Notes to Consolidated Financial Statements
September 30, 2016 and December 31, 2015
(Unaudited)
Note A - Background and Description of Business
MCPI, Inc. (“Company” or “Med-Cannabis Pharma”) was incorporated under the laws of the State of Nevada on February 23, 2011. The Company was originally incorporated as Southwest China Imports, Inc. on February 23, 2011 in the State of Nevada. The Company’s initial business plan was to import high-end handmade lace wigs, hairpieces, and other beauty supplies and accessories manufactured overseas into the United States. In June 2014, the Company changed its name to Med-Cannabis Pharma, Inc. and implemented a new business plan to enter into the retail sale of medical and personal use marijuana, where allowable. In October 2015, the Company changed its name to MCPI, Inc.
Effective March 31, 2016, the Company ceased activities in all of its subsidiaries and disposed of Med-Pharma Management, Inc. and High Desert MMJ, Inc. Prior thereto, the Company’s subsidiaries were Medical Management Systems, Inc., an Oregon corporation engaged in providing back-office and support services to marijuana dispensaries in the State of Oregon; Med-Pharma Management, Inc., a Washington State corporation which was formed to own, manage or provide back-office and support services to marijuana dispensaries in Washington State; and High Desert MMJ, Inc. an Oregon corporation, which is a 99.0% partner in Emerald Mountain Organics, an Oregon joint venture, formed to facilitate the development and growing of medical marijuana plants for wholesale distribution to licenced dispensaries in the State of Oregon.
As of September 30, 2015, Medical Management Systems, Inc. held a Management Contract for three marijuana dispensaries located in Newport, Bend and Cottage Grove, Oregon; which are owned by a company controlled by a related party. This Management Contract was terminated by the consent of both parties, effective March 31, 2016. Med-Pharma only conducted introductory due diligence efforts in the State of Washington and, currently, had abandoned all activities in the State of Washington. Emerald Mountain Organics had, as of September 30,2015, established an early-phase growing operation and has generated nominal sales.
During the first 10 days of October 2015, the Company’s subsidiary, High Desert MMJ, Inc., learned that the 1.0% minority partner in the Emerald Mountain Organics joint venture had absconded with all of the assets of the joint venture. Efforts to locate and recover either the individuals representing said 1.0% minority partner or the said absconded assets were unsuccessful. Accordingly, effective October 10, 2015, High Desert MMJ, Inc. abandoned the Emerald Mountain Organics joint venture and wrote off said investment. The cumulative start-up losses in the Company’s consolidated financial statements for the Emerald Mountain Organics joint venture, through the date of abandonment were approximately $53,000 and the Company recognized a loss on the stolen assets of approximately $51,000 during the quarter ended December 31, 2015.
On June 1, 2016, the Company entered into a Settlement, General and Mutual Release of Claims and Assignment of Interest Transfer Agreement (Settlement Agreement) with its majority shareholder and a related party. The Settlement Agreement relates to the Company’s management of three medical marijuana dispensaries (Stores) located in Oregon, which are owned by Bendor Investments, Ltd. (Bendor), whose sole shareholder is Charles Stidham. The Company owes Mr. Stidham approximately $1,100,000, including accrued interest, as of the date of the Settlement Agreement.
The Company asserted a claim for management fees of approximately $80,000 and reimbursement of monies advanced to support the operations of the Stores totaling approximately $343,000 for the services of the Company’s wholly-owned subsidiary, Medical Management Systems, Inc. (MMS), in managing the Stores. Bendor disputed this claim. To resolve the dispute, the parties agreed to forgive the accrued management fees and to offset the approximately $343,000 due from Bendor against the approximately $1,100,000 owed to Mr. Stidham with the Company releasing any and all interests it may have had in the Stores and MMS. Additionally, the Company agreed to assign a trademark to Mr. Stidham as well as executing a new Note in the principal sum of $752,694.19.
Note B - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with generally accepted accounting principles and has elected a year-end of December 31.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.
MCPI, Inc.
Notes to Consolidated Financial Statements - Continued
September 30, 2016 and December 31, 2015
(Unaudited)
Note B - Preparation of Financial Statements - Continued
Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the U. S. Securities and Exchange Commission on its Annual Report on Form 10-K for the year ended December 31, 2015. The information presented within these interim financial statements may not include all disclosures required by accounting principles generally accepted in the United States of America and the users of financial information provided for interim periods should refer to the annual financial information and footnotes when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements, prepared in accordance with the U. S. Securities and Exchange Commission’s instructions for Form 10-Q, are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending December 31, 2016.
For segment reporting purposes, the Company operated in only one industry segment during the periods represented in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole.
The accompanying consolidated financial statements, as of and for the periods ended September 30, 2016 and 2015, respectively, contain the accounts of MCPI, Inc.; its wholly-owned subsidiaries, Medical Management Systems, Inc., Med-Pharma Management, Inc., High Desert MMJ, Inc.; and it’s majority-owned joint venture, Emerald Mountain Organics. All significant intercompany transactions have been eliminated. The consolidated entities are collectively referred to as “Company”.
Note C - Going Concern Uncertainty
The Company was in the initial phases of providing back-office and support services to marijuana dispensaries and participates in a marijuana development and growing operation, all located in the State of Oregon. The dispensary operations under management by Medical Management Systems, Inc. began generating positive cash flows from operations during the 4
th
quarter of 2015. However, management terminated the Medical Management Systems, Inc. Management Agreement on March 31, 2016 and wrote off all management fees (and deferred revenues) through that date. Further, the Company liquidated its Med-Pharma Management, Inc. and High Desert MMJ, Inc. subsidiaries as of March 31, 2016. All other efforts started by the Company and/or its subsidiaries in prior periods were either unsuccessful or abandoned. There is no assurance that the Company will be able to successful in the implementation or operation of its current business plan.
The Company has limited operating history, limited cash on hand, no operating assets and has a business plan with inherent risk. Because of these factors, the Company’s auditors have issued an audit opinion on the Company’s financial statements which includes a statement describing our going concern status. This means, in the auditor’s opinion, substantial doubt about our ability to continue as a going concern exists at the date of their opinion.
Because of the Company's lack of operating assets, the Company’s continuance may become fully dependent upon either future sales of securities and/or advances or loans from significant stockholders or corporate officers to provide sufficient working capital to preserve the integrity of the corporate entity during the development phase.
The Company's continued existence is dependent upon its ability to implement its business plan, generate sufficient cash flows from operations to support its daily operations, and provide sufficient resources to retire existing liabilities and obligations on a timely basis. The Company faces considerable risk in it’s business plan and a potential shortfall of funding due to our uncertainty to raise adequate capital in the equity securities market.
MCPI, Inc.
Notes to Consolidated Financial Statements - Continued
September 30, 2016 and December 31, 2015
(Unaudited)
Note C - Going Concern Uncertainty - Continued
The Company is dependent upon existing cash balances to support its day-to-day operations. In the event that working capital sufficient to maintain the corporate entity and implement our business plan is not available, the Company’s existing controlling stockholders intend to maintain the corporate status of the Company and provide all necessary working capital support on the Company's behalf. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or existing controlling stockholders to provide additional future funding. Further, the Company is at the mercy of future economic trends and business operations for the Company’s existing controlling stockholders to have the resources available to support the Company.
The Company anticipates offering future sales of equity securities. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
The Company’s Articles of Incorporation authorizes the issuance of up to 25,000,000 million shares of preferred stock and 500,000,000 shares of common stock. The Company’s ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing as well as impede the implementation of the Company’s business plan. The Company’s ability to issue these authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt or equity securities.
In such a restricted cash flow scenario, the Company would be unable to complete its business plan steps, and would, instead, delay all cash intensive activities. Without necessary cash flow, the Company may become dormant during the next twelve months, or until such time as necessary funds could be raised in the equity securities market.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach its goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.
Note D - Summary of Significant Accounting Policies
1.
Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
2.
Organization costs
The Company has adopted the provisions of provisions required by the Start-Up Activities topic of the FASB Accounting Standards Codification whereby all costs incurred with the incorporation and reorganization, post-bankruptcy, of the Company were charged to operations as incurred.
3.
Revenue recognition
Revenue is recognized by the Company at the point at which a transaction is delivered or services are provided to a consumer at a fixed price, collection is reasonably assured, the Company has no remaining performance obligations and no right of return by the purchaser exists.
4.
Income taxes
The Company files income tax returns in the United States of America and various states, as appropriate and applicable. The Company is no longer subject to U.S. federal, state and local, as applicable, income tax examinations by regulatory taxing authorities for any period prior to January 1, 2011.
The Company uses the asset and liability method of accounting for income taxes. At September 30, 2016 and December 31, 2015, respectively, the deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. Temporary differences generally represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization, allowance for doubtful accounts and vacation accruals.
MCPI, Inc.
Notes to Consolidated Financial Statements - Continued
September 30, 2016 and December 31, 2015
(Unaudited)
Note D - Summary of Significant Accounting Policies - continued
4.
Income taxes
- continued
The Company has adopted the provisions required by the Income Taxes topic of the FASB Accounting Standards Codification. The Codification Topic requires the recognition of potential liabilities as a result of management’s acceptance of potentially uncertain positions for income tax treatment on a “more-likely-than-not” probability of an assessment upon examination by a respective taxing authority. As a result of the implementation of Codification’s Income Tax Topic, the Company did not incur any liability for unrecognized tax benefits.
5.
Income (Loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at the calculation date.
As of September 30, 2016 and 2015, respectively, the Company does not have any outstanding items which could be deemed to be dilutive.
6.
New and Pending Accounting Pronouncements
The Company is of the opinion that any and all other pending accounting pronouncements, either in the adoption phase or not yet required to be adopted, will not have a significant impact on the Company's financial position or results of operations.
Note E - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
Note F - Notes Payable to Stockholders
On July 28, 2014, the Company entered into a $500,000 Line of Credit note payable with South Beach Live, Ltd. (South Beach), a Company stockholder and an entity related to a significant Company stockholder, to provide funds necessary to support the corporate entity and provide working capital to pursue business combination or acquisition opportunities. This note bore interest at 10.0% and matured in July 2015. This note replaced a non-interest bearing shareholder note payable to a former controlling stockholder that was assumed during a 2014 change in control transaction. During the twelve months ended December 31, 2014, the Company recognized an aggregate $4,973 as additional paid-in capital for the economic event related to the non-interest bearing feature on the assumed note payable through its retirement.
On September 30, 2015, the Company executed a replacement Promissory Note with the principal stockholder of South Beach Live, Ltd. in the amount of $927,000, bearing interest at 12.0% and payable in monthly installments of approximately $13,300, including accrued interest with a final maturity and balloon payment due on October 31, 2016.
On May 11, 2016, as a component of the aforementioned Settlement Agreement, the Company and Charles Stidham, who is, directly and indirectly, a controlling stockholder of the Company, entered into a new Promissory Note agreement dated March 31, 2016. The note is for the principal amount of $752,694.19, bears interest at 10.0% per annum and requires monthly debt service payments of approximately $15,992.55 commencing June 30, 2016 through June 30, 2017, at which time all remaining principal and accrued interest is due and payable. The note also contains a repayment clause where the principal and accrued interest may be paid in common stock of the Company at a conversion rate of $0.001 per share. The lender, as controlling stockholder, verbally suspended the common stock conversion clause at the execution date of the note and said suspension remains in effect as of the date of these financial statements. The Company is delinquent in making the scheduled monthly debt service payments and no action is expected to be taken by the lender.
MCPI, Inc.
Notes to Consolidated Financial Statements - Continued
September 30, 2016 and December 31, 2015
(Unaudited)
Note F - Notes Payable to Stockholders - Continued
Through September 30, 2016 and December 31, 2015, respectively, an aggregate of approximately $818,770 and $607,314, inclusive of the effect of the June 1, 2016 Settlement Agreement, as the lender continues to advance funds to support the Company’s working capital needs. The Company is delinquent in making the required monthly installment payments.
Note G - Income Taxes
The components of income tax (benefit) expense for the each of the nine months ended September 30, 2016 and 2015, respectively, are as follows:
|
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Nine months
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|
|
Nine months
|
|
|
|
ended
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|
|
ended
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|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Federal:
|
|
|
|
|
|
|
Current
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|
$
|
—
|
|
|
$
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—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
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|
State:
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|
|
|
|
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Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
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Total
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$
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—
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|
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$
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—
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|
As of September 30, 2016, the Company had aggregate net operating loss carryforward(s) to offset future taxable income of approximately $1,255,000. The amount and availability of any net operating loss carryforward(s) will be subject to the limitations set forth in the Internal Revenue Code. Such factors as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of any net operating loss carryforward(s).
The Company's income tax (benefit) expense for the each of the nine months ended September 30, 2016 and 2015, respectively, are as follows:
|
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Nine months
|
|
|
Nine months
|
|
|
|
ended
|
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|
ended
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September 30,
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September 30,
|
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|
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2016
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|
|
2015
|
|
|
|
|
|
|
|
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Statutory rate applied to income before income taxes
|
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$
|
(53,000
|
)
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|
$
|
(189,400
|
)
|
Increase (decrease) in income taxes resulting from:
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|
|
|
|
|
|
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State income taxes
|
|
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—
|
|
|
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—
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Other, including reserve for deferred tax asset
|
|
|
|
|
|
|
|
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and application of net operating loss carryforward(s)
|
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53,000
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|
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189,400
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Temporary differences, consisting primarily of the prospective usage of net operating loss carryforwards give rise to deferred tax assets and liabilities as of September 30, 2016 and December 31, 2015, respectively:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
Net operating loss carryforwards
|
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$
|
426,700
|
|
|
$
|
385,000
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|
Less valuation allowance
|
|
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(
426,700
|
)
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|
|
(
385,000
|
)
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|
|
|
|
|
|
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|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
During the nine months ended September 30, 2016 and for the year ended December 31, 2015, respectively, the valuation allowance against the deferred tax asset increased by approximately $41,700 and $251,000.
MCPI, Inc.
Notes to Consolidated Financial Statements - Continued
September 30, 2016 and December 31, 2015
(Unaudited)
Note H - Common Stock Transactions
On March 23, 2016, the Company filed an amendment to its Articles of Incorporation stating “After giving effect to a ten for one reverse split, Article III is amended to read as follows: The total number of shares of all classes of stock which the Corporation shall have the authority to issue is five hundred twenty five million (525,000,000) shares, of which five hundred million (500,000,000) shares, par value $0.001 per share, shall be designated as “Common Stock” and twenty five million (25,000,000) shares, par value $0.001 per share, shall be designated as “Preferred Stock.” The effect of this action is reflected in the accompanying financial statements as of the first day of the first period presented.
On January 15, 2015, the Company issued an aggregate of 50,000 shares for consulting services related to the provision of back-office and other management support services to marijuana dispensaries located in the State of Oregon. This stock was valued at $0.30 per share, which approximated the closing price on date of the issuance.
During the period ended March 31, 2015, South Beach Live, Inc., a corporation controlled by a majority shareholder of the Company, transferred 1,000,000 shares of its holdings in the Company’s common stock to consultants for ongoing services associated with marketing strategies. South Beach Live, Inc. is a related party and does not expect to be repaid for this transaction which was valued at approximately $300,000 and recorded as professional fees and contributed capital on the books of the Company.
On February 29, 2016, the Company filed a Definitive Information Statement on Schedule 14C with the Securities and Exchange Commission noting a pending 1 for 10 reverse split of the Company’s issued and outstanding common stock; as approved by the Company’s Board of Directors, and a concurrent amendment to the Company’s Articles of Incorporation setting the authorized capital of the Company from the authorized, as adjusted, 25,000,000 post-split shares of common stock to 500,000,000 shares of $0.001 par value common stock and the authorized, as adjusted, 250,000 post-split shares of preferred stock to 25,000,000 shares of $0001 par value preferred stock. The time to implement the reverse split action has expired and no further action is anticipated by the Company’s Board of Directors.
Note I - Preferred Stock
The Company is authorized to issue up to 25,000,000 shares of preferred stock, $0.001 par value. As of September 30, 2016, there are no shares of preferred stock issued and outstanding.
Note J - Subsequent Events
Management has evaluated all other activity of the Company through the issue date of the financial statements and concluded that no subsequent events have occurred that would require recognition in the accompanying financial statements or disclosure in the Notes to Consolidated Financial Statements.