|
|
|
|
—
|
|
Less accumulated depreciation
|
|
|
(647
|
)
|
|
|
—
|
|
Property and equipment, net
|
|
$
|
4,213
|
|
|
$
|
—
|
|
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 $405 and $647 for
the three and six months ended June 30, 2017 and 2016, respectively; and $0 for the three and six months ended June 30, 2016.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
NOTE 5 – INVESTMENTS
MoneyTrac
On March 13, 2017, the Company entered into
a stock purchase agreement to acquire up to 15,000,000 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 June 30, 2017, the Company had acquired 12,300,000 common shares for $205,000 representing
approximately 15% ownership. In connection with the investment, Charlie Larsen, the Company’s President and Chief Operations
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. The Company has elected to estimate its fair value at cost minus impairment
plus or minus changes resulting from observable price changes since the equity security does not have a readily determinable fair
value.
BV-MCOA Management, LLC
On March 16, 2017, the Company entered
into a Joint Venture Agreement (“Agreement”) with Bougainville Ventures, Inc., a corporation organized under the
laws of Canada to engage in the development and promotion of products in the legalized marijuana industry in the state of
Washington under the name of BV-MCOA Management LLC. Ownership and voting control is divided on a 50/50 basis with neither
party having effective control.
BV-MCOA Management, LLC
On March 16, 2017, the Company entered into
a Joint Venture Agreement (“Agreement”) with Bougainville Ventures, Inc., a corporation organized under the laws of
Canada to engage in the development and promotion of products in the legalized marijuana industry in the state of Washington under
the name of BV-MCOA Management LLC. Ownership and voting control is divided on a 50/50 basis with neither party having effective
control.
Pursuant to the Agreement, the Company
committed to raising one million dollars for the joint venture based on the following schedule:
April
4, 2017
|
$75,000
|
April
17, 2017
|
$125,000
|
May
1, 2017
|
$513,750
|
June
1, 2017
|
$17,250
|
July
1, 2017
|
$19,000
|
August
1, 2017
|
$250,000
|
As of June 30, 2017, the Company made a
payment of $75,000 on April 4, but otherwise failed to comply with the funding schedule set forth in the Agreement. As a result,
the Company is in default of the Agreement as of June 30, 2017.
The Company’s investment of $75,000
is comprised of a 50% ownership of BV-MCOA Management LLC and is accounted for using the equity method of accounting. The Company’s
50% income earned by BV-MCOA Management LLC will recorded as other income/expense in the Company’s Statement of Operations
in the appropriate periods. As of June 30, 2017, there has not been any economic activity of BV-MCOA Management LLC.
NOTE 6 – CONVERTIBLE NOTE PAYABLE
Effective March 30, 2017, the Company issued
a 6.5% convertible promissory note for an aggregate of $2,777,778 due April 30, 2018 for consideration of $2,500,000, after original
interest discount (“OID) of $277,778; unsecured.
At June 30, 2017, the Company had received
net proceeds of $99,965 under the note. Gross face amount was $111,111, after additions for pro rate portion of OID and other related
costs.
The note is convertible, at any time, into
shares of the Company’s common stock at $0.03 per share unless on the day prior to the lender’s request to convert,
the closing price is less than $0.05 per share, then the conversion price shall be 60% of the average three lowest days closing
prices for 20 trading days prior to the request to convert.
The Company has identified the embedded derivatives
related to the above described note. These embedded derivatives included certain conversion features. The accounting treatment
of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of
the note and to fair value as of each subsequent reporting date.
At the funding date of the debenture, the Company
determined the aggregate fair value of $221,406 of embedded derivatives. The fair value of the embedded derivatives was determined
using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of
470.85%, (3) weighted average risk-free interest rate of 1.02%, (4) expected life of 1.08 years, and (5) estimated fair value of
the Company's common stock from $0.0604 per share.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
The determined fair value of the debt derivatives
of $221,406 was charged as a debt discount up to the net proceeds of the note with the remainder of $121,441 charged to operations
as non-cash interest expense.
At June 30, 2017, the Company determined the
aggregate fair value of $191,438 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial
Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 449.09%, (3) weighted
average risk-free interest rate of 1.24%, (4) expected life of 0.83 years, and (5) estimated fair value of the Company's common
stock from $0.0205 per share.
For the three and six months ended June 30,
2017, the Company recorded a gain on change in fair value of derivative liabilities of $10,079 and $29,968 and recorded amortization
of debt discounts of $25,533 and $25,814, respectively as a charge to interest expense, respectively.
NOTE 7 – NOTES PAYABLE, RELATED PARTY
Notes payable, related party is comprised of
the following:
|
|
June 30,
2017
|
|
December 31,
2016
|
Notes payable
|
|
$
|
1,321
|
|
|
$
|
7,487
|
|
Convertible promissory notes
|
|
|
614,347
|
|
|
|
—
|
|
Subtotal
|
|
|
615,668
|
|
|
|
7,487
|
|
Less unamortized debt discount
|
|
|
(612,663
|
)
|
|
|
—
|
|
Notes payable, net
|
|
|
3,005
|
|
|
|
7,487
|
|
Less current maturities
|
|
|
(3,005
|
)
|
|
|
(7,487
|
)
|
Long term portion
|
|
$
|
—
|
|
|
$
|
—
|
|
Notes payable
As of June 30, 2017 and December 31, 2016,
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 non-interest bearing.
Convertible promissory notes
On June 30, 2017, the Company issued 5% convertible
promissory notes for an aggregate of $614,347 due June 30, 2018 for consideration of $585,092, after original interest discount
(“OID) of $29,255; unsecured.
The notes are convertible, at any time, into
shares of the Company’s common stock at 50% of the lowest reported sales price of the Company’s common stock for 15
trading days prior to the request to convert. In addition, the notes contain certain reset provisions should the Company issue
subsequent equity linked instruments.
The Company has identified the embedded derivatives
related to the above described notes. These embedded derivatives included certain conversion features and reset provisions. The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the
inception date of the note and to fair value as of each subsequent reporting date.
At June 30, 2017, the Company determined the
aggregate fair value of $1,317,555 of embedded derivatives. The fair value of the embedded derivatives was determined using the
Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 449.09%,
(3) weighted average risk-free interest rate of 1.24%, (4) expected life of 1.00 years, and (5) estimated fair value of the Company's
common stock from $0.0205 per share.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
The determined fair value of the debt derivatives
of $1,317,555 was charged as a debt discount up to the net proceeds of the notes with the remainder of $732,463 charged to current
period operations as non-cash interest expense
For the three and six months ended June 30,
2017, the Company recorded amortization of debt discounts of $1,683 as a charge to interest expense.
NOTE 8 – DERIVATIVE LIABILITIES
As described in Notes 6 and 7, the Company
issued convertible notes 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 June 30, 2017 and December 31, 2016. As of June 30, 2017 and December 31, 2016,
the Company has 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.
Common stock
The Company is authorized to issue
5,000,000,000 shares of $0.001 par value common stock as of June 30, 2017 and December 31, 2016. As of June 30, 2017
and December 31, 2016, the Company had 1,975,075,786 and 1,620,996,998 common shares issued and outstanding.
During the six months ended June 30, 2017,
the Company issued an aggregate of 300,533,333 shares of its common stock for services rendered with an estimated fair value of
$17,692,083.
During the six months ended June 30, 2017,
the Company issued an aggregate of 29,545,455 shares of its common stock for prior year officer stock-based compensation accrual.
During the six months ended June 30, 2017,
the Company issued an aggregate of 20,000,000 shares of its common stock as replacement shares previously canceled in 2016 as part
of settlement agreement.
During the six months ended June 30, 2017,
the Company sold an aggregate of 4,000,000 shares of its common stock for net proceeds of $60,000.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
Options
The following table summarizes the stock option
activity for the six months ended June 30, 2017:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2016
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
8.76
|
|
$
|
76,000,000
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
8.51
|
|
$
|
|
15,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
583,333,333
|
|
|
$
|
0.005
|
|
|
|
8.51
|
|
|
$
|
9,041,667
|
|
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 $0.0205 as of June 30, 2017, which would have been received by the option holders had those option holders exercised their
options as of that date.
The following table presents information related to stock options
at June 30, 2017:
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Life
In Years
|
|
|
Exercisable
Number of
Options
|
|
$
|
0.005
|
|
|
|
1,000,000,000
|
|
|
8.26
|
|
|
|
500,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017,
stock-based compensation of $750,000 remains unamortized and is expected to be amortized over the weighted average remaining period
of 1.25 years.
The stock-based compensation
expense related to option grants was $150,000 and $300,000 during the three and six months ended June 30, 2017 and $150,000 and
$300,000 during the three and six months ended June 30, 2016, respectively.
Restricted Stock
Units (“RSU”)
The following table summarizes the restricted
stock activity for the three months ended June 30, 2017:
Restricted shares units issued as of December 31, 2016
|
|
|
10,000,000
|
|
Granted
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Total Restricted Shares Issued at June 30, 2017
|
|
|
10,000,000
|
|
Vested at June 30, 2017
|
|
|
—
|
|
Unvested restricted shares as of June 30, 2017
|
|
|
10,000,000
|
|
As of June 30, 2017, stock-based compensation
related to restricted stock awards of $76,875 remains unamortized and is expected to be amortized over the weighted average remaining
period of 0.75 years.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
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.
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 June 30, 2017 and December 31, 2016,
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 6. 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 Notes 4 and 5 are that of volatility and market price of the underlying common stock of the
Company.
As of June 30, 2017 and December 31, 2016,
the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of June 30, 2017,
in the amount of $1,508,993 has a level 3 classification.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
The following table provides a summary of changes
in fair value of the Company’s Level 3 financial liabilities for the three months ended June 30, 2017:
|
|
|
Debt
Derivative
|
|
|
Balance, December 31, 2016
|
|
$
|
—
|
|
Total (gains) losses
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
1,538,961
|
|
Mark-to-market at June 30, 2017:
|
|
|
(29,968
|
)
|
Transfers out of Level 3 upon conversion or payoff of notes payable
|
|
|
—
|
|
Balance, June 30, 2017
|
|
$
|
1,508,993
|
|
Net gain for the period included in earnings relating to the liabilities held during the period ended June 30, 2017
|
|
$
|
29,968
|
|
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 June
30, 2017, the Company’s stock price decreased 66.1% from initial valuation. 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.
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 June 30, 2017 and December 31, 2016, there
were no related party advances outstanding.
As of June 30, 2017 and December 31, 2016,
accrued compensation due officers and executives included as accrued compensation was $-0- and $32,710, respectively.
At June 30, 2017 and December 31, 2016, there
were an aggregate of $615,668 notes payable due to officers. See Note 7.
NOTE 12 – SUBSEQUENT EVENTS
St. George Investments LLC.
Effective July 3, 2017, the Company issued
a secured convertible promissory note in aggregate of $752,500 to St George Investments LLC (“St George”). The promissory
note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase price date and includes an original
issue discount (“OID”) of $67,500. In addition, the Company agreed to pay $10,000 for legal, accounting and other transaction
costs of the lender. The promissory note will be funded in four tranches of $422,500, $27,500, $27,500 and $275,000; net of OID
and transaction costs.
The promissory note is convertible, at any
time at the lender’s option, at $0.04. However, in the event the Company’s market capitalization (as defined) falls
below $35,000,000, 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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
Tangiers Global LLC
The Company entered into a Investment
Agreement on July 25, 2017 with Tangiers Global, LLC, (“Tangiers”). Pursuant to an Investment Agreement between the
Company and Tangiers, Tangiers agreed to invest up to five million dollars ($5,000,000) to purchase the Company’s common
stock. Coincidentally, the Company and Tangiers entered into a Registration Rights Agreement, as an inducement to Tangiers to execute
and deliver the Investment Agreement, whereby the Company agreed to provide certain registration rights with respect to the shares
of common stock issuable for Tangiers’s investment pursuant to the Investment Agreement. The Investment Agreement terminates
thirty-six (36) months after the effective date, or when Tangiers has purchased an aggregate of Five Million Dollars ($5,000,000)
in the Company’s common stock, or at such time that the registration statement agreed to in the Registration Rights Agreement
is no longer in effect, or upon the election of the Company, providing 15 days written notice to Tangiers.
The Company and Tangiers also executed two
fixed convertible promissory notes: one in the amount of two hundred and fifty thousand dollars ($250,000) and one in the amount
of fifty thousand dollars ($50,000), each bearing interest at the rate of ten percent (10%). The $250,000 Note is due and payable
within seven months of the effective date of each payment, and is convertible at a price equal to $0.0125. The $50,000 Note is
due and payable on February 25, 2018, and is convertible at a price equal to $0.0175. Tangiers may convert any amount of principal
or interest due into the Company’s common stock.
Forbearance agreement
On August 4, 2017, the Company entered into
a forbearance agreement with St George Investments LLC, due to the Company’s breached of certain default provisions of the
secured promissory note entered into with St George on July 3, 2017. The breach occurred due to the Company entering into an investment
agreement with Tangiers on July 15, 2017 and issued a fixed convertible promissory note to Tangiers. Due to the breach, St George
has the right, among other things, to accelerate the maturity date of the note, increase interest from 10% to 22% and cause the
balance of the outstanding promissory note to increase due to the application of the default provisions.
St George has agreed to refrain and forbear
from bringing any action to collect under the promissory note, including the interest rate increase and balance increase, with
respect to the default. As consideration of the forbearance, the Company agreed to accelerate the installment conversions from
1 year to 6 months and to add an additional OID of $112,875, which will be considered fully earned as of August 4, 2017, nonrefundable
and to be included in the first tranche. The Company and St George ratified the outstanding balance, after the added OID and accrued
interest, of $868,936 as of August 4, 2017.
MARIJUANA
COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2017
(unaudited)
Default on Bougainville Ventures, Inc.
Joint Venture Agreement Payment Schedule.
On March 16, 2017, the Company entered
into a Joint Venture Agreement (“Agreement”) with Bougainville Ventures, Inc., a corporation organized under the laws
of Canada to engage in the development and promotion of products in the legalized marijuana industry in the state of Washington
under the name of BV-MCOA Management LLC.
Pursuant to the Agreement, the Company
is committed to raising one million dollars for the joint venture based on the following schedule:
April
4, 2017
|
$75,000
|
April
17, 2017
|
$125,000
|
May
1, 2017
|
$513,750
|
June
1, 2017
|
$17,250
|
July
1, 2017
|
$19,000
|
August
1, 2017
|
$250,000
|
As of June 30, 2017, the Company made payment
of $75,000 on April 4, and a $300,000 payment on July 17, 2017, but otherwise failed to comply with the funding schedule set forth
in the Agreement. As a result, the Company is in default of the Agreement as of June 30, 2017.
On November 6, 2017,
pursuant to Section 12.9 of the Agreement, the Registrant and Bougainville entered into a written amendment which reduced the
Registrant’s funding obligation from one million dollars ($1,000,000) to eight hundred thousand dollars ($800,000), and
separately required the Registrant to issue to Bougainville fifteen million (15,000,000) shares of its restricted common stock
pursuant to the Reg. D exemption from registration pursuant to the 1933 Securities and Exchange Act.
On November 7, 2017,
the Registrant paid Bougainville $425,000, equaling total payments to Bougainville of $800,000 consistent with the amended Agreement.
January 4, 2018 U.S. Department of Justice
Prosecutorial Guidance
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 marijuana enforcement.
Mr. Sessions rescinded all previous prosecutorial guidance issued by the Department of Justice regarding marijuana, 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 marijuana
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 marijuana, 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 marijuana outside of the regulated system
and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana 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 marijuana-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 marijuana cases for prosecution,
and risk into the Company’s business as it relates to the research, development, marketing and sale of its products containing
CBD.
Mr. Sessions stated that U.S. Attorneys
must decide whether or not to pursue prosecution of marijuana 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 marijuana continues to be a crime under the U.S. Controlled Substances Act.
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 –
The Company
operates two distinct and separate business divisions related to its two wholly owned subsidiaries, H Smart, Inc. and MCOA CA,
Inc.
Through its wholly owned subsidiary, H Smart,
Inc., the Company launched its hempSMART™ division in 2016, focused on the development and sale of hemp based products under
the tradename hempSMART™, incorporating products with hemp oil that contains Cannabidiol, also known as “CBD.”
The Company’s first product under its hempSMART™ division is hempSMART™ Brain, a formulated product encapsulated
with CBD as the core ingredient, combined with other high quality ingredients. On July 18, 2016, the Company filed a patent application
for its proprietary formulation for hempSMART™ Brain. The Company has also filed for a trademark for the hempSMART™
brand name. The Company has a number of other hempSMART™ products in research and development, and intends to broaden hempSMART’s™
product offerings to include products targeting body care, cosmetics, and a line of branded merchandise using the hempSMART™
name. As of the date of this filing, the Company has no other products ready for market.
The Company
currently plans to market and sell its products only in those states where cannabis has been legalized and regulated for medicinal
or recreational use. Further, the Company plans to market its hempSMART™ products on its web site (http://www.hempsmart.com)
through an affiliate marketing program that allows individuals to qualify as affiliate sellers of the Company’s products
earning discounts and commissions on sales and referrals of other qualified affiliates.
In anticipation of establishing and
expanding its hempSMART™ sales affiliate program, the Company acquired a license from MultiSoft Corporation, a Florida
corporation (“MultiSoft”), to use its MarketPowerPro system software (“MarketPowerPro”).
MarketPowerPro is 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. MarketPowerPro is compliant
with Payment Card Industry financial standards for maintaining security regarding payment transactions conducted over the
internet using credit cards. MultiSoft also independently monitors licensee websites hosting MarketPowerPro to ensure that
licensee websites are compliant and are invulnerable to being compromised.
The Company established contractual relationships
with key suppliers and service providers to manufacture, package, warehouse and deliver hempSMART™ products to customers.
On March 17, 2017, the Company signed a binding
joint venture agreement with GateC Research Inc. (“GCR”), a California corporation. GCR maintains a permit to grow
Marijuana legally within an approved zone in Adelanto County, California. The Company and GCR intend to optimize collaborative
business opportunities in the development and sales of cannabis products in the legalized Marijuana industry in California, utilizing
GCR’s high quality grow operations to provide sales and marketing, agricultural procedures, operations security and monitoring,
processing and delivery, branding, capital resources and financial management. The Company’s commitment to the joint venture
project is to provide ($1,500,000) USD over a six-month period, with a minimum commitment of five hundred thousand ($500,000 USD)
within a three (3) month period. The Company has yet to provide this financing.
On March 16, 2017, the Company entered into
a binding joint venture agreement with Bougainville Ventures, Inc., a Canadian corporation (“BV”). BV holds assignable
cannabis licenses and a lease for real property located in the State of Washington to legally grow cannabis. The Company is committed
to provide capital in the amount of $1 million and other management services to support the grow operation and develop cannabis
products for sale through in legalized medicinal and adult use states. As of the date of this filing, the Company has entered into
a third-party financing agreement to provide $752,000 of financing for the BV joint project.
On July 12, 2016, the Company contracted with
CBD Global, Inc., a Colorado corporation (“CBD Global”), and licensed supplier of CBD, to provide the Company with
the necessary CBD for its product development, manufacture and sale.
The Company’s manufacturing is conducted
by Equinox Nutraceutical in Lindon, Utah in a plant that is certified as compliant with “Good Manufacturing Practices”
(“GMP”). Being “GMP” certified means Equinox conforms to the guidelines recommended by agencies that control
authorization and licensing for manufacture and sale of food, drug products, and active pharmaceutical products. These guidelines
provide minimum requirements that a pharmaceutical or a food product manufacturer must meet to assure that the products are of
high quality and do not pose any risk to the consumer or public. Equinox provides manufacturing of hempSMART™ products. Equinox
then provides verified product testing of components and finished products through a third-party lab to ensure quality control.
On November 1, 2016, the Company contracted
with Big Monkey 3PL Logistics (“Big Monkey”) to provide for warehousing, packaging, and order fulfillment of its hempSMART™
products.
Results of Operations
- For the three
months ended June 30, 2017, the Company had a loss from continuing operations of $1,122,587 compared to a loss from continuing
operations of $338,013 for the three months ended June 30, 2016. For the six months ended June 30, 2017, the Company had a net
loss from continuing operations of
$19,200,871, as compared to $1,429,511 for
the six months ended June 30, 2016. This change is due primarily to the Company’s cannabis operations and restricted stock
compensation granted to directors, employees and third party service providers recorded at an estimated fair value of $17,816,458
for the six months ended June 30, 2017, compared to $1,140,690 during the corresponding period in 2016.
Total Revenues - Total revenues were $11,130
for the three months ended June 30, 2017 and to $17,023 for the six months ended June 30, 2017 as compared to $0 for the three
and six months ended June 30, 2016. 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 2017 and expects revenues
to increase in the coming months.
Costs and Expenses - Costs of sales, include
the costs of product development, manufacturing, testing, packaging, storage and sale. For the three months ended June 30, 2017,
costs of sales were $8,809 and $12,158 for the six months ended June 30, 2017 as compared to $0 for the three and six months ended
June 30, 2016. The reported costs of sales for each period reflect the Company’s initial steps towards marketing and selling
its hempSMART™ products.
Other general and administrative expenses increased
to $373,082 for the three months ended June 30, 2017 compared to $338,013 the three months ended June 30, 2016. For the six months
ended June 30, 2017, general administrative expenses were $18,351,836 as compared to $1,429,511 for the six months ended June 30,
2016. The increase can be attributed primarily to is due primarily to restricted stock compensation granted to directors, employees
and third party service providers.
Liquidity and Capital Resources –
The Company has generated a net loss from continuing operations for the three months ended June 30, 2017 of ($1,122,587) and $(19,200,871)
for the six months ended June 30, 2017. As of June 30, 2017, the Company had total assets of $445,165, which included inventory
of $140,660, accounts receivable of $10,662, and cash of $9,630.
During the six months ended June 30, 2017 and
2016, 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. On July 25, 2017, the Company entered into
an Investment Agreement Tangiers Global, LLC (“Tangiers”), wherein Tangiers agreed to invest up to five million dollars
($5,000,000) to purchase the Company’s Common Stock, par value $0.001 per share, based upon an exemption from registration
provided under Section 4(a)(2) of the 1933 Securities Act, and Section 506 of Regulation D promulgated thereunder. Coincidentally,
the Company and Tangiers entered into a Registration Rights Agreement, as an inducement to Tangiers to execute and deliver the
Investment Agreement, whereby the Company agreed to provide certain registration rights under the Securities Act of 1933, as amended,
and the rules and regulations thereunder, and applicable state securities laws, with respect to the shares of Common Stock issuable
for Tangiers’s investment pursuant to the Investment Agreement.
The Company and Tangiers also executed two
fixed convertible promissory notes: one in the amount of two hundred and fifty thousand dollars ($250,000) and one in the amount
of fifty thousand dollars ($50,000), each bearing interest at the rate of ten percent (10%). The $250,000 Note is due and payable
within seven months of the Effective Date of each payment, and is convertible at a price equal to $0.0125. The $50,000 Note is
due and payable on February 25, 2018, and is convertible at a price equal to $0.0175. Tangiers may convert any amount of principal
or interest due into the Company’s Common Stock, par value $0.001 per share. (See Note 12 Subsequent Events).
Operating Activities - For the six months ended
June 30, 2017, the Company used cash in operating activities of $433,841. For the six months ended June 30, 2016, the Company used
cash in operating activities of $64,991. 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 six months
ended June 30, 2017, the Company spent cash of $280,000 in investing activities related to its purchase of 15 million restricted
common shares in MoneyTrac Technology, Inc. in exchange for $205,000, and its investment of $75,000 in the Bougainville Ventures
joint venture and $4,860 on office equipment. During the six months ended June 30, 2016 the Company had no investing activity.
Financing Activities - During the six months
ended June 30, 2017 the Company, primarily through its receipt of funds from the issuance of notes payable, notes payable to related
parties, and sale of common stock, resulted in financing activity of $580,845. For the six months ended June 30, 2016 the Company
received proceeds of $65,000 from sale of common stock.
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 2017 and 2016 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 materially in the second half of 2017 and
beyond as it implements its affiliate marketing and sales program and concurrently expands its sales of its hempSMART™
products. The Company has stockholders' deficiencies at June 30, 2017 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.
The Company’s two joint venture projects
require the Company to provide material commitments of cash in order to fund the acquisition of land and operations to initiate
the two grow operations. The Company does not have the ability to fund these joint ventures based upon its current cash position.
The Company has arranged for partial external third party financing in the amount of $752,500 for the Company’s one-million-dollar
financing commitment for the Bougainville Ventures joint venture project. However, the joint venture agreement commits the
Company to a funding schedule that obligated the Company to make the following payments: $75,000 by April 4, 2017; $125,000 by
April 17, 2017; $513,750 by May 1, 2017; $17,250 by June 1, 2017; $19,000 by July 1, 2017; and, $250,000 by August 1, 2017. As
of June 30, 2017, the Company made the initial payment of $75,000, but otherwise failed to comply with the requirements of the
funding schedule. The Company is in default of the joint venture agreement as of June 30, 2017.
The Company has a material capital commitment to provide
up to $1.5 million dollars in funding for the GateC joint venture project, but as of the date of this filing has not provided or
arranged financing for this project. As the Company does not currently have the funding capability to complete both projects, it
entered into a $5 million fixed funding commitment with Tangiers Global, LLC on August 1, 2017 requiring the Company to register
shares of its common stock for sale to Tangiers to provide the Company with the necessary funding to complete both the Bougainville
Ventures project and the GateC project. Aside from the completion of the Company’s financing commitments mentioned above,
the Company expects that cash provided by the Tangiers fixed funding commitment will allow it to augment its cash used in future
operating activities (See Note 12: Subsequent Events).
Government Regulations of Cannabis
Federal Law
The Company’s cannabis and CBD products
are currently illegal under Federal Law (See Part 2, Item IA: Risk Factors). Insofar as the Company sells cannabis or products
CBD, they are considered illegal under Federal Law.
The United States federal government regulates
drugs through the Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances, including
cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as highly addictive and having no medical
value. The United States Department of Justice defined CBD as a Schedule I drug. The United States Federal Drug Administration
has not approved the sale of marijuana for any medical application. Doctors may not prescribe cannabis for medical use under federal
law, however, they can recommend its use under the First Amendment. In 2010, the United States Veterans Affairs Department clarified
that veterans using medicinal cannabis will not be denied services or other medications that are denied to those using illegal
drugs.
However, the CSA
excludes
from its
definition of marijuana as a Schedule 1 drug “…the mature stalks of such plant, fiber produced from such stalks,
oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such
mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable
of germination.”
In 21 C.F.R. Part 1308, the U.S.
Department of Justice, Drug Enforcement Agency, provided: “DEA believes that industrial "hemp" products such
as paper, clothing, and rope, when used for legitimate industrial purposes (not for human consumption) meet the criteria
of section 811(g)(3)(B) and Sec. 1308.23. Legitimate use of such products cannot result in THC entering the
human body. Moreover, allowing these products to be exempted from CSA control in no way hinders the efficient enforcement of
the CSA. Accordingly, DEA believes that these types of industrial products should be exempted from application of the CSA,
provided they are not used, or intended for use, for human consumption. Included in the category of lawful hemp products are
textiles, such as clothing made using fiber produced from cannabis plant stalks. Also in the lawful category are personal
care products that contain oil from sterilized cannabis seeds, such as soaps, lotions, and shampoos…in order to
provide some guidance to the public, the following are some of the more common "hemp" products that are exempted
(non-controlled) under this final rule, provided they are not used, or intended for use, for human consumption: paper, rope,
and clothing made from fiber derived from cannabis stalks, industrial solvents made with oil from cannabis seeds, and bird
seed containing sterilized cannabis seed mixed with seeds from other plants (or other ingredients not derived from the
cannabis plant). Personal care products (such as lotions and shampoos) made with oil from cannabis seeds are also generally
exempted.”
Some of the Company’s products in conceptual
development, including body care, shampoos and other like products not meant for human consumption and are thus exempt from the
CSA, contingent upon other new laws and regulations being enacted in the future.
State Law
Twenty-eight states and the District of Columbia
currently have laws legalizing marijuana in some form. Three other states will soon join them after recently passing measures permitting
use of medical marijuana.
Recently, California, Massachusetts, Maine
and Nevada all passed measures in November, 2016 legalizing recreational marijuana. California’s Prop. 64 measure allows
adults 21 and older to possess up to one ounce of marijuana and grow up to six plants in their homes. Other tax and licensing provisions
of the law will not take effect until January 2018.
Additionally, there are active efforts by many
advocacy groups seeking to expand the legalization of cannabis, including, but not limited to the Marijuana Policy Project, a leading
advocate for major state-level marijuana policy reforms that have resulted in successful efforts to pass 10 of the 15 most recent
state medical marijuana laws (in Arizona, Delaware, Illinois, Maryland, Michigan, Minnesota, Montana, New Hampshire, Rhode Island,
and Vermont) and five of the seven most recent decriminalization laws (in Delaware, Maryland, Massachusetts, Rhode Island, and
Vermont).
These noted state laws, both proposed and enacted,
are in conflict with the federal Controlled Substances Act, which makes cannabis use and possession illegal on a national level.
However, on August 29, 2013, the U.S. Department of Justice issued a memorandum providing that where states and local governments
enact laws authorizing cannabis-related use, and implement strong and effective regulatory and enforcement systems, the federal
government will rely upon states and local enforcement agencies to address cannabis activity through the enforcement of their own
state and local narcotics laws. The memorandum further stated that the U.S Justice Department’s limited investigative and
prosecutorial resources will be focused on eight priorities to prevent unintended consequences of the state laws, including distribution
of cannabis to minors, preventing the distribution of cannabis from states where it is legal to states where it is not, and preventing
money laundering, violence and drugged driving.
However, with the election of 2016, the new
Trump administration has not taken a position on enforcement of federal laws relating to cannabis, in light of the foregoing administrative
position of the U.S. Department of Justice (see Part II, Section IA. Risk Factors).
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 1 of the condensed consolidated financial statements for discussion of recent accounting pronouncements.