MARIJUANA COMPANY OF AMERICA, INC. The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words "believes," "expects," "anticipates" and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ as a result of many factors, including the risks discussed from time to time in this report, including the risks described under "Risk Factors" in any filings we have made with theSEC . Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement income, bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates. Background
History and Development of the Company
We were incorporated in theState of Utah onOctober 4, 1985 , under the name ofMormon Mint, Inc. , and our business focused on the manufacture and marketing of commemorative medallions related to theChurch of Jesus Christ of Latter-Day Saints . OnJanuary 5, 1999 , the Company changed its name toConverge Global, Inc. , and subsequently focused on the development and implementation of Internet web content and e-commerce applications. In the period from 2009 to 2014, we operated primarily in the mining exploration business, and in 2015, we left the mining business and began an internet-based marketing business focused on online marketing of service items to the hospitality and food service industry, selling retail product directly to consumers from food distributors via credit card
and commercial accounts.
OnSeptember 4, 2015 ,Donald Steinberg andCharles Larsen acquired control of the Company through the purchase of 400,000,000 shares of restricted common stock and 10,000,000 shares of Preferred Class A stock for$105,000.00 , in equal amounts. OnSeptember 9, 2015 ,Donald Steinberg was appointed Chairman of the Board, Chief Executive Officer and Secretary of the Company.Mr. Larsen was appointed to the Board of Directors. The new management changed the Company's business plans and operations to focus on emerging opportunities in the cannabis and hemp industries. OnDecember 1, 2015 , the Company changed its name toMarijuana Company of America, Inc. and its stock trading symbol to MCOA. OnDecember 6, 2019 , a change of control occurred, whereDonald Steinberg andCharles Larsen transferred their control shares to directorsRobert Coale ,Edward Manolos andJesus Quintero . Also onDecember 6, 2019 ,Jesus Quintero , who was appointed as Chief Financial Officer in 2018, was appointed as our Chief Executive Officer.Mr. Quintero is currently our Chief Executive Officer and Chief Financial Officer, and a member of the Board of Directors. We are a publicly listed company quoted on OTC Markets OTC Pink Market Tier under the symbol "MCOA". We are aSmaller Reporting Company based inLos Angeles, California . Our business includes the research and development of (1) varieties of various species of hemp; (2) beneficial uses of hemp and hemp derivatives; (3) indoor and outdoor cultivation methods for hemp; (4) technology used for cultivation and harvesting of different species of hemp, including but not limited to lighting, venting, irrigation, hydroponics, nutrients and soil; (5) different industrial hemp derived cannabinoids ("CBD") and the possible health benefits thereof; and, (6) new and improved methods of hemp cannabinoid extraction omitting or eliminating the delta-9 tetrahydrocannabinol "THC" molecule.
33
We are an owner and operator of licensed cannabis cultivation, processing and
dispensary facilities and a developer, producer and distributor of innovative
branded cannabis and cannabidiol ("CBD") products in the United States . We are
committed to creating a national distributorship and retail brand portfolio of
branded cannabis and CBD products, although as of the date of this filing,
marijuana (defined as cannabis containing delta-9 tetrahydrocannabinol
concentration of more than 0.3 percent on a dry weight basis) currently remains
illegal under U.S. federal law.
Through our wholly-owned subsidiary cDistro, Inc., a Nevada corporation, our
wholly-owned CBD product distribution business, we distribute hemp and CBD
products throughout the United States . Through cDistro, we distribute high
quality hemp-derived cannabinoid products, as detailed on our cDistro website,
www.cdistro.com. cDistro offers CBD brands along with smoke and vape shop
related products to wholesalers, c-stores, specialty retailers, and consumers in
North America . Through cDistro, we work exclusively with select manufacturers to
deliver retail service and products at wholesale prices
Through our wholly owned subsidiary HSmart, Inc. , a California corporation, we
develop and sell CBD products under the brand name hempSMART™. Our business also
includes making selected investments and entering into joint ventures with
start-up businesses in the legalized cannabis and hemp industries.
Readers are directed to review our detailed disclosures in Item 1, Business;
Principal Products and their Markets; Joint Ventures and Investments above. A
summary of our investment and joint venture activity follows:
Joint Ventures
Bougainville Ventures, Inc. Our joint venture with Bougainville Ventures, Inc.
is currently in litigation (See Legal Proceedings, Item 3). We recorded an
annual impairment in 2017 of $792,500 , reflecting the Company's percentage of
ownership of the net book value of the investment. During 2018, the Company
recorded equity losses of $37,673 and $11,043 for the first and second quarters
respectively, and recorded an annual impairment of $285,986 for the year ended
December 31, 2018 , at which time we determined the investment to be fully
impaired due to Bougainville's breach of contract and resulting litigation.
Global Hemp Group Scio Oregon Joint Venture. On May 8, 2018 , we entered into a
joint venture with Global Hemp Group, Inc., develop a project to commercialize
the cultivation of industrial hemp on a 109 acre parcel of real property owned
by the Company and Global Hemp Group in Scio, Oregon , and operating under the
Oregon corporation Covered Bridges, Ltd. The joint venture agreement commits the
Company to a cash contribution of $600,000 payable on the following funding
schedule: $200,000 upon execution of the joint venture agreement; $238,780 by
July 31, 2018 ; $126,445 by October 31, 2018 ; and, $34,775 by January 31, 2019 .
The Company has complied with its payments. The 2018 crop of hemp grown on the
joint venture's real property consisted of 33 acres of high yielding CBD hemp
grown in an orchard style cultivation on the property. The 2018 harvest
consisted of approximately 37,000 high yielding CBD hemp plants producing 24
tons of biomass that produced 48,000 pounds of dried biomass. However, there
were delays with Global Hemp Group's management and maintenance of the business
and the biomass that caused degradation to the harvested crop affecting
marketability. Additional issues and disputes arose between the Company and
Global Hemp Group. These disputes led to the parties entering into a settlement
agreement on September 28, 2020 , whereby Global Hemp Group agreed to pay the
Company $200,000 and issue common stock to the Company equal in value to
$185,000 as of September 28, 2020 , subject to a non-dilutive protection
provision. Additionally, Global Hemp Group agreed to pay the Company $10,000 to
cover the Company's legal fees relating to the Agreement. In exchange for the
settlement consideration, the Company agreed to relinquish its ownership
interest in the joint venture.
34
Natural Plant Extract ofCalifornia & Subsidiaries Joint Venture; OnApril 15, 2019 , the Company entered into a joint venture agreement withNatural Plant Extracts of California, Inc. and subsidiaries ("NPE"). The purpose of the joint venture was to utilize NPE'sCalifornia and City cannabis licenses to jointly operate a business named "Viva Buds" to operate a licensed cannabis distribution service inCalifornia . In exchange for acquiring 20% of NPE's common stock, the Company agree to paytwo million dollars and issue NPEone million dollars ' worth of the Company's restricted common stock. As ofFebruary 3, 2020 , the Company was in arrears in its payment obligations under the joint venture agreement, and the parties entered into a settlement and release of all claims terminating the joint venture. The parties agreed to reduce the Company's equity ownership in NPE from 20% to 5%. The Company also agreed to pay NPE$85,000 and the balance of$56,085.15 paid in a convertible promissory note issued with terms allowing NPE to convert the note into common stock at a 50% discount to the closing price of MCOA's common stock as of the maturity date. As of the date of this filing, the Company satisfied its payment obligations under the settlement agreement. Our continuing 5% equity ownership in NPE involves related parties, sinceEdward Manolos , our director, is also a director and beneficial owner of 18.8% of the common stock in NPE. Joint Ventures inBrazil andUruguay ; OnOctober 1, 2020 , we entered into two Joint Venture Agreements withMarco Guerrero , a director of the Company, datedSeptember 30, 2020 , to form joint venture operations inBrazil and inUruguay to produce, manufacture, market and sell the Company's hempSMART™ products inLatin America , and will also work to develop and sell hempSMART™ products globally. The Joint Venture Agreements contain equal terms for the formation of joint venture entities inUruguay andBrazil . The Brazilian joint venture will be headquartered inSão Paulo, Brazil , and will be named HempSmart Produtos Naturais Ltda. ("HempSmart Brazil"). The Uruguayan joint venture will be headquartered inMontevideo, Uruguay and will be named Hempsmart Uruguay S.A.S. ("HempSmart Uruguay"). Both are in the development stage.
Investments
Share Exchange with Cannabis Global, Inc. OnSeptember 30, 2020 , the Company entered into a securities exchange agreement with Cannabis Global, Inc. (OTC: CBGL), aNevada corporation. By virtue of the agreement, the Company issued 650,000,000 shares of its unregistered common stock to Cannabis Global in exchange for 7,222,222 shares of Cannabis Global unregistered common stock. The Company and Cannabis Global also entered into a lock up leak out agreement, which prevents either party from sales of the exchanged shares for a period of 12 months. Thereafter the parties may sell not more than the quantity of shares equaling an aggregate maximum sale value of$20,000 per week, or$80,000 per month until all Shares and Exchange Shares are sold. Our transaction with Cannabis Global, Inc. is material and involves related parties, sinceEdward Manolos , our director and holder of Preferred Class A stock, is also a director of Cannabis Global, Inc. Share Exchange with Eco Innovation Group, Inc.OnFebruary 26, 2021 , we entered into a Share Exchange Agreement with Eco Innovation Group, Inc., aNevada corporation quoted on OTC Markets Pink ("ECOX") to acquire the number of shares of ECOX's common stock, equal in value to$650,000 based on the per-share price of$0.06 , in exchange for the number of shares of MCOA common stock equal in value to$650,000 based on the closing price for the trading day immediately preceding the effective date (the "Share Exchange Agreement"). For both parties, the Share Exchange Agreement contains a "true-up" provision requiring the issuance of additional common stock in the event that a decline in the market value of either parties' common stock should cause the aggregate value of the stock acquired pursuant to the Share Exchange Agreement to fall below$650,000 . Complementary to the Share Exchange Agreement, the Company and ECOX entered into a Lock-Up Agreement datedFebruary 26, 2021 (the "Lock-Up Agreement"), providing that the shares of common stock acquired pursuant to the Share Exchange Agreement shall be subject to a lock-up period preventing its sale for a period of 12 months following issuance and limiting the subsequent sale to aggregate maximum sale value of$20,000 per week, or$80,000 per month. OnOctober 1, 2021 , we entered into a First Amendment to Lock-Up Agreement between the Company and Eco Innovation Group, Inc., dated and effectiveOctober 1, 2021 (the "Amended Lock-Up Agreement"), which amends that certain Lock-Up Agreement entered into between the Company and Eco Innovation Group, Inc. onFebruary 26, 2021 (the "Original Lock-Up Agreement"). The Amended Lock-Up Agreement amends the Original Lock-Up Agreement in one respect, by amending the initial lock-up period from 12 months following its effective date to 6 months following its effective date. All other terms and conditions of the Original Lock-Up Agreement remain unaffected. 35 Asset Purchase Agreement withVBF Brands, Inc. OnOctober 6, 2021 , the Company, through its wholly owned subsidiarySalinas Diversified Ventures, Inc. , aCalifornia corporation, entered into an Asset Purchase Agreement, Management Services Agreement, Cooperation Agreement and Employment Agreement withVBF Brands, Inc. , aCalifornia corporation ("VBF"), a wholly owned subsidiary of Sunset Island Group, Inc., aColorado corporation ("SIGO"). VBF and SIGO agreed to transfer to the Company all of VBF's outstanding stock to the Company, and appointed our CEO and CFOJesus Quintero as President of VBF. VBF owns various fixed assets including machinery and equipment, a lease for a 10,000 square foot facility located at20420 Spence Road ,Salinas, California , 93908, leasehold improvements, good-will, inventory, tradenames including "VBF Brands," trade secrets, intellectual property, and other tangible and intangible properties, including licenses issued by theCity of Salinas , County ofMonterey , and theState of California to operate a licensed cannabis nursery, cultivation facility, and operations for the manufacturing and distribution of cannabis and cannabis products. VBF and SIGO agreed to sell and transfer to the Company all of VBF's outstanding stock, and, by virtue of the Management Services Agreement, appoint Mr.Jesus Quintero as President of VBF, vesting management and control of VBF's licensed cannabis operations in the Company. Concurrently, VBF and Livacich entered into a Cooperation Agreement, whereby VBF and Livacich agreed to cooperate to facilitate the transfer of ownership of VBF, which includes licenses issued by theCity of Salinas , County ofMonterey , and theState of California , to operate a cannabis nursery, cultivation facility and manufacturing and distribution operations to the Company. The Company also agreed to retain Livacich as Chief Executive Officer for a term of two years and agreed to compensate her with a salary including a signing cash bonus of$250,000 , and a$250,000 performance cash bonus payable after six months after the Effective Date. The bonus is conditioned upon Livacich meeting an agreed to "Net Revenue" target ofone million dollars ($1,000,000 ) from VBF's operations during the six-month period after closing of the Asset Purchase Agreement, and her compliance with the terms and conditions of this Asset Purchase Agreement, the Management Services Agreement and the Cooperation Agreement. As consideration for the transaction, the Company agreed to assume two secured convertible promissory notes issued by SIGO toSt. George Investments, LLC , aUtah limited liability company ("St. George") (the "SIGO Notes"). The first note was issuedDecember 8, 2017 , in the original face amount of$170,000.00 , and the second was issuedFebruary 13, 2018 , in the original face amount of$4,245,000.00 . SIGO also issued warrants to St. George to purchase common shares in SIGO, and fifty (50) shares of SIGO's preferred stock. St. George agreed to cancel the warrants and preferred shares upon the Company's assumption of the SIGO Notes.
Under the Asset Purchase Agreement, the closing is conditioned upon certain conditions precedent, specifically (i) VBF and SIGO's full corporate authorization, consent and execution of this Agreement; (ii) VBF's sale to MCOA of 100% of the issued and outstanding shares of VBF; (iii) full corporate authorization, consent compliance with and execution of the Management Services Agreement and Cooperation Agreement; (iv) SIGO's disclosure of the Agreement on Form 8-K with theSecurities and Exchange Commission ; (v) full cooperation in MCOA's financial auditing of VBF in accordance with ASC 805, including providing unrestricted access to all VBF corporate and financial records and providing all necessary cooperation with VBF financial personnel; (vi) full cooperation in aiding and assisting Buyer with its change of ownership applications with the relevant licensing authorities; (vii) the warranty of truthful representations and execution of and compliance with the terms and conditions of the Executive Employment Agreement, Management Services Agreement and the Cooperation Agreement. As of the date of this filing, the conditions precedent to the closing of the Asset Purchase Agreement remain in the process of implementation, so that the Asset Purchase Agreement closing has not yet occurred pursuant to its terms. Legal counsel for MCOA is currently in the process of working with VBF,Salinas Diversified Ventures , and the relevant state and local governments to effect the change of control and license transfers necessary to close the Asset Purchase Agreement. 36 Results of Operations
Year ended
The following table presents our operating results for the year ended
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
AUDITED
For the Year ended Dec 31,
2021 2020
REVENUES:
Sales $ 1,030,249 $ 267,584
Related party Sales - 13,069
Total Revenues 1,030,249 280,653
Cost of sales 873,371 159,304
Gross Profit 156,878 121,349
OPERATING EXPENSES:Depreciation and amortization 101,334
5,933
Selling and marketing 456,983 420,511
Payroll and related 681,786 411,954
Stock-based compensation 1,207,945 3,014,888
General and administrative 2,419,963 1,122,954
Total operating expenses 4,868,011 4,976,240
Net loss from operations (4,711,133 ) (4,854,891 )
OTHER INCOME (EXPENSES):
Interest expense, net (4,302,293 ) (2,999,291 )Impairment gain (Loss) on Joint Ventures 0 (22,658 ) Income (Loss) on equity investment (735,178 )
106,305
Gain (loss) on change in fair value of derivative liabilities 3,852 (4,698,072 ) Unrealized Gain (loss) on trading securities 504,137
248,204
Realized Gain (loss) on trading securities (543,200 ) (2,603 ) (Loss) Gain on settlement of debt (407,635 )
77,624
Total other income (expense) (5,480,317 ) (7,290,491 )
Net loss before income taxes (10,191,450 ) (12,145,382 )
Income taxes (benefit) - -
NET INCOME (LOSS) $ (10,191,450 ) $ (12,145,382 )
Foreign currency Translation Adjustment (11,725 )
Comprehensive Income $ (10,198,883 ) Loss per common share, basic and diluted $ (0.00 )
Weighted average number of common shares outstanding, basic and diluted (after stock-split) 5,248,075,532
962,029,388 37 Revenues Total revenues for the year endDecember 31, 2021 andDecember 31, 2020 , were$1,030,249 and$280,653 , respectively, an increase of$749,596 . This increase is attributed to$93,633 of our hempSMART product lines and our new line of businesses which were$901,535 for cDistro, a distributor of hemp and CBD products, and equipment lease rental from our new joint venture of$35,081 .
The following table identifies our new product offerings in 2021, and the revenues produces from sales of our products in 2021 and 2020 respectively:
2021 2020
Body $ 1,400 $ 3,901
Brain Capsules 3,635 29,135
Drink Mix 167 2,966
Drops 42,734 152,121
Face Moisturizers 2,648 13,951
Pain Capsules - 8,308
Pain Cream 37,753 55,938
Pet Drops 5,296 14,332
Bottles - Nic 41,470 -
Bottles - Salt Nic 20,804 -
CBD Hempettes 3,913 -
Disposables - Tobacco Free Nicotine (TFN) 261,719 -
Kratom 338,735 -
Other C-Distro Products 148,805 -
Vape 86,089 -
MCOA Equipment Lease 35,081 -
TOTAL $ 1,030,249 $ 280,653
Related Party Sales
Related party sales contributed$0 and$13,069 to our revenue for 2021 and 2020, respectively. Related party sales are comprised of sales of our hempSMART products to our directors, officers, and sales team members. No related party sales were for services. All sales were made at listed retail prices and were for cash consideration. Costs of Sales Costs of sales primarily consist of inventory cost and overhead, manufacturing, packaging, warehousing, shipping and direct labor costs directly attributable to our hempSMART products. For the year endedDecember 31, 2021 andDecember 31, 2020 , our total costs of sales were$873,371 and$159,304 , respectively. The increase is attributed to$62,434 for our hempSMART business and our new business line that we acquired during 2021, which were$810,937 for cDistro, a distributor of hemp and CBD products.
Gross Profit
For the year endedDecember 31, 2021 andDecember 31, 2020 , gross profit was$156,878 and$121,349 , respectively. This increase was attributed to$66,280 from our hempSMART products and the new business that we acquired during 2021, which was$90,598 for cDistro, a distributor of hemp and CBD products. Gross margins were 15.2% and 43.2% for the years endedDecember 31, 2021 andDecember 31, 2020 , respectively. The Company has incurred net losses from operations of$4,711,133 and$4,854,891 for the years endedDecember 31, 2021 and 2020, respectively. 38 The following is a tabular breakdown of expenses related to Selling and Marketing, Payroll and Related expenses, Stock-based Compensation and General and Administrative Expenses: Expense 2021 2020 Stock Based Compensation$ 1,207,945 $ 3,014,888 Legal Expense 495,117 171,680 Admin Compensation 424,537 163,091 Consulting Fees 408,047 236,343 Investor Relation 366,590 123,399 Travel and Related 299,014 74,244 Marketing / Media 280,749 136,703 Officer's Compensation 269,350 223,356 Marketing Compensation 157,050 154,430 Independent Contractor 137,885 47,800 Insurance Expense 111,327 56,762 Board of Director Fees 95,000 91,010 Accounting 92,743 111,810 Rent Expense 66,582 51,526 Advertising Promotion 60,296 4,012 Audit Fee 59,500 74,475 Office Supplies 26,308 6,741 Intangible amortization 40,000 - Bad Debt Expense 34,359 - Website Development Cost 32,320 56,260 SEC Filing Fees 28,057 16,668 Security 12,560 - Bank Service Charges 10,928 2,120 Web Sales Commission 6,765 30,632 UK Contract Compensation 4,274 26,704 Fees / Licensing 3,617 1,252 All other expenses, net* 137,091 100,334 Total Payroll & G&A Expenses$ 4,868,011 $ 4,976,240
*This represents other individually immaterial General and Administrative expenses in the ordinary course of business that were not compensation to any third-party vendors.
Stock-based Compensation decreased by$1,806,943 primarily due to less stock-based compensation issued to officers and employees during the year endedDecember 31, 2021 . Stock compensation was$1,207,945 for the year endedDecember 31, 2021 as compared to$3,014,888 for the year endedDecember 31, 2020 . Stock based compensation during the year endedDecember 31, 2021 included$251,008 related to additional shares issued to the former owners of cDistro as part of the merger and share exchange agreement amendment entered into onNovember 24, 2021 , and an additional$234,633 related to additional shares owed under that agreement as ofDecember 31, 2021 . Administrative compensation increased to$424,537 in 2021 from$163,091 in 2020, the$261,446 increase was due to new hires during 2021 resulting from the expansion of our business. Overall, selling and marketing increased by$36,472 , attributed mainly to marketing and media costs that increased by the amount of$36,472 in 2021, from$420,511 in 2020 to a total of$456,983 in 2021, due to an increase in social media advertising costs that resulted in an increase in sales for the year endedDecember 31, 2021 . Legal expenses increased to$495,117 for the year endedDecember 31, 2021 , from$171,680 in 2020, due primarily to increased compliance and regulatory filing activity associated with our public offerings and corporate governance. Investor relation costs increased by$243,191 during 2021 due to increase in investor and shareholder outreach events and hiring of additional investment firms to increase interactions with the investment community. This also resulted in an increase in travel and related expenses by$144,046 for 2021 over 2020. Director and officer insurance increased to$111,327 during the year endedDecember 31, 2021 from$56,762 for the year endedDecember 31, 2020 due to an increase in rates from insurance carriers affiliated with the cannabis industry.
Overall, our total operating expenses in 2021 decreased by 2.2% from 2020, from
39
Stock Compensation for Officers and Directors, 2021 and 2020.
Officer and Director 2021 2020 Edward Manolos$ 20,526 $ 15,600 Marco Guerrero$ 25,526 $ - Themistocles Psomiadis $ -$ 19,010 Jesus Quintero$ 501,264 $ 2,502,140 Tad Milander $ -$ 49,350 The 2021 stock compensation bonuses were issued by the Board of Directors pursuant to our Equity Incentive Plan and executive contracts with our directors and officers. Pursuant to our Equity Incentive Plan, the Company has discretion to make stock awards to its affiliates for past services, in lieu of bonuses or other cash compensation, for directors' compensation or for any other valid purpose. AtDecember 31, 2021 , we reviewed the performance of our staff and affiliates, and in making the 2021 awards, determined the awards justified because our staff and affiliates accomplished the following: Our Equity Plan issuances to affiliates as ofDecember 31, 2021 increased by$508,644 . This was due to the Company's performance during 2021 and additional shares issued as there were issues with liquidity to pay cash compensation at times. The balance was in stock-based compensation in 2021 as it was for 2020. This was primarily for shares issued for consulting services as follows:
The balance of our stock-based compensation in 2021, as compared to 2020 was for consulting services as follows:
2021 Stock-Based 2020 Stock-Based
Nature of Consultant
Consultant Compensation Compensation Variance Services Provided
Paula Vetter 10,900 19,065 16,467 Consulting Services -
Medical Advisory
Specialist for hempSMART
during 2021 and 2020
Gloria Lynch - 70,350 (70,350 ) Bonus as part of Equity
Incentive Plan during
2020
Lauren Regier 37,766 41,975 (4,209 ) Consulting Services -
Web and graphic design
during 2021 and 2020
Danny Rodriguez 15,395 - 15,395 Accounting Services 2021
Eddie Bonet 18,474 - 18,474 Accounting Services 2021
Mario Greco MD 25,011 - 25,011 Medical Advisory 2021
Herlin Soto 18,474 - 18,474 Marketing Research 2021
Alan T. Hawkins 100,000 -
100,000 Legal Advisory services
2021
John Grosso 34,800 - 34,800 Investor Relation
services 2021
Cory Battan 34,800 - 34,800 Investor Relation
services 2021
Ian Harvey 8,726 - 8,726 Consulting and Marketing
Services 2021
Tad Mailander - 43,950 (43,950 ) Consulting Services -
Legal services during
2020
Otto Creative Studio 31,140 31,140
- Consulting Services - IT
services during 2021 and
2020
40
The objective outcomes resulting from the consulting services are summarized as follows:
• The Company lowered its expense rate by becoming more efficient, reducing
head count, and making efficient and effective cashflow decisions.
• The Company paid off most variable priced convertible notes prior to
conversion over the last quarter with funds raised from its Form S-1
registration statement.
• The Company successfully negotiated a full settlement of its largest senior
convertible note holder at a fixed price, preserving shareholder value and
minimizing the impact of the dilutive nature of the notes.
• The management team has helped pivot from the legacy affiliate marketing
(MLM) model for hempSMART to the new direct to consumer e-commerce
marketing model. This required significant changes to the culture, business
plan and branding of the products.
• The Company successfully drew down on its Form S-1 registration equity line
with White Lion and was able to get a second Form S-1 primary offering
registration statement effective to obtain funds for operations and
expansion.
• The Company managed to not only survive during the COVID pandemic, but
actually grew and thrived due to key management decisions along the way and
the personal sacrifice of our CEO
expenses for several months on his personal business card to help float the
Company during periods where funds were depleted.
• The executive management team has overseen significant efforts to expand
into South America and move key parts of its supply chain to Uruguay to
reduce the cost of goods sold and increase gross margins and overall
profitability.
• The Company has successfully negotiated acquisitions and deals that
resulted in the Company's market capitalization increasing substantially
during the year to enhance shareholder value.
• The Company successfully removed over three billion shares that were on
reservation with the Transfer Agent during 2021 due to successful
settlement of convertible debt, resulting in less dilution and more shares
available for financing and acquisitions.
We anticipate continuing to reduce our dependence on stock-based compensation in
the future. However, given our present cash position, and because of possible
increased operational costs including overhead, product manufacturing and
development, and related costs, we may, to the extent necessary, utilize
stock-based compensation in the future to compensate key product development,
operations and sales and marketing personnel.
Operating Losses
For the year endedDecember 31, 2021 , operating losses were$4,711,133 or 457% of total revenues, as compared to$4,854,891 or 1,730% of total revenues for the year endedDecember 31, 2020 . This increase of$143,758 was due to continued restructuring and expansion of the Company's operations. We believe the reduced operating losses incurred in 2021, as compared to 2020, reflect the effectiveness of the Company's management team in 2021. We expect to continue to reduce our losses as we continue to implement our plan for new sales strategies and cost-cutting measures in the near future until profitability is achieved, which is not certain. Our operations are subject to numerous risks associated with establishing any new business, including unforeseen expenses, delays and complications. There can be no assurance that we will achieve or sustain profitable operations. This increase is attributed to the company's expansion intoLatin America and operations attributed to our acquisitions in 2021, one of which is not yet integrated financially. 41 Other Income (Expense) Other income (expense) for the years endedDecember 31, 2021 andDecember 31, 2020 included other expenses of$5,480,317 and$7,290,491 , respectively. The decrease of$1,810,174 was primarily due to an increase of$1,303,002 in interest expense. This was offset by an increase of$4,701,924 in gain on changes in fair value of derivative liabilities from a loss of$4,698,072 for the year endedDecember 31, 2020 to a gain of$3,852 for year endedDecember 31, 2021 and a decrease of$841,484 in losses on equity investment from a gain of$106,305 for the year endedDecember 31, 2020 as compared to a loss of$735,178 for the year endedDecember 31, 2021 . Also, we reflect a decrease in realized loss on trading securities of$540,597 from a loss of$2,603 for the period endedDecember 31, 2020 compared to a loss of$543,200 for the year endedDecember 31, 2021 .
Income Tax Expense (Benefit)
We did not have any income tax expense or benefit for the years ended
Net Income (Loss)
As a result of the factors discussed above, net losses for the year ended
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 following table represents the Company's
hempSMART business.
hempSMART
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
For the Years ended
Dec 31, 2021 Dec 31, 2020
Revenues $ 93,575 $ 280,653
Cost of Goods Sold 61,267 159,304
Gross Profit 32,308 121,349
Expense
Depreciation Expense 10,103 5,933
Stock-based Compensation 104,685 207,955
Selling and Marketing 443,569 393,799
Payroll and Related expenses 252,123 165,491
General and Admin Expenses 456,322 217,288
Total Expense 1,266,802 990,466
Net Loss from Operations $ (1,234,494 ) $ (869,117 ) The following table represents the Company's cDistro business segment for the
years ended
For the Years ended
Dec 31, 2021 Dec 31, 2020
Revenues $ 901,535 $ -
Cost of Goods Sold 810,937 -
Gross Profit 90,598 -
Expense
Depreciation and amortization expense 91,358 -
Stock-based Compensation - -
Selling and Marketing 4,549 -
Payroll and Related expenses 110,000 -
General and Admin Expenses 163,355 -
Total Expense 369,262 -
Net Loss from Operations $ (278,664 ) $ -
42
Liquidity and Capital Resources
As ofDecember 31, 2021 , andDecember 31, 2020 , our operating activities produced cash used in operations of$3,984,108 and$1,723,950 , respectively. Our primary internal sources of liquidity were provided by an increase in proceeds from the issuance of note payables of$3,295,863 for the year endedDecember 31, 2021 as compared to$1,017,664 for the year endedDecember 31, 2020 , and a decrease in proceeds from the sale of note payables to a related party of$20,000 in 2021 as compared to$75,000 in repayments to a related party for the year endedDecember 31, 2020 . We saw an increase in proceeds from sales of our common stock to$2,201,601 atDecember 31, 2021 , as compared to$478,685 atDecember 31, 2020 . During the period endedDecember 31, 2021 , we relied upon external financing arrangements to fund our operations. During the year endedDecember 31, 2020 , we entered into several separate financing arrangements withSt. George Investments, LLC , aUtah limited liability company, in which we borrowed an aggregate of$2,541,470 , the principal of which is convertible into shares of our common stock (see Note 4, Convertible Notes Payable). Our ability to rely upon external financing arrangements to fund operations is not certain, and this may limit our ability to secure future funding from external sources without changes in terms requested by counterparties, changes in the valuation of collateral, and associated risk, each of which is reasonably likely to result in our liquidity decreasing in a material way. We intend to utilize cash on hand, loans and other forms of financing such as the sale of additional equity and debt securities and other credit facilities to conduct our ongoing business, and to also conduct strategic business development and implementation of our business plans generally. Operating Activities For the year endedDecember 31, 2021 and 2020, the Company used cash for operating activities of$3,984,108 and$1,723,950 , respectively. Operating activities consist of corporate overhead, product development of our hempSMART™ products, and development of our distribution business. Increases are due primarily to increases in executive compensation, professional fees, and product development costs. Investing Activities
For the years endedDecember 31, 2021 andDecember 31, 2020 , net cash used in and provided by investing activities was$216,810 and$118,984 , respectively. For the year endedDecember 31, 2021 , the Company used$126,305 and$6,016 for the purchase of equipment, while receiving$125,000 in proceeds from the disposition of an investment during the year endedDecember 31, 2020 , compared to the receipt of$190,401 for the sales of investments during the year endedDecember 31, 2021 . Financing Activities
For the years endedDecember 31, 2021 and 2020, financing activities were a source of cash of$4,242,164 and$1,467,704 , respectively. For the years endedDecember 31, 2021 and 2020, this was primarily from proceeds of$3,295,863 and$1,017,664 derived from the issuance of notes payable, and repayment to related parties of$20,000 and$75,000 for the year endedDecember 31, 2021 and 2020, respectively. The Company received income from the sale of common stock of$2,201,601 and$478,685 for the years endedDecember 31, 2021 and 2020, respectively. For the year endedDecember 31, 2020 , the Company received proceeds of$35,500 from a Payroll Payment Protection loan from theSmall Business Administration and also received proceeds of$10,855 from the sale of trading securities. We currently do not have sufficient cash and liquidity to meet our anticipated working capital for the next twelve months. Historically, we have financed our operations primarily through private sales of our common stock. If our sales goals for our hempSMART™ products and our distribution business, cDistro, do not materialize as planned, and we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.
Off Balance Sheet Arrangements
As ofDecember 31, 2021 andDecember 31, 2020 , we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 43
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect amounts reported in those statements. We have made our best estimates of certain amounts contained in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. However, application of our accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties, and, as a result, actual results could differ materially from these estimates. Management believes that the estimates, assumptions, and judgments involved in the accounting policies described below have the most significant impact on our consolidated financial statements. We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we
deem it necessary. Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are held in operating accounts at a major financial institution.
Inventory
Inventory is primarily comprised of products and equipment to be sold to end-customers. Inventory is valued at cost, based on the specific identification method, unless and until the market value for the inventory is lower than cost, in which case an allowance is established to reduce the valuation to market value. As ofDecember 31, 2021 , andDecember 31, 2020 , market values of all of our inventory were greater than cost, and accordingly, no such valuation allowance was recognized. The value of inventory onDecember 31, 2021 andDecember 31, 2020 was$252,199 and$103,483 , respectively.
Deposits
Deposits is comprised of advance payments made to third parties, primarily for inventory for which we have not yet taken title. When we take title to inventory for which deposits are made, the related amount is classified as inventory, then recognized as a cost of revenues upon sale (see "Costs of Revenues" below).
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets is primarily comprised of advance payments made to third parties for independent contractors' services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate the life of the contract or service period. The balance of prepaid insurance atDecember 31, 2021 andDecember 31, 2020 was$61,705 and$55,783 . The balance of prepaid insurance atDecember 31, 2021 andDecember 31, 2020 was$61,705 and$55,783 .
Accounts Receivable
Accounts receivable are recorded at the net value of face amount less any allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and, based on a method of specific identification of any accounts receivable for which we deem the net realizable value to be less than the gross amounts of accounts receivable recorded, we establish an allowance for doubtful accounts for those balances. In determining our need for an allowance for doubtful accounts, we consider historical experience, analysis of past due amounts, client creditworthiness and any other relevant available information. However, our actual experience may vary from our estimates. If the financial condition of our clients were to deteriorate, resulting in their inability or unwillingness to pay our fees, we may need to record additional allowances or write-offs in future periods. This risk is mitigated to the extent that we collect retainers from our clients prior to performing significant services. The allowance for doubtful accounts, if any, is recorded as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client's inability to make required payments on accounts receivables, the provision is recorded in operating expenses. As ofDecember 31, 2021 , and 2020, allowance for doubtful accounts was$3,267 and$0 , respectively. ForDecember 31, 2021 andDecember 31, 2020 , we recorded bad debt expense of$34,359 and$9,249 , respectively. Net accounts receivable for year endDecember 31, 2021 andDecember 31, 2020 were$121,588 and$6,542 , respectively. Net accounts receivable for year endDecember 31, 2021 andDecember 31, 2020 were$121,588 and$6,542 , respectively. 44 Property and Equipment, net
Property and Equipment is stated at net book value, cost less depreciation. Maintenance and repairs are expensed as incurred. Depreciation of owned equipment is provided using the straight-line method over the estimated useful lives of the assets, ranging from two to seven years. Depreciation of capitalized construction in progress costs, a component of property and equipment, net, begins once the underlying asset is placed into service and is recognized over the estimated useful life. Property and equipment is reviewed for impairment as discussed below under "Accounting for the Impairment of Long-Lived Assets." We did not capitalize any interest as ofDecember 31, 2021 and as ofDecember 31, 2020 .
Accounting for the Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending upon the nature of the assets. We have recorded$0 and$22,658 in impairment charges related to our JV investments during the years endedDecember 31, 2021 and 2020, respectively.
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provide for a rate
of conversion that is below market value at issuance, this feature is
characterized as a beneficial conversion feature ("BCF"). We record a BCF as a
debt discount pursuant to Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ACF") Topic 470-20 Debt with Conversion and
Other Options. In those circumstances, the convertible debt is recorded net of
the discount related to the BCF, and we amortize the discount to interest
expense over the life of the debt using the effective interest method.
Revenue Recognition
For annual reporting periods afterDecember 15, 2017 , theFinancial Accounting Standards Board ("FASB") made effective ASU 2014-09 "Revenue from Contracts with Customers," to supersede previous revenue recognition guidance under currentU.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 principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Two options were made available for implementation of the standard: the full retrospective approach or modified retrospective approach. The guidance became effective for annual reporting periods beginning afterDecember 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 endedDecember 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 years endedDecember 31, 2021 and 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. 45
Identification of Our Contracts with Our Customers.
Contracts included in our application of FASB ASC Topic 606, consist completely of sales contracts between us and our customers that create enforceable rights and obligations. For the years endedDecember 31, 2020 , and 2019, our sales contracts included the following parties: us, our sales associates and our customers. Our sales contracts were offered by us and our sales associates to our customers directly through our web site. Our sales contracts, and those formalized by our sales associates, are represented by an electronic order form, which contains the contractual elements of offer for sale, acceptance and the provision of consideration consisting of the buyer's payment, which is concurrent with our delivery of hempSMART™ product. Since our hempSMART™ product sales contracts are consummated upon receipt of the customer's acceptance of our offer; our concurrent receipt of our customers payment; and, our delivery of the agreed to hempSMART™ product, all parties are equally committed to fulfilling their respective obligations under the sales contracts. Further, the sales contracts specifically identify (1) parties; (2) quantity of hempSMART™ product ordered; (3) price; and, (4) subject, and so each respective party's rights are identifiable and the payment terms are defined. Since the sales contracts are consummated concurrent with offer, acceptance, payment and delivery of the hempSMART™ product ordered, we recognize revenue and cash flows as the principal from the respective sales contract transactions as they complete. Further, because our sales contracts are offered, accepted and consummated concurrently, our ability to collect revenue is immediate. We receive no payments for agreements that do not qualify as a contract. If customers agree to multiple sales contracts when they are entered into at or near the same time, our policy is to combine those contracts if: (1) the sales contracts are negotiated as a single package; (2) the payment amount of one sales contract is dependent upon another sales contract; (3) our performance obligations of delivering multiple hempSMART™ products can be determined to be part of a single transaction. Since the nature of the entry into and consummation of our sales contracts occur concurrently, there are no changes or modifications to the terms of the sales contracts that would modify the enforceable rights and performance obligations of the parties and that would materially alter the timing of our receipt of revenue from our sales contracts.
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.
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. 46
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 2021 and 2020. Product Sales
Revenue from product sales, including delivery fees, FOB shipping point, 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.
Costs of Revenues
Our policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenues include the costs directly attributable to revenue recognition and includes compensation and fees for services, travel and other expenses for services and costs of products and equipment. Selling, general and administrative expenses are charged to expense as incurred.
Advertising and Promotion Costs
Advertising and promotion costs are included as a component of selling and
marketing expense and are expensed as incurred. During the years ended
Shipping and Handling Costs
For product and equipment sales, shipping and handling costs are included as a component of cost of revenues.
Stock-Based Compensation
Restricted shares are awarded to employees and entitle the grantee to receive shares of restricted common stock at the end of the established vesting period. The fair value of the grant is based on the stock price on the date of grant. We recognize related compensation costs on a straight-line basis over the requisite vesting period of the award, which to date has been one year from the grant date. During the years endedDecember 31, 2021 andDecember 31, 2020 , stock-based compensation expense for restricted shares was$1,207,945 and$3,014,888 , respectively. Compensation expense for warrants and options is based on the fair value of the instruments on the grant date, which is determined using the Black-Scholes valuation model and are expensed over the expected
term of the awards. Income Taxes We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. For the year endedDecember 31, 2021 andDecember 31, 2020 , due to cumulative losses, we recorded a valuation allowance against our deferred tax asset that reduced our income tax benefit for the period to zero. As ofDecember 31, 2021 , andDecember 31, 2020 , we had no liabilities related to federal or state income taxes and the carrying value of our deferred tax asset was zero. 47 Loss Contingencies From time to time the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. On at least a quarterly basis, consistent with ASC 450-20-50-1C, if the Company determines that there is a reasonable possibility that a material loss may have been incurred, or is reasonably estimable, regardless of whether the Company accrued for such a loss (or any portion of that loss), the Company will confer with its legal counsel, consistent with ASC 450. If the material loss is determinable or reasonably estimable, the Company will record it in its accounts and as a liability on the balance sheet. If the Company determines that such an estimate cannot be made, the Company's policy is to disclose a demonstration of its attempt to estimate the loss or range of losses before concluding that an estimate cannot be made, and to disclose it in the notes to the financial statements under Contingent Liabilities.
Net Income (Loss) Per Common Share
We report net income (loss) per common share in accordance with FASB ASC 260, "Earnings per Share." This statement requires dual presentation of basic and diluted earnings with a reconciliation of the numerator and denominator of the earnings per share computations. Basic net income (loss) per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period and excludes the effects of any potentially dilutive securities. Diluted net income (loss) per share gives effect to any dilutive potential common stock outstanding during the period. The computation does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. Related Party Transactions
We follow FASB ASC subtopic 850-10, "Related Party Transactions", for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC 850-10-20, related parties include: a) affiliates of theCompany; b ) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. Material related party transactions are required to be disclosed in the consolidated financial statements, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
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