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 the
six months ended June 30, 2019, the Company incurred net losses from operations of $4,652,001, and used cash in operations of $1,430,589.
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 for the three months ended June 30, 2019 has been from revenue generated from proceeds
from the issuance of convertible and other debt. The Company has experienced net losses from operations since inception, but expects
these conditions to improve in 2019 and beyond as it develops its business model. The Company has stockholders' deficiencies at
June 30, 2019 and requires additional financing to fund future operations.
The Company’s existence
is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can
be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s
liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to
continue as a going concern.
NOTE 3 –SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
For annual reporting periods after December
15, 2017, the Financial Accounting Standards Board (“FASB”) made effective ASU 2014-09 “Revenue from Contracts
with Customers,” to supersede previous revenue recognition guidance under current U.S. GAAP. Revenue is now recognized in
accordance with FASB ASC Topic 606, Revenue Recognition. The objective of the guidance is to establish the principles that an entity
shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer. The core principal is to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled
in exchange for those goods or services. Two options were made available for implementation of the standard: the full retrospective
approach or modified retrospective approach. The guidance became effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period, with early adoption permitted. We adopted FASB ASC Topic 606
for our reporting period as of the year ended December 31, 2017, which made our implementation of FASB ASC Topic 606 effective
in the first quarter of 2018. We decided to implement the modified retrospective transition method to implement FASB ASC Topic
606, with no restatement of the comparative periods presented. Using this transition method, we applied the new standards to all
new contracts initiated on/after the effective date. We also decided to apply this method to any incomplete contracts we determine
are subject to FASB ASC Topic 606 prospectively. For the three and six months ended June 30, 2019, there were no incomplete contracts.
As is more fully discussed below, we are of the opinion that none of our contracts for services or products contain significant
financing components that require revenue adjustment under FASB ASC Topic 606.
Contracts included in
our application of FASB ASC Topic 606, for the quarter ended June 30, 2019, consisted solely of sales of our hempSMART™ products
made by our sales associates and by us directly through our web site. Regarding our offered financial accounting, bookkeeping and/or
real property management consulting services, to date no contracts have been entered into, and thus no reportable revenues have
resulted for the fiscal years ended 2017 and 2018, or for the three and six months ended June 30, 2019.
In accordance with FASB
ASC Topic 606, Revenue Recognition, we are of the opinion that none of our hempSMART™ product sales or offered consulting
service, as each are discussed below, have a significant financing component. Our opinion is based upon the transactional basis
for our product sales, with revenue recognized upon customer order, payment and shipment, which occurs concurrently. Our evaluation
of the length of time between the customer order, payment and shipping is not a significant financing component, because shipment
occurs the same day as the order is placed and payment made by the customer. Our evaluation of our consulting services is based
upon recognizing revenue as the services are performed for a determinable price per hour. We only recognize revenues as we incur
and charge billable hours. Because our hourly fees for services are fixed and determinable and are only earned and recognized as
revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer based
significant financing, that would materially change the amount of revenue we recognize under the contract or would otherwise contain
a significant financing component under FASB ASC Topic 606.
Product Sales
Revenue from product
sales, including delivery fees, is recognized when (1) an order is placed by the customer; (2) the price is fixed and determinable
when the order is placed; (3) the customer is required to and concurrently pays for the product upon order; and, (4) the product
is shipped. The evaluation of our recognition of revenue after the adoption of FASB ASC 606 did not include any judgments or changes
to judgments that affected our reporting of revenues, since our product sales, both pre and post adoption of FASB ASC 606, were
evaluated using the same standards as noted above, reflecting revenue recognition upon order, payment and shipment, which all occurs
concurrently when the order is placed and paid for by the customer, and the product is shipped. Further, given the facts that (1)
our customers exercise discretion in determining the timing of when they place their product order; and, (2) the price negotiated
in our product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, we
are of the opinion that our product sales do not indicate or involve any significant customer financing that would materially change
the amount of revenue recognized under the sales transaction, or would otherwise contain a significant financing component for
us or the customer under FASB ASC Topic 606.
Consulting Services
We also offer professional
services for financial accounting, bookkeeping or real property management consulting services based on consulting agreements.
As of the date of this filing, we have not entered into any contracts for any financial accounting, bookkeeping and/or real property
management consulting services that have generated reportable revenues as of the years ended 2017 and 2018 or the three and six
months ended June 30, 2019. We intend and expect these arrangements to be entered into on an hourly fixed fee basis.
For hourly based fixed
fee service contracts, we intend to utilize and rely upon the proportional performance method, which recognizes revenue as services
are performed. Under this method, in order to determine the amount of revenue to be recognized, we will calculate the amount of
completed work in comparison to the total services to be provided under the arrangement or deliverable. We only recognize revenues
as we incur and charge billable hours. Because our hourly fees for services are fixed and determinable and are only earned and
recognized as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or
customer based significant financing, that would materially change the amount of revenue we recognize under the contract or would
otherwise contain a significant financing component under FASB ASC Topic 606.
The Company determined that upon adoption of
ASC 606 there were no adjustments converting from ASC 605 to ASC 606 because product sales revenue is recognized upon customer
order, payment and shipment, which occurs concurrently, and our consulting services offered are fixed and determinable and are
only earned and recognized as revenue upon actual performance.
Use
of Estimates
The preparation
of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the
Company’s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation
allowance related to deferred tax assets. Actual results may differ from these estimates.
Cash
The Company
considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily
convertible into cash.
Concentrations
of credit risk
The Company’s
financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s
cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions
is periodically reviewed by senior management.
Accounts
Receivable
Trade
receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus,
trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit
history with customers and their current financial condition.
Allowance
for Doubtful Accounts
Any charges
to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain
the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines
the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts
receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of June 30, 2019,
and December 31, 2018, 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 until the service is completed. 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.
Net Loss per Common Share, basic and diluted
The Company computes
earnings (loss) per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”).
Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise
or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if
converted” methods as applicable.
The computation of basic and diluted income
(loss) per share as of June 30, 2019 and 2018 excludes potentially dilutive securities when their inclusion would be anti-dilutive,
or if their exercise prices were greater than the average market price of the common stock during the period.
Property and Equipment
Property and equipment are stated at cost.
When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts
and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property
and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.
Investments
The Company follows
Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the accounting
for equity security to be measured at fair value with changes in unrealized gains and losses are included in current period operations.
Where an equity security is without a readily determinable fair value, the Company may elect to estimate its fair value at cost
minus impairment plus or minus changes resulting from observable price changes.
As a smaller reporting
company, the company is subject to provisions of Rule 8-03(b)(3) of Regulation S-X which requires the disclosure of certain financial
information for equity investees that constitute 20% of more of the Company’s consolidated net income (loss). For the three
months ended June 30, 2019, income allocations from the Company’s unconsolidated joint venture Natural Plant Extract accounted
for under the equity method, exceed more than 20% of the Company’s consolidated net loss.
|
Three Months Ended June 30
(1)
|
|
2019
|
2018
|
Revenues
|
374,937
|
0
|
Cost of Sales
|
346,265
|
0
|
Gross Margin
|
28,672
|
0
|
Expenses
|
358,973
|
0
|
Net Income
|
$ (330,301)
|
$ -
|
|
|
|
Equity in net loss of unconsolidated joint venture reflected in the accompanying Consolidated Statement of Operations
|
$
(6,291)
|
|
|
|
|
(1) Reflects from inception of acquisition April 24, 2019
|
|
|
Derivative Financial Instruments
The Company classifies
as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice
of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts
are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash
settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s
control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share
settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each
reporting date to determine whether a change in classification between equity and liabilities is required.
The Company’s free-standing
derivatives consisted of conversion options embedded within its issued convertible debt and warrants with anti-dilutive (reset)
provisions. The Company evaluated these derivatives to assess their proper classification in the balance sheet using the applicable
classification criteria enumerated under GAAP. The Company determined that certain conversion and exercise options do not contain
fixed settlement provisions. The convertible notes contain a conversion feature and warrants have a reset provision such that the
Company could not ensure it would have adequate authorized shares to meet all possible conversion demands.
As such, the Company
was required to record the conversion feature and the reset provision which does not have fixed settlement provisions as liabilities
and mark to market all such derivatives to fair value at the end of each reporting period.
The Company has adopted
a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception date first.
Thus, any available shares are allocated first to contracts with the most recent inception dates.
Fair Value of Financial Instruments
Fair value estimates
discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2019
and December 31, 2018. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair
values. These financial instruments include cash and accounts payable.
Fair values were assumed
to approximate carrying values for cash, accounts payables and short term notes 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 $249,777 and $15,000 for
the three months ended June 30, 2019 and 2018 respectively. By comparison, the Company charged to operations $391,116 and $70,745
for the six months ended June 30, 2019 and 2018 respectively.
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 June 30, 2019, and 2018, the Company has not recorded any unrecognized tax benefits.
Segment Information
Accounting Standards
Codification subtopic Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected information for those segments to be presented in interim
financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services
and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how
to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information
related to the Company's only material principal operating segment.
The following table represents
the Company’s hempSMART business, which is its sole operating segment as of June 30, 2019:
hempSMART
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE AND SIX MONTHS ENDED JUNE 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hempSMART
|
|
|
|
|
|
|
6 months
|
|
|
|
|
|
6 months
|
|
|
Three months ended
|
|
Ended
|
|
Three months ended
|
|
Ended
|
|
|
Mar 31, 2019
|
|
June 30, 2019
|
|
June 30, 2019
|
|
Mar 31, 2018
|
|
June 30, 2018
|
|
June 30, 2018
|
Revenues
|
|
$
|
114,810
|
|
|
$
|
208,580
|
|
|
$
|
323,390
|
|
|
$
|
19,010
|
|
|
$
|
28,435
|
|
|
$
|
47,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
39,878
|
|
|
|
29,139
|
|
|
|
69,017
|
|
|
|
4,372
|
|
|
|
6,540
|
|
|
|
10,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
74,932
|
|
|
|
179,441
|
|
|
|
254,373
|
|
|
|
14,638
|
|
|
|
21,895
|
|
|
|
36,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
1,696
|
|
|
|
1,696
|
|
|
|
3,392
|
|
|
|
1,393
|
|
|
|
1,524
|
|
|
|
2,918
|
|
Selling and general expenses
|
|
|
580,388
|
|
|
|
631,482
|
|
|
|
1,211,870
|
|
|
|
165,243
|
|
|
|
189,330
|
|
|
|
354,573
|
|
Total Expenses
|
|
|
582,084
|
|
|
|
633,178
|
|
|
|
1,215,262
|
|
|
|
166,636
|
|
|
|
190,854
|
|
|
|
357,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) from Operations
|
|
$
|
(507,152
|
)
|
|
$
|
(453,737
|
)
|
|
$
|
(960,889
|
)
|
|
$
|
(151,998
|
)
|
|
$
|
(168,959
|
)
|
|
$
|
(320,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In February 2016, the
FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and
a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018,
the FASB issued ASU 2018-11, Leases (Topic 842), which provides an optional transition method of applying the new lease standard.
Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as
permitted by ASU 2018-11, at the beginning of the period in which it is adopted.
We adopted this standard
using a modified retrospective approach on January 1, 2019. The modified retrospective approach includes a number of optional practical
expedients relating to the identification and classification of leases that commenced before the adoption date; initial direct
costs for leases that commenced before the adoption date; and, the ability to use hindsight in evaluating lessee options to extend
or terminate a lease or to purchase the underlying asset.
The Company elected the
package of practical expedients permitted under ASC 842 allowing it to account for its existing operating lease that commenced
before the adoption date as an operating lease under the new guidance without reassessing (i) whether the contract contains a lease;
(ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC 842.
In considering its qualitative
disclosure obligations under ASC 842-20-50-3, the Company examined its one lease for office space that has a fixed monthly rent
with no variable lease payments and no options to extend. The lease is for an office space with no right of use assets. The lease
does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants imposed
by the lease for dividends or incurring additional financial obligations by the Company. The Company also elected a short-term
lease exception policy and an accounting policy to not separate non-lease components from lease components for our facility lease,
as we determined our right of use asset to be zero.
Consistent with ASC 842-20-50-4,
for the Company's June 30, 2019, quarterly financial statements, the Company calculated its total lease cost based solely on its
monthly rent obligation. The Company had no cash flows arising from its lease, no finance lease cost, short term lease cost, or
variable lease costs. Our office lease does not produce any sublease income, or any net gain or loss recognized from sale and leaseback
transactions. As a result, the Company did not need to segregate amounts between finance and operating leases for cash paid for
amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows; supplemental non-cash
information on lease liabilities arising from obtaining right-of-use assets; weighted-average calculations for the remaining lease
term; or the weighted-average discount rate.
The adoption of this guidance resulted in
no significant impact to our results of operations or cash flows.
Subsequent Events
The Company
evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon
the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment
or disclosure in the financial statements, except as disclosed (See Note 11, Subsequent Events).
NOTE 4 – PROPERTY
AND EQUIPMENT
Property and equipment as
of June 30, 2019 and December 31, 2018 is summarized as follows:
|
|
June 30,
2019
|
|
December 31,
2018
|
Computer equipment
|
|
$
|
17,809
|
|
|
$
|
15,207
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
5,140
|
|
|
|
5,140
|
|
Subtotal
|
|
|
22,949
|
|
|
|
20,347
|
|
Less accumulated depreciation
|
|
|
(11,207
|
)
|
|
|
(7,917
|
)
|
Property and equipment, net
|
|
$
|
11,742
|
|
|
$
|
12,430
|
|
Property
and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 years. When
retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts
and the net difference less any amount realized from disposition, is reflected in earnings.
Depreciation expense was $1,695 and $3,391
for the three and six months ended June 30, 2019; and $1,525 and $2,918 for the three and six months ended June 30, 2018, respectively.
NOTE 5 – INVESTMENTS
MoneyTrac
On March 13, 2017, the Company entered into
a stock purchase agreement to acquire up to 15,000,000 common shares of MoneyTrac Technology, Inc., a corporation organized and
operating under the laws of the state of California, for a total purchase price of $250,000 representing approximately 15% ownership
at the time of the agreement. As of 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 using the market price for the publicly traded shares under the ticker
symbol “GOHE” as listed on OTC Markets as an indicator of fair market value. As of June 30, 2019, and December 31,
2018, the balance of this investment was $525,000 and $810,000 and was classified as a short-term investment.
On July 19, 2019, MoneyTrac completed a 1:100
reverse split of its common stock, which reduced the number of shares beneficially owned by the Company to 1,500,000 shares.
Benihemp
On June 16, 2017, the Company entered into
a Loan Agreement (“Agreement”) with Conveniant Hemp Mart, LLC (“Benihemp”), a limited liability company
formed and operating under the laws of the State of Wyoming. Pursuant to the Agreement, Benihemp executed a promissory note for
a principal loan amount of $50,000, accruing interest at the rate of 4% per annum and payable in one year, subject to one-time
six- month repayment extension. The Agreement also provided that the Company 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. As of December 31, 2018, the balance of this investment reported on the balance sheet for the year ended December 31,
2018 was $0.00 as a result of the investment being deemed fully impaired.
Global
Hemp Group Joint Ventures
We currently have two ongoing joint ventures
with Global Hemp Group, Inc., a Canadian corporation. Each is a related party transaction in that Global Hemp Group’s director,
Charles Larsen, is a beneficial owner of more than 10% of our common stock, and a former director of the Company. Further, our
President and Chief Executive Officer Donald Steinberg is a shareholder in Global Hemp Group. The two Global Hemp Group joint ventures
are discussed together due to the common ownership of the joint venture partners in each project, and the fact that both joint
ventures share a common purpose of growing, cultivating and performing research and development of industrial hemp.
Global Hemp Group New Brunswick Joint Venture
On
August 31, 2017, the Company entered into a Joint Venture Agreement (“Agreement”) with Global Hemp Group, Inc., a
Canadian corporation (“Global Hemp Group”). The Company 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 during 2019.
Global Hemp Group JV – Scio Oregon
On May
8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation, and TTO Enterprises, Ltd., an Oregon corporation entered
into a Joint Venture Agreement. The purpose of the joint venture is to develop a project to commercialize the cultivation of industrial
hemp on a 109 acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating under the
Oregon corporation Covered Bridges, Ltd. The joint venture is in the development stage. On May 30, 2018, the joint venture purchased
TTO’s 15% interest in the joint venture for $30,000. The Company and Global Hemp Group, Inc. now have an equal 50-50 interest
in the joint venture. The joint venture agreement commits the Company to a cash contribution of $600,000 payable on the following
funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018;
and, $34,775 by January 31, 2019. The Company has complied with its payments. The 2018 crop of hemp grown on the joint venture’s
real property consisted of 33 acres of high yielding CBD hemp grown in an orchard style cultivation on the property. The 2018 harvest
consisted of approximately 37,000 high yielding CBD hemp plants producing 24 tons of biomass that produced 48,000 pounds of dried
biomass. The joint venture partners prepared processing samples ranging in size from 100 lbs. to 2,000 lbs. for sample offers to
extraction companies. The biomass is being processed into CBD crude oil with the option to refine it further into isolate, or full
spectrum oil, in order to increase its value on the market. Results from the current extraction test batches were received in May,
2019 and will serve as a basis for the final terms of the sale of the biomass by the Partners. In August
of 2019, the JV sold 10,000 lbs. of shucked biomass to an Oregon extraction facility for US$400,000. The JV team is currently working
with this party and a number of others to complete the purchase of the remaining inventory.
Bougainville Ventures, Inc. Joint Venture
On March 16, 2017, we entered into a joint
venture agreement with Bougainville Ventures, Inc., a Canadian corporation. The purpose of the joint venture was for the Company
and Bougainville to jointly engage in the development and promotion of products in the legalized cannabis industry in Washington
State; (ii) utilize Bougainville’s high quality cannabis grow operations in the State of Washington, where it claimed to
have an ownership interest in real property for use within the legalized cannabis industry; (iii) leverage Bougainville’s
agreement with a I502 Tier 3 license holder to grow cannabis on the site; provide technical and management services and resources
including, but not limited to: sales and marketing, agricultural procedures, operations security and monitoring, processing and
delivery, branding, capital resources and financial management; and, (iv) optimize collaborative business opportunities. The Company
and Bougainville agreed to operate through a Washington State Limited Liability Company, and BV-MCOA Management, LLC was organized
in the State of Washington on May 16, 2017.
As our contribution to the joint venture, the
Company committed to raise not less than $1 million dollars to fund joint venture operations based upon a funding schedule. The
Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised
of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.
Bougainville represented that it had an ownership
interest in real property located in Washington State used for growing cannabis, and possessed information primarily related to
the management and control of cannabis grow operations as conducted in Washington State that included research, development and
know how in the cannabis industry. Bougainville also represented that it had an agreement with a I502 Tier 3 license holder in
Washington State to operate on the land. The Company and Bougainville's agreement provided that funding provided by the Company
would go, in part, towards the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan
County, Washington, for joint venture operations.
As disclosed on Form 8-K on December 11, 2017,
the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended
the joint venture agreement to reduce the amount of the Company's commitment to $800,000 and also required the Company to issue
Bougainville 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 for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 license holder to grow Marijuana
on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green
Ventures Capital Corp., purchased the land. The land is currently pending the payment of delinquent property taxes that would allow
for the Okanogan County Assessor to sub-divide the property, so that the appropriate portion could be deeded to the joint venture.
Although Bougainville represented it would pay the delinquent taxes, it has not. To date, the property has not been deeded to the
joint venture.
To clarify the respective contributions and
roles of the parties, the Company also offered to enter into good faith negotiations to revise and restate the joint venture agreement
with Bougainville. The Company diligently attempted to communicate with Bougainville in good faith to accomplish a revised and
restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the
Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to
pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint
venture.
On August 10, 2018, the Company advised its
independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information
concerning the audit of Bougainville’s receipt and expenditures of funds contributed by the Company in the joint venture
agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of
the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally,
the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but
not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded
to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property;
and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture
thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit against
Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior
Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract, fraud,
breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in
the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville,
and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on
the real property. The case is currently in litigation.
In connection with the agreement, the Company
recorded a cash investment of $1,188,500 to the Joint Venture during 2017. This was comprised of 49.5% ownership of BV-MCOA Management
LLC, and was accounted for using the equity method of accounting. The Company recorded an annual impairment in 2017 of $792,500,
reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded
equity losses of $37,673 and $11,043 for the first and second quarters respectively, and recorded an annual impairment of $285,986
for the year ended December 31, 2018, at which time the Company determined the investment to be fully impaired due to Bougainville’s
breach of contract, including: (i) its failure to communicate and cooperate regarding the Company’s audit; (ii) its misrepresentations
concerning its ownership interest in the real property in Okanogan County Washington; (iii) its failure to deed the property to
the joint venture within thirty days of payment pursuant to the amended joint venture agreement; and, (iv) its misrepresentation
that it possessed an agreement with a Tier 3 license holder to operate on the property.
GateC Joint Venture
On March 17, 2017, the Company and GateC Research,
Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”) whereby the Company committed to raise
up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum commitment of five hundred thousand
dollars ($500,000) within a three (3) month period; and, information establishing brands and systems for the representation of
cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies, including but
not limited to its affiliate marketing program, directly tailored to the cannabis industry.
GateC agreed to contribute its management and
control services and systems related to cannabis grow operations in Adelanto County, California, and its permit to grow marijuana
in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto County, California,
and GateC’s permit to grow cannabis did not contain a conditional use permit.
On or about November 28, 2017, GateC and the
Registrant orally agreed to suspend the Company’s funding commitment, pending the finalization of California State regulations
governing the growth, cultivation and distribution of cannabis, which were expected to be completed in 2018.
On March 19, 2018, the Company and GateC rescinded
the Agreement and concurrently released each other from any all any and all losses, claims, debts, liabilities, demands, obligations,
promises, acts, omissions, agreements, costs and expenses, damages, injuries, suits, actions and causes of action, of whatever
kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, that they may have against each other
and their Affiliates, arising out of the Agreement.
The Registrant incurred no termination penalties
as the result of its entry into the Recession and Mutual Release Agreement.
In 2017, the Company recorded a debt obligation
of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year ended December 31, 2017.
Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation
of $1,500,000 during the six months ended June 30, 2018.
MARIJUANA COMPANY OF AMERICA, INC.
|
|
|
|
INVESTMENT ROLL-FORWARD
|
|
|
|
|
|
AS OF JUNE 30, 2019
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
Natural
|
|
|
|
|
TOTAL
|
|
Hemp
|
|
|
|
|
|
Bougainville
|
|
Gate C
|
|
Plant
|
|
|
|
|
INVESTMENTS
|
|
Group
|
|
Benihemp
|
|
MoneyTrac
|
|
Ventues, Inc.
|
|
Research Inc.
|
|
Extract
|
|
Vivabuds
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 03-31-17 equity method Loss
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-17 equity method Loss
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 09-30-17 equity method Loss
|
|
|
(375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 12-31-17 equity method accounting
|
|
|
313,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Investment in 2017
|
|
|
(2,292,500
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
(792,500
|
)
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
Balances as of 12/31/17
|
|
|
695,477
|
|
|
|
10,775
|
|
|
|
100,000
|
|
|
|
250,000
|
|
|
|
334,702
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments made during 2018
|
|
|
986,654
|
|
|
|
986,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 03-31-18 equity method Loss
|
|
|
(37,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-18 equity method Loss
|
|
|
(11,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 09-30-18 equity method Loss
|
|
|
(10,422
|
)
|
|
|
|
|
|
|
(10,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 12-31-18 equity method Loss
|
|
|
(31,721
|
)
|
|
|
(31,721
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moneytrac investment reclassified to Short-Term investments
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on trading securities - 2018
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investment in 2018
|
|
|
(933,195
|
)
|
|
|
(557,631
|
)
|
|
|
(89,578
|
)
|
|
|
|
|
|
|
(285,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance @12-31-18
|
|
$
|
408,077
|
|
|
$
|
408,077
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance @03-31-19
|
|
$
|
477,576
|
|
|
$
|
477,576
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance @06-30-19
|
|
$
|
3,463,526
|
|
|
$
|
419,352
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,993,709
|
|
|
$
|
50,465
|
|
MARIJUANA COMPANY OF AMERICA, INC.
|
INVESTMENT RELATED DEBT ROLL-FORWARD
|
|
AS OF JUNE 30, 2019
|
|
Loan Payable
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
|
|
|
|
|
|
|
|
General
|
|
|
|
|
TOTAL
|
|
|
|
Hemp
|
|
|
|
|
|
|
|
|
|
|
|
Bougainville
|
|
|
|
Gate C
|
|
|
|
Plant
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
JV Debt
|
|
|
|
Group
|
|
|
|
Benihemp
|
|
|
|
MoneyTrac
|
|
|
|
Ventues, Inc.
|
|
|
|
Research Inc.
|
|
|
|
Extract
|
|
|
|
Vivabuds
|
|
|
|
Expense
|
|
Beginning balance @12-31-16
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 03-31-17 loan borrowings
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-17 loan activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 09-30-17 loan borrowings
|
|
|
725,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 12-31-17 loan repayments
|
|
|
(330,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General operational expense
|
|
|
172,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,856
|
|
Balances as of 12/31/17 (a)
|
|
|
2,067,411
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
394,555
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
172,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 03-31-18 loan borrowings (payments)
|
|
|
376,472
|
|
|
|
447,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-18 cancellation of JV debt obligation
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-18 loan repayments
|
|
|
(101,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 09-30-18 loan activity
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 12-31-18 loan borrowings
|
|
|
580,425
|
|
|
|
580,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance @12-31-18 (b)
|
|
$
|
1,422,410
|
|
|
$
|
1,027,855
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 03-31-19 loan borrowings
|
|
|
649,575
|
|
|
|
649,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 03-31-19 debt conversion to equity
|
|
|
(407,192
|
)
|
|
|
(407,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance @03-31-19(c)
|
|
$
|
1,664,793
|
|
|
$
|
1,270,238
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-19 loan borrowings
|
|
|
3,836,220
|
|
|
$
|
161,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,000,000
|
|
|
$
|
0
|
|
|
$
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter 06-30-19 debt conversion to equity
|
|
|
(1,572,971
|
)
|
|
$
|
(161,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(349,650
|
)
|
|
|
|
|
|
$
|
(1,062,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance @06-30-19(d)
|
|
$
|
3,928,042
|
|
|
$
|
1,270,238
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
394,555
|
|
|
$
|
0
|
|
|
$
|
1,650,350
|
|
|
$
|
0
|
|
|
$
|
612,899
|
|
|
|
06-30-19
|
|
03-31-19
|
|
12-31-18
|
|
12-31-17
|
This includes balances for:
|
|
Note (d)
|
|
Note (c)
|
|
Note (b)
|
|
Note (a)
|
- Debt obligation of JV
|
|
|
1,778,872
|
|
|
|
128,522
|
|
|
|
289,742
|
|
|
|
1,500,000
|
|
- Convertible NP, net of discount
|
|
|
2,149,170
|
|
|
|
1,536,271
|
|
|
|
1,132,668
|
|
|
|
394,555
|
|
- Longterm debt
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
172,856
|
|
Total Debt balance
|
|
|
3,928,042
|
|
|
|
1,664,793
|
|
|
|
1,422,410
|
|
|
|
2,067,411
|
|
NOTE
6 – NOTES PAYABLE, RELATED PARTY
As of
June 30, 2019, and December 31, 2018, the Company’s officers and directors have provided advances and incurred expenses on
behalf of the Company. The issued notes are unsecured, due on demand and bear 5% interest. At June 30, 2019 and, December 31, 2018
there were an aggregate of $1,778,872 and $180,000 notes payable due to officers.
During the six months ended June 30, 2019,
the Company issued an aggregate of 73,251,344 shares of its common stock in settlement of outstanding related party notes payable
of $732,513.
NOTE
7 – CONVERTIBLE NOTE PAYABLE
Convertible
notes payable are comprised of the following:
|
|
June 30,
2019
|
|
December 31,
2018
|
Convertible note payable-John Fife, last due October 27, 2018
|
|
$
|
—
|
|
|
$
|
150,959
|
|
Convertible notes payable-St George-last due January 24, 2020
|
|
|
3,222,890
|
|
|
|
1,877,890
|
|
Total
|
|
|
3,222,890
|
|
|
|
2,028,849
|
|
Less debt discounts
|
|
|
(1,073,720
|
)
|
|
|
(896,180
|
)
|
Net
|
|
|
2,149,170
|
|
|
|
1,132,669
|
|
Less current portion
|
|
|
2,149170
|
|
|
|
(1,132,669
|
)
|
Long term portion
|
|
$
|
—
|
|
|
$
|
—
|
|
Convertible
notes payable-St George Investments
Effective
November 1, 2017, the Company issued a secured convertible promissory note in aggregate amount of $601,420 to St George Investments
LLC (“St George”). The promissory note bears interest at 10% per annum, is due upon maturity sixteen months after the
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 June 30, 2019, the Company owed $417,890 on this convertible promissory
note.
Effective
December 20, 2017, the Company issued a secured convertible promissory note in aggregate of $1,655,000 to St George Investments
LLC (“St George”). The promissory note bears interest at 10% per annum, is due upon maturity sixteen months after purchase
price date and includes an original issue discount (“OID”) of $155,000. In addition, the Company agreed to pay $5,000
for legal, accounting and other transaction costs of the lender. The promissory note was funded in nine tranches of $300,000; $200,000;
$200,000; $400,000; $75,000; $150,000; $85,000; $120,000 and $70,000, resulting in receiving aggregate net proceeds of $1,500,000.
The Company had received aggregate net proceeds of $300,000 during the year ended December 31, 2017 with the remaining tranches
received during the year ended December 31, 2018. As an investment incentive, the Company issued 66,000,000 5-year warrants, exercisable
at $.04 with certain reset provisions.
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 $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due the 20 trading days immediately
preceding date of conversion, subject to additional adjustments, as defined. In addition, the promissory note includes certain
anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than
the lender conversion price.
The Company
has a right to prepayment of the note, subject to a 20% prepayment premium and is secured by a trust deed of certain assets of
the Company.
During
the six months ended June 30, 2019, $525,000 of principal along with $395,572 of derivative liabilities valued as of the respective
conversion dates were converted into 77,363,636 shares of common stock.
On November
5, 2018, $250,000 of principal and accrued interest was assigned to John Fife as an individual with all the terms and conditions
of the original note issued to St George. On March 21, 2019, $150,959 of principal and $4,963 of accrued interest along with $160,454
of derivative liabilities valued as of the respective conversion date were converted into 23,667,574 shares of common stock.
Effective
August 28, 2018, the Company issued a secured convertible promissory note in aggregate of $1,105,000 to St George Investments LLC
(“St George”). The promissory note bears interest at 10% per annum, is due upon maturity ten months after purchase
price date and includes an original issue discount (“OID”) of $100,000. In addition, the Company agreed to pay $5,000
for legal, accounting and other transaction costs of the lender. During the year ended December 31, 2018, the promissory note was
funded in seven tranches totaling aggregate net proceeds of $825,000. As an investment incentive, the Company issued 45,000,000
5 year warrants, exercisable at $.04 with certain reset provisions.
The
promissory note is convertible, at any time at the lender’s option, at $0.04. However, in the event the
Company’s market capitalization (as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest
closing trade prices due the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as
defined.
In addition, the promissory note includes certain anti-dilution provisions should the Company subsequently
issue any common stock or equivalents at an effective price less than the lender conversion price.
The Company
has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets of
the Company.
During
the six months ended June 30, 2019, an additional $135,000 was funded under this note for net proceeds of $125,000. The aggregate
fair value of $1,588,493 of the issued warrants was allocated to this funding based on the funding’s percentage of the $1,105,000
face value. The determined fair value of warrants issued was then allocated between the debt instrument and warrants based on their
relative fair values. The portion of the proceeds allocated to the warrants has been added to the debt discount, included in additional
paid in capital and amortized over the life of the debt.
At the
funding date of the eight tranches of this note, the Company determined an aggregate fair value of the embedded derivatives on
the total outstanding balance of this note of $1,180,646. 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 112.4%, (3) weighted
average risk-free interest rate of 2.54%, (4) expected life of .481 years, and (5) estimated fair value of the Company's common
stock from $.018 per share. The determined aggregate fair value of the debt derivatives was adjusted with a $36,343 reduction of
interest expense during the six months ending June 30, 2019.
Effective
January 29, 2019, the Company issued a secured convertible promissory note in aggregate of $2,205,000 to St George Investments
LLC (“St George”). The promissory note bears interest at 10% per annum, is due upon maturity ten months after the purchase
price date and includes an original issue discount (“OID”) of $200,000. In addition, the Company agreed to pay $5,000
for legal, accounting and other transaction costs of the lender. During the six months ended June 30, 2019, the promissory note
was funded in six tranches totaling $1,155,000 resulting in receiving aggregate net proceeds of $1,050,000 under this note. The
net proceeds received consisted of $888,780 in cash and $161,220 in payments on behalf of the Company. As an investment incentive,
the Company issued 90,000,000 5-year warrants, exercisable at $.04 with certain reset provisions.
The promissory
note is convertible, at any time at the lender’s option, at $0.04. However, in the event the Company’s market capitalization
(as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due the 20 trading days immediately
preceding date of conversion, subject to additional adjustments, as defined. In addition, the promissory note includes certain
anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than
the lender conversion price.
The Company
has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets of
the Company.
Additionally,
at the date of issuance, the Company determined the aggregate fair value of the issued warrants at $999,838. 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 109.63%, (3) weighted average risk-free interest rate of 2.55%, (4) expected life of 5.00 years,
and (5) estimated fair value of the Company's common stock of $0.0162 per share. The aggregate fair value of the issued warrants
is allocated to each funding based on the funding’s percentage of the aggregate warrant face value. The determined fair value
of warrants issued was then allocated between the debt instrument and warrants based on their relative fair values. The portion
of the proceeds allocated to the warrants has been added to the debt discount, included in additional paid in capital and amortized
over the life of the debt. During the six months ended June 30, 2019, the portion of proceeds allocated to warrants totaled $349,247.
At the
funding dates of the notes, the Company determined an aggregate fair value of $44,898 of the 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 105.68% to 109.79%, (3) weighted average risk-free interest rate of 2.31% to 2.53%, (4)
expected life of .681 to .836 years, and (5) estimated fair value of the Company's common stock from $.0123 to $.0163 per share.
The determined fair value of the debt derivatives was charged as a debt discount up to the net proceeds of the note.
Effective
March 25, 2019, the Company issued a secured convertible promissory note in aggregate of $580,000 to St George Investments LLC
(“St George”). The promissory note bears interest at 10% per annum, is due upon maturity ten months after the purchase
price date and includes an original issue discount (“OID”) of $75,000. In addition, the Company agreed to pay $5,000
for legal, accounting and other transaction costs of the lender. During the six months ended June 30, 2019, the promissory note
was funded in the amount of $580,000 resulting in receiving aggregate net proceeds of $500,000 under this note. As an investment
incentive, the Company issued 22,500,000 5-year warrants, exercisable at $.04 with certain reset provisions.
The promissory
note is convertible, at any time at the lender’s option, at $0.04. However, in the event the Company’s market capitalization
(as defined) falls below $30,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due the 20 trading days immediately
preceding date of conversion, subject to additional adjustments, as defined. In addition, the promissory note includes certain
anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than
the lender conversion price.
The Company
has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets of
the Company.
Additionally,
at the date of issuance, the Company determined the aggregate fair value of the issued warrants at $258,701. 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 108.20%, (3) weighted average risk-free interest rate of 2.21%, (4) expected life of 5.00 years,
and (5) estimated fair value of the Company's common stock of $0.0169 per share. The determined fair value of warrants issued was
allocated between the debt instrument and warrants based on their relative fair values. The portion of the proceeds allocated to
the warrants has been added to the debt discount, included in additional paid in capital and amortized over the life of the debt.
During the six months ended June 30, 2019, the portion of proceeds allocated to warrants totaled $170,489.
At the
funding dates of the notes, the Company determined an aggregate fair value of $233,477 of the 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 108.85%, (3) weighted average risk-free interest rate of 2.48%, (4) expected life of .836
years, and (5) estimated fair value of the Company's common stock from $.0169 per share. The determined fair value of the debt
derivatives was charged as a debt discount up to the net proceeds of the note.
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 June
30, 2019, the Company determined the aggregate fair values of $2,211,570 of embedded derivatives. 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
104.18%, (3) weighted average risk-free interest rate of 2.18%, (4) expected life of 0.250 to .817 years, and (5) estimated fair
value of the Company's common stock from $0.0103 per share.
For the
three months ended June 30, 2019, the Company recorded a gain on change in fair value of derivative liabilities of $2,207,299 and
recorded amortization of debt discounts of $813,112 as a charge to interest expense, respectively. For the six months ended June
30, 2019, the Company recorded a loss on change in fair value of derivative liabilities of $480,150 and recorded amortization of
debt discounts of $1,308,550 as a charge to interest expense, respectively.
NOTE
8 – STOCKHOLDERS’ DEFICIT
Preferred
stock
The Company is authorized to issue 50,000,000
shares of $0.001 par value preferred stock as of June 30, 2019 and December 31, 2018. As of June 30, 2019, and December 31, 2018,
the Company has designated and issued 10,000,000 shares of Class A Preferred Stock.
Each share of Class A Preferred Stock is entitled
to 100 votes on all matters submitted to a vote to the stockholders of the Company, does not have conversion, dividend or distribution
upon liquidation rights.
Common
stock
The Company
is authorized to issue 5,000,000,000 shares of $0.001 par value common stock as of June 30, 2019 and December 31, 2018. As of June
30, 2019, and December 31, 2018, the Company had 47,314,625 and 42,687,301, respectively, common shares issued and outstanding.
During the six months ended June 30, 2019,
the Company issued an aggregate of 535,387 shares of its common stock for services rendered with an estimated fair value of $152,082.
During the six months ended June 30, 2019,
the Company issued an aggregate of 1,220,856 shares of its common stock, in settlement of outstanding related party notes payable,
and in addition, common stock to be issued of $1,173,709 for a total aggregate value of $28,875.
During the six months ended June 30, 2019,
the Company issued 1,683,854 shares of its common stock in settlement of convertible notes payable, accrued interest and embedded
derivative liabilities of $1,988,976.
During the six months ended June 30, 2019,
the company issued 655,556 shares of its common stock in exchange for exercise of warrants on a cashless basis with an aggregate
value of $16,072.
During the six months ended June 30, 2019,
the Company sold an aggregate of 531,671 shares of its common stock for net proceeds of $130,553.
Warrants
The following
table summarizes the stock warrant activity for the six months ended June 30, 2019:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
Outstanding at January 1, 2019
|
|
|
1,847,447
|
|
|
$
|
0.0007
|
|
|
0.0697
|
|
$
|
25,500
|
Granted
|
|
|
1,919,444
|
|
|
|
0.0003
|
|
|
0.0762
|
|
|
267
|
Exercised
|
|
|
(192,521)
|
|
|
|
(0.0003)
|
|
|
(0.0425)
|
|
|
1,200
|
Outstanding at June 30, 2019
|
|
|
3,574,370
|
|
|
$
|
0.0007
|
|
|
0.1034
|
|
$
|
|
300
|
Exercisable at June 30, 2019
|
|
|
3,574,370
|
|
|
$
|
0.0007
|
|
|
0.1034
|
|
$
|
|
300
|
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
$0.0001
as of June 30, 2019, and after the
effect of the reverse stock split, 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 June 30, 2019:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise
Price
|
|
|
Number of
Warrants
|
|
|
Weighted Average
Remaining Life
In Years
|
|
|
Exercisable
Number of
Warrants
|
|
$
|
0.0007
|
|
|
|
3,574,371
|
|
|
4.19
|
|
|
|
3,574,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection
with the issuance of convertible notes payable, the Company issued an aggregate of 1,875,000 warrants to purchase the Company’s
common stock at $0.0007 per share, vesting immediately and expiring 5 years from the date of issuance. (See Note 6)
NOTE 9 — FAIR VALUE
MEASUREMENT
The Company
adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on
January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements
for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability,
such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10
establishes three levels of inputs that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
All items
required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To the
extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of
fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon
adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial
statements.
The carrying
value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including
convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
As of
June 30, 2019, and December 31, 2018, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company
recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in note 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 Note 6 are that of volatility and market price of the underlying common stock of the Company.
As of
June 30, 2019, and December 31, 2018, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as
of June 30, 2019 and December 31, 2018, in the amount of $2,211,570 and $2,256,631, respectively, have a level 3 classification.
The following
table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the six months ended
June 30, 2019:
|
|
|
Debt
Derivative
|
|
|
Balance, January 1, 2019
|
|
$
|
2,256,631
|
|
Total (gains) losses
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
692,574
|
|
Mark-to-market at June 30, 2019:
|
|
|
(480,150
|
)
|
Transfers out of Level 3 upon conversion or payoff of notes payable
|
|
|
(257,485
|
)
|
Balance, June 30, 2019
|
|
$
|
2,211,570
|
|
Net (loss) for the period included in earnings relating to the liabilities held during the period ended June 30, 2019
|
|
$
|
(480,150
|
)
|
Fluctuations
in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period.
During the period ended June 30, 2019, the Company’s stock price decreased significantly from initial valuations. As the
stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases.
Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative
instruments.
NOTE
10 — RELATED PARTY TRANSACTIONS
The Company’s
current officers and stockholders advanced funds to the Company for travel related and working capital purposes. As of June 30,
2019, and December 31, 2018, there were no related party advances outstanding.
As of
June 30, 2019, and December 31, 2018, accrued compensation due officers and executives included as accrued compensation was $180,000
and $454,316, respectively.
At June
30, 2019 and December 31, 2018, there were an aggregate of $71,553 and $287,140 notes payable due to officers. The notes are at
5% per annum and non-interest bearing, respectively, and are due on demand.
During the six months ended June 30, 2019,
the Company issued an aggregate of 1,220,856 shares of its common stock in settlement of outstanding related party notes payable
of $71,553 and accrued compensation of $180,000.
On August
31, 2017, the Company entered into a joint venture agreement with Global Hemp Group, Inc., a Canadian corporation. The Company’s
Director, Charles Larsen, is the President, Director and shareholder of Global Hemp Group, Inc. The Company’s Director, President
and Chief Executive Officer, Donald Steinberg, is a shareholder of Global Hemp Group, Inc. The Company’s prior Chief Financial
Officer, Robert L. Hymers, III, is a shareholder of Global Hemp Group, Inc. Mr. Hymers resigned as CFO and Director of the Company
on June 18, 2018.
On May
8, 2018, the Company entered into a joint venture agreement with Global Hemp Group, Inc., a Canadian corporation, and TTO Enterprises,
Ltd., an Oregon corporation. The Company’s Director, Charles Larsen, is the President, Director and shareholder of Global
Hemp Group, Inc. The Company’s Director, President and Chief Executive Officer, Donald Steinberg, is a shareholder of Global
Hemp Group, Inc. The Company’s prior Chief Financial Officer, Robert L. Hymers, III, is a shareholder of Global Hemp Group,
Inc.
The joint
venture will operate and has acquired a 109 acre agricultural property in Scio, Oregon (the “Property”) for the cultivation
of high CBD yielding hemp for the upcoming 2018 growing season. The joint venture acquired the property on May 1, 2018. The total
capital commitment for the project will be $1,380,000. The Company’s portion of the capital commitment is to raise $600,000
based upon the following funding schedule: $200,000 upon execution of this Agreement; $238,780 on or before July 31, 2018; $126,445
on or before October 31, 2018; and $34,775 on or before January 31, 2019. As of June 30, 2019, $200,000 has been funded.
NOTE
11 – SUBSEQUENT EVENTS
Reverse Stock Split
On July 3, 2019, the Company filed Form 8-K
disclosing the July 1, 2019 special meeting of the stockholders holding a majority of the shares eligible to vote, and their approval
by written consent of an amendment to the Company’s articles of incorporation to affect a sixty for one reverse stock split
of the Company’s issued and outstanding common stock. The reverse stock split affects all issued and outstanding shares of
the Company’s common stock. The par value of the Company’s common stock will remain unchanged at $0.001 per share after
the reverse stock split. The reverse stock split does not affect the Company’s authorized or issued preferred stock. The
reverse stock split affects all common stockholders uniformly and will not alter any common stockholder’s percentage interest
in the Company’s equity. No fractional shares will be issued in connection with the reverse split. Common stockholders who
would otherwise be entitled to receive a fractional share will instead receive one additional share. The Company filed Form 14C
Preliminary Information Statement on July 31, 2019. In response to comments from the Commission, the Company will be filing an
amendment to its 14C Preliminary Information Statement to address comments. FINRA has approved the reverse split. The Company expects
to issue a press release and Form 8-K upon clearance by the SEC and the assignment of an effective date for the reverse split.
Termination of Essence Farms, LLC Non-Binding
Letter of Intent
.
On
August 12, 2019, the Company and Essence Farms, LLC terminated their non-binding letter of intent entered into on May 7, 2019.
As previously disclosed in the Company’s March 31, 2019 Form 10-Q/A-2 filed on August 2, 2019, the Company and Essence entered
into a non-binding letter of intent to form a joint venture called Riverside Hemp Project, to operate farming operations in California
for the purpose of growing, cultivating, and harvesting legal industrial hemp for sale. The joint venture was contingent upon
completion of due diligence and the entry into a material definitive agreement. The Company determined that it was not an exercise
of prudent business judgment to move forward with the project. The Company did not incur any costs, penalties or associated fees
with the termination of the non-binding letter of intent.
Amendment
to Unicast Equities Material Definitive Agreement
.
On August 6, 2019, the Company announced an
amendment to its material definitive agreement, disclosed May 3, 2019 on Form 8-K, with Unicast Equities, LLC.
On May 1, 2019, the Company
entered into a material definitive agreement with Unicast Equities, LLC to obtain a listing on the Vienna Direct Multilateral Trading
Facility (“MTF”) for hempSMART, Ltd., a UK corporation and the Registrant’s wholly owned subsidiary, through
a Luxembourg based holding company. Unicast agreed to provide consulting and advisory services to help the Registrant apply for
a listing on the Vienna Stock Exchange. Unicast agreed to advise the Registrant in the creation of a Luxembourg domiciled holding
company which will serve as a listing vehicle for hempSMART, Ltd. Unicast also agreed to advise us on regulatory and compliance
matters.
The original contract
required the Registrant make an initial $50,000 payment to Unicast which the Registrant paid, and an additional $40,000 payment
within thirty days of the contract date of May 1, 2019, which the Registrant failed to pay, and the Registrant was in breach of
the contract. The Company and Unicast and Grantchester thereafter entered into negotiations to amend and restructure payment for
the engagement.
As amended, the
Parties elected to cancel the Registrant’s previous contractual obligations to make cash payments, and instead, the
Registrant entered into a direct agreement with Grantchester Equity, Ltd., a Company Unicast had subcontracted with to
provide the Services under the original Agreement. Under this new Agreement the Registrant agreed to issue to Grantchester
and/or its assignees, twenty percent (20%) of the total issued and outstanding shares in the entity slated to be issued on
the foreign exchange. Grantchester and its contractors and affiliates agreed to pay for all listing fees, corporate formation
fees, accounting fees, legal fees, Information Memorandum drafting fees and application fees. The Registrant agreed and
acknowledged, that aside from its issuance of 20% of the listing entities equity, to contribute such other assets as may be
required, including the Registrant’s equity, such that the listing entity’s capitalized shareholder equity is
valued at no less than
€
100,000.
VivaBuds Launch
On August 8, 2019, the
Company announced its launch of Viva Buds, its premium cannabis delivery service, which will initially deliver cannabis to the
San Fernando Valley, located in Los Angeles, California. As previously disclosed on Form 8-K on April 17, 2019, the Company entered
into a material definitive agreement with Natural Plant Extract of California, Inc., a California corporation, and its wholly owned
subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all California limited liability companies
(collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated in California under the name
Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant to California law legalizing
cannabis for recreational and medicinal use.
Pursuant to the material
definitive agreement, the Company agreed to acquire twenty percent (equal to 200,000) of NPE’s authorized shares in exchange
for Registrant’s payment of two million dollars and one million dollars’ worth of common stock, or approximately 1,173,709
shares of the Company’s restricted common stock, after the effects of the reverse stock split. As of the date of this filing,
the shares have not been issued. The Company’s payment obligations are governed by a stock purchase agreement which required
the Company to the following payment schedule:
a. Deposit
of $350,000 within 5 days of the execution of the material definitive agreement;
b. Deposit
of $250,000 payable within 30 days;
c. Deposit
of $400,000 within 60 days;
d. Deposit
of $500,000 within 75 days;
e. Deposit
of $500,000 within 90 days
The Company made its initial deposit pursuant
to this schedule. However, the Company failed to make the other scheduled payments and is now in default. As of the date of this
filing, the Company and NPE are in negotiations to restructure the payment plan.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking
statements that reflect Management’s current views with respect to future events and financial performance. You can identify
these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,”
“believe,” “estimate” and “continue,” or similar words. Those statements include statements
regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which
such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking
statements.
Readers
are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with
the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially
from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that
our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made
that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors
that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing
for materials, and competition.
Business Overview
Plan
of Operations –
Marijuana Company of America and subsidiaries is a publicly listed company quoted on the OTCQB trading
tier under the symbol “MCOA”. We are based in Escondido, California. Our business plan and operation focuses in part
on the development, manufacturing, marketing and sale of non-psychoactive industrial hemp, and hemp-derived consumer products containing
CBD. Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp
and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of
different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different
industrial hemp derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of hemp CBD extraction
omitting or eliminating the delta-9 tetrahydrocannabinol “THC” molecule. The Company operates two distinct and separate
business divisions related to its two wholly owned subsidiaries, H Smart, Inc. and MCOA CA, Inc.
Through
our wholly owned subsidiary H Smart, Inc., we develop consumer products that include industrial hemp derived, non-psychoactive
CBD as an ingredient, under the brand name “hempSMART
™
.
Our industrial hemp-based products are specifically developed with an enriched CBD molecular composition with a THC concentration
of three-tenths of one percent or less by dry weight. We market and sell our hempSMART
™
products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use
a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts
for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates, and calculates and accounts
for loyalty and rewards benefits for returning customers. We also retained a full-service marketing company that uses a multi-channel
transactional marketing campaign focused on digital advertising, infographics, content marketing, customer incentives and acquisition,
a broad social media presence, as well as search engine marketing and optimization that includes comprehensive research and analytics
and order fulfillment in order to boost direct sales.
Our business
also includes making selected investments in other related new businesses. Currently, we have made investments in startup ventures,
including:
Conveniant Hemp Mart, LLC
; Conveniant
(sic) Hemp Mart, LLC, or “Benihemp,” is a Wyoming limited liability company whose business plan includes the development,
manufacture and sale of consumer products containing CBD that are intended for marketing and sales at convenience stores, gas stations
and markets. On July 19, 2017, we agreed to lend fifty thousand dollars ($50,000) to Conveniant based on a promissory note. The
note provided that in lieu of receiving repayment, we could elect to exercise a right to convert the loaned amount into a payment
towards the purchase of a 25% interest in Conveniant, subject to our payment of an additional fifty thousand dollars $50,000 equaling
a total purchase price of $100,000. The Company exercised this option on November 20, 2017 and made payment to Conveniant on November
21, 2017. Conveniant developed a line of consumer products containing industrial hemp derived CBD with no traceable THC content.
The product line includes tinctures that combine industrial hemp-derived CBD with hemp seed oil, coconut oil and other essential
natural oils; a muscle cream product that combines industrial hemp-derived CBD with natural oils; a hand lotion that combines industrial
hemp derived CBD with lavender oils; and a line of pet treats that combine industrial hemp-derived CBD with natural oils. Conveniant
began its initial marketing efforts by introducing its brand and products at the ASD Market Tradeshow in Las Vegas that took place
in March 2018. The ASD Market Tradeshow is a business to business convention where retail merchandise is introduced to various
consumer market segments, including Conveniant’s primary focus on convenience stores, gas stations, small markets and similar
venues. Conveniant Hemp Mart’s operations are in the development stage.
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, that the Company is currently utilizing in the manufacture of hempSMART products provided by Fab Distro,
Inc., an affiliated company of Conveniant. The Company determined that as of December 31, 2018, its $100,000 investment in Conveniant
was fully impaired due to Conveniant’s failure to execute on its business plans.
MoneyTrac Technology, Inc
.; MoneyTrac
Technology, Inc. is a developer of an integrated and streamlined electronic payment processing system containing E-Wallet and mobile
applications, that allows for the management and processing of prepaid cards, debit cards, and credit card payments. We entered
into a stock purchase agreement with MoneyTrac on March 13, 2017 to purchase a 15% equity position in MoneyTrac. On July 27, 2017
we completed tender of the purchase price of $250,000. MoneyTrac’s business and banking software solutions offer firms the
ability to deposit funds directly into a “MoneyTrac Merchant Wallet,” created and controlled by the firm, from which
the firm can manage and provide inventory management, payroll processing, and audit tracking; and, the creation of “Customer
Wallets,” by anyone who wants to engage in cashless transactions, by loading money into their “MoneyTrac Customer Wallet”
from a bank account or through a MoneyTrac kiosk, which also accepts debit and credit card transactions. MoneyTrac’s kiosks
are marketed to businesses that wish to offer cashless transactions to its customers, who can choose to either have funds loaded
directly into their “Customer Wallet” or onto a pre-paid debit card. MoneyTrac’s system provides for a secure,
managed and auditable record of cashless transactions that is designed to be marketed to firms who want an alternative payment
and management method for transacting business, including those firms in the legalized cannabis business in those states where
cannabis has been legalized for recreational and/or medicinal use. Moneytrac is providing our VivaBuds delivery business join-venture
with payment processing services for our customers.
Bougainville Ventures, Inc. Joint Venture
;
On March 16, 2017, we entered into a joint venture agreement with Bougainville Ventures, Inc., a Canadian corporation. The purpose
of the joint venture was for the Company and Bougainville to jointly engage in the development and promotion of products in the
legalized cannabis industry in Washington State; (ii) utilize Bougainville’s high quality cannabis grow operations in the
State of Washington, where it claimed to have an ownership interest in real property for use within the legalized cannabis industry;
(iii) leverage Bougainville’s agreement with a I502 Tier 3 license holder to grow cannabis on the site; provide technical
and management services and resources including, but not limited to: sales and marketing, agricultural procedures, operations security
and monitoring, processing and delivery, branding, capital resources and financial management; and, (iv) optimize collaborative
business opportunities. The Company and Bougainville agreed to operate through a Washington State Limited Liability Company, and
BV-MCOA Management, LLC was organized in the State of Washington on May 16, 2017.
As our contribution to the joint venture, the
Company committed to raise not less than $1 million dollars to fund joint venture operations based upon a funding schedule. The
Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised
of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.
Bougainville represented that it had an ownership
interest in real property located in Washington State used for growing cannabis, and possessed information primarily related to
the management and control of cannabis grow operations as conducted in Washington State that included research, development and
know how in the cannabis industry. Bougainville also represented that it had an agreement with a I502 Tier 3 license holder in
Washington State to operate on the land. The Company and Bougainville's agreement provided that funding provided by the Company
would go, in part, towards the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan
County, Washington, for joint venture operations.
As disclosed on Form 8-K on December 11, 2017,
the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended
the joint venture agreement to reduce the amount of the Company's commitment to $800,000 and also required the Company to issue
Bougainville 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 for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 license holder to grow Marijuana
on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green
Ventures Capital Corp., purchased the land. The land is currently pending the payment of delinquent property taxes that would allow
for the Okanogan County Assessor to sub-divide the property, so that the appropriate portion could be deeded to the joint venture.
Although Bougainville represented it would pay the delinquent taxes, it has not. To date, the property has not been deeded to the
joint venture.
To clarify the respective contributions and
roles of the parties, the Company also offered to enter into good faith negotiations to revise and restate the joint venture agreement
with Bougainville. The Company diligently attempted to communicate with Bougainville in good faith to accomplish a revised and
restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the
Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to
pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint
venture.
On August 10, 2018, the Company advised its
independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information
concerning the audit of Bougainville’s receipt and expenditures of funds contributed by the Company in the joint venture
agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of
the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally,
the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but
not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded
to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property;
and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture
thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit against
Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior
Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract, fraud,
breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in
the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville,
and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on
the real property. The case is currently in litigation.
In connection with the agreement, the Company
recorded a cash investment of $1,188,500 to the Joint Venture during 2017. This was comprised of 49.5% ownership of BV-MCOA Management
LLC, and was accounted for using the equity method of accounting. The Company recorded an annual impairment in 2017 of $792,500,
reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded
equity losses of $37,673 and $11,043 for the first and second quarters respectively, and recorded an annual impairment of $285,986
for the year ended December 31, 2018, at which time the Company determined the investment to be fully impaired due to Bougainville’s
breach of contract, including: (i) its failure to communicate and cooperate regarding the Company’s audit; (ii) its misrepresentations
concerning its ownership interest in the real property in Okanogan County Washington; (iii) its failure to deed the property to
the joint venture within thirty days of payment pursuant to the amended joint venture agreement; and, (iv) its misrepresentation
that it possessed an agreement with a Tier 3 license holder to operate on the property. (See Legal Proceedings).
Global
Hemp Group Joint Ventures
We currently have two ongoing joint ventures
with Global Hemp Group, Inc., a Canadian corporation. Each is a related party transaction in that Global Hemp Group’s director,
Charles Larsen, is a beneficial owner of more than 10% of our common stock, and a former director of the Company, who resigned
on February 27, 2019. Further, our President and Chief Executive Officer Donald Steinberg is a shareholder in Global Hemp Group.
The two Global Hemp Group joint ventures are discussed together due to the common ownership of the joint venture partners in each
project, and the fact that both joint ventures share a common purpose of growing, cultivating and performing research and development
of industrial hemp.
Global Hemp Group New Brunswick Joint
Venture
: On August 31, 2017, the Company entered into a Joint Venture Agreement (“Agreement”)
with Global Hemp Group, Inc., a Canadian corporation (“Global Hemp Group”). The Company 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 during
2019.
Global Hemp Group JV – Scio Oregon
:
On May 8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation, and TTO
Enterprises, Ltd., an Oregon corporation entered into a Joint Venture Agreement. The purpose of the joint venture is to develop
a project to commercialize the cultivation of industrial hemp on a 109 acre parcel of real property owned by the Company and Global
Hemp Group in Scio, Oregon, and operating under the Oregon corporation Covered Bridges, Ltd. The joint venture is in the development
stage. On May 30, 2018, the joint venture purchased TTO’s 15% interest in the joint venture for $30,000. The Company and
Global Hemp Group, Inc. now have an equal 50-50 interest in the joint venture. The joint venture agreement commits the Company
to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint venture agreement;
$238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company has complied with its payments.
The 2018 crop of hemp grown on the joint venture’s real property consisted of 33 acres of high yielding CBD hemp grown in
an orchard style cultivation on the property. The 2018 harvest consisted of approximately 37,000 high yielding CBD hemp plants
producing 24 tons of biomass that produced 48,000 pounds of dried biomass. The joint venture partners prepared processing samples
ranging in size from 100 lbs. to 2,000 lbs. for sample offers to extraction companies. The biomass is being processed into CBD
crude oil with the option to refine it further into isolate, or full spectrum oil, in order to increase its value on the market.
Results from the current extraction test batches were received in May 2019, and will serve as a basis for the final terms of the
sale of the biomass by the Partners. In August of 2019, the JV sold 10,000 lbs of shucked biomass to an Oregon extraction facility
for US$400,000. The JV team is currently working with this party and a number of others to complete the purchase of the remaining
inventory.
The objective of phase one was to
re-introduce hemp into the area and ensure that it could be productive under New Brunswick growing conditions prior to
significantly increasing cultivation acreage and building a hemp processing facility in the region, in future phases of the
project. As a result of our participation in the joint venture, we will share in the ownership of research and development of
hemp and CBD related studies produced by the New Brunswick Project, and, in the event Canadian laws governing the growing,
harvesting, manufacturing and production of products containing hemp and CBD change (as expected, but not guaranteed) in
2018, we would benefit from possible preferred pricing and terms for the purchase of hemp and CBD that would enable us to
further conduct its business and research and development into hemp and CBD products.
GateC Joint Venture:
On March
17, 2017, the Company and GateC Research, Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”)
whereby the Company committed to raise up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum
commitment of five hundred thousand dollars ($500,000) within a three (3) month period; and, information establishing brands and
systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary
methodologies, including but not limited to its affiliate marketing program, directly tailored to the cannabis industry.
GateC agreed to contribute its management and
control services and systems related to cannabis grow operations in Adelanto County, California, and its permit to grow marijuana
in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto County, California,
and GateC’s permit to grow cannabis did not contain a conditional use permit.
On or about November 28, 2017, GateC and the
Registrant orally agreed to suspend the Company’s funding commitment, pending the finalization of California State regulations
governing the growth, cultivation and distribution of cannabis, which were expected to be completed in 2018.
On March 19, 2018, the Company and GateC rescinded
the Agreement and concurrently released each other from any all any and all losses, claims, debts, liabilities, demands, obligations,
promises, acts, omissions, agreements, costs and expenses, damages, injuries, suits, actions and causes of action, of whatever
kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, that they may have against each other
and their Affiliates, arising out of the Agreement.
The Registrant incurred no termination penalties
as the result of its entry into the Recession and Mutual Release Agreement.
In 2017, the Company recorded a debt obligation
of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year ended December 31, 2017.
Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation
of $1,500,000 during the six months ended June 30, 2018.
VivaBuds
:
On
August 8, 2019, the Company announced its launch of VivaBuds, its premium cannabis delivery service, which will initially deliver
cannabis to the San Fernando Valley, located in Los Angeles, California. As previously disclosed on Form 8-K on April 17, 2019,
the Company entered into a material definitive agreement with Natural Plant Extract of California, Inc., a California corporation,
and its wholly owned subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all California
limited liability companies (collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated
in California under the name Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant
to California law legalizing cannabis for recreational and medicinal use.
Pursuant to the material
definitive agreement, the Company agreed to acquire twenty percent (equal to 200,000) of NPE’s authorized shares in exchange
for Registrant’s payment of two million dollars and one million dollars’ worth of common stock, or approximately 1,173,709
shares of the Company’s restricted common stock, after the effects of the reverse stock split. As of the date of this filing,
the shares have not been issued. The Company’s payment obligations are governed by a stock purchase agreement which required
the Company to the following payment schedule:
a. Deposit
of $350,000 within 5 days of the execution of the material definitive agreement;
b. Deposit
of $250,000 payable within 30 days;
c. Deposit
of $400,000 within 60 days;
d. Deposit
of $500,000 within 75 days;
e. Deposit
of $500,000 within 90 days
The Company made its initial deposit pursuant
to this schedule. However, the Company failed to make the other scheduled payments and is now in default. As of the date of this
filing, the Company and NPE are in negotiations to restructure the payment plan.
Three Months Ended June 30, 2019 Compared
to Three Months Ended June 30, 2018
Results
of Operations
We anticipate
that our results of operations will fluctuate for the foreseeable future due to several factors, such as the progress of our hempSMART
™
product sales and research and development efforts. Due to these uncertainties, accurate predictions of future operations are difficult
or impossible to make.
Revenues/Cost
of sales
Total revenues for the 3 months ended June
30, 2019 and 2018 were $208,580 and $28,435, respectively, an increase of $180,145. This increase is attributable to the continuing
developing market for sales of our hempSMART
™
products and
the addition of several new products. The increase in our total revenues of hempSMART
™
products was due to the volume of sales, and not as the result of price increases, and reflect sales based on our efforts at implementing
our affiliate marketing sales program and direct sales through our website.
During the three months ended June 30, 2019
the Company released two new industrial hemp based hempSMART™ products: (i) hempSMART™ Comfort Cream, a cream formulated
with industrial hemp based CBD and natural ingredients containing a broad range of active terpenes and organic botanicals, and
(ii) hempSMART™ Comfort Capsules, capsules formulated with industrial hemp based CBD, and other botanicals ingredients.
The following table identifies our product
offerings and the revenues related to these product for the three months ended June 30, 2019 and 2018, respectively:
|
|
3 months ended June 30,
|
|
|
Products
|
|
2019
|
|
2018
|
|
|
Drops
|
|
$
|
77,657
|
|
|
$
|
7,072
|
|
|
|
Pain Cream
|
|
$
|
36,186
|
|
|
$
|
9,153
|
|
|
|
Brain Capsules
|
|
$
|
24,086
|
|
|
$
|
4,344
|
|
|
|
Pet Drops
|
|
$
|
15,545
|
|
|
$
|
1,029
|
|
|
|
Pain Capsules
|
|
$
|
12,488
|
|
|
$
|
3,387
|
|
|
|
Face Moisturizer
|
|
$
|
12,347
|
|
|
$
|
1,735
|
|
|
|
Comfort Cream
|
|
$
|
12,005
|
|
|
$
|
0
|
|
|
New Product during 2nd Quarter 2019
|
Comfort Capsules
|
|
$
|
10,419
|
|
|
$
|
0
|
|
|
New Product during 2nd Quarter 2019
|
Membership Fees
|
|
$
|
7,846
|
|
|
$
|
1,715
|
|
|
|
Totals
|
|
$
|
208,580
|
|
|
$
|
28,435
|
|
|
|
Costs
and Expenses - Costs of sales, include the costs of product development, manufacturing, testing, packaging, storage and sale. For
the three months ended June 30, 2019 and 2019, costs of sales was $29,139 as compared to $4,164 for the three months ended June
30, 2018. The reported costs of sales for each period reflect the Company’s increased effort and growth in the marketing
and selling its hempSMART™ products.
General
and administrative expenses
Selling,
general and administrative expenses increased to $1,477,415 for the three months ended June 30, 2019 compared to $861,886 the three
months ended June 30, 2018. General and administrative expenses include selling and marketing, research and development, building
rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase of $615,529 is attributed is attributed
primarily to the growth in sales of its hempSMART™ products on a global basis. Below is a table with details of the variances
in General and administrative expenses:
|
|
For the three months ended June 30, 2019
|
|
|
EXPENSE
|
|
2019
|
|
2018
|
|
Variance
|
|
Explanation
|
Board of Director fees
|
|
$
|
14,000
|
|
|
$
|
0
|
|
|
$
|
14,000
|
|
|
Board of directors were compensated as officers during Q2 2018
|
Travel Expenses
|
|
|
14,321
|
|
|
|
0
|
|
|
|
14,321
|
|
|
Increase in travel expenses due to increase in hempSMART sales
|
Legal consulting
|
|
|
72,580
|
|
|
|
54,810
|
|
|
|
17,770
|
|
|
Increase was due to more hours spent on responses to SEC inquiries related to the company's S-1 filing.
|
Consulting fees
|
|
|
406,415
|
|
|
|
161,110
|
|
|
|
245,305
|
|
|
Contractual commitments based on growth related to hempSMART sales in 2019
|
Accounting fees
|
|
|
19,450
|
|
|
|
0
|
|
|
|
19,450
|
|
|
New CFO during Q2 2019 vs $0 during Q2 2018
|
Officers Compensation
|
|
|
90,000
|
|
|
|
195,000
|
|
|
|
-105,000
|
|
|
Q2 2019 payments only to CEO Don Steinberg. Q2 2018 included Charlie Larsen and Robert Hymers
|
Marketing Compensation
|
|
|
7,300
|
|
|
|
0
|
|
|
|
7,300
|
|
|
New hempSMART Marketing consultant hired during Q2 2019
|
UK Contract Compensation
|
|
|
102,368
|
|
|
|
0
|
|
|
|
102,368
|
|
|
New hempSMART UK Sales Manager hired late in 2018
|
Admin Compensation
|
|
|
132,212
|
|
|
|
0
|
|
|
|
132,212
|
|
|
New staff hired in Q2 2019 and late in 2018 for Logistics, Sales, Accounting, IT, legal and administrative.
|
Wire transfer fees
|
|
|
14,696
|
|
|
|
0
|
|
|
|
14,696
|
|
|
Wire transfer costs incurred to send monies to UK operations
|
Commissions expense
|
|
|
31,430
|
|
|
|
2,896
|
|
|
|
28,534
|
|
|
Commissions paid based on sales volume at Q2 2019 vs Q2 2018
|
Marketing expense
|
|
|
337,855
|
|
|
|
82,902
|
|
|
|
254,953
|
|
|
Variance is due to increased Media due to sales growth
|
Stock based compensation
|
|
|
0
|
|
|
|
188,805
|
|
|
|
-188,805
|
|
|
Decrease due to accretion of vesting options recorded during Q2 2018. $0 in Q2 2019
|
Import duties and taxes
|
|
|
21,579
|
|
|
|
4,245
|
|
|
|
17,334
|
|
|
Expenses incurred due to increase hempSMART sales in the UK which began late 2018
|
Others, net
|
|
|
213,209
|
|
|
|
172,119
|
|
|
|
41,090
|
|
|
|
TOTALS
(1)
|
|
$
|
1,477,415
|
|
|
$
|
861,886
|
|
|
$
|
615,528
|
|
|
|
(1) Foreign exchange transactions were deemed immaterial,
and is included in the general and administrative expenses.
Gain
on change in fair value of derivative liabilities
During
the three months ended June 30, 2019 and 2018, respectively, we issued convertible promissory notes and warrants with an embedded
derivative, all requiring us to fair value the derivatives each reporting period, and mark to market as a non-cash adjustment to
our current period operations. This resulted in a gain of $2,356,570 and a loss of $3,470,957 change in fair value of derivative
liabilities for the three months ended June 30, 2019 and 2018, respectively.
Loss
on equity investment
During
the three months ended June 30, 2019 and 2018, we adjusted the carry value of our investment for our pro rata share of equity investment
of $171,284 and $11,043, respectively.
Interest
Expense
Interest
expense during the three months ended June 30, 2019 was $1,005,970 compared to $1,350,633 for the three months ended June 30, 2018.
Interest expense primarily consists of interest incurred on our convertible and other debt.
Unrealized
loss on trading securities
The company
incurred unrealized losses on its Moneytrac securities of $150,000 and $0 for the three months ended June 30, 2019 and 2018, respectively.
Six
Months Ended June 30, 2019 Compared to six Months Ended June 30, 2018
Results
of Operations
- The Company generated revenue of $323,390 and $47,445 for the six months ended June 30, 2019 and 2018, respectively.
The increase of $275,945 is due to the Company’s deployment of its hempSMART marketing and sales efforts and expansion into
the UK in Q1 2019. Since the Company’s sales efforts were launched approximately two years ago, no currently known or previous
matters are expected to have a material impact on current or future operations, with the exception of the Company’s need
for funding. For the six months ended June 30, 2019 and 2018, the Company had net losses from continuing operations of $2,113,774
and $1,133,448, respectively. This change is due primarily to the operational growth related to the deployment of sales and marketing
efforts.
Revenues/Cost
of sales
Total revenues for the six months ended June
30, 2019 and 2018 were $323,390 and $47,445, respectively, an increase of $275,945. This increase is attributable to the continuing
developing market for sales of our hempSMART
™
products and
the addition of several new products. The increase in our total revenues of hempSMART
™
products was due to the volume of sales, and not as the result of price increases, and reflect sales based on our efforts at implementing
our affiliate marketing sales program and direct sales through our website.
During the six months ended June 30, 2019 the
Company released two new industrial hemp based hempSMART™ products: (i) hempSMART™ Comfort Cream, a cream formulated
with industrial hemp based CBD and natural ingredients containing a broad range of active terpenes and organic botanicals, (ii)
hempSMART™ Comfort Capsules, capsules formulated with industrial hemp based CBD, and (iii) Leafles and related accessories
The following table identifies our product
offerings and the revenues related to these products for the six months ended June 30, 2019 and 2018, respectively:
|
|
Six Months Ended June 30,
|
|
|
Sales Product
|
|
2019
|
|
2018
|
|
|
Drops
|
|
$
|
135,075
|
|
|
$
|
16,235
|
|
|
Due to growth and new UK business
|
Pain Cream
|
|
|
64,484
|
|
|
|
12,143
|
|
|
Due to growth and new UK business
|
Brain Capsules
|
|
|
33,662
|
|
|
|
6,823
|
|
|
Due to growth and new UK business
|
Pet Drops
|
|
|
24,784
|
|
|
|
2,023
|
|
|
Due to growth and new UK business
|
Pain Capsules
|
|
|
21,990
|
|
|
|
5,792
|
|
|
Due to growth and new UK business
|
Face Moisturizer
|
|
|
19,849
|
|
|
|
1,735
|
|
|
Due to growth and new UK business
|
Membership Fees
|
|
|
10,835
|
|
|
|
2,695
|
|
|
Due to growth and new UK business
|
Comfort Cream
|
|
|
5,459
|
|
|
|
—
|
|
|
New product in 2019
|
Comfort Capsules
|
|
|
3,873
|
|
|
|
—
|
|
|
New product in 2019
|
Leaflets and accessories
|
|
|
2,968
|
|
|
|
—
|
|
|
New product in 2019
|
Total Product Sales
|
|
$
|
323,390
|
|
|
$
|
47,445
|
|
|
|
Costs
and Expenses - Costs of sales, include the costs of product development, manufacturing, testing, packaging, storage and sale. For
the six months ended June 30, 2019, costs of sales were $69,017 as compared to $14,610 for the six months ended June 30, 2018.
The reported costs of sales for each period reflect the Company’s increased effort and growth in the marketing and selling
its hempSMART™ products.
General
and administrative expenses
Other
general and administrative expenses increased to $2,464,756 for the six months ended June 30, 2019 compared to $1,163,365 the six
months ended June 30, 2018. General and administrative expenses include selling and marketing, research and development, building
rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase of $1,301,391 is attributed is
attributed primarily to the growth in sales of its hempSMART™ products on a global basis. Below is a table which explains
the variances in our General and administrative expenses for the six months ended June 30, 2019 and 2018, respectively:
For the 6 months ended June 30,
|
|
|
EXPENSE
|
|
2019
|
|
2018
|
|
Variance
|
|
Explanation
|
Collection expense
|
|
$
|
15,000
|
|
|
$
|
0
|
|
|
$
|
15,000
|
|
|
Writeoff was due to Merchant closing down.
|
Board of Director fees
|
|
|
18,000
|
|
|
|
0
|
|
|
|
18,000
|
|
|
New Board member fees established in 2019 vs 2018
|
Import duties and taxes
|
|
|
22,264
|
|
|
|
0
|
|
|
|
22,264
|
|
|
Increase due to hempSMART sales in UK as products sent to Europe.
|
Stock based compensation
|
|
|
100,350
|
|
|
|
(123,595
|
)
|
|
|
223,945
|
|
|
2019 reflects compensation for new Marketing team, while 2018 YTD reflected credit adjustment for FV of vesting non-employee options
|
Consulting Fees
|
|
|
678,019
|
|
|
|
417,040
|
|
|
|
260,980
|
|
|
Contractual commitments based on growth related to hempSMART sales and product development during 2019
|
Accounting fees
|
|
|
26,110
|
|
|
|
0
|
|
|
|
26,110
|
|
|
Principally $21,275 fees paid to new CFO hired in Sept 2018
|
Officer's Compensation
|
|
|
220,000
|
|
|
|
390,000
|
|
|
|
(170,000
|
)
|
|
2019 reflected Don Steinberg CEO and one month for Charlie Larsen vs 2018 amounts for CEO, Charles Larsen and CFO
|
Investor Relations
|
|
|
87,826
|
|
|
|
132,770
|
|
|
|
(44,944
|
)
|
|
|
hempSMART compensation
|
|
|
440,648
|
|
|
|
2,917
|
|
|
|
437,731
|
|
|
Increase is due to expansion and growth of hempSMART business in 2019 vs 2018
|
Bank service charges
|
|
|
54,271
|
|
|
|
5,700
|
|
|
|
48,570
|
|
|
Increase in fees is due to wire transfers to Europe as well as growth of hempSMART business in 2019
|
hempSMART commissions
|
|
|
99,320
|
|
|
|
6,937
|
|
|
|
92,383
|
|
|
Increase in Commissionss due to growth of hempSMART business in 2019
|
Marketing
|
|
|
583,145
|
|
|
|
242,462
|
|
|
|
340,683
|
|
|
Increase in Marketing costs is related to growth of hempSMART business in 2019
|
Others, net
|
|
|
119,802
|
|
|
|
89,135
|
|
|
|
30,667
|
|
|
|
TOTALS
(1)
|
|
$
|
2,464,756
|
|
|
$
|
1,163,365
|
|
|
$
|
1,301,390
|
|
|
|
(1) Foreign exchange transactions were deemed immaterial, and
is included in the general and administrative expenses.
Gain
on change in fair value of derivative liabilities
For the
six months ended June 30, 2019 and 2018 we issued convertible promissory notes and warrants with an embedded derivative, all requiring
us to fair value the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations.
This resulted in a loss of $330,879 and a gain of $1,585,729 change in fair value of derivative liabilities for the six months
ended June 30, 2019 and 2018, respectively.
Loss
on equity investment
During
the six months ended June 30, 2019 and 2018, we adjusted the carry value of our investment for our pro rata share loss on equity
investment of $230,825 and $48,716, respectively.
Gain
on settlement of debt
During
the six months ended June 30, 2019 and 2018, the company realized a gain on settlement of debt of $0 and $156,839, respectively.
This was related to the termination of a material definitive agreement not made in the ordinary course of its business during
the six months ended June 30, 2018. The parties to the agreement are the Company and GateC.
Interest
Expense
Interest
expense during the six months ended June 30, 2019 and 2018, was $1,442,252 and $2,081,379, respectively. Interest expense primarily
consists of interest incurred on our convertible and other debt. The debt discounts amortization and non-cash interest incurred
during the six months ended June 30, 2019 and 2018 was $2,750,802 and $2,011,841, respectively.
Liquidity
and Capital Resources –
The Company has generated a net loss from continuing operations for the six months ended June
30, 2019 of $2,213,774 and used $1,430,589 cash for operations. As of June 30, 2019, the Company had total assets of $4,456,276,
which included inventory of $249,258 and accounts receivable of $38,359.
During
the three months ended June 30, 2019 and 2018, the Company has met its capital requirements through a combination of loans and
convertible debt instruments. The Company will need to secure additional external funding in order to continue its operations.
Our primary internal sources of liquidity were provided by an increase in proceeds from the issuance of note payables of $1,675,000
for June 30, 2019, as compared to $942,940 for June 30, 2018, and an increase proceeds from the sale of note payables to a related
party of $0 for June 30, 2019 as compared to $103,791 for June 30, 2018. We have during the period ended June 30, 2018, relied
upon external financing arrangements to fund our operations. During the three months ended June 30, 2019 and 2018, we entered into
several separate financing arrangements with St. George Investments, LLC, a Utah limited liability company, in which we borrowed
an aggregate of $2,149,170, the principal of which is convertible into shares of our common stock (see Note 6, Convertible Note
Payable). Our ability to rely upon external financing arrangements to fund operations is not certain, and this may limit our ability
to secure future funding from external sources without changes in terms requested by counterparties, changes in the valuation of
collateral, and associated risk, each of which is reasonably likely to result in our liquidity decreasing in a material way. We
intend to utilize cash on hand, loans and other forms of financing such as the sale of additional equity and debt securities and
other credit facilities to conduct our ongoing business, and to also conduct strategic business development and implementation
of our business plans generally.
Operating
Activities
- For the six months ended June 30, 2019, the Company used cash in operating activities of $1,430,589. For the six
months ended June 30, 2018, the Company used cash in operating activities of $1,037,789. This increase is due primarily to net
loss for the six months ended June 30, 2019 as comparted to the net loss for the period ended June 30, 2018, offset by the loss
on change in fair value of derivative liabilities (non-cash) for the six months ended June 30, 2019 against the gain on change
in fair value of derivative liabilities (non-cash) and continued implementation of our new business plan, operations, management,
personnel and professional services.
Investing
Activities
- During the six months ended June 30, 2019, the Company spent cash of $501,361 in investing activities related
to its purchase of investment and equipment and investment in joint ventures. During the six months ended June 30, 2018, we spent
$376,403 on investment in joint ventures and purchase of equipment.
Financing
Activities
- During the six months ended June 30, 2019, the Company, primarily through its receipt of funds from the issuance
of notes payable resulted in financing activity of $1,675,000. For the six months ended June 30, 2018 the Company received proceeds
of $924,940 from issuance of notes payable, $103,791from proceeds of notes payable due to related party and $190,000 proceeds from
common stock subscriptions.
The Company’s
business plans have not generated significant revenues and as of the date of this filing are not sufficient to generate adequate
amounts of cash to meet its needs for cash. The Company's primary source of operating funds for the six months ended June 30, 2019
and 2018 have been from revenue generated from proceeds from the sale of common stock and the issuance of convertible and other
debt. The Company has experienced net losses from operations since inception, but expects these conditions to improve in the second
half of 2019 and beyond as it develops its affiliate marketing program and other direct sales and marketing programs. The Company
has stockholders' deficiencies at June 30, 2019 and requires additional financing to fund future operations. As of the date of
this filing, and due to the early stages of operations, the Company has insufficient sales data to evaluate the amounts and certainties
of cash flows, as well as whether there has been material variability in historical cash flows.
We
currently do not have sufficient cash and liquidity to meet our anticipated working capital for the next twelve months.
Historically, we have financed our operations primarily through private sales of our common stock and. If our sales goals for
our hempSMART
™
products do not materialize as planned,
and we are not able to achieve
profitable operations at some point in the future, we may have insufficient working
capital to maintain our operations
as we presently intend to conduct them or to fund our
expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing
on acceptable terms, or at all.
Off
Balance Sheet Arrangements
As of
June 30, 2019, and December 31, 2018,
we did not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources.
Government
Regulations of Cannabis
Federal
Law
Our business
includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp and hemp derivatives;
(3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of different species of
hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different industrial hemp
derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of hemp CBD extraction omitting or eliminating
the delta-9 tetrahydrocannabinol “THC” molecule.
The Company
is not engaged in the direct growth, cultivation, harvesting and distribution of cannabis containing psychoactive amounts of the
THC molecule. However, we do offer and provide financial consulting and property management services to licensed, lawful and compliant
operator(s) engaged within legalized states where cannabis strains containing the THC molecule is regulated and/or has been de-criminalized
for personal and/or medicinal use.
Hemp
is a member of the cannabis family. Industrial hemp derived CBD, like cannabis, is illegal under federal law and is a “Schedule
1” drug under the Controlled Substances Act (21 U.S.C. § 811). As a Schedule 1 drug, hemp derived CBD is viewed as being
highly addictive and having no medical value. The United States Drug Enforcement Agency enforces the Controlled Substances Act,
and persons violating it are subject to federal criminal prosecution. The criminal penalty structure in the Controlled Substances
Act is determined based on the specific predicate violations, including but not limited to: simple possession, drug trafficking,
attempt and conspiracy, distribution to minors, trafficking in drug paraphernalia, money laundering, racketeering, environmental
damage from illegal manufacturing, continuing criminal enterprise, and smuggling. A first conviction under the Controlled Substances
Act can generally result in possible fines from $250,000 to $50 million dollars, and incarceration for periods generally from five
and up to forty years. For a second conviction, fines increase generally from $500,000 to $75 million dollars, and incarceration
for periods generally from ten years to twenty years to life.
The federal
government recently issued guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act
(CSA). On January 4, 2018, Attorney General Jeff Sessions issued a memorandum for all United States Attorneys concerning federal
cannabis enforcement generally. Mr. Sessions rescinded all previous prosecutorial guidance issued by the Department of Justice
regarding cannabis, including the August 29, 2013 memorandum by James Cole, Deputy Attorney General (the “Cole Memorandum”).
The
Cole Memorandum previously set out the Department of Justice’s prosecutorial priorities in light of various states
legalizing cannabis for medicinal and/or recreational use. The Cole Memorandum provided that when states have implemented
strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of
cannabis, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities. Indeed, a
robust system may affirmatively address those priorities by, for example, implementing effective measures to prevent
diversion of cannabis outside of the regulated system and to other states, prohibiting access to cannabis by minors, and
replacing an illicit cannabis trade that funds criminal enterprises with a tightly regulated market in which revenues are
tracked and accounted for. In those circumstances, consistent with the traditional allocation of federal-state efforts in
this area, the Cole Memorandum provided that enforcement of state law by state and local law enforcement and regulatory
bodies should remain the primary means of addressing cannabis-related
activity. If state enforcement efforts are not
sufficiently robust to protect against the harms set forth above, the federal government may seek to challenge the regulatory
structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused
on those harms.
By rescinding
the Cole Memorandum, Mr. Sessions injected material uncertainty as it relates to how the Department of Justice will evaluate cannabis
cases for prosecution, and risk into the Company’s business as it relates to the research, development, marketing and sale
of its products containing industrial hemp derived CBD (see Risk Factors, Item 1A).
Mr. Sessions
stated that U.S. Attorneys must decide whether or not to pursue prosecution of cannabis activity based upon factors including:
the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the
community. Mr. Sessions reiterated that the cultivation, distribution and possession of cannabis continues to be a crime under
the U.S. Controlled Substances Act.
On March
23, 2018, President Donald J. Trump signed into law a $1.3 trillion-dollar spending bill that included an amendment known as “Rohrabacher-Blumenauer,”
which prohibits the Justice Department from using federal funds to prevent certain states “from implementing their own State
laws that authorize the use, distribution, possession or cultivation of medical marijuana.”
The United
States Food & Drug Administration (“FDA”) is generally responsible for protecting the public health by ensuring
the safety, efficacy, and security of (1) prescription and over the counter drugs; (2) biologics including vaccines, blood &
blood products, and cellular and gene therapies; (3) foodstuffs including dietary supplements, bottled water, and baby formula;
and, (4) medical devices including heart pacemakers, surgical implants, prosthetics, and dental devices.
Regarding
its regulation of drugs, the FDA process requires a review that begins with the filing of an “Investigational New Drug”
(IND) application, with follow on clinical studies and clinical trials that the FDA uses to determine whether a drug is safe and
effective, and therefore subject to approval for human use by the FDA.
Aside
from the FDA’s mandate to regulate drugs, the FDA also regulates dietary supplement products and dietary ingredients under
the Dietary Supplement Health and Education Act of 1994. This law prohibits manufacturers and distributors of dietary supplements
and dietary ingredients from marketing products that are adulterated or misbranded. This means that these firms are responsible
for evaluating the safety and labeling of their products before marketing to ensure that they meet all the requirements of the
law and FDA regulations, including, but not limited to the following labeling requirements: (1) identifying the supplement; (2)
nutrition labeling; (3) ingredient labeling; (4) claims; and, (5) daily use information.
The FDA
has not approved cannabis, hemp or CBD derived from industrial hemp as a safe and effective drug for any indication. As of the
date of this filing, we have not, and do not intend to file an IND with the FDA, concerning any of our consumer products that contain
CBD derived from industrial hemp.
The
FDA has concluded that products containing industrial hemp derived CBD are excluded from the dietary supplement definition under
sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. The FDA’s position is that products
containing industrial hemp derived CBD are Schedule 1 drugs under the Controlled Substances Act, and so are illegal drugs that
are under the purview of the U.S. Drug Enforcement Agency and U.S. Justice Dept., who are charged with enforcing the Controlled
Substances Act. However, at some indeterminate future time, the FDA may choose to change its position concerning cannabis generally,
and specifically products containing industrial hemp derived CBD, and may choose to enact regulations that are applicable to such
products as either drugs or supplements. In this event, our industrial hemp-based products containing CBD may be subject to regulation
(See Risk Factors, Item IA).
In
addition to strict compliance with state laws and regulations in those jurisdictions where cannabis is legal for recreational
or medical use, the Company’s research and development activities intend to comply with the parameters of a recent 9th
Cir. Federal Appellate Court decision, United States v. McIntosh, 2016 DJDAR 8484 (Aug. 16, 2016), which held: “the
U.S. Department of Justice cannot spend money to prosecute federal marijuana cases if the defendants
comply with state
guidelines that permit the drug's sale for medical purposes”. The Court reasoned that “if the DOJ punishes
individuals for engaging in activities permitted under state law (such as the use, cultivation, distribution and possession
of medical marijuana), then the DOJ is preventing state law from being implemented as a practical matter.” “By
officially permitting certain conduct, state law provides for non-prosecution of individuals who engage in such conduct. If
the federal government prosecutes such individuals, it has prevented the state from giving practical effect to its law
providing for non-prosecution of individuals who engage in the permitted conduct." This ruling is consistent with
Congress’s passing of its current budget law, that included an amendment known as
“Rohrabacher-Blumenauer,” which prohibits the Justice Department from using federal funds to prevent certain
states “from implementing their own State laws that authorize the use, distribution, possession or cultivation of
medical marijuana.”
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable
to Smaller Reporting Companies.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
Management
is responsible for establishing and maintaining adequate disclosure controls and procedures that are designed to ensure that information
required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as appropriate, to allow for timely and reliable financial
reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America.
As of the quarter ended June 30, 2019, our
principal executive officer and principal financial officer completed an assessment of the effectiveness of our disclosure controls
and procedures, to determine the existence of any material weaknesses or significant deficiencies. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely
basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting
that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the
registrant's financial reporting.
Management identified the following material
weakness which has caused management to conclude that, as of June 30, 2019, our disclosure controls and procedures were not effective:
(1) a lack of organizational controls designed
to allow us to gather and provide our auditor timely documentation concerning our joint ventures’ financial records. This
material weakness causes us to not be able to provide reasonable assurances that transactions are recorded as necessary to permit
preparation of financial statements in accordance with US GAAP, and effectively close our books in a timely fashion and report
to the Commission consistent with its rules and forms.
Changes in Internal
Control over Financial Reporting.
In order to address the
material weakness and significant deficiency, we made the following changes to our internal control over financial reporting:
(1) After our year
ended December 31, 2018, we considered and approved on May 28, 2019, an internal audit sub-committee, led by independent
director Robert Coale, to obtain timely information on a weekly basis on the status of our joint ventures, the respective
budgets and expenses and variances on balances. Mr. Jesus Quintero, our Chief Financial Officer, has monitored, reviewed and
to the extent he deemed prudent, tested Mr. Coale’s work since inception of the internal audit sub-committee. Mr. Coale
has reported to the Board of Directors on the status of each joint venture on a weekly basis, along with a discussion of the
ability to sell and liquidate inventory and to also advised concerning funding. Although we believe our implementation of
this framework will provide an effective preventative control that will allow us to provide our auditor timely information
about our joint ventures so that we can close our books in a timely fashion and file our reports to the Commission consistent
with its rules and forms, our internal sub-committee has been operational for approximately three months, and so our
evaluation of its effectiveness is not complete and will require further review, assessment and disclosure. This material
weakness remains unremedied.