ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies
applied in the presentation of the accompanying financial statements follows:
Basis and business
presentation
Marijuana Company of America, Inc. (The “Company”)
was incorporated under the laws of the State of Utah in October 1985 under the name Mormon Mint, Inc. The corporation was originally
a startup company organized to manufacture and market commemorative medallions related to the Church of Jesus Christ of Latter
Day Saints. On January 5, 1999, Bekam Investments, Ltd. acquired one hundred percent of the common shares of the Company and spun
the Company off changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the
development and implementation of Internet web content and e-commerce applications. In October 2009, in a 30 for 1 exchange, the
Company merged with Sparrowtech, Inc. for the purpose of exploration and development of commercially viable mining properties.
From 2009 to 2014, we operated primarily in the mining exploration business.
In 2015, the Company changed its business model
to a marketing and distribution company for medical marijuana. In conjunction with the change, the Company changed its name to
Marijuana Company of America, Inc.
At the time of the transition in 2015, there were no remaining
assets, liabilities or operating activities of the mining business.
On September 21, 2015, the Company formed H
Smart, Inc, a Delaware corporation as a wholly owned subsidiary for the purpose of operating the hempSMART brand.
On February 1, 2016, the Company formed MCOA
CA, Inc., a California corporation as a wholly owned subsidiary to facilitate mergers, acquisitions and the offering of investments
or loans to the Company.
On May
3, 2017, the Company formed Hempsmart Limited, a United Kingdom corporation as a wholly owned subsidiary for the purpose of future
expansion into the European market.
The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries: H Smart, Inc., Hempsmart Limited and
MCOA CA, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 December 31, 2017 and 2016, allowance for doubtful
accounts was $-0-.
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 December 31, 2017, there were outstanding stock options to purchase 1,000,000,000 shares of common
stock, 750,000,000 shares of which were vested. (See Note 10)
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The computation of basic and diluted income
(loss) per share as of December 31, 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:
|
|
2017
|
|
2016
|
Convertible notes payable
|
|
|
46,108,713
|
|
|
|
—
|
|
Options to purchase common stock
|
|
|
1,000,000,000
|
|
|
|
1,000,000,000
|
|
Warrants to purchase common stock
|
|
|
99,953,846
|
|
|
|
—
|
|
Restricted stock units
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
Total
|
|
|
1,156,062,559
|
|
|
|
1,010,000,000
|
|
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 (See Note 4).
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of December 31, 2017 and 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.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $77,552 and $44,688 for the year ended December
31, 2017 and 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.
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 December 31, 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 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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Adoption of Accounting Standards
In May 2014, the Financial
Accounting Standards Board (the “FASB”) issued ASU 2014-09 “Revenue from Contracts with Customers” to supersede
previous revenue recognition guidance under current U.S. GAAP. The guidance presents a single five-step model for comprehensive
revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Two options are available for implementation of the standard which is either the retrospective approach or cumulative effect adjustment
approach. The guidance becomes effective for annual reporting periods beginning after December 15, 2017, including interim periods
within that reporting period, with early adoption permitted.
The Company has determined
that the adoption of ASU-2014-09 will not have a material impact on its financial statements.
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 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 year ended December 31, 2017, the Company incurred
net losses of $33,441,920 and used cash in operations of $895,743. 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 has 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
2017 and beyond as it develops its business model. The Company has stockholders' deficiencies at December 31, 2017 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. The accompanying statements do not include any adjustments that might result should the Company be unable to continue
as a going concern.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2017 and 2016 is summarized
as follows:
|
|
2017
|
|
2016
|
Computer equipment
|
|
$
|
11,004
|
|
|
$
|
—
|
|
Furniture and fixtures
|
|
|
5,140
|
|
|
|
—
|
|
Subtotal
|
|
|
16,144
|
|
|
|
—
|
|
Less accumulated depreciation
|
|
|
(2,576
|
)
|
|
|
—
|
|
Property and equipment, net
|
|
$
|
13,568
|
|
|
$
|
—
|
|
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 $2,576 and $0 for
the year ended December 31, 2017 and 2016.
NOTE 4 – 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 19.8% ownership
at the time of the agreement. As of December 31, 2017, the Company had acquired 15,000,000 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. 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
The standalone unaudited financial statements of the BV- MCOA Management LLC Joint Venture for the year ended December 31,
2017 and December 31, 2016 were as follows:
|
|
2017
|
|
2016
|
Cash
|
|
$
|
187,312.40
|
|
|
$
|
—
|
|
Notes Receivable
|
|
|
79,811
|
|
|
$
|
—
|
|
Fixed Assets
|
|
|
161,175
|
|
|
$
|
—
|
|
Land
|
|
|
274,000
|
|
|
$
|
—
|
|
Total Assets
|
|
$
|
702,298.23
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
4,365
|
|
|
$
|
—
|
|
Total Liabilities
|
|
$
|
4,364.55
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
697,934
|
|
|
$
|
—
|
|
Total Assets and Liabilities
|
|
$
|
702,298.23
|
|
|
$
|
—
|
|
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 49.5% basis with neither party having effective
control.
On November 6, 2017, the Company amended a
material definitive agreement not made in the ordinary course of its business. The parties to the agreement are the Company and
Bougainville Ventures, Inc. (“Bougainville”). On March 16, 2017, the Company and Bougainville previously entered into
a Joint Venture Agreement (“Agreement”). The Agreement required the Company to raise funds for the Joint Venture Project
in the amount of not less than one million dollars ($1,000,000). Pursuant to Section 12.9 of the Agreement, the Company and Bougainville
entered into a written amendment of the Agreement which changed the Company’s funding obligation from one million dollars
($1,000,000) to eight hundred thousand dollars ($800,000), and separately required the Company to issue to Bougainville or its
designee 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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The total investment of $345,477 is comprised
of a 49.5% 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. The Company’s 50% loss incurred by the Company’s interest was $50,523 and $0 for the
years ended December 31, 2017 and 2016 and was recorded as other income/expense in the Company’s Statement of Operations
in the appropriate periods. A $792,500 impairment write down was recorded against this investment for the year ended December 31,
2017 to reflect the Company’s percentage of ownership of the net book value of the investment.
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 shall have 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.
GateC Research, Inc.
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
($500,000 USD) within a three (3) month period; and, information establishing brands and systems for the representation of marijuana
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 marijuana industry.
GateC agreed to contribute its management and
control services and systems related to marijuana 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 marijuana did not contain a conditional use permit.
On or about November 28, 2017, GateC and the
Registrant orally agreed to a suspension of the Registrant’s funding commitment, pending the finalization of California State
regulations governing the growth, cultivation and distribution of marijuana.
On March 19, 2018, subsequent to these financial
statements, the Company terminated a material definitive agreement not made in the ordinary course of its business. The parties
to the agreement are the Company and
GateC.
With the exception
of the entry into a Recession and Mutual Release Agreement terminating the material definitive agreement, no material relationship
exists between the Registrant, or any of the Registrant’s affiliates or control persons on the one hand, and GateC, and any
of its affiliates or control persons on the other hand.
In connection with the agreement
dated November 28, 2017, the Company recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding
impairment charge of $1,500,000 relating the Agreement dated March 17, 2017.
Global Hemp Group JV
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 will 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 in 2018. The Company’s costs incurred by the Company’s interest was $10,775
and $0 for the years ended December 31, 2017 and 2016 and was recorded as other income/expense in the Company’s Statement
of Operations in the appropriate periods.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 5 – ACCOUNTS PAYABLE
During the years ended December 31, 2017 and
2016, the Company settled outstanding payables with vendors. In connection with the settlement, the Company recorded a gain of
$4,822 and $7,442 for the years ended December 31, 2017 and 2016, respectively.
NOTE 6 – NOTES PAYABLE
Purchase agreement CBD Global, Inc.
On July 12, 2016, the Company entered into
a payment agreement with CBD Global, Inc. for the supply of raw materials used in the sale of the Company’s product for an
aggregate amount of $15,000.
Under the terms of the payment agreement, the
Company and the vendor agreed to payments, net 30 days from delivery, 75% cash and 25% of the Company’s common stock at a
fixed conversion rate of $0.00335.
In accordance ASC 470-20, Debt (“ASC
470-20”), the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion
of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured
an aggregate of $3,638 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to
additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature was
charged to current period operations as interest expense.
NOTE 7 – NOTES PAYABLE, RELATED PARTY
As of December 31, 2017 and 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 bear 5% interest for 2017 notes and non-interest bearing for 2016 notes.
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.
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
During the year ended December 31, 2017, the
Company issued an aggregate of 62,721,553 shares of its common stock in settlement of the issued notes payable and accrued interest.
For the year ended December 31, 2017, the Company
recorded amortization of debt discounts of $585,092 as a charge to interest expense.
NOTE 8 – CONVERTIBLE NOTE PAYABLE
Convertible notes payable are comprised of
the following:
|
|
2017
|
|
2016
|
Convertible note payable-DTTO- due April 30, 2018
|
|
$
|
111,111
|
|
|
$
|
—
|
|
Convertible notes payable-St George-last due April 27, 2019
|
|
|
1,688,920
|
|
|
|
—
|
|
Total
|
|
|
1,800,031
|
|
|
|
—
|
|
Less debt discounts
|
|
|
(1,232,620
|
)
|
|
|
—
|
|
Net
|
|
|
567,411
|
|
|
|
—
|
|
Less current portion
|
|
|
(394,555
|
)
|
|
|
—
|
|
Long term portion
|
|
$
|
172,856
|
|
|
$
|
—
|
|
Convertible debenture-Guillermo Haro
On October 13, 2016, the Company issued a convertible
debenture for $40,000, due January 13, 2017, bearing interest of 12% per annum due upon conversion and is unsecured.
The debenture is convertible, at any time,
into shares of the Company’s common stock at the published last three closing prices for the Company prior to the date of
conversion.
The Company has identified the embedded derivatives
related to the above described debenture. 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 Notes and to fair value as of each subsequent reporting date.
At the funding dates of the debenture, the
Company determined the aggregate fair value of $154,910 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 482.68%, (3) weighted average risk-free interest rate of 0.30%, (4) expected life of 0.25 years, and (5) estimated fair value
of the Company's common stock from $0.0155 per share.
The determined fair value of the debt derivatives
of $154,910 was charged as a debt discount up to the net proceeds of the note with the remainder of $114,910 charged to 2016 operations
as non-cash interest expense.
On December 30, 2016, the Company issued 3,440,860
shares of its common stock in settlement of the outstanding debenture and accrued interest. In connection with the settlement,
the Company recorded a loss on settlement of debt of $95,955 representing the fair value of common shares issued at conversion
in excess of the terms of the note.
Convertible note payable-DTTO
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
On 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.
At the funding date of the note, 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.
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.
Convertible note payable-Tangiers Global LLC
On July 31, 2017, the Company issued a 10%
fixed convertible promissory note for an aggregate of $250,000 due February 28, 2018. The Company had received net proceeds of
$76,500 under the note. Gross face amount was $85,000, 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 $0.0125 per share. As an investment incentive, the Company issued 10,000,000
5 year cashless warrants, exercisable at $.025.
At the funding date of the note, the Company
determined the aggregate fair value of $374,100 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
448.42% to 448.47%, (3) weighted average risk-free interest rate of 1.13% to 1.15%, (4) expected life of 0.58 to .59 years, and
(5) estimated fair value of the Company's common stock from $0.0375 to $0.0376 per share.
The determined fair value of the debt derivatives
of $374,100 was charged as a debt discount up to the net proceeds of the note with the remainder of $234,100 charged to operations
as non-cash interest expense.
Additionally, date of issuance, the Company
determined the aggregate fair value of $375,000 of the issued warrant. The fair value of the warrant was determined using the Binomial
Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 448.47%, (3) weighted
average risk-free interest rate of 1.84%, (4) expected life of 5.00 years, and (5) estimated fair value of the Company's common
stock from $0.0375 per share.
The determined fair value of the issued warrant
of $375,000 was charged as an inducement cost and charged to operations as non-cash interest expense.
On October 10, 2017, the Company entered into
a “Settlement and Mutual Release of All Claims Agreement” (“Agreement”) with Tangiers Global, LLC (“Tangiers”)
terminating the Company’s previously announced material definitive agreement with Tangiers reported on Form 8-K on July 31,
2017. The Agreement terminated an Investment Agreement between the Company and Tangiers, wherein Tangiers previously 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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Further, the Agreement, terminated a Registration
Rights Agreement entered into between the Company and Tangiers, which was 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.
Further, the Agreement
settled two outstanding fixed convertible promissory notes the Company executed in favor of Tangiers: one in the amount of two
hundred and fifty thousand dollars ($250,000.00), of which Tangiers had advanced eighty-five thousand dollars ($85,000) to the
Company, with total principal and interest due in the amount of ninety-three thousand, five hundred dollars ($93,500); and one
in the amount of fifty thousand dollars ($50,000), with total principal and interest due in the amount of fifty-five thousand dollars
($55,000). In addition, previously issued warrants to acquire 10,000,000 shares of the Company’s common stock were returned
and canceled.
The Agreement further provided that in order
to affect a prepayment of the fixed convertible promissory note in the amount of two hundred and fifty thousand dollars ($250,000),
the Company agreed to pay a prepayment penalty of eighteen thousand, five hundred dollars ($18,500), resulting in a total payable
on this note in the amount of one hundred and twelve thousand, two hundred dollars ($112,200).
The Company agreed to settle the notes by paying
Tangiers one hundred and sixty-seven thousand, two hundred dollars ($167,200) and issuing Tangiers three million shares of the
Company’s restricted common stock. The Company and Tangiers agreed to mutual releases of all claims.
On October 10, 2017, the Company issued 3,000,000
shares of common stock and paid $167,200 in full settlement of the outstanding Tangiers notes recognizing a gain on settlement
of debt of $342,399. The gain was determined by the fair value of the common shares obligated at the time of settlement of 11,200,000
less the 3,000,000 issued to settle, net with cash paid plus the fair value of the canceled liability warrants.
Convertible notes payable-St George Investments
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 was funded in five tranches of $422,500, $27,500, $167,200 and $107,800; net of OID and
transaction costs. As an investment incentive, the Company issued 33,653,846, 5 year cashless warrants, exercisable at $.04 with
certain reset provisions.
Forbearance agreement
On August 4, 2017, the Company entered into
a forbearance agreement with St. George Investments LLC, due to the Company’s alleged breached of certain default provisions
of the secured promissory note entered into with St. George on July 3, 2017. The alleged 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 alleged 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 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 alleged 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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
As of December 31, 2017, the Company had received
aggregate net proceeds of $675,000 under the note. Gross face amount was $752,500, after additions for OID and other related costs.
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 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 $59,220. The promissory note was funded on November 11, 2017 of $542,200; net of OID and
transaction costs.
As of December 31, 2017, the Company had received
aggregate net proceeds of $542,200 under the note. Gross face amount was $601,420, after additions for OID and other related costs.
Effective December 20, 2017, the Company issued
a secured convertible promissory note in aggregate of $335,000 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 $35,000. The promissory note was funded on December 27, 2017 of $542,200; net of OID and
transaction costs. As an investment incentive, the Company issued 33,653,846, 5 year cashless warrants, exercisable at $.04 with
certain reset provisions.
As of December 31, 2017, the Company had received
aggregate net proceeds of $300,000 under the note. Gross face amount was $335,000, after additions for OID and other related costs.
The promissory notes are 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.
At the funding dates of the notes, the Company
determined the aggregate fair value of $414,997 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
447.62% to 448.40%, (3) weighted average risk-free interest rate of 1.19% to 1.13%, (4) expected life of 1.33 years, and (5) estimated
fair value of the Company's common stock from $0.0231 to $0.0355 per share.
The determined fair value of the debt derivatives
of $414,997 was charged as a debt discount up to the net proceeds of the note with the remainder of $809 charged to operations
as non-cash interest expense.
Additionally, date of issuance, the Company
determined the aggregate fair value of $3,032,900 of the issued warrants. The fair value of the warrants were determined using
the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 436.55%
to 448.94%, (3) weighted average risk-free interest rate of 1.93% to 2.15%, (4) expected life of 5.00 years, and (5) estimated
fair value of the Company's common stock from $0.0205 to $0.0355 per share.
The determined fair value of the issued warrants
of $3,032,900 was charged as an inducement cost and charged to operations as non-cash interest expense.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Summary:
The Company has identified the embedded derivatives
related to the above described notes and warrants. These embedded derivatives included certain conversion and reset 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 December 31, 2017, the Company determined
the aggregate fair values of $1,934,097 and $5,859,635 of embedded derivatives and warrant liabilities, respectively. The fair
values were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2)
expected volatility of 436.67%, (3) weighted average risk-free interest rate of 1.39% to 2.20%, (4) expected life of 0.33 to 4.96
years, and (5) estimated fair value of the Company's common stock from $0.0588 per share.
For the year ended December 31, 2017, the Company
recorded a loss on change in fair value of derivative liabilities of $4,329,743 and recorded amortization of debt discounts of
$1,042,999 as a charge to interest expense, respectively.
NOTE 9 – DERIVATIVE LIABILITIES
As described in Notes 7 and 8, 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 10 – 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, 2017 and December 31, 2016. As of December 31, 2017 and 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 December 31, 2017 and 2016. As of December 31, 2017 and 2016, the Company had 2,103,464,006
and 1,620,996,998 common shares issued and outstanding.
In 2016, the Company issued an aggregate of
91,333,333 shares of its common stock for services rendered with an estimated fair value of $1,218,879.
In 2016, the Company issued an aggregate of
409,674,303 shares of its common stock in settlement of related party notes payable in aggregate of $450,642.
In 2016, the Company issued an aggregate of
4,565,860 shares of its common stock in settlement of notes payable and purchase agreements of $43,750.
In 2016, the Company canceled and returned
to treasury an aggregate of 65,500,000 shares of previously issued common stock.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
In 2016, the Company sold an aggregate of 69,623,874
shares of its common stock for net proceeds of $349,500.
In December 2016,
the Company’s board of directors approved bonuses to the officers of the Company of an aggregate of 25,000,000 shares. As
such, the Company recorded stock based compensation of $2,025,000 based on the fair value at the date of grant.
During the year ended December 31, 2017, the
Company issued an aggregate of 344,033,333 shares of its common stock for services rendered with an estimated fair value of $19,068,583.
During the year ended December 31, 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 year ended December 31, 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 year ended December 31, 2017, the
Company sold an aggregate of 8,166,667 shares of its common stock for net proceeds of $85,000.
During the year ended December 31, 2017, the
Company issued an aggregate of 62,721,553 shares of its common stock in settlement of $616,095 related party notes payable and
accrued interest.
During the year ended December 31, 2017, the
Company issued 3,000,000 shares of its common stock in part settlement of $140,000 convertible notes payable, accrued interest
and penalties.
During the year ended December 31, 2017, the
Company issued 15,000,000 shares of its common stock as part investment into Bougainville Ventures, Inc.
Options
Option valuation models
require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes
option model with a volatility figure derived from using the Company’s historical stock prices. Management determined this
assumption to be a more accurate indicator of value. The Company accounts for the expected life of options based on the contractual
life of options for non-employees. For employees, the Company accounts for the expected life of options in accordance with the
“simplified” method, which is used for “plain-vanilla" options, as defined in the accounting standards codification.
The risk-free interest
rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected
term of the options.
In addition, the Company
is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating
the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options,
and the number of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is
materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation
expense could be significantly different from what the Company has recorded in the current period.
The following table summarizes the stock option
activity for the years ended December 31, 2017 and 2016:
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2016
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
9.77
|
|
$
|
23,300,000
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
8.76
|
|
$
|
|
76,000,000
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
7.76
|
|
|
|
53,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
750,000,000
|
|
|
$
|
0.005
|
|
|
|
7.76
|
|
|
$
|
40,350,000
|
|
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 $0.0588 as of December 31, 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 December 31, 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
|
|
|
7.76
|
|
|
|
750,000,000
|
|
As of December 31,
2017, stock-based compensation of $450,000 remains unamortized and is expected to be amortized over the weighted average remaining
period of 0.75 years.
The stock-based compensation
expense related to option grants was $600,000 and $600,000 during the year ended December 31, 2017 and 2016, respectively.
Warrants
The following table summarizes the stock warrant
activity for the two years ended December 31, 2017:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
Outstanding at January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
-
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
109,653,846
|
|
|
$
|
0.039
|
|
$
|
5.00
|
|
|
$
|
158,000
|
Forfeitures or expirations
|
|
|
(10,000,000
|
)
|
|
$
|
0.025
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
99,653,846
|
|
|
$
|
0.04
|
|
|
4.81
|
|
|
$
|
1,873,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
99,653,846
|
|
|
$
|
0.04
|
|
|
4.81
|
|
|
$
|
1,873,492
|
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 $0.0588 as of December 31, 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 warrants at
December 31, 2017:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Life
In Years
|
|
|
Exercisable
Number of
Options
|
|
$
|
0.04
|
|
|
|
99,653,846
|
|
|
4.81
|
|
|
|
99,953,846
|
|
In connection with the issuance of convertible
notes payable, the Company issued an aggregate of 109,653,846 warrants to purchase the Company’s common stock from $0.025
to $0.04, vesting immediately and expiring 5 years from the date of issuance. (See Note 8)
Restricted Stock
Units (“RSU”)
The following table summarizes the restricted
stock activity for the nine months ended September 30, 2017:
Restricted shares units issued as of January 1, 2016
|
|
|
—
|
|
Granted
|
|
|
10,000,000
|
|
Forfeited
|
|
|
—
|
|
Total Restricted Shares Issued at December 31, 2016
|
|
|
10,000,000
|
|
Granted
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Total Restricted Shares Issued at December 31, 2017
|
|
|
10,000,000
|
|
Vested at December 31, 2017
|
|
|
—
|
|
Unvested restricted shares as of December 31, 2017
|
|
|
10,000,000
|
|
In
April 2016, the Company granted to Robert Cronin and Robert Peak an aggregate of 10,000,000 shares of restricted common stock each
vesting two years from Anniversary. On November 3, 2016, Mr. Cronin and Mr. Peak each agreed to return to treasury all 20,000,000
shares to the Company, and the Company agreed to issue Mr. Cronin and Mr. Peak 2,500,000 restricted shares each. The fair value
of the granted restricted stock units vested in 2017 and 2016 of $210,750 and $303,750 was recognized in operations as stock based
compensation.
As of December 31, 2017, stock-based compensation
related to restricted stock awards of $73,500 remains unamortized and is expected to be amortized over the weighted average remaining
period of 0.25 years.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 11 — 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 December 31, 2017 and 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 December 31, 2017 and 2016, the Company
did not have any derivative instruments that were designated as hedges.
The derivative and warrant liability as of
December 31, 2017, in the amount of $2,631,375 and $6,447,631, respectively, have a level 3 classification.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The following table provides a summary of changes
in fair value of the Company’s Level 3 financial liabilities for the two years ended December 31, 2017:
|
|
Warrant
Liability
|
|
Debt
Derivative
|
Balance, January 1, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
Initial fair value of debt derivative at note issuance
|
|
|
—
|
|
|
|
154,911
|
|
Mark-to-market at December 31, 2016
|
|
|
—
|
|
|
|
(14,208
|
)
|
Transfers out of Level 3 upon conversion or payoff of notes payable
|
|
|
—
|
|
|
|
(140,703
|
)
|
Balance, December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
Total (gains) losses
|
|
|
|
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
|
|
|
|
3,383,913
|
|
Initial fair value of warrant liability at issuance
|
|
|
3,407,900
|
|
|
|
|
|
Mark-to-market at December 31, 2017:
|
|
|
2,731,734
|
|
|
|
1,598,009
|
|
Transfers out of Level 3 upon conversion or payoff of notes payable or cancellation of warrant
|
|
|
(279,999
|
)
|
|
|
(2,350,547
|
)
|
Balance, December 31, 2017
|
|
$
|
5,859,635
|
|
|
$
|
2,631,375
|
|
Net gain (loss) for the period included in earnings relating to the liabilities held during
the period ended December 31, 2017
|
|
$
|
(2,731,734
|
)
|
|
$
|
(1,598,009
|
)
|
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
December 31, 2017, the Company’s stock price increased significantly from initial valuations. As the stock price increases
for each of the related derivative instruments, the value to the holder of the instrument generally increases. Stock price is
one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.
NOTE 12 — RELATED PARTY TRANSACTIONS
The Company’s current officers and stockholders
advanced funds to the Company for travel related and working capital purposes. As of December 31, 2017, and 2016, there were no
related party advances outstanding.
As of December 31, 2017, and 2016, accrued
compensation due officers and executives included as accrued compensation was $0 and $32,710, respectively.
In 2017 and 2016, the Company issued for accrued
compensation and subsequently converted to common stock an aggregate of $195,000 and $357,500 notes payable.
In 2016, the Company issued for incurred expenses
and subsequently converted to common stock an aggregate of $93,142 convertible notes payable. In connection with the settlement,
the Company incurred a $59,272 loss on settlement of debt
At December 31, 2017 and 2016, there were an
aggregate of $542,573 and $7,487 notes payable due to officers. The notes are at 5% per annum and non-interest bearing, respectively,
and are due on demand.
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. The Company’s Chief Financial Officer, Robert L. Hymers,
III, is a shareholder of Global Hemp Group, Inc.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Employment contracts
Effective January 1, 2016, the Company entered
into employment contracts with Donald Steinberg (Chief Executive Officer), Charles Larsen (Director) and Robert Hymers (Chief Financial
Officer) for annual compensation of $180,000, $120,000 and $90,000, respectively. The contracts are for a one year term with automatic
renewal. For each fiscal year, the officers are eligible to receive an annual bonus based on the sole and absolute discretion of
the board of directors. In addition, during the employment term, the officers are eligible to participate in the Marijuana Company
of America, Inc. Equity Incentive Plan, as determined by the board of board of directors and any fringe benefits and perquisites
consistent with the practices of the Company and to the extent the Company provides similar benefits or perquisites (or both) to
similarly situated executives of the Company during employment term.
The employment contracts can be terminated
by either the Company or the officer at any time for any reason with at least a 30-day notice. Should termination occur by the
Company without cause and subject to certain limitations (as defined); the officer is entitled to one year base pay and target
bonus for the year in which termination occurs, as a lump sum payment 30 days following termination. In addition, subject to the
Marijuana Company of America, Inc. Equity Incentive Plan or any successor Plan, all previously granted and outstanding equity based
compensation awards shall become fully vested and exercisable for their remaining terms (subject to limitations).
Operating lease
On June 16, 2017, the Company entered into
a lease agreement, whereby the Company leased for office space in Escondido, California, commencing July 1, 2019 and expiring on
June 30, 2019 at a base monthly lease rate of $1,234 per month.
Future minimum lease payments under these three
agreements are as follows:
Year Ending December 31,
|
|
|
|
2018
|
|
|
$
|
14,805
|
|
|
2019
|
|
|
|
7,403
|
|
|
|
|
|
$
|
22,208
|
|
Litigation
The Company
is subject at times to other legal proceedings and claims, which arise in the ordinary course of its business. Although
occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not
have a material adverse effect on its financial position, results of operations or liquidity. There was no outstanding
litigation as of December 31, 2016 or 2015.
NOTE 14 – INCOME TAXES
At December 31, 2017, the Company has available
for federal income tax purposes a net operating loss carry forward of approximately $42,888,104, expiring in the year 2037, that
may be used to offset future taxable income, but could be limited under Section 382. The Company has provided a valuation reserve
against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of
the Company; it is more likely than not that the benefits will not be realized. Due to possible significant changes in the Company's
ownership, the future use of its existing net operating losses may be limited. All or portion of the remaining valuation allowance
may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits. During
the year ended December 31, 2017, the Company has increased the valuation allowance from $9,446,184 to $42,988,104.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
We have adopted the provisions of ASC 740-10-25,
which provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in
income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized
in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities.
Tax position that meet the more likely than
not threshold is then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income
tax returns that were considered to be uncertain.
We file income tax returns in the U.S.
and in the state of California and Utah with varying statutes of limitations.
The Company is required to file income tax
returns in the U.S. Federal jurisdiction and in California. The Company is no longer subject to income tax examinations by tax
authorities for tax years ending before December 31, 2013.
The Company’s deferred taxes as of December
31, 2017 and 2016 consist of the following:
|
|
2017
|
|
2016
|
Non-Current deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
41,560,772
|
|
|
$
|
9,446,184
|
|
Valuation allowance
|
|
|
(41,560,772
|
)
|
|
|
(9,446,184
|
)
|
Net non-current deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 15 – SUBSEQUENT EVENTS
On
March 19, 2018. GateC and the Company rescinded the joint venture agreement dated March 16, 2017 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 joint
venture agreement.
On
April 14, 2018, Money Trac Technology, Inc. informed the Company that due to unregistered sales of its common stock, the Company’s
interest in Money Trac was reduced to approximately 6%.
On February 2, 2018,
the Company issued 1 million common shares to Caren Glasser as consideration for an engagement agreement for services. The issuance
was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506
of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Ms. Glasser was an “accredited
investor” and/or “sophisticated investor” pursuant to Section 501(a) of the Securities Act, who provided the
Company with representations, warranties and information concerning her qualifications as a “sophisticated investor”
and/or “accredited investor.” The Company provided and made available to Ms. Glasser full information regarding its
business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities.
Ms. Glasser acquired the restricted common stock for her own account, for investment purposes and not with a view to public resale
or distribution thereof within the meaning of the Securities Act. The restricted shares so purchased cannot be sold unless pursuant
to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities
Act—the existence of any such exemption subject to legal review and approval by the Company.
On April 11, 2018, the Company issued 34.5
million common shares to the William Miertschin Revocable Trust as a replacement for a lost stock certificate, and pursuant to
the order of the Texas District Court, case no. DC-17-16531, dated March 14, 2018. The issuance was made in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder,
with respect to the issuance of the restricted stock. Miertschin Trust was an “accredited investor” and/or “sophisticated
investor” pursuant to Section 501(a) of the Securities Act, who provided the Company with representations, warranties and
information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The
Company provided and made available to Miertschin Trust full information regarding its business and operations. There was no general
solicitation in connection with the offer or sale of the restricted securities. Miertschin Trust acquired the restricted common
stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning
of the Securities Act. The restricted shares so purchased cannot be sold unless pursuant to an effective registration statement
by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any
such exemption subject to legal review and approval by the Company.