MARIJUANA COMPANY OF AMERICA, INC. The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
financial statements, during the nine months ended
The Company's primary source of operating funds for the nine months ended
The Company's existence is dependent upon management's ability to develop profitable operations and to obtain additional funding; however, there can be no assurance that the Company will be successful in developing profitable operations or that it will be able to obtain financing on favorable terms, if at all. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
NOTE 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The unaudited condensed consolidated interim financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in
Revenue Recognition
For annual reporting periods after
9
Identification of Our Contracts with Customers
Contracts included in the Company's application of ASC Topic 606 for the quarter
ended
In accordance with ASC Topic 606, the Company of the opinion that none of its hempSMART™ or cDistro product sales or offered consulting service, each of which are discussed below, have a significant financing component. The Company's opinion is based upon the transactional basis for its product sales, with revenue recognized upon customer order, payment and shipment, which occurs concurrently. The Company's evaluation of the length of time between the customer order, payment and shipping is not a significant financing component because shipment occurs the same day as the order is placed and payment made by the customer. The Company's evaluation of its consulting services is based upon recognizing revenue as the services are performed for a determinable price per hour. The Company only recognizes revenues as incurred and charge billable hours. Because the Company's hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, the Company is of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing that would materially change the amount of revenue the Company recognizes under the contract or would otherwise contain a significant financing component under ASC Topic 606.
Determination of the Price in Our Sales Contracts
The transaction prices in the Company's sales contract are the amount of consideration the Company expects to be entitled to for transferring promised hempSMART™ and cDistro products. The consideration amount is fixed and not variable. The transaction price is allocated to the identified performance obligations in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled, which is concurrently upon receipt of payment. There are no future options for a contract when considering and determining the transaction price. The Company excludes amounts third parties will eventually collect, such as sales tax, when determining the transaction price. Since the timing between receiving consideration and transferring goods or services is immediate, the Company's sales contract do not have a significant financing component, i.e., recognizing revenue at the amount that reflects the cash payment that the customer would have made at the time the goods or services were transferred to them (cash selling price), rather than significantly before or after the goods or services are provided.
Allocation of the Transaction Price of Our Sales Contracts
The Company's sales contracts are not considered multi-element arrangements which require the fulfillment of multiple performance obligations. Rather, the Company's sales contracts include one performance obligation in each contract. As such, from the outset, the Company allocates the total consideration to each performance obligation based on the fixed and determinable standalone selling price, which the Company believes is an accurate representation of what the price is in each transaction.
Recognition of Revenue when the Performance Obligation is Satisfied
A performance obligation is satisfied when or as control of the good or service is transferred to the customer. ASC 606-10-20 defines control as "the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset." For performance obligations that are fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation. As noted above, the Company's single performance obligation sales contracts are singularly related to its promise to provide the hempSMART™ and cDistro products to the customer upon receipt of payment, and upon completion, allows the Company to realize revenue under its revenue recognition policy.
With respect to the Company's offered financial accounting, bookkeeping and/or
real property management consulting services, to date no contracts have been
entered into, and thus no reportable revenues have resulted for the fiscal years
ended
Identifying the Performance Obligations in Our Sales Contracts
In analyzing the Company's sales contracts, the Company's policy is to identify the distinct performance obligations in a sales contract arrangement. In determining the Company's performance obligations under its sales contracts, the Company considers that the terms and conditions of sales are explicitly outlined in its sales contracts and are so distinct and identifiable within the context of each sales contract, and so are not integrated with other goods, or constitute a modification or customization of other goods in the Company's contracts, or are highly dependent or highly integrated with other goods in the Company's sales contracts. Thus, the Company's performance obligations are singularly related to its promise to provide the hempSMART™ and cDistro products upon receipt of payment. The Company offers an assurance warranty on its hempSMART™ and cDistro products that allows a customer to return any hempSMART™ and cDistro products within 30 days if not satisfied for any reason. Assurance warranties are not identifiable performance obligations since they may be elected at the whim of the customer for any reason. However, the Company does account for returns of purchase prices, if made.
Product Sales
Revenue from product sales, including delivery fees, is recognized when (1) an order is placed by the customer; (2) the price is fixed and determinable when the order is placed; (3) the customer is required to and concurrently pays for the product upon order; and (4) the product is shipped. The evaluation of the Company's recognition of revenue after the adoption of ASC Topic 606 did not include any judgments or changes to judgments that affected the Company's reporting of revenues since the Company's product sales, both pre and post adoption of ASC Topic 606 were evaluated using the same standards as noted above, reflecting revenue recognition upon order, payment and shipment, which all occurs concurrently when the order is placed and paid for by the customer, and the product is shipped. Further, given the facts that (1) the Company's customers exercise discretion in determining the timing of when they place their product order and (2) the price negotiated in the Company's product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, the Company is of the opinion that its product sales do not indicate or involve any significant customer financing that would materially change the amount of revenue recognized under the sales transaction, or would otherwise contain a significant financing component for the Company or the customer under ASC Topic 606.
10 Consulting Services
The Company also offers professional services for financial accounting,
bookkeeping and/or real property management consulting services based on
consulting agreements. As of the date of this filing, the Company has not
entered into any contracts for any financial accounting, bookkeeping and/or real
property management consulting services that have generated reportable revenues
as of the years ended
For hourly based fixed fee service contracts, the Company intends to utilize and rely upon the proportional performance method, which recognizes revenue as services are performed. Under this method, in order to determine the amount of revenue to be recognized, the Company will calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. The Company only recognizes revenues as incurred and charges billable hours. Because the Company's hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, the Company is of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing that would materially change the amount of revenue the Company recognizes under the contract or would otherwise contain a significant financing component under ASC Topic 606.
The Company determined that upon adoption of ASC Topic 606 there were no adjustments converting from ASC 605 to ASC Topic 606 because product sales revenue is recognized upon customer order, payment and shipment, which occurs concurrently, and the Company's consulting services offered are fixed and determinable and are only earned and recognized as revenue upon actual performance.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company's stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
Cash
The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company's cash
in interest-bearing accounts may exceed
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
11 Inventories
Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.
Cost of Sales
Cost of sales is comprised of cost of product sold, packaging, and shipping costs.
Stock-Based Compensation - Employees
The Company accounts for the stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of ASC 718-10-30. Pursuant to ASC 718-10-30-6, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company's most recent private placement based on sales to third parties or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial Option Model option-pricing valuation model. The ranges of assumptions for inputs are as follows:
• Expected term of share options and similar instruments. The expected life of
options and similar instruments represents the period of time the options
and/or similar instruments are expected to be outstanding. Pursuant to ASC
718-10-50-2(f)(2)(i). the expected term of share options and similar
instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual
term of the instruments and employees' expected exercise and post-vesting
employment termination behavior into the fair value (or calculated value) of
the instruments. Pursuant to ASC 718-10-S99-1, it may be appropriate to use
the simplified method, i.e., expected term equal the quotient of the vesting
term plus the original contractual term divided by two if (i) a company does
not have sufficient historical exercise data to provide a reasonable basis
upon which to estimate expected term due to the limited period of time its
equity shares have been publicly traded; (ii) a company significantly changes
the terms of its share option grants or the types of employees that receive
share option grants such that its historical exercise data may no longer
provide a reasonable basis upon which to estimate expected term; or (iii) a
company has or expects to have significant structural changes in its business
such that its historical exercise data may no longer provide a reasonable
basis upon which to estimate expected term. The Company uses the simplified
method to calculate expected term of share options and similar instruments as
it does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
• Expected volatility of the entity's shares and the method used to estimate
it. Pursuant to ASC 718-10-50-2(f)(2)(ii), a thinly-traded or non-public
entity that uses the calculated value method shall disclose the reasons why it
is not practicable for it to estimate the expected volatility of its share
price, the appropriate industry sector index that it has selected, the reasons
for selecting that particular index, and how it has calculated historical
volatility using that index. The Company uses the average historical
volatility of the comparable companies over the expected contractual life of
the share options or similar instruments as its expected volatility. If shares
of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations
as the volatility calculation using daily observations for such shares could
be artificially inflated due to a larger spread between the bid and asked
quotes and lack of consistent trading in the market.
• Expected annual rate of quarterly dividends. An entity that uses a method that
employs different dividend rates during the contractual term shall disclose
the range of expected dividends used and the weighted-average expected
dividends. The expected dividend yield is based on the Company's current
dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
• Risk-free rate(s). An entity that uses a method that employs different
risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods within the expected term of the share options
and similar instruments.
12
Generally, all forms of share-based payments, including stock options, warrants, restricted stock and stock appreciation rights are measured at their fair value on the grant date of the award based on the estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock-Based Compensation - Non Employees
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
In
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial option-pricing valuation model. The ranges of assumptions for inputs are as follows:
• Expected term of share options and similar instruments: Pursuant to ASC
718-10-50-2(f)(2)(i), the expected term of share options and similar
instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual
term of the instruments and the holder's expected exercise behavior into the
fair value (or calculated value) of the instruments. The Company uses
historical data to estimate the holder's expected exercise behavior. If a
company is a newly formed corporation or shares of such company are thinly
traded, the contractual term of the share options and similar instruments is
used as the expected term of share options and similar instruments as such
company does not have sufficient historical exercise data to provide a
reasonable basis upon which to estimate expected term.
• Expected volatility of the entity's shares and the method used to estimate
it. Pursuant to ASC 718-10-50-2(f)(2)(ii), a thinly-traded or non-public
entity that uses the calculated value method shall disclose the reasons why it
is not practicable for the company to estimate the expected volatility of its
share price, the appropriate industry sector index that it has selected, the
reasons for selecting that particular index, and how it has calculated
historical volatility using that index. The Company uses the average
historical volatility of the comparable companies over the expected
contractual life of the share options or similar instruments as its expected
volatility. If shares of a company are thinly traded the use of weekly or
monthly price observations would generally be more appropriate than the use of
daily price observations as the volatility calculation using daily
observations for such shares could be artificially inflated due to a larger
spread between the bid and asked quotes and lack of consistent trading in the
market.
• Expected annual rate of quarterly dividends. An entity that uses a method that
employs different dividend rates during the contractual term shall disclose
the range of expected dividends used and the weighted-average expected
dividends. The expected dividend yield is based on the Company's current
dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
• Risk-free rate(s). An entity that uses a method that employs different
risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods within the expected term of the share options
and similar instruments.
Earnings per Share
Basic earnings per share are calculated by dividing net income (loss) by the weighted average number of shares of the Company's common stock outstanding during the period. "Diluted earnings per share" reflects the potential dilution that could occur if the Company's share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of the Company's share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted earnings per share calculation. The dilutive effect of the Company's convertible preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning of the year.
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.
13
The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value. The following table summarizes the Company's intangible assets:
Schedule of intangible assets, net
September 30, 2022 December 31, 2021
Trademarks (estimated 5-year life) $ 500,000 $ 500,000
Licenses (estimated 10-year life) 600,000 600,000
Customer Relationships (estimated 5-year life) 100,000 100,000
Intangible assets, gross 1,200,000 1,200,000
Accumulated amortization (225,000 ) (90,000 )
Intangible assets, net $ 975,000 $ 1,110,000 We evaluate long-lived assets, including intangible assets and goodwill for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Upon such an occurrence,
recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to forecasted undiscounted net cash flows expected
to be generated by the asset. If the carrying amount of the asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. For
long-lived assets held for sale, assets are written down to fair value, less
cost to sell. Fair value is determined based on discounted cash flows, appraised
values or management's estimates, depending upon the nature of the assets. The
Company completed an evaluation of goodwill and intangible assets at
Investments
The Company follows ASC subtopic 321-10,
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
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. The Company charged to operations
Segment Information
ASC subtopic Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company's principal operating segments, hempSMART and cDistro.
14
The following table represents the Company's hempSMART business for the nine
months ended
hempSMART
STATEMENT OF OPERATIONS© Edgar Online, source
