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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2021

 

or

 

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

 

For the transition period from                          to                          

 

Commission file number: 000-27039

 

MARIJUANA COMPANY OF AMERICA, INC.

(Exact name of registrant as specified in its charter)

 

Utah   98-1246221
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
633 West Fifth Street, Suite 2826    
Los Angeles, CA   90071
(Address of principal executive offices)   (Zip Code)

 

(888) 777-4362

(Registrant’s telephone number, including area code)

 

Not applicable

(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.  Yes    No

 

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).  Yes    No

 

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

 

Large accelerated filer   Accelerated filer
Non-accelerated Filer   Smaller reporting company
Emerging growth company      

 

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

 

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

 

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding at November 16, 2021 was 6,621,939,591.

 

 

 
 
 

 

 

     PAGE
PART I. FINANCIAL INFORMATION    
           
  ITEM 1.   Financial Statements   3
           
      Condensed consolidated balance sheets as of September 30, 2021 (unaudited) and December 31, 2020 (audited)   3
           
      Condensed consolidated statements of operations for the three and nine month ended September 30, 2021 and 2020 (unaudited)   4
           
      Condensed consolidated statement of stockholders’ deficit for the nine months ended September 30, 2021 and 2020 (unaudited)   5
           
      Condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 (unaudited)   7
           
      Notes to condensed consolidated financial statements (unaudited)   8
           
  ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   34
  ITEM 3.   Quantitative and Qualitative Disclosures about Market Risk   45
  ITEM 4.   Controls and Procedures   45
           
PART II. OTHER INFORMATION    
           
  ITEM 1.   Legal Proceedings   46
  ITEM 1A.   Risk Factors   46
  ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds   46
  ITEM 3.   Defaults Upon Senior Securities   46
  ITEM 4.   Mine Safety Disclosures   46
  ITEM 5.   Other Information   46
  ITEM 6.   Exhibits   47
      SIGNATURES   48
           

 

1 
 
 

 

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, plans and objectives of management and markets for our common stock 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 and any updates described in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-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 the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.

 

 

 

2 
 
 

 PART I – FINANCIAL INFORMATION

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS  

 

           
    September 30, 2021    December 31, 2020 
    Unaudited    Audited 
ASSETS          
Current assets:          
Cash  $107,730   $74,503 
Short-term Investments         239,063 
Accounts receivable, net   151,927    8,640 
Inventory   201,860    103,483 
Prepaid Insurance   86,250    55,783 
Other current assets   187,200    56,121 
  Total current assets   734,967    537,593 
           
Property and equipment, net   122,467    6,542 
           
Other assets:          
Long-term Investments   2,301,099    1,552,001 
Right- of- use- assets         7,858 
Goodwill   2,925,884       
Security deposit   2,750    2,500 
           
Total assets   6,087,167    2,106,494 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable   927,260    480,877 
Accrued compensation         79,214 
Accrued liabilities   175,901    401,461 
Notes payable, related parties   20,000    40,000 
Loans payable PPP Stimulus         35,500 
Convertible notes payable, net of debt discount of $950,807 and $808,980, respectively   1,059,443    1,426,894 
Contingent Liability - Acquisition   1,000,000       
Right-of-use liabilities - current portion         7,858 
Subscriptions payable   754,961    670,000 
Derivative liability   432,024    4,426,057 
  Total current liabilities   4,369,589    7,567,861 
           
Total liabilities   4,369,589    7,567,861 
           
Stockholders'  equity (deficit):          
Preferred stock, $0.001 par value, 50,000,000 shares authorized          
Class A preferred stock, $0.001 par value, 10,000,000 shares designated, 10,000,000 shares issued and outstanding as of September 30, 2021 and December 31, 2020   10,000    10,000 
Class B preferred stock, $0.001 par value, 5,000,000 shares designated, 2,000,000 shares issued and outstanding as of September 30, 2021 and December 31, 2020   2,000    2,000 
Common stock, $0.001 par value; 15,000,000,000 shares authorized; 6,373,157,821 and 3,136,774,861 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively   6,373,158    3,136,775 
Common stock to be issued, 30,226,275 and 11,892,411 shares, respectively   30,226    11,892 
Additional paid in capital   88,862,487    77,687,561 
Accumulated deficit   (93,560,293)   (86,309,595)
  Total stockholders' equity (deficit)   1,717,578    (5,461,367)
           
Total liabilities and stockholders' equity  (deficit)  $6,087,167   $2,106,494 

 

 See the accompanying notes to these unaudited condensed consolidated financial statements

3 
 
 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
UNAUDITED

                     
   For the three months ended  For the nine months ended
   September 30, 2021  September 30, 2020  September 30, 2021  September 30, 2020
REVENUES:            
Sales  $442,178   $49,933   $493,988   $206,407 
Related party Sales         3,262          11,565 
Total Revenues   442,178    53,195    493,988    217,972 
                     
Cost of sales   378,491    37,170    406,972    110,563 
                     
Gross Profit   63,687    16,025    87,016    107,409 
                     
OPERATING EXPENSES:                    
Depreciation   3,697    1,374    6,350    4,702 
Selling and marketing   167,664    125,942    430,425    326,608 
Payroll and related   142,830    62,000    413,232    258,842 
Stock-based compensation   529,393    123,000    688,293    665,767 
General and administrative   639,767    294,821    1,777,419    710,094 
  Total operating expenses   1,483,352    607,137    3,315,719    1,966,013 
                     
Net loss from operations   (1,419,664)   (591,112)   (3,228,703)   (1,858,604)
                     
OTHER INCOME (EXPENSES):                    
Interest expense, net   (549,363)   (688,090)   (2,542,108)   (2,460,185)
Impairment gain (Loss) on Joint Ventures         238,296          (22,658)
Income (Loss) on equity investment        240,198         106,305 
Loss on share exchange agreement   (340,984)         (735,178)      
Gain (Loss) on change in fair value of derivative liabilities   1,177,610    (1,454,903)   (451,679)   (312,631)
Unrealized Gain (loss) on trading securities               504,137    (13,945)
Loss on sale of trading securities   (543,200)         (543,200)   (2,603)
(Loss) Gain on settlement of debt   (88,990)   383,440    (253,967)   386,930 
Total other income (expense)   (344,927)   (1,281,059)   (4,021,995)   (2,318,787)
                     
Net loss before income taxes   (1,764,591)   (1,872,171)   (7,250,698)   (4,177,391)
                     
Income taxes (benefit)                        
                     
NET INCOME (LOSS)  $(1,764,591)  $(1,872,171)  $(7,250,698)  $(4,177,391)
                     
Loss per common share, basic and diluted  $(0.00)  $(0.00)  $(0.00)  $(0.01)
                     
Weighted average number of common shares outstanding, basic and diluted (after stock-split)   5,266,505,915    1,178,860,134    4,867,533,020    518,261,567 
                     

 See the accompanying notes to these unaudited condensed consolidated financial statements

 

4 
 
 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
UNAUDITED
 

                                                             
   Class A Preferred Stock   Class B Preferred Stock   Common Stock   Common Stock to be issued   Stock   Paid In   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Subscriptions   Capital   Deficit   Total 
Balance, December 31, 2019   10,000,000   $10,000         $      77,958,081   $77,958         $     $     $63,467,054   $(74,164,213)  $(10,609,201)
Common stock issued to settle amounts previously accrued    —            —            8,333    8    —                 $6,692          6,700 
Common stock issued for services rendered   —            —            156,444,047    156,444    —                  509,323          665,767 
Common stock issued in settlement of convertible notes payable and accrued interest   —            —            1,469,725,298    1,469,725    —                  1,165,922          2,635,647 
Conversion of related party notes payable   —            —            21,384,103    21,384    —                  29,229          50,613 
Common stock issued in exchange for exercise of warrants on a cashless basis   —            —            51,054,214    51,054    1,000,000    1,000          375,446          427,500 
Sale of common stock   —            —            127,012,847    127,013    —                  26,673          153,686 
Common shares issued in settlement of legal case   —            —            10,293,843    10,294    —                  1,273,338          1,283,632 
Reclassification of derivative liabilities to additional paid in capital   —            —            —            —                  3,886,972          3,886,972 
Net Loss   —            —            —            —                        (4,177,391)   (4,177,391)
Balance, September 30, 2020   10,000,000   $10,000         $      1,913,880,766   $1,913,880    1,000,000   $1,000   $     $70,740,649   $(78,341,604)  $(5,676,075)

 

 

 

5 
 
 

 

 

   Class A Preferred Stock   Class B Preferred Stock   Common Stock   Common Stock to be issued   Stock   Paid In   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Subscriptions   Capital   Deficit   Total 
Balance, December 31, 2020   10,000,000   $10,000    2,000,000   $2,000    3,136,774,841   $3,136,775    11,892,411   $11,892   $     $77,687,561   $(86,309,595)  $(5,461,367)
Common stock issued to settle amounts previously accrued   —            —            —            —                                 
Issuance of Preferred stock to officer   —            —     $      —            —                       $         
Common stock issued for services rendered   —            —            142,946,860    142,947    —                  518,345          661,292 
Common stock issued in settlement of convertible notes payable and accrued interest   —            —            905,667,530    905,668    29,226,275    29,226          1,054,388          1,989,282 
Issuance of common stock for settlement of liabilities   —            —            3,027,031    3,027    (10,892,411)   (10,892)         16,488          8,623 
Conversion of related party notes payable and accounts payable   —            —           22,500,000    22,500    —                  119,250          141,750 
Common stock issued in exchange for exercise of warrants on a cashless basis   —            —            462,844,406    462,844    —                  (462,844)            
Sale of common stock   —            —            742,297,599    742,298    —                  895,828          1,638,126 
Issuance of common stock for investments   —            —            691,935,484    691,935    691,935                608,065          1,300,000 
Reclassification of derivative liabilities to additional paid in capital   —            —            —            —                  6,270,052          6,270,052 
Debt discount from warrants issued with convertible notes payable   —            —            —            —                  716,953          716,953 
Common stock issued for acquisition of business   —            —            265,164,070    265,164    —                  1,352,337          1,617,501 
Modification of Notes Payable   —            —            —            —                  86,064          86,064 
Net Loss   —            —            —            —                        (7,250,698)   (7,250,698)
Balance, September 30, 2021   10,000,000   $10,000    2,000,000   $2,000    6,373,157,821   $6,373,158    30,918,210   $30,226   $     $88,862,487   $(93,560,293)  $1,717,578 

 

 

 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, 2021 AND 2020
UNAUDITED

           
   Nine Months Ended September 30,
   2021  2020
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income (Loss)  $(7,250,698)  $(4,177,391)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount   1,232,641    1,373,575 
Depreciation and amortization   5,753    4,702 
Bad debt expense   34,359       
Impairment loss on equity investment         22,658 
Loss on equity investment   735,178    (106,305)
Loss (Gain) on change in fair value of derivative liability   451,679    312,631 
Interest expense recognized for the excess of fair value of derivative liability over net book value of notes payable at issuance   1,035,115       
Loss on share inducement and settlement of warrant liability         427,500 
Stock-based compensation   661,292    665,767 
Unrealized (Gain) Loss on trading securities   39,063    13,945 
Gain on Settlement of joint venture         (386,930)
Loss on settlement of liabilities   256,336       
Changes in operating assets and liabilities:          
Accounts receivable   (5,496)   9,754 
Inventories   (90,561)   3,652 
Prepaid expenses and other current assets   (161,352)   (77,605)
Accounts payable   386,122    205,061 
Accrued expenses and other current liabilities   (23,063)   446,746 
Right-of-use assets   7,858    10,459 
Right-of-use liabilities   (7,858)   (10,577)
Net cash provided by (used in) operating activities   (2,693,632)   (1,262,358)
           
           
Cash flows from investing activities:          
Purchases of property and equipment   (121,603)   (1,271)
Payment to establish joint venture   (99,098)      
Proceeds from sale of investments   190,401       
Investment in joint venture         125,000 
Acquisition of business   (155,550)      
Net cash provided by (used in) investing activities   (185,850)   123,729 
           
Cash flows from financing activities:          
Proceeds from issuance of notes payable   2,065,863    876,302 
Proceeds from PPP loan payable         35,500 
Proceeds from sales of trading securities         10,854 
Repayments of notes payable   (626,005)      
Repayments to related parties   (20,000)      
Proceeds from sale of common stock   1,492,851    153,685 
Net cash provided by (used in) financing activities   2,912,709    1,076,341 
           
Net increase (decrease) in cash   33,227    (62,288)
           
Cash at beginning of period   74,503    211,765 
           
Cash at end of period  $107,730   $149,477 
    —        
           
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  $1,989,282   $2,635,647 
Common stock issued in settlement of related party notes payable and accrued compensation        $50,613 
Reclassification of derivative liabilities to additional paid-in capital  $6,270,052   $3,886,971 
Gains on settlement of JV investment  $     $386,930 
Common stock issued for investment  $1,300,000   $   
Common stock issued to settle liabilities  $8,623   $   
Common stock issued for acquisition of business  $1,617,501   $   
Common shares issued in settlement of legal case  $     $1,283,632 

 

 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, 2021

(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 100% of the common shares of the Company and spun the Company off changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the development and implementation of Internet web content and e-commerce applications. In October 2009, in a 30 for 1 exchange, the Company merged with Sparrowtech, Inc. for the purpose of exploration and development of commercially viable mining properties. From 2009 to 2014, we operated primarily in the mining exploration business.

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

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

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

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

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

The condensed consolidated balance sheet as of December 31, 2020 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 14, 2021 and amended on September 27, 2021 (the “Annual Report”).

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2020.

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, 2021, the Company incurred net losses from operations of $7,250,699 and used cash in operations of $2,838,907. These factors among others may indicate that the Company may be unable to continue as a going concern for a reasonable period of time.

The Company's primary source of operating funds for the nine months ended September 30, 2021 was from revenue 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 2021 and beyond as it continues to develop its direct sales and marketing programs; 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, 2021 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.

 

8 
 
 

 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, 2021, 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.

Identification of Our Contracts with Customers 

Contracts included in the Company’s application of ASC Topic 606 for the quarter ended September 30, 2021 consisted of sales of the Company’s hempSMART™ products, as well as products from its new subsidiary cDistro. 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 no reportable revenues have resulted for the fiscal years ended December 31, 2020 or 2019, or for the quarter ended September 30, 2021.

In accordance with ASC Topic 606, the Company is of the opinion that some of its product sales have a significant financing component. The Company’s opinion is based upon the transactional basis for its product sales, with revenue recognized upon customer payment and/or shipment. The Company’s evaluation of the length of time between some of the customer orders, payment and shipping is a significant financing component, while other shipments 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.

 

9 
 
 

 

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 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 shipment and or/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 for some of the products are not immediate, the Company’s sales contract have a significant financing component, i.e., recognizing revenue at the amount that reflects the invoice and/or cash payment that the customer would have made at the time the goods or services were transferred to them (cash or invoice selling price).

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 performance obligation sales contracts are related to its promise to provide products to the customers upon delivery and/or 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, 2020 and 2019 or for the quarter ended September 30, 2021. 

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 products upon delivery and/or receipt of payment. The Company offers an assurance warranty on its products that allows a customer to return any 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.

Income From Lease

On May 20, 2021, the Company purchased a new cannabis extraction machine which is to be leased to a cannabis distributor and manufacturer called Lynwood-MCOA joint venture. This joint venture is between Cannabis Global Inc. and the Company and pertains to the licensed cannabis operations of Natural Plant Extract of California Inc. in the city of Lynwood, CA. The Company has retained control of title of the machine. The Equipment was leased to Lynwood- MCOA joint venture for a monthly fee of $7,500, beginning ninety (90) days after the Effective Date of May 20, 2021, for a period of two (2) years. After this two-year period, title to all such equipment shall revert to the joint venture at the agreed upon residual value of the equipment. The Company recorded $12,581 and $0 in equipment lease revenues for the three and nine months ended September 30, 2021 and 2020, respectively pursuant to ASC 842.

 

10 
 
 

 

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.

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, 2021 and December 31, 2020, allowance for doubtful accounts was $37,632 and $0, respectively.

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.

Stock-Based Compensation - Employees

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. 

 

 

12 
 
 

 

  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. 

 

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”).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.

 

13 
 
 

 

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.

 

Earnings per Share

Basic earnings per share are calculated by dividing net income (loss) by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could occur if 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 straight-line method over their estimated useful lives of 3 to 5 years.

 

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Investments 

The Company follows ASC subtopic 321-10, Investments-Equity Securities 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, 2021 and December 31, 2020. 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 $183,491 and $159,428 for the nine months ended September 30, 2021 and 2020, respectively, as advertising costs.

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, cDistro and hempSMART.

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The following table represents the Company's hempSMART' business segment as of September 30, 2021 and 2020:

hempSMART
STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

                    
             
   For the three months ended  For the nine months ended
   September 30, 2021  September 30, 2020  September 30, 2021  September 30, 2020
             
             
Revenues  $22,351   $53,195   $73,760   $217,972 
Cost of Goods Sold   19,435    37,170    47,769    110,563 
Gross Profit   2,916    16,025    25,991    107,409 
                     
Expense                    
Depreciation Expense   3,100    1,374    5,881    4,702 
Selling and Marketing   105,757    117,978    363,796    294,231 
Payroll and Related expenses   56,988    26,394    165,800    77,256 
Stock Based Compensation   104,685          104,685    29,325 
General and Admin Expenses   87,517    55,672    284,182    169,707 
Total Expense   358,047    201,418    924,344    575,221 
                     
Net Loss from Operations  $(355,131)  $(185,393)  $(898,353)  $(467,812)

 

The following table represents the Company's cDistro business segment as of September 30, 2021

 

                     
   For the three months ended  For the nine months ended
   September 30, 2021  September 30, 2020  September 30, 2021  September 30, 2020
             
Revenues  $407,246   $     $407,589   $   
Cost of Goods Sold   359,056          359,056       
Gross Profit   48,190          48,533       
                     
Expense                    
Depreciation Expense   597          597       
Selling and Marketing   3,696          3,696       
Payroll and Related expenses   45,000          45,000       
Stock Based Compensation                        
General and Admin Expenses   94,650          94,938       
Total Expense   143,943          144,231       
                     
Net Loss from Operations  $(95,753)  $     $(95,698)  $   
                     

 

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, 2021 and 2020, the Company has not recorded any unrecognized tax benefits.

 

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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.

 

Recently Issued Accounting Pronouncements Adopted 

 

Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.

 

Equity Securities, Equity-method Investments and Certain Derivatives In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. ASU 2020-01 became effective for the Company in the first quarter of 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated 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.

 

 

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The Company 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 $2,349 per month. In considering its qualitative disclosure obligations under ASC 842-20-50-3, the Company examined its office accommodation agreement for office space that has a fixed monthly fee with no variable payments and no options to extend. The office accommodation agreement creates no tenancy, leasehold, or other real property interest, other than a shared right-of-use. The office accommodation agreement does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants imposed for dividends or incurring additional financial obligations by the Company.

 

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.

 

NOTE 5 – PROPERTY, MACHINERY AND EQUIPMENT

 

Property and equipment as of September 30, 2021 and December 31, 2020 is summarized as follows:

          
       
  

September 30,

2021

 

December 31,

2020

Computer equipment  $25,194   $20,143 
Furniture and fixtures   13,278    5,140 
Machinery   104,102       
Subtotal   142,574    25,283 
Less accumulated depreciation   (20,107)   (18,741)
Property, machinery and equipment, net  $122,467   $6,542 

 

Property, machinery and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. On May 20, 2021, the Company purchased a new cannabis extraction machine which is to be leased to a cannabis distributor and manufacturer called Lynwood-MCOA joint venture. This joint venture is between Cannabis Global Inc. and the Company and pertains to the licensed cannabis operations of Natural Plant Extract of California Inc. in the city of Lynwood, CA. The Company recorded $12,581 and $0 in equipment lease revenues for the three and nine months ended September 30, 2021 and 2020, respectively.

 

Depreciation expense was $5,753 and $4,702 for the nine months ended September 30, 2021 and 2020, respectively. 

 

 

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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 $1,000,000 to fund joint venture operations, based upon a funding schedule. The Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.

 

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 $1,000,000 to $800,000, and also required the Company to issue Bougainville 15 million shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The amended agreement provided that Bougainville would deed the real property to the joint venture within thirty days of its receipt of payment.

 

Thereafter, the Company determined that Bougainville had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property that was in breach 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.

 

 

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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 $800,000 contributed by the Company to the joint venture. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally, the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded to the joint venture; (ii) it had an agreement with a Tier 3 I-502 cannabis license holder to grow cannabis on the real property; and (iii) that clear title to the real property associated with the Tier 3 I-502 license would be deeded to the joint venture thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed a lawsuit against Bougainville, BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court, case number 18-2-0045324. The Company seeks legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the Company, the appointment of a receiver, the return to treasury of 15 million shares of restricted common stock issued by the Company to Bougainville and treble damages pursuant to the Consumer Protection Act. The Company has filed a lis pendens on the real property. The case is currently in litigation.

 

In connection with the joint venture agreement, the Company recorded a cash investment of $1,188,500 to the joint venture during 2017. This was comprised of a 49.5% ownership of BV-MCOA Management, LLC, and was accounted for using the equity method of accounting. The Company recorded an annual impairment in 2017 of $792,500, reflecting the Company’s percentage of ownership of the net book value of the investment. During 2018, the Company recorded equity losses of $37,673 and $11,043 for the quarters ended March 31, 2018 and June 30, 2018, respectively, and recorded an annual impairment of $285,986 for the year ended December 31, 2018, at which time the Company determined the investment to be fully impaired due to Bougainville’s breach of contract and resulting litigation, as discussed above.

 

Natural Plant Extract

 

On April 15, 2019, the Company entered into a joint venture agreement with Natural Plant Extract of California, Inc. and its   subsidiaries (collectively, “NPE”), to operate a licensed psychoactive cannabis distribution service in California. California legalized THC psychoactive cannabis for medicinal and recreational use on January 1, 2018. On February 3, 2020, the parties terminated the joint venture and entered into a settlement and release agreement (the “Settlement Agreement”). In exchange for a complete release of all claims, the Company and NPE (1) agreed that the Company would reduce its interest in NPE from 20% to 5%; (2) the Company agreed to pay NPE a total of $85,000 as follows: $35,000 concurrent with the execution of the Settlement Agreement, and $25,000 no later than the fifth calendar day for each of the two months following execution of Settlement Agreement; and, (3) to retire the balance of the Company’s original valuation obligation from the material definitive agreement, representing a shortfall of $56,085, in a convertible promissory note, with terms allowing NPE to convert the note into shares of the Company’s common stock of at a 50% discount to the closing price of the Company’s common stock as of the maturity date. The note was satisfied in full during the year ended December 31, 2020.

 

As of the date of this filing, the Company does not owe any amount and is in compliance with the terms of the Settlement Agreement . On February 3, 2020, the Company issued NPE a convertible promissory note in the principal amount of $56,085. Additionally, as a result of the Settlement Agreement, the Company became liable to pay NPE its 5% portion equal to $25,902 of the regulatory charges to the City of Lynwood and the State of California to transfer the cannabis licenses back to NPE.

 

Of the total amount due and payable by the Company with regards to the NPE joint venture agreement as of the date of this filing, the Company owes $75,000 and is in breach of the Settlement and Release of All Claims Agreement with NPE. On February 3, 2020, the Company issued a convertible promissory note in the principal amount of $56,085.15 to NPE. Additionally, as a result of the Company’s settlement agreement with NPE, the Company became liable to pay NPE its 5% portion equal to $25,902 of the regulatory charges to the City of Lynwood and the State of California to transfer the cannabis licenses back to NPE. To date, the Company has not paid this amount and it is due and owing.

 

20 
 
 

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 $50,000 to both HempSmart Brazil and HempSmart Uruguay, for a total capital outlay obligation of $100,000. It is expected that the proceeds of the initial capital contribution will be used for contracting with third-party manufacturing facilities in Brazil and Uruguay and related infrastructure and employment of key personnel. As of September 30, 2021, the Company has not initiated the capital contribution; however, it intends to make the payment during the first quarter of 2022. 

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 $250,000 into a newly formed entity (“MCOA Lynwood”) and Cannabis Global, through Natural Plant Extracts of California, Inc. (“Natural Plant”), an entity in which Cannabis Global owns a majority interest, will operate a regulated and licensed laboratory to manufacture various cannabis products in the State of California. As of September 30, 2021, the Company has invested $115,000.

 

Share Exchange

 

On September 30, 2020, the Company entered into a securities exchange agreement with Cannabis Global pursuant to which the Company issued 650,000,000 shares of its common stock to Cannabis Global in exchange for 7,222,222 shares of Cannabis Global common stock, subject to true-up provisions. In addition, the Company and Cannabis Global entered into a lock-up leak-out agreement which contains certain restrictions with respect to the sales of such securities. During the three months ended September 30, 2021, the Company issued the 650,000,000 shares of stock to Cannabis Global pursuant to the true-up provision.

 

 

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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 $0.001, equal in value to $650,000 based on the per-share price of $0.06, in exchange for the number of shares of Company 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. As of September 30, 2021, the Company owed ECOX an additional 64,621,893 shares of common stock with an estimated value of $754,961 related to the ECOX Share Exchange Agreement. The investment balance is $650,000, with a liability of $754,961 included in subscriptions payable related to the value of the additional shares to be issued. The Company recognized a loss of $394,194 related to the shares to be issued.

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, the Company entered into a First Amendment to Lock-Up Agreement between the Company and ECOX, dated and effective October 1, 2021 (the “Amended Lock-Up Agreement”), which amends the Lock-Up Agreement 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 Lock-Up Agreement remain unaffected.

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 the Company, 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 times the number of Shares or Exchange Shares, as the case may be, that are issued pursuant to the Share Exchange Closing. 

 

On February 24, 2021, the closing price of the Company’s common stock was $0.0155, so that the number of shares of Company common stock issuable to ECOX under the Share Exchange Agreement was 41,935,484. As a result of the transactions pursuant to the Share Exchange Agreement, the Company had 4,179,073,945 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, 2021, the Company recorded a loss on equity investment and corresponding increase in subscriptions payable of $735,178 to address the decline in the Company's stock price from the original issuance price of $0.0155.

 

 

22 
 
 

NOTE 7 – NOTES PAYABLE, RELATED PARTY

As of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 was $20,000 and $40,000, respectively. These notes are payable to the estate of Charles Larsen.

NOTE 8 – CONVERTIBLE NOTES PAYABLE

During the nine months ended September 30, 2021, the Company issued an aggregate of 905,667,530 shares of its common stock in settlement of issued convertible notes payable and accrued interest.  

 

For the nine months ended September 30, 2021 and September 30, 2020, the Company recorded amortization of debt discounts of $1,232,641 and $1,373,575, respectively, as a charge to interest expense.

 

Convertible notes payable are comprised of the following:

          
       
   September 30,  December 31,
   2021  2020
Lender  (Unaudited)  (Audited)
Convertible note payable - Power Up Lending Group  $     $35,000 
Convertible note payable - Crown Bridge Partners  $35,000   $172,500 
Convertible note payable – Labrys  $537,500   $   
Convertible note payable - GS Capital Partners LLC  $82,000   $143,500 
Convertible note payable – Geneva Roth  $153,750   $33,500 
Convertible note payable - Robert L. Hymers III  $110,000   $70,000 
Convertible note payable – Dutchess Capital  $135,000   $10,000 
Convertible note payable – Redstart Holdings  $     $109,000 
Convertible note payable - GW Holdings  $120,750   $98,175 
Convertible note payable – FF Global Opportunities funds   268,750      
Convertible note payable - St. George/Bucktown  $567,500   $1,160,726 
Total  $2,010,250   $1,832,401 
Less debt discounts  $(950,807)  $(405,507)
Net  $1,059,443   $1,426,894 
Less current portion  $(1,059,443)  $(1,426,894)
Long term portion  $     $  

 

Convertible Note Payable-Firstfire

In July 2021, the Company issued a convertible promissory note in the aggregate principal amount of $268,750 to Firstfire Global Opportunities Fund LLC (“Firstfire”). The promissory note accrues interest at 12% per annum, is due one year from the issuance date and includes an original issuance discount and financing fees in the aggregate amount of $44,888 and received $200,963 of net proceeds. The note is convertible at any time at a conversion price of $0.005 per share. The Company also issued a five-year warrants to purchase up to 38,174,715 shares of its common stock to Firstfire, at an exercise price of $0.00704 per share. The aggregate debt discount of $245,851 is being amortized to interest expense over the respective terms of the note.

 

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 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 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. Accrued interest on the note was $6,538 as of September 30, 2021.

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Convertible Note Payable-Labrys

In June 2021, the Company issued a convertible promissory note in the aggregate principal amount of $537,500 to Labrys Funds, LP (“Labrys”). The promissory note accrues interest at 12% per annum, is due one year from the issuance date and includes an original issuance discount in the aggregate amount of $53,750. The Company also paid $33,750 in deferred financing fees and received $450,000 of net proceeds. The note is convertible at any time at a conversion price of $0.005 per share. The Company also issued a five-year warrants to purchase up to 76,349,431 shares of its common stock to Labrys, at an exercise price of $0.00704 per share. In addition, the Company issued five-year warrants to purchase up to 76,349,431 shares of its common stock to an investment banker for services, which warrants have an exercise price of $0.008448 per share. The aggregate debt discount of $533,526 is being amortized to interest expense over the respective terms of the note.

 

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 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 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. Accrued interest on the note was $20,219 as of September 30, 2021.

 

Convertible Notes Payable-Power Up Lending

On June 25, 2020, the Company entered into a convertible promissory note with Power Up Lending Group Ltd. (“Power Up”). The promissory notes accrue interest at a rate of 10% per annum, were due one year from the respective issuance date The note was convertible at a conversion price equal to 61% of the market price of the Company’s common stock, defined as the lowest trading price during the 15-trading-day period prior to the date of conversion. During the nine months ended September 30, 2021, the principal and accrued interest of $1,750 were converted into 15,978,261 shares of common stock resulting in the settlement of $48,107 of derivative liabilities.

 

As of September 30, 2021 and December 31, 2020, the Company owed an aggregate of $0 and $35,000 of principal, respectively, on the notes. As of September 30, 2021 and December 31, 2020, the Company owed $0 and $1,167, respectively, of accrued interest on the notes.

 

Convertible Notes Payable-Redstart Holdings

During the year ended December 31, 2020, the Company entered into various convertible promissory notes with Redstart Holdings (“Redstart Holdings”) totaling a principal amount of $109,000. The promissory notes accrue interest at a rate of 10% per annum, were due one year from the respective issuance date. The notes were convertible at a conversion price equal to 61% of the market price of the Company’s common stock, defined as the lowest trading price during the 15-trading-day period prior to the date of conversion. Upon the issuance of these convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the notes should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares of common stock would be available to settle all potential future conversion transactions. 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 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 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 conversion of the note. During the three months ended March 31, 2021, the Company repaid $109,000 of principal and $43,204 of total interest and penalties.

 

During the nine months ended September 30, 2021, the Company entered into an additional three convertible promissory notes with principal value of $226,250, which accrued interest at 8% per annum and were convertible at 65% of the average of the two lowest trading prices during the previous 15 day trading period. These notes along with accrued interest and early repayment penalties of $40,857 were paid in full prior to September 30, 2021. As of September 30, 2021, the Company owes no amount to Redstart Holdings.

 

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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 $225,000 to Crown Bridge Partners LLC (“Crown Bridge”). The promissory notes accrue interest at a rate of 10% per annum, were due one year from the respective issuance date and include an original issuance discount in aggregate amount of $22,500. Interest accrues from the issuance date, but interest shall not become payable until the notes becomes payable. The notes are convertible at any time at a conversion price equal to 60% of the market price of the Company’s common stock, defined as the lowest trading price during the 15-trading-day period prior to the conversion date. Upon the issuance of these convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the debentures should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares of common stock would be available to settle all potential future conversion transactions. 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 $88,674 was being amortized to interest expense over the respective terms of the notes. The Company also issued a warrants to purchase up to 519,230 shares of the Company’s common stock with an initial exercise price of $0.26, with reset provisions based on issuances of common stock subsequent to the issuance date. Due to the reset provision, the exercise option of these warrants is also accounted for as a derivative liability. See Note 10.

 

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 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 conversion of the note.

 

As of September 30, 2021 and December 31, 2020, the Company owed an aggregate of $35,000 and $172,500 of principal, respectively, on the notes. As of September 30, 2021 and December 31, 2020, the Company owed accrued interest of $0 and $6,500 on the notes, respectively.

 

Convertible Notes Payable-GS Capital Partners LLC

On December 19, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $173,000 to GS Capital Partners LLC (“GS Capital”). The promissory notes accrue interest at a rate of 10% per annum, were due one year from the respective issuance date, and include an original issuance discount in an aggregate amount of $15,000. Pursuant to the notes, GS Capital is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of the notes into shares of the Company's common stock at a conversion price equal to 62% of the lowest trading price of the Company's common stock as reported on the OTC Markets or such other exchange on which the Company’s shares are then traded, for the 20 trading days prior to the date of conversion. During the nine months ended September 30, 2021, the Company repaid $96,130 of principal and $4,622 of accrued interest, and an additional $47,370 of principal and $2,628 of accrued interest were converted into 11,357,987 shares of common stock, resulting in the settlement of $129,285 of derivative liabilities.

 

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 $166,193 was being amortized to interest expense over the respective terms of the notes. As of September 30, 2021 and December 31, 2020, the Company owed $0 and $143,500 of principal, respectively, on the notes. As of September 30, 2021 and December 31, 2020, the Company owed $0 and $2,789 in accrued interest on the notes, respectively.

 

25 
 
 

 

Convertible Notes Payable-St. George Investments

On November 1, 2017, the Company issued a secured convertible promissory note in the principal amount of $601,420 to St. George Investments LLC (“St. George”). The promissory note accrues interest at a rate of 10% per annum compounded daily, was due upon maturity on September 10, 2018 and includes an original issue discount of $59,220. The promissory note was funded on November 11, 2017 for $542,200, net of the original issue discount and transaction costs. During the nine months ended September 30, 2021, $420,726 of principal and $125,090 of accrued interest, along with $1,297,664 of derivative liabilities valued as of the respective conversion date were converted into an aggregate of 181,938,599 shares of the Company’s common stock. As of September 30, 2021, the Company owed no principal or accrued interest on this convertible promissory note.

On March 25, 2019, the Company issued a secured convertible promissory note in the principal amount of $580,000 to St. George. The promissory note accrues interest at a rate of 10% per annum compounded daily, was due upon maturity on January 24, 2020 and includes an original issue discount of $75,000. In addition, the Company agreed to pay $5,000 for legal, accounting and other transaction costs of the lender. During the nine months ended September 30, 2019, the promissory note was funded in the amount of $580,000 resulting in net proceeds of $500,000. During the three months ended March 31, 2021, the principal balance of $580,000 and accrued interest of $93,755 were converted into 288,888,889 shares of common stock and resulted in the settlement of $1,207,773 of derivative liabilities. As of September 30, 2021, the Company owed no principal or accrued interest on this convertible promissory note.

The Company entered into five convertible note agreements with Bucktown Capital, LLC, an affiliated entity of St. George in fiscal year 2020 and during the nine months ended September 30, 2021. The notes have total principal due of $727,500 and bear interest at 8% per annum. The notes mature between December 2021 and March 2022. The notes are convertible at fixed prices, with $225,000 of principal convertible at $0.002 per share, $80,000 convertible at $0.003 per share, and $422,500 convertible at $0.005 per share.

As of September 30, 2021 and December 31, 2020, the Company owed $727,500 of principal on these notes. As of September 30, 2021 and December 31, 2020, the Company owed $27,031 of accrued interest on the above notes, respectively. 

Convertible Notes Payable - Robert L. Hymers III

On September 8, 2020, the Company issued convertible promissory notes in the aggregate principal amount of $70,000 to Robert L. Hymers III (“Hymers”). The promissory note accrues interest at a rate of 10% per annum and matured on September 8, 2021.  Hymers has the option to convert all or any portion of the unpaid principal amount of the notes, plus accrued interest, into shares of the Company’s common stock at a conversion price equal to a 50% discount to the lowest closing bid price of the Company’s common stock during the 15 day trading period prior to the date of conversion. The aggregate debt discount of $70,000 is being amortized to interest expense over the respective terms of the notes.

On February 4, 2021, $70,000 of principal and $4,286 of accrued interest, along with $385,688 of derivative liabilities valued as of the respective conversion date were converted into an aggregate of 30,952,626 shares of the Company’s common stock.

On February 4, 2021, the Company issued convertible promissory notes in the aggregate principal amount of $75,000 to Hymers. The promissory notes accrue interest at a rate of 10% per annum and mature on February 4, 2022. Hymers has the option to convert all or any portion of the unpaid principal amount of the notes, plus accrued interest, into shares of the Company’s common stock at a conversion price of $0.07. The aggregate debt discount of $75,000 is being amortized to interest expense over the respective terms of the notes.

On August 11, 2021 the Company and Hymers modified the February 4, 2021 note so that the conversion price was equal to $0.002. As a result of the modification, the Company recorded a loss on the extinguishment of the old debt of $123,564. Also on August 11, 2021, $75,000 of principal and $3,884 of accrued interest, along with $102,324 of derivative liabilities valued as of the respective conversion date were converted into an aggregate of 39,441,780 shares of the Company’s common stock.

As of September 30, 2021 and December 31, 2020, the Company owed an aggregate of $0 and $70,000 of principal, respectively, to Hymers.  As of September 30, 2021 and December 31, 2020, the Company owed $0 and $1,005 in accrued interest on the notes, respectively.

Convertible Note Payable – GW Holdings Group

As of December 31, 2020, the Company owed $98,175 of principal on convertible promissory notes issued to GW Holdings Group, LLC (“GW”). GW has the option, beginning on the six month anniversary of the date of issuance, to convert all or any amount of the principal face amount of the notes then outstanding into shares of the Company's common stock at a conversion price equal to 40% discount of the lowest trading price for the 15 trading days prior to the date of the conversion. The notes accrue interest at a rate of 10% per annum. During the nine months ended September 30, 2021, GW converted all principal and $5,045 of accrued interest into 35,840,446 shares of the Company’s common stock, resulting in the settlement of $170,358 of derivative liabilities. 

On June 3, 2021, the Company entered issued a convertible promissory note in the amount of $120,750 to. The holder has the option to convert all or any amount of the principal face amount of the note then outstanding into shares of the Company's common stock at a conversion price equal to $0.005 for the first 90 days and $0.002 thereafter. The note accrues interest at a rate of 10% per annum and included $15,750 of deferred financing fees and original issue discount which is being amortized to interest expense over the term of the note. This note was repaid in full during the nine months ended September 30, 2021.

On August 24, 2021, the Company entered issued a convertible promissory note in the amount of $120,750 to GW. GW has the option to convert all or any amount of the principal face amount of the note then outstanding into shares of the Company's common stock at a conversion price equal to $0.0025 for the first 90 days and $0.001 thereafter. The note accrues interest at a rate of 10% per annum and includes a $15,750 original issue discount which is being amortized to interest expense over the term of the note

As of September 30, 2021 and December 31, 2020, the Company owed $120,750 and $98,175 of principal, respectively, on the note. As of September 30, 2021 and December 31, 2020, the Company owed $959 and $818 in accrued interest on the note, respectively.

 

 

26 
 
 

 

Convertible Debt Summary:  

The Company has identified the embedded derivatives related to the above-described notes and warrants. These embedded derivatives included certain conversion and reset features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the note and to fair value as of each subsequent reporting date.

 

At September 30, 2021, the Company determined the aggregate fair value of embedded derivatives to be $432,024. The fair values were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 95.1% to 198.2%, (3) weighted average risk-free interest rate of 0.05% to 0.28%, (4) expected life of 0.05 to 4.7 years, (5) conversion prices of $0.0004 to $0.007 and (6) the Company's common stock price of $0.0029 per share as of September 30, 2021.

 

For the nine months ended September 30, 2021, the Company recorded a loss on the change in fair value of derivative liabilities of $1,101,640 and a loss of $1,035,115 related to the excess of the fair value of derivatives at issuance above convertible note principal as a charge to interest expense. For the nine months ended September 30, 2020, the Company recorded a gain on change in fair value of derivative liabilities of $1,142,272, a loss of $395,607 related to the excess of the fair value of derivatives at issuance above convertible note principal as a charge to interest expense, and amortization of debt discounts of $1,028,931 as a charge to interest expense.

NOTE 9. OTHER DEBT

 

Paycheck Protection Program Loan

 

During the quarter ended June 30, 2020, the Company's wholly-owned subsidiary, H Smart Inc., received a $35,500 loan as part of the Paycheck Protection Program (“PPP”) offered by the Small Business Administration.

 

The Company has elected to account for the PPP loan pursuant to FASB ASC 470, Debt, or as a government grant by analogy to International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance.

 

Following the guidance in ASC 470, the Company has recognized the entire loan amount as a liability on the balance sheet, with interest accrued and expensed over the term of the loan. The Company will not impute additional interest at a market rate because transactions where interest rates are prescribed by governmental agencies are excluded from the scope of ASC 835-30.

For purposes of derecognizing the liability, ASC 470 refers to the extinguishment guidance in ASC 405, Liabilities.

Based on that guidance, the loan would remain recorded as a liability until either of the following criteria are met:

  · The Company has been legally released from being the primary obligor under the liability.

 

  · The Company pays the lender and is relieved of its obligation for the liability.

 

Because the Company will not be legally released from being the primary obligor of the PPP loan until forgiveness is actually granted, income from the extinguishment of the loan would only be recognized once the Company's application for forgiveness is approved. If the forgiveness application is approved, any resulting amount forgiven would be recognized and separately disclosed in the income statement as a gain on extinguishment. As of September 30, 2021 the balance of the PPP loan was $0 as the loan was formally forgiven by the Small Business Administration.

 

NOTE 10. SUBSCRIPTIONS PAYABLE

 

Subscriptions Payable

On September 30, 2020, the Company entered into a share  exchange agreement (“Cannabis Global Exchange Agreement”) with Cannabis Global to acquire the number of shares of Cannabis Global’s common stock equal in value to $650,000 based on the closing price for the trading day immediately preceding the effective date of the Cannabis Global Exchange Agreement, in exchange for the number of shares of Company common stock equal in value to $650,000 based on the closing price for the trading day immediately preceding the effective date of the Cannabis Global Exchange Agreement.  For both parties, the Cannabis 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 Cannabis Global Exchange Agreement to fall below $650,000.

On February 26, 2021, the Company entered into the Share Exchange Agreement with ECOX dated February 26, 2021, 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 Company common stock equal in value to $650,000 based on the closing price for the trading day immediately preceding the effective date of 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. Based on the value of ECOX shares in the market as of September 30, 2021, the Company recorded a value for additional shares owed to ECOX pursuant to the Share Exchange Agreement of $754,961 as a subscription agreement along with a loss from equity investment of $735,178. As of September 30, 2021, 41,935,484 shares of the Company’s common stock have been issued. As a result, the balance of subscriptions payable as of September 30, 2021 and December 31, 2020 was $754,961 and $670,000, respectively.

 

 

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NOTE 11 – STOCKHOLDERS DEFICIT

Preferred Stock

The Company is authorized to issue 50,000,000 shares of $0.001 par value preferred stock (“Series A Preferred Stock”) as of September 30, 2021 and December 31, 2020 of which 10,000,000 shares are outstanding as of September 30, 2021. Each share of Class A Preferred Stock is entitled to 100 votes on all matters submitted to a vote to the stockholders of the Company and does not have conversion, dividend or distribution upon liquidation rights.

 

As of September 30, 2021 and December 31, 2020, the Company is authorized to issue 5,000,000 shares of Class B Preferred Stock of which 2,000,000 shares are issued and outstanding as of September 30, 2021. Each share of Class B Preferred Stock is entitled to 1,000 votes on all matters submitted to a vote to the stockholders of the Company and does not have conversion, dividend or distribution upon liquidation rights.

 

Common stock

As of September 30, 2021, the Company was authorized to issue 15,000,000,000 shares of $0.001 par value common stock. On October 21, 2021, the Company increased its authorized common shares to 22,000,000,000. As of September 30, 2021, and December 31, 2020, the Company had 6,373,157,821 and 3,136,774,861 shares of common stock issued and outstanding, respectively. As of November 15, 2021, there were 6,621,939,591 shares of the Company’s common stock issued and outstanding.

During the nine months ended September 30, 2021, the Company issued an aggregate of 142,946,860 shares of its common stock for services with an estimated fair value of $661,292.

 

During the nine months ended September 30, 2021, the Company issued an aggregate of 905,667,530 shares of its common stock, including 153,227,150 related to warrants accounted for as liabilities, in settlement of convertible notes payable, accrued interest of $343,011, and reclassified derivative liabilities of $6,270,052 to additional paid in capital in connection with the conversions.

 

During the nine months ended September 30, 2021, the Company issued a net amount of 3,027,031 shares of its common stock in settlement of liabilities with an estimated fair value of $8,623, which included 10,892,411 related to shares to be issued as of December 31, 2020, the cancellation of 8,755,714 shares for previous settlements, and 890,334 new shares issued for settlement of accounts payable.  

 

During the nine months ended September 30, 2021, the Company issued 22,500,000 of its common stock upon the settlement of related party notes payable and accounts payable with an estimated fair value of $141,750.

 

During the nine months ended September 30, 2021, the Company issued 462,844,406 of its common stock upon the exercise of warrants on a cash basis, including warrant liabilities with an estimated value of $63,500.

During the nine months ended September 30, 2021, the Company sold 742,297,599 of its common stock for an aggregate value of $1,638,126.

During the nine months ended September 30, 2021, the Company issued 41,935,484 of its common stock with a value of $650,000 and will issue an additional 117,580,554 shares for investments with an estimated value of $735,178 related to the Share Exchange Agreement. The investment balance is $650,000, with a liability of $754,961 included in subscriptions payable related to the value of the additional shares to be issued. The Company recognized a loss of $735,178 related to these additional shares during the nine months ended September 30, 2021.

During the nine months ended September 30, 2021, the Company issued 650,000,000 shares of its common stock with a value of $650,000 for investments with an estimated value of $650,000 related to the Cannabis Global Exchange Agreement.

 

The Company was authorized to issue 15,000,000,000 shares of $0.001 par value common stock as of September 30, 2021, and as of October 21, 2021, is authorized to issue 22,000,000,000 shares of common stock. As of December 31, 2020, the Company was authorized to issue 5,000,000,000 shares of $0.001 par value common stock. As of September 30, 2020 and December 31, 2019, the Company had 469,288,934 and 77,958,081 shares of common stock issued and outstanding, respectively.

 

 

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During the nine months ended September 30, 2020, the Company issued an aggregate of 8,333 shares of its common stock to settle amounts previously accrued with an estimated fair value of $6,700.

 

During the nine months ended September 30, 2020, the Company issued an aggregate of 156,444,047 shares of its common stock for services with an estimated fair value of $665,767.

 

During the nine months ended September 30, 2020, the Company issued an aggregate of 1,469,725,298 shares of its common stock in settlement of convertible notes payable, accrued interest and embedded derivative liabilities of an aggregate of $6,522,619.

During the nine months ended September 30, 2020, the Company issued 21,384,103 of its common stock upon the conversion of related party notes payable with an estimated fair value of $50,613.

During the nine months ended September 30, 2020, the Company issued 51,054,214 shares of its common stock upon the exercise of warrants on a cashless basis.

During the nine months ended September 30, 2020, the Company issued 10,293,843 shares of its common stock in settlement of a legal case with an estimated fair value of $1,283,632.

On January 17, 2020, the Company entered into an amendment of an existing convertible promissory note issued to Paladin. The Company authorized the issuance of a warrant to purchase up to 5,750,000 shares of the Company’s common stock, which warrant could be exercised on a cashless basis. This warrant was exercised during the three months ended June 30, 2020.

Options

As of September 30, 2021, the Company has no outstanding stock options.

Warrants

The following table summarizes the stock warrant activity for the nine months ended September 30, 2021:

                    
             
   Shares 

Weighted-Average

Exercise Price

 

Weighted Average

Remaining

Contractual Term

 

Aggregate

Intrinsic Value

Outstanding at December 31, 2020   293,054,702   $0.0011    2.22   $1,023,306 
Granted   133,107,371    0.0084    5.00       
Increase due to reset provision   (9,722,222)   0.0004    2.41       
Exercised   (271,137,466)   0.01    2.53    1,427,826 
Outstanding at September 30, 2021   145,302,385   $0.0033    3.05   $220,650 
Exercisable at September 30, 2021   145,302,385   $0.0033    3.05   $220,650 

 

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 $0.0029 as of September 30, 2021, which would have been received by the option holders had those option holders exercised their options as of that date.

 

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NOTE 12 — 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, 2021 and December 31, 2020, the Company did not have any items that would be classified as level 1 or 2 disclosures.

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Note 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, 2021 and December 31, 2020, the Company did not have any derivative instruments that were designated as hedges.

 

The derivative liability as of September 30, 2021 and December 31, 2020, in the amount of $432,024 and $4,426,057, respectively, have a level 3 classification.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2021:

     
    
 

  Debt Derivative  
Balance, January 1, 2021  $4,426,057 
Increase resulting from initial issuance of additional convertible notes payable   1,824,340 
Decreases resulting from conversion of convertible notes payable   (6,270,052)
Decreases resulting from payoff of convertible notes payable   (649,961)
Loss from change in fair value included in earnings   1,101,640 
Balance, September 30, 2021  $432,024 

 

The total impact to net loss during the nine months ended September 30, 2021 was a loss of $451,679 from the net impact of the change in fair value and decreases from payoffs of convertible notes payable. 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, 2021, 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.

 

 

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NOTE 13 — 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, 2021 and December 31, 2020, respectively, there were no balances due to officers for travel and working capital purposes.

As of September 30, 2021 and December 31, 2020, accrued compensation due to officers and executives included as accrued compensation was $0 and $79,214, respectively.

Related party sales contributed $0 and $3,262 to revenues for the three months ended September 30, 2021 and 2020, respectively, while related party sales contributed $0 and $11,565 to revenues for the nine months ended September 30, 2021 and 2020, respectively. Related party sales are comprised of sales of the Company’s hempSMART products to the Company’s directors, officers, employees, and sales team members. No related party sales were for services. All sales were made at listed retail prices and were for cash consideration.

 

NOTE 14 – ACQUISITION 

On June 29, 2021, the Company, cDistro Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and cDistro, Inc., a privately-held Nevada corporation engaged in the hemp and CBD product distribution business (“cDistro”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, among other things, Merger Sub merged with and into cDistro on September 30, 2021, with cDistro becoming a wholly-owned subsidiary of the Company and the surviving corporation in the merger (the “Merger”). The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

 

Contingent Consideration - Earnout Agreement

 

In connection to the Merger, the Company and the securityholder of cDistro (the “cDistro Stockholder”) entered into an earnout agreement dated June 29, 2021 (the “Earnout Agreement”), whereby the Company agreed to issue additional shares of its common stock to the cDistro Stockholder as compensation for the Merger conditioned upon the achievement of certain gross revenue milestones. If cDistro meets revenue targets of $600,000 per quarter, up to a total of $2,400,000 of revenue, the Company will issue shares worth $250,000 upon the achievement each quarterly revenue target, with the number of shares to be issued at each payout date calculated based on the lessor of 220,970,059 shares of common stock or a 30% discount to the average close price of the Company’s common stock for the 20-day period immediately preceding the payout date of the earnout. In accordance with ASC 805, the Company accounts for this earnout agreement as contingent consideration based on the number of shares calculated as owed as of each quarter end, with changes in value to be recorded in earnings each reporting period.

 

Leak-Out Agreement

 

On June 29, 2021, in connection with the Merger and the Earnout Agreement, the cDistro Stockholder entered into a Lock-Up and Leak-Out Agreement with the Company pursuant to which, among other thing, such stockholder agreed to certain restrictions regarding the resale of the common stock issued pursuant to the Merger for a period of six months from the date of the Merger.

 

Employment Agreement

 

On June 29, 2021, in connection with the Merger, the Company and the Chief Executive Officer of cDistro entered into an employment agreement, pursuant to which that employee will serve as cDistro’s Chief Executive Officer for a three-year term.

 

The acquisition of cDistro is being accounted for as a business combination under ASC 805. The Company is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date. 

 

 

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The aggregate preliminary fair value of consideration for the cDistro acquisition was as follows:

 

     
   Amount
Cash, net of cash acquired of $94,450  $155,550 
Contingent Consideration - Earnout Agreement   1,000,000 
265,164,070 shares of common stock   1,617,501 
Total preliminary consideration transferred  $2,773,051 

 

During the nine months ended September 30, 2021, the Company has paid $250,000 of the cash consideration.

 

The following information summarizes the preliminary allocation of the fair values assigned to the assets acquired and liabilities assumed at the acquisition date:

     
    
Accounts Receivable  $26,875 
 Inventory   7,816 
 Other Assets   518 
 Goodwill   2,925,884 
 Accounts payable   (181,042)
 Other accrued liabilities   (7,000)
 Net assets acquired  $2,773,051