UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

     
(Mark One)    

 

ý

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2020

 

Or

 

o  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                          to                     

 

 

Commission File Number 000-27039

MARIJUANA COMPANY OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

     
Utah
(State or other jurisdiction of
incorporation or organization)
 

98-1246221

(I.R.S. Employer
Identification No.)

 

1340 West Valley Parkway, Ste. 205
Escondido, California
(Address of principal executive offices)

 

 

92029
(Zip Code)

 

(888) 777-4362
(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

None

(Title of each class)

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value

646,883,314 Common Shares Registered as of December 31, 2020

[File No. 333-250887]

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ý    No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

  

 
 
 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer  
Non-accelerated filer ý   Smaller reporting company ý
Emerging growth company ý      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

 

The aggregate market value of the common stock held by non-affiliates, based upon the average bid and asked price of common stock, as of the last business day of the registrant’s most recently completed fiscal year was $12,801,948.

As of December 31, 2020, 3,136,774,861 shares of common stock were outstanding.

As of April 14, 2021, 4,836,957,259 shares of common stock were outstanding.

 

 

 
 
 

 

 

TABLE OF CONTENTS 

 

    Page
PART I
 
Item 1.   Business     4  
Item 1A.   Risk Factors     53  
Item 1B.   Unresolved Staff Comments     26  
Item 2.   Properties     26  
Item 3.   Legal Proceedings     26  
Item 4.   Mine Safety Disclosures     27  
PART II
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     27  
Item 6.   Selected Financial Data     51  
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     51  
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk     68  
Item 8.   Financial Statements and Supplementary Data     69  
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure     71  
Item 9A   Controls and Procedures     71  
Item 9B.   Other Information     73  
PART III
Item 10.   Directors, Executive Officers and Corporate Governance     73  
Item 11.   Executive Compensation     76  
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     77  
Item 13.   Certain Relationships and Related Transactions, and Director Independence     79  
Item 14.   Principal Accountant Fees and Services     79  
PART IV
Item 15.   Exhibits, Financial Statement Schedules     80  
Item 16.   Form 10-K Summary     82  

 

 

 

2 
 
 

 

PART I.

 

ITEM 1. BUSINESS

 

FORWARD LOOKING STATEMENTS

 

This annual report on Form 10-K (including, but not limited to, the following disclosures regarding our Business) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this annual report on Form 10-K. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

 

Forward-looking statements in this annual report on Form 10-K reflect our good faith judgment based on facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this annual report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this annual report on Form 10-K, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

Company Background – Business Overview

 

We were incorporated in the State of Utah on October 4, 1985, under the name of 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. From 2009 to 2014, we operated primarily in the mining exploration business. In 2015, we left the mining business and began an internet-based marketing business focused on offerings from our “Majestic Menu” food service items offered to the hospitality and food service industry via an on-line internet site, where individuals could purchase retail direct from food distributors via credit cards and commercial accounts.

 

On September 4, 2015, Donald Steinberg and Charles Larsen purchased 400,000,000 shares of restricted common stock and 10,000,000 shares of the Preferred Class A stock from the Company’s President, Cornelia Volino, in exchange for $105,000.00. On September 9, 2015, Donald Steinberg was appointed Chairman of the Board, Chief Executive Officer and Secretary of the Company. Mr. Larsen was appointed to the Board of Directors. The former officers and directors of the Company resigned concurrent with the new appointments. By virtue of Messrs. Steinberg and Larsen’s stock purchase and appointment to the Company’s Board of Directors, a purchase or sale of a significant amount of assets not in the ordinary course of business and a corresponding change of control occurred. The Company reported the change of control in its September 30, 2015 quarterly report filed with the OTC Markets. Thereafter, the Company’s business plans and operations changed to focus on cannabis and legalized hemp more fully discussed in this filing. The Company changed its name to Marijuana Company of America, Inc. and trading symbol on December 1, 2015.

 

 

3 
 
 

 

Marijuana Company of America Inc. and subsidiaries is a publicly listed company quoted on OTC Markets Pink Tier under the symbol “MCOA”. We are based in Escondido, California. Our business develops, manufactures, markets and sells non-psychoactive industrial hemp, and hemp-derived consumer products containing cannabinoids (hereafter referred to as “CBD”), with a THC content of less than 0.03%. Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different species of industrial hemp derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of hemp CBD extraction omitting or eliminating the delta-9 THC molecule.

  

Principal Products and their Markets

 

hempSMART™

 

Our consumer products containing hemp and CBD are sold through our wholly owned subsidiary H Smart, Inc. under the brand name hempSMART™. We market and sell our hempSMART™ products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates and calculates and accounts for loyalty and rewards benefits for returning customers. The Company plans on focusing its sales and marketing through direct sales on its website and intends to wind down and terminate its affiliate marketing and sales program during fiscal 2021.

 

Our current hempSMART™ wellness products offerings include the following:

 

  • hempSMART Brain™ a proprietary patented and formulated personal care consumer product encapsulated with enriched non-psychoactive industrial hemp derived CBD. This encapsulation is combined with other high quality, proprietary natural ingredients to compliment CBD to support brain wellness.
  • hempSMART Pain™ capsules formulated with 10mg of Full Spectrum, non-psychoactive CBD per serving, derived from industrial hemp, which along with a proprietary blend of other natural ingredients, delivers an all-natural formulation for the temporary relief of minor discomfort associated with physical activity.
  • hempSMART Pain Cream™ each container formulated with 300mg of full spectrum non-psychoactive CBD derived from industrial hemp. The newly developed product contains a synergistic combination of natural botanicals and full spectrum hemp extract featuring CBD, CBG and a broad range of terpenes. The Company’s proprietary blend of Ayurvedic herbs along with Menthol, Cayenne Pepper Extract, Rosemary Oil, Aloe Gel, White Willow Bark, Arnica, Wintergreen Extract and Tea Tree Oil, provides an immediate cooling and soothing sensation. This topical wellness consumer product is formulated to help reduce minor discomfort and promote muscle relaxation on areas that it is applied.
  • hempSMART Drops™ full Spectrum Hemp CBD Oil Tincture Drops, available in 250mg and 500mg bottles, enriched with non-psychoactive industrial hemp derived CBD, and available in four different flavors: lemon, mint, orange and strawberry that is free of the THC isolate.

 

4 
 
 

 

  • hempSMART Pet Drops™ for cats and dogs, formulated with 250mg of full spectrum non-psychoactive CBD derived from industrial hemp. This new specially formulated product contains naturally occurring CBD derived from hemp seed oil, full spectrum hemp extract, fractionated coconut oil, and a rich bacon flavor.
  • hempSMART Face™ a nourishing facial moisturizer combines full spectrum CBD from hemp, with a unique blend of Ayurvedic herbs and botanicals. Designed to refresh, replenish and restore the skin providing long lasting hydration and balance.
  • hempSMART Drink Mix, a new industrial hemp based powderized premium CBD Drink made with Organic CBD Infused with Honey to be mixed with any beverage of preference.

Consulting Services

 

We also provide financial accounting and property management services for companies associated with the cannabis industry in all stages of development. Our services include the following:

 

  • Financial Accounting and Bookkeeping. Our business accounting services provide financial accounting, bookkeeping and reporting protocols in order to allow licensed cannabis and/or hemp operators, in those states where cannabis has been legalized for medicinal and/or recreational use, to report collect, verify and state effective financial records and disclosure. We provide a comprehensive accounting strategy based on best accounting practices. We understand the challenges and complexities of financial accounting in the regulated commercial cannabis market and we have the expertise to help client businesses report their financial operations consistent with GAAP. As of the date of this filing, we have not offered any consulting, bookkeeping or financial accounting consulting services that have generated reportable revenues.
  • Property Management Consulting. Our property management consulting services consist of providing planning, budgeting, acquisition, accounting and management services to licensed cannabis and/or hemp operators in those states where cannabis and/or hemp has been legalized for medicinal and/or recreational use, and who are searching for appropriate real property to conduct operations. As of the date of this filing, we have not offered any real property management consulting services that have generated reportable revenues.

Joint Ventures and Investments

 

Our business also includes participating and making selected investments in other related businesses. The following disclosures include two parts. The first part discloses past joint ventures and investments that as of December 31, 2020 and 2019, were no longer effective and do not have a material current effect on the Company or its financial condition. These disclosures are provided to give a historical account of joint venture and investment activity over the past three to four years. The second part discloses active joint ventures and investments having a material effect on current operations and financial condition.

 

1. Past Joint Ventures & Investments

 

· GateC Joint Venture; On March 17, 2017, the Company and GateC Research, Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”) whereby the Company committed to raise up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum commitment of five hundred thousand dollars ($500,000) within a three (3) month period; and, information establishing brands and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies, including but not limited to its affiliate marketing program, directly tailored to the cannabis industry.

 

GateC agreed to contribute its management and control services and systems related to cannabis grow operations in Adelanto County, California, and its permit to grow marijuana in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto County, California, and GateC’s permit to grow cannabis did not contain a conditional use permit.

 

 

5 
 
 

 

On or about November 28, 2017, GateC and the Registrant orally agreed to suspend the Company’s funding commitment, pending the finalization of California State regulations governing the growth, cultivation and distribution of cannabis, which were expected to be completed in 2018.

 

On March 19, 2018, the Company and GateC rescinded the Agreement and concurrently released each other from any all any and all losses, claims, debts, liabilities, demands, obligations, promises, acts, omissions, agreements, costs and expenses, damages, injuries, suits, actions and causes of action, of whatever kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, that they may have against each other and their Affiliates, arising out of the Agreement.

 

The Registrant incurred no termination penalties as the result of its entry into the Recession and Mutual Release Agreement.

 

In 2017, the Company recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year ended December 31, 2017. Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation of $1,500,000 during the six months ended June 30, 2018. As of December 31, 2018, we determined our joint venture with GateC to be fully impaired as having no intrinsic value due to our decision on March 19, 2018 to rescind the Agreement with GateC. Our decision to fully impair our venture with GateC had an impact on our reported operations in fiscal year ended December 31, 2018, but had no impact on our reported operations for the fiscal years ended December 31, 2019 and 2020.

 

  • MoneyTrac Technology, Inc.; On March 13, 2017, in exchange for $250,000, we purchased a 15% interest in MoneyTrac Technology, Inc. (“MoneyTrac”), a developer of an integrated and streamlined electronic payment processing system containing E-Wallet and mobile applications, that allows for the management and processing of prepaid cards, debit cards, and credit card payments. On June 12th, 2018 Global Payout, Inc. (“Global”) entered into a Reverse Triangular Merger with MoneyTrac, MoneyTrac Technology, Inc., a California Corporation and MTrac Tech Corporation, a Nevada corporation and wholly-owned subsidiary of Global Payout, Inc., whereby MoneyTrac merged into MTrac Tech Corporation, the surviving corporation of the merger, and thereafter the separate existence of MoneyTrac ceased, and all rights, privileges, powers and property, were assumed by Merger Sub. Pursuant to the terms of the Merger, Global issued 1,100,000,000 (one billion, one hundred million) shares of its common stock to MoneyTrac as consideration for the purchase of MoneyTrac, whereby each one (1) share of MoneyTrac stock, issued and outstanding immediately prior to the effective date of the Merger, was canceled and converted into ten (10) shares of Global common stock. We acquired 150,000,000 Global common shares for our original $250,000 representing approximately 15% ownership. Global’s name changed in April, 2020 to Global Trac Solutions, Inc. Global’s trading on the OTC Markets under the symbol “PYSC.” We realized $51,748.17 from sales of our Global securities during fiscal year ended December 31, 2019.

  • Conveniant Hemp Mart, LLC; Conveniant Hemp Mart, LLC (“Conveniant”) is a Wyoming limited liability company whose business plan includes the development, manufacture and sale of consumer products containing CBD that are intended for marketing and sales at convenience stores, gas stations and markets. On July 19, 2017, we agreed to lend $50,000 to Conveniant based on a promissory note. The note provided that in lieu of receiving repayment, we could elect to exercise a right to convert the loaned amount into a payment towards the purchase of a 25% interest in Conveniant, subject to our payment of an additional $50,000 equaling a total purchase price of $100,000. The Company exercised this option on November 20, 2017 and paid Conveniant on November 21, 2017. Conveniant developed a line of consumer products containing industrial hemp derived CBD with no traceable THC content. On May 1, 2019, the Company and Conveniant agreed to cancel the Company’s 25% interest in Conveniant. Conveniant issued to the Company a credit memo equal to the Company’s $100,000 investment. The Company determined that as of December 31, 2018, the total investment was impaired.

 

6 
 
 

 

  • Global Hemp Group, Inc. New Brunswick Joint Venture; On September 5, 2017, we announced our agreement to participate in a joint venture with Global Hemp Group Inc., a Canadian corporation, in a multi-phase industrial hemp project on the Acadian peninsula of New Brunswick, Canada. The joint venture’s goal is to develop a “Hemp Agro-Industrial Zone”, a concept that promotes and engages farmers, processors and manufacturers to collaboratively produce and process 100% of the hemp plant into a number of wholesale materials that can be manufactured into healthy and sustainable products. Our participation included providing one-half, or $10,775 of the funding for the phase one work. On January 10, 2018, phase-one was completed by successfully harvesting industrial hemp during the 2017 growing season for research purposes. The Company expected to share in the ownership of research and development of hemp and CBD related studies produced by the New Brunswick Project. The Company also expected to benefit from the expected change to Canadian laws and regulations governing cultivation and processing of hemp and hemp-derived CBD products, by acquiring possible preferred pricing and terms for the purchase of hemp and CBD. However, the 2018 hemp harvest and the extracted CBD was determined to not have sufficient CBD content to be salable. In 2019, Canada released regulations requiring those cultivating hemp for CBD extraction to obtain individual cannabis licenses, as cannabis was deemed to have more valuable CBD content than hemp. Canada’s resulting emphasis on cannabis cultivation and the requirement for individual producers to obtain individual licenses led to termination of phase two of the research project. The Company determined the New Brunswick joint venture fully impaired in 2018.
  • Viva Buds Joint Venture with Natural Plant Extracts of California Inc.; On April 15, 2019, the Company entered into a joint venture agreement with Natural Plant Extracts of California, Inc. and subsidiaries (“NPE”). The purpose of the joint venture was to utilize NPE’s California and City cannabis licenses to jointly operate a business named “Viva Buds” to operate a licensed cannabis distribution service in California. In exchange for acquiring 20% of NPE’s common stock, the Company agree to pay two million dollars and issue NPE one million dollars’ worth of the Company’s restricted common stock. As of February 3, 2020, the Company was in arrears in its payment obligations under the joint venture agreement, and the parties entered into a settlement and release of all claims terminating the joint venture. The parties agreed to reduce the Company’s equity ownership in NPE from 20% to 5%. The Company also agreed to pay NPE $85,000 and the balance of $56,085.15 paid in a convertible promissory note issued with terms allowing NPE to convert the note into common stock at a 50% discount to the closing price of MCOA’s common stock as of the maturity date. As of the date of this filing, the Company satisfied its payment obligations under the settlement agreement. Our continuing 5% equity ownership in NPE involves related parties, since Edward Manolos, our director, is also a director and beneficial owner of 18.8% of the common stock in NPE.
  • Natural Plant Extract of California & Subsidiaries Joint Venture; On April 15, 2019, the Company entered into a joint venture agreement with Natural Plant Extracts of California, Inc. and subsidiaries. The purpose of the joint venture was to utilize Natural Plant Extracts’ California and City cannabis licenses to jointly operate a business named “Viva Buds” to operate a licensed cannabis distribution service in California. In exchange for acquiring 20% of Natural Plant Extracts’ common stock, the Company agree to pay two million dollars and issue Natural Plant Extract one million dollars’ worth of the Company’s restricted common stock. As of February 3, 2020, the Company was in arrears in its payment obligations under the joint venture agreement, and the parties entered into a settlement and release of all claims terminating the joint venture. The parties agreed to reduce the Company’s equity ownership in Natural Plant Extracts from 20% to 5%. The Company also agreed to pay Natural Plant Extracts $85,000 and the balance of $56,085.15 paid in a convertible promissory note issued with terms allowing Natural Plant Extracts to convert the note into common stock at a 50% discount to the closing price of MCOA’s common stock as of the maturity date. As of the date of this filing, the Company satisfied its payment obligations under the settlement agreement

 

2. Current Joint Ventures  and Investments.

 

  • Global Hemp Group Joint Venture/Scio Oregon Hemp Project; On May 8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation, and TTO Enterprises, Ltd., an Oregon corporation entered into a Joint Venture Agreement. The purpose of the joint venture is to develop a project to commercialize the cultivation of industrial hemp on a 109 acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating under the Oregon corporation Covered Bridges, Ltd. The joint venture agreement committed the Company to provide cash contributions of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company complied with its payments. The 2018 crop of hemp grown on the joint venture’s real property consisted of 33 acres of high yielding CBD hemp grown in an orchard style cultivation on the property. The 2018 harvest consisted of approximately 37,000 high yielding CBD hemp plants producing 24 tons of biomass that produced 48,000 pounds of dried biomass. The joint venture partners prepared processing samples ranging in size from 100 lbs. to 2,000 lbs. for sample offers to extraction companies. However, there were delays with Global Hemp Group’s management and maintenance of the business and the biomass that caused degradation to the harvested crop affecting marketability. Additional issues and disputes arose between the Company and Global Hemp Group. These disputes led to the parties entering into a settlement agreement on September 28, 2020, whereby Global Hemp Group agreed to pay the Company $200,000 and issue common stock to the Company equal in value to $185,000 as of September 28, 2020, subject to a non-dilutive protection provision. Additionally, Global Hemp Group agreed to pay the Company $10,000 to cover the Company’s legal fees relating to the Agreement. In exchange for the settlement consideration, the Company agreed to relinquish its ownership interest in the joint venture.

 

7 
 
 

 

  • Bougainville Ventures, Inc. Joint Venture; On March 16, 2017, we entered into a joint venture agreement with Bougainville Ventures, Inc., a Canadian corporation. The purpose of the joint venture was for the Company and Bougainville to (i) jointly engage in the development and promotion of products in the legalized cannabis industry in Washington State; (ii) utilize Bougainville's high quality cannabis grow operations in the State of Washington, where it claimed to have an ownership interest in real property for use within the legalized cannabis industry; (iii) leverage Bougainville’s agreement with a I502 Tier 3 license holder to grow cannabis on the site; provide technical and management services and resources including, but not limited to: sales and marketing, agricultural procedures, operations, security and monitoring, processing and delivery, branding, capital resources and financial management; and, (iv) optimize collaborative business opportunities. The Company and Bougainville agreed to operate through a Washington State Limited Liability Company, and BV-MCOA Management, LLC was organized in the State of Washington on May 16, 2017.

As our contribution to the joint venture, the Company committed to raise not less than $1,000,000 to fund joint venture operations, based upon a funding schedule. The Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.

The Company and Bougainville's agreement provided that funding by the Company would pay for the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan County, Washington, for joint venture operations.

 

As disclosed on Form 8-K on December 11, 2017, the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended the joint venture agreement to reduce the amount of the Company's commitment from $1,000,000 to $800,000, and also required the Company to issue Bougainville 15 million shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The amended agreement provided that Bougainville would deed the real property to the joint venture within thirty days of its receipt of payment.

Thereafter, the Company determined that Bougainville had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property that was in breach of contract for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 license holder to grow Marijuana on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green Ventures Capital Corp., purchased the land, but did not deed the real property to the joint venture. Bougainville failed to pay delinquent property taxes to Okanogan County and to date, the property has not been deeded to the joint venture.

 

To clarify the respective contributions and roles of the parties, the Company offered to enter into good faith negotiations to revise and restate the joint venture agreement with Bougainville. The Company diligently attempted to communicate with Bougainville to accomplish a revised and restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint venture.

 

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On August 10, 2018, the Company advised its independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information concerning the audit of Bougainville’s receipt and expenditures of $800,000 contributed by the Company in the joint venture agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally, the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property; and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit against Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville, and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on the real property. The case is currently in litigation.

In connection with the agreement, the Company recorded a cash investment of $1,188,500 to the Joint Venture during 2017. This was comprised of 49.5% ownership of BV-MCOA Management LLC, and was accounted for using the equity method of accounting. The Company recorded an annual impairment in 2017 of $792,500, reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded equity losses of $37,673 and $11,043 for the first and second quarters respectively, and recorded an annual impairment of $285,986 for the year ended December 31, 2018, at which time the Company determined the investment to be fully impaired due to Bougainville’s breach of contract and resulting litigation, as discussed above.

 

· Share Exchange with Cannabis Global, Inc. On September 30, 2020, the Company entered into a securities exchange agreement with Cannabis  Global, Inc., a Nevada corporation. By virtue of the agreement, the Company issued 650,000,000 shares of its unregistered common stock to Cannabis Global in exchange for 7,222,222 shares of Cannabis Global unregistered common stock. The Company and Cannabis Global also entered into a lock up leak out agreement which prevents either party from sales of the exchanged shares for a period of 12 months. Thereafter the parties may sell not more than the quantity of shares equaling an aggregate maximum sale value of $20,000 per week, or $80,000 per month until all Shares and Exchange Shares are sold. This material transaction involves related parties, insofar as Edward Manolos, our director, is also a director of Cannabis Global, Inc.

 

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The following table indicates the amount of impairments recorded by the Company quarter to quarter for investment activity quarter to quarter related to its joint venture investments:

 

MARIJUANA COMPANY OF AMERICA, INC.

INVESTMENT ROLL-FORWARD

AS OF DECEMBER 31, 2020

 

  INVESTMENTS   SHORT-TERM INVESTMENTS
                                              
    TOTAL   Global Hemp   Cannabis Global           Bougainville Ventures,   Gate C Research   Natural Plant       TOTAL Short-Term   Global Hemp    
    INVESTMENTS   Group   Inc.   Benihemp   MoneyTrac   Inc.   Inc.   Extract   Vivabuds   Investments   Group   MoneyTrac
Beginning balance @12-31-16   $ 0     $ 0             $ 0     $ 0     $ 0     $ 0                     $ 0             $ 0  
                                                                                                 
Investments made during 2017     3,049,275       10,775               100,000       250,000       1,188,500       1,500,000                       0               0  
                                                                                                 
Quarter 03-31-17 equity method Loss     0                                                                       0                  
                                                                                                 
Quarter 06-30-17 equity method Loss     0                                                                       0                  
                                                                                                 
Quarter 09-30-17 equity method Loss     (375,000 )                                     (375,000 )                             0                  
                                                                                                 
Quarter 12-31-17 equity method accounting     313,702                                       313,702                               0                  
                                                                                                 
Impairment of Investment in 2017     (2,292,500 )     0                               (792,500 )     (1,500,000 )                     0               0  
Balances as of 12/31/17     695,477       10,775       0       100,000       250,000       334,702       0       0       0       0       0       0  
                                                                                                 
Investments made during 2018     986,654       986,654                                                               0                  
                                                                                                 
Quarter 03-31-18 equity method Loss     (37,673 )                                     (37,673 )                             0                  
                                                                                                 
Quarter 06-30-18 equity method Loss     (11,043 )                                     (11,043 )                             0                  
                                                                                                 
Quarter 09-30-18 equity method Loss     (10,422 )                     (10,422 )                                             0                  
                                                                                                 
Quarter 12-31-18 equity method Loss     (31,721 )     (31,721 )             0                                               0                  
                                                                                                 
Moneytrac investment reclassified to Short-Term investments     (250,000 )                             (250,000 )                                     250,000               250,000  
                                                                                                 
Unrealized gains on trading securities - 2018     0                                                                       560,000               560,000  
                                                                                                 
Impairment of investment in 2018     (933,195 )     (557,631 )             (89,578 )             (285,986 )                             0                  
Balance @12-31-18   $ 408,077     $ 408,077     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 810,000     $ 0     $ 810,000  

 

 

10 
 
 

 

 

  INVESTMENTS   SHORT-TERM INVESTMENTS
                                              
    TOTAL   Global Hemp   Cannabis Global           Bougainville Ventues,   Gate C Research   Natural Plant       TOTAL Short-Term   Global Hemp    
    INVESTMENTS   Group   Inc.   Benihemp   MoneyTrac   Inc.   Inc.   Extract   Vivabuds   Investments   Group   MoneyTrac
Investments made during quarter ended 03-31-19     129,040       129,040                                                                                  
                                                                                                 
Quarter 03-31-19 equity method Loss     (59,541 )     (59,541 )                                                                                
                                                                                                 
Unrealized gains on trading securities - quarter ended 03-31-19                                                                             (135,000 )           $ (135,000 )
Balance @03-31-19   $ 477,576     $ 477,576     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 675,000     $ 0     $ 675,000  
                                                                                                 
Investments made during quarter ended 06-30-19   $ 3,157,234     $ 83,646                                             $ 3,000,000     $ 73,588                          
                                                                                                 
Quarter 06-30-19 equity method Income (Loss)   ($ 171,284 )   ($ 141,870 )                                           $ (6,291 )   $ (23,123 )                        
                                                                                                 
Unrealized gains on trading securities - quarter ended 06-30-19   $ 0                                                                       (150,000 )           $ (150,000 )
Balance @06-30-19   $ 3,463,526     $ 419,352     $ 0     $ 0     $ 0     $ 0     $ 0     $ 2,993,709     $ 50,465     $ 525,000     $ 0     $ 525,000  
                                                                                                 
Investments made during quarter ended 09-30-19   $ 186,263                                                             $ 186,263                          
                                                                                                 
Quarter 09-30-19 equity method Income (Loss)   $ 122,863     $ 262,789                                             $ (94,987 )   $ (44,939 )                        
                                                                                                 
Sale of trading securities during quarter ended 09-30-19                                                                           $ (41,667 )           $ (41,667 )
                                                                                                 
Unrealized gains on trading securities - quarter ended 09-30-19   $ 0                                                                       (362,625 )           $ (362,625 )
Balance @09-30-19   $ 3,772,652     $ 682,141     $ 0     $ 0     $ 0     $ 0     $ 0     $ 2,898,722     $ 191,789     $ 120,708     $ 0     $ 120,708  

 

 

11 
 
 

 

 

  INVESTMENTS   SHORT-TERM INVESTMENTS
                                              
    TOTAL   Global Hemp   Cannabis Global           Bougainville Ventues,   Gate C Research   Natural Plant       TOTAL Short-Term   Global Hemp    
    INVESTMENTS   Group   Inc.   Benihemp   MoneyTrac   Inc.   Inc.   Extract   Vivabuds   Investments   Group   MoneyTrac
Investments made during quarter ended 12-31-19   $ 392,226     $ 262,414                                                     $ 129,812                          
                                                                                                 
Quarter 12-31-19 equity method Income (Loss)   $ (178,164 )   $ (75,220 )                                           $ (23,865 )   $ (79,079 )                        
                                                                                                 
Reversal of Equity method Loss for 2019   $ 272,285                                                     $ 125,143     $ 147,142                          
                                                                                                 
Impairment of investment in 2019   $ (3,175,420 )   $ (869,335 )                                           $ (2,306,085 )   $ 0                          
                                                                                                 
Loss on disposition of investment   $ (389,664 )                                                           $ (389,664 )                        
                                                                                                 
Sale of trading securities during quarter ended 12-31-19   $ 0                                                                     $ (17,760 )           $ (17,760 )
                                                                                                 
Unrealized gains on trading securities - quarter ended 12-31-19   $ 0                                                                       (75,545 )           $ (75,545 )
Balance @12-31-19   $ 693,915     $ (0 )   $ 0     $ 0     $ 0     $ 0     $ 0     $ 693,915     $ 0     $ 27,403     $ 0     $ 27,403  
                                                                                                 
Equity Loss for Quarter ended 03-31-20     126,845       126,845                                                                                  
                                                                                                 
Recognize Joint venture liabilities per JV agreement @03-31-20     394,848       394,848                                                                                  
                                                                                                 
Impairment of Equity Loss for Quarter ended 03-31-20     (521,692 )     (521,692 )                                                                                
                                                                                                 
Unrealized gains on trading securities - quarter ended 03-31-19                                                                             (13,945 )           $ (13,945 )
Balance @03-31-20   $ 693,915     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 693,915     $ 0     $ 13,458     $ 0     $ 13,458  

 

 

 

12 
 
 

 

 

  INVESTMENTS   SHORT-TERM INVESTMENTS
                                              
    TOTAL   Global Hemp   Cannabis Global           Bougainville Ventues,   Gate C Research   Natural Plant       TOTAL Short-Term   Global Hemp    
    INVESTMENTS   Group   Inc.   Benihemp   MoneyTrac   Inc.   Inc.   Extract   Vivabuds   Investments   Group   MoneyTrac
Equity Loss for Quarter ended 06-30-20     (7,048 )     (7,048 )                                                                                
                                                                                                 
Impairment of Equity Loss for Quarter ended 06-30-20     7,048       7,048                                                                                  
                                                                                                 
Sales of of trading securities - quarter ended 06-30-20                                                                             (13,458 )           $ (13,458 )
Balance @06-30-20   $ 693,915     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 693,915     $ 0     $ 0     $ 0     $ 0  
                                                                                                 
Global Hemp Group trading securities issued     650,000             $ 650,000                                                     $ 185,000     $ 185,000          
                                                                                                 
Investment in Cannabis Global     0                                                                                          
Balance @09-30-20   $ 1,343,915     $ 0     $ 650,000     $ 0     $ 0     $ 0     $ 0     $ 693,915     $ 0     $ 185,000     $ 185,000     $ 0  
                                                                                                 
Unrealized gain on Global Hemp Group securities - 4th Quarter 2020                                                                           $ 54,064     $ 54,064          
                                                                                                 
Unrealized gains on Cannabis Global Inc securities - 4th Quarter 2020     208,086             $ 208,086                                                                          
Balance @12-31-20   $ 1,552,001     $ 0     $ 858,086     $ 0     $ 0     $ 0     $ 0     $ 693,915     $ 0     $ 239,064     $ 239,064     $ 0  

 

 

 

13 
 
 

 

 

The following table indicates the amount of debt the Company recorded quarter to quarter as a result of its joint venture investments:

 

Loan Payable
                                                                           
      TOTAL       Global Hemp                       Bougainville Ventues,       Gate C Research       Natural Plant        Robert L Hymers               General Operating  
      JV Debt       Group       Benihemp       MoneyTrac       Inc.       Inc.       Extract       III       Vivabuds       Expense  
Beginning balance @12-31-16   $ 0     $ 0     $ 0     $ 0     $ 0     $ 0                             $ 0  
                                                                                 
Quarter 03-31-17 loan borrowings     1,500,000                                       1,500,000                                  
                                                                                 
Quarter 06-30-17 loan activity                                                                                
                                                                                 
Quarter 09-30-17 loan borrowings     725,000                               725,000                                          
                                                                                 
Quarter 12-31-17 loan repayments     (330,445 )                             (330,445 )                                        
                                                                                 
General operational expense     172,856                                                                       172,856  
Balances as of 12/31/17 (a)     2,067,411       0       0       0       394,555       1,500,000       0       0       0       172,856  
                                                                                 
Quarter 03-31-18 loan borrowings (payments)     376,472       447,430                                                               (70,958 )
                                                                                 
Quarter 06-30-18 cancellation of JV debt obligation     (1,500,000 )                                     (1,500,000 )                                
                                                                                 
Quarter 06-30-18 loan repayments     (101,898 )                                                                     (101,898 )
                                                                                 
Quarter 09-30-18 loan activity     0                                                                          
                                                                                 
Quarter 12-31-18 loan borrowings     580,425       580,425                                                                  
Balance @12-31-18   (b)     1,422,410       1,027,855       0       0       394,555       0       0       0       0       0  

 

14 
 
 

 

 

Loan Payable
                                                                           
      TOTAL       Global Hemp                       Bougainville Ventues,       Gate C Research       Natural Plant        Robert L Hymers               General Operating  
      JV Debt       Group       Benihemp       MoneyTrac       Inc.       Inc.       Extract       III       Vivabuds       Expense  
Quarter 03-31-19 loan borrowings     649,575       649,575                                                                  
                                                                                 
Quarter 03-31-19 debt conversion to equity     (407,192 )     (407,192 )                                                                
Balance @03-31-19  ©     1,664,793       1,270,238       0       0       394,555       0       0       0       0       0  
                                                                                 
Quarter 03-31-19 loan borrowings     3,836,220     $ 161,220                                     $ 2,000,000             $ 0     $ 1,675,000  
                                                                                 
Quarter 03-31-19 debt conversion to equity     (1,572,971 )   $ (161,220 )                                   $ (349,650 )                   $ (1,062,101 )
Balance @06-30-19   (d)     3,928,042       1,270,238       0       0       394,555       0       1,650,350       0       0       612,899  
                                                                                 
Quarter 09-30-19 loan borrowings     582,000                                                                     $ 582,000  
                                                                                 
Quarter 09-30-19 debt conversion to equity     (187,615 )                                                                   $ (187,615 )
Balance @09-30-19   (e)     4,322,427       1,270,238       0       0       394,555       0       1,650,350       0       0       1,007,284  
                                                                                 
Quarter 12-31-19 loan borrowings     2,989,378     $ 262,414                                     $ 596,784     $ 4,221             $ 2,125,959  
                                                                                 
Impairment of investment in 2019     (4,083,349 )   $ (1,532,652 )                   $ (394,555 )           $ (2,156,142 )                        
                                                                                 
Loss on settlement of debt in 2019     50,093                                             $ 50,093                          
                                                                                 
Adjustment to reclassify amount to accrued liabilities     (85,000 )                                           $ (85,000 )                        
Balance @12-31-19   (f)   $ 3,193,548     $ (0 )   $ 0     $ 0     $ 0     $ 0     $ 56,085     $ 4,221     $ 0     $ 3,133,243  

 

 

15 
 
 

 

 

Loan Payable
                                                                           
      TOTAL       Global Hemp                       Bougainville Ventues,       Gate C Research       Natural Plant        Robert L Hymers               General Operating  
      JV Debt       Group       Benihemp       MoneyTrac       Inc.       Inc.       Extract       III       Vivabuds       Expense  
Quarter 03-31-20 loan borrowings   $ 441,638                                                                     $ 441,638  
                                                                                 
Quarter 03-31-20 debt conversion to equity   $ (619,000 )                                                                   $ (619,000 )
                                                                                 
Recognize Joint venture liabilities per JV agreement @03-31-20   $ 394,848     $ 394,848                                                                  
                                                                                 
Quarter 03-31-20 Debt Discount adjustments   $ 24,138                                                     $ 24,138                  
Balance @03-31-20  (g)   $ 3,435,172     $ 394,848     $ 0     $ 0     $ 0     $ 0     $ 56,085     $ 28,359     $ 0     $ 2,955,881  
                                                                                 
Quarter 06-30-20 loan borrowings, net   $ 65,091                                                     $ 65,091                  
                                                                                 
Quarter 06-30-20 debt conversion to equity   ($ 727,118 )                                                                   $ (727,118 )
                                                                                 
Quarter 06-30-20 reclass of liability   $ 83,647     $ 83,647                                                                  
                                                                                 
Quarter 06-30-20 Debt Discount adjustments   $ 405,746                                                     $ (27,715 )           $ 433,461  
Balance @06-30-20  (h)   $ 3,262,538     $ 478,495     $ 0     $ 0     $ 0     $ 0     $ 56,085     $ 65,735     $ 0     $ 2,662,224  
                                                                                 
Quarter 09-30-20 debt conversion to equity   $ (606,472 )                                           $ (56,085 )   $ (65,735 )           $ (484,652 )
                                                                                 
Debt Settlement during Q3 2020   $ (474,495 )   $ (474,495 )                                                                
Balance @09-30-20  (i)   $ 2,181,571     $ 4,000     $ 0     $ 0     $ 0     $ 0     ($ 0 )   $ 0     $ 0     $ 2,177,572  
                                                                                 
Quarter 12-31-20 loan borrowings, net   $ 309,675                                                                     $ 309,675  
                                                                                 
Quarter 12-31-20 Debt Discount adjustments   $ (71,271 )                                                                   $ (71,271 )
                                                                                 
Quarter 12-31-20 debt conversion to equity   $ (993,081 )                                                                   $ (993,081 )
Balance @12-31-20  (j)   $ 1,426,894     $ 4,000     $ 0     $ 0     $ 0     $ 0     ($ 0 )   $ 0     $ 0     $ 1,422,895  

 

 

 

    12-31-20   09-30-20   06-30-20   03-31-20   12-31-19   09-30-19   06-30-19   03-31-19   12-31-18   12-31-17
This includes balances for:     Note (j)       Note (i)       Note (h)       Note (g)       Note (f)       Note (e)       Note (d)       Note (c)       Note (b)       Note (a)  
      - Debt obligation of JV     0       0       478,494       394,848       0       1,633,872       1,778,872       128,522       289,742       1,500,000  
      - Convertible NP, net of discount     1,426,894       2,181,571       2,784,044       3,040,324       3,193,548       2,688,555       2,149,170       1,536,271       1,132,668       394,555  
      - Longterm debt     0       0       0       0       0       0       0       0       0       172,856  
Total Debt balance     1,426,894       2,181,571       3,262,538       3,435,172       3,193,548       4,322,427       3,928,042       1,664,793       1,422,410       2,067,411  

 

 

16 
 
 

 

Recent US Government Decriminalization and Legalization of Hemp

 

On December 20, 2018, President Donald J. Trump signed into law the Agriculture Improvement Act of 2018, otherwise known as the “Farm Bill.” Prior to its passage, hemp, a member of the cannabis family, and hemp derived CBD, were classified as Schedule 1 controlled substances, and so illegal under the Controlled Substances Act, 21 U.S.C. § 811 (hereafter referred to as the “CSA”).

 

With the passage of the Farm Bill, hemp cultivation is now broadly permitted. The Farm Bill explicitly allows the transfer of hemp-derived products across state lines for commercial or other purposes. It also puts no restrictions on the sale, transport, or possession of hemp-derived products, so long as those items are produced in a manner consistent with the law.

 

Under Section 10113 of the Farm Bill, hemp cannot contain more than 0.3 percent THC, the chemical compound found in cannabis that produces the psychoactive “high” associated with cannabis. Any cannabis plant that contains more than 0.3 percent THC would be considered non-hemp cannabis—or marijuana—illegal under the CSA.

 

Additionally, there will be significant, shared state-federal regulatory power over hemp cultivation and production. Under Section 10113 of the Farm Bill, state departments of agriculture must consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary of the United States Department of Agriculture (hereafter referred to as the “USDA”). A state’s plan to license and regulate hemp can only commence once the Secretary of USDA approves that state’s plan. In states opting not to devise a hemp regulatory program, USDA will construct a regulatory program under which hemp cultivators in those states must apply for licenses and comply with a federally-run program. This system of shared regulatory programming is similar to options states had in other policy areas such as health insurance marketplaces under Affordable Care Act, or workplace safety plans under Occupational Health and Safety Act—both of which had federally-run systems for states opting not to set up their own systems. 

 

The Farm Bill outlines actions that are considered violations of federal hemp law (including such activities as cultivating without a license or producing cannabis with more than 0.3 percent THC). The Farm Bill details possible punishments for such violations, pathways for violators to become compliant, and even which activities qualify as felonies under the law, such as repeated offenses.

One of the goals of the previous 2014 Farm Bill was to generate and protect research into hemp. The 2018 Farm Bill continues this effort. Section 7605 re-extends the protections for hemp research and the conditions under which such research can and should be conducted. Further, section 7501 of the Farm Bill extends hemp research by including hemp under the Critical Agricultural Materials Act. This provision recognizes the importance, diversity, and opportunity of the plant and the products that can be derived from it, but also recognizes that there is a still a lot to learn about hemp and its products from commercial and market perspectives.

We currently operate two divisions within the regulated hemp industry: (i) the development, manufacturing, marketing and sale of our hempSMART consumer products that include non-psychoactive industrial hemp-based CBD as an ingredient; and, (ii) professional financial consulting and property management services.

 

On April 15, 2019, we entered into a joint venture with Natural Plant Extract of California, Inc., and subsidiaries, to operate a licensed psychoactive cannabis distribution service in California, who legalized THC psychoactive cannabis for medicinal and recreational use on January 1, 2018. As disclosed in greater detail below, on February 3, 2020, we terminated the joint venture. As of the date of this filing, we do not conduct any business in the psychoactive cannabis markets in those states that have legalized cannabis for medicinal or recreational use.

 

Brazilian Law Regarding Cannabis and Hemp

 

Brazilian law currently prohibits cannabis cultivation, processing, and sales. This restriction applies to both marijuana and industrial hemp. There is no distinction between hemp and marijuana. As a result, there is no specific legislation on industrial hemp. However, on August 18, 2020, draft legislation was introduced that would allow Brazilian farmers to grow cannabis for medical and industrial purposes on domestic soil for the first time has been submitted to the country’s lower house of Congress. The bill was delivered to the House of Deputies speaker by lawmakers Paulo Teixeira and Luciano Ducci, co-sponsors of the bill who sit on the chamber’s special commission for the regulation of medicinal cannabis. Action is pending on this legislation.

 

17 
 
 

 

 

Uruguayan Law on Cannabis

 

Cannabis is legal in Uruguay, and is one of the most widely used drugs in the nation. President Jose Mujica signed legislation to legalize recreational cannabis in December 2013, making Uruguay the first country in the modern era to legalize cannabis. Uruguay has an established market that the Company intends to enter and compete in.

 

Sales and Marketing

 

We market and sell our services and products throughout the United States consistent with the Farm Bill, as well as in Canada and in the United Kingdom. We intend to expand our offerings as additional countries and jurisdictions who adopt state-regulated or government programs like the Farm Bill. We market and sell our hempSMART products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates and calculates and accounts for loyalty and rewards benefits for returning customers. The Company plans on focusing its sales and marketing through direct sales on its website and intends to wind down and terminate its affiliate marketing and sales program during fiscal 2021.

 

On March 21, 2019, our wholly owned subsidiary, hempSMART, Ltd., a corporation organized in the United Kingdom, officially launched the sales efforts for the Company’s industrial hemp CBD formulated hempSMART™ products in the United Kingdom. As of the date of this filing, our sales efforts in the UK are accomplished through our affiliate marketing program.

 

On October 1, 2020, we entered into two Joint Venture Agreements with Marco Guerrero, a director of the Company, dated September 30, 2020, to form joint venture operations in Brazil and in Uruguay to produce, manufacture, market and sell the Company’s hempSMART™ products in Latin America, and will also work to develop and sell hempSMART™ products globally. The Joint Venture Agreements contain equal terms for the formation of joint venture entities in Uruguay and Brazil. The Brazilian joint venture will be headquartered in São Paulo, Brazil, and will be named HempSmart Produtos Naturais Ltda. (“HempSmart Brazil”). The Uruguayan joint venture will be headquartered in Montevideo, Uruguay and will be named Hempsmart Uruguay S.A.S. (“HempSmart Uruguay”). Both are in the development stage.

 

Research and Development

 

Our research and development activity for the fiscal year ended December 31, 2020 was primarily focused on formulations of our various hempSMART products. Our research and development costs were $0. We may conduct additional research and development as the Company expands its hempSMART line of products.

 

Significant Customers

 

Sales of our hempSMART products, both directly by us and through our affiliate marketing sales program and directly on our website, have not resulted in reportable significant customers.

 

Intellectual Property

 

On February 12, 2019, the U. S. Patent Office issued patent number 10,201,553 for the Company’s hempSMART Brain product. On October 3, 2016, H Smart, Inc. filed a trademark application with the U.S. Patent and Trademark Office for the tradename hempSMART™, Application No. 87/531,833. The trademark has not yet been registered, and the application is pending.

 

18 
 
 

 

Competition

 

Our competitors include sellers of hemp-based CBD products and professional services firms dedicated to the regulated hemp industry. We compete in markets where hemp has been legalized and regulated, which includes the United States, Canada and the United Kingdom. Our marketing efforts in Brazil and Uruguay are in the development stages. We expect that the quantity and composition of our competitive environment will continue to evolve as the global industry matures. Additionally, increased competition worldwide is possible to the extent that new states, jurisdictions and countries enter the marketplace as a result of continued enactment of regulatory and legislative changes that de-criminalize and regulate hemp products, including the 2018 Farm Bill. We believe that by being well established in the industry, along with our experience, and our continued expansion of service and product offerings in new and existing locations, are factors that mitigate the risks associated with operating in a developing competitive environment. Additionally, the contemporaneous growth of the industry as a whole will result in new customers entering the marketplace, thereby further mitigating the impact of competition on our expected operations and results.

 

Employees

 

As of December 31, 2020, we had 4 full-time employees.

 

ITEM 1A. RISK FACTORS

 General risk relating to COVID-19 pandemic

The novel coronavirus (COVID-19) pandemic may have an expected effect on our business, financial condition and results of operations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, supply chains, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn across many global economies.

The COVID-19 pandemic has rapidly escalated in the United States, creating significant uncertainty and economic disruption, and leading to record levels of unemployment nationally. Numerous state and local jurisdictions have imposed, and others in the future may impose as variants of the virus proliferate, shelter-in-place orders, quarantines, shut-downs of non-essential businesses, and similar government orders and restrictions on their residents to control the spread of COVID-19. Such orders or restrictions have resulted in temporary facility closures, work stoppages, slowdowns and travel restrictions, among other effects, thereby adversely impacting our operations. In addition, we expect to be impacted by a downturn in the United States economy, which could have an adverse impact on discretionary consumer spending and may have a significant impact on our business operations and/or our ability to generate revenues and profits.

In response to the COVID-19 disruptions, we have implemented a number of measures designed to protect the health and safety of our staff and contractors. These measures include restrictions on non-essential business travel, the institution of work-from-home policies wherever feasible and the implementation of strategies for workplace safety at our facilities that remain open. We are following the guidance from public health officials and government agencies, including implementation of enhanced cleaning measures, social distancing guidelines and wearing of masks.

The extent to which COVID-19 ultimately impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity and duration of the COVID-19 outbreak and the effectiveness of actions taken to contain the COVID-19 outbreak or treat its impact, among others. Additionally, while the extent to which COVID-19 ultimately impacts our operations will depend on a number of factors, many of which will be outside of our control. The COVID-19 outbreak is evolving and new information emerges daily; accordingly, the ultimate consequences of the COVID-19 outbreak cannot be predicted with certainty. In addition to the COVID-19 disruptions possibility adversely impacting our business and financial results, they may also have the effect of heightening many of the other risks described in “Risk Factors,” including risks relating to changes due to our limited operating history; our ability to generate sufficient revenue, to generate positive cash flow; our relationships with third parties, and many other factors. We will endeavor to minimize these impacts, but there can be no assurance relative to the potential impacts that may be incurred.

19 
 
 

 

Risks Related to Our Business

The Farm Bill recently passed, and undeveloped shared state-federal regulations over hemp cultivation and production may impact our business.

The Farm Bill was signed into law on December 20, 2018. Under Section 10113 of the Farm Bill, state departments of agriculture must consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary of USDA. A state’s plan to license and regulate hemp can only commence once the Secretary of USDA approves that state’s plan. In states opting not to devise a hemp regulatory program, USDA will need to construct a regulatory program under which hemp cultivators in those states must apply for licenses and comply with a federally-run program. The details and scopes of each state’s plans are not fully known at this time and may contain varying regulations that may impact our business. Even if a state creates a plan in conjunction with its governor and chief law enforcement officer, the Secretary of the USDA must approve it. There can be no guarantee that any state plan will be approved. Review times may be extensive. There may be amendments and the ultimate plans, if approved by states and the USDA, may materially limit our business depending upon the scope of the regulations.

Laws and regulations affecting our industry to be developed under the Farm Bill are in development.

As a result of the Farm Bill’s recent passage, laws and regulations affecting the hemp industry will evolve which could detrimentally affect our operations. Local, state and federal hemp laws and regulations may be broad in scope and subject to changing interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse effect on our operations. In addition, we cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to our business.

Psychoactive Cannabis and derivatives are illegal under the CSA.

Psychoactive Cannabis and derivatives are Schedule 1 controlled substances and are illegal under the CSA. Even in states that have legalized the use of Psychoactive Cannabis, its sale and use remain violations of federal law. The illegality of Psychoactive Cannabis under the CSA preempts state laws that legalize its use. Therefore, strict enforcement of the CSA regarding Psychoactive Cannabis and derivatives would likely result in Natural Plant Extracts of California, Inc.’s inability to proceed with its business plans involving operating a psychoactive cannabis delivery service in California. This event would cause us to suffer losses related to our 5% interest in Natural Plant Extracts of California, Inc.

Risk of government action.

While we will use our best efforts to comply with all laws and regulations, there is a possibility that governmental action to enforce any alleged violations may result in legal fees and damage awards that would adversely affect us.

We anticipate our operating expenses will increase, and we may never achieve profitability.

We launched our first hempSMART™ product, hempSMART Brain™, in November 2016. Since then, we have introduced a number of other consumer products, including hempSMART Pain™, hempSMART™ Full Spectrum Pet Drops™, and hempSMART™ Full Spectrum Drops™. As we continue to produce other hempSMART™ products, we anticipate increases in our operating expenses, without realizing significant revenues from operations. Within the next 12 months, these increases in expenses will be attributed to the cost of (i) general and administrative, (ii) new research and development, (iii) advertising and website development, (iv) legal and accounting fees at various stages of operation, (v) joint venture activities, (vi) creating and maintaining distribution and supply chain channels.

20 
 
 

 

As a result of some or all of these factors in combination, we will incur significant financial losses in the foreseeable future. There is no history upon which to base any assumption as to the likelihood that our Company will prove successful. We cannot provide investors with any assurance that our business will attract customers and investors. If we are unable to address these risks, there is a high probability that our business will fail.

Because our business is dependent upon continued market acceptance by consumers, any negative trends will adversely affect our business operations.

We are substantially dependent on continued market acceptance and proliferation of consumers of hemp and hemp-derived CBD. We believe that as hemp and hemp-derived CBD becomes more accepted as a result of the passage of the Farm Bill, the stigma associated with hemp and CBD will diminish and as a result consumer demand will continue to grow. While we believe that the market and opportunity in the hemp space continues to grow, we cannot predict the future growth rate and size of the market. Any negative outlook on the hemp industry will adversely affect our business operations.

The possible FDA Regulation of hemp and industrial hemp derived CBD, and the possible registration of facilities where hemp is grown and CBD products are produced, if implemented, could negatively affect the hemp industry generally, which could directly affect our financial condition.

The Farm Bill established that hemp containing less the 0.3% THC was no longer a Schedule 1 drug under the CSA. Previously, the U.S. Food and Drug Administration (“FDA”) did not approve hemp or CBD derived from hemp as a safe and effective drug for any indication. The FDA considered hemp and hemp-derived CBD as illegal Schedule 1 drugs. Further, the FDA has concluded that products containing hemp or CBD derived from hemp are excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. However, as a result of the passage of the Farm Bill, at some indeterminate future time, the FDA may choose to change its position concerning products containing hemp, or CBD derived from hemp, and may choose to enact regulations that are applicable to such products, including, but not limited to: the growth, cultivation, harvesting and processing of hemp; regulations covering the physical facilities where hemp is grown and processed; and possible testing to determine efficacy and safety of hemp derived CBD. In this hypothetical event, our hemp-based hempSMART™ products containing CBD may be subject to regulation. In the hypothetical event that some or all of these regulations are imposed, we do not know what the impact would be on the hemp industry in general, and what costs, requirements and possible prohibitions may be enforced. If we are unable to comply with the conditions and possible costs of possible regulations and/or registration as may be prescribed by the FDA, we may be unable to continue to operate our business.

Laws governing our access to banking services remain uncertain and are in a state of flux.

On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed cannabis businesses. A memorandum issued by the Justice Department to federal prosecutors re-iterated guidance previously given, this time to the financial industry, that banks can do business with legal cannabis businesses and “may not” be prosecuted. We believe this applies to hemp and to Psychoactive Cannabis. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidelines to banks that “it is possible to provide financial services” to state-licensed cannabis (and hemp) businesses and still be in compliance with federal anti-money laundering laws. These provisions created barriers to our banking operations. With the passage of the Farm Bill, we expect that the banking industry will be more open to doing business with compliant hemp businesses. Currently, the U.S. Congress is considering the Secure and Fair Enforcement Banking Act sponsored by Reps. Ed Perlmutter (D-CO) Denny Heck (D-WA), Steve Stivers (R-OH) and Warren Davidson (R-OH) filed in March, 2019 designed to protect banks that service the marijuana industry from being penalized by federal regulators. The act currently has 138 cosponsors—more than a quarter of the House. However, this may take time and may not result in a more open banking climate. We expect that banks will be more open to serving cannabis and hemp businesses, but there is no guarantee – even with the passage of the Farm Bill.