NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 and 2015
Note 1.
Description of the Business
American Cannabis
Company, Inc. and its subsidiary Company, Hollister & Blacksmith, Inc., doing business as American Cannabis Consulting (“American
Cannabis Consulting”), (collectively “the “Company”) are based in Denver, Colorado and operate a fully-integrated
business model that features end-to-end solutions for businesses operating in the regulated cannabis industry in states and countries
where cannabis is regulated and/or has been de-criminalized for medical use and/or legalized for recreational use. We provide
advisory and consulting services specific to this industry, design industry-specific products and facilities, and sell both exclusive
and non-exclusive customer products commonly used in the industry.
Note
2. Summary of Significant Accounting Policies
Basis
of Accounting
The financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.
GAAP"). The Company has elected a fiscal year ending on December 31.
Use of
Estimates in Financial Reporting
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts
of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and
reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates
and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period
they are deemed to be necessary. Significant estimates made in the accompanying financial statements include but are not limited
to following: those related to revenue recognition, allowance for doubtful accounts and unbilled services, lives and recoverability
of equipment and other long-lived assets, contingencies and litigation. The Company is subject to uncertainties, such as the impact
of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results
may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent
liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company's
financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and
as the Company's operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements
in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates
are disclosed in the notes to the financial statements.
Cash
and Cash Equivalents
The Company
considers 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. Cash balances may exceed federally insured limits.
Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date. As
of December 31, 2016, and 2015, the Company had cash balances in excess of FDIC insured limits of $453,691 and $130,667, respectively.
Inventory
Inventory is
comprised of products and equipment owned by the Company to be sold to end-customers. Inventory is valued at cost, using the first-in
first-out and specific identification methods, 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 of December 31, 2016, market values of all of the
Company’s inventory were greater than cost, and accordingly, no such valuation allowances was recognized.
Deposits
Deposits is
comprised of advance payments made to third parties, primarily for inventory for which the Company has not yet taken title. When
the Company takes 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.
Accounts
Receivable
Accounts receivable
are recorded at the net value of face amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates
its accounts receivable and, based on a method of specific identification of any accounts receivable for which it deems the net
realizable value to be less than the gross amount of accounts receivable recorded, establishes an allowance for doubtful accounts
for those balances. In determining its need for an allowance for doubtful accounts, the Company considers historical experience,
analysis of past due amounts, client creditworthiness and any other relevant available information. However, the Company’s
actual experience may vary from its estimates. If the financial condition of its clients were to deteriorate, resulting in their
inability or unwillingness to pay the Company’s fees, it may need to record additional allowances or write-offs in future
periods. This risk is mitigated to the extent that the Company receives retainers from its 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 of December 31, 2016, and December 31, 2015 our allowance
for doubtful accounts was $31,421 and $8,419, respectively. For December 31, 2016 and December 31, 2015, we recorded bad debt
expense of $118,641 and $30,753, respectively, which is reflected as a component of general and administrative expenses on the
consolidated statement of operations.
Significant
Customers
For
the year ended December 31, 2016 and December 31, 2015, in the aggregate, three customers, respectively, accounted for 46% and
74% of the Company’s total revenues for each respective period.
On
a geographical basis, for the year ended December 31, 2016, approximately 92% and 5% of our total revenues were generated from
the United States and Canada, respectively, and for the year ended December 31, 2015, approximately 91% and 9% of our total revenues
were generated from the United States and Canada.
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. Property and equipment is reviewed for impairment as discussed below under “Accounting
for the Impairment of Long-Lived Assets.” The Company had not capitalized any interest as of December 31, 2016 and 2015.
Accounting
for the Impairment of Long-Lived Assets
The Company
evaluates 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. The Company did not record any impairment charges related to long-lived assets during the years
ended December 31, 2016 and 2015.
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”). A BCF is recorded by the Company 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 the Company amortizes the discount to interest expense over the life of the debt using the effective interest
method.
Embedded
Conversion Features
The Company
evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine
whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at
fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under
ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of
any beneficial conversion features.
Derivative
Financial Instruments
Fair value
accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments,
and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes
option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument
is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument
is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative
financial instruments.
Once determined,
derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair
value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding
derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Revenue
Recognition
Revenue is
recognized in accordance with FASB ASC Topic 605,
Revenue Recognition
. The Company recognizes revenue when persuasive evidence
of an arrangement exists, the related services are rendered or delivery has occurred, the price is fixed or determinable and collectability
is reasonably assured.
The Company
primarily generates revenues from professional services consulting agreements. These arrangements are generally entered into on
a time basis, for a fixed-fee or on a contingent fee basis. Generally, a prepayment or retainer is required prior to performing
services.
Revenues from
time-based engagements are recognized as the hours are incurred by the Company.
Revenues from
fixed-fee engagements are recognized under the completed or proportional performance methods. Management reviews arrangement to
determine whether or not the fixed-fee is for a final deliverable or act which is significant to the arrangement as a whole. If
it is, revenue is recognized under the completed performance method, in which revenue is recognized once the final act or deliverable
is performed or delivered. Revenue recognized under the proportional performance method is recognized as services are performed.
Under this method, the Company estimates the amount of completed work in comparison to the total services to be provided under
the arrangement or deliverable in order to determine the amount of revenue to be recognized. Revenue recognition is affected by
a number of factors that change the estimated amount of work required to complete the deliverable, such as changes in scope, timing,
awaiting notification of license award from local government, and the level of client involvement. Losses, if any, on fixed-fee
engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. During the year ended
December 31, 2016 and December 31, 2015, no such losses have occurred. The Company believes if an engagement terminates prior
to completion it can recover the costs incurred related to the services provided.
The Company
occasionally enters into arrangements for which revenues are contingent upon achieving a pre-determined deliverable or future
outcome. Any contingent revenue for these arrangements is not recognized until the contingency is resolved and collectability
is reasonably assured.
The Company’s
arrangements with clients may include terms to deliver multiple services or deliverables. These contracts specifically identify
the services to be provided with the corresponding deliverable. The value for each deliverable is determined based on the prices
charged when each element is sold separately or by other vendor-specific objective evidence (“VSOE”), or estimates
of stand-alone selling prices. Revenues are recognized in accordance with the Company’s accounting policies for the elements
as described above. The elements qualify for separation when the deliverables have value on a stand-alone basis and the value
of the separate elements can be established by VSOE or an estimated selling price.
While assigning
values and identifying separate elements requires judgment, selling prices of the separate elements are generally readily identifiable
as the Company also sells those elements individually outside of a multiple services engagement. Contracts with multiple elements
typically incorporate a fixed-fee or hourly pricing structure. Arrangements are typically terminable by either party upon sufficient
notice and do not include provisions for refunds relating to services provided.
Differences
between the timing of billings and the recognition of revenue are recognized as either unbilled revenue (a component of accounts
receivable) or deferred revenue on the consolidated balance sheet. Revenues recognized for services performed but not yet billed
to clients are recorded as unbilled revenue.
Reimbursable
expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included as a component
of revenues. Typically, an equivalent amount of reimbursable expenses are included in total direct client service costs. Reimbursable
expenses related to time and materials and fixed-fee engagements are recognized as revenue in the period in which the expense
is incurred and collectability is reasonably assured. Taxes collected from customers and remitted to governmental authorities
are presented in the statement of operations on a net basis.
Revenue from
product and equipment sales, including delivery fees, is recognized when an order has been obtained, the price is fixed and determinable,
the product is shipped, title has transferred and collectability is reasonably assured. Generally, our suppliers’ drop-ship
orders to our clients with origin terms. For any shipments with destination terms, the Company defers revenue until delivery to
the customer. During the year ended December 31, 2016 and December 31, 2015, sales returns were not significant and as such, no
sales return allowance had been recorded as of December 31, 2016 nor at December 31, 2015. During the year ended December 31,
2016, the Company generated revenue from the sale of products to an entity controlled by a shareholder (Director).
Costs
of Revenues
The Company’s
policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenue includes 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 year
ended December 31, 2016 and 2015, these costs were $88,047 and $79,989, respectively.
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 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 ended December 31, 2016 and 2015, stock-based compensation expense for restricted shares for Company employees
and service providers was $30,208 and $319,187, 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. During the year ended December 31, 2016 and 2015, compensation expense for warrants and options
was $0, respectively.
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 years ended December 31, 2016 and 2015, we
recorded a valuation allowance against our deferred tax asset that reduced our income tax benefit for the period to zero. As of
December 31, 2016, and, we had no liabilities related to federal or state income taxes and the carrying value of our deferred
tax asset was zero.
Net Income
(Loss) Per Common Share
The Company
reports 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 since that would have an anti-dilutive
effect on earnings.
Related
Party Transactions
The Company
follows FASB ASC subtopic 850-10,
Related Party Disclosures
, for the identification of related parties and disclosure of
related party transactions. Related parties include: a) affiliates of the Company; 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. During the
year ended December 31, 2016, the Company generated revenue from the sale of products to an entity controlled by a shareholder
(Director). See Note 10. Related Party Transactions for associated disclosures.
Reclassifications
Certain
balance sheet reclassifications have been made to prior period balances to reflect the current period’s presentation format;
such reclassifications had no impact on the Company’s consolidated statements of operations or consolidated statements of
cash flows and had no material impact on the Company’s consolidated balance sheets.
Recent
Accounting Pronouncements
In
August 2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements – Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”).
By incorporating and expanding upon certain principles that are currently in U.S. auditing standards, ASU 2014-15 requires management
to assess whether there is substantial doubt about the entity’s ability to continue as a going concern. Specifically, ASU
2014-15 (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim
periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures
when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement
and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after
the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period
ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company
has not elected to early adopt the provisions of ASU 2014-15, and accordingly, the requirements of ASU 2014-15 will apply beginning
with the year ended December 31, 2017. The Company is currently evaluating the effects, if any, that the application of ASU 2014-15
will have on disclosures associated with its consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-9”),
which provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the
transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for
those goods or services. This guidance is effective for annual reporting and interim periods beginning after December 15,
2016 and allows for either full retrospective or modified retrospective application, with early adoption not permitted. Accordingly,
the standard becomes effective for the Company on January 1, 2017. The Company is currently evaluating the adoption method
it will apply and the impact that this guidance will have on its consolidated financial statements and related disclosures.
In
February 2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic
842). Under the new guidance, the following will be required to be recognized for all leases (with the exception of short-term
leases) as of the commencement date:
|
|
•
|
A
lease liability, which is a lessee‘s obligation to make lease payments arising
from a lease, measured on a discounted basis; and
|
|
|
•
|
A
right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term.
|
|
|
•
|
Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements
were made to align, where necessary, lessor accounting with the lessee accounting model
and Topic 606, Revenue from Contracts with Customers.
|
|
|
•
|
The
new lease guidance simplified the accounting for sale and leaseback transactions primarily
because lessees must recognize lease assets and lease liabilities. Lessees will no longer
be provided with a source of off-balance sheet financing.
|
Public
business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). The Company is currently evaluating the
effects, if any, that the application of ASU 2016-02 will have on disclosures associated with its consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation —Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments
and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based
payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity
or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments are effective for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the
amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning
after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period. The Company is currently
evaluating the effects, if any, that the application of ASU 2016-09 will have on disclosures associated with its consolidated
financial statements.
In
April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance
obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in
Topic 606. The Company is currently evaluating the effects, if any, that the application of ASU 2016-10 will have on disclosures
associated with its consolidated financial statements.
In
January 2017, FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business, clarifying the definition of a business. The amendments affect all companies and other reporting organizations
that must determine whether they have acquired or sold a business. For public companies, the amendments are effective for annual
periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating
the effects, if any, that the application of ASU 2017-01 will have on disclosures associated with its consolidated financial statements.
Note 3.
Accounts Receivable, net
Accounts
receivable, net, was comprised of the following:
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Gross accounts receivable
|
|
$
|
195,872
|
|
|
$
|
56,704
|
|
|
Less: allowance for doubtful accounts
|
|
|
(31,421
|
)
|
|
|
(8,419
|
)
|
|
Accounts receivable, net
|
|
$
|
164,451
|
|
|
$
|
48,285
|
|
For
the years ended December 31, 2016 and December 31, 2015, the Company had bad debt expense of $118,641 and $30,753, respectively.
Note 4
Inventory
Inventory
as of December 31, 2016 and 2015 consisted of the following:
|
|
|
December
31, 2016
|
|
December
31, 2015
|
|
Raw
materials
|
|
$
|
16,614
|
|
|
$
|
—
|
|
|
Demo
|
|
|
—
|
|
|
|
57,170
|
|
|
Finished
goods
|
|
|
25,886
|
|
|
|
10,265
|
|
|
Total
|
|
$
|
42,500
|
|
|
$
|
67,435
|
|
Note
5. Property and Equipment, net
Property
and equipment, net, was comprised of the following:
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Office
equipment
|
|
$
|
7,472
|
|
|
$
|
7,472
|
|
|
Furniture
and fixtures
|
|
|
8,777
|
|
|
|
8,777
|
|
|
Machinery
and equipment
|
|
|
4,938
|
|
|
|
2,336
|
|
|
Property
and equipment, gross
|
|
|
21,187
|
|
|
|
18,585
|
|
|
Less:
accumulated depreciation
|
|
|
(10,148
|
)
|
|
|
(5,137
|
)
|
|
Property
and equipment, net
|
|
$
|
11,639
|
|
|
$
|
13,448
|
|
For
the year ended December 31, 2016 and December 31, 2015, the Company recorded depreciation expense of $5,173 and $3,575, respectively.
Note 6.
Convertible Notes Payable
The Company
had convertible debentures which were originally issued on April 24, 2014, maturing on April 24, 2016, paid zero interest, and
were convertible until maturity at the holders’ discretion into shares of the Company’s common stock at $0.08 per
share. On April 11, 2016, the maturity date on this note was renegotiated to April 24th, 2018. On April 12, 2016, the Company
received notice of a partial conversion of the outstanding balance due in the amount of $58,000 that was converted into 725,000
shares of common stock at a price of $0.08 per share. On May 6, 2016, the Company received notice for the conversion of the remaining
balance of the note in the amount of $13,500 that was converted into 168,750 shares of common stock at a price of $0.08 per share.
The unamortized debt discount was applied to additional paid in capital.
On June 23,
2016, the Company entered into two convertible promissory notes: one for $50,000 and one for $330,000. As of the date of this
filing, the Company received $330,000 in principal less origination discounts of $24,750. The maturity date for each note was
February 14, 2017. Each note paid 8% fixed guaranteed interest and was convertible at the holder’s discretion into shares
of the Company’s common stock at a conversion formula based on the closing bid price of our common stock used to determine
the conversion price per share. The conversion formula created an embedded conversion feature. The Company valued this conversion
feature on the first $150,000 advance and guaranteed interest at origination at $90,222 using the Black Scholes valuation model
with the following assumptions: dividend yield of zero, 236 day term to maturity, risk free interest rate of 0.474% and annualized
volatility of 125%. The value of the conversion feature was assigned to the derivative liability and created a conversion debt
discount to be amortized over the life of the convertible debt.
On August 4,
2016, the notes were amended and restated to change the conversion formula used to determine the conversion price per share to
a fixed price of $0.1135 per share, and to delete a provision that provided for repayment of the notes through a separate investment
agreement providing for the Company to sell its registered shares to an investor. Based on the August 4, 2016 amendment to the
convertible feature of the note payable, The Company revalued the conversion feature on the first $150,000 advance as of the date
of the amendment at $75,773 which yielded a change in derivative liabilities of $14,449. The Company utilized the Black Scholes
valuation model with the following assumptions: dividend yield of zero, 194-day term to maturity, risk free interest rate of 0.409%
and annualized volatility of 109%. The resulting change in the value of the conversion feature exceeded 10% of the debt’s
carrying value, and we recognized a loss on extinguishment of debt of $7,639.
On December
5, 2016, the Company received notice for the conversion of the first $150,000 advance and related guaranteed interest of $12,000.
The Company issued 1,427,313 shares of common stock in accordance with the amended conversion formula and price
On December
28, 2016, the Company remaining outstanding convertible debt balance of $180,000 and related guaranteed interest of $14,400 along
with prepayment penalty interest of $19,440.
Note
7. Accrued and Other Current Liabilities
Accrued
and other current liabilities consisted of the following:
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Accrued
legal fees
|
|
$
|
8,835
|
|
|
$
|
—
|
|
|
Accrued
payroll liabilities
|
|
|
12,903
|
|
|
|
18,185
|
|
|
Accrual
for inventory products sold and shipped (in transit)
|
|
|
—
|
|
|
|
64,050
|
|
|
Other
|
|
|
14,986
|
|
|
|
11,233
|
|
|
Accrued
and other current liabilities
|
|
$
|
36,724
|
|
|
$
|
93,468
|
|
Note
8. Related Party Transactions
For the year
ended December 31, 2016, the Company generated $3,768 in revenue from the sale of SoHum Soil to Dixie Brands, an entity controlled
by Vincent Keber, III, a Director.
During the
year ended December 31, 2015, the Company incurred $38,360 of expense payable to New Era CPAs, an accounting firm in which Antonio
Migliarese, the Company’s former Chief Financial Officer, was a partner.
During the
year ended December 31, 2015 the Company sold $25,214 of equipment and supplies to an entity controlled by Vincent Keber, III,
a Director of the Company. As of December 31, 2015, the Company was owed $17,512 from this entity.
During the
year ended December 31, 2016, the Company incurred $40,922 of expenses to JDE Development LLC, an accounting firm in which, the
Company’s form Chief Financial Officer, is a partner.
During the
year ended December 31, 2016, the Company incurred $34,250 of expenses to Prince & Tuohey CPA, LTD, an accounting firm in
which, the Company’s Chief Financial Officer, is a partner. As of December 31, 2016, the Company had $14,325 due to this
related party.
Note
9. Commitments and Contingencies
Under the terms
of our agreement with the manufacturer of our exit packing product, the Satchel
TM
, we were committed to the purchase
of a total of 500,000 units during 2015. During 2015, the Company met its purchase obligation, and on September 2015 the Company
exercised its contractual right to purchase additional units at a negotiated price.
Under the terms
of the Company’s various consulting agreements with clients, the Company is obligated to perform certain future services.
On January
20, 2016, we were named as a defendant in a civil suit entitled: Anthony Baroud vs. Hollister & Blacksmith, Inc., dba American
Cannabis Company filed in the Circuit Court of Cook County, Illinois. The lawsuit sought damages of $100,000 related to a terminated
employment contract. The Company filed a motion to dismiss the case based upon the employment contract, which required mandatory
contractual arbitration of disputes. On May 18, 2016, the Circuit Court of Cook County, Illinois granted the Company’s motion
and the case was dismissed. On November 1, 2016, the Company received notice of a demand for arbitration filed with the American
Arbitration Association by Mr. Baroud on October 27, 2016. The Company filed an answer denying liability and a cross compliant
for damages against Mr. Baroud. The case is in litigation and an arbitration hearing is set for September 11-12, 2017. Based upon
available information at this very early stage of litigation, management believes the likelihood of material loss resulting from
this action to be remote.
On
July 28, 2015, the Company entered into a 5-year lease for 6,500 square feet of office space to house its corporate offices. Under
the terms of the lease, payments are $4,500 per month for the first 36 months of the lease, and escalate thereafter.
Rent expense
was $54,084 and $53,800 for the years ended December 31, 2016 and 2015, respectively.
The
following table summarizes the Company’s future lease obligations:
|
Year
|
|
Amount
|
|
|
2017
|
|
|
$
|
54,000
|
|
|
|
2018
|
|
|
|
54,000
|
|
|
|
2019
|
|
|
|
56,320
|
|
|
|
2020
|
|
|
|
33,610
|
|
|
|
Total
|
|
|
$
|
143,930
|
|
Note
10. Stock-based Compensation
During
the year ended December 31, 2016 and December 31, 2015, stock-based compensation expense for restricted shares to Company employees
and service providers was $30,208 and $319,187, which was the result of the following activity:
Restricted
Shares
From
time to time, the Company grants certain employees restricted shares of its common stock to provide further compensation in-lieu
of wages and to align the employee’s interests with the interests of its stockholders. Because vesting is based on continued
employment, these equity-based incentives are also intended to attract, retain and motivate personnel upon whose judgment, initiative
and effort the Company’s success is largely dependent. There were 220,100 shares granted as of December 31, 2016. The fair
value of restricted stock units is determined based on the quoted closing price of the Company’s common stock on the date
of grant.
The
following table summarizes the Company’s restricted share award activity during the years ended December 31, 2016 and 2015:
|
|
Restricted Shares
Common Stock
|
|
Weighted Average
Grant Date Fair Value
|
|
|
Outstanding
unvested at December 31, 2014
|
|
|
150,000
|
|
|
$
|
0.94
|
|
|
|
Granted
|
|
|
164,981
|
|
|
|
0.21
|
|
|
|
Vested restricted
shares
|
|
|
(100,000
|
)
|
|
|
0.94
|
|
|
|
Forfeited
|
|
|
(50,000
|
)
|
|
|
0.94
|
|
|
|
Outstanding unvested
at December 31, 2015
|
|
|
164,981
|
|
|
|
0.21
|
|
|
|
Granted
|
|
|
267,172
|
|
|
|
0.11
|
|
|
|
Vested restricted
shares
|
|
|
(323,553
|
)
|
|
|
0.15
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
Outstanding
unvested at December 31, 2016
|
|
|
—
|
|
|
$
|
—
|
|
During the
year ended December 31, 2016, the Company granted 158,572 restricted shares to Company employees and service providers and recognized
$30,208 in associated stock-based compensation expense. During the year ended December 31, 2015, the Company granted 164,981 restricted
shares and recognized $319,187 in associated employee stock based compensation expense.
Warrants
In
connection with his appointment to the Company’s board of directors, the Company granted its independent board member, Vincent
“Tripp” Keber, warrants to purchase up to two hundred and fifty thousand (250,000) shares of common stock at an exercise
price of sixty-three cents ($0.63) per share, exercisable within five (5) years of the date of issuance on November 19, 2014.
Additionally, Mr. Keber shall be eligible to receive options for 400,000 shares of common stock under the Company’s incentive
plan, as and when duly approved by the Board of Directors.
The
Company used the Black-Scholes valuation model to determine the fair value of warrants as of the grant date. Assumptions used
in this calculation for the warrant award to purchase 250,000 shares of common stock include expected volatility of 160.7%, based
on an average of historical data of the Company’s stock price and the stock prices of three comparable companies that are
also included in the marijuana index, a risk-free rate of 1.62%, based on U.S. Treasury yields as published by the Federal
Reserve, a dividend yield of 0.0%, as the Company has not historically paid dividends nor does it have any plans to do so in the
foreseeable future, and an expected term of five years. The grant date fair value of the warrants, as calculated based on these
assumptions, was $0.59 per share.
During
2016 the Company had no warrant activity. During 2016 and 2015, the Company had the following warrant activity:
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Common
Stock Warrants
|
|
|
|
Grant
Date Fair Value
|
|
|
Outstanding
at December 31, 2014
|
|
|
250,000
|
|
|
$
|
0.59
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Expired
or forfeited
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
at December 31, 2015
|
|
|
250,000
|
|
|
$
|
0.59
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Expired
or forfeited
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
at December 31, 2016
|
|
|
250,000
|
|
|
$
|
0.59
|
|
|
Vested
at December 31, 2016
|
|
|
250,000
|
|
|
$
|
0.59
|
|
As
of December 31, 2016, the price per share exceeded the exercise price per share of our common shares, resulting in an aggregate
intrinsic value of $40,000 of the outstanding warrants.
Note 11.
Income Taxes
As
part of the Reverse Merger on September 29, 2014, the Company’s corporate status changed from an S-Corporation, which it
had been since inception, to a C-Corporation. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes,
S-Corporations are not subject to corporate income taxes; instead, the owners are taxed on their proportionate share of the S-Corporation’s
taxable income. Accordingly, the Company’s accumulated net losses prior to September 29, 2014 were not subject to income
tax.
The following
table displays a reconciliation from the U.S. statutory rate to the effective tax rate and the provision for (benefit from) income
taxes for the years ended December 31, 2016 and 2015, respectively:
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Tax benefit at the US statutory rate of 34%
|
|
$
|
205,253
|
|
|
$
|
175,322
|
|
|
State income tax benefit
|
|
|
27,951
|
|
|
|
23,875
|
|
|
Non-deductible expenses including non-deductible pre-merger losses
|
|
|
—
|
|
|
|
(773
|
)
|
|
Change in valuation allowance
|
|
|
(233,204
|
)
|
|
|
(198,424
|
)
|
|
Total income tax benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax
assets (liabilities) consisted of the following:
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Net operating loss carryforwards
|
|
$
|
441,067
|
|
|
$
|
212,106
|
|
|
Beneficial conversion feature accumulated amortization
|
|
|
13,791
|
|
|
|
13,791
|
|
|
Allowance for Doubtful Accounts
|
|
|
13,727
|
|
|
|
—
|
|
|
Valuation allowance
|
|
|
(468,585
|
)
|
|
|
(235,381
|
)
|
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Due to cumulative
net losses since the change in our corporate status to a C-Corporation, the Company determined that it is not more likely than
not that its deferred tax asset would be realizable. Accordingly, the Company recorded a valuation allowance for the full amount
of its deferred tax asset, resulting in a zero carrying value of the Company’s deferred tax asset and no benefit from or
provision for income taxes for the year ended December 31, 2016 and 2015. Federal and state operating loss carry forwards of $1,141,773
and $549,070 as of December 31, 2016 and 2015, respectively, begin expiring on 2034. The years 2010 to 2015 remain subject to
examination by the Company’s major tax jurisdictions.
Utilization
of the net operating loss carry forwards and credits may be subject to a substantial annual limitation due to ownership change
limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions.
Note 12.
Stockholders’ Equity
Preferred
Stock
The American
Cannabis Company, Inc. is authorized to issue 5,000,000 shares of preferred stock at $0.01 par value.
No shares of
preferred stock were issued and outstanding during the year ended December 31, 2016 and 2015.
Common Stock
The American
Cannabis Company, Inc. is authorized to issue 100,000,000 shares of common stock at $0.0001 par value. As of December 31, 2016,
and 2015, the Company had 49,847,593 and 44,808,731 shares issued and outstanding, respectively.
In connection
with the September 29, 2014 Reverse Merger, American Cannabis Consulting was deemed to have been the accounting acquirer in accordance
with U.S. GAAP. Consequently, the Company’s consolidated financial statements reflect the results of American Cannabis
Consulting since Inception (March 5, 2013) and of American Cannabis Company, Inc. (formerly BIMI) from September 29, 2014 to December
31, 2014.
As a reverse
triangular merger, the Reverse Merger resulted in a recapitalization of American Cannabis Company, Inc. (formerly BIMI). This
recapitalization included retrospective restatement of all stock issuances by American Cannabis Consulting from Inception (March
5, 2013), whereby the issued and outstanding shares of American Cannabis Consulting common stock were retrospectively restated
for a 1:3,171.0628 forward share split to recognize the exchange ratio associated with the Reverse Merger, and for the change
in the par value of shares issued in connection with the Reverse Merger.
On the date
of the Reverse Merger, an additional 8,714,372 shares were issued, and accordingly, $87 of common stock was recorded (8,714,372
shares issued multiplied by the $0.00001 par value) and additional paid-in capital of $5,258 was recorded, reflecting the net
assets assumed from Brazil Interactive Media, Inc. in connection with the Reverse Merger.
As a result
of the transactions described above, as of December 31, 2014, the balances of common stock and additional paid-in capital were
$446 and $3,699,526, respectively.
During the
year ended December 31, 2015, the Company rescinded and canceled 250,000 shares of restricted common stock.
The Company
issued 250,000 shares of restricted common stock to various vendors for $195,087 during the year ended December 31, 2015.
The Company
issued 164,981 shares of restricted common stock valued at $124,099 to various employees for services during the year ended December
31, 2015.
The Company
received $250,000 from an investor for the purchase of 833,333 shares of unrestricted common stock during the year ended December
31, 2015. These shares were issued to the investor during year ended December 31, 2016.
The Company
issued 195,260 shares of restricted common stock to various vendors for $13,968 during the year ended December 31, 2016.
The Company
issued 152,500 shares of restricted common stock valued at $16,240 to various employees for services during the year ended December
31, 2016.
As discussed
in Note 7, the company issued 2,321,063 shares of restricted common stock to convert outstanding convertible debt during the year
ended December 31, 2016.
Pursuant to
the amended and restated Investment Agreement, the Company sold 1,536,706 registered common shares to Tangiers for $858,247 net
of applicable financing costs in three separate transactions: On December 6, 2016, the Company sold 284,933 shares to Tangiers
in exchange for $ $159,688; and on December 14, 2016, the Company sold 628,536 shares to Tangiers in exchange for $ $370,082;
and, on December 27, 2016, the Company sold 623,237 shares to Tangiers in exchange for $370,701.
Note 13.
Subsequent Events
Effective
January 1, 2017, Mr. Corey Hollister resigned as our Principal Executive Officer. Effective January 1, 2017, Mr. Terry Buffalo
was appointed as our Principal Executive Officer.
On
January 4, 2017, the Company issued a total of 430,227 shares of restricted common stock to 9 employees and consultants pursuant
to consulting contracts and the Company’s 2015 Employee Incentive Plan.
On
January 10, 2017, the Company sold, pursuant to the amended and restated Investment Agreement, 588,841 shares of registered common
stock to Tangiers in exchange for $414,544.
On
February 22, 2017, the Company sold, pursuant to the amended and restated Investment Agreement, the Company sold 320,549 registered
common shares to Tangiers in exchange for $250,000.
SUPPLEMENTARY
DATA
The
Company is a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information
required under this item.