NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017 and 2016, and THE YEAR ENDED DECEMBER 31, 2016
(Unaudited)
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. The Company provides advisory and consulting services specific to this industry, designs industry-specific
products and facilities, and manages a strategic group partnership that offers both exclusive and non-exclusive customer products
commonly used in the industry. American Cannabis Company, Inc. is a publicly listed company quoted on the OTCQB under the symbol
“AMMJ”.
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. 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.
Use
of Estimates in Financial Reporting
The preparation
of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of
assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the financial statements 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 in which 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.
Unaudited
Interim Financial Statements
The accompanying
unaudited financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments consisting of normal recurring entries necessary for a fair statement of the periods presented for: (a) the financial
position; (b) the result of operations; and (c) cash flows, have been made in order to make the financial statements presented
not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year.
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.
Accounts
Receivable
Accounts
receivable are recorded at the net value of face amount less an allowance for doubtful accounts. The Company evaluates its accounts
receivable periodically based on specific identification of any accounts receivable for which the Company deems the net realizable
value to be less than the gross amount of accounts receivable recorded; in these cases, an allowance for doubtful accounts is
established 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 March 31, 2017, and December 31, 2016, the Company’s
allowance for doubtful accounts was $62,295 and $31,421, respectively. The Company recorded bad debt expense during the three
months ended March 31, 2017 of $30,879 and $0 during the three months ended March 31, 2016.
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.
Inventory
Inventory
is comprised of products and equipment owned by the Company to be sold to end-customers. Inventory is valued at cost, based on
the specific identification method, unless and until the market value for the inventory is lower than cost, in which case an allowance
is established to reduce the valuation to market value. As of March 31, 2017, and December 31, 2016, market values of all of the
Company’s inventory were greater than cost, and accordingly, no such valuation allowances were recognized.
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.
Significant
Clients and Customers
For the
three months ended March 31, 2017, three customers individually accounted for $487,075 of the Company’s total revenues;
these customers accounted for approximately 78% of the Company’s total revenues for the period. For the three months ended
March 31, 2016, five customers individually accounted for $514,824 of the Company’s total revenues and, in the aggregate,
the comprised 95% of the Company’s revenues, for the period.
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. Costs associated with in-progress construction are capitalized as incurred and depreciation is consummated 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 did not capitalize any interest as of March 31, 2017.
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 had not recorded any impairment charges related to long-lived assets as of March 31,
2017 or December 31, 2016.
Beneficial
Conversion Feature
If the
conversion features of conventional convertible debt provides 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.
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
generates revenues from sales of industry-specific products and professional services consulting agreements. Consulting agreements
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 three-month
periods ended March 31, 2017 and March 31, 2016, 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
has some 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”). Revenues are
recognized in accordance with our 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, generally selling prices
of the separate elements are readily identifiable as the Company also sells those elements individually outside of a multiple
services engagement. Contracts with multiple elements are typically fixed-fee or on time basis. 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 services or deferred revenue in
the accompanying balance sheet. Revenues recognized for services performed, but not yet billed to clients are recorded as unbilled
services.
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 three months ended March 31, 2017 and March 31, 2016, sales returns were not significant
and as such, no sales return allowance had been recorded as of March 31, 2017 and December 31, 2016.
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
Selling
and Marketing costs are included as a component of selling and marketing expense and are expensed as incurred. During the three
months ended March 31, 2017 and March 31, 2016, these costs were $38,235 and $20,815, 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. The Company recognizes related compensation
costs on a straight-line basis over the requisite vesting period of the award. During the three months ended March 31, 2017 and
March 31, 2016, the Company had employee stock-based compensation expense of $299,000 and $7,529, 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. During the three months ended March 31, 2017 and March 31, 2016, there was no compensation expense for warrants
or stock options.
Income
Taxes
The Company’s
corporate status changed from an S-Corporation, which it had been since inception, to a C-Corporation during the year ended December
31, 2014. 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, we were not subject to income taxes for the three months ended March 31, 2014. 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 three months ended March 31, 2017, due to cumulative losses since
our corporate status changed, we recorded a valuation allowance against our deferred tax asset that reduced our income tax benefit
for the period to zero. As of March 31, 2017, and December 31, 2016, we had no liabilities related to federal or state income
taxes and the carrying value of our deferred tax asset was zero.
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.
Pursuant
to ASC 850-10-20, 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.
See Note
10, “Related Party Transactions” for associated disclosures.
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 that would have an anti-dilutive effect
on earnings.
Due to
the Company’s net losses for the three months ended March 31, 2017, any potentially dilutive shares outstanding for these
periods, respectively, were not presented in the EPS computations, as their effect would have been antidilutive.
Recent
Accounting Pronouncements
The
Company has reviewed all the recently issued, but not yet effective, accounting pronouncements and it does not believe any of
these pronouncements will have a material impact on the Company.
Reclassifications
Prior
year amounts have been reclassified to conform to the current year presentation.
Note
3. Accounts Receivable, net
Accounts
receivable, net, was comprised of the following as of March 31, 2017 and December 31, 2016:
|
|
March
31,
2017
|
|
December 31, 2016
|
Gross
accounts receivable
|
|
$
|
179,610
|
|
|
$
|
195,872
|
|
Less:
allowance for doubtful accounts
|
|
|
(62,295
|
)
|
|
|
(31,421
|
)
|
Accounts
receivable, net
|
|
$
|
117,315
|
|
|
$
|
164,481
|
|
The Company
had bad debt expense during the three months ended March 31, 2017 of $30,879. During the three months ended March 31, 2017 and
2016, the Company wrote-off old receivables and their related allowances for bad debts of $5 and $0, respectively.
Note
4. Inventory
Inventory
as of March 31, 2017 and December 31, 2016 consisted of the following:
|
|
March 31,
2017
|
|
December
31, 2016
|
Raw materials
|
|
$
|
12,192
|
|
|
$
|
16,614
|
|
Work in progress
|
|
|
3,601
|
|
|
|
—
|
|
Finished goods
|
|
|
20,197
|
|
|
|
25,886
|
|
Total
|
|
$
|
28,788
|
|
|
$
|
42,500
|
|
Note
5. Property and Equipment
Property
and equipment, net, was comprised of the following as of March 31, 2017 and December 31, 2016:
|
|
March 31,
2017
|
|
December
31, 2016
|
Office equipment
|
|
$
|
9,275
|
|
|
$
|
9,275
|
|
Furniture and fixtures
|
|
|
9,949
|
|
|
|
10,175
|
|
Machinery and equipment
|
|
|
2,337
|
|
|
|
2,337
|
|
Property and equipment, gross
|
|
|
21,561
|
|
|
|
21,787
|
|
Less: accumulated depreciation
|
|
|
(11,253
|
)
|
|
|
(10,148
|
)
|
Property and equipment,
net
|
|
$
|
10,308
|
|
|
$
|
11,639
|
|
Note
6. Other Assets
Other
assets were comprised of the following as of March 31, 2017 and December 31, 2016:
|
|
March 31,
2017
|
|
December
31, 2016
|
Deposits
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
Joint venture investments
|
|
|
55,000
|
|
|
|
—
|
|
Other assets
|
|
$
|
59,500
|
|
|
$
|
4,500
|
|
Deposits
as of March 31, 2017 and December 31, 2016 reflect down payments made to vendors and service providers.
As of March
31, 2017, the Company entered into a joint venture exchanging services valued at $55,000 for a 1% equity ownership in the joint
venture. As of March 31, 2017, the joint venture has yet to begin operations.
Note
7. Accrued and Other Current Liabilities
Accrued
and other current liabilities was comprised of the following at March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
|
|
December 31, 2016
|
Accrued payroll liabilities
|
|
|
115,000
|
|
|
|
12,903
|
|
Other accruals
|
|
|
61,220
|
|
|
|
14,986
|
|
Accrued and other current liabilities
|
|
$
|
176,220
|
|
|
$
|
36,724
|
|
Note
8. Related Party Transactions
During
the three months ended March 31, 2017, the Company incurred $10,650 of expense payable to Prince & Tuohey CPA, Ltd., a company
in which J. Michael Tuohey, the Company’s Chief Financial Officer, is an owner. Amounts owed as of March 31, 2017 and December
31, 2016, were $0 and $14,325, respectively.
Note
9. Stock-based Compensation
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.
The following
table summarizes the Company’s restricted share award activity during the three months ended March 31, 2017:
|
|
|
|
Weighted Average
|
|
|
Restricted Shares
|
|
Grant Date
|
|
|
Common Stock
|
|
Fair Value
|
Outstanding unvested at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
930,227
|
|
|
|
0.92
|
|
Vested restricted shares
|
|
|
(200,000
|
)
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding unvested at March 31, 2017
|
|
|
730,227
|
|
|
$
|
-
|
|
During
the three months ended March 31, 2017 and 2016, the Company granted 930,227 and 0 restricted shares respectively, and total stock-based
compensation expense for restricted shares was $299,000 and $7,259 for the three months ended March 31, 2017 and 2016, respectively.
Warrants
As of March
31, 2017, and December 31, 2016, the Company issued fully-vested warrants to the Company’s independent board member 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
were outstanding, exercisable within five (5) years of the date of issuance on November 19, 2014. The grant date fair value of
the warrants, as calculated based on the Black-Scholes valuation model, was $0.59 per share. There were no outstanding unvested
warrants or new issuances of warrants during the three months ended March 31, 2017; consequently, no stock-based compensation
expense associated with warrants was recorded during the three months ended March 31, 2017.
As of March
31, 2017, and December 31, 2016, as the exercise price per share exceeded the price per share of our common shares, there was
no aggregate intrinsic value of outstanding warrants. As of March 31, 2017, and December 31, 2016, the warrants had 2.8 and 3.2
years remaining until expiration, respectively. No warrants were issued or outstanding during or preceding the three months ended
March 31, 2017.
Stock
Options
In addition
to the warrants as described above, the Company’s independent board member 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.
Stock
Issuable in Compensation for Professional Services
From time
to time, the Company enters into agreements whereby a professional service provider will be compensated for services rendered
to the Company by shares of common stock in lieu of cash. During the three months ended March 31, 2017, no common stock was issued.
Note
10. Stockholders’ Equity
Preferred
Stock
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 three months ended March 31, 2017, and 2016 respectively.
Common
Stock
American
Cannabis Company, Inc. is authorized to issue 100,000,000 common shares at $0.00001 par value per share.
On January
4, 2017, the Company issued 430,227 restricted shares to employees, valued at $184,000.
On
January 10, 2017, pursuant to the amended and restated Investment Agreement between the Company and Tangiers Global, LLC, the
Company sold 588,841 registered common shares to Tangiers for $414,544 net of applicable financing costs received March 3, 2017.
On
February 22, 2017, pursuant to the amended and restated Investment Agreement between the Company and Tangiers Global, LLC, the
Company sold 320,549 registered common shares to Tangiers for $188,143 net of applicable financing costs received on March 3,
2017.
Note
11. Subsequent Events
Except
as discussed below, we have evaluated all events that occurred after the balance sheet date through the date when our financial
statements were issued to determine if there were any reportable subsequent events. Management has determined that there were
no reportable subsequent events to be disclosed.
On April
11, 2017, the Company issued 8,955 common shares to its former Chief Financial Officer, Jesus Quintero, pursuant to a contract.