UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding at November 16, 2021 was .
| |
| 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 | $ | $ | ||||||
| Short-term Investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid Insurance | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Long-term Investments | ||||||||
| Right- of- use- assets | ||||||||
| Goodwill | ||||||||
| Security deposit | ||||||||
| Total assets | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued compensation | ||||||||
| Accrued liabilities | ||||||||
| Notes payable, related parties | ||||||||
| Loans payable PPP Stimulus | ||||||||
| Convertible notes payable, net of debt discount of $ | ||||||||
| Contingent Liability - Acquisition | ||||||||
| Right-of-use liabilities - current portion | ||||||||
| Subscriptions payable | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred stock, $ par value, shares authorized | ||||||||
| Class A preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2021 and December 31, 2020 | ||||||||
| Class B preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2021 and December 31, 2020 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Common stock to be issued, | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders' equity (deficit) | $ | $ |
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 | $ | $ | $ | $ | ||||||||||||
| Related party Sales | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Payroll and related | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment gain (Loss) on Joint Ventures | ( | ) | ||||||||||||||
| Income (Loss) on equity investment | ||||||||||||||||
| Loss on share exchange agreement | ( | ) | ( | ) | ||||||||||||
| Gain (Loss) on change in fair value of derivative liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized Gain (loss) on trading securities | ( | ) | ||||||||||||||
| Loss on sale of trading securities | ( | ) | ( | ) | ( | ) | ||||||||||
| (Loss) Gain on settlement of debt | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes (benefit) | ||||||||||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted (after stock-split) | ||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 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 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued to settle amounts previously accrued | — | — | — | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services rendered | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of convertible notes payable and accrued interest | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Conversion of related party notes payable | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in exchange for exercise of warrants on a cashless basis | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued in settlement of legal case | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to additional paid in capital | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued to settle amounts previously accrued | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred stock to officer | — | — | $ | — | — | $ | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services rendered | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of convertible notes payable and accrued interest | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of liabilities | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of related party notes payable and accounts payable | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in exchange for exercise of warrants on a cashless basis | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for investments | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to additional paid in capital | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Debt discount from warrants issued with convertible notes payable | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for acquisition of business | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Modification of Notes Payable | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
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) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Impairment loss on equity investment | ||||||||
| Loss on equity investment | ( | ) | ||||||
| Loss (Gain) on change in fair value of derivative liability | ||||||||
| Interest expense recognized for the excess of fair value of derivative liability over net book value of notes payable at issuance | ||||||||
| Loss on share inducement and settlement of warrant liability | ||||||||
| Stock-based compensation | ||||||||
| Unrealized (Gain) Loss on trading securities | ||||||||
| Gain on Settlement of joint venture | ( | ) | ||||||
| Loss on settlement of liabilities | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Right-of-use assets | ||||||||
| Right-of-use liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payment to establish joint venture | ( | ) | ||||||
| Proceeds from sale of investments | ||||||||
| Investment in joint venture | ||||||||
| Acquisition of business | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of notes payable | ||||||||
| Proceeds from PPP loan payable | ||||||||
| Proceeds from sales of trading securities | ||||||||
| Repayments of notes payable | ( | ) | ||||||
| Repayments to related parties | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provided by (used in) financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| — | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for taxes | ||||||||
| Non cash financing activities: | ||||||||
| Common stock issued in settlement of convertible notes payable | $ | $ | ||||||
| Common stock issued in settlement of related party notes payable and accrued compensation | $ | |||||||
| Reclassification of derivative liabilities to additional paid-in capital | $ | $ | ||||||
| Gains on settlement of JV investment | $ | $ | ||||||
| Common stock issued for investment | $ | $ | ||||||
| Common stock issued to settle liabilities | $ | $ | ||||||
| Common stock issued for acquisition of business | $ | $ | ||||||
| Common shares issued in settlement of legal case | $ | $ | ||||||
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 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
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 $
| 11 |
Inventories
Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.
Cost of Sales
Cost of sales is comprised of cost of product sold, packaging, and shipping costs.
The Company accounts for the stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of ASC 718-10-30. Pursuant to ASC 718-10-30-6, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement based on sales to third parties or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial Option Model option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments. The expected life of options and similar instruments represents the period of time the options and/or similar instruments are expected to be outstanding. Pursuant to ASC 718-10-50-2(f)(2)(i), the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to ASC 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term equal the quotient of the vesting term plus the original contractual term divided by two if (i) a company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) a company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) a company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
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| • | 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. |
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
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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 $
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 | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Expense | ||||||||||||||||
| Depreciation Expense | ||||||||||||||||
| Selling and Marketing | ||||||||||||||||
| Payroll and Related expenses | ||||||||||||||||
| Stock Based Compensation | ||||||||||||||||
| General and Admin Expenses | ||||||||||||||||
| Total Expense | ||||||||||||||||
| Net Loss from Operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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 | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Expense | ||||||||||||||||
| Depreciation Expense | ||||||||||||||||
| Selling and Marketing | ||||||||||||||||
| Payroll and Related expenses | ||||||||||||||||
| Stock Based Compensation | ||||||||||||||||
| General and Admin Expenses | ||||||||||||||||
| Total Expense | ||||||||||||||||
| Net Loss from Operations | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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 $
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 | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Machinery | ||||||||
| Subtotal | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property, machinery and equipment, net | $ | $ | ||||||
Property, machinery and equipment
are stated at cost and depreciated using the straight-line method over their estimated useful lives of
Depreciation expense was
$5,753 and $
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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 $
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 $
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 $
In
connection with the joint venture agreement, the Company recorded a cash investment of $
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
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 $
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 $
| 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 $
The boards of directors of HempSmart Brazil and HempSmart Uruguay will consist of three directors elected by the joint venture partners. Pursuant to the Joint Venture Agreements, the Company agreed to license, on a royalty-free basis, certain of its intellectual property regarding its existing products to HempSmart Brazil and HempSmart Uruguay to enable the joint ventures to manufacture and sell its products in Brazil, Uruguay, and for export to other Latin American countries, the United States, and globally in accordance with the terms of the Joint Venture Agreements.
In addition, as majority partner, in the event a joint venture is frustrated in its intent or purpose, the Company may trigger a compulsory buy-sell procedure pursuant to which the Company could pursue a sale of all or substantially all of the joint venture. Subject to certain exceptions, the joint venture partners may not transfer their interests in HempSmart Brazil and HempSmart Uruguay.
Cannabis Global, Inc.
Joint Venture
On May 12, 2021, the Company entered into
a joint venture agreement with Cannabis Global, Inc. (“Cannabis Global”) pursuant to which the Company will invest up to $
Share Exchange
On September 30, 2020, the Company entered
into a securities exchange agreement with Cannabis Global pursuant to which the Company issued shares of its common stock
to Cannabis Global in exchange for
| 21 |
Eco Innovation Group Inc. – Share Exchange
On February 26, 2021, the Company
entered into a Share Exchange Agreement with Eco Innovation Group, Inc., a Nevada corporation quoted on OTC Markets Pink
(“ECOX”) dated February 26, 2021, to acquire the number of shares of ECOX’s common stock, par value $, equal
in value to $
Complementary to the Share Exchange
Agreement, the Company and ECOX entered into a Lock-Up Agreement dated February 26, 2021 (the “Lock-Up Agreement”), providing
that the shares of common stock acquired pursuant to the Share Exchange Agreement shall be subject to a lock-up period preventing its
sale for a period of 12 months following issuance and limiting the subsequent sale to aggregate maximum sale value of $
For a period of two years following the Effective Date, at the closing of each fiscal quarter, should the per-share closing price of the common shares of the same class as the Shares or the Exchange Shares, as quoted by the OTC Markets for the last day of the relevant fiscal quarter, decrease below original issuance value with the effect that the aggregate value of the Shares or the Exchange Shares at the fiscal quarter close would be lower than $650,000, then either 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 $, so that the number of shares of Company common stock issuable to ECOX under the Share Exchange Agreement was . As a result of the transactions pursuant to the Share Exchange Agreement, the Company had 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 $
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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 $
NOTE 8 – CONVERTIBLE NOTES PAYABLE
During the nine months ended September 30, 2021, the Company issued an aggregate of shares of its common stock in settlement of issued convertible notes payable and accrued interest.
For the nine months ended September 30,
2021 and September 30, 2020, the Company recorded amortization of debt discounts of $
Convertible notes payable are comprised of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Lender | (Unaudited) | (Audited) | ||||||
| Convertible note payable - Power Up Lending Group | $ | $ | ||||||
| Convertible note payable - Crown Bridge Partners | $ | $ | ||||||
| Convertible note payable – Labrys | $ | $ | ||||||
| Convertible note payable - GS Capital Partners LLC | $ | $ | ||||||
| Convertible note payable – Geneva Roth | $ | $ | ||||||
| Convertible note payable - Robert L. Hymers III | $ | $ | ||||||
| Convertible note payable – Dutchess Capital | $ | $ | ||||||
| Convertible note payable – Redstart Holdings | $ | $ | ||||||
| Convertible note payable - GW Holdings | $ | $ | ||||||
| Convertible note payable – FF Global Opportunities funds | ||||||||
| Convertible note payable - St. George/Bucktown | $ | $ | ||||||
| Total | $ | $ | ||||||
| Less debt discounts | $ | ( | ) | $ | ( | ) | ||
| Net | $ | $ | ||||||
| Less current portion | $ | ( | ) | $ | ( | ) | ||
| Long term portion | $ | $ | ||||||
Convertible Note Payable-Firstfire
In July 2021, the Company issued a convertible
promissory note in the aggregate principal amount of $
The Company is prohibited from effecting
a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially
own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance
of shares of common stock upon conversion of the note. The Company is prohibited from effecting an exercise of the warrant to the extent
that, as a result of such exercise, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of
shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon
exercise of the note. Accrued interest on the note was $
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Convertible Note Payable-Labrys
In June 2021, the Company issued a convertible
promissory note in the aggregate principal amount of $
The Company is prohibited from effecting
a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially
own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance
of shares of common stock upon conversion of the note. The Company is prohibited from effecting an exercise of the warrant to the extent
that, as a result of such exercise, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of
shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon
exercise of the note. Accrued interest on the note was $
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
As of September 30, 2021 and December
31, 2020, the Company owed an aggregate of $
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 $
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 $
During the nine months ended September
30, 2021, the Company entered into an additional three convertible promissory notes with principal value of $
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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 $
The Company has the right to prepay the notes for an amount ranging from 125% to 140% multiplied by the outstanding balance (all principal and accrued interest) depending on the prepayment period (ranging from 1 to 180 days following the issuance date). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than % of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note.
As of September 30, 2021 and December 31,
2020, the Company owed an aggregate of $
Convertible Notes Payable-GS Capital Partners LLC
On December 19, 2019, the Company issued
convertible promissory notes in the aggregate principal amount of $
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 $
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Convertible Notes Payable-St. George Investments
On November 1, 2017, the Company issued
a secured convertible promissory note in the principal amount of $
On March 25, 2019, the Company issued a
secured convertible promissory note in the principal amount of $
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 $
As
of September 30, 2021 and December 31, 2020, the Company owed $
Convertible Notes Payable - Robert L. Hymers III
On
September 8, 2020, the Company issued convertible promissory notes in the aggregate principal amount of $
On February 4, 2021, $
On February 4, 2021, the Company issued
convertible promissory notes in the aggregate principal amount of $
On August 11, 2021 the Company and Hymers
modified the February 4, 2021 note so that the conversion price was equal to $
As of September 30, 2021 and December 31,
2020, the Company owed an aggregate of $
Convertible Note Payable – GW Holdings Group
As
of December 31, 2020, the Company owed $
On June 3, 2021, the Company entered issued
a convertible promissory note in the amount of $
On August 24, 2021, the Company entered
issued a convertible promissory note in the amount of $
As of September 30, 2021 and December 31,
2020, the Company owed $
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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 $
For the nine months ended September 30,
2021, the Company recorded a loss on the change in fair value of derivative liabilities of $
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 $
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 $
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 $
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 $
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NOTE 11 – STOCKHOLDERS DEFICIT
Preferred Stock
The Company is authorized to issue
shares of $ par value preferred stock (“Series A Preferred Stock”) as of September 30, 2021 and December 31, 2020 of
which shares are outstanding as of September 30, 2021. Each share of Class A Preferred Stock is entitled to
As of September 30, 2021 and December 31, 2020, the
Company is authorized to issue shares of Class B Preferred Stock of which shares are issued and outstanding as of
September 30, 2021. Each share of Class B Preferred Stock is entitled to
Common stock
As of September 30, 2021, the Company was authorized to issue shares of $ 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 and shares of common stock issued and outstanding, respectively. As of November 15, 2021, there were shares of the Company’s common stock issued and outstanding.
During the nine months ended September
30, 2021, the Company issued an aggregate of shares of its common stock for services with an estimated fair value of $
During the nine months ended September
30, 2021, the Company issued an aggregate of shares of its common stock, including
During the nine months ended September
30, 2021, the Company issued a net amount of shares of its common stock in settlement of liabilities with an estimated fair
value of $
During the nine months ended September
30, 2021, the Company issued of its common stock upon the settlement of related party notes payable and accounts payable with
an estimated fair value of $
During the nine months ended September
30, 2021, the Company issued of its common stock upon the exercise of warrants on a cash basis, including warrant liabilities
with an estimated value of $
During the nine months ended September
30, 2021, the Company sold of its common stock for an aggregate value of $
During the nine months ended September
30, 2021, the Company issued of its common stock with a value of $
During the nine months ended September
30, 2021, the Company issued shares of its common stock with a value of $
The Company was authorized to issue shares of $ par value common stock as of September 30, 2021, and as of October 21, 2021, is authorized to issue shares of common stock. As of December 31, 2020, the Company was authorized to issue shares of $ par value common stock. As of September 30, 2020 and December 31, 2019, the Company had and 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 shares of its common stock to settle amounts previously accrued with an estimated fair
value of $
During the nine months ended September
30, 2020, the Company issued an aggregate of shares of its common stock for services with an estimated fair value of $
During the nine months ended September
30, 2020, the Company issued an aggregate of shares of its common stock in settlement of convertible notes payable, accrued
interest and embedded derivative liabilities of an aggregate of $
During the nine months ended September
30, 2020, the Company issued of its common stock upon the conversion of related party notes payable with an estimated fair
value of $
During the nine months ended September 30, 2020, the Company issued 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 shares of its common stock in settlement of a legal case with an estimated fair value of $
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 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 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Increase due to reset provision | ( | ) | ||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Outstanding at September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2021 | $ | $ | ||||||||||||||
Certain warrants issued to debt holders have reset provisions whereby upon subsequent issuances of common stock at a price below the current exercise price, the number of warrants increase and the exercise price is reduced to the new price. The aggregate intrinsic value in the preceding tables represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock price of $ as of September 30, 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 $
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 | $ | ||||
| Increase resulting from initial issuance of additional convertible notes payable | |||||
| Decreases resulting from conversion of convertible notes payable | ( | ) | |||
| Decreases resulting from payoff of convertible notes payable | ( | ) | |||
| Loss from change in fair value included in earnings | |||||
| Balance, September 30, 2021 | $ | ||||
The total impact to net loss during the
nine months ended September 30, 2021 was a loss of $
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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
As of September 30, 2021 and December 31,
2020, accrued compensation due to officers and executives included as accrued compensation was $
Related party
sales contributed $
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 $
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.
| 31 |
The aggregate preliminary fair value of consideration for the cDistro acquisition was as follows:
| Amount | ||||
| Cash, net of cash acquired of $94,450 | $ | |||
| Contingent Consideration - Earnout Agreement | ||||
| 265,164,070 shares of common stock | ||||
| Total preliminary consideration transferred | $ | |||
During the nine months ended September 30, 2021, the
Company has paid $
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 | $ | |||
| Inventory | ||||
| Other Assets | ||||
| Goodwill | ||||
| Accounts payable | ( | ) | ||
| Other accrued liabilities | ( | ) | ||
| Net assets acquired | $ | |||
Unaudited Pro Forma Financial Information
The following table sets forth the pro-forma consolidated results of operations for the three and nine months ended September 30, 2021 and 2020 as if the cDistro acquisition occurred on January 1, 2020. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisitions had taken place on the dates noted above, or of results that may occur in the future.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average common shares outstanding | ||||||||||||||||
NOTE 15 – SUBSEQUENT EVENTS
Amendment to Lock-Up Agreement.
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, 2021which amends that certain Lock-Up Agreement entered into between the Company and ECOX on February 26, 2021.
The Lock-Up Agreement was ancillary to the share exchange
agreement dated February 26, 2021 between the Company and ECOX, whereby the parties exchanged common stock equal in value to $
The Amended Lock-Up Agreement 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.
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Salinas Diversified Ventures
On October 6, 2021, the Company, through its wholly owned subsidiary Salinas Diversified Ventures, Inc., a California corporation, entered into an Asset Purchase Agreement, Management Services Agreement, Cooperation Agreement and Employment Agreement with VBF Brands, Inc., a California corporation (“VBF”), a wholly owned subsidiary of Sunset Island Group, Inc., a Colorado corporation (“SIGO”), and Ms. Lori Livacich, individually, and as an affiliate of both VBF and SIGO (“Livacich”). No material relationship exists between the parties, other than with respect to the material definitive agreements.
VBF
and SIGO agreed to sell and transfer to the Company all of VBF’s outstanding stock, and, by virtue of the Management Services Agreement,
appoint Mr. Jesus Quintero as President of VBF, vesting management and control of VBF’s licensed cannabis operations in the Company.
Concurrently, VBF and Livacich entered into a Cooperation Agreement, whereby VBF and Livacich agreed to cooperate to facilitate the transfer
of ownership of VBF, which includes licenses issued by the City of Salinas, County of Monterey, and the State of California, to operate
a cannabis nursery, cultivation facility and manufacturing and distribution operations to the Company. The Company also agreed to retain
Livacich as Chief Executive Officer for a term of two years and agreed to compensate her with a salary including a signing cash bonus
of $
As consideration for the transaction, the Company
agreed to assume two secured convertible promissory notes issued by SIGO with St. George. The first note was issued December 8, 2017,
in the original principal amount of $
Increase in Authorized Common Stock
On October 21, 2021, the Company filed an amendment to its articles of incorporation to increase the Company’s authorized common stock from to shares.
Regulation A Offering
On October 1, 2021, the Company filed an Offering Statement on Form 1-A (File No. 024-11668) (the “Regulation A Offering”) with the Securities and Exchange Commission with respect to shares of common stock that was qualified by the SEC on October 20, 2021.
Common Stock Issued for Cash
In October 2021, the Company sold a total of shares of its
common stock for a total of $
On October 6, 2021 the Company issued
shares of common stock upon the full conversion of $
On October 22, 2021 the Company issued
shares of common stock upon the conversion of $
In October 2021, the Company sold a total
of shares of common stock for cash proceeds of $
Subsequent to September 30, 2021, the Company
repaid approximately $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with and our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
Overview
Through hempSMART™, our retail CBD product division, we develop and sell consumer products that include industrial hemp derived, non-psychoactive CBD as an ingredient, under the brand name “hempSMART™” through our wholly-owned subsidiary, H Smart, Inc. In addition, we provide consulting services to licensed cannabis and/or hemp operators with respect to financial accounting and bookkeeping and real property management. Our business also includes making selected investments and entering into joint ventures with start-up businesses in the legalized cannabis and hemp industries.
Through cDistro, our wholly-owned CBD product distribution business, we distribute hemp and CBD products throughout the United States. Through cDistro, we distribute high quality hemp-derived cannabinoid products, as detailed on our cDistro website, www.cdistro.com. cDistro offers CBD brands along with smoke and vape shop related products to wholesalers, c-stores, specialty retailers, and consumers in North America. Through cDistro, we work exclusively with select manufacturers to deliver retail service and products at wholesale prices
Our Products
hempSMART™
Our consumer products containing hemp and CBD are sold through our wholly-owned subsidiary H Smart, Inc. under the brand name hempSMART™. Our current hempSMART™ products offerings include the following:
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Our Consulting Services
In addition to selling our hempSMART™ products, we also provide certain services to licensed cannabis and/or hemp operators. Our services include the following:
Financial Accounting and Bookkeeping
We provide financial accounting, bookkeeping and reporting protocols in order to allow licensed cannabis and/or hemp operators in those states where cannabis has been legalized for medicinal and/or recreational use, to report, collect, verify and state effective financial records and disclosure. We provide a comprehensive accounting strategy based on best accounting practices.
Real Property Management Consulting
Our property management consulting services consist of providing planning, budgeting, acquisition, accounting and management services to licensed cannabis and/or hemp operators in those states where cannabis and/or hemp has been legalized for medicinal and/or recreational use and who are searching for real property to conduct operations.
We have not yet entered into any engagements for such services and have not generated any revenue related to such services.
cDistro
On June 29, 2021, we acquired cDistro, Inc. which is engaged in the hemp and CBD product distribution business. Specifically, cDistro distributes high quality hemp-derived cannabinoid products on its website, www.cdistro.com. cDistro offers CBD brands along with smoke and vape shop related products to wholesalers, c-stores, specialty retailers, and consumers in North America. Through cDistro, we work exclusively with select manufacturers to deliver retail products at wholesale prices.
Current Joint Ventures and Investments
Joint Ventures in Brazil and Uruguay
On September 30, 2020, we entered into two joint venture agreements with Marco Guerrero, our director, to form joint venture operations in Brazil and Uruguay to produce, manufacture, market and sell our hempSMART™ products in Latin America and to develop and sell hempSMART™ products globally.
Cannabis Global, Inc.
Joint Venture
On May 12, 2021, we entered into a joint venture agreement with Cannabis Global, Inc. (“Cannabis Global”) pursuant to which we will invest up to $250,000 into a newly formed entity (“MCOA Lynwood”) and Cannabis Global, through Natural Plant Extracts of California, Inc., 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, we have invested $158,000.
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Share Exchange
On September 30, 2020, we entered into a securities exchange agreement with Cannabis Global pursuant to which we issued 650,000,000 shares of our common stock to Cannabis Global in exchange for 7,222,222 shares of Cannabis Global common stock. In addition, we 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 value provision of the securities exchange agreement.
Joint Venture Subject to Ongoing Dispute
On March 16, 2017, we entered into a joint venture agreement with Bougainville Ventures, Inc. (“Bougainville”) to, among other things, engage in the development and promotion of products in the legalized cannabis industry in Washington State. We believe that some of the funds we paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds and that Bougainville misrepresented certain material facts in the joint venture agreement. As a result of the foregoing, on September 20, 2018, we filed suit against Bougainville, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court. See Part II, Item 1 - Legal Proceedings.
Recent Developments
Salinas Diversified Ventures
On October 6, 2021, the Company, through its wholly owned subsidiary Salinas Diversified Ventures, Inc., a California corporation, entered into an Asset Purchase Agreement, Management Services Agreement, Cooperation Agreement and Employment Agreement with VBF Brands, Inc., a California corporation (“VBF”), a wholly owned subsidiary of Sunset Island Group, Inc., a Colorado corporation (“SIGO”), and Ms. Lori Livacich, individually, and as an affiliate of both VBF and SIGO (“Livacich”). No material relationship exists between the parties, other than with respect to the material definitive agreements.
VBF and SIGO agreed to sell and transfer to the Company all of VBF’s outstanding stock, and, by virtue of the Management Services Agreement, appoint Mr. Jesus Quintero as President of VBF, vesting management and control of VBF’s licensed cannabis operations in the Company. Concurrently, VBF and Livacich entered into a Cooperation Agreement, whereby VBF and Livacich agreed to cooperate to facilitate the transfer of ownership of VBF, which includes licenses issued by the City of Salinas, County of Monterey, and the State of California, to operate a cannabis nursery, cultivation facility and manufacturing and distribution operations to the Company. The Company also agreed to retain Livacich as Chief Executive Officer for a term of two years and agreed to compensate her with a salary including a signing cash bonus of $250,000, and a $250,000 performance cash bonus payable after six months after the Effective Date. The bonus is conditioned upon Livacich meeting an agreed to “Net Revenue” target of $1,000,000 from VBF’s operations during the six month period after closing of the Asset Purchase Agreement, and her compliance with the terms and conditions of this Asset Purchase Agreement, the Management Services Agreement and the Cooperation Agreement.
As consideration for the transaction, the Company agreed to assume two secured convertible promissory notes issued by SIGO with St. George. The first note was issued December 8, 2017, in the original principal amount of $170,000 (“Note 1”); and the second note was issued February 13, 2018, in the original principal amount of $4,245,000 (“Note 2”). As part of Note 2, SIGO also issued warrants to St. George to purchase shares in SIGO, and 50 shares of Series A Preferred Stock in SIGO. St. George agreed to cancel the warrants and preferred shares upon the Company’s assumption of Notes 1 and 2 (collectively, the “SIGO Notes”). On October 6, 2021, the Company issued and sold a convertible promissory note to St. George in the principal amount of $3,455,178. As partial consideration for the purchase of the securities, St. George assigned and transferred to the Company, who agreed to receive and accept, the SIGO Notes, valued at $1,770,982. The Company agreed to pay an original issue discount of $574,196 and $10,000 in legal fees. St. George paid a cash purchase price of $1,100,000 to the Company.
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Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Revenues
Total revenues for the three months ended September 30, 2021 and 2020, were $442,178 and $53,195, respectively, an increase of $388,983. This increase is mainly attributable to $407,246 of product sales from our new acquisition of cDistro, which was began full operations during the quarter ended September 30, 2021. In addition, we also recorded $12,581 in equipment lease revenues to a cannabis distributor and manufacturer, the Lynwood-MCOA joint venture. This joint venture is between us and Cannabis Global Inc. and pertains to the licensed cannabis operations of Natural Plant Extract of California Inc. in the city of Lynwood, CA. We also sold $22,351 of hempSMART products during the three months ended September 30, 2021, due to our new sales platform as well as changes to our sales strategy including the rebranding of hempSMART products.
The following table identifies sales of products and services during the three months ended September 30, 2021 and 2020:
| Products | September 30, 2021 | September 30, 2020 | ||||||
| Body Lotion - hempSMART | $ | 184 | $ | 679 | ||||
| Brain - hempSMART | 1,153 | 4,610 | ||||||
| Drink Mix - hempSMART | — | 563 | ||||||
| Drops - hempSMART | 11,533 | 25,541 | ||||||
| Face Moisturizer - hempSMART | — | 1,606 | ||||||
| Pain Capsules - hempSMART | — | 2,714 | ||||||
| Pain Cream - hempSMART | 8,379 | 14,911 | ||||||
| Pet Drops - hempSMART | 2,939 | 2,571 | ||||||
| Accessories and hardware - cDistro products | 21,844 | — | ||||||
| CBD Products – cDistro product | 485 | — | ||||||
| E-Liquids - cDistro | 75,531 | — | ||||||
| Kratom - cDistro | 306,256 | — | ||||||
| Nutraceutical products - cDistro | 441 | — | ||||||
| Other products – cDistro | 852 | — | ||||||
| Leased equipment revenues – Marijuana Company of America | 12,581 | — | ||||||
| Totals | $ | 442,178 | $ | 82,958 | ||||
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Related Party Sales
Related party sales contributed $0 and $3,262 to revenues for the three months ended September 30, 2021 and 2020, respectively. Related party sales are comprised of sales of our hempSMART products to our 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.
Costs of Sales
Costs of sales primarily consist of inventory cost and overhead, manufacturing, packaging, warehousing, shipping, and direct labor costs directly attributable to all of our products. For the three months ended September 30, 2021 and 2020, our total costs of sales were $378,491 and $37,170, respectively, an increase of $341,321. The increase in costs of sales is attributed to volume from our acquisition of cDistro which began full operations with us during the three months ended September 30, 2021.
Gross Profit
For the three months ended September 30, 2021 and 2020, gross profit was $63,687 and $16,025, respectively, an increase of $47,662. This increase is mainly attributed to gross profits from our acquisition of cDistro which began full operations with us during the three months ended September 30, 2021. In addition, our hempSMART business improved gross profits due to new pricing and promotions associated with our sales restructuring and new sales strategies, along with the effects of the COVID-19 pandemic during the three months ended September 30, 2021. As a result, the combined gross margin was 14.4% and 30.1% for the three months ended September 30, 2021 and 2020, respectively.
Selling and Marketing Expenses
For the three months ended September 30, 2021 and 2020, selling and marketing expenses were $167,664 and $125,942, respectively, an increase of $41,722. The increase is due primarily to the selling and marketing expenses from our acquisition of cDistro which began operations with us during the three months ended September 30, 2021. These expenses included expenses for advertisement, promotions and digital media during the period. In addition, hempSMART added marketing staff for promotional opportunities along with new market analyst to assist market trends.
Payroll and Related Expenses
For the three months ended September 30, 2021 and 2020, payroll and related expenses were $142,830 and $62,000, respectively, an increase of $80,830. Of this increase, $45,000 is attributed to payroll with regards to our acquisition of cDistro which began operations with us during the period. and in addition, an increases in our Chief Executive Officer’s compensation and an increase in our staff during the three months ended September 30, 2021 as compared to September 30, 2020.
Stock-based Compensation
For the three months ended September 30, 2021 and 2020, stock-based compensation was $529,393 and $123,000 respectively, an increase of $406,393. This increase was due to the issuance of equity pursuant to a stock incentive plan to officers, employees, and vendors during the three months ended September 30, 2021 as compared to September 30, 2020.
General and Administrative Expenses
General and administrative expenses increased to $639,767 for the three months ended September 30, 2021 as compared to $294,821 for the three months ended September 30, 2020. General and administrative expenses include research and development, building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase of $344,946 during the three months ended September 30, 2021 is primarily attributed to an increase in the following expenses - legal fees of approximately $88,000 related to acquisition costs and SEC filings, approximately $67,000 in travel related expenses, $67,000 for investor relations as we expanded our investor/stockholder communications, $34,000 in bad debt expenses and the remaining expenses were attributed to operating expenses from our acquisition of cDistro which began operations with us during the three months ended September 30, 2021.
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Gain on Change in Fair Value of Derivative Liabilities
During the three months ended September 30, 2021 and 2020, we issued convertible promissory notes and warrants with an embedded derivative, all requiring us to adjust to reflect the fair value of the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations. This resulted in a gain of $1,177,610 and a loss of $1,454,903 change in fair value of derivative liabilities for the three months ended September 30, 2021 and 2020, respectively.
Loss/Income on Equity Investment and Loss on Share Exchange Agreement
During the three months ended September 30, 2021 and 2020, we adjusted the carrying value of our investment for our pro rata share of equity investment loss of $0 and an equity investment income of $240,198, respectively. The Company also recognized a loss on its share exchange agreement with Eco Innovation Group of $340,984 during the nine months ended September 30, 2021.
Loss/Gain on Settlement of Debt
During the three months ended September 30, 2021 and 2020, we realized a loss on settlement of debt of $88,990 and a gain of $383,440, respectively.
Loss on Sale of Trading Securities
During the three months ended September 30, 2021 and 2020, we realized a loss on sale of trading securities of $543,200 and $0, respectively.
Interest Expense
Interest expense during the three months ended September 30, 2021 was $549,363 compared to $688,090 for the three months ended September 30, 2020. Interest expense primarily consists of interest incurred on our convertible and non-convertible debt. The debt discounts amortization incurred during the three months ended September 30, 2021 and 2020 was $525,358 and $344,644, respectively.
Net Loss
Our net loss for the three months ended September 30, 2021 and 2020 was $1,764,591 and $1,872,171, respectively, a decrease of $107,580. The net loss of $1,764,591 for the three months ended September 30, 2021 represents 399.1% of total revenues for the period. The net loss of $1,872,171 for the three months ended September 30, 2020 represents 3,519.4% of total revenues for the period.
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Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Revenues
Total revenues for the nine months ended September 30, 2021 and 2020, were $493,988 and $217,972, respectively, an increase of $276,016. This increase is mainly attributable to $407,589 of product sales from our acquisition of cDistro, which was effective on June 30, 2021 and accordingly, began to contribute revenue during the period ended September 30, 2021. In addition, we also recorded $12,581 in equipment lease revenues to a cannabis distributor and manufacturer, under the Lynwood joint venture. This joint venture is between us and Cannabis Global Inc. and pertains to the licensed cannabis operations of Natural Plant Extract of California Inc. in the city of Lynwood, CA. We also sold $73,818 of hempSMART products during the nine months ended September 30, 2021, due to our new sales platform as well as changes to our sales strategy, including the rebranding of our hempSMART product line.
The following table identifies sales of products and services during the nine months ended September 30, 2021 and 2020:
| Products | September 30, 2021 | September 30, 2020 | ||||||
| Body Lotion - hempSMART | $ | 1,251 | $ | 3,131 | ||||
| Brain - hempSMART | 1,514 | 24,284 | ||||||
| Drink Mix - hempSMART | 167 | 2,615 | ||||||
| Drops - hempSMART | 41,249 | 111,673 | ||||||
| Face Moisturizer - hempSMART | 2,793 | 8,915 | ||||||
| Pain Capsules - hempSMART | — | 6,360 | ||||||
| Pain Cream - hempSMART | 24,802 | 46,817 | ||||||
| Pet Drops - hempSMART | 3,879 | 14,177 | ||||||
| Accessories and hardware - cDistro products | 22,187 | — | ||||||
| CBD Products – cDistro product | 485 | — | ||||||
| E-Liquids - cDistro | 75,531 | — | ||||||
| Kratom - cDistro | 306,256 | — | ||||||
| Nutraceutical products - cDistro | 441 | — | ||||||
| Other products – cDistro | 852 | — | ||||||
| Leased equipment revenues – Marijuana Company of America | 12,581 | — | ||||||
| Totals | $ | 493,988 | $ | 217,972 | ||||
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Related Party Sales
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 our hempSMART products to our 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.
Costs of Sales
Costs of sales primarily consist of inventory cost and overhead, manufacturing, packaging, warehousing, shipping, and direct labor costs directly attributable to all of our products. For the nine months ended September 2021 and 2020, our total costs of sales were $406,972 and $110,563, respectively, an increase of $296,409. The increase in costs of sales is mainly attributed to the cost of goods sold from our acquisition of cDistro which we acquired on June 30, 2021 and began operating as a wholly-owned subsidiary of the Company at the beginning of the three months ended September 30, 2021.
Gross Profit
For the nine months ended September 30, 2021 and 2020, gross profit was $87,016 and $107,409, respectively, a decrease of $20,393. This decrease is mainly attributed to gross profits from our new acquisition cDistro which began full operations with the Company during the three months ended September 30, 2021 as their margins reflect wholesale margins as compared to hempSMART retail margins. In addition, gross profits from hempSMART products decreased due to continued new pricing and promotions associated with our sales restructuring and new sales strategies, along with the continued effects of the COVID-19 pandemic during the nine months ended September 30, 2021. As a result, the combined gross margin was 17.6% and 49.3% for the nine months ended September 30, 2021 and 2020, respectively.
Selling and Marketing Expenses
For the nine months ended September 30, 2021 and 2020, selling and marketing expenses were $430,425 and $326,608, respectively, an increase of $103,817. This increase was attributed to our investment in product marketing and social media advertising in support of our new e-commerce program promoting our rebranded hempSMART products and the marketing expenses from our acquisition of cDistro which began operations with us after June 30, 2021.
Payroll and Related Expenses
For the nine months ended September 30, 2021 and 2020, payroll and related expenses were $413,232 and $258,842, respectively, an increase of $154,390. The increase is primarily due to an increase in our Chief Executive Officer’s compensation and the payroll expenses from our acquisition of cDistro, which began operations with us during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.
Stock-based Compensation
For the nine months ended September 30, 2021 and 2020, stock-based compensation was $688,293 and $665,767 respectively, an increase of $22,526. This 3.4% increase during the nine months ended September 30, 2021 is considered reasonable as compared to the nine months ended September 30, 2020 as these expenses are related to issuances of equity pursuant to our stock incentive plan to officers, employees and vendors.
General and Administrative Expenses
General and administrative expenses increased to $1,777,419 for the nine months ended September 30, 2021 as compared to $710,094 for the nine months ended September 30, 2020. General and administrative expenses include research and development, building rent, utilities, legal fees, office supplies, subscriptions, and office equipment. The increase of $1,067,326 during the nine months ended September 30, 2021 is primarily attributed to an increase in the following expenses - legal fees of approximately $360,000 related to acquisition costs, lawsuits, public offerings and SEC filings, approximately $48,000 increase in insurance premiums in director and officer’s liability insurance due to cannabis industry risk assessments, $135,000 in travel expenses related to acquisition visits, various business and company events as well as trade show participations, $215,000 for investor relations as we expanded our investor/stockholder communications, $34,000 in bad debt expenses, $95,000 in operational expenses related to our acquisition of cDistro which began operations at the end of June 30, 2021, $72,000 in operating expenses of our new hempSMART Brazil subsidiary which began operations during the nine month period ended September 30, 2021, $38,000 in fees to the our medical advisory board, $30,000 in board of director fees based on new agreements established during 2021, $17,000 in truck rental fees incurred as part of a discontinued operation, $63,000 in consulting fees related to services related to the establishment of a new subsidiary in the country of Uruguay for the purpose of selling hempSMART products and $56,000 in other operational and administrative expenses incurred during the nine period ended September 30, 2021 as compared to September 30, 2020.
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Gain on Change in Fair Value of Derivative Liabilities
During the nine months ended September 30, 2021 and 2020, we issued convertible promissory notes and warrants with an embedded derivative, all requiring us to adjust to reflect the fair value of the derivatives each reporting period, and mark to market as a non-cash adjustment to our current period operations. This resulted in a loss of $451,679 and $312,631 change in fair value of derivative liabilities for the nine months ended September 30, 2021 and 2020, respectively.
Loss / Income on Equity Investment and Loss on Share Exchange Agreement
During the nine months ended September 30, 2021 and 2020, we adjusted the carrying value of our investment for our pro rata share of equity investment loss of $0 and an equity investment income of $106,305, respectively. The Company also recognized a loss on its share exchange agreement with Eco Innovation Group of $735,178 during the nine months ended September 30, 2021.
Loss /Gain on Settlement of Debt
During the nine months ended September 30, 2021 and 2020, we realized a loss on settlement of debt of $253,967 and a gain of $386,930, respectively.
Unrealized Gain/Loss on Sale of Trading Securities
During the nine months ended September 30, 2021, we recorded an unrealized gain on trading securities of $504,137, while recording an unrealized loss on trading securities of $13,945 for the nine months ended September 30, 2020.
Loss on Sale of Trading Securities
During the nine months ended September 30, 2021 and 2020, we realized a loss on sale of trading securities of $543,200 and $2,603, respectively.
Interest Expense
Interest expense during the nine months ended September 30, 2021 was $2,542,108 compared to $2,460,185 for the nine months ended September 30, 2020. Interest expense primarily consists of interest incurred on our convertible and non-convertible debt. The debt discounts amortization incurred during the nine months ended September 30, 2021 and 2020 was $1,232,641 and $1,373,575, respectively.
Net Loss
Our net loss for the nine months ended September 30, 2021 and 2020 was $7,250,698 and $4,177,391, respectively, an increase of $3,073,307. The net loss of $7,250,698 for the nine months ended September 30, 2021 represents 1,468% of total revenues for the period. The net loss of $4,177,391 for the nine months ended September 30, 2020, represents 1,917% of total revenues for the period.
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Liquidity and Capital Resources
We have generated a net loss from continuing operations for the nine months ended September 30, 2021 of $7,250,699 and used $2,693,632 cash for operations and we had a working capital deficit of $3,634,622. As of September 30, 2021, we had total assets of $6,087,167, which includes accounts receivable of $151,927, inventory of $201,860, prepaid insurance of $86,250 and other current assets of $187,200. The other current assets consisted of $157,775 in non-trade receivable due from a brokerage and investment firm and advance payments to vendors.
During the nine months ended September 30, 2021 and 2020, we met our capital requirements through a combination of loans, sales of equity and convertible debt instruments; however, we will need to secure additional external funding in order to continue our operations. Our primary internal sources of liquidity were provided by an increase in proceeds from the issuance of notes payable of $2,065,863 and sale of our common stock for gross proceeds of $1,638,126 for the nine months ended September 30, 2021 as compared to an increase in proceeds from the issuance of note payables of $876,302, sale of our common stock for gross proceeds of $153,685, a government loan due to COVID-19 of $35,500 and gross proceeds for the sales of trading securities of $10,854 for the nine months ended September 30, 2020. Our ability to rely upon external financing arrangements to fund operations is not certain, and this may limit our ability to secure future funding from external sources without changes in terms requested by counterparties, changes in the valuation of collateral, and associated risk, each of which is reasonably likely to result in our liquidity decreasing in a material way. We intend to utilize cash on hand, loans and other forms of financing such as the sale of additional equity and debt securities and other credit facilities to conduct our ongoing business, and to also conduct strategic business development and implementation of our business plans generally. However, we may be unable to raise additional funds when needed on favorable terms, or at all, which may have a negative impact on our financial condition and could force us to curtail or cease our operations.
Cash Flows from Operating Activities
For the nine months ended September 30, 2021, we used cash in operating activities of $2,693,632. For the nine months ended September 30, 2020, we used cash in operating activities of $1,262,358. This decrease of $1,431,274 is due primarily to loss for the period, which was offset by loss on equity investment, interest expense recognized for the excess of fair value of derivative liability over net book value of notes payable at issuance and continued implementation of our business plans, operations, management, personnel and professional services.
Cash Flows from Investing Activities
During the nine months ended September 30, 2021, we used $185,850 in investing activities related to purchase of equipment and property of $121,603, $99,098 to establish a joint venture and $155,550 in the acquisition of a new business, and these amounts were offset by proceeds from the sale of investments of $190,401. During the nine months ended September 30, 2020, cash provided by investing activities was $123,729 which was primarily from proceeds attributed to an investment in a joint venture of $125,000, which was offset by $1,271 related to our purchase of property and equipment.
Cash Flows from Financing Activities
During the nine months ended September 30, 2021, cash provided by financing activities was $2,912,709 as a result of our receipts of funds from the issuance of notes payable of $2,065,863 and sale of our common stock of $1,492,851, along with repayments of notes payable of $626,005 and repayments of related party notes of $20,000. During the nine months ended September 30, 2020, cash provided by financing activities was $1,076,341 as a result of our receipt of funds from the issuance of notes payable of $876,302, sale of our common stock with gross proceeds of $153,685, a government loan due to COVID-19 of $35,500 and proceeds from the sales of trading securities of $10,854.
Our business plans have not generated significant revenues and as of the date of this filing are not sufficient to generate adequate amounts of cash to meet our needs for cash. Our primary source of operating funds in 2021 and 2020 has been proceeds from the sale of our common stock and the issuance of convertible debt and non-convertible debt. We have experienced net losses from operations since inception, but expect these conditions to improve in 2021 and beyond as we develop direct sales and marketing programs. We had stockholders' deficiencies at September 30, 2021 and require additional financing to fund future operations. As of the date of this filing, and due to the early stages of operations, we have insufficient sales data to evaluate the amounts and certainties of cash flows, as well as whether there has been material variability in historical cash flows.
We currently do not have sufficient cash and liquidity to meet our anticipated working capital for the next twelve months. Historically, we have financed our operations primarily through private sales of our common stock and debt. If our sales goals for our hempSMART™ products do not materialize as planned, and we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.
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Off Balance Sheet Arrangements; Commitments and Contractual Obligations
As of September 30, 2021, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources nor did we have any commitments or contractual obligations.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the condensed consolidated financial statements describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements. Estimates are used for, among other things, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the condensed consolidated financial statements.
Stock-Based Compensation
We account for employee and non-employee compensation in accordance with Accounting Standards Codification 718-10-30 of the Financial Accounting Standards Board. See Note 3 - “Summary of Significant Accounting Policies” set forth in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to opt out of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition periods for complying with new or revised accounting standards is irrevocable.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
COVID-19:
The COVID-19 global pandemic has been unprecedented and unpredictable and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on the Company’s current assessment, however, the Company does not expect any material impact on its long-term strategic plans, its operations, or its liquidity due to the worldwide spread of COVID-19. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We are required to maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of September 30, 2021, our disclosure controls and procedures were not effective due to material weaknesses described below. Management has identified the following material weaknesses: our ability to prepare our financial statements in a timely manner and inadequate segregation of duties consistent with control objectives. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to create a new controller position and hire a controller in order to segregate duties within the accounting department consistent with control objectives. In addition, we also intend to increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us and we are able to find a qualified person to fill such roll. This includes hiring a competent director of corporate reporting to help ensure that the Company meets its filing deadlines in a more timely manner.
Changes in Internal Control
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II - OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may become involved in various lawsuits and legal proceedings. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth herein, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
On September 20, 2018, we filed suit against Bougainville Ventures, Inc. (“Bougainville”), BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court. We previously entered into a joint venture agreement with Bougainville on March 16, 2017, as amended on November 6, 2017.
We and Bougainville originally agreed to a joint venture with the goal of participating in the legalized cannabis business in Washington State. We intended to organize and operate a cannabis growth and cultivation business on land owned by Bougainville in Oroville, Washington. Furthermore, we agreed to finance the joint venture with a cash payment of $800,000 and issued Bougainville 15 million shares of our common stock. Bougainville represented that it would provide the real property for the joint venture, computer-controlled greenhouses and agricultural facilities and, as landlord, oversight of the operations of a cannabis licensee holding a I-502 cannabis license. Bougainville represented that the property was I-502 compliant, and that it had a lease payment arrangement with an I-502 license holder to operate on the land. Bougainville agreed to vend clear title to the real property associated with the I-502 licensee to the joint venture within 30 days of the final payment by us. Despite our compliance, in full with our financial obligations, Bougainville did not and has not transferred the real property to the joint venture. We determined that Bougainville did not own the real property, misappropriated funds paid into the joint venture for its own purposes and did not have an agreement with a licensed I-502 operator.
Pursuant to our complaint, we are seeking legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the registrant, for the appointment of a receiver, the return to treasury of the 15 million shares of common stock issued to Bougainville, and, for treble damages pursuant to the Consumer Protection Act in Washington State. We have filed a lis pendens on the real property.
We recently served process on the defendants and the case is currently in litigation. The case is currently set for trial on January 22, 2022.
| ITEM 1A. | RISK FACTORS. |
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2020 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
During the three months ended September 30, 2021, the Company issued the following securities:
The Company issued 54,700,000 shares on September 14, 2021 at $0.0025 per share for cash proceeds of $134,084.
The Company issued 55,000,000 shares on September 28, 2021 at $0.0026 per share for total proceeds of $145,275. The Company reflected a receivable for the total purchase price as of September 30, 2021, and the cash proceeds were received on October 7, 2021.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
None.
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| ITEM 6. | EXHIBITS. |
| * | Filed herewith. |
| + | Indicates a management contract or any compensatory plan, contract or arrangement. |
| † | The schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MARIJUANA COMPANY OF AMERICA, INC. | ||
| Date: November 16, 2021 | By: | /s/ Jesus Quintero |
| Jesus Quintero, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) | ||
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