Quarterly Report (10-q)

Date : 11/19/2019 @ 9:39PM
Source : Edgar (US Regulatory)
Stock : Marijuana Company Of America, Inc. (PC) (MCOA)
Quote : 0.11  -0.03 (-21.43%) @ 9:13PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2019

 

  o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                       

 

Commission file number: 000-27039

 

MARIJUANA COMPANY OF AMERICA, INC.

(Exact name of registrant as specified in its charter)

 

Utah   98-1246221
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

1340 West Valley Parkway

Suite 205

Escondido, CA 92029

(Address of principal executive offices) (zip code)

 

(888) 777-4362

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer   Accelerated filer  ☐
Non-accelerated filer   Smaller reporting company
Emerging growth company      
  1  

 

  

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

 

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

 

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

 

As of September 30, 2019, and November 19, 2019, there were 52,029,238 and 74,989,736 shares of registrant’s common stock issued and outstanding respectively.

 

 

 

 

  2  

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
       
  ITEM 1. Financial Statements  
       
    Condensed consolidated balance sheets as of September 30, 2019 (unaudited)
and December 31, 2018 (audited)
4
       
    Condensed consolidated statements of operations for the three and nine months ended
September 30, 2019 and 2018 (unaudited)
5
       
    Condensed consolidated statement of stockholders’ deficit for the nine months ended September 30, 2019 and 2018 (unaudited) 6
       
    Condensed consolidated statements of cash flows for the nine months ended
September 30, 2019 and 2018 (unaudited)
7
       
    Notes to condensed consolidated financial statements (unaudited) 9
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 49
  ITEM 4. Controls and Procedures 49
       
PART II. OTHER INFORMATION  
       
  ITEM 1. Legal Proceedings 50
  ITEM 1A. Risk Factors 50
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
  ITEM 3. Defaults Upon Senior Securities 65
  ITEM 4. Mine Safety Disclosures 65
  ITEM 5. Other Information 65
  ITEM 6. Exhibits 65
       
  SIGNATURES 66

 

 

   

 

 

 

 

 

  3  

 

  

ITEM 1. FINANCIAL STATEMENTS 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
      September 30,       December 31,
      2019       2018
      Unaudited       Audited
ASSETS              
Current assets:              
Cash   $ 44,821     $ 359,577
Short-term Investments     120,708       810,000
Accounts receivable, net     62,973       46,376
Inventory     204,041       186,989
Other current assets     111,540       93,833
  Total current assets     544,083       1,496,775
               
Property and equipment, net     10,046       12,430
               
Other assets:              
Long-term Investments     3,772,652       408,077
Security deposit     2,500       2,500
               
Total assets   $ 4,329,281     $ 1,919,782
               
LIABILITIES AND STOCKHOLDERS' DEFICIT              
Current liabilities:              
Accounts payable   $ 751,109     $ 416,444
Accrued compensation     270,000       454,316
Accrued liabilities     271,948       216,946
Debt obligations of Joint venture     1,633,872       289,742
Notes payable, related party     90,418       287,140
Convertible notes payable, net of debt discount of $838,335 and $896,180, respectively     2,688,555       1,132,668
Warrant liability to be settled     45,000       —  
Contingency Liability     956,251       —  
Derivative liability     5,118,562       2,256,631
  Total current liabilities     11,825,715       5,053,887
               
Total liabilities     11,825,715       5,053,887
               
Stockholders' deficit:              
Preferred stock, $0.001 par value, 50,000,000 shares authorized              
Class A preferred stock, $0.001 par value, 10,000,000 shares designated, 10,000,000 shares issued and outstanding as of September 30, 2019 and December 31, 2018     10,000       10,000
Class B preferred stock, $0.001 par value, 5,000,000 shares designated, 0 issued and outstanding as of September 30, 2019 and December 31, 2018.     —        —  
Common stock, $0.001 par value; 5,000,000,000 shares authorized; 52,029,238 and 42,687,301 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively (Reflects post reverse stock split of 1:60)     52,029       42,687
Common Stock to be issued     28       —  
Common stock subscriptions     —         90,000
Additional paid in capital     57,304,027       50,707,103
Accumulated deficit     (64,862,517 )     (53,983,895
  Total stockholders' deficit     (7,496,433 )     (3,134,105
               
Total liabilities and stockholders' deficit   $ 4,329,281     $ 1,919,782
               
See the accompanying notes to these unaudited condensed consolidated financial statements  

 

  4  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
                 
    For the three months Ended September 30,   For the nine months Ended September 30,
    2019   2018   2019   2018
REVENUES:                
Sales   $ 222,984     $ 81,007     $ 538,026     $ 128,452  
Related party Sales     6,387       9,269       14,735       9,269  
Total Revenues     229,371       90,276       552,761       137,721  
                                 
Cost of sales     90,843       28,437       159,860       43,047  
                                 
Gross Profit     138,528       61,839       392,901       94,674  
                                 
OPERATING EXPENSES:                                
Selling, general and administrative expenses     761,454       728,254       3,226,210       1,891,619  
Depreciation     1,696       1,524       5,087       4,442  
  Total operating expenses     763,150       729,778       3,231,297       1,896,061  
                                 
Net loss from operations     (624,622 )     (667,939 )     (2,838,396 )     (1,801,387 )
                                 
OTHER INCOME (EXPENSES):                                
Interest expense, net     (1,559,720 )     (1,422,231 )     (3,001,972 )     (3,503,610 )
Legal contingency expense     (1,497,674 )     —         (1,497,674 )     (1,676,870 )
Impairment of Joint Ventures     —         —         —         (296,761 )
Loss on equity investment     122,864       (107,982 )     (107,961 )     (156,698 )
Loss on debt modification             (1,343,161 )             (1,343,161 )
Gain (Loss) on change in fair value of derivative liabilities     (1,668,112 )     3,072,345       (2,148,262 )     4,658,074  
Gain on cancellation of debt             1,500,000               1,500,000  
Unrealized (Loss) Gain on trading securities     (362,625 )     1,175,000       (647,625 )     1,175,000  
Loss on sales of trading securities     (24,698 )             (24,698 )        
(Loss) Gain on settlement of debt     (612,034 )     (61,906 )     (612,034 )     94,933  
  Total other income (expense)     (5,601,999 )     2,812,065       (8,040,226 )     450,907  
                                 
Net loss before income taxes     (6,226,621 )     2,144,126       (10,878,622 )     (1,350,480 )
                                 
Income taxes (benefit)     —         —         —         —    
                                 
NET INCOME (LOSS)   $ (6,226,621 )   $ 2,144,126     $ (10,878,622 )   $ (1,350,480 )
                                 
                                 
Loss per common share, basic and diluted   $ (0.13 )   $ 0.06     $ (0.26 )   $ (0.04 )
                                 
Weighted average number of common shares outstanding, basic and diluted (Reflects post reverse stock split of 1:60)     49,686,994       38,150,788       41,726,239       36,891,076  
                                 
See the accompanying notes to these unaudited consolidated financial statements

  

  5  

 

  

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

   

Class A

Preferred

Stock

 

Class B

Preferred

Stock

  Common Stock   Common Stock to be issued  

Common

Stock

 

Additional

Paid In

  Accumulated    
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Subscriptions   Capital   Deficit   Total
Balance, December 31, 2017     10,000,000     $ 10,000       —       $ —         35,057,733     $ 35,058       —       $ —       $ —       $ 32,525,294     $ (42,888,104 )   $ (10,317,752 )
Common stock issued for services rendered     —         —         —         —         370,847       371       —         —         —         327,384               327,755  
Common stock issued in settlement of convertible notes payable and accrued interest     —         —         —         —         1,525,673       1,526       —         —         —         3,035,563       —         3,037,089  
Conversion of related party notes payable     —         —         —         —         1,265,471       1,265               —                 758,018               759,283  
Common stock issued in exchange for exercise of warrants on a cashless basis     —         —         —         —         928,447       928       —         —                 (928 )     —         0  
Common stock issued in settlement of legal case     —         —         —         —         961,280       961                               1,700,504               1,701,465  
Sale of common stock     —         —                                         83,333       83               49,917               50,000  
Proceeds from common stock subscriptions     —         —         —         —                                         190,000                       190,000  
Reclassification of derivative liabilities     —         —         —         —                                                 1,456,550               1,456,550  
Reclassification of warrant liability     —         —         —         —                                                 2,490,767               2,490,767  
Stock based compensation     —         —         —         —                         —         —                 (64,501 )     —         (64,501 )
Net Loss     —         —         —         —         —         —         —         —         —         —         (1,350,480 )     (1,350,480 )
Balance, September 30, 2018     10,000,000     $ 10,000       —       $ —         40,109,450     $ 40,109       83,333     $ 83     $ 190,000     $ 42,278,568     $ (44,238,584 )   $ (1,719,823 )

 

  6  

 

 

   

Class A

Preferred

Stock

 

Class B

Preferred

Stock

  Common Stock   Common Stock to be issued  

Common

Stock

 

Additional

Paid In

  Accumulated    
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Subscriptions   Capital   Deficit   Total
Balance, December 31, 2018     10,000,000     $ 10,000       —       $ —         42,687,301     $ 42,687       —       $ —       $ 90,000     $ 50,707,103     $ (53,983,895 )   $ (3,134,105 )
Common stock issued for services rendered     —         —         —         —         552,054       552       —         —         —         553,815               554,367  
Common stock issued in settlement of convertible notes payable and accrued interest     —         —         —         —         5,208,063       5,208       —         —                 3,551,615       —         3,556,823  
Additional paid-in capital due to issuance of convertible debt     —         —         —         —                 —         —         —                 462,714               462,714  
Conversion of related party notes payable                                     2,394,565       2,394               —                 1,730,119               1,732,513  
Common stock issued in exchange for exercise of warrants on a cashless basis     —         —         —         —         655,556       656       27,778       28       (40,000 )     95,139       —         55,823  
Sale of common stock     —         —         —         —         531,699       532       —         —         (50,000 )     203,522       —         154,054  
Net Loss     —         —         —         —         —         —         —         —         —         —         (10,878,622 )     (10,878,622 )
Balance, September 30, 2019     10,000,000     $ 10,000       —       $ —         52,029,238     $ 52,029       27,778     $ 28     $ —       $ 57,304,027     $ (64,862,517 )   $ (7,496,433 )

 

  

See the accompanying notes to these unaudited consolidated financial statements

 

  7  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
         
   

For the nine months ended

September 30,

    2019   2018
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Income (Loss)   $ (10,878,622 )   $ (1,350,480 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     5,087       4,442  
Amortization of debt discount     2,172,936       1,171,549  
Bad debt expense     15,000       1,559  
Non cash interest     1,886,837       2,827,419  
Stock based compensation     100,350       21,404  
Unrealized Gain on trading securities     647,625       —    
Realized Loss on trading securities     41,667       —    
(Gain) Loss on change in fair value of derivative liabilities     2,148,262       (4,658,074 )
Impairment of investment in BV joint venture     —        296,761  
(Gain) Loss on settlement of debt     612,034       (1,594,933 )
Loss on equity investment     107,961       156,698  
Changes in operating assets and liabilities:                
  Accounts receivable     (31,597 )     1,149  
  Inventory     (17,052 )     (401,033 )
  Other current assets     (17,707 )        
  Accounts payable     206,926       474,128  
  Accrued liabilities     (348 )     (27,993 )
  Contingency Liability     1,497,675        1,676,870  
  Accrued compensation     (381,038 )     390,014  
    Net cash used in operating activities     (1,884,004 )     (1,010,520 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Investment in joint venture     (685,049 )        
Purchase of investments     —         (624,767 )
Purchase of property and equipment     (2,703 )     (7,119 )
  Net cash used in investing activities     (687,752 )     (631,886 )
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from issuance of notes payable     2,257,000       1,080,186  
Proceeds from issuance of notes payable, related party     —         194,881  
Proceeds from sale of common stock     —        185,000  
    Net cash provided by Financing activities     2,257,000       1,460,067  
                 
Net decrease in cash     (314,756 )     (182,339 )
                 
                 
Cash-beginning of period     359,577       249,831  
Cash-end of period   $ 44,821     $ 67,492  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Interest paid   $ —       $ —    
Taxes paid   $ —       $ —    
                 
Non cash financing activities:                
Common stock issued in settlement of convertible notes payable   $ 3,016,750     $ 762,650  
Common stock issued in settlement of related party notes payable and accrued compensation   $ 462,714     $ 759,283  
Investment in joint venture   $ 2,650,000     $ —    
See the accompanying notes to these unaudited condensed consolidated financial statements

 

  8  

 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Marijuana Company of America, Inc. (The “Company”) was incorporated under the laws of the State of Utah in October 1985 under the name Mormon Mint, Inc. The corporation was originally a startup company organized to manufacture and market commemorative medallions related to the Church of Jesus Christ of Latter Day Saints. On January 5, 1999, Bekam Investments, Ltd. acquired one hundred percent of the common shares of the Company and spun the Company off changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the development and implementation of Internet web content and e-commerce applications. In October 2009, in a 30 for 1 exchange, the Company merged with Sparrowtech, Inc. for the purpose of exploration and development of commercially viable mining properties. From 2009 to 2014, we operated primarily in the mining exploration business.

 

In 2015, the Company changed its business model to a marketing and distribution company for medical marijuana. In conjunction with the change, the Company changed its name to Marijuana Company of America, Inc. At the time of the transition in 2015, there were no remaining assets, liabilities or operating activities of the mining business.

 

On September 21, 2015, the Company formed H Smart, Inc., a Delaware corporation as a wholly owned subsidiary for the purpose of operating the hempSMART™ brand.

 

On February 1, 2016, the Company formed MCOA CA, Inc., a California corporation as a wholly owned subsidiary to facilitate mergers, acquisitions and the offering of investments or loans to the Company.

 

On May 3, 2017, the Company formed Hempsmart Limited, a United Kingdom corporation as a wholly owned subsidiary for the purpose of future expansion into the European market.

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: H Smart, Inc., Hempsmart Limited and MCOA CA, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The unaudited condensed interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The condensed balance sheet as of December 31, 2018 has been derived from audited financial statements.

 

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2018.

 

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements for nine months ended September 30, 2019, the Company had a net loss of $10,878,622 and used cash in operations of $1,884,004. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. 

  

 

  9  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

The Company's primary source of operating funds in 2019 has been from funds generated from proceeds from the issuance of convertible and other debt and issuance of stock through private placements. With the exception of the current quarter, the Company has experienced net losses from operations since inception, but expects these conditions to improve as its business develops. The Company has stockholders' deficiencies at September 30, 2019 and requires additional financing to fund future operations.

 

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems discussed in this filing. The accompanying statements do not include any adjustments that might result, should the Company be unable to continue as a going concern.

 

NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

For annual reporting periods after December 15, 2017, the Financial Accounting Standards Board (“FASB”) made effective ASU 2014-09 “Revenue from Contracts with Customers,” to supersede previous revenue recognition guidance under current U.S. GAAP. Revenue is now recognized in accordance with FASB ASC Topic 606, Revenue Recognition. The objective of the guidance is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The core principal is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Two options were made available for implementation of the standard: the full retrospective approach or modified retrospective approach. The guidance became effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. We adopted FASB ASC Topic 606 for our reporting period as of the year ended December 31, 2017, which made our implementation of FASB ASC Topic 606 effective in the first quarter of 2018. We decided to implement the modified retrospective transition method to implement FASB ASC Topic 606, with no restatement of the comparative periods presented. Using this transition method, we applied the new standards to all new contracts initiated on/after the effective date. We also decided to apply this method to any incomplete contracts we determine are subject to FASB ASC Topic 606 prospectively. For the year ended December 31, 2018, and for the quarter ended September 30, 2019, there were no incomplete contracts. As is more fully discussed below, we are of the opinion that none of our contracts for services or products contain significant financing components that require revenue adjustment under FASB ASC Topic 606.

Identification of Our Contracts with Our Customers.

Contracts included in our application of FASB ASC Topic 606, consist completely of sales contracts between us and our customers that create enforceable rights and obligations. For the year ended December 31, 2018, and for the three and nine months ended September 30, 2019, our sales contracts included the following parties: us, our sales associates and our customers. Our sales contracts were offered by us and our sales associates to our customers directly through our web site. Our sales contracts, and those formalized by our sales associates, are represented by an electronic order form, which contains the contractual elements of offer for sale, acceptance and the provision of consideration consisting of the buyer’s payment, and the concurrent delivery of our hempSMART™ product. Since our hempSMART™ product sales contracts are consummated upon (i) receipt of the customer’s acceptance of our offer; (ii) our concurrent receipt of our customers payment; and, (iii) our delivery of the agreed to hempSMART™ product, all parties are equally committed to fulfilling their respective obligations under the sales contracts. Further, the sales contracts specifically identify (i) parties; (ii) quantity and type of hempSMART™ product ordered; (iii) price; and, (iv) subject, and so each respective party’s rights are identifiable and the payment terms are defined. Since the sales contracts are consummated concurrent with offer, acceptance, payment and delivery of the hempSMART™ product ordered, we recognize principal revenue and cash flows as the respective sales contract transactions are completed. Further, because our sales contracts are offered, accepted and consummated concurrently, our ability to collect revenue is immediate. We receive no payments for agreements that do not qualify as a contract. If customers agree to multiple sales contracts when they are entered into at or near the same time, our policy is to combine those contracts if: (i) the sales contracts are negotiated as a single package; (ii) the payment amount of one sales contract is dependent upon another sales contract; (iii) our performance obligations of delivering multiple hempSMART™ products can be determined to be part of a single transaction. Since the nature of the entry into and consummation of our sales contracts occurs concurrently, there are no changes or modifications to the terms of the sales contracts that would modify the enforceable rights and performance obligations of the parties, and/or materially alter the timing of our receipt of revenue from our sales contracts.

  10  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

Identifying the Performance Obligations in Our Sales Contracts.

In analyzing our sales contracts, our policy is to identify the distinct performance obligations in a sales contract arrangement. In determining our performance obligations under our sales contracts, we consider that the terms and conditions of sales are explicitly outlined in our sales contracts, and are so distinct and identifiable within the context of each sales contract, and so are not integrated with other goods, or constitute a modification or customization of other goods in our contracts, or are highly dependent or highly integrated with other goods in our sales contracts. Thus, our performance obligations are singularly related to our promise to provide the hempSMART™ products upon receipt of payment. We offer an assurance warranty on our hempSMART™ products that allows a customer to return any hempSMART™ products within thirty days if not satisfied for any reason. Assurance warranties are not identifiable performance obligations, since they are electable at the whim of the customer for any reason. However, we do account for returns of purchase prices if made.

Determination of the Price in Our Sales Contracts.

The transaction prices in our sales contract is the amount of consideration we expect to be entitled to for transferring promised hempSMART™ products. The consideration amount is fixed and not variable. The transaction price is allocated to the identified performance obligations in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled, which is concurrently upon receipt of payment. There are no future options for a contract when considering and determining the transaction price. We exclude amounts third parties will eventually collect, such as sales tax, when determining the transaction price. Since the timing between receiving consideration and transferring goods or services is immediate, our sales contracts do not have significant financing components, i.e., recognizing revenue at the amount that reflects the cash payment that the customer would have made at the time the goods or services were transferred to them (cash selling price), rather than significantly before or after the goods or services are provided.

Allocation of the Transaction Price of Our Sales Contracts.

Our sales contracts are not considered multi-element arrangements which require the fulfillment of multiple performance obligations. Rather, our sales contracts include one performance obligation in each contract. As such, from the outset, we allocate the total consideration to each performance obligation based on the fixed and determinable standalone selling price, which we believe is an accurate representation of what the price is in each transaction.

Recognition of Revenue when the Performance Obligation is Satisfied.

A performance obligation is satisfied when or as control of the good or service is transferred to the customer. The standard defines control as “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.” (ASC 606-10-20). For performance obligations that are fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation. As noted above, our single performance obligation sales contracts are singularly related to our promises to provide the hempSMART™ products to the customer upon receipt of payment, which occurs concurrently and when completed, allows us under our revenue recognition policy to realize revenue.

  11  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

Product Sales

Revenue from product sales, including delivery fees, is recognized when (i) an order is placed by the customer; (ii) the price is fixed and determinable when the order is placed; (iii) the customer is required to and concurrently pays for the product upon order; and, (iv) the product is shipped. The evaluation of our recognition of revenue after the adoption of FASB ASC 606 did not include any judgments or changes to judgments that affected our reporting of revenues, since our product sales, both pre and post adoption of FASB ASC 606, were evaluated using the same standards as noted above, reflecting revenue recognition upon order, payment and shipment, which all occurs concurrently when the order is placed and paid for by the customer, and the product is shipped. Further, given the facts that (i) our customers exercise discretion in determining the timing of when they place their product order; and, (ii) the price negotiated in our product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, we are of the opinion that our product sales do not indicate or involve any significant customer financing that would materially change the amount of revenue recognized under the sales transaction, or would otherwise contain a significant financing component for us or the customer under FASB ASC Topic 606.

Consulting Services

We also offer professional services for financial accounting, bookkeeping or real property management consulting services based on consulting agreements. As of the date of this filing, we have not entered into any contracts for any financial accounting, bookkeeping and/or real property management consulting services that have generated reportable revenues as of the years ended 2017 and 2018 or the three and nine months ended September 30, 2019. We intend and expect these arrangements to be entered into on an hourly fixed fee basis.

For hourly based fixed fee service contracts, we intend to utilize and rely upon the proportional performance method, which recognizes revenue as services are performed. Under this method, in order to determine the amount of revenue to be recognized, we will calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. We will only recognize revenues as we incur and charge billable hours. Because our hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing, that would materially change the amount of revenue we recognize under the contract or would otherwise contain a significant financing component under FASB ASC Topic 606.

The Company determined that upon adoption of ASC 606 there were no quantitative adjustments converting from ASC 605 to ASC 606 respecting the timing of our revenue recognition because product sales revenue is recognized upon customer order, payment and shipment, which occurs concurrently, and our consulting services offered are fixed and determinable and are only earned and recognized as revenue upon actual performance.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.

 

Cash

 

The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.

 

  12  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

Concentrations of credit risk

 

The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.

 

Accounts Receivable

 

Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus, trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition.

 

Allowance for Doubtful Accounts

 

Any charges to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of September 30, 2019, and December 31, 2018, allowance for doubtful accounts was $0, respectively. 

 

Inventories

 

Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.

 

Cost of sales

 

Cost of sales is comprised of cost of product sold, packaging, and shipping costs.

 

Stock Based Compensation

 

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such amounts were paid in cash.

 

  13  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

 

Net Loss per Common Share, basic and diluted

 

The Company computes earnings (loss) per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year.  Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.  

 

The computation of basic and diluted income (loss) per share as of September 30, 2019 and 2018 excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.

 

Potentially dilutive securities excluded from the computation of basic and diluted net loss per share are as follows (September 30, 2018, figures adjusted to reflect the 1:60 reverse stock split effective September 3, 2019):

 

   

September 30,

2019

 

September 30,

2018

Convertible notes payable     52,346,160       1,059,202  
Options to purchase common stock     —         16,666,667  
Warrants to purchase common stock     3,602,160       1,983,712  
Restricted stock units     —         166,667  
  Total     55,948,320       19,876,248  

 

Property and Equipment

 

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.

 

Investments

 

The Company follows Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10”) which requires the accounting for equity security to be measured at fair value with changes in unrealized gains and losses are included in current period operations. Where an equity security is without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus impairment plus or minus changes resulting from observable price changes.

 

As a smaller reporting company, the company is subject to provisions of Rule 8-03(b)(3) of Regulation S-X which requires the disclosure of certain financial information for equity investees that constitute 20% of more of the Company’s consolidated net income (loss). For the three months ended September 30, 2019, income allocations from the Company’s stock purchase agreement in Natural Plant Extract accounted for under the equity method, exceeded more than 20% of the Company’s consolidated net loss.

 

  14  

 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

Natural Plant Extract of California, Inc.

The standalone unaudited financial statements of Natural Plant Extract of California, Inc. for the third quarter ended September 30, 2019 and the year ended December 31, 2018 were as follows:

Natural Plant Extract ("NPE")

    For the three months ended   For the nine months ended
    September 30, 2019   September 30, 2019
Revenues   $ 11,081     $ 326,019  
Cost of Sales     60,757       407,022  
Gross Margin     (49,676 )     (81,003 )
Expenses     95,870       426,984  
Net Loss     (145,546 )     (507,987 )
                 
Equity in net loss of unconsolidated joint venture reflected in the accompanying Consolidated Statement of Operations   $ (29,109 )   $ (101,597 )

 

Summarized Balance Sheet   September 30, 2019   December 31, 2018
 Cash   $ 29,961     $ 1,794  
 Total Current Assets     2,983,993       —    
 Total Fixed assets     56,202       98,282  
 Notes receivable and other non-current assets     1,578,229       312,004  
TOTAL ASSETS     4,648,385       412,080  
                 
Long Term Liabilities     2,657,381       616,264  
Equity     1,991,004       (204,184 )
Total Liabilities and equity   $ 4,648,385     $ 412,080  
                 
      For the third Quarter ended       For the Year ended  
      September 30, 2019       December 31, 2018  
Summarized Income Statement                
     Sales   $ 11,081       —    
    Total expenses     156,627     $ 204,184  
Net Losses   $ (145,546 )   $ (204,184  

 

  15  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

On April 15, 2019, the Company entered into a material definitive agreement with Natural Plant Extract of California, Inc., a California corporation, and its wholly owned subsidiaries, Green Ethos LLC, Northern Lights Distribution LLC, and, Block Chain 420 LLC, all California limited liability companies (collectively, “NPE”). The Company and NPE agreed to form a joint venture incorporated in California under the name Viva Buds for the purpose of operating a California licensed cannabis distribution business pursuant to California law legalizing cannabis for recreational and medicinal use.

Pursuant to the material definitive agreement, the Company agreed to acquire twenty percent (equal to 200,000) of NPE’s authorized shares in exchange for Registrant’s payment of two million dollars and one million dollars’ worth of common stock, or approximately 1,173,709 shares of the Company’s restricted common stock, after the effects of the reverse stock split effective September 3, 2019. The shares were issued on July 3, 2019. The Company’s payment obligations are governed by a stock purchase agreement which required the Company to the following payment schedule:

a. Deposit of $350,000 within 5 days of the execution of the material definitive agreement;

b. Deposit of $250,000 payable within 30 days;

c. Deposit of $400,000 within 60 days;

d. Deposit of $500,000 within 75 days;

e. Deposit of $500,000 within 90 days

The Company made its initial deposit pursuant to this schedule. However, the Company failed to make the other scheduled payments and is now in default. As of the date of this filing, the Company and NPE are in negotiations to restructure the payment plan.

Derivative Financial Instruments

 

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.

The Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance sheet using the applicable classification criteria enumerated under GAAP.  The Company determined that certain conversion and exercise options do not contain fixed settlement provisions.  The convertible notes contain a conversion feature and warrants have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands.

As such, the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.   

The Company has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception date first. Thus, any available shares are allocated first to contracts with the most recent inception dates.

  16  

 

 MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

Fair Value of Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2019 and December 31, 2018. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash, accounts payables and short-term notes, as they are short term in nature.

 

Advertising

 

The Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $159,428 and $550,544 for the three and nine months ended September 30, 2019 and $273,219 and $343,964 for the three and nine months ended September 30, 2018, respectively; as advertising costs.

 

Income Taxes

 

Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry forwards and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The Company records an estimated valuation allowance on its deferred income tax assets if it is not more likely than not that these deferred income tax assets will be realized.

 

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of September 30, 2019, and 2018, the Company has not recorded any unrecognized tax benefits.

 

Segment Information

 

Accounting Standards Codification subtopic Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company's only material principal operating segment.

 

 

 

 

 

 

  17  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

The following table represents the Company’s hempSMART business, which is its sole operating segment as of September 30, 2019:

 

hempSMART                
STATEMENT OF OPERATIONS                

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2019

   
                 
    For the Three months ended September 30,   For the Nine months ended September 30,
    2019   2018   2019   2018
Revenues   $ 229,371     $ 90,276     $ 552,761     $ 137,721  
                                 
Cost of Sales     90,843       28,437       159,860       43,047  
                                 
Gross profit     138,528       61,839       382,901       94,674  
                                 
Expenses                                
  Depreciation expense     1,696       1,524       5,087       4,442  
  Selling and general expenses     399,662       251,786       1,611,581       617,294  
Total Expenses     401,358       253,310       1,616,668       621,736  
                                 
Net Loss from Operations   $ (262,830 )   $ (191,471 )   $ (1,223,767 )   $ (527,062  

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.

We adopted this standard using a modified retrospective approach on January 1, 2019. The modified retrospective approach includes a number of optional practical expedients relating to the identification and classification of leases that commenced before the adoption date; initial direct costs for leases that commenced before the adoption date; and, the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.

The Company elected the package of practical expedients permitted under ASC 842 allowing it to account for its existing operating lease that commenced before the adoption date as an operating lease under the new guidance without reassessing (i) whether the contract contains a lease; (ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC 842. The Company negotiated a 2 year extension on its current office lease.

  18  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

On July 1, 2019, the Company entered into an amendment and extension of its one applicable lease for office space until June 30, 2021. The extension requires the Company to pay monthly rent of $1,308.88 from July 1, 2019 to June 30, 2020; and, $1,348.14 from July 1, 2020 to June 30, 2021. In considering its qualitative disclosure obligations under ASC 842-20-50-3, the Company examined its one lease for office space that has a fixed monthly rent with no variable lease payments. The lease is for an office space with no right of use assets. The lease does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants imposed by the lease for dividends or incurring additional financial obligations by the Company. The Company also elected a short-term lease exception policy and an accounting policy to not separate non-lease components from lease components for our facility lease, as we determined our right of use asset to be zero.

Consistent with ASC 842-20-50-4, for the Company's September 30, 2019, quarterly financial statements, the Company calculated its total lease cost based solely on its monthly rent obligation. The Company had no cash flows arising from its lease, no finance lease cost, short term lease cost, or variable lease costs. Our office lease does not produce any sublease income, or any net gain or loss recognized from sale and leaseback transactions. As a result, the Company did not need to segregate amounts between finance and operating leases for cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows; supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets; weighted-average calculations for the remaining lease term; or the weighted-average discount rate.

The adoption of this guidance resulted in no significant impact to our results of operations or cash flows.

Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.  Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment as of September 30, 2019 and December 31, 2018 is summarized as follows:

 

   

September 30,

2019

 

December 31,

2018

Computer equipment   $ 17,809     $ 15,207  
Furniture and fixtures     5,140       5,140  
Subtotal     22,949       20,347  
Less accumulated depreciation     (12,903 )     (7,917 )
Property and equipment, net   $ 10,046     $ 12,430  

 

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.

 

Depreciation expense was $1,696 and $5,087 for the three and nine months ended September 30, 2019; and $1,524 and $4,442 for the three and nine months ended September 30, 2018, respectively.

 

 

  19  

 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

NOTE 5 – INVESTMENTS

 

On March 13, 2017, the Company entered into a stock purchase agreement to acquire up to 150,000,000 common shares of MoneyTrac Technology, Inc., a corporation organized and operating under the laws of the state of California, for a total purchase price of $250,000 representing approximately 15% ownership at the time of the agreement. As of December 31, 2017, the Company had acquired 150,000,000 common shares for $250,000 representing approximately 15% ownership. In connection with the investment, Donald Steinberg, the Company’s President and Chief Executive Officer and Director, was appointed as a board member to MoneyTrac.

 

The Company accounts for its investment in MoneyTrac Technology, Inc. at estimated market fair value using the market price for the publicly traded shares under the ticker symbol “GOHE” as listed on OTC Markets as an indicator of fair market value. As of September 30, 2019, and December 31, 2018, the balance of this investment was $120,708 and $810,000 and was classified as a short-term investment.

 

On July 19, 2019, MoneyTrac completed a 1:100 reverse split of its common stock, which reduced the number of shares beneficially owned by the Company to 1,500,000 shares.

Benihemp

On June 16, 2017, the Company entered into a Loan Agreement (“Agreement”) with Conveniant Hemp Mart, LLC (“Benihemp”), a limited liability company formed and operating under the laws of the State of Wyoming. Pursuant to the Agreement, Benihemp executed a promissory note for a principal loan amount of $50,000, accruing interest at the rate of 4% per annum and payable in one year, subject to one-time six- month repayment extension. The Agreement also provided that the Company with the option to waive repayment of the note and pay Benihemp an additional $50,000 payment in exchange for a 25% membership interest in Benihemp’s limited liability company. As of December 31, 2018, the balance of this investment reported on the balance sheet for the year ended December 31, 2018 was $0.00 as a result of the investment being deemed fully impaired.

Global Hemp Group Joint Ventures

We currently have two ongoing joint ventures with Global Hemp Group, Inc., a Canadian corporation. Each is a related party transaction in that Global Hemp Group’s director, Charles Larsen, is a beneficial owner of more than 10% of our common stock, and a former director of the Company. Further, our President and Chief Executive Officer Donald Steinberg is a shareholder in Global Hemp Group. The two Global Hemp Group joint ventures are discussed together due to the common ownership of the joint venture partners in each project, and the fact that both joint ventures share a common purpose of growing, cultivating and performing research and development of industrial hemp.

Global Hemp Group New Brunswick Joint Venture

On August 31, 2017, the Company entered into a Joint Venture Agreement (“Agreement”) with Global Hemp Group, Inc., a Canadian corporation (“Global Hemp Group”). The Company agreed to assist Global Hemp Group in developing commercial hemp production in New Brunswick, Canada. In the first year of the Agreement, the Company will share the costs of the ongoing hemp trial in New Brunswick; provide its expertise in developing hemp cultivation going forward; and, be granted a right of first refusal as Global Hemp Group’s primary off-taker of any raw materials produced from the project. The Company’s joint venture partner, Global Hemp Group, also partnered with Collège Communautaire du Nouveau Brunswick (CCNB) in Bathurst, New Brunswick, to assist in conducting research with the hemp trials. The trials are taking place on the Acadian peninsula of New Brunswick, and the initial trials to establish commercial cultivation pursuant to the Agreement are expected to be completed during 2019. As of September 30, 2019, we have fully impaired our investment in this joint venture.

  20  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

Global Hemp Group JV – Scio Oregon

On May 8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation, and TTO Enterprises, Ltd., an Oregon corporation entered into a Joint Venture Agreement. The purpose of the joint venture is to develop a project to commercialize the cultivation of industrial hemp on a 109 acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating under the Oregon corporation Covered Bridges, Ltd. The joint venture is in the development stage. On May 30, 2018, the joint venture purchased TTO’s 15% interest in the joint venture for $30,000. The Company and Global Hemp Group, Inc. now have an equal 50-50 interest in the joint venture. The joint venture agreement committed the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company complied with its payments. The 2018 crop of hemp grown on the joint venture’s real property consisted of 33 acres of high yielding CBD hemp grown in an orchard style cultivation on the property. The 2018 harvest consisted of approximately 37,000 high yielding CBD hemp plants producing 24 tons of biomass that produced 48,000 pounds of dried biomass. The joint venture partners prepared processing samples ranging in size from 100 lbs. to 2,000 lbs. for sample offers to extraction companies. The biomass is being processed into CBD crude oil with the option to refine it further into isolate, or full spectrum oil, in order to increase its value on the market. Results from the current extraction test batches were received in May, 2019 and will serve as a basis for the final terms of the sale of the biomass by the Partners. In August of 2019, the JV sold 10,000 lbs. of shucked biomass to an Oregon extraction facility for US$400,000. On October 29, 2019, the partners announced the completion of the 2019 harvest and subject to drying, shucking, processing and weighing for expected sale the fourth quarter 2019.

 

Bougainville Ventures, Inc. Joint Venture

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

 

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

 

Bougainville represented that it had an ownership interest in real property located in Washington State used for growing cannabis, and possessed information primarily related to the management and control of cannabis grow operations as conducted in Washington State that included research, development and know how in the cannabis industry. Bougainville also represented that it had an agreement with a I502 Tier 3 license holder in Washington State to operate on the land. The Company and Bougainville's agreement provided that funding provided by the Company would go, in part, towards the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan County, Washington, for joint venture operations.

 

 

  21  

 

 MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

As disclosed on Form 8-K on December 11, 2017, the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended the joint venture agreement to reduce the amount of the Company's commitment to $800,000 and also required the Company to issue Bougainville 250,000 shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The amended agreement provided that Bougainville would deed the real property to the joint venture within thirty days of its receipt of payment.

 

Thereafter, the Company determined that Bougainville had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property that was in breach for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 license holder to grow Marijuana on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green Ventures Capital Corp., purchased the land. The land is currently pending the payment of delinquent property taxes that would allow for the Okanogan County Assessor to sub-divide the property, so that the appropriate portion could be deeded to the joint venture. Although Bougainville represented it would pay the delinquent taxes, it has not. To date, the property has not been deeded to the joint venture.

 

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

 

On August 10, 2018, the Company advised its independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information concerning the audit of Bougainville’s receipt and expenditures of funds contributed by the Company in the joint venture agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally, the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property; and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit against Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville, and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on the real property. The case is currently in litigation. The trial is set for January 26-28, 2021.

 

In connection with the agreement, the Company recorded a cash investment of $1,188,500 to the Joint Venture during 2017. This was comprised of 49.5% ownership of BV-MCOA Management LLC, and was accounted for using the equity method of accounting. The Company recorded an annual impairment in 2017 of $792,500, reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded equity losses of $37,673 and $11,043 for the first and second quarters respectively, and recorded an annual impairment of $285,986 for the year ended December 31, 2018, at which time the Company determined the investment to be fully impaired due to Bougainville’s breach of contract, including: (i) its failure to communicate and cooperate regarding the Company’s audit; (ii) its misrepresentations concerning its ownership interest in the real property in Okanogan County Washington; (iii) its failure to deed the property to the joint venture within thirty days of payment pursuant to the amended joint venture agreement; and, (iv) its misrepresentation that it possessed an agreement with a Tier 3 license holder to operate on the property.

  22  

 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

The Company was able to obtain general loans from St. George Investments LLC, not specific to any of the company’s joint ventures. Therefore, accordingly, the impairment of this investment did not create any defaults to the loan agreements and covenants. The loan agreement established the lender’s option to convert the loans to common shares of the Company.

GateC Joint Venture

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

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

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

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

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

In 2017, the Company recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year ended December 31, 2017. Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation of $1,500,000 during the six months ended June 30, 2018.

Natural Plant Extract (“NPE”)

Pursuant to a material definitive agreement, the Company agreed to acquire twenty percent of NPE’s authorized shares, totaling 200,000 shares, in exchange for Registrant’s payment of $2,000,000 (two million dollars) and $1,000,000 worth or approximately 1,173,709 shares of the Company’s restricted common stock, after the effects of the reverse stock split. As of the date of this filing, the shares have been issued. The Company’s payment obligations are governed by a stock purchase agreement which required the Company to the following payment schedule:

 

a. Deposit of $350,000 within 5 days of the execution of the material definitive agreement;

b. Deposit of $250,000 payable within 30 days;

c. Deposit of $400,000 within 60 days;

d. Deposit of $500,000 within 75 days;

e. Deposit of $500,000 within 90 days.’

  23  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

The Company accounted this transaction as an investment and a liability - “debt obligation of Joint Venture”. The Company follows Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the accounting for equity security to be measured at fair value with changes in unrealized gains and losses are included in current period operations. Where an equity security is without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus impairment plus or minus changes resulting from observable price changes.

 

The Company made its initial deposit pursuant to this schedule. However, the Company failed to make the other scheduled payments and is now in default. As of the date of this filing, the Company and NPE are in negotiations to restructure the payment plan.

 

The standalone unaudited financial statements of Natural Plant Extract of California, Inc. for the third quarter ended September 30, 2019 and the year ended December 31, 2018 were as follows:

Natural Plant Extract ("NPE")
                 
Summarized Balance Sheet     September 30, 2019       December 31, 2018  
 Cash   $ 29,961     $ 1,794  
 Total Current Assets     2,983,993       —    
 Total Fixed assets     56,202       98,282  
 Notes receivable and other non-current assets     1,578,229       312,004  
TOTAL ASSETS     4,648,385       412,080  
                 
Long Term Liabilities     2,657,381       616,264  
Equity     1,991,004       (204,184 )
Total Liabilities and equity   $ 4,648,385     $ 412,080  
                 
      For the third Quarter ended       For the Year ended  
      September 30, 2019       December 31, 2018  
Summarized Income Statement                
     Sales   $ 11,081       —    
    Total expenses     156,627     $ 204,184  
Net Losses   $ (145,546 )   $ (204,184 )

 

  24  

 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(unaudited)

 

MARIJUANA COMPANY OF AMERICA, INC.                  
INVESTMENT ROLL-FORWARD              
AS OF SEPTEMBER 30, 2019   INVESTMENTS           SHORT-TERM INVESTMENTS
        Global                   Natural       TOTAL    
    TOTAL   Hemp           Bougainville   Gate C   Plant       Short-Term    
    INVESTMENTS   Group   Benihemp   MoneyTrac   Ventues, Inc.   Research Inc.   Extract   Vivabuds   Investments   MoneyTrac
Beginning balance @12-31-16   $ 0     $ 0     $ 0     $ 0     $ 0     $ 0                     $ 0     $ 0  
Investments made during 2017     3,049,275       10,775       100,000       250,000       1,188,500       1,500,000                       0       0  
                                                                                 
Quarter 03-31-17 equity method Loss     0                                                               0          
                                                                                 
Quarter 06-30-17 equity method Loss     0                                                               0          
                                                                                 
Quarter 09-30-17 equity method Loss     (375,000 )                             (375,000 )                             0          
                                                                                 
Quarter 12-31-17 equity method accounting     313,702                               313,702                               0          
                                                                                 
Impairment of Investment in 2017     (2,292,500 )     0                       (792,500 )     (1,500,000 )                     0       0  
Balances as of 12/31/17     695,477       10,775       100,000       250,000       334,702       0       0       0       0       0  
                                                                                 
Investments made during 2018     986,654       986,654                                                       0          
                                                                                 
Quarter 03-31-18 equity method Loss     (37,673 )                             (37,673 )                             0          
                                                                                 
Quarter 06-30-18 equity method Loss     (11,043 )                             (11,043 )                             0          
                                                                                 
Quarter 09-30-18 equity method Loss     (10,422 )             (10,422 )                                             0          
                                                                                 
Quarter 12-31-18 equity method Loss     (31,721 )     (31,721 )     0                                               0          
                                                                                 
Moneytrac investment reclassified to Short-Term investments     (250,000 )                     (250,000 )                                     250,000       250,000  
                                                                                 
Unrealized gains on trading securities - 2018     0                                                               560,000       560,000  
                                                                                 
Impairment of investment in 2018     (933,195 )     (557,631 )     (89,578 )             (285,986 )                             0          
Balance @12-31-18   $ 408,077     $ 408,077     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 810,000     $ 810,000  
                                                                                 
Investments made during quarter ended 03-31-19     129,040       129,040                                                                  
                                                                                 
Quarter 03-31-19 equity method Loss     (59,541 )     (59,541 )                                                                
                                                                                 
Unrealized gains on trading securities - quarter ended 03-31-19                                                                     (135,000 ) $ (135,000 )
Balance @03-31-19   $ 477,576     $ 477,576     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 675,000     $ 675,000  
                                                                                 
Investments made during quarter ended 06-30-19   $ 3,157,234     $ 83,646                                     $ 3,000,000     $ 73,588                  
                                                                                 
Quarter 06-30-19 equity method Income (Loss)   ($ 171,284 )   ($ 141,870 )                                   $ (6,291 )   $ (23,123 )                
                                                                                 
Unrealized gains on trading securities - quarter ended 06-30-19   $ 0                                                               (150,000   $ (150,000 )
Balance @06-30-19   $ 3,463,526     $ 419,352     $ 0     $ 0     $ 0     $ 0     $ 2,993,709     $ 50,465     $ 525,000     $ 525,000  
                                                                                 
Investments made during quarter ended 09-30-19   $ 186,263                                                     $ 186,263                  
                                                                                 
Quarter 09-30-19 equity method Income (Loss)   $ 122,863     $ 262,789                                     $ (94,987 )   $ (44,939 )                
                                                                                 
Sale of trading securities during quarter ended 09-30-19                                                                           $ (41,667 )
Unrealized gains on trading securities - quarter ended 09-30-19   $ 0                                                               (362,625 )   $ (362,625 )
Balance @09-30-19   $ 3,772,652     $ 682,141     $ 0     $ 0     $ 0     $ 0     $ 2,898,722     $ 191,789     $ 120,708     $ 120,708  

 

   

  25  

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 

(unaudited)

 

Loan Payable
              Global                                       Natural               General  
      TOTAL       Hemp                       Bougainville       Gate C       Plant                Operating  
      JV Debt       Group       Benihemp       MoneyTrac       Ventues, Inc.       Research Inc.       Extract       Vivabuds       Expense  
Beginning balance @12-31-16   $ 0     $ 0     $ 0     $ 0     $ 0     $ 0                     $ 0  
                                                                         
                                                                         
Quarter 03-31-17 loan borrowings     1,500,000                                       1,500,000                          
                                                                         
Quarter 06-30-17 loan activity                                                                        
                                                                         
Quarter 09-30-17 loan borrowings     725,000                               725,000                                  
                                                                         
Quarter 12-31-17 loan repayments     (330,445 )                             (330,445 )                                
                                                                         
General operational expense     172,856                                                               172,856  
Balances as of 12/31/17 (a)     2,067,411       0       0       0       394,555       1,500,000                       172,856  
                                                                         
Quarter 03-31-18 loan borrowings (payments)     376,472       447,430                                                       (70,958 )
                                                                         
Quarter 06-30-18 cancellation of JV debt obligation     (1,500,000 )                                     (1,500,000 )                        
                                                                         
Quarter 06-30-18 loan repayments     (101,898 )                                                             (101,898 )
                                                                         
Quarter 09-30-18 loan activity     0                                                                  
                                                                         
Quarter 12-31-18 loan borrowings     580,425       580,425                                                          
Balance @12-31-18   (b)   $ 1,422,410     $ 1,027,855     $ 0     $ 0     $ 394,555     $ 0                     $ 0  
                                                                         
Quarter 03-31-19 loan borrowings     649,575       649,575