UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ________________ to ________________
Commission File Number:
MARIJUANA COMPANY OF AMERICA, INC.
(Exact Name of Registrant as Specified in its Charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the issuer’s common stock, no par value per share, outstanding at November 21, 2022 was .
Table of Contents
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common shares and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our most recent Annual Report on Form 10-K as may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”). You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to the reports we file with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
| 3 |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| Unaudited | Audited | |||||||
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid Insurance | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Long-term Investments | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Security deposit | ||||||||
| Total assets | ||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued compensation | ||||||||
| Accrued liabilities | ||||||||
| Notes payable, related parties | ||||||||
| Convertible notes payable, net of debt discount of $ | ||||||||
| Contingent Liability - Acquisition | ||||||||
| Subscriptions payable | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock, $ par value, shares authorized | ||||||||
| Class A preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2022 and December 31, 2021 | ||||||||
| Class B preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2022 and December 31, 2021 | ||||||||
| Common stock, par value; shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock to be issued, | ||||||||
| Treasury Stock | ( | ) | ||||||
| Accumulated other Comprehensive (loss) | ( | ) | ( | ) | ||||
| Accumulated (deficit) | ( | ) | ( | ) | ||||
| Total stockholders' (deficit) | ( | ) | ||||||
| Total liabilities and stockholders' (deficit) | $ | $ | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 4 |
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
UNAUDITED
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Total Revenues | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Payroll and related | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on share exchange agreement | ( | ) | ( | ) | ||||||||||||
| Impairment Loss on Intangible Asset | ( | ) | ||||||||||||||
| (Loss) Gain on change in fair value of derivative liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss on equity investment | ( | ) | ( | ) | ||||||||||||
| Unrealized Gain on trading securities | ||||||||||||||||
| (Loss) Gain on sale of trading securities | ( | ) | ( | ) | ||||||||||||
| Loss on settlement of debt | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes (benefit) | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency Translation Adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted (after stock-split) | ||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 5 |
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
UNAUDITED
| Class A Preferred Stock | Class B Preferred Stock | Common Stock | Treasury | Common Stock to be issued | Accumulated | Other Comprehensive | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Stock | Shares | Amount | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services rendered | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of convertible notes payable and accrued interest | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for setlement of liabilities | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of related party notes payable and accounts payable | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in exchange for exercise of warrants on a cashless basis | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for investments | ||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to additional paid in capital | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debt discount from warrants issued with convertible notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for acquisition of business | ||||||||||||||||||||||||||||||||||||||||||||||||
| Modification of notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Class A Preferred Stock | Class B Preferred Stock | Common Stock | Treasury | Common Stock to be issued | Accumulated | Other Comprehensive | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Stock | Shares | Amount | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock issued to settle amounts previously accrued | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services rendered | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of convertible notes payable and accrued interest | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for deferred finance costs | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of shares upon settlement of SEC legal case | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock purchase | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares cancelled by officer | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to additional paid in capital | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debt discount from warrants issued with convertible notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for contingent consideration | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for subscriptions payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 6 |
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
UNAUDITED
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Loss on equity investment | ||||||||
| Loss on VBF acquisition | ||||||||
| Loss (Gain) on change in fair value of derivative liability | ||||||||
| Interest expense recognized for the excess of fair value of derivative liability over net book value of notes payable at issuance | ||||||||
| Stock-based compensation | ||||||||
| Unrealized Gain on trading securities | ( | ) | ||||||
| Loss on sale of trading securities | ||||||||
| Loss on settlement of liabilities | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Right-of-use assets | ||||||||
| Right-of-use liabilities | ( | ) | ||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payment to establish joint venture | ( | ) | ||||||
| Proceeds from sale of investments | ||||||||
| Acquisition of business | ( | ) | ||||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of notes payable | ||||||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Proceeds from related parties | ||||||||
| Repayments to related parties | ( | ) | ||||||
| Repurchase of common stock | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Foreign exchange impact on cash | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for taxes | ||||||||
| Non cash financing activities: | ||||||||
| Common stock issued in settlement of convertible notes payable | $ | $ | ||||||
| Reclassification of derivative liabilities to additional paid-in capital | $ | $ | ||||||
| Common stock issued for investment | $ | $ | ||||||
| Common stock issued to settle liabilities | $ | $ | ||||||
| Common stock issued for acquisition of business | $ | $ | ||||||
| Common stock issued for deferred finance costs | $ | $ | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 7 |
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Marijuana Company of America, Inc. (the “Company”)
was incorporated under the laws of the State of Utah in October 1985 under the name Mormon Mint, Inc. The corporation was originally a
startup company organized to manufacture and market commemorative medallions related to the Church of Jesus Christ of Latter Day Saints.
On January 5, 1999, Bekam Investments, Ltd. acquired one hundred percent of the common shares of the Company and spun the Company off
changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the development and implementation
of Internet web content and e-commerce applications.
In 2015, the Company changed its business model to a marketing and distribution company for medical marijuana. In conjunction with the change, the Company changed its name to Marijuana Company of America, Inc. At the time of the transition in 2015, there were no remaining assets, liabilities or operating activities of the mining business.
On February 1, 2016, the Company formed MCOA CA, Inc., a California corporation as a wholly owned subsidiary to facilitate mergers, acquisitions and the offering of investments or loans to the Company.
On May 3, 2017, the Company formed Hempsmart Limited, a United Kingdom corporation as a wholly owned subsidiary for the purpose of future expansion into the European market.
On August 8, 2017, the Company formed H Smart, Inc., a Delaware corporation as a wholly owned subsidiary for the purpose of operating the hempSMART™ brand.
On January 11, 2021, the Company formed Hempsmart Global, Inc., a Nevada corporation, as a wholly owned subsidiary for the purpose of facilitating the Company’s Latin American joint ventures in Uruguay and Brazil.
On June 29, 2021, the Company acquired 100% of the capital stock of cDistro, Inc., a Nevada corporation, which is now a wholly owned subsidiary of the Company for the purpose of engaging in the distribution of hemp and CBD products to retail outlets in the North American market.
On, July 20, 2021, the Company formed Salinas Diversified Ventures, Inc., a California corporation, as a wholly owned subsidiary for the purpose of consummating the asset purchase agreement with VBF Brands, Inc.
On July 19, 2022, the Company formed H Smart, Inc., a California corporation, as a wholly owned subsidiary for the purpose of facilitating the sale and distribution of products in California.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries H Smart, Inc., Hempsmart Limited, cDistro, Inc. and MCOA CA, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2021 has been derived from audited financial statements set forth in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on April 16, 2022 (the “Annual Report”). Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2021.
| 8 |
NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The accompanying consolidated financial statements
have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the accompanying financial statements, during the nine months ended September 30, 2022, the Company incurred
net losses from operations of $
The Company's primary source of operating funds for the nine months ended September 30, 2022 was from funds generated from the issuance of convertible and non-convertible debt. The Company has experienced net losses from operations since inception, but expects these conditions to improve in 2022 and beyond as it continues to develop its business; however, no assurance can be provided that the Company will not continue to experience losses in the future. The Company has stockholders' deficiencies as of September 30, 2022 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; however, there can be no assurance that the Company will be successful in developing profitable operations or that it will be able to obtain financing on favorable terms, if at all. 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
Interim Financial Statements
The unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Revenue Recognition
For annual reporting periods after December 15, 2017, the Financial Accounting Standards Board (“FASB”) made effective Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers,” to supersede previous revenue recognition guidance under current GAAP. Revenue is now recognized in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue Recognition (“ASC Topic 606”). The objective of the guidance is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Two options were made available for implementation of the standard: the full retrospective approach or modified retrospective approach. The guidance became effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASC Topic 606 for its reporting period as of the year ended December 31, 2017, which made its implementation of ASC Topic 606 effective in the first quarter of 2018. The Company decided to implement the modified retrospective transition method to implement ASC Topic 606, with no restatement of the comparative periods presented. Using this transition method, the Company applied the new standards to all new contracts initiated on or after the effective date. The Company also decided to apply this method to any incomplete contracts it determined are subject to ASC Topic 606 prospectively. For the quarter ended September 30, 2022, there were no incomplete contracts. As is more fully discussed below, the Company is of the opinion that none of its contracts for services or products contain significant financing components that require revenue adjustment under ASC Topic 606.
| 9 |
Identification of Our Contracts with Customers
Contracts included in the Company’s
application of ASC Topic 606 for the quarter ended September 30, 2022 consisted solely of sales of the Company’s hempSMART™
and cDistro products. With respect to the Company’s financial accounting, bookkeeping and/or real property management consulting
services, to date no contracts have been entered into, and thus
In accordance with ASC Topic 606, the Company of the opinion that none of its hempSMART™ or cDistro product sales or offered consulting service, each of which are discussed below, have a significant financing component. The Company’s opinion is based upon the transactional basis for its product sales, with revenue recognized upon customer order, payment and shipment, which occurs concurrently. The Company’s evaluation of the length of time between the customer order, payment and shipping is not a significant financing component because shipment occurs the same day as the order is placed and payment made by the customer. The Company’s evaluation of its consulting services is based upon recognizing revenue as the services are performed for a determinable price per hour. The Company only recognizes revenues as incurred and charge billable hours. Because the Company’s hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, the Company is of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing that would materially change the amount of revenue the Company recognizes under the contract or would otherwise contain a significant financing component under ASC Topic 606.
Determination of the Price in Our Sales Contracts
The transaction prices in the Company’s sales contract are the amount of consideration the Company expects to be entitled to for transferring promised hempSMART™ and cDistro products. The consideration amount is fixed and not variable. The transaction price is allocated to the identified performance obligations in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled, which is concurrently upon receipt of payment. There are no future options for a contract when considering and determining the transaction price. The Company excludes amounts third parties will eventually collect, such as sales tax, when determining the transaction price. Since the timing between receiving consideration and transferring goods or services is immediate, the Company’s sales contract do not have a significant financing component, i.e., recognizing revenue at the amount that reflects the cash payment that the customer would have made at the time the goods or services were transferred to them (cash selling price), rather than significantly before or after the goods or services are provided.
Allocation of the Transaction Price of Our Sales Contracts
The Company’s sales contracts are not considered multi-element arrangements which require the fulfillment of multiple performance obligations. Rather, the Company’s sales contracts include one performance obligation in each contract. As such, from the outset, the Company allocates the total consideration to each performance obligation based on the fixed and determinable standalone selling price, which the Company believes is an accurate representation of what the price is in each transaction.
Recognition of Revenue when the Performance Obligation is Satisfied
A performance obligation is satisfied when or as control of the good or service is transferred to the customer. ASC 606-10-20 defines control as “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.” For performance obligations that are fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation. As noted above, the Company’s single performance obligation sales contracts are singularly related to its promise to provide the hempSMART™ and cDistro products to the customer upon receipt of payment, and upon completion, allows the Company to realize revenue under its revenue recognition policy.
With respect to the Company’s offered financial accounting, bookkeeping and/or real property management consulting services, to date no contracts have been entered into, and thus no reportable revenues have resulted for the fiscal years ended December 31, 2021 and 2020 or for the quarter ended September 30, 2022.
Identifying the Performance Obligations in Our Sales Contracts
In analyzing the Company’s sales contracts, the Company’s policy is to identify the distinct performance obligations in a sales contract arrangement. In determining the Company’s performance obligations under its sales contracts, the Company considers that the terms and conditions of sales are explicitly outlined in its sales contracts and are so distinct and identifiable within the context of each sales contract, and so are not integrated with other goods, or constitute a modification or customization of other goods in the Company’s contracts, or are highly dependent or highly integrated with other goods in the Company’s sales contracts. Thus, the Company’s performance obligations are singularly related to its promise to provide the hempSMART™ and cDistro products upon receipt of payment. The Company offers an assurance warranty on its hempSMART™ and cDistro products that allows a customer to return any hempSMART™ and cDistro products within 30 days if not satisfied for any reason. Assurance warranties are not identifiable performance obligations since they may be elected at the whim of the customer for any reason. However, the Company does account for returns of purchase prices, if made.
Product Sales
Revenue from product sales, including delivery fees, is recognized when (1) an order is placed by the customer; (2) the price is fixed and determinable when the order is placed; (3) the customer is required to and concurrently pays for the product upon order; and (4) the product is shipped. The evaluation of the Company’s recognition of revenue after the adoption of ASC Topic 606 did not include any judgments or changes to judgments that affected the Company’s reporting of revenues since the Company’s product sales, both pre and post adoption of ASC Topic 606 were evaluated using the same standards as noted above, reflecting revenue recognition upon order, payment and shipment, which all occurs concurrently when the order is placed and paid for by the customer, and the product is shipped. Further, given the facts that (1) the Company’s customers exercise discretion in determining the timing of when they place their product order and (2) the price negotiated in the Company’s product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, the Company is of the opinion that its product sales do not indicate or involve any significant customer financing that would materially change the amount of revenue recognized under the sales transaction, or would otherwise contain a significant financing component for the Company or the customer under ASC Topic 606.
| 10 |
Consulting Services
The Company also offers professional services for financial accounting, bookkeeping and/or real property management consulting services based on consulting agreements. As of the date of this filing, the Company has not entered into any contracts for any financial accounting, bookkeeping and/or real property management consulting services that have generated reportable revenues as of the years ended December 31, 2021 or 2020 or the quarter ended September 30, 2022. If and when the Company provides these professional services, it would intend and expect the arrangements to be entered into on an hourly fixed fee basis.
For hourly based fixed fee service contracts, the Company intends to utilize and rely upon the proportional performance method, which recognizes revenue as services are performed. Under this method, in order to determine the amount of revenue to be recognized, the Company will calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. The Company only recognizes revenues as incurred and charges billable hours. Because the Company’s hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, the Company is of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing that would materially change the amount of revenue the Company recognizes under the contract or would otherwise contain a significant financing component under ASC Topic 606.
The Company determined that upon adoption of ASC Topic 606 there were no adjustments converting from ASC 605 to ASC Topic 606 because product sales revenue is recognized upon customer order, payment and shipment, which occurs concurrently, and the Company’s consulting services offered are fixed and determinable and are only earned and recognized as revenue upon actual performance.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
Cash
The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s cash 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, 2022 and December 31, 2021, allowance for doubtful accounts was $
| 11 |
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.
The Company accounts for the stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of ASC 718-10-30. Pursuant to ASC 718-10-30-6, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement based on sales to third parties or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial Option Model option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments. The expected life of options and similar instruments represents the period of time the options and/or similar instruments are expected to be outstanding. Pursuant to ASC 718-10-50-2(f)(2)(i). the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to ASC 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term equal the quotient of the vesting term plus the original contractual term divided by two if (i) a company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) a company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) a company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC 718-10-50-2(f)(2)(ii), a thinly-traded or non-public entity that uses the calculated value method shall disclose the reasons why it is not practicable for it to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. | |
| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments. | |
| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments. |
| 12 |
Generally, all forms of share-based payments, including stock options, warrants, restricted stock and stock appreciation rights are measured at their fair value on the grant date of the award based on the estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock-Based Compensation – Non Employees
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation: Improvement to Nonemployee Share-Based Payment Accounting (“Topic 718”s). The ASU supersedes ASC 505-50, Equity-Based Payment to Non-Employment, and expands the scope of the Topic 718 to include stock-based payments granted to non-employees. Under the new guidance, the measurement date and performance and vesting conditions for stock-based payments to non-employees are aligned with those of employees, most notably aligning the award measurement date with the grant date of an award. The new guidance is required to be adopted using the modified retrospective transition approach. The Company adopted the new guidance effective January 1, 2019, and the adoption did not have a material impact on its financial statements and related disclosures.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments: Pursuant to ASC 718-10-50-2(f)(2)(i), the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and the holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate the holder’s expected exercise behavior. If a company is a newly formed corporation or shares of such company are thinly traded, the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as such company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. | |
| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC 718-10-50-2(f)(2)(ii), a thinly-traded or non-public entity that uses the calculated value method shall disclose the reasons why it is not practicable for the company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. | |
| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments. | |
| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments. | |
Basic earnings per share are calculated by dividing net income (loss) by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could occur if the Company’s share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of the Company’s share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted earnings per share calculation. The dilutive effect of the Company’s convertible preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning of the year.
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
| 13 |
Goodwill and Intangible Assets
Goodwill is carried at cost and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 350.
The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value. The following table summarizes the Company’s intangible assets:
| September 30, 2022 | December 31, 2021 | |||||||
| Trademarks (estimated 5-year life) | $ | $ | ||||||
| Licenses (estimated 10-year life) | ||||||||
| Customer Relationships (estimated 5-year life) | ||||||||
| Intangible assets, gross | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
We evaluate long-lived assets, including intangible assets and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending upon the nature of the assets. The Company completed an evaluation of goodwill and intangible assets at September 30, 2022 and determined that no impairment was necessary.
Investments
The Company follows ASC subtopic 321-10, Investments-Equity Securities (“ASC 321-10”) which requires the accounting for an 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 6).
Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.
The Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance sheet using the applicable classification criteria enumerated under GAAP. The Company determined that certain conversion and exercise options do not contain fixed settlement provisions. The convertible notes contain a conversion feature and warrants have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands. As such, the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.
The Company has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception date first. Thus, any available shares are allocated first to contracts with the most recent inception dates.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash, accounts payables and short-term notes because they are short term in nature.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $
Segment Information
ASC 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 principal operating segments, hempSMART and cDistro.
| 14 |
The following table represents the Company’s hempSMART business for the nine months ended September 30, 2022 and 2021:
hempSMART
STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
| * The Company has begun the phase-out of this business in the USA during 2022 | ||||||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||
| Operating Expenses | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Selling and Marketing expenses | ||||||||||||||||
| Payroll and related | ||||||||||||||||
| Stock-based Compensation | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Expenses | ||||||||||||||||
| Net Loss from Operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 15 |
The following table represents the Company’s cDistro business for the nine months ended September 30, 2022 and 2021:
cDistro Inc.
STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Selling and Marketing expenses | ||||||||||||||||
| Payroll and related | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Expenses | ||||||||||||||||
| Net Loss from Operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 16 |
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 condensed 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, 2022 and 2021, the Company has
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative which aims to reduce unnecessary complexity in GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.
NOTE 4 – OPERATING LEASE
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which provides an optional transition method of applying the new lease standard. ASU 2018-11, Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.
We adopted this standard using a modified retrospective approach on January 1, 2019. The modified retrospective approach includes a number of optional practical expedients relating to the identification and classification of leases that commenced before the adoption date; initial direct costs for leases that commenced before the adoption date; and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.
The Company elected the package of practical expedients permitted under ASU 2018-11, Leases, allowing it to account for its existing operating lease that commenced before the adoption date as an operating lease under the new guidance without reassessing (i) whether the contract contains a lease; (ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC 842.
On May 31, 2021, the
Company’s operating lease for its office space located at 1340 West Valley Parkway, Suite 205, Escondido, CA 92029 expired
and, at that time, the Company fully amortized its right-of-use asset for such lease. On June 1, 2021, the Company entered into an
office accommodation agreement whereby it may access a shared office space located at 633 West Fifth Street, Suite 2826, Los
Angeles, CA 90071 on a month-to-month basis over a one-year term for a fee of $
The Company determined under ASC 2018-11, Leases (Topic 842), due to the short-term nature of the office accommodation agreement, that such agreement met the criteria of ASC 842-20-25-2 and as such it is not necessary to capitalize the office accommodation agreement and fees will be recognized on a monthly straight-line basis. The adoption of this guidance resulted in no significant impact to the Company’s results of operations or cash flows.
| 17 |
NOTE 5 – PROPERTY, MACHINERY AND EQUIPMENT
Property and equipment as of September 30, 2022 and December 31, 2021 is summarized as follows:
September 30, 2022 | December 31, 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Machinery | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, machinery and equipment, net | $ | $ | ||||||
Property, machinery and equipment
are stated at cost and depreciated using the straight-line method over their estimated useful lives of
Depreciation expense was
$
NOTE 6 – INVESTMENTS
Bougainville Ventures, Inc. Joint Venture
On March 16, 2017, the Company entered into a joint venture agreement with Bougainville Ventures, Inc. (“Bougainville”), a Canadian corporation, to (i) jointly engage in the development and promotion of products in the legalized cannabis industry in Washington State; (ii) utilize Bougainville's high quality cannabis grow operations in the State of Washington, where it claimed to have an ownership interest in real property for use within the legalized cannabis industry; (iii) leverage Bougainville’s agreement with a I-502 Tier 3 license holder to grow cannabis on the site; provide technical and management services and resources including, but not limited to, sales and marketing, agricultural procedures, operations, security and monitoring, processing and delivery, branding, capital resources and financial management; and (iv) optimize collaborative business opportunities. The Company and Bougainville agreed to operate through BV-MCOA Management, LLC, a limited liability company organized in the State of Washington on May 17, 2017.
Pursuant
to the joint venture agreement, the Company committed to raise not less than $
The joint venture agreement provided that funding provided by the Company would contribute towards the joint venture’s ultimate purchase of the land consisting of a one-acre parcel located in Okanogan County, Washington, for joint venture operations.
As disclosed in the Company’s
Current Report on Form 8-K filed with the SEC on December 11, 2017, the Company did not comply with the funding schedule for the joint
venture. On November 6, 2017, the Company and Bougainville amended the joint venture agreement to reduce the amount of the Company's commitment
from $
| 18 |
Thereafter, the Company determined that Bougainville had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property that was in breach of contract for non-payment. Bougainville also did not possess an agreement with a Tier 3 I-502 license holder to grow marijuana on the property. Nonetheless, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green Ventures Capital Corp., purchased the land, but did not deed the real property to the joint venture. Bougainville failed to pay delinquent property taxes to Okanogan County, and as a result, as further discussed below, to date, the property has not been deeded to the joint venture.
To clarify the respective contributions and roles of the parties, the Company offered to enter into good faith negotiations to revise and restate the joint venture agreement with Bougainville. The Company diligently attempted to communicate with Bougainville to enter into an amended and restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint venture.
On
August 10, 2018, the Company advised its independent auditor that Bougainville did not cooperate or communicate with the Company regarding
its requests for information concerning the audit of Bougainville’s receipt and expenditures of $
In
connection with the joint venture agreement, the Company recorded a cash investment of $
| 19 |
Natural Plant Extract
Natural
Plant Extract of California & Subsidiaries Joint Venture; On April 15, 2019, the Company entered into a joint venture agreement with
Natural Plant Extracts of California, Inc. and subsidiaries. The purpose of the joint venture was to utilize Natural Plant Extracts’
California and City cannabis licenses to jointly operate a business named “Viva Buds” to operate a licensed cannabis distribution
service in California. In exchange for acquiring 20% of Natural Plant Extracts’ common stock, the Company agree to pay two million
dollars and issue Natural Plant Extract one million dollars’ worth of the Company’s restricted common stock. As of February
3, 2020, the Company was in arrears in its payment obligations under the joint venture agreement, and the parties entered into a settlement
and release of all claims terminating the joint venture. The parties agreed to reduce the Company’s equity ownership in Natural
Plant Extracts from
During the nine months ended September 30, 2022, the Company recorded an impairment on the investment in the amount of $142,567.
Brazilian Joint Ventures
On September 30, 2020, the Company entered into two joint venture agreements (the “Joint Venture Agreements”) with Marco Guerrero, a director of the Company (“Guerrero”) and related party, to form joint ventures in Brazil and in Uruguay to produce, manufacture, market and sell the Company’s hempSMART™ products in Latin America and to develop and sell hempSMART™ products globally. The Joint Venture Agreements contain equal terms for the formation of the joint venture entities in Uruguay and Brazil. The Brazilian joint venture, HempSmart Produtos Naturais Ltda. (“HempSmart Brazil”), will be headquartered in São Paulo, Brazil. The Uruguayan joint venture, Hempsmart Uruguay S.A.S. (“HempSmart Uruguay”), will be headquartered in Montevideo, Uruguay.
Pursuant to the Joint Venture
Agreements, the Company acquired a 70% equity interest in both HempSmart Brazil and HempSmart Uruguay, with a minority 30% equity interest
in both HempSmart Brazil and HempSmart Uruguay being held by newly formed entities controlled by Guerrero. Pursuant to the Joint Venture
Agreements, the Company agreed to provide capital in the amount of $
The boards of directors of HempSmart Brazil and HempSmart Uruguay will consist of three directors, elected by the joint venture partners. Pursuant to the Joint Venture Agreements, the Company agreed to license, on a royalty-free basis, certain of its intellectual property regarding its existing products to HempSmart Brazil and HempSmart Uruguay to enable the joint ventures to manufacture and sell its products in Brazil, Uruguay, and for export to other Latin American countries, the United States, and globally in accordance with the terms of the Joint Venture Agreements.
In addition, as majority partner, in the event a joint venture is frustrated in its intent or purpose, the Company may trigger a compulsory buy-sell procedure pursuant to which the Company could pursue a sale of all or substantially all of the joint venture. Subject to certain exceptions, the joint venture partners may not transfer their interests in HempSmart Brazil and HempSmart Uruguay.
Cannabis Global, Inc.
Joint Venture
On May 12, 2021, the Company
entered into a joint venture agreement with Cannabis Global, Inc. (“Cannabis Global”) pursuant to which the Company will invest
up to $
Share Exchange
On September 30, 2020, the
Company entered into a securities exchange agreement with Cannabis Global pursuant to which the Company issued shares of its
common stock to Cannabis Global in exchange for
During the nine months ended September 30, 2022, the Company recorded an impairment on the investment in the amount of $852,597.
| 20 |
Eco Innovation Group Inc.
Share Exchange
On February 26, 2021, the Company entered
into a Share Exchange Agreement with Eco Innovation Group, Inc., a Nevada corporation quoted on OTC Markets Pink (“ECOX”)
dated February 26, 2021, to acquire the number of shares of ECOX’s common stock, par value $, equal in value to $
Complementary to the Share Exchange Agreement,
the Company and ECOX entered into a Lock-Up Agreement dated February 26, 2021 (the “Lock-Up Agreement”), providing that the
shares of common stock acquired pursuant to the Share Exchange Agreement shall be subject to a lock-up period preventing its sale for
a period of 12 months following issuance and limiting the subsequent sale to aggregate maximum sale value of $
For a period of two years following the Effective Date, at the closing of each fiscal quarter, should the per-share closing price of the common shares of the same class as the Shares or the Exchange Shares, as quoted by the OTC Markets for the last day of the relevant fiscal quarter, decrease below original issuance value with the effect that the aggregate value of the Shares or the Exchange Shares at the fiscal quarter close would be lower than $650,000, then either MCOA, in the case of the Shares, or ECOX, in the case of the Exchange Shares, shall issue the other party the number of shares of common stock necessary to cause the aggregate value of the Shares or the Exchange Shares, as applicable, be $650,000 as of the end of the relevant fiscal quarter. The parties shall irrevocably instruct their respective transfer agents to reserve and maintain authorized and unissued common stock in a reserve account designated for the purpose of issuing such shares pursuant to this share exchange adjustment provision. Such share reserve accounts shall be maintained with a number of authorized and unissued common stock not less than three (3) times the number of Shares or Exchange Shares, as the case may be, that are issued pursuant to the Share Exchange Closing.
On September 30, 2022, the closing price of the Company’s common stock was $, so that the number of shares of Company common stock issuable to ECOX under the Share Exchange Agreement was . As a result of the transactions pursuant to the Share Exchange Agreement, the Company will have shares of common stock outstanding, with the shares issued to ECOX pursuant to the Share Exchange Agreement representing 1.00% of the Company’s outstanding shares.
For the quarter ended September
30, 2022, the Company recorded a Loss on Equity Investment and corresponding increase in Subscriptions Payable of $
Asset Purchase Agreement with VBF Brands, Inc.
On October 6, 2021, the Company, through its wholly owned subsidiary Salinas Diversified Ventures, Inc., a California corporation, entered into an Asset Purchase Agreement, Management Services Agreement, Cooperation Agreement and Employment Agreement with VBF Brands, Inc., a California corporation (“VBF”), a wholly owned subsidiary of Sunset Island Group, Inc., a Colorado corporation (“SIGO”). VBF and SIGO agreed to transfer to the Company all of VBF’s outstanding stock to the Company and appointed our CEO and CFO Jesus Quintero as President of VBF.
| 21 |
BF owns various fixed assets including machinery and equipment, a lease for a 10,000 square foot facility located at 20420 Spence Road, Salinas, California, 93908, leasehold improvements, good-will, inventory, tradenames including “VBF Brands,” trade secrets, intellectual property, and other tangible and intangible properties, including licenses issued by the City of Salinas, County of Monterey, and the State of California to operate a licensed cannabis nursery, cultivation facility, and operations for the manufacturing and distribution of cannabis and cannabis products.
VBF and SIGO agreed to sell and transfer to the Company all of VBF’s outstanding stock, and, by virtue of the Management Services Agreement, appoint Mr. Jesus Quintero as President of VBF, vesting management and control of VBF’s licensed cannabis operations in the Company. Concurrently, VBF and Livacich entered into a Cooperation Agreement, whereby VBF and Livacich agreed to cooperate to facilitate the transfer of ownership of VBF, which includes licenses issued by the City of Salinas, County of Monterey, and the State of California, to operate a cannabis nursery, cultivation facility and manufacturing and distribution operations to the Company. The Company also agreed to retain Livacich as Chief Executive Officer for a term of two years and agreed to compensate her with a salary including a signing cash bonus of $250,000, and a $250,000 performance cash bonus payable after six months after the Effective Date. The bonus is conditioned upon Livacich meeting an agreed to “Net Revenue” target of one million dollars ($1,000,000) from VBF’s operations during the six-month period after closing of the Asset Purchase Agreement, and her compliance with the terms and conditions of this Asset Purchase Agreement, the Management Services Agreement and the Cooperation Agreement.
As consideration for the transaction, the Company
agreed to assume two secured convertible promissory notes issued by SIGO to St. George Investments, LLC, a Utah limited liability company
(“St. George”) (the “SIGO Notes”). The first note was issued December 8, 2017, in the original face amount of
$
Under the Asset Purchase Agreement, the closing is conditioned upon certain conditions precedent, specifically (i) VBF and SIGO’s full corporate authorization, consent and execution of this Agreement; (ii) VBF’s sale to MCOA of 100% of the issued and outstanding shares of VBF; (iii) full corporate authorization, consent compliance with and execution of the Management Services Agreement and Cooperation Agreement; (iv) SIGO’s disclosure of the Agreement on Form 8-K with the Securities and Exchange Commission; (v) full cooperation in MCOA’s financial auditing of VBF in accordance with ASC 805, including providing unrestricted access to all VBF corporate and financial records and providing all necessary cooperation with VBF financial personnel; (vi) full cooperation in aiding and assisting Buyer with its change of ownership applications with the relevant licensing authorities; (vii) the warranty of truthful representations and execution of and compliance with the terms and conditions of the Executive Employment Agreement, Management Services Agreement and the Cooperation Agreement.
As of the date of this filing, the conditions precedent
to the closing of the Asset Purchase Agreement remain in the process of implementation, so that the Asset Purchase Agreement closing has
not yet occurred pursuant to its terms. Legal counsel for MCOA is currently in the process of working with VBF, Salinas Diversified Ventures,
and the relevant state and local governments to effect the change of control and license transfers necessary to close the Asset Purchase
Agreement. During the nine months ended September 30, 2022, based on the remote likelihood of the Company closing this acquisition, the
Company recognized a loss of $
| 22 |
MARIJUANA COMPANY OF AMERICA, INC.
INVESTMENT ROLL-FORWARD
AS OF SEPTEMBER 30, 2022
| INVESTMENTS AS OF SEPTEMBER 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| TOTAL | Consolidated | Cannabis Global | Hempsmart | Lynwood | Natural Plant | Salinas Ventures | VBF | |||||||||||||||||||||||||||||||||||||
| INVESTMENTS | Eliminations | Inc. | ECOX | C'Distro | Brazil | JV | Extract | Holding | BRANDS | Vivabuds | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 03-31-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Quarter 03-31-19 equity method Loss | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on trading securities - quarter ended 03-31-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @03-31-19 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 06-30-19 | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Quarter 06-30-19 equity method Income (Loss) | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Unrealized gains on trading securities - quarter ended 06-30-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @06-30-19 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 09-30-19 | $ | |||||||||||||||||||||||||||||||||||||||||||
| Quarter 09-30-19 equity method Income (Loss) | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Sale of trading securities during quarter ended 09-30-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on trading securities - quarter ended 09-30-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @09-30-19 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 12-31-19 | $ | |||||||||||||||||||||||||||||||||||||||||||
| Quarter 12-31-19 equity method Income (Loss) | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Reversal of Equity method Loss for 2019 | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Impairment of investment in 2019 | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Loss on disposition of investment | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Sale of trading securities during quarter ended 12-31-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on trading securities - quarter ended 12-31-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @12-31-19 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Equity Loss for Quarter ended 03-31-20 | ||||||||||||||||||||||||||||||||||||||||||||
| Recognize Joint venture liabilities per JV agreement @03-31-20 | ||||||||||||||||||||||||||||||||||||||||||||
| Impairment of Equity Loss for Quarter ended 03-31-20 | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on trading securities - quarter ended 03-31-19 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @03-31-20 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Equity Loss for Quarter ended 06-30-20 | ||||||||||||||||||||||||||||||||||||||||||||
| Impairment of Equity Loss for Quarter ended 06-30-20 | ||||||||||||||||||||||||||||||||||||||||||||
| Sales of of trading securities - quarter ended 06-30-20 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @06-30-20 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Global Hemp Group trading securities issued | $ | |||||||||||||||||||||||||||||||||||||||||||
| Investment in Cannabis Global | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @09-30-20 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Unrealized gain on Global Hemp Group securities - 4th Quarter 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on Cannabis Global Inc securities - 4th Quarter 2020 | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance @12-31-20 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investment in ECOX | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance @03-31-21 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 06-30-21 | $ | |||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on Global Hemp Group securities - 2nd quarter 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @06-30-21 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 09-30-21 | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Sale of short-term investments in quarter ended 09-30-21 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance @09-30-21 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Investments made during quarter ended 12-31-21 | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Eliminations @12/31/21 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance @12-31-21 | $ | ( | ) | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Investments made during quarter ended 03-31-22 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance @03-31-22 | $ | ( | ) | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Investments made during quarter ended 06-30-22 | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance @06-30-22 | $ | ( | ) | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Investments made during quarter ended 06-30-22 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Investment write off during quarter ended 09-30-22 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance @09-30-22 | $ | ( | ) | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| 23 |
NOTE 7 – NOTES PAYABLE, RELATED PARTY
As of September 30, 2022 and December 31,
2021, the Company’s officers and directors have provided advances and incurred expenses on behalf of the Company as such have been
evidenced by the issuance of notes to such officers and directors. The notes are unsecured, due on demand and accrue interest at a rate
of 5% per annum. The balance due to Notes Payable Related Party as of September 30, 2022 and December 31, 2021 was $
NOTE 8 – CONVERTIBLE NOTES PAYABLE
During the nine months ended September 30, 2022, the Company issued an aggregate of shares of its common stock in settlement of issued convertible notes payable and accrued interest.
For the nine months ended September 30, 2022
and September 30, 2021, the Company recorded amortization of debt discounts of $
Convertible notes payable are comprised of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Lender | (Unaudited) | (Audited) | ||||||
| Convertible note payable – Labrys | $ | $ | ||||||
| Convertible note payable – FF Global Opportunities fund | ||||||||
| Convertible note payable - Crown Bridge Partners | ||||||||
| Convertible note payable – Beach Labs | ||||||||
| Convertible note payable - GS Capital Partners LLC | ||||||||
| Convertible note payable – Pinnacle Consulting Services, Inc. | ||||||||
| Convertible note payable – Geneva Roth | ||||||||
| Convertible note payable – Dutchess Capital | ||||||||
| Convertible note payable – Coventry | ||||||||
| Convertible note payable - GW Holdings | ||||||||
| Convertible note payable – Sixth Street Lending | ||||||||
| Convertible note payable – Fourth Man LLC | ||||||||
| Convertible note payable – 1800 Diagonal Lending LLC | ||||||||
| Convertible note payable – Mast Hill Fund | ||||||||
| Convertible note payable – Powerup Lending | ||||||||
| Convertible note payable – Vista Point Services LLC | ||||||||
| Convertible note payable – EBF Holdings, LLC | ||||||||
| Convertible note payable – Fundamental Capital, LLC | ||||||||
| Convertible note payable – Kingdom Kapital, LLC | ||||||||
| Convertible note payable – Speedy Funding, LLC | ||||||||
| Convertible note payable - St. George | ||||||||
| Total | ||||||||
| Less debt discounts | ( | ) | ( | ) | ||||
| Net | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Long term portion | $ | $ | ||||||
| 24 |
Convertible Note Payable-Mast Hill Fund
In May 2022, the Company
issued a convertible promissory note in the aggregate principal amount of $
The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note. The Company is prohibited from effecting an exercise of the warrant to the extent that, as a result of such exercise, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of the note.
As of September 30, 2022 the Company owed an aggregate
of $
Convertible Note Payable-Labrys
In June 2021, the Company
issued a convertible promissory note in the aggregate principal amount of $
The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note. The Company is prohibited from effecting an exercise of the warrant to the extent that, as a result of such exercise, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of the note.
As of September 30, 2022 and December 31, 2021, the
Company owed an aggregate of $
Convertible Notes Payable-Crown Bridge Partners
From October 1 through December 31, 2019,
the Company issued convertible promissory notes in the aggregate principal amount of $
| 25 |
The Company has the right to prepay the notes for an amount ranging from 125% to 140% multiplied by the outstanding balance (all principal and accrued interest) depending on the prepayment period (ranging from 1 to 180 days following the issuance date). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note.
During the nine months ended September 30, 2022, the
Company repaid Crown Bridge $
Convertible Notes Payable-GS Capital Partners LLC
In August 2021, the Company issued convertible promissory
notes in the aggregate principal amount of $
The Holder of this Note is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of this Note then outstanding into shares of the Company's common stock (the "Common Stock") at a price ("Conversion Price") for each share of Common Stock equal to 62% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer. To the extent the Conversion Price of the Company’s Common Stock closes below the par value per share, the Company will take all steps necessary to solicit the consent of the stockholders to reduce the par value to the lowest value possible under law. The Company agrees to honor all conversions submitted pending this increase. In the event the Company experiences a DTC “Chill” on its shares, the Conversion Price shall be decreased to 52% instead of 62% while that “Chill” is in effect. In no event shall the Holder be allowed to effect a conversion if such conversion, along with all other shares of Company Common Stock beneficially owned by the Holder and its affiliates would exceed 4.99% of the outstanding shares of the Common Stock of the Company (which may be increased up to 9.9% upon 60 days’ prior written notice by the Investor).
As of the funding date of
each note, the Company determined the fair value of the embedded derivative associated with the convertibility of each note. The fair
value of the embedded derivative has been added to the debt discount (total debt discount is limited to the face value of the debt) with
any excess of the derivative liability recognized as interest expense. The aggregate debt discount of $
In January 2022, the Company issued convertible promissory
notes in the aggregate principal amount of $
The Holder of this Note is entitled, at its option,
at any time after cash payment, to convert all or any amount of the principal face amount of this Note then outstanding into shares of
the Company's common stock (the "Common Stock") at a price ("Conversion Price") for each share of Common Stock equal
to $
In February 2022, the Company issued a convertible
promissory note in the aggregate principal amount of $
The Holder of this Note is entitled, at its option,
at any time after cash payment, to convert all or any amount of the principal face amount of this Note then outstanding into shares of
the Company's common stock (the "Common Stock") at a price ("Conversion Price") for each share of Common Stock equal
to $
As of September 30, 2022 and December 31, 2021, the
Company owed an aggregate of $
| 26 |
Convertible Notes Payable-St. George Investments
In January and March 2021, the Company entered into
three convertible promissory notes in the aggregate amount of $
Effective October 6, 2021, the Company issued a secured
convertible promissory note in the amount of $
In March 2022, the Company issued a convertible promissory note in the amount of $266,500 of principal with Bucktown, Capital LLC. The Company received net proceeds of $240,000 after and original issue discount of $24,000 and fees of $2,500. The note matures in March 2023 and bear interest at 8% or 22% in the event of default. The note is convertible at the lender’s option at any time at a fixed price of $0.001 per common share, subject to normal adjustment for common stock splits.
In May 2022, the Company issued a convertible promissory
note in the amount of $
As of September 30, 2022 and December
31, 2021, the Company owed $
Convertible Notes Payable - Robert L. Hymers III
On December 27, 2021, the Company issued convertible
promissory notes in the aggregate principal amount of $
For so long as there remains any amount due hereunder,
the Holder shall have the option to convert all or any portion of the unpaid principal amount of this Note, plus accrued interest (together
with the unpaid principal amount, the “Converted Amount”), into shares of the Company’s common stock. The conversion
price (the “Conversion Price”) shall be equal to a $
The aggregate debt discount of $
On August 6, 2022, the Company issued convertible
promissory notes in the aggregate principal amount of $
For so long as there remains any amount due hereunder, the Holder shall have the option to convert all or any portion of the unpaid principal amount of this Note, plus accrued interest (together with the unpaid principal amount, the “Converted Amount”), into shares of the Company’s common stock. The conversion price (the “Conversion Price”) shall be equal to 80% of the lowest trad price in the 25 prior trading days.
As of September 30, 2022, and December 31, 2021, the
Company owed an aggregate of $
| 27 |
Convertible Note Payable – GW Holdings Group
On January 6, 2020,
the Company entered into a convertible promissory note in the principal amount of $
As of September 30, 2022 and December 31, 2021, the
Company owed principal of $
Convertible Note Payable- Beach Labs
On November 24, 2021, the Company issued a convertible
promissory note in the aggregate principal amount of $
The holder of this Note is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of this Note then outstanding into shares of the Company's common stock (the "Common Stock") at a price ("Conversion Price") for each share of Common Stock equal to 70% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer.
The Company determined the
fair value of the embedded derivative associated with the convertibility of each note. The fair value of the embedded derivative has been
added to the debt discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability
recognized as interest expense. The aggregate debt discount of $
As of September 30, 2022, and December 31, 2021, the
Company owed principal of $
Convertible Note Payable- Sixth Street Lending
On November 16, 2021, the Company issued a promissory
note in the aggregate principal amount of $
On January 10, 2022, the Company issued a promissory
note in the aggregate principal amount of $
As of September 30, 2022, and December 31, 2021, the
Company owed principal of $
Convertible Note Payable- Coventry
On December 29, 2021, the Company issued a promissory
note in the aggregate principal amount of $
As of September 30, 2022 and December 31, 2021, the
Company owed an aggregate of $
| 28 |
Convertible Note Payable-Firstfire
In July 2021, the Company
issued a convertible promissory note in the aggregate principal amount of $
The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note. The Company is prohibited from effecting an exercise of the warrant to the extent that, as a result of such exercise, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of the note.
As of September 30, 2022 and December 31, 2021, the
Company owed an aggregate of $
Convertible Note Payable- Dutchess Capital Growth Fund LP
On May 25, 2021, the Company issued a convertible
promissory note in the aggregate principal amount of $
Beginning six months after date of issue, the holder of this Note is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of this Note then outstanding into shares of the Company's common stock (the "Common Stock") at a price ("Conversion Price") for each share of Common Stock equal to 55% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the fifteen prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer.
The Company determined the
fair value of the embedded derivative associated with the convertibility of each note. The fair value of the embedded derivative has been
added to the debt discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability
recognized as interest expense. The aggregate debt discount of $
On May 5, 2022, the Company
issued a convertible promissory note in the aggregate amount of $
In the event of default on the note by the Company, the holder of this Note is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of this Note then outstanding into shares of the Company's common stock (the "Common Stock") at a price ("Conversion Price") for each share of Common Stock equal to 80% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the 25 prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer.
As of September 30, 2022
and December 31, 2021, the Company owed an aggregate of $
Convertible Note Payable- Geneva Roth Holdings
On July 28, 2021, the Company
issued a promissory note in the aggregate principal amount of $
As of September 30, 2022 and December 31, 2021, the
Company owed an aggregate of $
| 29 |
Convertible Note Payable - Fourth Man LLC
In January 2022, the Company
issued a convertible promissory note in the aggregate principal amount of $
As of September 30, 2022, the Company owed an aggregate
of $
Convertible Note Payable- 1800 Diagonal Lending LLC
On May 18, 2022, the Company issued a promissory note
in the aggregate principal amount of $
On July 29, 2022, the Company issued a promissory
note in the aggregate principal amount of $
As of September 30, 2022, and December 31, 2021, the
Company owed principal of $
Revenue share agreement – Money Well Group
In March 2022, the Company
entered into a revenue share in the aggregate principal amount of $
Revenue share agreement – Vista Point Services LLC
On August 5, 2022, the Company
entered into a revenue share in the aggregate principal amount of $
Revenue share agreement – Everest Business Funding LLC
On August 9 2022, the Company
entered into a revenue share in the aggregate principal amount of $
Revenue share agreement – Fundamental Capital, LLC
On September 13, 2022, the
Company entered into a revenue share in the aggregate principal amount of $
| 30 |
Revenue share agreement – Kingdom Kapital LLC
On July 7, 2022, the Company
entered into a revenue share in the aggregate principal amount of $
Revenue share agreement – Speedy Funding LLC
On August 29, 2022, the Company
entered into a revenue share in the aggregate principal amount of $
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. See Note 10.
Subscriptions Payable
On September 30, 2020, the Company entered
into a share exchange agreement (“Share Exchange Agreement”) with Cannabis Global, Inc. (“CBGL”) dated September
30, 2020, to acquire the number of shares of CBGL’s common stock equal in value to $
On February 26, 2021, the Company entered
into a share exchange agreement (“ECOX Share Exchange Agreement”) with Eco Innovation Group, Inc. (“ECOX”) dated
February 26, 2021, to acquire the number of shares of ECOX’s common stock, equal in value to $
| 31 |
NOTE 9 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company is authorized to issue shares of $ par value preferred stock (“Series A Preferred Stock”) as of September 30, 2022 and December 31, 2021 of which shares are outstanding as of September 30, 2022. As of September 30, 2022 and December 31, 2021, the Company is authorized to issue shares of Class B Preferred Stock of which 2,000,000 shares are issued and outstanding as of September 30, 2022.
Each share of Class A Preferred Stock is entitled
to
Each share of Class B Preferred Stock is
entitled to
Common stock
The Company is authorized to issue
shares of
During the nine months ended September 30,
2022, the Company issued an aggregate of shares of its common stock for services with an estimated fair value of $
During the nine months ended September 30,
2022, the Company issued an aggregate of shares of its common stock, including shares related to warrants accounted for
as liabilities, in settlement of $
During the nine months ended September 30,
2022, the Company sold of its common stock for an aggregate value of $
During the nine months ended September 30,
2022, the Company issued of its common stock for an aggregate value of $
During the nine months ended September 30,
2022, the Company reacquired its common stock of $
During the nine months ended September 30, 2022, the Company’s officer cancelled in commons stock.
During the nine months ended September 30,
2022, the Company had Debt discount from warrants issued with convertible notes payable with an aggregate value of $
During the nine months ended September 30,
2022, the Company issued of its Common stock for contingent consideration for an aggregate value of $
During the nine months ended September 30,
2022, the Company issued of its common stock for subscriptions payable for an aggregate value of $
During the nine months ended September 30,
2022, the Company issued of its common stock for the settlement of accounts payable for an aggregate value of $
During the nine months ended September 30, 2022, the Company had of its common stock cancelled and returned to treasury as a result of the settlement of a legal case between the Securities and Exchange Commission and the holder of the shares, whereby the holder was required to forfeit and cancel all outstanding shares its held of the Company’s Common Stock
Options
As of September 30, 2022, the Company has no outstanding stock options.
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Warrants
The following table summarizes the stock warrant activity for the nine months ended September 30, 2022:
| Shares | Weighted-Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Cancelled/Expired | ( | ) | — | |||||||||||||
| Increase due to reset provision | — | |||||||||||||||
| Exercised | — | |||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2022 | $ | $ | ||||||||||||||
Certain warrants issued to debt holders have reset provisions whereby upon subsequent issuances of common stock at a price below the current exercise price, the number of warrants increase and the exercise price is reduced to the new price. 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 $ as of September 30, 2022, which would have been received by the option holders had those option holders exercised their options as of that date.
NOTE 10 — FAIR VALUE MEASUREMENT
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, 2022 and December 31,
2021, the Company did
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The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Note 3. 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 3 are that of volatility and market price of the underlying common stock of the Company.
As of September 30, 2022 and December 31, 2021, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of September
30, 2022 and December 31, 2021, in the amount of $
The fair values were determined using the Binomial
Option Pricing Model based on the following assumptions: (1) dividend yield of %; (2) expected volatility of % to %, (3)
weighted average risk-free interest rate of % to %, (4) expected life of to years, (5) conversion prices of $ to
$ and (6) the Company's common stock price of $
For the nine-month period ended September 30, 2022,
the Company recorded a loss on the change in fair value of derivative liabilities of $
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, 2022:
| Debt Derivative | ||||
| Balance, January 1, 2022 | $ | |||
| Increase resulting from initial issuance of additional convertible notes payable recorded as debt discount | ||||
| Increase resulting from initial issuances of additional convertible notes payable recorded as day one loss | ||||
| Decreases resulting from conversion or payoff of convertible notes payable | ( | ) | ||
| Decreases resulting from payoff of convertible notes payable | ( | ) | ||
| Loss due to change in fair value included in earnings | ||||
| Balance, September 30, 2022 | $ | |||
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, 2022, 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 to business meetings and due diligence with respect to acquisition
targets and working capital purposes. As of September 30, 2022 and December 31, 2021, the balance due to officers for travel and working
capital purposes was $
As of September 30, 2022 and December 31,
2021, accrued compensation due to officers and executives included as accrued compensation was $
Related party
sales contributed $
NOTE 12 – 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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with and our consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
Background
History and Development of the Company
We were incorporated in the State of Utah on October 4, 1985, under the name of Mormon Mint, Inc., and our business focused on the manufacture and marketing of commemorative medallions related to the Church of Jesus Christ of Latter-Day Saints. On January 5, 1999, the Company changed its name to Converge Global, Inc., and subsequently focused on the development and implementation of Internet web content and e-commerce applications. In the period from 2009 to 2014, we operated primarily in the mining exploration business, and in 2015, we left the mining business and began an internet-based marketing business focused on online marketing of service items to the hospitality and food service industry, selling retail product directly to consumers from food distributors via credit card and commercial accounts.
On September 4, 2015, Donald Steinberg and Charles Larsen acquired control of the Company through the purchase of 400,000,000 shares of restricted common stock and 10,000,000 shares of Preferred Class A stock for $105,000.00, in equal amounts. On September 9, 2015, Donald Steinberg was appointed Chairman of the Board, Chief Executive Officer and Secretary of the Company. Mr. Larsen was appointed to the Board of Directors. The new management changed the Company’s business plans and operations to focus on emerging opportunities in the cannabis and hemp industries. On December 1, 2015, the Company changed its name to Marijuana Company of America, Inc. and its stock trading symbol to MCOA. On December 6, 2019, a change of control occurred, where Donald Steinberg and Charles Larsen transferred their control shares to directors Robert Coale, Edward Manolos and Jesus Quintero. Also on December 6, 2019, Jesus Quintero, who was appointed as Chief Financial Officer in 2018, was appointed as our Chief Executive Officer. Mr. Quintero is currently our Chief Executive Officer and Chief Financial Officer, and a member of the Board of Directors.
Marijuana Company of America is a Utah corporation quoted on OTC Markets Pink Tier under the symbol “MCOA”. We are based in Los Angeles, California.
We are an owner and operator of licensed cannabis cultivation, processing and dispensary facilities and a developer, producer and distributor of innovative branded cannabis and cannabidiol (“CBD”) products in the United States. We are committed to creating a national distributorship and retail brand portfolio of branded cannabis and CBD products, although as of the date of this filing, marijuana (defined as cannabis containing delta-9 tetrahydrocannabinol concentration of more than 0.3 percent on a dry weight basis) currently remains illegal under U.S. federal law.
Through our wholly-owned subsidiary cDistro, Inc., a Nevada corporation, our wholly-owned CBD product distribution business, we distribute hemp and CBD products throughout the United States. Through cDistro, we distribute high quality hemp-derived cannabinoid products, as detailed on our cDistro website, www.cdistro.com. cDistro offers CBD brands along with smoke and vape shop related products to wholesalers, c-stores, specialty retailers, and consumers in North America. Through cDistro, we work exclusively with select manufacturers to deliver retail service and products at wholesale prices
Through our wholly owned subsidiary H Smart, Inc., a Delaware corporation, we develop and sell CBD products under the brand name hempSMART™. Our business also includes making selected investments and entering into joint ventures with start-up businesses in the legalized cannabis and hemp industries.
Readers are directed to review our detailed disclosures in Item 1, Business; Principal Products and their Markets; Joint Ventures and Investments above. A summary of our investment and joint venture activity follows:
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Joint Ventures
Bougainville Ventures, Inc. Our joint venture with Bougainville Ventures, Inc. is currently in litigation (See Legal Proceedings, Item 3). We recorded an annual impairment in 2017 of $792,500, reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded equity losses of $37,673 and $11,043 for the first and second quarters respectively, and recorded an annual impairment of $285,986 for the year ended December 31, 2018, at which time we determined the investment to be fully impaired due to Bougainville’s breach of contract and resulting litigation.
Global Hemp Group Scio Oregon Joint Venture. On May 8, 2018, we entered into a joint venture with Global Hemp Group, Inc., develop a project to commercialize the cultivation of industrial hemp on a 109-acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating under the Oregon corporation Covered Bridges, Ltd. The joint venture agreement commits the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company has complied with its payments. The 2018 crop of hemp grown on the joint venture’s real property consisted of 33 acres of high yielding CBD hemp grown in an orchard style cultivation on the property. The 2018 harvest consisted of approximately 37,000 high yielding CBD hemp plants producing 24 tons of biomass that produced 48,000 pounds of dried biomass. However, there were delays with Global Hemp Group’s management and maintenance of the business and the biomass that caused degradation to the harvested crop affecting marketability. Additional issues and disputes arose between the Company and Global Hemp Group. These disputes led to the parties entering into a settlement agreement on September 28, 2020, whereby Global Hemp Group agreed to pay the Company $200,000 and issue common stock to the Company equal in value to $185,000 as of September 28, 2020, subject to a non-dilutive protection provision. Additionally, Global Hemp Group agreed to pay the Company $10,000 to cover the Company’s legal fees relating to the Agreement. In exchange for the settlement consideration, the Company agreed to relinquish its ownership interest in the joint venture.
Natural Plant Extract of California & Subsidiaries Joint Venture; On April 15, 2019, the Company entered into a joint venture agreement with Natural Plant Extracts of California, Inc. and subsidiaries (“NPE”). The purpose of the joint venture was to utilize NPE’s California and City cannabis licenses to jointly operate a business named “Viva Buds” to operate a licensed cannabis distribution service in California. In exchange for acquiring 20% of NPE’s common stock, the Company agree to pay two million dollars and issue NPE one million dollars’ worth of the Company’s restricted common stock. As of February 3, 2020, the Company was in arrears in its payment obligations under the joint venture agreement, and the parties entered into a settlement and release of all claims terminating the joint venture. The parties agreed to reduce the Company’s equity ownership in NPE from 20% to 5%. The Company also agreed to pay NPE $85,000 and the balance of $56,085.15 paid in a convertible promissory note issued with terms allowing NPE to convert the note into common stock at a 50% discount to the closing price of MCOA’s common stock as of the maturity date. As of the date of this filing, the Company satisfied its payment obligations under the settlement agreement. Our continuing 5% equity ownership in NPE involves related parties, since Edward Manolos, our director, is also a director and shareholder of Cannabis Global, Inc., which is the controlling shareholder holding 55% of Natural Plant Extract of California Inc. Joint Ventures in Brazil and Uruguay; On October 1, 2020, we entered into two Joint Venture Agreements with Marco Guerrero, a director of the Company, dated September 30, 2020, to form joint venture operations in Brazil and in Uruguay to produce, manufacture, market and sell the Company’s hempSMART™ products in Latin America, and will also work to develop and sell hempSMART™ products globally. The Joint Venture Agreements contain equal terms for the formation of joint venture entities in Uruguay and Brazil. The Brazilian joint venture will be headquartered in São Paulo, Brazil, and will be named HempSmart Produtos Naturais Ltda. (“HempSmart Brazil”). The Uruguayan joint venture will be headquartered in Montevideo, Uruguay and will be named Hempsmart Uruguay S.A.S. (“HempSmart Uruguay”). Both are in the development stage.
Investments
Share Exchange with Cannabis Global, Inc. On September 30, 2020, the Company entered into a securities exchange agreement with Cannabis Global, Inc. (OTC: CBGL), a Nevada corporation. By virtue of the agreement, the Company issued 650,000,000 shares of its unregistered common stock to Cannabis Global in exchange for 7,222,222 shares of Cannabis Global unregistered common stock. The Company and Cannabis Global also entered into a lock up leak out agreement, which prevents either party from sales of the exchanged shares for a period of 12 months. Thereafter the parties may sell not more than the quantity of shares equaling an aggregate maximum sale value of $20,000 per week, or $80,000 per month until all Shares and Exchange Shares are sold. Our transaction with Cannabis Global, Inc. is material and involves related parties, since Edward Manolos, our director and holder of Preferred Class A stock, is also a director and officer of Cannabis Global, Inc.
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Share Exchange with Eco Innovation Group, Inc. On February 26, 2021, we entered into a Share Exchange Agreement with Eco Innovation Group, Inc., a Nevada corporation quoted on OTC Markets Pink (“ECOX”) to acquire the number of shares of ECOX’s common stock, equal in value to $650,000 based on the per-share price of $0.06, in exchange for the number of shares of MCOA common stock equal in value to $650,000 based on the closing price for the trading day immediately preceding the effective date (the “Share Exchange Agreement”). For both parties, the Share Exchange Agreement contains a “true-up” provision requiring the issuance of additional common stock in the event that a decline in the market value of either parties’ common stock should cause the aggregate value of the stock acquired pursuant to the Share Exchange Agreement to fall below $650,000. Complementary to the Share Exchange Agreement, the Company and ECOX entered into a Lock-Up Agreement dated February 26, 2021 (the “Lock-Up Agreement”), providing that the shares of common stock acquired pursuant to the Share Exchange Agreement shall be subject to a lock-up period preventing its sale for a period of 12 months following issuance and limiting the subsequent sale to aggregate maximum sale value of $20,000 per week, or $80,000 per month. On October 1, 2021, we entered into a First Amendment to Lock-Up Agreement between the Company and Eco Innovation Group, Inc., dated and effective October 1, 2021 (the “Amended Lock-Up Agreement”), which amends that certain Lock-Up Agreement entered into between the Company and Eco Innovation Group, Inc. on February 26, 2021 (the “Original Lock-Up Agreement”). The Amended Lock-Up Agreement amends the Original Lock-Up Agreement in one respect, by amending the initial lock-up period from 12 months following its effective date to 6 months following its effective date. All other terms and conditions of the Original Lock-Up Agreement remain unaffected.
Asset Purchase Agreement with VBF Brands, Inc. On October 6, 2021, the Company, through its wholly owned subsidiary Salinas Diversified Ventures, Inc., a California corporation, entered into an Asset Purchase Agreement, Management Services Agreement, Cooperation Agreement and Employment Agreement with VBF Brands, Inc., a California corporation (“VBF”), a wholly owned subsidiary of Sunset Island Group, Inc., a Colorado corporation (“SIGO”). VBF and SIGO agreed to transfer to the Company all of VBF’s outstanding stock to the Company, and appointed our CEO and CFO Jesus Quintero as President of VBF.
VBF owns various fixed assets including machinery and equipment, a lease for a 10,000 square foot facility located at 20420 Spence Road, Salinas, California, 93908, leasehold improvements, good-will, inventory, tradenames including “VBF Brands,” trade secrets, intellectual property, and other tangible and intangible properties, including licenses issued by the City of Salinas, County of Monterey, and the State of California to operate a licensed cannabis nursery, cultivation facility, and operations for the manufacturing and distribution of cannabis and cannabis products.
VBF and SIGO agreed to sell and transfer to the Company all of VBF’s outstanding stock, and, by virtue of the Management Services Agreement, appoint Mr. Jesus Quintero as President of VBF, vesting management and control of VBF’s licensed cannabis operations in the Company. Concurrently, VBF and Livacich entered into a Cooperation Agreement, whereby VBF and Livacich agreed to cooperate to facilitate the transfer of ownership of VBF, which includes licenses issued by the City of Salinas, County of Monterey, and the State of California, to operate a cannabis nursery, cultivation facility and manufacturing and distribution operations to the Company. The Company also agreed to retain Livacich as Chief Executive Officer for a term of two years and agreed to compensate her with a salary including a signing cash bonus of $250,000, and a $250,000 performance cash bonus payable after six months after the Effective Date. The bonus is conditioned upon Livacich meeting an agreed to “Net Revenue” target of one million dollars ($1,000,000) from VBF’s operations during the six-month period after closing of the Asset Purchase Agreement, and her compliance with the terms and conditions of this Asset Purchase Agreement, the Management Services Agreement and the Cooperation Agreement.
As consideration for the transaction, the Company agreed to assume two secured convertible promissory notes issued by SIGO to St. George Investments, LLC, a Utah limited liability company (“St. George”) (the “SIGO Notes”). The first note was issued December 8, 2017, in the original face amount of $170,000.00, and the second was issued February 13, 2018, in the original face amount of $4,245,000.00. SIGO also issued warrants to St. George to purchase common shares in SIGO, and fifty (50) shares of SIGO’s preferred stock. St. George agreed to cancel the warrants and preferred shares upon the Company’s assumption of the SIGO Notes.
Under the Asset Purchase Agreement, the closing is conditioned upon certain conditions precedent, specifically (i) VBF and SIGO’s full corporate authorization, consent and execution of this Agreement; (ii) VBF’s sale to MCOA of 100% of the issued and outstanding shares of VBF; (iii) full corporate authorization, consent compliance with and execution of the Management Services Agreement and Cooperation Agreement; (iv) SIGO’s disclosure of the Agreement on Form 8-K with the Securities and Exchange Commission; (v) full cooperation in MCOA’s financial auditing of VBF in accordance with ASC 805, including providing unrestricted access to all VBF corporate and financial records and providing all necessary cooperation with VBF financial personnel; (vi) full cooperation in aiding and assisting Buyer with its change of ownership applications with the relevant licensing authorities; (vii) the warranty of truthful representations and execution of and compliance with the terms and conditions of the Executive Employment Agreement, Management Services Agreement and the Cooperation Agreement.
As of the date of this filing, the conditions precedent to the closing of the Asset Purchase Agreement remain in the process of implementation, so that the Asset Purchase Agreement closing has not yet occurred pursuant to its terms. Legal counsel for MCOA is currently in the process of working with VBF, Salinas Diversified Ventures, and the relevant state and local governments to effect the change of control and license transfers necessary to close the Asset Purchase Agreement.
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Results of Operations
Comparison of the three months Ended September 30, 2022 and 2021
For the three months ended September 30, 2022 and 2021, we had net losses from continuing operations of $722,115 and $1,419,664, respectively, an decrease of $697,549. This decrease is due primarily to the effects of a company-wide effort for overall reduction of General and Administrative expenses, as well as a decrease in gross revenues.
Revenues
The Company generated revenues of $142,394 and $442,178 for the three months ended September 30, 2022 and 2021, respectively. The decrease of $299,784 and is primarily attributed to the Company’s phase-out of its hempsmart operations during the quarter and due to effects of Hurricane Ian which affected CDistro sales in South Florida.
The following table identifies products and equipment lease revenues during the three months ended September 30, 2022 and 2021, respectively:
| September 30, 2022 | September 30, 2021 | |||||||
| Body Lotion | $ | — | $ | 184 | ||||
| Brain | $ | 470 | $ | 1,153 | ||||
| Drink Mix | $ | — | $ | — | ||||
| Drops | $ | 4,250 | $ | 11,533 | ||||
| Face Moisturizer | $ | — | $ | — | ||||
| Pain Cream | $ | 3,266 | $ | 8,379 | ||||
| Pet Drops | $ | — | $ | 2,939 | ||||
| Bottles – Nic | $ | — | $ | 75,531 | ||||
| Bottles – Salt Nic | $ | — | $ | — | ||||
| CBD Hempettes | $ | 1,911 | 485 | |||||
| Disposables–Tobacco – Free Nicotine | $ | — | $ | — | ||||
| Kratom | $ | 14,304 | $ | 306,256 | ||||
| Other cDistro products | $ | 6,731 | $ | 23,137 | ||||
| Vape products | $ | 31,670 | $ | — | ||||
| Marketing fees | $ | 57,292 | — | |||||
| MCOA Equipment Lease rental | $ | 22,500 | $ | 12,581 | ||||
| $ | 142,394 | $ | 442,178 | |||||
Cost of sales
Costs of sales primarily consist of inventory cost and overhead, manufacturing, packaging, warehousing, shipping, and direct labor costs directly attributable to all of our products. For the three months ended September 30, 2022 and 2021, our total costs of sales were $58,200 and $378,491, respectively, an decrease of $320,291.The decrease in costs of sales is attributed to low volumes from our hempsmart business as we began to phase-out product sales during the quarter and also due to low purchases from our CDistro business which was impacted by Hurricane Ian. .
Gross profit
For the three months ended September 30, 2022 and 2021, gross profit was $84,194 and $63,687, respectively. This increase of $20,507 was primarily attributed to the cDistro business which sold CBD and hemp products throughout the USA during the period. We anticipate an increase in sales from our cDistro company as the company ramping up business after Hurricane Ian.. As a percentage of total revenues, gross profit was 59.1% and 14.4% for the three months ended September 30, 2022 and 2021, respectively.
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Selling and marketing expenses
For the three months ended September 30, 2022 and 2021, selling and marketing expenses were $43,835 and $167,664, respectively. This decrease of $123,829 is due to the phase-out of the Company’s hempsmart business in the USA as well as a decrease from our CDistro business due to the impact of Hurricane Ian. .
Payroll and related expenses
For the three months ended September 30, 2022 and 2021, payroll and related expenses were $241,504 and $142,830, respectively. This increase of $98,674, is mainly attributable to an increase in wages for operation staff and the Company CEO compensation and benefits as well as the Company’s new employee health insurance. during the three months ended eptember 30, 2022 as compared to the three months ended September 30, 2021.
Stock-based compensation
We measure 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. We record stock-based compensation expense in the same expense classifications in the statements of operations, as if such amounts were paid in cash. For the three months ended September 30, 2022 and 2021, stock-based compensation was $9,000 and $529,393, respectively. This decrease of $520,393is due primarily to less issuance of equity to consultants and employees during the three months ended ended September 30, 2022 as compared to September 30, 2021.
General and administrative expenses
Other general and administrative expenses decreased to $631,514 for the three months ended September 30, 2022 compared to $639,767 for the three months ended September 30, 2021. General and administrative expenses include research and development, building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The decrease of $8,253 is attributed consistent cost cutting measures implemented during the quarter as compared to the three months ended September 30, 2021
Loss on change in fair value of derivative liabilities
For the three months ended September 30, 2022 and 2021, we issued convertible promissory notes and warrants with an embedded derivative, all requiring us to calculate the fair value of the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations. This resulted in a loss in changes in fair value of derivative liabilities of $126,136 and a gain of 1,177,610 for the three months ended September 30, 2022 and 2021, respectively.
Loss on equity investments
During the three months ended September 30, 2022 and 2021, we realized a loss on equity investments of $2,009,254 and $0, respectively. The loss was related primarily to the writeoff of the Company’s investments in Cannabis Global Inc. and ECO Innovation Group Inc. during the three months ended September 30, 2022.
Gain (loss) on settlement of debt
During the three months ended September 30, 2022 and 2021, we realized a loss on settlement of debt of $148,324 and $88,990, respectively. The loss was related primarily to the settlement in shares to lenders during the three months ended September 30, 2022 and September 30, 2021.
Interest expense
Interest expense during the three months ended September 30, 2022 was $761,060 as compared to $549,363 for the three months ended September 30, 2021 an increase of $211,697. Interest expense primarily consists of interest incurred on our convertible debt and other debt. The debt discounts amortization and non-cash interest incurred during the three months ended September 30, 2022 and 2021 was $640,417 and $487,858, respectively. ..
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Results of Operations
Comparison of the nine months Ended September 30, 2022 and 2021
For the nine months ended September 30, 2022 and 2021, we had net losses from continuing operations of $2,481,068 and $3,228,703, respectively, a decrease of $747,635. This decrease is primarily attributed to the Company’s phase-out of its hempsmart operations during the quarter and due to effects of Hurricane Ian which affected CDistro sales in South Florida.
Revenues
The Company generated revenues of $962,343 and $493,988 for the nine months ended September 30, 2022 and 2021, respectively. The increase of $468,355 and is primarily attributed to the Company’s cDistro business which distributes CBD and hemp products throughout the USA.
The following table identifies products and equipment lease revenues during the nine months ended September 30, 2022 and 2021, respectively
| September 30, 2022 | September 30, 2021 | |||||||
| Body Lotion | $ | — | $ | 1,251 | ||||
| Brain | $ | 2,594 | $ | 1,514 | ||||
| Drink Mix | $ | — | $ | 167 | ||||
| Drops | $ | 16,180 | $ | 41,249 | ||||
| Face Moisturizer | $ | — | $ | 2,793 | ||||
| Pain Cream | $ | 8,836 | $ | 24,802 | ||||
| Pet Drops | $ | 2,408 | $ | 3,879 | ||||
| Bottles – Nic | $ | 246 | $ | 75,531 | ||||
| Bottles – Salt Nic | $ | 288 | $ | — | ||||
| CBD Hempettes | $ | 52,293 | $ | — | ||||
| Disposables–Tobacco – Free Nicotine | $ | 303,936 | $ | — | ||||
| Kratom | $ | 250,006 | $ | 306,256 | ||||
| Other cDistro products | $ | 45,639 | $ | 23,965 | ||||
| Vape products | $ | 155,125 | $ | — | ||||
| Marketing fees | $ | 57,292 | — | |||||
| MCOA Equipment Lease rental | $ | 67,500 | $ | 12,581 | ||||
| $ | 962,343 | $ | 493,988 | |||||
Cost of sales
Costs of sales primarily consist of inventory cost and overhead, manufacturing, packaging, warehousing, shipping and direct labor costs attributable to our hempSMART products. For the nine months ended September 30, 2022 and 2021, our total costs of sales were $607,061 and $406,972, respectively. The increase of $200,089 was primarily attributed to our distributor cDistro purchases products from various CBD and hemp manufactures for resale during the nine month period ended September 30, 2022 as compared to the nine months ended September 30, 2021..
Gross profit
For the nine months ended September 30, 2022 and 2021, gross profit was $355,282 and $87,016, respectively. This increase of $268,266 was primarily attributed to the Company’s cDistro distribution business which sells CBD and hemp products throughout the USA. We anticipate an increase in sales from our cDistro company as we continue the deployment our new distribution strategies during the rest of 2022; however, no assurance can be provided that sales will increase. As a percentage of total revenues, gross profit was 37.0% and 18.0% for the nine months ended September 30, 2022 and 2021, respectively.
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Selling and marketing expenses
For the nine months ended September 30, 2022 and 2021, selling and marketing expenses were $221,302 and $430,425, respectively. This decrease of $209,123 is due to the phase-out of the Company’s hempsmart business in the USA as well as a decrease from our CDistro business due to the impact of Hurricane Ian.
Payroll and related expenses
For the nine months ended September 30, 2022 and 2021, payroll and related expenses were $778,682 and $413,232, respectively. This increase of $365,396, is mainly attributable to wages for operation staff, the Company CEO compensation and benefits, compensation from the Company’s cDistro business, $80,000 attributed to our new subsidiary Salinas Diversified Ventures, as well as the Company’s new employee health insurance, which was implemented during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Stock-based compensation
We measure 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. We record stock-based compensation expense in the same expense classifications in the statements of operations, as if such amounts were paid in cash. For the nine months ended September 30, 2022 and 2021, stock-based compensation was $179,000 and $688,293, respectively. This decrease of $509,293 is primarily to less issuance of equity to consultants and employees during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
General and administrative expenses
Other general and administrative expenses decreased to $1,674,805 for the nine months ended September 30, 2022 compared to $1,777,419for the nine months ended September 30, 2021. General and administrative expenses include research and development, building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The decrease of $102,614 is principally attributed to a $298,460 decrease in lawsuits engaged by the Company which was offset by an increase in overall accounting fees over $45,000,an increase in consulting and audit fees of over $125,000 and a $35,000 reduction in meals and entertainment. for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Loss on change in fair value of derivative liabilities
For the nine months ended September 30, 2022 and 2021, we issued convertible promissory notes and warrants with an embedded derivative, all requiring us to calculate the fair value of the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations. This resulted in a gain on changes in fair value of derivative liabilities of $1,177,610 and a loss of $451,679 for the nine months ended September 30, 2022 and 2021, respectively.
Loss on equity investments
During the nine months ended September 30, 2022 and 2021, we realized a loss on equity investments of $2,009,254 and $0, respectively. The loss was related primarily to the writeoff of the Company’s investments in Cannabis Global Inc. and ECO Innovation Group Inc. during the nine months ended September 30, 2022.
Gain (loss) on settlement of debt
During the nine months ended September 30, 2022 and 2021, we realized a loss on settlement of debt of $335,824 and $253,967, respectively. The loss was related primarily to the settlement in shares to lenders during the nine months ended September 30, 2022 and 2021.
Interest expense
Interest expense during the nine months ended September 30, 2022 was $2,859,534 as compared to $2,542,108 for the nine months ended September 30, 2021 an increase of $317,426. Interest expense primarily consists of interest incurred on our convertible debt and other debt. The debt discounts amortization and non-cash interest incurred during the nine months ended September 30, 2022 and 2021 was $1,370,366 and $744,783, respectively. In addition, as of September 30, 2022 and 2021, we incurred a non-cash interest of $2,010,783 and $1,232,641, respectively, in connection with convertible notes.
Impairment (Loss) on Intangible Asset
During the nine months ended September 30, 2022, the Company incurred a $2,020,982 impairment loss on an intangible asset associated with the acquisition of VBF Brands Inc. which is currently under litigation.
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Liquidity and Capital Resources
We have generated a net loss from continuing operations for the nine months ended September 30, 2022 of $2,651,720 and used $1,757,153 of cash for operations. As of September 30, 2022, we had total assets of $3,468,297, which included cash of $831. Accounts receivable trade of $240,351, inventory of $180,580 and other current assets of $36,937. On October 6, 2021, the Company entered into an Asset Purchase Agreement, Management Services Agreement, Cooperation Agreement and Employment Agreement with VBF Brands, Inc. As consideration for the transaction, the Company agreed to assume two secured convertible promissory notes issued by SIGO to St. George Investments, LLC with a net balance of $4,091,378. Since the conditions of the acquisition of VBF haven’t been consummated, this assumed debt was recorded as an Other Current Asset. Based on the current conditions and at the suggestion of legal counsel, the company has determined a risk in the collectability of this asset and accordingly, has calculated an impairment loss of $2,020,982 as the acquisition continues to not be consummated as of September 30, 2022.
During the nine months ended September 30, 2022 and 2021, we met our capital requirements through a combination the sale of securities and convertible debt instruments. We will need to secure additional external funding in order to continue our operations. For the nine months ended September 30, 2022, our primary internal sources of liquidity were provided by an increase in proceeds from the issuance of note payables of $1,649,980 and proceeds from the sale of common stock of $1218,315, as compared to proceeds from issuance of notes payable of $2,065,863 for the nine months ended September 30, 2021 and proceeds from sale of common stock of $1,492,851 for the nine months ended September 30, 2021.
Cash Flows from Operating Activities
For the nine months ended September 30, 2022 and 2021, we used cash in operating activities of $1,757,153 and $2,693,632, respectively. This decrease of $936,479 is due primarily to an increase in net loss for the nine months ended September 30, 2022 of $10,066,431 as compared to $7,250,698 for the nine months ended September 30, 2021. This was offset by the increase in cashflows from the impairment loss of the VBF acquisition asset of $2,020,982 and a increase in accounts payable $735,480 and a decrease in accounts receivable of $101,644 for the nine months for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Cash Flows from Investing Activities
During the nine months ended September 30, 2022 and 2021, we used cash of $2,748 and 185,850, respectively, in investing activities related to our purchase of property and equipment for the nine months ended September 30, 2022. In addition, we invested in joint ventures and acquisition of new business during the nine months ended September 30, 2021.
Cash Flows from Financing Activities
During the nine months ended September 30, 2022, net cash provided by financing activities was $1,676,649 which was primarily attributable to $1,649,980 from the issuance of notes and $1,218,315 from the sale of our common stock, this was offset by $1,144,760 of repayments of notes payable and a $60,000 repurchase of the company’s common stock. During the nine months ended September 30, 2021, net cash provided by financing activities was $2,912,709 which was attributable to $2,065,863 from the issuance of notes and $1,492,851 which was from the sale of our common stock.
Our 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 our needs for cash. Our primary source of operating funds in 2022 and 2021 has been proceeds from the sale of our common stock and the issuance of convertible debt and other debt. We have experienced net losses from operations since inception, but expect these conditions to improve in the second half of 2022 and beyond as we develop direct sales and marketing programs. We had stockholders' deficiencies at June 30, 2022 and require additional financing to fund future operations. As of the date of this filing, and due to the early stages of operations, we have 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 cDistroproducts 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.
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Off-Balance Sheet Arrangements; Commitments and Contractual Obligations
As of September 30, 2022, we did not have any off-balance sheet arrangements and did not have any commitments or contractual obligations.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to opt out of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition periods for complying with new or revised accounting standards is irrevocable.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We are required to maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2022, our disclosure controls and procedures were not effective due to material weaknesses. Management has identified the following material weaknesses: our ability to prepare our financial statements in a timely manner and inadequate segregation of duties consistent with control objectives. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to create a new controller position and hire a controller in order to segregate duties within the accounting department consistent with control objectives. In addition, we also intend to increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us and we are able to find a qualified person to fill such role.
Changes in Internal Control
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth herein, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
On September 20, 2018, we filed suit against Bougainville Ventures, Inc. (“Bougainville”), BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court. We previously entered into a joint venture agreement with Bougainville on March 16, 2017, as amended on November 6, 2017.
We and Bougainville originally agreed to a joint venture with the goal of participating in the legalized cannabis business in Washington State. We intended to organize and operate a cannabis growth and cultivation business on land owned by Bougainville in Oroville, Washington. Furthermore, we agreed to finance the joint venture with a cash payment of $800,000 and issued Bougainville 15 million shares of our common stock. Bougainville represented that it would provide the real property for the joint venture, computer-controlled greenhouses and agricultural facilities and, as landlord, oversight of the operations of a cannabis licensee holding a I-502 cannabis license. Bougainville represented that the property was I-502 compliant, and that it had a lease payment arrangement with an I-502 license holder to operate on the land. Bougainville agreed to vend clear title to the real property associated with the I-502 licensee to the joint venture within 30 days of the final payment by us. Despite our compliance, in full with our financial obligations, Bougainville did not and has not transferred the real property to the joint venture. We determined that Bougainville did not own the real property, misappropriated funds paid into the joint venture for its own purposes and did not have an agreement with a licensed I-502 operator.
Pursuant to our complaint, we are seeking legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the registrant, for the appointment of a receiver, the return to treasury of the 15 million shares of common stock issued to Bougainville, and, for treble damages pursuant to the Consumer Protection Act in Washington State. We have filed a lis pendens on the real property.
We recently served process on the defendants and the case is currently in litigation.
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Subsequent to December 31, 2021, the Company has sold a total of 90,000,000 shares of common stock at a fixed price of $0.001 per share for a total of $90,000 in cash to accredited investors under the Company’s active Regulation A offering.
Subsequent to December 31, 2021, the Company has sold a total of 706,250,000 shares of common stock at a fixed price of $0.0008 per share for a total of $565,000 in cash to accredited investors under the Company’s active Regulation A offering.
Subsequent to December 31, 2021, the Company has sold a total of 2,020,000,000 shares of common stock at a fixed price of $0.0002 per share for a total of $404,000 in cash to accredited investors under the Company’s active Regulation A offering.
The foregoing issuances were exempt from registration under Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MARIJUANA COMPANY OF AMERICA, INC. | ||
| Date: November 21, 2022 | By: | /s/ Jesus Quintero |
| Jesus Quintero, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) | ||
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