NOTE
2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the accompanying financial statements for nine months ended September 30, 2018, the Company
had a net loss of $1,350,480 and used cash in operations of $1,010,520. 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
SEPTEMBER 30, 2018
(unaudited)
The Company's primary source of operating funds in 2018 has been
from funds generated from proceeds from the issuance of convertible and other debt and issuance of stock through private placements.
With the exception of the current quarter, the Company has experienced net losses from operations since inception, but expects
these conditions to improve in the fourth quarter of 2018 and beyond as it develops its business model. The Company has stockholders'
deficiencies at September 30, 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
Effective January
1, 2018, the Company recognizes revenue in accordance with Accounting Standards Codification 2014-09, Revenue from Contracts
with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific
revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The updated guidance states
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides
for additional disclosures with respect to revenues and cash flows arising from contracts with customers. The standard will be
effective for the first interim period within annual reporting periods beginning after December 15, 2017, and the Company
adopted the standard using the modified retrospective approach effective January 1, 2018.
At the time of each transaction, management
assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured.
The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. Collectability is
assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client.
The Company’s primary sources of revenue
are from the sale of products relating to the cannabis industry. Revenues for the products sold are not recorded until received
by the customer and collections are reasonably assured. 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 performance obligations have 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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
Concentrations
of credit risk
The Company’s
financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s
cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions
is periodically reviewed by senior management.
Accounts
Receivable
Trade
receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus,
trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit
history with customers and their current financial condition.
Allowance
for Doubtful Accounts
Any
charges to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain
the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines
the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts
receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of September
30, 2018, and December 31, 2017, allowance for doubtful accounts was $-0, respectively.
Inventories
Inventories are stated at the lower of cost
or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.
Cost of sales
Cost of sales is comprised of cost of product
sold, packaging, and shipping costs.
Stock Based Compensation
The Company measures the cost of services received
in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value
of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting
dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over
the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based
compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such
amounts were paid in cash. As of September 30, 2018, there were outstanding stock options to purchase 1,000,000,000 shares of common
stock, 916,666,667 shares of which were vested. (See Note 9)
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
Net
Loss per Common Share, basic and diluted
The Company
computes earnings (loss) per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”).
Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share, if presented, would
include the dilution that would occur upon the
exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if
converted” methods as applicable.
The computation
of basic and diluted income (loss) per share as of September 30, 2018 and 2017 excludes potentially dilutive securities when their
inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during
the period.
Potentially
dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Convertible notes payable
|
|
|
63,552,114
|
|
|
|
33,826,242
|
|
|
Options to purchase common stock
|
|
|
1,000,000,000
|
|
|
|
1,000,000,000
|
|
|
Warrants to purchase common stock
|
|
|
119,022,722
|
|
|
|
43,653,846
|
|
|
Restricted stock units
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
|
Total
|
|
|
1,192,574,836
|
|
|
|
1,087,480,088
|
|
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
The
Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants
with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance
sheet using the applicable classification criteria enumerated under GAAP. The Company determined that certain conversion
and exercise options do not contain fixed settlement provisions. The convertible notes contain a conversion feature and warrants
have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion
demands.
As
such, the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions
as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.
The Company
has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception
date first. Thus, any available shares are allocated first to contracts with the most recent inception dates.
Fair Value of Financial
Instruments
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of September 30, 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, as they are short term in nature.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $273,219 and $343,964 for the three and nine
months ended September 30, 2018 and $43,474 and $75,855 for the three and nine months ended September 30, 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 September 30, 2018, and 2017, the Company has not recorded any unrecognized tax benefits.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
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.
Subsequent Events
The Company
evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon
the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment
or disclosure in the financial statements, except as disclosed.
NOTE 4 – PROPERTY
AND EQUIPMENT
Property and equipment as
of September 30, 2018 and December 31, 2017 is summarized as follows:
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
Computer equipment
|
|
$
|
18,123
|
|
|
$
|
11,004
|
|
|
Furniture and fixtures
|
|
|
5,140
|
|
|
|
5,140
|
|
|
Subtotal
|
|
|
23,263
|
|
|
|
16,144
|
|
|
Less accumulated depreciation
|
|
|
(7,018
|
)
|
|
|
(2,576
|
)
|
|
Property and equipment, net
|
|
$
|
16,245
|
|
|
$
|
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 $1,524 and $4,442 for the three and nine
months ended September 30, 2018; and $755 and $1,402 for the three and nine months ended September 30, 2017, respectively.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
NOTE 5 – INVESTMENTS
MoneyTrac
On March
13, 2017, the Company entered into a stock purchase agreement to acquire up to 15,000,000 common shares of MoneyTrac Technology,
Inc., a corporation organized and operating under the laws of the state of California, for a total purchase price of $250,000 representing
approximately 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.
On August
6, 2018, Moneytrac merged into GlobalPayout (OTC: GOHE) through the consummation of a share exchange. Consequently, the Company
received 150,000,000 shares of GOHE stock in exchange for its MoneyTrac stock on the date of the merger. The closing stock price
for GOHE on September 30, 2018 was $.0095, making the 150,000,000 shares owned by the Company valued at $1,425,000 at September
30, 2018. It is the Company's intention to commence selling the shares prior the end of fiscal year 2018. Consequently, for accounting
purposes, the stock has been be accounted for using the Trading Method of accounting pursuant to ASC 320.
Benihemp
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
Global Hemp Group JV/New Brunswick
On September 15, 2018,
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 2017, the Company shared the costs of an ongoing hemp trial in New Brunswick, and provided its expertise in developing
hemp cultivation. The Company was 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 2017 trials
took place on the Acadian peninsula of New Brunswick and were completed. The joint venture began commercial cultivation activities
in 2018. The Company’s costs for the year ended December 31, 2017 were $10,775 and was recorded as other income/expense in
the Company’s Statement of Operations in the appropriate periods. The joint venture agreement required the Company to make
an initial payment of $115,000 on September 15, 2018. The Company made this payment.
Global Hemp Group JV/Scio, Oregon
On May 8, 2018, the Company,
Global Hemp Group, Inc., a Canadian corporation, and TTO Enterprises, Ltd., an Oregon corporation entered into a Joint Venture
Agreement. The purpose of the joint venture is to develop a project to commercialize the cultivation of industrial hemp on a 109
acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating under the Oregon corporation
Covered Bridges, Ltd. The joint venture is in the development stage. On May 30, 2018, the joint venture purchased TTO’s 15%
interest in the joint venture for $30,000. The Company and Global Hemp Group, Inc. now have an equal 50-50 interest in the joint
venture.
The joint venture agreement
commits the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the
joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company
has complied with its payments on schedule.
Bougainville JV
On August 10, 2018, the Company advised
its independent auditor that its joint venture partner, Bougainville Ventures, Inc., has not cooperated or communicated with the
Company regarding requests for information concerning the audit of Bougainville’s receipt and expenditures of funds contributed
by the Company in the joint venture agreement dated March 16, 2017. The Company believes that some of the funds it paid to Bougainville
were misappropriated and that there may be self-dealing with respect to those funds. Additionally, the Company believes that Bougainville
misrepresented material facts in the joint venture agreement including, but not limited to, Bougainville’s representations
that it leased real property that was to be deeded to the joint venture; had an agreement with a Tier 3 # I502 cannabis license
holder to grow cannabis on the real property; and, that clear title to the real property associated with the Tier 3 # I502 license
would be deeded to the joint venture thirty days after the Company made its final funding contribution. The real property has
not been deeded to the joint venture because of unpaid property taxes Bougainville was responsible for. Bougainville has been
non-responsive. As a result, the Company intends to take legal action to rescind the joint venture agreement, for return of its
investment, for an accounting, and the recovery of all forms of damages available to it. The Company has retained legal counsel
in Washington State. As of the date of this quarterly report, a lawsuit has been filed against Bougainville and its principals
and the Canadian Stock Exchange (CSE) has been informed of the lawsuit.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
NOTE 6 – NOTES
PAYABLE, RELATED PARTY
As of September 30, 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 September 30, 2018 and, December 31, 2017 there
were an aggregate of $173,175 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.
During the nine months
ended September 30, 2018, the Company issued an aggregate of 75,928,246 shares of its common stock in settlement of outstanding
related party notes payable of $564,283 and accrued compensation of $195,000.
NOTE
7 – CONVERTIBLE NOTE PAYABLE
Convertible
notes payable are comprised of the following:
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
Convertible note payable-DTTO- due April 30, 2018 (in default)
|
|
$
|
—
|
|
$
|
111,111
|
|
|
Convertible notes payable-St George-last due July 8, 2019
|
|
|
1,939,764
|
|
|
1,688,920
|
|
|
Total
|
|
|
1,939,764
|
|
|
1,800,031
|
|
|
Less debt discounts
|
|
|
(590,319)
|
|
|
(1,232,620
|
)
|
|
Net
|
|
|
1,349,445
|
|
|
567,411
|
|
|
Less current portion
|
|
|
(1,349,445)
|
|
|
(394,555
|
)
|
|
Long term portion
|
|
$
|
|
—
|
|
$
|
172,856
|
|
|
|
|
|
|
|
|
|
|
|
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
Convertible
notes payable-St George Investments
Effective
July 3, 2017, the Company issued a secured convertible promissory note in aggregate of $752,500 to St George Investments LLC (“St
George”). The promissory note is bears interest at 10% per annum, is due upon maturity sixteen months after purchase price
date and includes an original issue discount (“OID”) of $67,500. In addition, the Company agreed to pay $10,000 for
legal, accounting and other transaction costs of the lender. The promissory note was funded in five tranches of $422,500, $27,500,
$167,200 and $107,800; net of OID and transaction costs. As an investment incentive, the Company issued 33,653,846, 5 year cashless
warrants, exercisable at $.04 with certain reset provisions.
Forbearance
Agreement
On
August 4, 2017, the Company entered into a forbearance agreement with St. George Investments LLC, due to the Company’s alleged
breached of certain default provisions of the secured promissory note entered into with St. George on July 3, 2017. The alleged
breach occurred due to the Company entering into an investment agreement with Tangiers on July 15, 2017 and issued a fixed convertible
promissory note to Tangiers. Due to the alleged breach, St George has the right, among other things, to accelerate the maturity
date of the note, increase interest from 10% to 22% and cause the balance of the outstanding promissory note to increase due to
the application of the default provisions.
St.
George agreed to refrain and forbear from bringing any action to collect under the promissory note, including the interest rate
increase and balance increase, with respect to the alleged default. As consideration of the forbearance, the Company agreed to
accelerate the installment conversions from 1 year to 6 months and to add an additional OID of $112,875, which will be considered
fully earned as of August 4, 2017, nonrefundable and to be included in the first tranche. The Company and St George ratified the
outstanding balance, after the added OID and accrued interest, of $868,936 as of August 4, 2017.
As
of September 30, 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 September 30, 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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
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.
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.
Effective
May 18, 2018, the Company issued a secured convertible promissory note in aggregate of $150,000 to St George Investments LLC (“St
George”). The promissory note is bears interest at 10% per annum, is due upon maturity on October 26, 2018. The promissory
note was funded on May 18, 2018 of $150,000.
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 $1,684,238 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 426.38% to 435.64%, (3) weighted average risk-free interest rate of 1.89% to 2.09%, (4) expected
life of 0.44 to 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 $1,684,238 was charged as a debt discount up to the net proceeds of the note with the remainder of $759,298
charged to operations as non-cash interest expense.
During the nine months
ended September 30, 2018, the Company issued an aggregate of 47,974,428 shares of its common stock in settlement of $1,065,186
of outstanding St. George Investments notes payable and accrued interest.
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.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
At September 30, 2018,
the Company determined the aggregate fair values of $1,441,548 and $648,579 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 426.23%, (3) weighted average risk-free interest rate of 1.93% to 2.73%, (4) expected life of
0.21 to 4.46 years, and (5) estimated fair value of the Company's common stock from $0.0384 per share.
For the three and nine
months ended September 30, 2018, the Company recorded a gain on change in fair value of derivative liabilities of $3,072,345 and
$4,658,074, respectively and recorded amortization of debt discounts of $608,642 and $2,827,419 as a charge to interest expense,
respectively.
NOTE
8 – 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
9 – STOCKHOLDERS’ DEFICIT
Preferred
stock
The Company
is authorized to issue 50,000,000 shares of $0.001 par value preferred stock as of September 30, 2018 and December 31, 2017. As
of September 30, 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 September 30, 2018 and December 31, 2017. As of September 30, 2018, and December
31, 2017, the Company had 2,406,567,025 and 2,241,490,270 common shares issued and outstanding respectively.
During the nine months
ended September 30, 2018, the Company issued an aggregate of 22,250,794 shares of its common stock for services rendered with an
estimated fair value of $327,755.
During the nine months
ended September 30, 2018, the Company issued an aggregate of 91,540,373 shares of its common stock in settlement of $744,811 of
outstanding St. George Investments notes payable.
During the nine months
ended September 30, 2018, the Company issued an aggregate of 75,928,246 shares of its common stock in settlement of outstanding
related party notes payable of $564,283 and accrued compensation of $195,000.
During the nine months
ended September 30, 2018, the Company issued an aggregate of 55,706,796 shares of its common stock for 52,944,526 warrants exercised
on a cashless basis.
During the nine months ended September 30,
2018, the Company received stock subscriptions for 5,000,000 shares valued at $50,000. The company issued 5,000,000 warrants in
connection with stock subscription during the nine months ended September 30, 2018. The warrants have exercise prices of $.01 per
warrant and expire three years from the date of the warrant. The warrants have an estimated fair value of $345,062.
On June
25, 2018, DTTO Funding filed suit against the Company in the United States District Court for the Northern District of Texas, Dallas
Division, for breach of contract related to an April 20, 2017 convertible promissory note. DTTO sought damages under the note including
principal, default interest, liquidated damages, default penalties, costs and attorney fees. On August 27, 2018, DTTO and the Company
entered into a settlement agreement requiring court review and approval. A fairness hearing was heard on noticed motion on September
4, 2018, and the court reviewed and approved the settlement agreement, adopting it as the order of the court. Pursuant to the agreement
to settle and order of the court, the company issued 57,676,810 shares of common stock to DTTO in settlement of the litigation,
and the court entered the dismissal of the case with prejudice. The Company’s issuance of the shares of common stock was
made pursuant to Section 3(a)(10) of the Securities Act.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
Options
The following
table summarizes the stock option activity for the nine months ended September 30, 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 September 30, 2018
|
|
|
1,000,000,000
|
|
|
$
|
0.005
|
|
|
|
7.26
|
|
$
|
|
21,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
995,437,956
|
|
|
$
|
0.005
|
|
|
|
7.26
|
|
|
$
|
21,003,074
|
|
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 $0.0261 as of September 30, 2018, which would have been received by the option holders had those option holders exercised
their options as of that date.
The following table presents
information related to stock options at September 30, 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
|
|
|
7.26
|
|
|
|
995,437,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2018, the company made payment of stock-based compensation of $150,000. has expired.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
Warrants
The following
table summarizes the stock warrant activity for the nine months ended September 30, 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
|
|
|
45,000,000
|
|
|
|
0.04
|
|
|
4.92
|
|
|
625,500
|
|
Exercised
|
|
|
(52,944,526)
|
|
|
$
|
0.04
|
|
|
4.39
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
91,709,320
|
|
|
$
|
0.03
|
|
|
4.47
|
|
|
|
1,006,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
91,709,320
|
|
|
$
|
0.03
|
|
|
4.47
|
|
|
$
|
1,006,709
|
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 $0.0261 as of September 30, 2018, 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 September 30, 2018:
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Life
In Years
|
|
|
Exercisable
Number of
Options
|
|
|
$
|
0.03
|
|
|
|
91,709,320
|
|
|
4.47
|
|
|
|
91,709,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2018, the Company issued an aggregate of 55,706,796 shares of its common stock for 52,944,526
warrants exercised on a cashless basis Restricted Stock Units (“RSU”).
The
following table summarizes the restricted stock activity for the nine months ended September 30, 2018:
|
Total Restricted Shares Issued at January 1, 2018
|
|
|
10,000,000
|
|
|
Granted
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
Total Restricted Shares Issued at September 30, 2018
|
|
|
10,000,000
|
|
|
Vested at September 30, 2018
|
|
|
10,000,000
|
|
|
Unvested restricted shares as of September 30, 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 nine months ended September 30, 2018 and 2017 of
$(514,500) and $(175,625) was recognized in operations as stock based compensation.
As
of September 30, 2018, no stock-based compensation related to restricted stock awards remains unamortized.
MARIJUANA
COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(unaudited)
NOTE
10 — FAIR VALUE MEASUREMENT
The
Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”)
on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements
for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability,
such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10
establishes three levels of inputs that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
All
items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon
adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial
statements.
The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including
convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
As of
September 30, 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 7.
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.
MARIJUANA
COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(unaudited)
As
of September 30, 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 September 30, 2018, in the amount of $1,441,548 and $648,579, 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 nine months
ended September 30, 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
|
|
|
—
|
|
|
|
2,236,459
|
|
Change in fair value of embedded conversion terms due to note modifications
|
|
|
—
|
|
|
|
1,343,161
|
|
Mark-to-market at September 30, 2018:
|
|
|
(2,325,327)
|
|
|
|
(2,332,747)
|
|
Transfers out of Level 3 upon conversion or payoff of notes payable or exercise of warrants
|
|
|
(2,885,729)
|
|
|
|
(2,436,700)
|
|
Balance, September 30, 2018
|
|
$
|
648,579
|
|
|
$
|
1,441,548
|
|
Net gain (loss) for the period included in earnings relating to the liabilities held during the period ended September 30, 2018
|
|
$
|
(2,325,327)
|
|
|
$
|
2,332,747
|
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 September 30, 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
11 — RELATED PARTY TRANSACTIONS
The
Company’s current officers and stockholders advanced funds to the Company for travel related and working capital purposes.
As of September 30, 2018, and December 31, 2017, there were no related party advances outstanding.
As
of September 30, 2018, and December 31, 2017, accrued compensation due officers and executives included as accrued compensation
was $195,014 and $0, respectively.
At
September 30, 2018 and December 31, 2017, there were an aggregate of $173,175 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.
During
the nine months ended September 30, 2018, the Company issued an aggregate of 75,928,246 shares of its common stock in settlement
of outstanding related party notes payable of $564,279 and accrued compensation of $195,000.
MARIJUANA
COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(unaudited)
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.
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
joint venture will operate and has acquired a 109 acre agricultural property in Scio, Oregon (the “Property”) for the
cultivation of high CBD yielding hemp for the upcoming 2018 growing season. The joint venture acquired the property on May 1, 2018.
The total capital commitment for the project will be $1,380,000. The Company’s portion of the capital commitment is to raise
$600,000 based upon the following funding schedule: $200,000 upon execution of this Agreement; $238,780 on or before July 31, 2018;
$126,445 on or before October 31, 2018; and $34,775 on or before January 31, 2019. As of September 30, 2018, $200,000 has been
funded.
NOTE
12 – SUBSEQUENT EVENTS
On
October 19, 2018 the Company issued Casey Eberhart 1,500,000 common shares for services rendered pursuant to a consulting contract.
The Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of
Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Mr. Eberhart was an “accredited
investor” and/or “sophisticated investor” pursuant to Section 501(a), 506(b) of the Securities Act, who provided
the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor”
and/or “accredited investor.” The Company provided and made available to Mr. Eberhart full information regarding its
business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities.
On October 19, 2018,
the Company issued to the John Schwenderman and Frances Schwenderman 2,000,000 common shares stock in exchange for $20,000.
The
Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation
D promulgated thereunder, with respect to the issuance of the restricted stock. John and Frances Schwenderman were “accredited
investors” and/or “sophisticated investors” pursuant to Section 501(a), 506(b) of the Securities Act, who provided
the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor”
and/or “accredited investor.” The Company provided and made available to the Schwendermans full information regarding
its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities.
On October 31, 2018, the Company issued Trevor
Muehlfelder 1,000,000 common shares in exchange for $10,000.
The Company relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder,
with respect to the issuance of the restricted stock. Mr.
Muehlfelder
was an “accredited
investor” and/or “sophisticated investor” pursuant to Section 501(a), 506(b) of the Securities Act, who provided
the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor”
and/or “accredited investor.” The Company provided and made available to Mr.
Muehlfelder
full
information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the
restricted securities.
On November 1, 2018,
the Company issued Michael Peskin 4,000,000 common shares pursuant to the Company’s board issuance resolution dated September
25, 2018.
The Company relied upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted
stock. Mr. Peskin was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a),
506(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications
as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to
Mr. Peskin full information regarding its business and operations. There was no general solicitation in connection with the offer
or sale of the restricted securities.
On November 9, 2018, the Company issues Jesus
Quintero 250,000 common shares for services rendered pursuant to the Company’s board issuance resolution dated August 31,
2018.
The Company relied upon the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted
stock. Mr. Quintero was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a),
506(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications
as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to
Mr. Quintero full information regarding its business and operations. There was no general solicitation in connection with the offer
or sale of the restricted securities.
On November 19, 2018, the Company issued to
Paula Vetter 500,000 common shares for services.
The Company relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with
respect to the issuance of the restricted stock. Ms. Vetter was an “accredited investor” and/or “sophisticated
investor” pursuant to Section 501(a), 506(b) of the Securities Act, who provided the Company with representations, warranties
and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.”
The Company provided and made available to Ms. Vetter full information regarding its business and operations. There was no general
solicitation in connection with the offer or sale of the restricted securities.
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 plan and operation focuses in
part on the development, manufacturing, marketing and sale of non-psychoactive industrial hemp, and hemp-derived consumer products
containing CBD. Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial
uses of hemp and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and
harvesting of different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and
soil; (5) different industrial hemp derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of
hemp CBD extraction omitting or eliminating the delta-9 tetrahydrocannabinol “THC” molecule. The Company operates two
distinct and separate business divisions related to its two wholly owned subsidiaries, H Smart, Inc. and MCOA CA, Inc.
Through
our wholly owned subsidiary H Smart, Inc., we develop consumer products that include industrial hemp derived, non-psychoactive
CBD as an ingredient, under the brand name “hempSMART
™
.
Our industrial hemp-based products are specifically developed with an enriched CBD molecular composition with a THC concentration
of three-tenths of one percent or less by dry weight. We market and sell our hempSMART
™
products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use
a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts
for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates, and calculates and accounts
for loyalty and rewards benefits for returning customers. We also retained a full-service marketing company that uses a multi-channel
transactional marketing campaign focused on digital advertising, infographics, content marketing, customer incentives and acquisition,
a broad social media presence, as well as search engine marketing and optimization that includes comprehensive research and analytics
and order fulfillment in order to boost direct sales.
Our business
also includes making selected investments in other related new businesses. Currently, we have made investments in startup ventures,
including:
Conveniant
Hemp Mart, LLC
; Conveniant 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.
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.
Global
Hemp Group, Inc. Joint Venture/New Brunswick Hemp Project;
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 2017 in support of the trials. 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. The Collège
Communautaire du Nouveau Brunswick (CCNB) in Bathurst, New Brunswick (“CCNB”) assisted Global Hemp Group in research
on its ongoing industrial hemp trials in the region, and to perform laboratory tests in support of the trials. These tests provided
information validating agronomic and key yield data in preparation of a large scale industrial development project involving the
processing of the full plant: grain, straw, flowers and leaves, that began on a 125 acre parcel in 2018. The Company’s 2017
participation included providing one-half, or $10,775 of the funding for the phase one work. On June 15, 2018, the Company entered
into a Joint Venture Agreement with Global Hemp Group, Inc. Aside from assisting Global Hemp Group in developing and cultivating
commercial hemp production in New Brunswick, the Company was granted a right of first refusal as Global Hemp Group’s primary
off-taker of any raw materials produced from the project, and the Company will share in the ownership of research and development
of hemp and CBD related studies produced by the New Brunswick Project. 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, the Company
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. As noted, the joint venture began commercial cultivation
activities in 2018. The joint venture agreement required the Company to make an initial payment of $115,000 on June 15, 2018. The
Company made this payment.
Global
Hemp Group Joint Venture/Scio Oregon Hemp Project
; On May 8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation,
and TTO Enterprises, Ltd., an Oregon corporation entered into a Joint Venture Agreement. The purpose of the joint venture is to
develop a project to commercialize the cultivation of industrial hemp on a 109 acre parcel of real property owned by the Company
and Global Hemp Group in Scio, Oregon, and operating under the Oregon corporation Covered Bridges, Ltd. The joint venture is in
the development stage. On May 30, 2018, the joint venture purchased TTO’s 15% interest in the joint venture for $30,000.
The Company and Global Hemp Group, Inc. now have an equal 50-50 interest in the joint venture. The joint venture agreement commits
the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint
venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company has complied
with its payments on schedule.
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 September 30, 2018 Compared to Three Months Ended September 30, 2017
Results
of Operations
- The Company generated revenue of $90,276 and 2,947 for the three months ended September 30, 2018 and
2017, respectively. 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 September 30, 2018 and 2017,
the Company had net income of $2,144,126 as compared to a net loss of $3,884,747 for the three months ended September 30,
2017. This change is due primarily to the company experiencing a gain on changes in fair value of derivative liabilities of
$3,072,345 as compared to a loss of $863,472 for 2017. Also, the company had loss on equity investment for the three months
ended September 30, 2018 of 107,982 as compared to $375,000 for 2017.
Revenues/Cost
of sales
Total
Revenues - Total revenues were $90,276 for the three months ended September 30, 2018 as compared to $2,927 for the three ended
September 30, 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 September 30, 2018, costs of sales were $28,437 as compared to $1,941 for the three months ended September
30, 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 increased to $729,778 for the three months ended September 30, 2018 compared to $700,867 the
three months ended September 30, 2017. General and administrative expenses include selling and marketing, research and development,
building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase is attributed primarily
to increase increases in service providers and other operating costs in the current period.
(Loss)
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 $3,072,345 and a loss of $863,472 change in fair value of derivative liabilities for the three months ended September
30, 2018 and 2017, respectively.
Legal Contingency Expense
On June
25, 2018, DTTO Funding filed a complaint against the Company for breach of contract related to the Company’s April 20, 2017
convertible promissory note in which DTTO lent the Company $111,111. Principal and interest in the note were, at the election of
DTTO, convertible into common shares of the Company. On November 30, 2017, DTTO notified the Company of an election to convert
a portion of the note to common shares, but the Company failed to process the conversion. The Company failed to repay principal
and interest otherwise due on the maturity date of April 20, 2018. DTTO’s action seeks damages against the Company including
principal, default interest, liquidated damages, attorney fees and costs in an amount with an alleged present cash value of $1,787,981.10.
On September 6, 2018 the company issued, pursuant to a court approved and ordered settlement, 57,676,810 common stock shares in
settlement of the litigation with prejudice for at a total value of $1,701,466 and thus eliminating the contingent liability.
Loss
on equity investment
During
the three months ended September 30, 2018, we adjusted the carry value of our investment for our pro rata share of loss with BV-MCOA
Management LLC to $102,440 incurring a $107,982 loss.
Interest
Expense
Interest expense during the
three months ended September 30, 2018 was $1,442,231 compared to $1,946,394 for the three months ended September 30, 2017. Interest
expense primarily consists of interest incurred on our convertible and other debt. The debt discounts amortization incurred during
the three months ended September 30, 2018 and 2017 was $608,642 and $868,709, respectively. In addition, we incurred non-cash interest
of $2,827,419 and $1,064,903 in connection with convertible notes in 2018 and 2017 respectively.
Nine
Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Results
of Operations
- The Company generated revenue of $137,721 and $19,950 for the nine months ended September 30, 2018 and 2017,
respectively. 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 nine months ended September 30, 2018, the Company had a net loss of $1,350,480
compared to a net loss of $23,085,618 for the nine months ended September 30, 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 $137,721 for the nine months ended September 30, 2018 as compared to $19,950 for the nine ended
September 30, 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 nine months ended September 30, 2018, costs of sales were $43,047 as compared to $14,099 for the nine months ended September
30, 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 $1,896,061, for the nine months ended September 30, 2018 as compared to $19,053,350 for the
nine months ended September 30, 2017, a decrease of $17,307,289. 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 nine months ended September 30, 2017 of $17,816,458 as
compared to $73,255 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 $4,658,074 and a loss of $833,504 change in fair value of derivative liabilities for the nine months ended September
30, 2018 and 2017, respectively.
Legal
Contingency Expense
On September
25, 2018, DTTO Funding filed a complaint against the Company for breach of contract related to the Company’s April 20, 2017
convertible promissory note in which DTTO lent the Company $111,111. Principal and interest in the note were, at the election of
DTTO, convertible into common shares of the Company. On November 30, 2017, DTTO notified the Company of an election to convert
a portion of the note to common shares, but the Company failed to process the conversion. The Company failed to repay principal
and interest otherwise due on the maturity date of April 20, 2018. DTTO’s action seeks damages against the Company including
principal, default interest, liquidated damages, attorney fees and costs in an amount with an alleged present cash value of $1,787,981.10.
On September 6, 2018 the company issued 57,676,810 common stock shares in settlement of this case for at a total value of $1,701,466
and thus eliminating the contingent liability.
Impairment
of GateC Joint Venture
During
the nine months ended September 30, 2018 and 2017, we incurred an impairment loss relating to our investment in GateC Joint Venture
of $296,761 and $0, respectively (see below,
Gain on Settlement of Debt
).
Loss
on equity investment
During
the nine months ended September 30, 2018 and 2017, we adjusted the carry value of our investment for our pro rata share of loss
with BV-MCOA Management LLC to $102,440, incurring a loss of $156,69 and $375,000 for the nine months ended September 2018 and
2017, respectively.
Gain
on settlement of debt
During
the nine months ended September 30, 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 gain on debt settlement of $94,933 due to default
provisions of our previously issued convertible notes.
Interest
Expense
Interest
expense during the nine months ended September 30, 2018 and 2017 was $3,503,610 and $2,829,615, respectively. Interest expense
primarily consists of interest incurred on our convertible and other debt. The debt discounts amortization incurred during the
nine months ended September 30, 2018 and 2017 was $484,021 and $84,916, respectively. In addition, we incurred a non-cash interest
of $2,827,419 and $1,020,784 non-cash interest in connection with convertible notes in 2018 and 2017.
Liquidity
and Capital Resources –
The Company has generated a net loss from continuing operations for the nine months ended September
30, 2018 of $1,350,480, however used $1,010,520 cash for operations. As of September 30, 2018, the Company had total assets of
$2,694,929, which included inventory of $564,753, short-term investments of $1,425,000 and investments of $616,785.
During
the nine months ended September 30, 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 $1,080,186
for September 30, 2018, as compared to $99,965 for September 30, 2017, and an increase proceeds from the sale of note payables
to a related party of $194,881 for September 30, 2018 as compared to $395,880 for September 30, 2017, and an increase in proceeds
from sales of our common stock and receipt of common stock subscriptions of $190,000 for September 30, 2018, as compared to $85,000
for the nine months ended September 30, 2017. We have during the period ended September 30, 2018, relied upon external financing
arrangements to fund our operations. During the nine months ended September 30, 2018, we entered into five separate financing arrangements
with St. George Investments, LLC, a Utah limited liability company, in which we borrowed an aggregate of $1,015,000, 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 nine months ended September 30, 2018, the Company used cash in operating activities of $1,010,520 as compared
to $527,412 for the nine months ended September 30, 2017. 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 nine months ended September 30, 2018, the Company spent cash of $631,886 in investing activities related
to its purchase of equipment of $7,119 and investments in joint ventures of $624,767. During the nine months ended September 30,
2017, we spent $14,144 on equipment purchases and $688,275 investment in joint ventures.
Financing
Activities
- During the nine months ended September 30, 2018, net cash provided through financing activities were $1,460,067,
which were primarily through its receipt of funds from the issuance of notes payable and notes payable to related parties and proceeds
from common stock subscriptions of $190,000. For the nine months ended September 30, 2017 the Company, primarily through its receipts
of funds from the issuance of notes payable, notes payable to related parties and sale of common stock, resulted in financing activity
of $1,082,345.
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 September 30, 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
September 30, 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.