UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2020

 

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

 

For the transition period from                          to

 

Commission file number: 000-27039

 

MARIJUANA COMPANY OF AMERICA, INC.

(Exact name of registrant as specified in its charter)

 

Utah   98-1246221
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 1340 West Valley Parkway

Suite 205

Escondido, CA 92029

(Address of principal executive offices) (zip code)

 

(888) 777-4362

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes    No

 

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

 

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

 1 

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

 

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

 

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

 

As of June 30, 2020, there were 469,288,934 shares of registrant’s common stock outstanding, as of August 14, 2020, the date of this filing, there were 1,292,526,855 shares of registrant’s common stock outstanding.

 

 

 

 

 

 

 

 

 2 

 

 

 PART I. FINANCIAL INFORMATION  PAGE
       
  ITEM 1. Financial Statements 3
       
    Condensed consolidated balance sheets as of June 30, 2020 (unaudited) and December 31, 2019 (audited) 3
       
    Condensed consolidated statements of operations for the three and six month ended June 30, 2020 and 2019 (unaudited) 4
       
    Condensed consolidated statement of stockholders’ deficit for the three and six months ended June 30, 2020 and 2019 (unaudited) 5
       
    Condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 (unaudited) 6
       
    Notes to condensed consolidated financial statements (unaudited) 7
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 52
  ITEM 4. Controls and Procedures 53
       
PART II. OTHER INFORMATION  
       
  ITEM 1. Legal Proceedings 54
  ITEM 1A. Risk Factors 54
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
  ITEM 3. Defaults Upon Senior Securities 84
  ITEM 4. Mine Safety Disclosures 84
  ITEM 5. Other Information 84
  ITEM 6. Exhibits 84
    SIGNATURES  

 3 

 

 PART 1 – FINANCIAL INFORMATION

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

   June 30,
2020
  December 31,
2019
   (Unaudited)  (Audited)
ASSETS      
Current assets:          
Cash  $18,989   $211,765 
Short-term Investments   —      27,403 
Accounts receivable, net   8,565    18,317 
Inventory   158,465    149,175 
Prepaid insurance   88,838    —  
Other current assets   17,580    11,034 
  Total current assets   292,437    417,694 
           
Property and equipment, net   5,455    7,512 
           
Other assets:          
Long-term Investments   693,915    693,915 
Right-of-use-assets   15,334    22,101 
Security deposit   2,500    2,500 
           
Total assets   1,009,641    1,143,722 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable   747,638    797,789 
Accrued compensation   96,400    4,875 
Accrued liabilities   433,457    522,258 
Debt obligation of Joint Venture   478,494    —   
Notes payable, related parties   40,000    40,000 
Loans payable PPP Stimulus   35,500    —   
Convertible notes payable, net of debt discount of $442,957 and $808,980, respectively   2,784,044    3,193,548 
Right-of-use liabilities - current portion   7,476    14,361 
Warrant liability to be settled   —      192,115 
Contingency Liability   —      956,251 
Subscriptions payable   327,383    330,797 
Derivative liability   3,219,398    5,693,071 
  Total current liabilities   8,169,790    11,745,065 
           
Non-Current Liabilities          
Right-of-use liabilities   7,858    7,858 
           
Total liabilities   8,177,648    11,752,923 
           
Stockholders' deficit:          
Preferred stock, $0.001 par value, 50,000,000 shares authorized          
Class A preferred stock, $0.001 par value, 10,000,000 shares designated, 10,000,000 shares issued and outstanding as of June 30, 2020 and December 31, 2019   10,000    10,000 
Class B preferred stock, $0.001 par value, 5,000,000 shares designated, 0 shares issued and outstanding as of June 30, 2020 and December 31, 2019   —      —   
Common stock, $0.001 par value; 5,000,000,000 shares authorized; 469,288,934 and 77,958,081 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively   469,289    77,958 
Common stock to be issued, 44,994,720 and 0 shares, respectively   44,995    —   
Additional paid in capital   68,777,044    63,467,054 
Accumulated deficit   (76,469,334)   (74,164,213)
  Total stockholders' deficit   (7,168,006)   (10,609,201)
           
Total liabilities and stockholders' deficit  $1,009,641   $1,143,722 
           
See the accompanying notes to these unaudited condensed consolidated financial statements

 4 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

   Three months ended June 30,  Six months ended June 30,
   2020  2019  2020  2019
REVENUES:            
Sales  $77,827   $201,771   $156,474   $315,042 
Related party Sales   5,131    6,809    8,303    8,348 
Total Revenues   82,958    208,580    164,777    323,390 
                     
Cost of sales   39,187    29,139    73,392    69,017 
                     
Gross Profit   43,771    179,441    91,385    254,373 
                     
OPERATING EXPENSES:                    
Depreciation   1,582    1,695    3,328    3,391 
Selling and marketing   74,212    656,751    200,667    1,085,762 
Payroll and related   95,644    90,000    196,843    220,000 
Stock-based compensation   536,452    395,400    542,767    549,250 
General and administrative   211,116    335,264    415,173    609,744 
  Total operating expenses   919,006    1,479,110    1,358,777    2,468,147 
                     
Net loss from operations   (875,235)   (1,299,669)   (1,267,392)   (2,213,774)
                     
OTHER INCOME (EXPENSES):                    
Interest expense, net   (881,945)   (1,005,970)   (1,772,096)   (1,442,252)
Impairment gain (Loss) on Joint Ventures   7,048    0    (260,954)   0 
Loss on equity investment   (7,048)   (171,284)   (133,893)   (230,825)
Gain (Loss) on change in fair value of derivative liabilities   1,572,964    2,207,299    1,142,272    (480,150)
Unrealized Loss on trading securities   0    (150,000)   (13,945)   (285,000)
Loss on sale of trading securities   (2,603)   0    (2,603)     
Gain on settlement of debt   0    0    3,490    0 
Total other income (expense)   688,416    880,045    (1,037,729)   (2,438,227)
                     
Net loss before income taxes   (186,819)   (419,624)   (2,305,121)   (4,652,001)
                     
Income taxes (benefit)   0    0    0    0 
                     
NET INCOME (LOSS)  $(186,819)  $(419,624)  $(2,305,121)  $(4,652,001)
                     
Loss per common share, basic and diluted  $(0.00)  $(0.01)  $(0.01)  $(0.12)
                     
Weighted average number of common shares outstanding, basic and diluted (after stock-split)   245,000,528    46,170,199    185,851,674    40,100,656 
See the accompanying notes to these unaudited condensed consolidated financial statements

 

 5 

 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS JUNE 30, 2020 AND 2019    (UNAUDITED)
 
    Class A Preferred Stock    Class B Preferred Stock    Common Stock    Common Stock to be issued 

Common

Stock

    Additional Paid In    Accumulated      
    Shares    Amount    Shares    Amount    Shares    Amount    Shares    Amount    Subscriptions    Capital    Deficit    Total 
Balance, December 31, 2018   10,000,000   $10,000    —     $—      42,687,301   $42,687    316,693   $90,000   $—     $50,707,103   $(53,983,895)  $(3,134,105)
Common stock issued for services rendered   —      —                535,387    535    —      —      —      548,715         549,250 
Common stock issued in settlement of convertible notes payable and accrued interest                       1,683,854    1,684    —      —      —      2,032,824    —      2,034,508 
Additional paid-in capital due to issuance of convertible debt                                                462,714         462,714 
Common stock to be issued pursuant to NPE stock purchase agreement                       1,220,856    1,221    1,173,709    1,174         1,730,119         1,732,514 
Common stock issued in exchange for exercise of warrants on a cashless basis        —                655,556    656    (140,752)   (40,000)        79,344    —      40,000 
Sale of common stock                       531,671    532    (175,941)   (50,000)        203,523         154,055 
Net Loss        —      —      —      —      —      —      —      —      —      (4,652,001)   (4,652,001)
Balance, June 30, 2019   10,000,000   $10,000   $—     $—      47,314,625   $47,315    1,173,709   $1,174   $—     $55,764,342   $(58,635,896)  $(2,813,066)

 

 6 

 

 

    Class A Preferred Stock    Class B Preferred Stock    Common Stock    Common Stock to be issued    

Common

Stock

    

Additional

Paid In

    Accumulated      
    Shares    Amount    Shares    Amount    Shares    Amount    Shares    Amount    Subscriptions    Capital    Deficit    Total 
Balance, December 31, 2019   10,000,000   $10,000    —     $—      77,958,081   $77,958    —     $—     $—     $63,467,054   $(74,164,213)  $(10,609,201)
Common stock issued to settle amounts previously accrued                       8,333    8                  $6,692         6,700 
Common stock issued for services rendered   —      —                44,658,333    44,658    —      —      —      498,108         542,766 
Common stock issued in settlement of convertible notes payable and accrued interest   —      —                270,547,861    270,548    43,994,720    43,995         1,216,928    —      1,531,471 
Conversion of related party notes payable                       21,384,103    21,384    —      —           29,229         50,613 
Common stock issued in exchange for exercise of warrants on a cashless basis   —      —                51,054,214    51,054    1,000,000    1,000    —      375,446    —      427,500 
Sale of common stock   —      —                —      —      —      —           —      —      —   
Common shares issued in settlement of legal case                       3,677,889    3,678                   952,573         956,251 
Reclassification of derivative liabilities to additional paid in capital                                                2,231,014         2,231,014 
Net Loss   —      —      —      —      —      —      —      —      —      —      (2,305,121)   (2,305,121)
Balance, June 30, 2020   10,000,000   $10,000    —     $—      469,288,814   $469,289    44,994,720   $44,995   $—     $68,777,044   $(76,469,334)  $(7,168,006)
                                                             
See the accompanying notes to these unaudited condensed consolidated financial statements

 

 7 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(UNAUDITED)

       
    2020    2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income (Loss)  $(2,305,121)  $(4,652,001)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount   1,028,931    1,308,550 
Depreciation and amortization   3,328    3,391 
Bad debt expense   —      15,000 
Non cash interest   —      1,442,252 
Impairment Loss on equity method investee   260,954      
Loss on equity investment   133,895    230,825 
(Gain) Loss on change in fair value of derivative liability   (1,142,272)   480,150 
Interest expense recognized for the excess of fair value of derivative liability over net book value of notes payable at issuance   395,607    —   
Loss on share inducement and settlement of warrant liability   138,885    —   
Stock-based compensation   542,767    549,250 
Unrealized Loss on trading securities   27,403    285,000 
Changes in operating assets and liabilities:          
Accounts receivable   9,752    (6,983)
Inventories   (9,290)   (62,469)
Prepaid expenses and other current assets   (95,384)   30,769 
Accounts payable   145,784    (67,893)
Accrued expenses and other current liabilities   195,874  (986,430)
Right-of-use assets   6,767    —   
Right-of-use liabilities   (6,885)   —   
Contingency liability   —      —   
Net cash provided by (used in) operating activities   (669,005)   (1,430,589)
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,271)   (2,703)
Investment in joint venture   —      (498,658)
Purchase of investments   —      —   
Net cash provided by (used in) investing activities   (1,271)   (501,361)
           
Cash flows from financing activities:          
Proceeds from issuance of notes payable   442,000    1,675,000 
Proceeds from PPP loan payable   35,500    —   
Net cash provided by (used in) financing activities   477,500    1,675,000 
           
Net increase (decrease) in cash   (192,776)   (256,950)
           
Cash at beginning of period   211,765    359,577 
           
Cash at end of period  $18,989   $102,627 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest   —      —   
Cash paid for taxes   —      —   
           
Non cash financing activities:          
Common stock issued in settlement of convertible notes payable  $1,531,471   $462,714 
Reclassification of derivative liabilities to additional paid-in capital  $2,231,014   $—   
Investment in joint venture  $—     $2,650,000 
Common shares issued in settlement of legal case  $956,251   $—   
See the accompanying notes to these unaudited condensed consolidated financial statements

 

 8 

 

MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(unaudited)

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Marijuana Company of America, Inc. (the “Company”) was incorporated under the laws of the State of Utah in October 1985 under the name Mormon Mint, Inc. The corporation was originally a startup company organized to manufacture and market commemorative medallions related to the Church of Jesus Christ of Latter Day Saints. On January 5, 1999, Bekam Investments, Ltd. acquired one hundred percent of the common shares of the Company and spun the Company off changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the development and implementation of Internet web content and e-commerce applications. In October 2009, in a 30 for 1 exchange, the Company merged with Sparrowtech, Inc. for the purpose of exploration and development of commercially viable mining properties. From 2009 to 2014, we operated primarily in the mining exploration business.

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

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

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

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

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

The condensed balance sheet as of December 31, 2019 has been derived from audited financial statements.

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019.

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements during the six months ended June 30, 2020, the Company incurred net losses from operations of $2,305,121 and used cash in operations of $669,005. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The Company's primary source of operating funds for the six months ended June 30, 2020 has been from revenue generated from proceeds from the issuance of convertible and other debt. The Company has experienced net losses from operations since inception, but expects these conditions to improve in 2020 and beyond as it continues to develop its business model. The Company has stockholders' deficiencies as of June 30, 2020 and requires additional financing to fund future operations.

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 9 

 

 

NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Financial Statements

The unaudited condensed 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 ASU 2014-09 “Revenue from Contracts with Customers,” to supersede previous revenue recognition guidance under current U.S. GAAP. Revenue is now recognized in accordance with FASB ASC Topic 606, Revenue Recognition. 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 principal 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. We adopted FASB ASC Topic 606 for our reporting period as of the year ended December 31, 2017, which made our implementation of FASB ASC Topic 606 effective in the first quarter of 2018. We decided to implement the modified retrospective transition method to implement FASB ASC Topic 606, with no restatement of the comparative periods presented. Using this transition method, we applied the new standards to all new contracts initiated on/after the effective date. We also decided to apply this method to any incomplete contracts we determine are subject to FASB ASC Topic 606 prospectively. For the quarter ended June 30, 2020, there were no incomplete contracts. As is more fully discussed below, we are of the opinion that none of our contracts for services or products contain significant financing components that require revenue adjustment under FASB ASC Topic 606.

Identification of Our Contracts with Our Customers.

Contracts included in our application of FASB ASC Topic 606, for the quarter ended June 30, 2020, consisted solely of sales of our hempSMART™ products made by our sales associates and by us directly through our web site. Regarding our 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 2017, 2018 and 2019, or for the quarter ended June 30, 2020.

In accordance with FASB ASC Topic 606, Revenue Recognition, we are of the opinion that none of our hempSMART™ product sales or offered consulting service, as each are discussed below, have a significant financing component. Our opinion is based upon the transactional basis for our product sales, with revenue recognized upon customer order, payment and shipment, which occurs concurrently. Our evaluation of the length of time between the customer order, payment and shipping is not a significant financing component, because shipment occurs the same day as the order is placed and payment made by the customer. Our evaluation of our consulting services is based upon recognizing revenue as the services are performed for a determinable price per hour. We only recognize revenues as we incur and charge billable hours. Because our hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, we are 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 we recognize under the contract or would otherwise contain a significant financing component under FASB ASC Topic 606.

 10 

 

Determination of the Price in Our Sales Contracts.

The transaction prices in our sales contract is the amount of consideration we expect to be entitled to for transferring promised hempSMART™ products. The consideration amount is fixed and not variable. The transaction price is allocated to the identified performance obligations in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled, which is concurrently upon receipt of payment. There are no future options for a contract when considering and determining the transaction price. We exclude amounts third parties will eventually collect, such as sales tax, when determining the transaction price. Since the timing between receiving consideration and transferring goods or services is immediate, our sales contract do not have a significant financing component, i.e., recognizing revenue at the amount that reflects the cash payment that the customer would have made at the time the goods or services were transferred to them (cash selling price), rather than significantly before or after the goods or services are provided.

Allocation of the Transaction Price of Our Sales Contracts.

Our sales contracts are not considered multi-element arrangements which require the fulfillment of multiple performance obligations. Rather, our sales contracts include one performance obligation in each contract. As such, from the outset, we allocate the total consideration to each performance obligation based on the fixed and determinable standalone selling price, which we believe 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. The standard defines control as “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.” (ASC 606-10-20). For performance obligations that are fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation. As noted above, our single performance obligation sales contracts are singularly related to our promise to provide the hempSMART™ products to the customer upon receipt of payment, which occurs concurrently and when, upon completion, allows us under our revenue recognition policy to realize revenue.

Regarding our 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 2019 and 2018 or for the quarter ended June 30, 2020.

 

Identifying the Performance Obligations in Our Sales Contracts.

 

In analyzing our sales contracts, our policy is to identify the distinct performance obligations in a sales contract arrangement. In determining our performance obligations under our sales contracts, we consider that the terms and conditions of sales are explicitly outlined in our 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 our contracts, or are highly dependent or highly integrated with other goods in our sales contracts. Thus, our performance obligations are singularly related to our promise to provide the hempSMART™ products upon receipt of payment. We offer an assurance warranty on our hempSMART™ products that allows a customer to return any hempSMART™ products within thirty days if not satisfied for any reason. Assurance warranties are not identifiable performance obligations, since they are electable at the whim of the customer for any reason. However, we do account for returns of purchase prices if made.

 11 

 

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 our recognition of revenue after the adoption of FASB ASC 606 did not include any judgments or changes to judgments that affected our reporting of revenues, since our product sales, both pre and post adoption of FASB ASC 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) our customers exercise discretion in determining the timing of when they place their product order; and, (2) the price negotiated in our product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, we are of the opinion that our 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 us or the customer under FASB ASC Topic 606.

Consulting Services

The Company has also offered professional services for financial accounting, bookkeeping or real property management consulting services based on consulting agreements. As of the date of this filing, we have not entered into any contracts for any financial accounting, bookkeeping and/or real property management consulting services that have generated reportable revenues as of the years ended 2017, 2018 and 2019 or the quarter ended June 30, 2020. If and when the Company provides these professional services, we would intend and expect the arrangements to be entered into on an hourly fixed fee basis.

For hourly based fixed fee service contracts, we intend to utilize and rely upon the proportional performance method, which recognizes revenue as services are performed. Under this method, in order to determine the amount of revenue to be recognized, we will calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. We only recognize revenues as we incur and charge billable hours. Because our hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, we are 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 we recognize under the contract or would otherwise contain a significant financing component under FASB ASC Topic 606.

The Company determined that upon adoption of ASC 606 there were no adjustments converting from ASC 605 to ASC 606 because product sales revenue is recognized upon customer order, payment and shipment, which occurs concurrently, and our consulting services offered are fixed and determinable and are only earned and recognized as revenue upon actual performance.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.

Cash

The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.

Concentrations of credit risk

The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.

 12 

 

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 June 30, 2020, and December 31, 2019, allowance for doubtful accounts was $0 and $0 respectively.

Inventories

Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.

Cost of sales 

Cost of sales is comprised of cost of product sold, packaging, and shipping costs.

Stock-Based Compensation - Employees

The Company accounts for its 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 section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, 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 memorandum (based on sales to third parties) (“PPM”), 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 option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification 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 paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), 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 the 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 Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic 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. 

Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on 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.

 13 

 

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 expends 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, with an immaterial impact on its financial statements and related disclosures.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Binomial option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification 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 holder’s expected exercise behavior into the fair value (or calculated value) of the instruments.  The Company uses historical data to estimate holder’s expected exercise behavior.  If the Company is a newly formed corporation or shares of the 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 the 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 Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. 

 

Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments. 

  Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

Earnings per Share

Basic earnings per share are calculated by dividing net income (loss) by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning of the year.

Property and Equipment

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.

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Investments 

The Company follows Accounting Standards Codification subtopic 321-10, Investments-Equity Securities (“ASC 321-10) which requires the accounting for equity security to be measured at fair value with changes in unrealized gains and losses are included in current period operations. Where an equity security is without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus impairment plus or minus changes resulting from observable price changes (See Note 4).

Derivative Financial Instruments

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.

The Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance sheet using the applicable classification criteria enumerated under GAAP.  The Company determined that certain conversion and exercise options do not contain fixed settlement provisions.  The convertible notes contain a conversion feature and warrants have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands.

As such, the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.   

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 June 30, 2020 and December 31, 2019. 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 $44,659 and $296,356 for the six months ended June 30, 2020 and 2019, respectively, as advertising costs.

Segment Information

Accounting Standards Codification subtopic Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company's only material principal operating segment.

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The following table represents the Company’s hempSMART, Inc. business, which is its sole operating segment as of June 30, 2020 and 2019:

hempSMART

STATEMENT OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

                   
   For the three months ended 

6 Months

Ended

  For the three months ended 

6 Months

Ended

   March 31, 2020  June 30, 2020  June 30, 2020  March 31, 2019  June 30, 2019  June 30, 2019
                   
                   
Revenues  $81,819   $82,958   $164,777   $114,810   $208,580   $323,390 
                               
Cost of Goods Sold   34,205    39,187    73,392    39,878    29,139    69,017 
                               
Gross Profit   47,614    43,771    91,385    74,932    179,441    254,373 
                               
Expense                              
Stock Based Compensation   0    17,850    17,850    0    0    0 
Selling and Marketing   101,897    74,356    176,253    292,365    351,268    643,633 
Payroll and Related expenses   18,749    32,113    50,862    0    0    0 
Depreciation Expense   1,746    1,582    3,328    1,696    1,696    3,392 
General and Admin Expenses   71,599    53,911    125,510    288,023    280,214    568,237 
Total Expense   193,991    179,812    373,803    582,084    633,178    1,215,262 
                               
Net Loss from Operations  $(146,377)  $(136,041)  $(282,418)  $(507,152)  $(453,737)  $(960,889)

 

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.

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The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of June 30, 2020, and 2019, the Company has not recorded any unrecognized tax benefits.

 

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 U.S. 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.

 

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. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.

We adopted this standard using a modified retrospective approach on January 1, 2019. The modified retrospective approach includes a number of optional practical expedients relating to the identification and classification of leases that commenced before the adoption date; initial direct costs for leases that commenced before the adoption date; and, the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.

The Company elected the package of practical expedients permitted under ASC 842 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.

In considering its qualitative disclosure obligations under ASC 842-20-50-3, the Company examined its one lease for office space that has a fixed monthly rent with no variable lease payments and no options to extend. The lease is for an office space with no right of use assets. The lease does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants imposed by the lease for dividends or incurring additional financial obligations by the Company. The Company also elected a short-term lease exception policy and an accounting policy to not separate non-lease components from lease components for our facility lease, as we determined our right of use asset to be $15,334 for the period ended June 30, 2020.

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Consistent with ASC 842-20-50-4, for the Company's June 30, 2020, quarterly financial statements, the Company calculated its total lease cost based solely on its monthly rent obligation. The Company had no cash flows arising from its lease, no finance lease cost, short term lease cost, or variable lease costs. Our office lease does not produce any sublease income, or any net gain or loss recognized from sale and leaseback transactions. As a result, the Company did not need to segregate amounts between finance and operating leases for cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows; supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets; weighted-average calculations for the remaining lease term; or the weighted-average discount rate.

The adoption of this guidance resulted in no significant impact to our results of operations or cash flows.

NOTE 4 – OPERATING LEASE

On July 1, 2019, the Company entered into a lease extension agreement for its single operating lease, whereby the Company extended its office lease located in Escondido, California, for one year. The extension period commenced on June 30, 2020 and will expire on June 30, 2021 at a base monthly lease rate of $1,309 per month through June 30, 2020, and $1,348 to June 30, 2021.  

To evaluate the impact on adoption of ASC842 – Leases, on the accounting treatment for leasing of real office property referred to as the “Premises,” the Company utilizes the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is readily determinable. The Company used an estimated incremental borrowing rate of 10% to estimate the present value of the right of use liability.

The Company has right-of-use assets of $15,334 and operating lease liabilities of $18,819 as of June 30, 2020. Operating lease expense for the six months ended June 30, 2020 was $32,371.

The following table provides the maturities of lease liabilities at June 30, 2020:

Maturity of Lease Liabilities at June 30, 2020   
2020  $12,015 
2021   8,089 
 2021 and thereafter   —   
    —   
Total future undiscounted lease payments   20,104 
Less: Interest   (1,285)
Present value of lease liabilities  $18,819 

 

Minimum lease payments under the Company’s operating lease under ASC 840 as of for 2020 and 2021 are $12,015 and $8,089, respectively.

 

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NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment as of June 30, 2020 and December 31, 2019 is summarized as follows:

  

June 30,

2020

 

December 31,

2019

Computer equipment  $17,629   $16,358 
Furniture and fixtures   5,140    5,140 
Subtotal   22,769    21,498 
Less accumulated depreciation   (17,314)   (13,986)
Property and equipment, net  $5,455   $7,512 

 

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.

Depreciation expense was $3,328 and $3,391 for the six months ended June 30, 2020 and 2019, respectively. 

NOTE 6 – INVESTMENTS

MoneyTrac

We entered into a stock purchase agreement on March 13, 2017 with MoneyTrac Technology, Inc., a California stock corporation (“MoneyTrac”) to purchase a 15% equity position in MoneyTrac. On July 27, 2017, we completed tender of the purchase price of $250,000 pursuant to that stock purchase agreement. On June 12th, 2018, Global Payout, Inc. (“Global”) entered into a reverse triangular merger business combination (the “Merger”) with MoneyTrac and MTrac Tech Corporation, a Nevada corporation and wholly-owned subsidiary of Global (“Merger Sub”), whereby MoneyTrac was successfully merged into Merger Sub, the surviving corporation of the Merger. Thereafter, the separate existence of MoneyTrac ceased, and all rights, privileges, powers and property of MoneyTrac were assumed by Merger Sub. Additionally, Merger Sub assumed all of the financial obligations and liabilities of MoneyTrac, except minute books and stock records of MoneyTrac insofar as they relate solely to its organization and capitalization, and the rights of MoneyTrac arising out of the executed Merger. Pursuant to the terms of the Merger, Global issued 1,100,000,000 (one billion, one hundred million) shares of its common stock to MoneyTrac as consideration for the acquisition of MoneyTrac. Pursuant to the terms of the Merger, a conversion of issued MoneyTrac stock was completed whereby each one (1) share of MoneyTrac stock, issued and outstanding immediately prior to the effective date of the Merger, was canceled and extinguished and converted automatically into ten (10) shares of Global common stock. As of the effective date of the Merger, all shares of Global Preferred Stock issued prior to the effective date of the Merger were canceled and extinguished without any conversion thereof. We acquired 150,000,000 Global common shares for our purchase price of $250,000, representing ownership of approximately fifteen percent (15%) of the post-Merger issued and outstanding equity of Global. Global’s name changed in April, 2020 to Global Trac Solutions, Inc. Global’s common stock is traded on the OTC Markets under the symbol “PYSC.” We realized $51,748.17 from the sales of all of our Global securities, and as of June 30, 2020, have no remaining shares. We have a cash balance in the amount of $12,500 held in our brokerage account, a receivable resulting from the proceeds of our sale of our Global shares, that we have not collected.

Benihemp

On July 19, 2017, we agreed to lend $50,000 to Conveniant Hemp Mart, LLC (“Benihemp”) based on a promissory note. The note provided that in lieu of receiving repayment, we could elect to exercise a right to convert the loaned amount into a payment towards the purchase of a 25% interest in Benihemp, subject to our payment of an additional $50,000, equaling a total purchase price of $100,000. The Company exercised this option on November 20, 2017 and made payment to Benihemp on November 21, 2017. On May 1, 2019, the Company and Benihemp agreed to cancel the Company’s 25% interest in Benihemp. Benihemp issued to the Company a credit memo equal to the Company’s $100,000 investment. The Company determined that as of December 31, 2019, approximately $41,000 of this credit was impaired and not usable.

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Global Hemp Group New Brunswick Joint Venture

On September 5, 2017, we announced our agreement to participate in a joint venture with Global Hemp Group, Inc., a Canadian corporation (“Global Hemp Group”), in a multi-phase industrial hemp project on the Acadian peninsula of New Brunswick, Canada. Our participation included providing one-half, or $10,775, of the funding for the phase one work of the multi-phase industrial hemp project. On January 10, 2018, phase one of the project was completed by successfully cultivating industrial hemp during the 2017 growing season for research purposes. The Company’s project-related costs incurred according to the Company’s interest in the industrial hemp project were $0 and $10,775 for the years ended December 31, 2019 and 2018 respectively and was recorded as other income/expense in the Company’s Statement of Operations in the appropriate periods. As of December 31, 2019, and June 30, 2020, the balance of the New Brunswick industrial hemp joint venture investment reported on the balance sheet for the year ended December 31, 2019 was $0 as a result of the investment being deemed fully impaired and the Company withdrawing from the joint venture as of September 30, 2019. 

Global Hemp Group Oregon Joint Venture

On May 8, 2018, the Company, Global Hemp Group, and TTO Enterprises, Ltd., an Oregon corporation (“TTO”) entered into a joint venture agreement. The purpose of the joint venture was to develop an Oregon-licensed industrial hemp project to commercialize the cultivation of industrial hemp biomass on a 109-acre parcel of farmland owned by the Company and Global Hemp Group in Scio, Oregon. The joint venture operated through the Oregon corporation Covered Bridges, Ltd. On May 30, 2018, the joint venture purchased TTO’s 15% interest in the joint venture for $30,000. The Company and Global Hemp Group then had equal interests as co-owners of the joint venture. The joint venture agreement committed the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and $34,775 by January 31, 2019. The Company performed these payment obligations pursuant to the joint venture agreement.

The 2018 crop of industrial hemp grown on the joint venture’s farmland consisted of 33 acres of high-yield CBD industrial hemp biomass grown in an orchard-style cultivation method on our farmland. The 33-acre 2018 harvest produced approximately 37,000 high CBD content industrial hemp plants, yielding a total of 24 tons of wet harvested industrial hemp biomass that resulted in a saleable harvest of 48,000 pounds of cured industrial hemp biomass. The joint venture partners prepared processing samples ranging in size from 100 to 2,000 lbs. for sample offers to licensed industrial hemp handlers and CBD extraction companies. This industrial hemp biomass was processed into a CBD crude oil concentrate with the option to refine it further into CBD isolate, or full spectrum oil, in order to increase its value on the market.

As of December 31, 2019, the combined balance of this joint venture investment and related farmland investment was $0, as the investment was written off as a loss as a result of its failure to generate any cash flow for the Company for the period ended December 31, 2019. The debt obligation of $262,414 related to this joint venture was also written off to $0 as of the year ended December 31, 2019. The debt obligation related to the joint venture for the six months ended June 30, 2020 was $478,494.

BV-MCOA Joint Venture

On March 16, 2017, we entered into a joint venture agreement with Bougainville Ventures, Inc., a Canadian corporation (“Bougainville”). The purpose of this joint venture between the Company and Bougainville was for the Company and Bougainville 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 Washington State legal cannabis industry production license holder to grow cannabis on the joint venture 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 a Washington State limited liability company, which was organized in the State of Washington on May 16, 2017 under the name BV-MCOA Management, LLC (“BV-MCOA”).

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As our contribution to the BV-MCOA joint venture, the Company committed to raise not less than $1,000,000 to fund joint venture operations, based upon a funding schedule. The Company also committed to providing branding and systems for the representation of state-licensed cannabis products and derivatives comprised of management, marketing and various proprietary methodologies directly tailored to the state-licensed cannabis industry.

The Company and Bougainville's joint venture agreement dictated that funding provided by the Company to the BV-MCOA joint venture would contribute towards the joint venture’s ultimate purchase of a state-licensed cannabis cultivation site, consisting of a one-acre parcel located in Okanogan County, Washington.

As disclosed on Form 8-K on December 11, 2017, the Company did not comply with the funding schedule for the BV-MCOA joint venture. On November 6, 2017, the Company and Bougainville amended the joint venture agreement to reduce the amount of the Company's commitment from $1,000,000 to $800,000, with a related compensatory element whereby the Company agreed to issue Bougainville 15 million shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The amended joint venture agreement provided that Bougainville would deed the real property comprising the BV-MCOA joint venture’s state-licensed cannabis cultivation site within thirty days of Bougainville’s receipt of payment.

Subsequently, the Company determined that Bougainville had no ownership interest in the real property comprising the BV-MCOA joint venture’s state-licensed cannabis cultivation site in Washington State, but rather was a party to a purchase agreement for real property that was in breach of contract for non-payment. Additionally, the Company also determined that Bougainville did not possess an agreement with a Washington State legal cannabis industry production license holder to grow cannabis on the BV-MCOA joint venture’s cannabis cultivation site, contrary to what Bougainville had previously represented to the Company. Further, as a result of funding arranged for by the Company, Bougainville and an unrelated third party, Green Ventures Capital Corp., purchased the cannabis cultivation site and did not then deed the real property comprising the site to the BV-MCOA joint venture. As of the date of this filing, the real property comprising the site has still not been deeded to the BV-MCOA joint venture. 

To clarify the respective contributions and roles of the parties, the Company offered to enter into good faith negotiations to further revise and restate the amended BV-MCOA joint venture agreement with Bougainville. The Company diligently attempted to communicate with Bougainville to accomplish a revised and restated joint venture agreement, and made diligent efforts towards satisfying the conditions to complete the subdivision of the site required 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 of the site and the deeding of the site’s real property to the BV-MCOA joint venture.

On August 10, 2018, the Company advised its independent auditor that Bougainville failed to respond to the Company regarding the Company’s requests to Bougainville for information concerning the audit of Bougainville’s receipt and expenditure of the $800,000 contributed by the Company to the BV-MCOA joint venture agreement, which was Bougainville’s material obligation pursuant to the amended BV-MCOA joint venture agreement. The Company believes that some of the joint venture funds it paid into the BV-MCOA joint venture were misappropriated by Bougainville’s management and that there was self-dealing with respect to those funds. Additionally, the Company believes that Bougainville misrepresented material facts in both the original and amended BV-MCOA joint venture agreements, including, but not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded to the joint venture; (ii) it had an agreement with a Washington State legal cannabis production license holder to grow cannabis on the BV-MCOA joint venture’s cannabis cultivation site; and, (iii) that clear title to the real property associated with the BV-MCOA joint venture’s cannabis cultivation site and the Washington State legal cannabis production license holder claimed by Bougainville would be deeded to the BV- MCOA joint venture no later than thirty days after the Company made its final funding contribution pursuant to the amended BV-MCOA joint venture agreement.

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As a result, on September 20, 2018, the Company filed suit against Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal and Richard Cindric, et al. in the Okanogan County, Washington Superior Court, case number 18-2- 0045324. The Company’s complaint against the defendants seeks legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, civil theft and conversion, rescission of the BV-MCOA joint venture agreement, a full accounting of the funds invested into BV-MCOA, quiet title to real property comprising the joint venture cannabis cultivation site in the name of the Company, for the appointment of a receiver to BV-MCOA, the return to treasury of the 15 million shares of the Company’s preferred common stock issued to Bougainville, and for treble damages pursuant to the Consumer Protection Act in Washington State. The Company filed a lis pendens on the real property in question and the case is currently in litigation.

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

GateC Joint Venture

On March 17, 2017, the Company and GateC Research, Inc. (“GateC”) entered into a joint venture agreement whereby the Company committed to raise venture capital operating funds of up to $1,500,000 over a six-month period, with a minimum commitment of five hundred thousand dollars ($500,000) within a three (3) month period. The Company’s non-cash contribution to the GateC joint venture was to provide information establishing brands and systems for the representation of cannabis-related products and derivatives comprised of management, marketing and various proprietary methodologies, including but not limited to its affiliate marketing program, directly tailored to the cannabis industry. GateC agreed to contribute its management and control services and systems related to cannabis grow operations in Adelanto County, California, and its permit to grow marijuana in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto County, California, and GateC’s permit to grow cannabis did not contain a conditional use permit.

On or about November 28, 2017, GateC and the Company orally agreed to suspend the Company’s funding commitment, pending the finalization of California State regulations governing the growth, cultivation and distribution of cannabis, which were expected to be completed in 2018. On March 19, 2018, the Company and GateC entered into a recession and mutual release agreement, by which they rescinded the GateC joint venture agreement and concurrently each gave the other party a universal general release from all claims arising out of the agreement. We incurred no termination penalties as the result of its entry into the recession and mutual release agreement.

In 2017, the Company recorded a debt obligation of $1,500,000 to the GateC joint venture and a corresponding impairment charge of $1,500,000 during for the year ended December 31, 2017. Upon termination of the GateC joint venture agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation of $1,500,000 for the year ended December 31, 2018.

Natural Plant Extract of California

On April 15, 2019, we entered into a joint venture with Natural Plant Extract of California, Inc. (“NPE”) to operate a licensed psychoactive cannabis distribution service in California to be named Viva Buds. California legalized psychoactive cannabis for medicinal and recreational use on January 1, 2018. On February 3, 2020, we terminated the NPE joint venture and entered into a Settlement and Release of All Claims Agreement with NPE. In exchange for that universal release, the Company and NPE (i) agreed to reduce the Company’s interest in NPE from 20% to 5%; (ii) agreed the Company would pay NPE a total of $85,000 as follows: $35,000 concurrent with the execution of the universal release, and $25,000 no later than the 5th calendar day for each of the two months following execution of Settlement and Release of All Claims Agreement; and, (iii) agreed to retire the balance of our original valuation obligation from the material definitive agreement, representing a shortfall of $56,085.15, in a convertible promissory note, with terms allowing NPE to convert the note into common stock of MCOA at a 50% discount to the closing price of MCOA’s common stock as of the maturity date.

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

MARIJUANA COMPANY OF AMERICA, INC.

INVESTMENT ROLL-FORWARD

AS OF JUNE 30, 2020

   INVESTMENTS        SHORT-TERM INVESTMENTS
                         TOTAL   
   TOTAL  Global       Bougainville  Gate C  Natural     Short-   
   INVESTMENTS 

Hemp

Group

  Benihemp  MoneyTrac  Ventues, Inc.  Research Inc. 

Plant

Extract

  Vivabuds 

Term

Investments

  MoneyTrac
Beginning balance @12-31-16  $0   $0   $0   $0   $0   $0             $0   $0 
Investments made during 2017   3,049,275    10,775    100,000    250,000    1,188,500    1,500,000              0    0 
                                                   
Quarter 03-31-17 equity method Loss   0                                       0      
                                                   
Quarter 06-30-17 equity method Loss   0                                       0      
                                                   
Quarter 09-30-17 equity method Loss   (375,000)                  (375,000)                  0      
                                                   
Quarter 12-31-17 equity method accounting   313,702                   313,702                   0      
                                                   
Impairment of Investment in 2017   (2,292,500)   0              (792,500)   (1,500,000)             0    0 
Balances as of 12/31/17   695,477    10,775    100,000    250,000    334,702    0    0    0    0    0 
                                                   
Investments made during 2018   986,654    986,654                                  0      
                                                   
Quarter 03-31-18 equity method Loss   (37,673)                  (37,673)                  0      
                                                   
Quarter 06-30-18 equity method Loss   (11,043)                  (11,043)                  0      
                                                   
Quarter 09-30-18 equity method Loss   (10,422)        (10,422)                            0      
                                                   
Quarter 12-31-18 equity method Loss   (31,721)   (31,721)   0                             0      
                                                   
Moneytrac investment reclassified to Short-Term investments   (250,000)             (250,000)                       250,000    250,000 
                                                   
Unrealized gains on trading securities - 2018   0                                       560,000    560,000 
                                                   
Impairment of investment in 2018   (933,195)   (557,631)   (89,578)        (285,986)                  0      
Balance @12-31-18  $408,077   $408,077   $0   $0   $0   $0   $0   $0   $810,000   $810,000 
                                                   
Investments made during quarter ended 03-31-19   129,040    129,040                                         
                                                   
Quarter 03-31-19 equity method Loss   (59,541)   (59,541)                                        
                                                   
Unrealized gains on trading securities - quarter ended 03-31-19                                           (135,000)  $(135,000)
Balance @03-31-19  $477,576   $477,576   $0   $0   $0   $0   $0   $0   $675,000   $675,000 
                                                   
Investments made during quarter ended 06-30-19  $3,157,234   $83,646                       $3,000,000   $73,588           
                                                   
Quarter 06-30-19 equity method Income (Loss)  $(171,284)  $141,870)                      $(6,291)  $(23,123)          
                                                   
Unrealized gains on trading securities - quarter ended 06-30-19  $0                                       (150,000)  $(150,000)
Balance @06-30-19  $3,463,526   $419,352   $0   $0   $0   $0   $2,993,709   $50,465   $525,000   $525,000 
                                                   
Investments made during quarter ended 09-30-19  $186,263                                 $186,263           
                                                   
Quarter 09-30-19 equity method Income (Loss)  $122,863   $262,789                       $(94,987)  $(44,939)          
                                                   
Sale of trading securities during quarter ended 09-30-19                                          $(41,667)  $(41,667)
                                                   
Unrealized gains on trading securities - quarter ended 09-30-19  $0                                       (362,625)  $(362,625)
Balance @09-30-19  $3,772,652   $682,141   $0   $0   $0   $0   $2,898,722   $191,789   $120,708   $120,708 
                                                   
Investments made during quarter ended 12-31-19  $392,226   $262,414                            $129,812           
                                                   
Quarter 12-31-19 equity method Income (Loss)  $(178,164)  $(75,220)                      $(23,865)  $(79,079)          
Reversal of Equity method Loss for 2019  $272,285                            $125,143   $147,142           
Impairment of investment in 2019  $(3,175,420)  $(869,335)                      $(2,306,085)  $0           
Loss on disposition of investment  $(389,664)                                $(389,664)          
Sale of trading securities during quarter ended 12-31-19  $0                                      $(17,760)  $(17,760)
                                                   
Unrealized gains on trading securities - quarter ended 12-31-19  $0                                       (75,545)  $(75,545)
Balance @12-31-19  $693,915   $0)  $0   $0   $0   $0   $693,915   $0   $27,403   $27,403 
                                                   
Equity Loss for Quarter ended 03-31-20   126,845    126,845                                         
                                                   
Recognize Joint venture liabilities per JV agreement @03-31-20   394,848    394,848                                         
                                                   
Impairment of Equity Loss for Quarter ended 03-31-20   (521,692)   (521,692)                                        
                                                   
Unrealized gains on trading securities - quarter ended 03-31-19                                           (13,945)  $(13,945)
Balance @03-31-20  $693,915   $0   $0   $0   $0   $0   $693,915   $0   $13,458   $13,458 
                                                   
Equity Loss for Quarter ended 06-30-20   (7,048)   (7,048)                                        
                                                   
                                                   
Impairment of Equity Loss for Quarter ended 06-30-20   7,048    7,048                                         
                                                   
Sales of of trading securities - quarter ended 06-30-20                                           (13,458)  $(13,458)
Balance @06-30-20  $693,915   $0   $0   $0   $0   $0   $693,915   $0   $0   $0 

 

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Loan Payable
         Global                        Natural              General 
    TOTAL    Hemp              Bougainville    Gate C    Plant     Robert L         Operating 
    JV Debt    Group    Benihemp    MoneyTrac    Ventues, Inc.    Research Inc.    Extract    Hymers III    Vivabuds    Expense 
Beginning balance @12-31-16  $0   $0   $0   $0   $0   $0                  $0 
                                                   
                                                   
Quarter 03-31-17 loan borrowings   1,500,000                        1,500,000                     
                                                   
Quarter 06-30-17 loan activity                                                  
                                                   
Quarter 09-30-17 loan borrowings   725,000                   725,000                          
                                                   
Quarter 12-31-17 loan repayments   (330,445)                  (330,445)                         
                                                   
General operational expense   172,856                                            172,856 
Balances as of 12/31/17 (a)   2,067,411    0    0    0    394,555    1,500,000    0    0    0    172,856 
                                                   
                                                   
                                                   
Quarter 03-31-18 loan borrowings (payments)   376,472    447,430                                       (70,958)
                                                   
Quarter 06-30-18 cancellation of JV debt obligation   (1,500,000)                       (1,500,000)                    
                                                   
Quarter 06-30-18 loan repayments   (101,898)                                           (101,898)
                                                   
Quarter 09-30-18 loan activity   0                                              
                                                   
Quarter 12-31-18 loan borrowings   580,425    580,425                                         
                                                   
                                                   
                                                   
                                                   
Balance @12-31-18   (b)   1,422,410    1,027,855    0    0    394,555    0    0    0    0    0 
                                                   
Quarter 03-31-19 loan borrowings   649,575    649,575                                         
Quarter 03-31-19 debt conversion to equity   (407,192)   (407,192)                                        
                                                   
                                                   
                                                   
Balance @03-31-19  ©   1,664,793    1,270,238    0    0    394,555    0    0    0    0    0 
                                                   
Quarter 03-31-19 loan borrowings   3,836,220   $161,220                       $2,000,000        $0   $1,675,000 
                                                   
Quarter 03-31-19 debt conversion to equity   (1,572,971)  $161,220)                      $349,650)            $1,062,101)
                                                   
                                                   
Balance @06-30-19   (d)   3,928,042    1,270,238    0    0    394,555    0    1,650,350    0    0    612,899 
                                                   
Quarter 09-30-19 loan borrowings   582,000                                           $582,000 
                                                   
Quarter 09-30-19 debt conversion to equity   (187,615)                                          $(187,615)
                                                   
Balance @09-30-19   (e)   4,322,427    1,270,238    0    0    394,555    0    1,650,350    0    0    1,007,284 
                                                   
Quarter 12-31-19 loan borrowings   2,989,378   $262,414                       $596,784   $4,221        $2,125,959 
                                                   
Impairment of investment in 2019   (4,083,349)  $(1,532,652)            $(394,555)       $(2,156,142)               
                                                   
Loss on settlement of debt in 2019   50,093                            $50,093                
                                                   
Adjustment to reclassify amount to accrued liabilities   (85,000)                           $(85,000)               
                                                   
                                                   
Balance @12-31-19   (f)  $3,193,548   $(0)  $0   $0   $0   $0   $56,085   $4,221   $0   $3,133,243 
Quarter 03-31-20 loan borrowings  $441,638                                           $441,638 
                                                   
Quarter 03-31-20 debt conversion to equity  $(619,000)                                          $(619,000)
                                                   
Recognize Joint venture liabilities per JV agreement @03-31-20  $394,848   $394,848                                         
                                                   
Quarter 03-31-20 Debt Discount adjustments  $24,138                                 $24,138           
                                                   
Balance @03-31-20  (g)  $3,435,172   $394,848   $0   $0   $0   $0   $56,085   $28,359   $0   $2,955,881 
                                                   
Quarter 06-30-20 loan borrowings, net  $65,091                                 $65,091           
Quarter 06-30-20 debt conversion to equity  $(727,118)                                          $(727,118)
Quarter 06-30-20 reclass of liability  $83,647   $83,647                                         
                                                   
Quarter 06-30-20 Debt Discount adjustments  $405,746                                 $(27,715)       $433,461 
                                                   
Balance @06-30-20  (h)  $3,262,538        $0   $0   $0   $0   $56,085   $65,735   $0   $2,662,224 
 24 

 

 

                   
  06-30-20 03-31-20 12-31-19 09-30-19 06-30-19 03-31-19 12-31-18 12-31-17  
This includes balances for: Note (H) Note (g) Note (f) Note (e) Note (d) Note (c) Note (b) Note (a)  
      - Debt obligation of JV 478,494 394,848 0 1,633,872 1,778,872 128,522 289,742 1,500,000  
      - Convertible NP, net of discount 2,784,044 3,040,324 3,193,548 2,688,555 2,149,170 1,536,271 1,132,668 394,555  
      - Longterm debt 0 0 0 0 0 0 0 172,856  
Total Debt balance 3,262,538 3,435,172 3,193,548 4,322,427 3,928,042 1,664,793 1,422,410 2,067,411  

 

NOTE 7 – NOTES PAYABLE, RELATED PARTY

As of June 30, 2020, and December 31, 2019, the Company’s officers and directors have provided advances and incurred expenses on behalf of the Company. The issued notes are unsecured, due on demand and bear 5% interest. The balance due to Notes Payable Related Party as of June 30, 2020 and December 31, 2019 was $40,000 and $40,000 respectively. These notes are payable to the estate of Charles Larsen, who passed away on May 15, 2020.

NOTE 8 – CONVERTIBLE NOTES PAYABLE

During the six months ended June 30, 2020, the Company issued an aggregate of 291,931,964 shares of its common stock in settlement of the issued convertible notes payable and accrued interest.

For the six months ended June 30, 2020 and June 30, 2019, the Company recorded amortization of debt discounts of $1,028,931 and $1,308,550, respectively, as a charge to interest expense.

Convertible notes payable are comprised of the following:

   June 30,  December 31,
   2020  2019
Lender  (Unaudited)  (Audited)
Convertible note payable - Power Up Lending Group  $209,000   $294,000 
Convertible note payable - Crown Bridge Partners  $114,900   $110,000 
Convertible note payable - Odyssey Funding LLC  $0   $250,000 
Convertible note payable - Paladin Advisors LLC  $25,000   $75,000 
Convertible note payable - GS Capital Partners LLC  $173,000   $173,000 
Convertible note payable - Natural Plant Extract  $56,085   $56,085 
Convertible note payable - Robert L. Hymers III  $161,644   $96,553 
Convertible note payable - LG Capital  $50,000   $—   
Convertible note payable - BHP Capital  $37,625   $—   
Convertible note payable - Jefferson Capital  $37,625   $—   
Convertible note payable - GW Holdings  $57,750   $—   
Convertible note payable - St. George  $2,304,372   $2,947,890 
Total  $3,227,001   $4,002,528 
Less debt discounts  $(442,957)  $(808,980)
Net  $2,784,044   $3,193,548 
Less current portion  $(2,784,044)  $(3,193,548)
Long term portion  $—     $—   

 

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Convertible notes payable-Power Up Lending

From July 1 through September 12, 2019, the Company issued four convertible promissory notes in the aggregate principal amount of $294,000 to Power Up Lending Group Ltd. (“Power Up”). The promissory notes bear interest at 10% per annum, are due one year from the respective issuance date and include an original issuance discount in the aggregate of $12,000. Interest on the notes accrues from the issuance date, but interest will not become payable until the notes become payable. The notes are convertible at any time at a conversion rate equal to 61% of the market price of the Company’s common stock, defined as the lowest trading price during the 15-trading-day period prior to the conversion date. Upon the issuance of these convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the debentures should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions. As of the funding date of each note, the Company determined the fair value of the embedded derivative associated with the convertibility of each note. The fair value of the embedded derivative has been added to the debt discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability recognized as interest expense. The aggregate debt discount of $169,202 is being amortized to interest expense over the respective terms of the notes.

The Company has the right to prepay the notes for an amount ranging from 125% - 140% multiplied by the outstanding balance (all principal and accrued interest) depending on the prepayment period (ranging from 1 to 180 days following the issuance date). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note.

As of June 30, 2020, and December 31, 2019, the Company owed an aggregate of $209,000 and, $294,000 of principal, respectively on these convertible promissory notes. As of June 30, 2020, the Company owed $7,929 of accrued interest.

Convertible notes payable-Crown Bridge Partners

From October 1 through December 31, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $225,000 to Crown Bridge Partners LLC (“Crown Bridge”). The promissory notes bear interest at 10% per annum, are due one year from the respective issuance date and include an original issuance discount (“OID”) in aggregate of $22,500. Interest accrues from the issuance date, but interest shall not become payable until the notes becomes payable. The notes are convertible at any time at a conversion rate equal to 60% of the market price of the Company’s common stock, defined as the lowest trading price during the 15-trading-day period prior to the conversion date. Upon the issuance of these convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the debentures should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions. As of the funding date of each note, the Company determined the fair value of the embedded derivative associated with the convertibility of each note. The fair value of the embedded derivative has been added to the debt discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability recognized as interest expense. The aggregate debt discount of $88,674 is being amortized to interest expense over the respective terms of the notes. The Company also issued a total of 519,230 warrants with an initial exercise price of $0.26, with reset provisions based on issuances of common stock subsequent to the issuance date. Due to the reset provision, the conversion option of these warrants is also accounted for as a derivative liability. See Note 10.

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The Company has the right to prepay the notes for an amount ranging from 125% - 140% multiplied by the outstanding balance (all principal and accrued interest) depending on the prepayment period (ranging from 1 to 180 days following the issuance date). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note.

As of June 30, 2020, and December 31, 2019, the Company owed an aggregate of $114,900, and $110,000 of principal respectively. As of June 30, 2020, the Company owed of accrued interest of $1,250, on these convertible promissory notes.

Convertible notes payable-Odyssey Funding LLC

On October 30, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $250,000 to Odyssey Funding LLC (“Odyssey”). The promissory notes bear interest at 12% per annum, are due one year from the respective issuance date and include an original issuance discount in an aggregate of $12,500. Interest accrues from the issuance date, but interest does not become payable until the notes becomes payable. The notes are convertible at any time at a conversion rate equal to 55% the average of the two lowest trading prices of the Company’s common stock as quoted on the National Quotations Bureau OTC market or exchange where the Company's shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days to the conversion date.

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 $207,650 is being amortized to interest expense over the respective terms of the notes. As of June 30, 2020, and December 31, 2019, the Company owed principal of $0 and $250,000. As of June 30, 2020, the Company owed $0 in accrued interest.

Convertible notes payable - Paladin Advisors LLC

On October 23, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $75,000 to Paladin Advisors, LLC (“Paladin”). The promissory notes bear interest at 8% per annum and are due six months from the respective issuance date of each note along with accrued and unpaid interest. Principal and interest is payable on the date six months from the date of issuance of the note. Pursuant to the notes, Paladin has the option to convert all or any portion of the unpaid principal amount of the notes, plus accrued interest, into shares of the Company’s common stock at a conversion price equal to a 45% discount to the lowest closing bid of the previous 10 day trading period prior to the conversion.

 27 

 

The aggregate debt discount of $46,721 is being amortized to interest expense over the respective terms of the notes. As of June 30, 2020, and December 31, 2019, the Company owed an aggregate of $25,000 and $75,000 of principal. As of June 30, 2020, the Company owed $1,000 in accrued interest.

Convertible notes payable-GS Capital Partners LLC

On December 19, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $173,000 to GS Capital Partners LLC (“GS Capital”). The promissory notes bear interest at 10% per annum, are due one year from the respective issuance date, and include an original issuance discount in an aggregate of $15,000. Pursuant to the notes, GS Capital is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of the notes into shares of the Company's common stock at a per-share conversion price equal to 62% of the lowest trading price of the Company's common stock as reported on the National Quotations Bureau OTC Marketplace exchange on which the Company’s shares are quoted, or any exchange upon which the Company's common stock may be traded in the future, for the twenty trading days prior to the conversion.

As of the funding date of each note, the Company determined the fair value of the embedded derivative associated with the convertibility of each note. The fair value of the embedded derivative has been added to the debt discount (total debt discount is limited to the face value of the debt) with any excess of the derivative liability recognized as interest expense. The aggregate debt discount of $166,193 is being amortized to interest expense over the respective terms of the notes. As of June 30, 2020, and December 31, 2019, the Company owed principal of $173,000 and $173,000 respectively. As of June 30, 2020, the Company owed $9,219 in accrued interest.

Convertible notes payable-St George Investments

On November 1, 2017, the Company issued a secured convertible promissory note in the amount of $601,420 to St. George Investments LLC (“St George”). The promissory note bears interest at 10% compounded daily, was due upon maturity on September 10, 2018 and includes an original issue discount of $59,220. The promissory note was funded on November 11, 2017 for $542,200, net of the original issue discount and transaction costs. As of September 30, 2019, the Company owed $417,890 of principal and $38,378 of accrued interest on this convertible promissory note. As of September 30, 2019, this note was in default, but the lender has not enforced the default interest rate. On December 20, 2017, the Company issued a secured convertible promissory note in aggregate of $1,655,000 to St George Investments LLC (“St George”). The promissory note bears interest at 10% compounded daily, was due upon maturity on October 27, 2018 and includes an original issue discount of $155,000. In addition, the Company agreed to pay $5,000 for legal, accounting and other transaction costs of the lender. The promissory note was funded in nine tranches of $300,000; $200,000; $200,000; $400,000; $75,000; $150,000; $85,000; $120,000 and $70,000, resulting in aggregate net proceeds of $1,500,000. The Company received aggregate net proceeds of $1,200,000 and $300,000 during the years ended December 31, 2018 and 2017, respectively. As an investment incentive, the Company issued 1,100,000 five-year warrants, exercisable at $2.40 per share, with certain reset provisions. As of June 30, 2020, the warrants had an exercise price of $0.0085 for 5,274,146 total warrants.

The promissory notes are convertible, at any time at the lender’s option, at $2.40 per share. However, in the event the Company’s market capitalization (as defined) falls below $30,000,000, the conversion rate pursuant to the promissory notes will be 60% of the 3 lowest closing trade prices from the 20 trading days immediately preceding the date of conversion. In addition, the promissory notes include certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than the lender conversion price. The Company has a right to prepayment of the note, subject to a 20% prepayment premium and is secured by a trust deed of certain assets of the Company.

On November 5, 2018, $250,000 of principal and accrued interest was assigned to John Fife as an individual with all the terms and conditions of the original note issued to St George. On March 21, 2019, $150,959 of principal and $4,963 of accrued interest along with $160,454 of derivative liabilities valued as of the respective conversion date were converted into 394,460 shares of common stock.

During the nine months ended September 30, 2019, $550,000 of principal, $122,694 of accrued interest and $441,394 of derivative liabilities valued as of the respective conversion dates were converted into 1,710,897 shares of common stock, resulting in a gain on debt settlement of $21,586. As of September 30, 2019, the Company owed $0 of principal and $0 of accrued interest on this convertible promissory note. Although this note was in default until it was repaid, the lender did not enforce the default interest rate.

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On August 28, 2018, the Company issued a secured convertible promissory note in the amount of $1,128,518 (including overfunding of $23,518) to St. George Investments LLC (“St. George”). The promissory note bears interest at 10% compounded daily, was due upon maturity on June 30, 2019, and includes an original issue discount of $100,000. In addition, the Company agreed to pay $5,000 for legal, accounting and other transaction costs of the lender. During the year ended December 31, 2018, the Company received aggregate net proceeds of $825,000. During the nine months ended September 30, 2019, an additional $218,518 was funded under this note resulting in net proceeds of $198,518.

As an investment incentive to St. George, the Company issued to St. George 750,000 five-year warrants, exercisable at $2.40 per share, with certain reset provisions. The aggregate fair value of the issued warrants was $1,588,493. The face value of the debt was then allocated, on a relative fair value basis, between the debt and the warrants. The portion allocated to warrants has been added to the debt discount with a resulting increase in additional paid-in capital. As of the funding date of each tranche of this note, the Company determined the fair value of the embedded derivative associated with the convertibility of this 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. As of the aggregate debt discount of $1,114,698 is being amortized to interest expense over the respective term of each tranche. As of June 30, 2020, the warrants had an exercise price of $0.0085 for 3,750,000 total warrants.

The promissory notes are convertible, at any time at St. George’s option, at $2.40 per share. However, in the event the Company’s market capitalization falls below $30,000,000, the conversion rate will be 60% of the 3 lowest closing trade prices due the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as defined. In addition, the promissory notes include certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than the lender conversion price. The Company has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets of the Company.

During the nine months ended September 30, 2019, $1,000,859 of principal and $840,299 of derivative liabilities valued as of the respective conversion dates were converted into 4,475,543 shares of common stock, resulting in a loss on debt settlement of $612,034. As of September 30, 2019, the Company owed $828,518 of principal and $28,138 of accrued interest on this convertible promissory note. As of September 30, 2019, this note was in default, but the lender has not enforced the default interest rate.

On January 29, 2019, the Company issued a secured convertible promissory note in the amount of of $2,205,000 to St. George Investments LLC (“St. George”). The promissory note bears interest at 10% compounded daily, is due upon maturity on December 5, 2019, and includes an original issue discount of $200,000. In addition, the Company agreed to pay $5,000 for legal, accounting and other transaction costs of the lender. During the nine months ended September 30, 2019, the promissory note was funded in eight tranches totaling $1,406,482, resulting in aggregate net proceeds of $1,276,482. As an investment incentive to St. George, the Company issued to St. George 1,500,000 5-year warrants, exercisable at $2.40 per share, with certain reset provisions. As of June 30, 2020, the warrants had an exercise price of $0.0085 for 7,500,000 total warrants. The aggregate fair value of the issued warrants was $999,838. The face value of the debt was then allocated, on a relative fair value basis, between the debt and the warrants. The portion allocated to warrants has been added to the debt discount with a resulting increase in additional paid-in capital. As of the funding date of each tranche of this note, the Company determined the fair value of the embedded derivative associated with the convertibility of this 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.

 29 

 

The promissory notes are convertible, at any time at the lender’s option, at $2.40 per share. However, in the event the Company’s market capitalization (as defined) falls below $30,000,000, the conversion rate will be 60% of the 3 lowest closing trade prices due the 20 trading days immediately preceding date of conversion, subject to additional adjustments, as defined. In addition, the promissory note includes certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than the lender conversion price. The Company has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets of the Company.

On March 25, 2019, the Company issued a secured convertible promissory note in the amount of $580,000 to St. George Investments LLC (“St. George”). The promissory note bears interest at 10% compounded daily, is due upon maturity on January 24, 2020 and includes an original issue discount of $75,000. In addition, the Company agreed to pay $5,000 for legal, accounting and other transaction costs of the lender. During the nine months ended September 30, 2019, the promissory note was funded in the amount of $580,000 resulting in net proceeds of $500,000. As an investment incentive, the Company issued 375,000 five-year warrants, exercisable at $2.40 per share, with certain reset provisions. As of June 30, 2020, the warrants had an exercise price of $0.0085 for 1,875,000 total warrants. The aggregate fair value of the issued warrants was $258,701. The face value of the debt was then allocated, on a relative fair value basis, between the debt and the warrants. The portion allocated to warrants has been added to the debt discount with a resulting increase in additional paid-in capital. As of the funding date of this note, the Company determined the fair value of the embedded derivative associated with the convertibility of this 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 $483,966 is being amortized to interest expense over the term of the note.

The promissory notes are convertible, at any time at St. George’s option, at $2.40 per share. However, in the event the Company’s market capitalization (as defined) falls below $30,000,000, the conversion rate will be 60% of the 3 lowest closing trade prices from the 20 trading days immediately preceding the date of conversion, subject to additional adjustments. In addition, the promissory note includes certain anti-dilution provisions should the Company subsequently issue any common stock or equivalents at an effective price less than the lender conversion price. The Company has a right to prepayment of the note, subject to a 15% prepayment premium and is secured by a trust deed of certain assets of the Company. As of June 30, 2020, and December 31, 2019, the Company owed principal of $2,304,372 and $2,947,890 of principal. As of June 30, 2020, the Company owed $304,597 of accrued interest.

Convertible notes payable - Robert L. Hymers III

On December 23, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $96,552.70 to Robert L. Hymers III (“Hymers”) in satisfaction of funds owed to Mr. Hymers from his consulting contract with the Company for past services rendered and completed. The promissory notes bear interest at 10% per anum,and are due six months from the respective issuance date of the note along with accrued and unpaid interest. Principal and interest are payable to Hymers six months after the date of issuance. Hymers has the option to convert all or any portion of the unpaid principal amount of the note, plus accrued interest, into shares of the Company’s common stock. The conversion price will be equal to a 50% discount to the lowest closing bid of the previous 15 day trading period. The aggregate debt discount of $92,332 is being amortized to interest expense over the respective terms of the notes. As of June 30, 2020, and December 31, 2019, the Company owed an aggregate of $161,644 and $96,553 of principal respectively. As of June 30, 2020, the Company owed $5,040 in accrued interest.

Convertible notes payable – Natural Plant Extract

On April 15, 2019, we entered into a joint venture agreement with Natural Plant Extract of California, Inc. (“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, we terminated the joint venture.

The Original Material Definitive Agreement

Pursuant to the original material definitive agreement with NPE, we agreed to acquire twenty percent (equal to 200,000 shares) of NPE’s authorized shares in exchange for our payment of $2,000,000 and $1,000,000 worth of our restricted common stock. We agreed to form a joint venture with NPE incorporated in California under the name “Viva Buds, Inc.” (“Viva Buds”) for the purpose of operating a California licensed cannabis distribution business pursuant to California law legalizing THC psychoactive cannabis for recreational and medicinal use.

 30 

 

Our payment obligations were governed by a stock purchase agreement which required us to make the following payments: 

a. Deposit of $350,000 within 5 days of the execution of the material definitive agreement;

b. Deposit of $250,000 payable within 30 days;

c. Deposit of $400,000 within 60 days;

d. Deposit of $500,000 within 75 days;

e. Deposit of $500,000 within 90 days

We made our initial payment pursuant to this schedule, but otherwise failed to comply with the payment schedule and we were in breach of contract.

Settlement and Release of All Claims Agreement

On February 3, 2020, the Company and NPE entered into a Settlement and Release of All Claims Agreement. In exchange for a universal release of all claims, the Company and NPE (i) agreed to reduce the Company’s interest in NPE from 20% to 5%; (ii) agreed that the Company would to pay NPE a total of $85,000 as follows: $35,000 concurrent with the execution of the Settlement and Release of All Claims Agreement, and $25,000 no later than the 5th calendar day for each of the two months following execution of Settlement and Release of All Claims Agreement; and, (iii) agreed to retire the balance of the Company’s original valuation obligation from the material definitive agreement, representing a shortfall of $56,085.15, in a convertible promissory note, with terms allowing NPE to convert the note into the Company’s common stock at a 50% discount to the closing price of our common stock as of the maturity date.

Of the total amount due and payable by us as of the date of this filing, we owe $50,000, and we are in breach of the Settlement and Release of All Claims Agreement. On February 3, 2020, we executed a convertible promissory note in the amount of $56,085.15 to NPE. Additionally, as a result of our settlement agreement with NPE, we became liable to pay NPE our 5% portion equal to $25,902 of the regulatory charges to the City of Lynwood and the State of California to transfer the cannabis licenses back to NPE. To date, we have not paid this amount and it is due and owing.

Convertible Note payable – GW Holdings Group

On January 6, 2020, the Company entered into a convertible promissory note in the amount of $57,750.00 with GW Holdings Group, LLC, a New York limited liability company (“GW”). GW has the option, beginning on the 6 month anniversary of the date of execution, to convert all or any amount of the principal face amount of the note then outstanding into shares of the Company's common stock equal to 40% discount of the lowest trading price for the fifteen prior trading days. The note bears interest at a rate of 10% per annum and include a $5,250.00 original issue discount such that the price of the note was $57,750.00 As of June 30, 2020, and December 31, 2019, the Company owed principal of $57,750 and $0 respectively. As of June 30, 2020, the Company owed $2,888 in accrued interest.

Convertible Note payable – Jefferson Capital

On January 20, 2020, the Company issued a convertible promissory note to Jefferson Capital, LLC, a New Jersey limited liability company (“Jefferson”) with a maturity date of January 20, 2021. Jefferson has the right to convert any or all of the debt into common stock of the Company, calculated on 60% multiplied by the lowest trading price of the Company’s common stock during the 20 trading day period prior to the issue date of the note, or (ii) 60% multiplied by the market price, meaning the lowest trade price for the Common Stock during the 20 trading day period ending on the latest complete trading tay prior to the conversion. As of June 30, 2020, and December 31, 2019, the Company owed principal of $37,625 and $0 respectively. As of June 30, 2020, the Company owed $1,568 in accrued interest.

 31 

 

Convertible Note payable – BHP Capital

On January 21, 2021, the Company issued a convertible promissory note in the principal sum of $37,625.00, plus accrued but unpaid interest thereon, to BHP Capital NY, Inc. (“BHP”) The Company agreed to pay simple interest on the outstanding principal amount of the note at the annual rate of ten percent (10%). All amounts owed pursuant to the note are convertible, in whole or in part, into shares of the Company’s common stock at BHP’s option at the lower of (i) the lowest price at which the Company has issued stock; or (ii) the market price, defined as 60% of the lowest trading price for the Company’s common stock during the 20 trading day period ending on the last trading day prior to the conversion date. As of June 30, 2020, and December 31, 2019, the Company owed principal of $37,625 and $0 respectively. As of June 30, 2020, the Company owed $1,568 in accrued interest.

Convertible Notes payable – LG Capital

On March 2, 2020, the Company entered into a convertible promissory note in the amount of $50,000 with LG Capital Funding, LLC (“LG Capital”), with a maturity date of March 2, 2021. The Company agreed to pay interest of 8% per annum. LG Capital is entitled, at its option, at any time after cash payment, to convert all or any amount of the principal face amount of this note then outstanding into shares of the Company's common stock at a price for each share of equal to 55% of the lowest trading price of the Company’s common stock as quoted on the National Quotations Bureau OTC Markets for the twenty trading days prior to conversion. As of June 30, 2020, and December 31, 2019, the Company owed principal of $50,000 and $0, respectively. As of June 30, 2020, the Company owed $1,333 in accrued interest.

Summary:

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

At June 30, 2020, the Company determined the aggregate fair value of embedded derivatives to be $3,219,398. The fair values were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 128.2% to 169.0%, (3) weighted average risk-free interest rate of 0.16% to 0.18%, (4) expected life of 0.05 to 2.7 years, (5) conversion prices of $0.00185 to $0.00333 and (6) the Company's common stock price of $0.0044 per share as of June 30, 2020.

For the six month period ended June 30, 2020, the Company recorded a gain on the change in fair value of derivative liabilities of $1,142,272 and a loss of $395,607 related to the excess of the fair value of derivatives at issuance above convertible note principle as a charge to interest expense. During the six months ended June 30, 2020, derivative liabilities of $2,231,014 were reclassified to additional paid in capital as a result of conversions of the underlying notes payable into common stock. For the six-month period ended June 30, 2019, the Company recorded a loss on change in fair value of derivative liabilities of $480,150, and recorded amortization of debt discounts of $1,308,550 as a charge to interest expense.

Paycheck Protection Program (PPP) Loan

 

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

 

The Company has elected to account for the PPP loan pursuant to FASB Accounting Standards Codification (ASC) 470, Debt, or as a government grant by analogy to International Accounting Standard (IAS) 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 won't 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.

Subscriptions Payable

On December 6, 2019, Donald Steinberg resigned as the president, CEO, director and principal executive officer of the Company. As of the date of his resignation, he was owed $330,797.73 in unpaid accrued compensation pursuant to the terms of his executive employment agreement. In exchange for a full release of compensation owed to Steinberg, the Company agreed to issue 6,615,954 common shares. These shares have not been issued as of the quarter ended June 30, 2020. As a result, the company owes a balance of $327,383 after applying payments issued subsequent to his resignation. The Company intends to issue these shares before year end in satisfaction of this debt.

NOTE 9 – STOCKHOLDERS’ DEFICIT

Preferred stock

The Company is authorized to issue 50,000,000 shares of $0.001 par value preferred stock as of June 30, 2020 and December 31, 2019. As of June 30, 2020, and December 31, 2019, the Company has designated and issued 10,000,000 shares of Class A Preferred Stock, and 5,000,000 of Class B Preferred Stock.

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Each share of Class A Preferred Stock is entitled to 100 votes on all matters submitted to a vote to the stockholders of the Company, does not have conversion, dividend or distribution upon liquidation rights.

 

Each share of Class "B" Preferred Stock is entitled to 1,000 votes on all matters submitted to a vote to the stockholders of the Company, does not have conversion, dividend or distribution upon liquidation rights.

Common stock

The Company is authorized to issue 15,000,000,000 shares of $0.001 par value common stock as of June 30, 2020. As of December 31, 2019, the Company was authorized to issue 5,000,000,000 shares of $0.001 par value common stock. As of June 30, 2020, and December 31, 2019, the Company had 469,288,934 and 77,958,081, respectively, common shares issued and outstanding. As of August 14, 2020, the date of this filing, there were 1,039,494,074 shares of registrant’s common stock outstanding.

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

During the six months ended June 30, 2020, the Company issued an aggregate of 44,658,333 shares of its common stock for services rendered with an estimated fair value of $542,766.

During the six months ended June 30, 2020, the Company issued an aggregate of 270,547,861 shares of its common stock in settlement of convertible notes payable, accrued interest and embedded derivative liabilities of $1,531,471.

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

During the six months ended June 30, 2020, the Company issued 51,054,214 shares of its common stock in exchange for exercise of warrants on a cashless basis.

During the six months ended June 30, 2020, the Company issued 3,677,889 shares of its common stock in settlement of a legal case with an estimate fair value of $956,251.

On January 17, 2020, the Company entered into an amendment of an existing convertible promissory note issued to Paladin Advisors, LLC. The Company authorized the issuance of a cashless warrant to purchase 5,750,000 common shares. This warrant was exercised during the three months ended June 30, 2020.

Options

As of June 30, 2020, the Company has no stock options.

The following table summarizes the stock option activity for the three months ended June 30, 2020 and the year ended December 31, 2019:

   Shares 

Weighted-Average

Exercise Price

 

Weighted Average

Remaining

Contractual Term

 

Aggregate

Intrinsic Value

Outstanding at December 31, 2019   0(1)  $—      —     $0 
Granted   —      —      —      —   
Cancellations   (1,000,000,000)(1)   —      —      —   
Forfeitures or expirations   —      —      —      —   
Outstanding at June 30, 2020   —     $—      —     $—   
Exercisable at June 30, 2020   —     $—      —     $—   

 

(1) On February 27, 2019, Donald Steinberg and Charles Larsen canceled all 1,000,000,000 stock options previously issued to them by the Company.

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Warrants

The following table summarizes the stock warrant activity for the three months ended June 30, 2020:

   Shares 

Weighted-Average

Exercise Price

 

Weighted Average

Remaining

Contractual Term

 

Aggregate

Intrinsic Value

Outstanding at January 1, 2020   4,011,111   $2.15    3.60   $—   
Granted   5,846,154   $0.0043    0.44    —   
Increase due to reset provision   82,502,706   $0.0031    2.53    —   
Exercised   (40,843,463)   0.90    1.82    —   
Outstanding at June 30, 2020   51,516,508   $0.0054    2.76   $82,021 
Exercisable at June 30, 2020   51,516,508   $0.0054    2.76   $82,021 

 

Certain warrants issued to debt holders have reset provisions whereby upon subsequent issuances of common stock at a price below the current exercise price, the number of warrants increase and the exercise price is reduced to the new price. The aggregate intrinsic value in the preceding tables represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock price of $0.044 as of June 30, 2020, which would have been received by the option holders had those option holders exercised their options as of that date.

NOTE 10 — FAIR VALUE MEASUREMENT

The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

All items required to be recorded or measured on a recurring basis are based upon level 3 inputs.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

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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 June 30, 2020, and December 31, 2019, 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 June 30, 2020, and December 31, 2019, the Company did not have any derivative instruments that were designated as hedges.

The derivative liability as of June 30, 2020 and December 31, 2019, in the amount of $3,219,398 and $5,693,071, respectively, have a level 3 classification.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the three months ended June 30, 2020:

    

Debt

Derivative

 
Balance, January 1, 2020  $5,693,071 
Increase resulting from initial issuance of additional convertible notes payable     
Initial fair value of debt derivative at note issuance   899,613 
Mark-to-market at June 30, 2020:   6,592,421 
Transfers out of Level 3 upon conversion or payoff of notes payable   (2,231,014)   
Net gain for the period included in earnings relating to the liabilities held during the period ended June 30, 2020   (1,142,272) 
Balance, June 30, 2020  $3,219,398 

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. During the period ended June 30, 2020, the Company’s stock price decreased significantly from initial valuations. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.

NOTE 11 — RELATED PARTY TRANSACTIONS

The Company’s current officers and stockholders advanced funds to the Company for travel related and working capital purposes. As of June 30, 2020, and December 31, 2019, the balance due to officers for travel related and working capital purposes was $25,261 and $0, respectively.

As of June 30, 2020, and December 31, 2019, accrued compensation due officers and executives included as accrued compensation was $96,400 and $4,875, respectively.

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Related party sales contributed $5,131 and $6,809 to revenues for the three months ended June 30, 2020 and 2019, respectively, while related party sales contributed $8,303 and 8,348 to revenues for the six months ended June 30, 2020 and 2019, 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.

 

NOTE 12 – SUBSEQUENT EVENTS

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.  Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed.

On July 2, 2020, the Company filed a general form for registration of securities under the Securities Act of 1933 on Form S-1, which was amended by the Company by a Form S-1/A filed on August 11, 2020. The S-1 was filed in connection with the registration rights granted to White Lion Capital, LLC, a Nevada limited liability company (“White Lion”) pursuant to an investment agreement entered into between the Company and White Lion on June 17, 2020. Pursuant to the June 17, 2020 agreement, White Lion agreed to invest up to ten million dollars to purchase the Company’s common stock. The original S-1 filed on July 2, 2020 related to the intended registration of up to 2,005,000,000 shares of the Company’s common stock, and was amended based on the SEC’s comment that the total amount of shares to be issued and registered was disproportionate to the Company’s then-current number of outstanding shares. The S-1/A filed on August 11, 2020 relates to the resale of up to 122,012,847 shares of the Company’s common shares issuable to White Lion pursuant to a “put right” under the investment agreement, which permits us to “put” up to ten million dollars ($10,000,000) in shares of our common stock to White Lion, under certain circumstances, over a period of up to twenty-four (24) months or until $10,000,000 of such shares have been “put.” White Lion may sell all or a portion of the shares being offered pursuant to the registration statement at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. As of August 11, 2020 (the date of this filing), the Company had 1,246,166,689 shares of common stock in the public float. The 122,012,847 shares being registered represent approximately 9.8% of the shares in the public float at August 14, 2020.  Assuming all of these shares are sold, the registrant’s total number of issued and outstanding shares of common stock will be 1,414,540,702, calculated on the number of issued and outstanding shares at August 14, 2020 (the date of this filing) of 1,039,494,074. The total number of shares registered pursuant to this prospectus and available to White Lion will then represent 8.6% of the Company’s issued and outstanding shares. We will not receive any proceeds from the sale of shares of our common stock by White Lion. However, we will receive proceeds from the sale of shares of our common stock pursuant to our exercise of the put right offered by White Lion. We will pay for expenses of this offering, except that White Lion will pay any broker discounts or commissions or equivalent expenses and expenses of its legal counsel applicable to the sale of its shares. On August 13, 2020, the Securities and Exchange Commission made effective the Registrant's Form S-1 registration statement filed on July 20, 2020, as amended.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Business Overview

Plan of Operations – Marijuana Company of America Inc. and subsidiaries is a publicly listed company quoted on OTC Markets OTCQB Tier under the symbol “MCOA”. We are based in Escondido, California. The Company operates two distinct and separate business divisions related to its three wholly owned subsidiaries, H Smart, Inc., MCOA CA, Inc, and Hempsmart, Ltd., a corporation formed and operating in the United Kingdom. Our business develops, manufactures, markets and sells non-psychoactive industrial hemp, and hemp-derived consumer products containing cannabinoids (hereafter referred to as “CBD”), with a THC content of less than 0.03%. Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different species of industrial hemp derived CBD, and the possible health benefits thereof; and, (6) new and improved methods of hemp CBD extraction omitting or eliminating the delta-9 THC molecule. As part of our hemp related business, we entered into joint ventures to develop and grow, cultivate and harvest hemp in Scio, Oregon and are joint venture partners in a hemp research and development project in New Brunswick, Canada.

Our consumer products containing hemp and CBD are sold through our wholly owned subsidiary H Smart, Inc. under the brand name hempSMART™. We market and sell our hempSMART™ products directly through our web site, and through our affiliate marketing program, where qualified sales affiliates use a secure multi-level-marketing sales software program that facilitates order placement over the internet via a web site, and accounts for affiliate orders and sales; calculates referral benefits apportionable to specific sales associates and calculates and accounts for loyalty and rewards benefits for returning customers. We also retained a full-service marketing company that uses a multi-channel transactional marketing campaign focused on digital advertising, infographics, content marketing, customer incentives and acquisition, a broad social media presence, as well as search engine marketing and optimization that includes comprehensive research and analytics and order fulfillment in order to boost direct sales.

Our current hempSMART™ wellness products offerings include the following:

HempSmart- Pure™ The existing products make up this line which has been repackaged for wholesale distribution. The Pure line has the highest industry standards for premium CBD-based products. hempSMART – Pure™ ingredients are organically grown. It contains Full Spectrum pure CBD, independently lab tested and certified.
SMART by HempSmart™ product line is directed at a younger audience. SMART products are “smart formulations” created through scientific nano-technology which enables products to be absorbed by the body faster.
HempSmart- Luxe™ product line is focused on luxury Men’s and Women’s Beauty CBD products, applying creative branding and disruptive marketing strategies across the US and abroad. This also includes a commercial Spa and Hotel line.

 

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All product lines are sold through the following Distribution Channels

hempSMART™ Network Affiliate Program

This is a sales program that provides an opportunity for those customers who are looking to earn additional income by selling hempSMART™ products to their network of friends and family. In the current shut down market this model has proven to be efficient and growing both domestically and internationally.

HempSmart Global™ Retail E - Commerce Program

Through diversification of product lines and consumer audiences, a new platform is under construction to deliver sales revenue across all channels. HempSmart Global will unveil over 80 products to over 100 countries by 2023.

HempSmart Global™ – Wholesale Direct

Our wholesale program will grow through a separate website dedicated to domestic and international sales. It will allow our distributors to log into their account and place orders directly. It will also include the required import/export documentation and will allow our clients to track their current orders and past purchase history. Information of this site will be translated to the country language, and they will be allowed to buy across all product lines.

  · hempSMART Brain™ a proprietary patented and formulated personal care consumer product encapsulated with enriched non-psychoactive industrial hemp derived CBD. This encapsulation is combined with other high quality, proprietary natural ingredients to compliment CBD to support brain wellness.

  

  · hempSMART Pain™ capsules formulated with 10mg of Full Spectrum, non-psychoactive CBD per serving, derived from industrial hemp, which along with a proprietary blend of other natural ingredients, delivers an all-natural formulation for the temporary relief of minor discomfort associated with physical activity.

 

  · hempSMART Pain Cream™ each container formulated with 300mg of full spectrum non-psychoactive CBD derived from industrial hemp. The newly developed product contains a synergistic combination of natural botanicals and full spectrum hemp extract featuring CBD, CBG and a broad range of terpenes. The Company’s proprietary blend of Ayurvedic herbs along with Menthol, Cayenne Pepper Extract, Rosemary Oil, Aloe Gel, White Willow Bark, Arnica, Wintergreen Extract and Tea Tree Oil, provides an immediate cooling and soothing sensation. This topical wellness consumer product is formulated to help reduce minor discomfort and promote muscle relaxation on areas that it is applied.

 

  · hempSMART Drops™ full Spectrum Hemp CBD Oil Tincture Drops, available in 250mg and 500mg bottles, enriched with non-psychoactive industrial hemp derived CBD, and available in four different flavors: lemon, mint, orange and strawberry that is free of the THC isolate.

 

  · hempSMART Pet Drops™ for cats and dogs, formulated with 250mg of full spectrum non-psychoactive CBD derived from industrial hemp. This new specially formulated product contains naturally occurring CBD derived from hemp seed oil, full spectrum hemp extract, fractionated coconut oil, and a rich bacon flavor.

 

  · hempSMART Face™ a nourishing facial moisturizer combines full spectrum CBD from hemp, with a unique blend of Ayurvedic herbs and botanicals. Designed to refresh, replenish and restore the skin providing long lasting hydration and balance.

 

We additionally offer consulting services in accounting and real property management for licensed businesses in the cannabis industry in those states where cannabis has been legalized for recreational and/or medicinal use.

Our business also includes making selected investments in other related new businesses. Currently, we have made investments in startup ventures, including:

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MoneyTrac Technology, Inc.; MoneyTrac Technology, Inc. is a developer of an integrated and streamlined electronic payment processing system containing E-Wallet and mobile applications, that allows for the management and processing of prepaid cards, debit cards, and credit card payments. We entered into a stock purchase agreement with MoneyTrac on March 13, 2017 to purchase a 15% equity position in MoneyTrac. On July 27, 2017 we completed tender of the purchase price of $250,000. MoneyTrac’s business and banking software solutions offer firms the ability to deposit funds directly into a “MoneyTrac Merchant Wallet,” created and controlled by the firm, from which the firm can manage and provide inventory management, payroll processing, and audit tracking; and, the creation of “Customer Wallets,” by anyone who wants to engage in cashless transactions, by loading money into their “MoneyTrac Customer Wallet” from a bank account or through a MoneyTrac kiosk, which also accepts debit and credit card transactions. MoneyTrac’s kiosks are marketed to businesses that wish to offer cashless transactions to its customers, who can choose to either have funds loaded directly into their “Customer Wallet” or onto a pre-paid debit card. MoneyTrac’s system provides for a secure, managed and auditable record of cashless transactions that is designed to be marketed to firms who want an alternative payment and management method for transacting business, including those firms in the legalized cannabis business in those states where cannabis has been legalized for recreational and/or medicinal use. On June 12th, 2018 Global Payout, Inc. ("Global", "Parent") entered into a Reverse Triangular Merger (the "Merger") with MoneyTrac Technology, Inc. ("MoneyTrac") a California Corporation and MTrac Tech Corporation (" Merger Sub") a Nevada corporation and wholly-owned subsidiary of Global Payout, Inc. whereby MoneyTrac Technology was successfully merged into MTrac Tech, the surviving corporation of the merger, and thereafter the separate existence of MoneyTrac ceased and all rights, privileges, powers and property, including, without limitation, all rights, privileges, franchise, patents, trademarks, licenses, registrations, bank accounts, contracts, patents, copyrights, and other assets of every kind and description of MoneyTrac were assumed by Merger Sub. Additionally, Merger Sub assumed all of the obligations and liabilities of MoneyTrac, except minute books and stock records of MoneyTrac insofar as they relate solely to its organization and capitalization, and the rights of MoneyTrac arising out of the executed Merger Agreement. Pursuant to the terms of the Merger, Global issued 1,100,000,000 (one billion, one hundred million) shares of its common stock to MoneyTrac as consideration for the purchase of MoneyTrac. Pursuant to the terms of the Merger, a conversion of issued MoneyTrac stock was completed whereby each one (1) share of MoneyTrac stock, issued and outstanding immediately prior to the effective date of the Merger, was canceled and extinguished and converted automatically into ten (10) shares of Global common stock. As of the effective date of the Merger, all shares of Global Preferred Stock issued prior to the effective date of the Merger were canceled and extinguished without any conversion thereof. We acquired 150,000,000 Global common shares for our original $250,000 representing approximately 15% ownership. Global’s name changed in April, 2020 to Global Trac Solutions, Inc. Global’s common stock is traded on the OTC Markets under the symbol “PYSC.” We realized $51,748.17 from sales of our Global securities.

Conveniant Hemp Mart, LLC; Conveniant Hemp Mart, LLC (“Benihemp”) is a Wyoming limited liability company whose business plan includes the development, manufacture and sale of consumer products containing CBD that are intended for marketing and sales at convenience stores, gas stations and markets. On July 19, 2017, we agreed to lend fifty thousand dollars ($50,000) to Benihemp based on a promissory note. The note provided that in lieu of receiving repayment, we could elect to exercise a right to convert the loaned amount into a payment towards the purchase of a 25% interest in Benihemp, subject to our payment of an additional fifty thousand dollars [$50,000] equaling a total purchase price of $100,000. The Company exercised this option on November 20, 2017 and made payment to Benihemp on November 21, 2017. Benihemp developed a line of consumer products containing industrial hemp derived CBD with no traceable THC content. The product line includes tinctures that combine industrial hemp-derived CBD with hemp seed oil, coconut oil and other essential natural oils; a muscle cream product that combines industrial hemp-derived CBD with natural oils; a hand lotion that combines industrial hemp derived CBD with lavender oils; and a line of pet treats that combine industrial hemp-derived CBD with natural oils. On May 1, 2019, the Company and Benihemp agreed to cancel the Company’s 25% interest in Benihemp. Benihemp issued to the Company a credit memo equal to the Company’s $100,000 investment. As of June 30, 2020, The Company determined that as of December 31, 2019, approximately $41,000 of this credit was impaired.

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Global Hemp Group New Brunswick Joint Venture; On September 5, 2017, we announced our agreement to participate in a joint venture with Global Hemp Group Inc., a Canadian corporation (“Global Hemp Group”), in a multi-phase industrial hemp project on the Acadian peninsula of New Brunswick, Canada. The joint venture’s goal was to develop a “Hemp Agro-Industrial Zone”, a concept that promotes and engages farmers, processors and manufacturers to collaboratively produce and process 100% of the hemp plant into a number of wholesale materials that can be manufactured into healthy and sustainable products. The “Hemp Agro-Industrial Zone” has a goal of producing social and environmental benefits to the communities where they operate. These zones are envisioned to prospectively create jobs for farmers, foster rural development, provide the opportunity to develop more sustainable products of superior quality and help support Global Hemp Group’s commitment to creating a carbon free economy. The first phase of the project involved lab testing in support of the trials. The Collège Communautaire du Nouveau Brunswick (CCNB) in Bathurst, New Brunswick (“CCNB”) intends to assist Global Hemp Group in research on its ongoing industrial hemp trials in the region, and to perform laboratory tests in support of these trials. These tests will provide information to validate agronomic and key yield data in preparation of a large-scale industrial development project that will involve processing of the full plant: grain, straw, flowers and leaves, scheduled to begin in 2018. The results of these tests will also be used in discussions with farmers of the region to refine a hemp-based farming model, and to mobilize additional farmers for the next growing season. Our participation included providing one-half, or $10,775 of the funding for the phase one work. On January 10, 2018, phase-one was completed by successfully cultivating industrial hemp during the 2017 growing season for research purposes. The objective of phase one was to re-introduce hemp into the area and ensure that it could be productive under New Brunswick growing conditions prior to significantly increasing cultivation acreage and building a hemp processing facility in the region, in future phases of the project. As a result of our participation in the joint venture, we will share in the ownership of research and development of hemp and CBD related studies produced by the New Brunswick Project, and, in the event Canadian laws governing the growing, harvesting, manufacturing and production of products containing hemp and CBD change (as expected, but not guaranteed) in 2018, we would benefit from possible preferred pricing and terms for the purchase of hemp and CBD that would enable us to further conduct its business and research and development into hemp and CBD products. As of December 31, 2019, the balance of the New Brunswick JV investment reported on the balance sheet for the year ended December 31, 2019 was $0 as a result of the investment being deemed fully impaired and the Company withdrawing from the joint venture as of September 30, 2019.

Global Hemp Group Oregon Joint Venture; On May 8, 2018, the Company, Global Hemp Group, Inc., a Canadian corporation (“Global Hemp Group”), and TTO Enterprises, Ltd., an Oregon corporation (“TTO”) entered into a joint venture agreement. The purpose of the joint venture was to develop a project to commercialize the cultivation of industrial hemp on a 109 acre parcel of real property owned by the Company and Global Hemp Group in Scio, Oregon, and operating as a joint venture under the Oregon corporation Covered Bridges, Ltd. On May 30, 2018, the joint venture purchased TTO’s 15% interest in the joint venture for $30,000, and subsequently the Company and Global Hemp Group had equal interests in the joint venture. The joint venture agreement commits the Company to a cash contribution of $600,000 payable on the following funding schedule: $200,000 upon execution of the joint venture agreement; $238,780 by July 31, 2018; $126,445 by October 31, 2018; and, $34,775 by January 31, 2019. The Company has complied with its payments. The 2018 crop of hemp grown on the joint venture’s real property consisted of 33 acres of high yielding CBD hemp grown in an orchard style cultivation on the property. The 2018 harvest consisted of approximately 37,000 high yielding CBD hemp plants producing 24 tons of biomass that produced 48,000 pounds of dried biomass. The joint venture partners prepared processing samples ranging in size from 100 lbs. to 2,000 lbs. for sample offers to extraction companies. The biomass is being processed into CBD crude oil with the option to refine it further into isolate, or full spectrum oil, in order to increase its value on the market. As of December 31, 2019, the combined balance of the joint venture investment and related farmland investment was $0 as the investment was written off as a loss for the period ended December 31, 2019.

Bougainville Ventures, Inc. Joint Venture; On March 16, 2017, we entered into a joint venture agreement with Bougainville Ventures, Inc., a Canadian corporation. The purpose of the joint venture was for the Company and Bougainville to (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 I502 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 a Washington State Limited Liability Company, and BV-MCOA Management, LLC was organized in the State of Washington on May 16, 2017.

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As our contribution to the joint venture, the Company committed to raise not less than $1,000,000 to fund joint venture operations, based upon a funding schedule. The Company also committed to providing branding and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies directly tailored to the cannabis industry.

The Company and Bougainville's 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 on Form 8-K on December 11, 2017, the Company did not comply with the funding schedule for the joint venture. On November 6, 2017, the Company and Bougainville amended the joint venture agreement to reduce the amount of the Company's commitment from $1,000,000 to $800,000, and also required the Company to issue Bougainville 15 million shares of the Company's restricted common stock. The Company completed its payments pursuant to the amended agreement on November 7, 2017, and on November 9, 2017, issued to Bougainville 15 million shares of restricted common stock. The amended agreement provided that Bougainville would deed the real property to the joint venture within thirty days of its receipt of payment.

Thereafter, the Company determined that Bougainville had no ownership interest in the property in Washington State, but rather was a party to a purchase agreement for real property that was in breach of contract for non-payment. Bougainville also did not possess an agreement with a Tier 3 I502 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 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 accomplish a revised and restated joint venture agreement, and efforts towards satisfying the conditions to complete the subdivision of the land by the Okanogan County Assessor. However, Bougainville failed to cooperate or communicate with the Company in good faith, and failed to pay the delinquent taxes on the real property that would allow for sub-division and the deeding of the real property to the joint venture.

On August 10, 2018, the Company advised its independent auditor that Bougainville did not cooperate or communicate with the Company regarding its requests for information concerning the audit of Bougainville’s receipt and expenditures of $800,000 contributed by the Company in the joint venture agreement. Bougainville had a material obligation to do so under the joint venture agreement. The Company believes that some of the funds it paid to Bougainville were misappropriated and that there was self-dealing with respect to those funds. Additionally, the Company believes that Bougainville misrepresented material facts in the joint venture agreement, as amended, including, but not limited to, Bougainville’s representations that: (i) it had an ownership interest in real property that was to be deeded to the joint venture; (ii) it had an agreement with a Tier 3 # I502 cannabis license holder to grow cannabis on the real property; and, (iii) that clear title to the real property associated with the Tier 3 # I502 license would be deeded to the joint venture thirty days after the Company made its final funding contribution. As a result, on September 20, 2018, the Company filed suit against Bougainville Ventures, Inc., BV-MCOA Management, LLC, Andy Jagpal, Richard Cindric, et al. in Okanogan County Washington Superior Court, case number 18-2- 0045324. The Company’s complaint seeks legal and equitable relief for breach of contract, fraud, breach of fiduciary duty, conversion, recession of the joint venture agreement, an accounting, quiet title to real property in the name of the Company, for the appointment of a receiver, the return to treasury of 15 million shares issued to Bougainville, and, for treble damages pursuant to the Consumer Protection Act in Washington State. The registrant has filed a lis pendens on the real property. The case is currently in litigation.

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

GateC Joint Venture; On March 17, 2017, the Company and GateC Research, Inc. (“GateC”) entered into a Joint Venture Agreement (“Agreement”) whereby the Company committed to raise up to one and one-half million dollars ($1,500,000) over a six-month period, with a minimum commitment of five hundred thousand dollars ($500,000) within a three (3) month period; and, information establishing brands and systems for the representation of cannabis related products and derivatives comprised of management, marketing and various proprietary methodologies, including but not limited to its affiliate marketing program, directly tailored to the cannabis industry.

GateC agreed to contribute its management and control services and systems related to cannabis grow operations in Adelanto County, California, and its permit to grow marijuana in an approved zone in Adelanto, California. GateC did not own a physical site for its operation in Adelanto County, California, and GateC’s permit to grow cannabis did not contain a conditional use permit.

On or about November 28, 2017, GateC and the Company orally agreed to suspend the Company’s funding commitment, pending the finalization of California State regulations governing the growth, cultivation and distribution of cannabis, which were expected to be completed in 2018.

On March 19, 2018, the Company and GateC rescinded the Agreement and concurrently released each other from any all any and all losses, claims, debts, liabilities, demands, obligations, promises, acts, omissions, agreements, costs and expenses, damages, injuries, suits, actions and causes of action, of whatever kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, that they may have against each other and their Affiliates, arising out of the Agreement.

We incurred no termination penalties as the result of its entry into the Recession and Mutual Release Agreement.

In 2017, the Company recorded a debt obligation of $1,500,000 to the Joint Venture and a corresponding impairment charge of $1,500,000 during for year ended December 31, 2017. Upon termination of the material definitive agreement on March 19, 2018, the Company realized a gain on settlement of debt obligation of $1,500,000 for the year ended December 31, 2018.

Natural Plant Extract; On April 15, 2019, we entered into a joint venture with Natural Plant Extract of California, Inc., and subsidiaries, 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, we terminated the joint venture and entered into a settlement and release of all claims agreement. In exchange for a complete release of all claims, the Company and NPE (i) agreed to reduce our interest in NPE from 20% to 5%; (ii) we agreed to pay NPE a total of $85,000 as follows: $35,000 concurrent with the execution of the Settlement and Release of All Claims Agreement, and $25,000 no later than the 5th calendar day for each of the two months following execution of Settlement and Release of All Claims Agreement; and, (iii) to retire the balance of our original valuation obligation from the material definitive agreement, representing a shortfall of $56,085.15, in a convertible promissory note, with terms allowing NPE to convert the note into common stock of MCOA at a 50% discount to the closing price of MCOA’s common stock as of the maturity date.

Of the total amount due and payable by us as of the date of this filing, we owe $75,000, and we are in breach of the settlement agreement. On February 3, 2020, we executed a convertible promissory note in the amount of $56,085.15 to NPE. Additionally, as a result of our settlement agreement with NPE, we became liable to pay NPE our 5% portion equal to $25,902 of the regulatory charges to the City of Lynwood and the State of California to transfer the cannabis licenses back to NPE. To date, we have not paid this amount and it is due and owing.

The following table indicates the amount of impairments recorded by the Company quarter to quarter for investment activity quarter to quarter related to its joint venture investments:

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MARIJUANA COMPANY OF AMERICA, INC.

INVESTMENT ROLL-FORWARD

AS OF JUNE 30, 2020

   INVESTMENTS        SHORT-TERM INVESTMENTS
      Global              Natural     TOTAL   
   TOTAL  Hemp        Bougainville  Gate C  Plant     Short-Term   
   INVESTMENTS  Group  Benihemp  MoneyTrac  Ventues, Inc.  Research Inc.  Extract  Vivabuds  Investments  MoneyTrac
Beginning balance @12-31-16  $0   $0   $0   $0   $0   $0             $0   $0 
Investments made during 2017   3,049,275    10,775    100,000    250,000    1,188,500    1,500,000              0    0 
                                                   
Quarter 03-31-17 equity method Loss   0                                       0      
                                                   
Quarter 06-30-17 equity method Loss   0                                       0      
                                                   
Quarter 09-30-17 equity method Loss   (375,000)               &n