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 three months ended March
31, 2018, the Company incurred net losses from operations of $290,308 and used cash in operations of $493,250. These factors among
others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
The Company's
primary source of operating funds in 2018 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 2018 and
beyond as it develops its business model. The Company has stockholders' deficiencies at March 31, 2018 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
The Company recognizes revenue when: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability
is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature
of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to
customers, estimated returns and allowances, and other adjustments are provided for in the same period the related revenue is recorded.
The Company defers any revenue for which the services has not been performed or is subject to refund until such time that the Company
and the customer jointly determine that the services has been performed or no refund will be required.
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
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 March 31,
2018 and December 31, 2017, allowance for doubtful accounts was $-0-.
Inventories
Inventories are stated at the lower of cost
or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.
Cost of sales
Cost of sales is comprised of cost of product
sold, packaging, and shipping costs.
Stock Based Compensation
The Company measures the cost of services received
in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value
of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting
dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over
the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based
compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such
amounts were paid in cash. As of March 31, 2018, there were outstanding stock options to purchase 1,000,000,000 shares of common
stock, 833,333,333 shares of which were vested. (See Note 9)
Earnings per Share
Basic earnings per share are calculated by dividing
net income (loss) by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted
earnings per share” reflects the potential dilution that could occur if our share-based awards and convertible securities
were exercised or converted into common stock. The dilutive effect of our share-based awards is computed using the treasury stock
method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common
stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus
purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive
effect of our convertible preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion
at the beginning of the year.
The following represents a reconciliation of the
numerators and denominators of the basic and diluted earnings per share computation for the three months ended March 31, 2018 and
2017:
As of March 31, 2017, common stock equivalents relating
to convertible debt, warrants and options were not included in the denominators of the diluted earnings per share as their effect
would be anti-dilutive.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
Net income (loss)
|
|
$
|
4,150,799
|
|
|
$
|
(18,078,284
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
2,122,103,506
|
|
|
|
1,676,904,069
|
|
Plus: incremental shares from assumed exercise-options
|
|
|
833,333,333
|
|
|
|
—
|
|
Plus: incremental shares from assumed exercise-warrants
|
|
|
74,022,722
|
|
|
|
—
|
|
Plus: incremental shares from assumed conversion of convertible debt
|
|
|
83,878,457
|
|
|
|
—
|
|
Adjusted weighted average common shares outstanding
|
|
|
3,113,338,017
|
|
|
|
1,676,904,069
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.002
|
|
|
$
|
(0.011
|
)
|
Diluted
|
|
$
|
0.001
|
|
|
$
|
(0.011
|
)
|
Property and Equipment
Property
and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are
removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over
their estimated useful lives of 3 to 5 years.
Investments
The Company
follows Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the
accounting for equity security to be measured at fair value with changes in unrealized gains and losses are included in current
period operations. Where an equity security is without a readily determinable fair value, the Company may elect to estimate its
fair value at cost minus impairment plus or minus changes resulting from observable price changes (See Note 4).
Derivative
Financial Instruments
The
Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company
with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that
such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the
Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement
or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between equity and liabilities is required.
The
Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants
with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance
sheet using the applicable classification criteria enumerated under GAAP. The Company determined that certain conversion
and exercise options do not contain fixed settlement provisions. The convertible notes contain a conversion feature and warrants
have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion
demands.
As such,
the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions
as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
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 March 31, 2018 and December 31, 2017. 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 $55,745 and $21,962
for the three months ended March 31, 2018 and 2017, 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 March 31, 2018 and 2017, the Company has not recorded any unrecognized tax benefits.
Segment Information
Accounting Standards Codification subtopic
Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding operating segments
in annual financial statements and requires selected information for those segments to be presented in interim financial reports
issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources
and assess performance. The information disclosed herein materially represents all of the financial information related to the
Company's only material principal operating segment.
Recent Accounting Pronouncements
There
are various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations
or cash flows.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
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 3 – PROPERTY
AND EQUIPMENT
Property and equipment as
of March 31, 2018 and December 31, 2017 is summarized as follows:
|
|
March 31,
2018
|
|
December 31,
2017
|
Computer equipment
|
|
$
|
15,207
|
|
|
$
|
11,004
|
|
Furniture and fixtures
|
|
|
5,140
|
|
|
|
5,140
|
|
Subtotal
|
|
|
20,347
|
|
|
|
16,144
|
|
Less accumulated depreciation
|
|
|
(3,970
|
)
|
|
|
(2,576
|
)
|
Property and equipment, net
|
|
$
|
16,377
|
|
|
$
|
13,568
|
|
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 $1,393 and $242 for the three months ended March 31, 2018 and 2017.
NOTE 4 – INVESTMENTS
MoneyTrac
On
March 13, 2017, the Company entered into a stock purchase agreement to acquire up to 15,000,000 common shares of MoneyTrac Technology,
Inc., a corporation organized and operating under the laws of the state of California, for a total purchase price of $250,000 representing
approximately 19.8% ownership at the time of the agreement. As of December 31, 2017, the Company had acquired 15,000,000 common
shares for $250,000 representing approximately 15% ownership. In connection with the investment, Donald Steinberg, the Company’s
President and Chief Executive Officer and Director, was appointed as a board member to MoneyTrac. Mr. Steinberg resigned his position
on July 18, 2017.
On April 14, 2018, MoneyTrac informed the Company that
due to unregistered sales of its common stock, the Company’s interest in MoneyTrac was reduced to 6%.
The Company
accounts for its investment in MoneyTrac Technology, Inc. at estimated market fair value. The Company has elected to estimate its
fair value at cost minus impairment plus or minus changes resulting from observable price changes since the equity security does
not have a readily determinable fair value.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
BV-MCOA
Management, LLC
The standalone
unaudited financial statements of the BV- MCOA Management LLC Joint Venture as of March 31, 2018 and December 31, 2017 were as
follows:
|
|
March 31,
2018
|
|
December 31,
2017
|
Deposits
|
|
$
|
31,017
|
|
|
$
|
187,312
|
|
Note Due From Related Party
|
|
|
114,949
|
|
|
|
79,811
|
|
Fixed Assets
|
|
|
216,276
|
|
|
|
161,175
|
|
Land
|
|
|
274,000
|
|
|
|
274,000
|
|
Total Assets
|
|
$
|
636,242
|
|
|
$
|
702,298
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
14,415
|
|
|
$
|
4,365
|
|
Total Liabilities
|
|
$
|
14,415
|
|
|
|
4,365
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
621,827
|
|
|
|
697,934
|
|
Total Assets and Liabilities
|
|
$
|
636,242
|
|
|
$
|
702,298
|
|
On March
16, 2017, the Company entered into a Joint Venture Agreement (“Agreement”) with Bougainville Ventures, Inc., a corporation
organized under the laws of Canada to engage in the development and promotion of products in the legalized marijuana industry in
the state of Washington under the name of BV-MCOA Management LLC. Ownership and voting control is divided on a 49.5% basis with
neither party having effective control.
On November
6, 2017, the Company amended a material definitive agreement not made in the ordinary course of its business. The parties to the
agreement are the Company and Bougainville Ventures, Inc. (“Bougainville”). On March 16, 2017, the Company and Bougainville
previously entered into a Joint Venture Agreement (“Agreement”). The Agreement required the Company to raise funds
for the Joint Venture Project in the amount of not less than one million dollars ($1,000,000). Pursuant to Section 12.9 of the
Agreement, the Company and Bougainville entered into a written amendment of the Agreement which changed the Company’s funding
obligation from one million dollars ($1,000,000) to eight hundred thousand dollars ($800,000), and separately required the Company
to issue to Bougainville or its designee fifteen million (15,000,000) shares of its restricted common stock pursuant to the Reg.
D exemption from registration pursuant to the 1933 Securities and Exchange Act.
The net
carrying amount of the investment of $307,804 is comprised of a 49.5% ownership of BV-MCOA Management LLC and is accounted for
using the equity method of accounting. The Company’s 49.5% income earned by BV-MCOA Management LLC will recorded as other
income/expense in the Company’s Statement of Operations in the appropriate periods. The Company’s 49.5% loss
incurred by the Company’s interest was $37,673 and $0 for the three months ended March 31, 2018 and 2017, respectively and
was recorded as other income/expense in the Company’s Statement of Operations in the appropriate periods.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
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.
Conveniant
Hemp Mart, LLC 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.
GateC
Research, Inc.
On March
17, 2017, the Company and GateC Research, Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”)
whereby the Company committed to raise up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum
commitment of five hundred thousand ($500,000 USD) within a three (3) month period; and, information establishing brands and systems
for the representation of marijuana related products and derivatives comprised of management, marketing and various proprietary
methodologies, including but not limited to its affiliate marketing program, directly tailored to the marijuana industry.
GateC
agreed to contribute its management and control services and systems related to marijuana grow operations in Adelanto County, California,
and its permit to grow marijuana in an approved zone in Adelanto, California. GateC did not own a physical site for its operation
in Adelanto County, California, and GateC’s permit to grow marijuana did not contain a conditional use permit.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
On or
about November 28, 2017, GateC and the Registrant orally agreed to a suspension of the Registrant’s funding commitment, pending
the finalization of California State regulations governing the growth, cultivation and distribution of marijuana.
On March
19, 2018, the Company terminated a material definitive agreement not made in the ordinary course of its business. The parties to
the agreement are the Company and GateC. With the exception of the entry into a Recession and Mutual Release Agreement terminating
the material definitive agreement, no material relationship exists between the Registrant, or any of the Registrant’s affiliates
or control persons on the one hand, and GateC, and any of its affiliates or control persons on the other hand.
In connection
with the agreement dated November 28, 2017, the Company recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding
impairment charge of $1,500,000 relating the Agreement dated March 17, 2017 during the 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 three months ended March 31, 2018.
Global
Hemp Group JV
On
August 31, 2017, the Company entered into a Joint Venture Agreement (“Agreement”) with Global Hemp Group, Inc., a
Canadian corporation (“Global Hemp Group”). The Company will assist Global Hemp Group in developing commercial
hemp production in New Brunswick, Canada. In the first year of the Agreement, the Company will share the costs of the ongoing
hemp trial in New Brunswick; provide its expertise in developing hemp cultivation going forward; and, be granted a right of
first refusal as Global Hemp Group’s primary off-taker of any raw materials produced from the project. The
Company’s joint venture partner, Global Hemp Group, also partnered with Collège Communautaire du Nouveau
Brunswick (CCNB) in Bathurst, New Brunswick, to assist in conducting research with the hemp trials. The trials are taking
place on the Acadian peninsula of New Brunswick, and the initial trials to establish commercial cultivation pursuant to the
Agreement are expected to be completed in 2018. The Company’s costs incurred by the Company’s interest was
$10,775 for the year ended December 31, 2017 and was recorded as other income/expense in the Company’s Statement of
Operations in the appropriate periods.
NOTE
5 – NOTES PAYABLE, RELATED PARTY
As of
March 31, 2018 and December 31, 2017, 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 March 31, 2018 and, December 31,
2017 there were an aggregate of $564,279 and $542,573 notes payable due to officers. The notes are at 5% per annum and non-interest
bearing, respectively, and are due on demand.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
NOTE
6 – CONVERTIBLE NOTE PAYABLE
Convertible
notes payable are comprised of the following:
|
|
March 31,
2018
|
|
December 31,
2017
|
Convertible note payable-DTTO- due April 30, 2018
|
|
$
|
111,111
|
|
|
$
|
111,111
|
|
Convertible notes payable-St George-last due July 8, 2019
|
|
|
1,746,267
|
|
|
|
1,688,920
|
|
Total
|
|
|
1,857,378
|
|
|
|
1,800,031
|
|
Less debt discounts
|
|
|
(1,166,937
|
)
|
|
|
(1,232,620
|
)
|
Net
|
|
|
687,441
|
|
|
|
567,411
|
|
Less current portion
|
|
|
(585,543
|
)
|
|
|
(394,555
|
)
|
Long term portion
|
|
$
|
101,898
|
|
|
$
|
172,856
|
|
Convertible
note payable-DTTO
Effective
March 30, 2017, the Company issued a 6.5% convertible promissory note for an aggregate of $2,777,778 due April 30, 2018 for consideration
of $2,500,000, after original interest discount (“OID”) of $277,778; unsecured.
On June
30, 2017, the Company had received net proceeds of $99,965 under the note. Gross face amount was $111,111, after additions for
pro rate portion of OID and other related costs.
The note
is convertible, at any time, into shares of the Company’s common stock at $0.03 per share unless on the day prior to the
lender’s request to convert, the closing price is less than $0.05 per share, then the conversion price shall be 60% of the
average three lowest days closing prices for 20 trading days prior to the request to convert.
At the
funding date of the note, the Company determined the aggregate fair value of $221,406 of embedded derivatives. The fair value of
the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 470.85%, (3) weighted average risk-free interest rate of 1.02%, (4) expected life of 1.08
years, and (5) estimated fair value of the Company's common stock from $0.0604 per share.
The determined
fair value of the debt derivatives of $221,406 was charged as a debt discount up to the net proceeds of the note with the remainder
of $121,441 charged to operations as non-cash interest expense.
Convertible
notes payable-St George Investments
Effective
July 3, 2017, the Company issued a secured convertible promissory note in aggregate of $752,500 to St George Investments LLC (“St
George”). The promissory note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase price
date and includes an original issue discount (“OID”) of $67,500. In addition, the Company agreed to pay $10,000 for
legal, accounting and other transaction costs of the lender. The promissory note was funded in five tranches of $422,500, $27,500,
$167,200 and $107,800; net of OID and transaction costs. As an investment incentive, the Company issued 33,653,846, 5 year cashless
warrants, exercisable at $.04 with certain reset provisions.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
Forbearance
agreement
On August
4, 2017, the Company entered into a forbearance agreement with St. George Investments LLC, due to the Company’s alleged breached
of certain default provisions of the secured promissory note entered into with St. George on July 3, 2017. The alleged breach occurred
due to the Company entering into an investment agreement with Tangiers on July 15, 2017 and issued a fixed convertible promissory
note to Tangiers. Due to the alleged breach, St George has the right, among other things, to accelerate the maturity date of the
note, increase interest from 10% to 22% and cause the balance of the outstanding promissory note to increase due to the application
of the default provisions.
St. George
agreed to refrain and forbear from bringing any action to collect under the promissory note, including the interest rate increase
and balance increase, with respect to the alleged default. As consideration of the forbearance, the Company agreed to accelerate
the installment conversions from 1 year to 6 months and to add an additional OID of $112,875, which will be considered fully earned
as of August 4, 2017, nonrefundable and to be included in the first tranche. The Company and St George ratified the outstanding
balance, after the added OID and accrued interest, of $868,936 as of August 4, 2017.
As of
March 31, 2018, the Company had received aggregate net proceeds of $675,000 under the note. Gross face amount was $752,500, after
additions for OID and other related costs.
Effective
November 1, 2017, the Company issued a secured convertible promissory note in aggregate of $601,420 to St George Investments LLC
(“St George”). The promissory note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase
price date and includes an original issue discount (“OID”) of $59,220. The promissory note was funded on November 11,
2017 of $542,200; net of OID and transaction costs.
As of
March 31, 2018, the Company had received aggregate net proceeds of $542,200 under the note. Gross face amount was $601,420, after
additions for OID and other related costs.
Effective
December 20, 2017, the Company issued a secured convertible promissory note in aggregate of $335,000 to St George Investments LLC
(“St George”). The promissory note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase
price date and includes an original issue discount (“OID”) of $35,000. The promissory note was funded on December 27,
2017 of $542,200; net of OID and transaction costs. As an investment incentive, the Company issued 33,653,846, 5 year cashless
warrants, exercisable at $.04 with certain reset provisions.
As of
March 31, 2018, the Company had received aggregate net proceeds of $300,000 under the note. Gross face amount was $335,000, after
additions for OID and other related costs.
Effective
February 9, 2018, the Company issued a secured convertible promissory note in aggregate of $220,000 to St George Investments LLC
(“St George”). The promissory note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase
price date and includes an original issue discount (“OID”) of $20,000. The promissory note was funded on February 9,
2018 of $200,000; net of OID and transaction costs.
As of
March 31, 2018, the Company had received aggregate net proceeds of $200,000 under the note. Gross face amount was $220,000, after
additions for OID and other related costs.
Effective
March 8, 2018, the Company issued a secured convertible promissory note in aggregate of $220,000 to St George Investments LLC (“St
George”). The promissory note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase price
date and includes an original issue discount (“OID”) of $20,000. The promissory note was funded on March 8, 2018 of
$200,000; net of OID and transaction costs.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
As of
March 31, 2018, the Company had received aggregate net proceeds of $200,000 under the note. Gross face amount was $220,000, after
additions for OID and other related costs.
The promissory
notes are convertible, at any time at the lender’s option, at $0.04. However, in the event the Company’s market capitalization
(as defined) falls below $35,000,000, the conversion rate is 60% of the 3 lowest closing trade prices due the 20 trading days immediately
preceding date of conversion, subject to additional adjustments, as defined. In addition, the promissory note includes certain
anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than
the lender conversion price.
The Company
has a right to prepayment of the note, subject to a 20% prepayment premium and is secured by a trust deed of certain assets of
the Company.
Effective
January 18, 2018, upon default of the St. George Investment notes, the conversion rate on all notes were reset from $0.04 to $0.023.
Accordingly, the Company recorded as a loss on modification of debt of $1,343,161 due to the change in fair value of the underlying
conversion option. The change in fair value was determined using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 436.43%, (3) weighted average risk-free interest rate of 1.79%, (4) expected
life of 0.83 to 1.07 years, and (5) estimated fair value of the Company's common stock from $0.0435 per share.
At the
funding dates of the 2018 notes, the Company determined the aggregate fair value of $587,861 of embedded derivatives. The fair
value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1)
dividend yield of 0%; (2) expected volatility of 434.99% to 435.64%, (3) weighted average risk-free interest rate of 1.89% to 2.05%,
(4) expected life of 1.33 years, and (5) estimated fair value of the Company's common stock from $0.028 to $0.0341 per share.
The determined
fair value of the debt derivatives of $587,861 was charged as a debt discount up to the net proceeds of the note with the remainder
of $187,861 charged to operations as non-cash interest expense.
During
the three months ended March 31, 2018, the Company issued an aggregate of 16,637,073 shares of its common stock in settlement of
$382,652 of outstanding St. George Investments notes payable.
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 March
31, 2018, the Company determined the aggregate fair values of $2,084,459 and $1,961,598 of embedded derivatives and warrant liabilities,
respectively. The fair values were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 434.72%, (3) weighted average risk-free interest rate of 1.93% to 2.56%, (4) expected life
of 0.64 to 4.71 years, and (5) estimated fair value of the Company's common stock from $0.0265 per share.
For the
three months ended March 31, 2018, the Company recorded a gain on change in fair value of derivative liabilities of $5,056,686
and recorded amortization of debt discounts of $502,682 as a charge to interest expense, respectively.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
NOTE
7 – DERIVATIVE LIABILITIES
As described
in Note 6, the Company issued convertible notes and warrants that contained conversion features and a reset provisions. The accounting
treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception
date and to fair value as of each subsequent reporting date.
NOTE
8 – STOCKHOLDERS’ DEFICIT
Preferred
stock
The Company
is authorized to issue 50,000,000 shares of $0.001 par value preferred stock as of March 31, 2018 and December 31, 2017. As of
March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017. As of
March 31, 2018 and December 31, 2017, the Company had 2,139,307,875 and 2,103,464,006 common shares issued and outstanding.
During
the three months ended March 31, 2018, the Company issued 1,000,000 shares of its common stock for services rendered with an estimated
fair value of $52,100.
During
the three months ended March 31, 2018, the Company issued an aggregate of 16,637,073 shares of its common stock in settlement of
$382,652 of outstanding St. George Investments notes payable.
During
the three months ended March 31, 2018, the Company issued an aggregate of 18,206,796 shares of its common stock for 25,631,124
warrants exercised on a cashless basis.
Options
The following table summarizes the stock option
activity for the three months ended March 31, 2018:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2017
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
7.76
|
|
$
|
53,800,000
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
7.51
|
|
$
|
|
21,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
833,333,333
|
|
|
$
|
0.005
|
|
|
|
7.51
|
|
|
$
|
17,916,667
|
|
The aggregate intrinsic value in the preceding
tables represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock
price of $0.0265 as of March 31, 2018, which would have been received by the option holders had those option holders exercised
their options as of that date.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
The following table presents information related to stock options
at March 31, 2018:
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Life
In Years
|
|
|
Exercisable
Number of
Options
|
|
$
|
0.005
|
|
|
|
1,000,000,000
|
|
|
7.51
|
|
|
|
833,333,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018,
stock-based compensation of $300,000 remains unamortized and is expected to be amortized over the weighted average remaining period
of 0.50 years.
Warrants
The following
table summarizes the stock warrant activity for the three months ended March 31, 2018:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
Outstanding at January 1, 2018
|
|
|
99,653,846
|
|
|
$
|
0.04
|
|
|
4.81
|
|
$
|
1,873.492
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(25,631,124)
|
|
|
$
|
0.125
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
74,022,722
|
|
|
$
|
0.0125
|
|
|
4.66
|
|
|
|
1,036,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
74,022,722
|
|
|
$
|
0.0125
|
|
|
4.66
|
|
|
$
|
1,036,318
|
The aggregate
intrinsic value in the preceding tables represents the total pretax intrinsic value, based on options with an exercise price less
than the Company’s stock price of $0.0588 as of December 31, 2017, which would have been received by the option holders had
those option holders exercised their options as of that date.
The following table presents
information related to warrants at December 31, 2017:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Life
In Years
|
|
|
Exercisable
Number of
Options
|
|
$
|
0.04
|
|
|
|
99,653,846
|
|
|
4.81
|
|
|
|
99,953,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection
with the issuance of convertible notes payable, the Company issued an aggregate of 109,653,846 warrants to purchase the Company’s
common stock from $0.025 to $0.04, vesting immediately and expiring 5 years from the date of issuance. (See Note 8)
Restricted
Stock Units (“RSU”)
The
following table summarizes the restricted stock activity for the three months ended March 31, 2018:
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
Total Restricted Shares Issued at January 1, 2018
|
|
|
10,000,000
|
|
Granted
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Total Restricted Shares Issued at March 31, 2018
|
|
|
10,000,000
|
|
Vested at March 31, 2018
|
|
|
10,000,000
|
|
Unvested restricted shares as of March 31, 2018
|
|
|
-
|
|
In
April 2016, the Company granted to Robert Cronin and Robert Peak an aggregate of 10,000,000 shares of restricted common stock each
vesting two years from Anniversary. On November 3, 2016, Mr. Cronin and Mr. Peak each agreed to return to treasury all 20,000,000
shares to the Company, and the Company agreed to issue Mr. Cronin and Mr. Peak 2,500,000 restricted shares each. The fair value
of the granted restricted stock units vested during the three months ended March 31, 2018 and 2017 of $(514,500) and $(28,750)
was recognized in operations as stock based compensation.
As of
March 31, 2018, no stock-based compensation related to restricted stock awards remains unamortized.
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
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
March 31, 2018 and December 31, 2017, 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
March 31, 2018 and December 31, 2017, the Company did not have any derivative instruments that were designated as hedges.
The derivative
and warrant liability as of March 31, 2018, in the amount of $2,084,459 and $1,961,598, 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 three years ended
March 31, 2018:
|
|
Warrant
Liability
|
|
Debt
Derivative
|
Balance, January 1, 2018
|
|
$
|
5,859,635
|
|
|
$
|
2,631,375
|
|
Total (gains) losses
|
|
|
|
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
|
|
|
|
587,861
|
|
Change in fair value of embedded conversion terms due to note modifications
|
|
|
|
|
|
|
1,343,161
|
|
Mark-to-market at March 31, 2018:
|
|
|
(3,206,187
|
)
|
|
|
(1,850,499
|
)
|
Transfers out of Level 3 upon conversion or payoff of notes payable or exercise of warrants
|
|
|
(691,850
|
)
|
|
|
(627,439
|
)
|
Balance, March 31, 2018
|
|
$
|
1,961,598
|
|
|
$
|
2,084,459
|
|
Net gain for the period included in earnings relating to the liabilities held during the period ended March 31, 2018
|
|
$
|
3,206,187
|
|
|
$
|
1,850,499
|
|
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 March 31, 2018, 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 March 31,
2018 and December 31, 2017, there were no related party advances outstanding.
As of
March 31, 2018 and December 31, 2017, accrued compensation due officers and executives included as accrued compensation was $195,000
and $0, respectively.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(unaudited)
At March
31, 2018 and December 31, 2017, there were an aggregate of $564,279 and $542,573 notes payable due to officers. The notes are at
5% per annum and non-interest bearing, respectively, and are due on demand.
On August
31, 2017, the Company entered into a joint venture agreement with Global Hemp Group, Inc., a Canadian corporation. The Company’s
Director, Charles Larsen, is the President, Director and shareholder of Global Hemp Group, Inc. The Company’s Director, President
and Chief Executive Officer, Donald Steinberg, is a shareholder of Global Hemp Group, Inc. The Company’s Chief Financial
Officer, Robert L. Hymers, III, is a shareholder of Global Hemp Group, Inc.
NOTE
11 – SUBSEQUENT EVENTS
On April
3, 2018, the Company converted debt for compensation due its directors under executive employment agreements in effect for the
first quarter of 2018, and debt for cash loans made by directors to the Company as follows: Charles Larsen converted unpaid accrued
compensation and loans to the Company for the first quarter of 2018 in the amount of $69,946.35, and other outstanding loans to
the Company in an amount of $163,876.46 into 23,382,281 shares of restricted common stock with a cost basis of $0.01 per share;
Robert L. Hymers, III converted unpaid accrued compensation and loans to the Company for the first quarter of 2018 in the amount
of $45,496.02 and other outstanding loans to the Company in an amount of $106,076.26 into 15,157,228 shares of restricted common
stock with a cost basis of $0.01 per share; and, Donald Steinberg converted unpaid accrued compensation and loans to the Company
for the first quarter of 2018 in the amount of $101,264.21 and other outstanding loans to the Company in an amount of $272,623.16
into 37,388,737 shares of restricted common stock with a cost basis of $0.01 per share.
On May
6, 2018, DTTO Funding notified the Company that it was in default of its April 1, 2017 promissory note for principal of $100,000
plus default interest at the rate of 13% and penalties and costs.
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 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.
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 OTC Pink Sheet Exchange under the symbol “MCOA”.
We are based in Escondido, California. Our business strategy has evolved over the course of fiscal year ended December 31, 2017.
We originally were very interested in directly entering into the legalized cannabis business in those states where cannabis is
legal for recreational and/or medicinal use. Our original business plans included directly engaging in the growth, cultivation,
harvesting and distribution of cannabis and the research and development of cannabis products for sale, in addition to consumer
products containing hemp derived, non-psychoactive cannabinoids (“CBD”). Our business plan and operation evolved to
only focus 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:
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Conveniant
Hemp Mart, LLC;
Conveniant (sic) Hemp Mart, LLC 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.
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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.
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Global
Hemp Group, Inc. Joint Venture;
On September
5, 2017, we announced our agreement to participate in a joint venture with Global Hemp Group Inc., a Canadian corporation, in a
multi-phase industrial hemp project on the Acadian peninsula of New Brunswick, Canada. The joint venture’s goal is to develop
a “Hemp Agro-Industrial Zone”, a concept that promotes and engages farmers, processors and manufacturers to collaboratively
produce and process 100% of the hemp plant into a number of wholesale materials that can be manufactured into healthy and sustainable
products. The “HAIZ” will be surrounded by hemp production
thereby minimizing the cost of expensive transportation to distant processing facilities. The “Hemp Agro-Industrial Zone”
has a goal of producing social and environmental benefits to the communities where they operate. These zones are envisioned to
prospectively create jobs for farmers, foster rural development, provide the opportunity to develop more sustainable products of
superior quality and help support Global Hemp Group’s commitment to creating a carbon free economy. The first phase of the
project involved lab testing in support of the trials. The Collège Communautaire du Nouveau Brunswick (CCNB) in Bathurst,
New Brunswick (“CCNB”) intends to assist Global Hemp Group in research on its ongoing industrial hemp trials in the
region, and to perform laboratory tests in support of these trials. These tests will provide information to validate agronomic
and key yield data in preparation of a large scale industrial development project that will involve processing of the full plant:
grain, straw, flowers and leaves, scheduled to begin in 2018. The results of these tests will also be used in discussions with
farmers of the region to refine a hemp-based farming model, and to mobilize additional farmers for the next growing season. Our
participation included providing one-half, or $10,775 of the funding for the phase one work. On January 10, 2018, phase-one was
completed by successfully cultivating industrial hemp during the 2017 growing season for research purposes. 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.
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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 Marijuana industry in Washington State; (ii) utilize BV’s high quality grow operations
in the State of Washington on real property leased by BV for use within the legalized Marijuana industry; (iii) 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.
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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 Marijuana
related products and derivatives comprised of management, marketing and various proprietary methodologies directly tailored to
the Marijuana industry.
Bougainville
represented that it possessed a lease for real property in Washington State suitable for growing marijuana, and information primarily
related to the management and control of Marijuana grow operations as conducted in Washington State that included research, development
and know how in the Marijuana industry. Bougainville also represented that it was associated with a Tier 3 license holder in Washington
State. The Company and Bougainville's agreement was that the funding provided by the
Company
would go, in part, towards the ultimate purchase of the land leased by Bougainville, consisting of a one-acre parcel located in
Okanogan County, Washington.
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.
Thereafter,
the Company determined that Bougainville was not a lessee to property in Washington State, but rather was a party to a purchase
agreement for real property. Bougainville also did not possess an agreement with an I503 license holder to grow Marijuana on the
property. Nonetheless, as a result of funding arranged for by the Company Bougainville purchased the land.
Thereafter,
Bougainville and the Company entered into good faith negotiations to revise and restate the joint venture agreement to clarify
the respective contributions and roles of the parties going forward. Once the revised and restated joint venture agreement is finalized,
and the land is subdivided by the Okanogan County Assessor, Bougainville will deed the land to the joint venture. Thereafter, the
joint venture will lease the property to a third party who will operate and curate the land for the growth, cultivation harvest
and sale of agricultural products determined by the lessee of the land in its discretion. As noted above, our business plans and
priorities evolved over 2017. Originally, we were very interested in directly engaging in the growth, cultivation, harvesting and
distribution of cannabis and the research and development of cannabis products for sale. We initially envisioned the joint venture
as playing an active role in the growth, cultivation and harvesting of cannabis on the land. However, we ultimately determined
to abandon direct involvement with THC psychoactive cannabis in favor of focusing on the development, manufacturing, marketing
and sale of non-psychoactive industrial hemp, and hemp-derived consumer products containing CBD. As a result of the foregoing,
we expect that aside from having arranged for the funding necessary for the purchase of the land, our participation in the joint
venture’s role going forward will only be to lease the land to a third party, and to provide financial accounting and business
services. The following documents, once completed and executed, will be filed on Form 8-K:
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The
revised and restated joint venture agreement between the Company and Bougainville;
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A
copy of the deed transferring the land from Bougainville to BV-MCOA Management, LLC;
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The
lease agreement between BV-MCOA Management, LLC and a third party; and,
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The
agreement between BV-MCOA Management, LLC and third party for consulting services.
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GateC
Research Joint Venture;
On March 17, 2017, the Company and GateC Research, Inc. entered into a Joint Venture Agreement. The
Company committed to raise up to $1,500,000 over a six-month period, with a minimum commitment of $500,000 within a three (3) month
period; and, information establishing brands and systems for the representation of marijuana related products and derivatives comprised
of management, marketing and various proprietary methodologies, including but not limited to its affiliate marketing program, directly
tailored to the marijuana industry. GateC agreed to contribute its management and control services and systems related to marijuana
grow operations in Adelanto County, California, and its permit to grow marijuana in an approved zone in Adelanto, California. On
or about
November 28, 2017, GateC and the Company orally agreed to a suspension of the Company’s funding commitment, pending the finalization
of California State regulations governing the growth, cultivation and distribution of marijuana. Consistent with the Company’s
decision, as discussed above, to not directly engage in TCH psychoactive cannabis growth, the Company and GateC entered into a
Recession and Mutual Release Agreement on March 19, 2018. GateC and the Company 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 joint
venture agreement.
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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.
Three Months Ended March 31, 2018 Compared
to Three Months Ended March 31, 2017
Results of Operations
- The Company
generated revenue of $19,010 for the three months ended March 31, 2018. This increase is due to the Company’s initial deployment
of its hempSMART marketing and sales efforts. Since the Company’s sales efforts were launched approximately one year 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 additional funding (See Note 2 to the Financial Statements). For the three months ended March 31,
2018, the Company had income from continuing operations of $4,150,799 compared to a loss from continuing operations of $18,078,284
for the three months ended March 31, 2017. This change is due primarily to the Company’s stock based compensation issued
in 2017 as compared to 2018, changes in our derivative and warrant liabilities and non-cash interest related to our with our convertible
debt.
Revenues/Cost of sales
Total Revenues - Total revenues were $19,010
for the three months ended March 31, 2018 as compared to $5,893 for the three ended March 31, 2017. The reported revenues for each
period reflect the Company’s initial steps towards marketing and selling its hempSMART™ products. Management plans
to expand its marketing and selling efforts in 2018 and expects revenues to increase in the coming months.
Costs and Expenses - Costs of sales, include
the costs of product development, manufacturing, testing, packaging, storage and sale. For the three months ended March 31, 2018,
costs of sales were $10,446 as compared to $3,349 for the three months ended March 31, 2017. The reported costs of sales for each
period reflect the Company’s initial steps towards marketing and selling its hempSMART™ products.
General and administrative expenses
Other general and administrative expenses decreased
to $301,479 for the three months ended March 31, 2018 compared to $17,978,754 the three months ended March 31, 2017. General and
administrative expenses include selling and marketing, research and development, building rent, utilities, legal fees, office supplies,
subscriptions, and office equipment. The decrease is attributed primarily to reduction in stock based compensation from the three
months ended March 31, 2017 of $17,672,750 to $312,400 in the current period.
Gain on change in fair value of derivative
liabilities
During 2017 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 gain of $5,056,686 and $19,889 change in fair value of derivative liabilities for the three months ended March 31, 2018 and 2017,
respectively.
Loss on equity investment
During the three months ended March 31, 2018,
we adjusted the carry value of our investment for our pro rata share of loss with BV-MCOA Management LLC to $0 incurring a $37,673
loss.
Gain on settlement of debt
During the three months ended March 31, 2018,
we
terminated a material definitive agreement not made in the ordinary course of its business.
The parties to the agreement are the Company and GateC. As such we canceled our outstanding debt obligation to joint venture realizing
a gain on settlement of $1,500,000. In addition, we incurred a loss on debt settlement of $1,343,161 due to default provisions
of our previously issued convertible notes.
Interest Expense
Interest expense during the three months ended
March 31, 2018 was $730,746 compared to $121,721 for the three months ended March 31, 2017. Interest expense primarily consists
of interest incurred on our convertible and other debt. The debt discounts amortization and non-cash interest incurred during the
three months ended March 31, 2018 and 2017 was $502,682 and $281, respectively. In addition, we incurred a non-cash interest of
$187,861 and $138,957 non-cash interest in connection with convertible notes in 2018 and 2017.
Liquidity and Capital Resources –
The Company has generated a net income from continuing operations for the three months ended March 31, 2018 of $4,150,799,
however used $497,250 cash for operations. As of March 31, 2018, the Company had total assets of $1,079,409, which included inventory
of $228,930 and accounts receivable of $3,713.
During the three months ended March 31, 2018
and 2017, 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 $400,000 for
March 31, 2018, as compared to $99,965 for March 31, 2017, and an increase proceeds from the sale of note payables to a related
party of $21,706 for March 31, 2018 as compared to $0 for March 31, 2017, and a decrease in proceeds from sales of our common stock
of $0 for March 31, 2018, as compared to $85,000 for the three months ended March 31, 2017. We have during the period ended March
31, 2018, relied upon external financing arrangements to fund our operations. During the three months ended March 31, 2018, we
entered into two separate financing arrangements with St. George Investments, LLC, a Utah limited liability company, in which we
borrowed an aggregate of $440,000, 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 three months
ended March 31, 2018, the Company used cash in operating activities of $493,250. For the three months ended March 31, 2017, the
Company used cash in operating activities of $189,565. This increase is due primarily to the implementation of our new business
plan, operations, management, personnel and professional services, and the resulting increases in operating expenses.
Investing Activities - During the three months
ended March 31, 2018, the Company spent cash of $4,202 in investing activities related to its purchase of equipment. During the
three months ended March 31, 2017, we spent $4,860 on equipment purchases and $75,000 investment in joint ventures.
Financing Activities - During the three months
ended March 31, 2018, the Company, primarily through its receipt of funds from the issuance of notes payable and notes payable
to related parties resulted in financing activity of $421,706. For the three months ended March 31, 2017 the Company received proceeds
of $85,000 from sale of common stock and $99,965 from issuance of note payable.
The Company’s business plans have not
generated significant revenues and as of the date of this filing are not sufficient to generate adequate amounts of cash to meet
its needs for cash. The Company's primary source of operating funds in 2018 and 2017 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 2018 and beyond as it develops its affiliate marketing
program and other direct sales and marketing programs. The Company has stockholders' deficiencies at March 31, 2018 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
March 31, 2018, and December 31, 2017,
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.”
Critical Accounting Policies
- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and
methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, contingencies
and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements.
Stock-Based Compensation
- The Company also issues restricted shares of its common stock for share-based compensation programs to employees and non-employees.
The Company measures the compensation cost with respect to restricted shares to employees based upon the estimated fair value
at the date of the grant, and is recognized as expense over the period which an employee is required to provide services in exchange
for the award. For non-employees, the Company measures the compensation cost with respect to restricted shares based upon the
estimated fair value at measurement date which is either a) the date at which a performance commitment is reached, or b) at the
date at which the necessary performance to earn the equity instruments is complete.
Recent Accounting Pronouncements
- See Note 3 of the condensed consolidated financial statements for discussion of recent accounting pronouncements.