Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Information
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should”, “could”, “predicts”, “potential”, “proposed”, or “continue” or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of operations, impact of competition and other risks detailed below as well as those discussed elsewhere in this Form 10-Q and from time to time in the Company’s Securities and Exchange Commission filings and reports. In addition, general economic and market conditions and growth rates could affect such statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
General
These unaudited interim consolidated financial statements should be read in conjunction with the annual financial statements for the Company most recently completed fiscal year ended December 31, 2016. These unaudited interim consolidated financial statements do not include all disclosures required in annual financial statements, but rather are prepared in accordance with recommendations for interim financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited interim consolidated financial statements have been prepared using the same accounting policies and methods as those used by the Company in the annual audited financial statements for the year ended December 31, 2016.
Discussion on the Company’s Operations and Recent Event
MariJ Pharmaceuticals, Inc.
MariJ Pharma has a mobile CO2, supercritical extraction unit which was USDA certified Organic on September 28th, 2016, by
OneCert
, under the US National Organic Program; 7 CFR PART 205. MariJ Pharma extracts and processes very high quality, high-cannabinoid profile content medical grade cannabis oils from medicinal cannabis plants. As such, MariJ Pharma is authorized to process directly for certified organic farms and is able to produce
certified organic
cannabis oils.
The Company intends to acquire, through its MariJ Pharma subsidiary, portions or complete ownership of licenses and grow operations in one or more states and seeking to cultivate, organically extract and process its medicinal cannabis crops year round in indoor facilities. The acquisition of these licenses is anticipated to provide the Company with the opportunity to compound medicinal products using mixtures of high cannabinoid profile oils that have very little hallucinogenic properties but have significantly improved medicinal properties.
In addition, MariJ Pharma has the technical expertise and capability to process and formulate the oils and to employ them in its compounding operations. MariJ Pharma will seek to become engaged as owner or co-owner of a grow facility in Florida or other location(s) such as to produce its own plants for processing. MariJ Pharma has also been preparing for its newly-developed, proprietary GeoTraking Technology that is fully compliant with the Health Insurance Portability and Accountability standard (“HIPAA”) utilizing its “
plant to patient
” solution. This GeoTraking Technology is designed to provide a full-channel patient care tracking system that is fully compliant under today’s strict HIPAA regulations that require privacy and security of the patients’ information. Beginning with RFID labeling and tracking of every single seed employed in the grow program and continuing through the sale of prescription products in a sophisticated retail Point of Sale delivery system, the GeoTraking Technology will be one of the most advanced system available.
The Company’s primary source of revenue is from the extraction of medicinal cannabis oil, from a non-psychoactive cannabis plant. All extraction services are currently limited to the State of Colorado, as the Company is attempting to attain various licenses for business in the State of Florida.
It is anticipated that MariJ Pharma could generate revenues from the following activities:
1)
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Cannabis oil extraction and processing - MariJ Pharma has a unique mobile cannabis oil processing and extraction unit designed into a heavy-duty truck chassis. The unit has already begun performing extractions and processing of medical hemp oils at various sites in Colorado, and MariJ Pharma is currently developing additional contracts for services.
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2)
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Wholesale sale of raw and processed medical cannabis oils.
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3)
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Laboratory testing and certification services – As the demand for these services grows in the medical cannabis industry, MariJ Pharma is uniquely positioned to fulfill the growing demand for these services by utilizing its existing mobile laboratory and testing unit built on a heavy-duty truck chassis.
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4)
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Licensing and support of the Company’s GeoTraking Technology systems.
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5)
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Processing and compounding services for medical grade cannabis oils.
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The Company is preparing to seek additional investments and financing to pay the costs of constructing its second mobile oil extraction and processing unit, to finance final construction of its mobile laboratory and testing unit for the same industry, and to complete the roll-out of its GeoTraking Technology system. However, there can be no assurance that the Company will be successful in its plans to generate the required capital.
Canna-Cures Research and Development Center, Inc.
In August 2016, Canna-Cures began engaging in product development activities as well as retail distribution of medicinal Hemp products in Colorado. In July 2017, Canna-Cures closed its retail operations in Colorado and retained all its inventory as the Company begins to focus its developmental activities in Tennessee.
Eufloria Medical of Tennessee, Inc.
In addition to our current operations in the State of Colorado, the Company has been invited to be part of the hemp pilot program in Tennessee. This program provides the Company the license to grow, manufacture, and dispense USDA organic hemp oil in Tennessee and represents the first step in moving its operations to the east coast of the United States. The Company plans on participating in this pilot program through this new, wholly-owned subsidiary.
EMT will seek to align itself with institutions of higher learning in working to develop new products and to identify and develop additional uses for its medical cannabis products. It is anticipated that EMT could generate revenues from the following activities:
1)
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EMT will seek to enter into product development projects with institutions of higher learning in efforts to develop new and better strains of medical cannabis related products for dispensing as medications, nutraceuticals, cosmeceuticals, and probably dietary supplements. EMT anticipates participating in state and federal grants in conjunction with one or more universities as a means to defray part of its costs in these efforts.
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2)
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Private label packaging services - the Company has obtained a majority of the equipment required to engage in the business of packaging and labeling of medical cannabis oils, oil-infused products, and related items.
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3)
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Retail sales of medical cannabis oils, oil-infused products, and other merchandise through its web-based portal or retail dispensaries planned for that purpose. These activities are dependent in large part upon meeting FDA regulations and criteria relating to the sale and distribution of cannabis-infused products, and the Company is currently in the process of determining the status of those criteria.
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4)
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Retail and wholesale sales of cosmeceutical and nutraceutical products and dietary supplements containing its high-quality cannabis oil extracts, subject to compliance with FDA and other regulations.
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5)
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Growing high quality cannabis plants and extracting oil for sale or for manufacturing of oil-infused products.
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The Company will require additional capital to execute these plans and there can be no assurance that the Company will be successful in its plans to generate that capital.
Operating results for the three months ended June 30, 2017 and 2016:
For the three months ended June 30, 2017, the Company generated revenues of $132,715 from operations, compared to $0 for the three months ended June 30, 2016 since the Company earned revenues from its extraction services in the first quarter of 2016 and none in the second quarter. In addition, the Company did not open its retail store operations in Colorado until third quarter of 2016.
For the three months ended June 30, 2017, costs of goods sold was $69,999, compared to $41,289 for the three months ended June 30, 2016, an increase of $28,710, or 70%. The increase in our costs is primarily related to production based bonuses, recognition of non-cash stock based compensation expense from a restricted stock award granted to our extraction technician and costs of goods sold in our retain store in Colorado.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross profit increased from a loss of $41,289 for the three months ended June 30, 2016 to $62,716, or 47% of revenues for the three months ended June 30, 2017.
For the three months ended June 30, 2017, selling, general and administrative expenses were $399,291, compared to $263,579 during the three months ended June 30, 2016, an increase of $135,712, or 51%. The increase in these expenses are attributable to (1) an increase in employee compensation expenses in Canna-Cures which did not begin operations until third quarter of 2016, the hiring of additional administrative staff, stock based compensation to employees, and accrual of bonuses for current management, and (2) a decrease in general administrative expenses primarily due to fewer legal activities during the current period.
During the three months ended June 30, 2017, the Company incurred interest expense of $168,984, compared to $38 for the three months ended June 30, 2016. During the current period, the Company paid interest in the amount of $5,000 to the convertible note holder, accrued $5,984 of interest expense on the notes payable to related party and issued common stock valued at $158,000 as interest to a related party for working capital advances. There were no such liabilities existed at June 30, 2016.
As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $509,808 for the three months ended June 30, 2017, compared to a net loss of $304,906 for the three months ended June 30, 2016.
The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the cannabis industry grows, additional expenses are anticipated to be incurred in complying with various state and federal regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Operating results for the six months ended June 30, 2017 and 2016:
For the six months ended June 30, 2017, the Company generated revenues of $280,361 from operations, compared to $225,366 for the six months ended June 30, an increase of $54,995 or 24%. The increase in revenues is primarily attributable to the increase in processing and revenues generated from its retail store operations in Colorado.
For the six months ended June 30, 2017, costs of goods sold was $164,740, compared to $113,064 for the six months ended June 30, 2016, an increase of $51,676, or 46%. The increase in our costs is primarily related to production based bonuses, recognition of non-cash stock based compensation expense from a restricted stock award granted to our extraction technician and costs of goods sold in our retail store in Colorado.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross profit increased from $112,302 for the six months ended June 30, 2016 to $115,621, or 41% of revenues for the six months ended June 30, 2017.
For the six months ended June 30, 2017, selling, general and administrative expenses were $913,556, compared to $634,658 during the six months ended June 30, 2016, an increase of $278,898, or 44%. The increase in these expenses are attributable to (1) an increase in employee compensation expenses in Canna-Cures which did not begin operations until third quarter of 2016, the hiring of additional administrative staff, stock based compensation to employee, and accrual of bonuses for current management, and (2) an increase in general administrative expenses primarily due to stock based compensation to board of directors, third party vendors and outside counsel, and increase in professional fees.
During the six months ended June 30, 2017, the Company incurred interest expense of $403,134, compared to $38 for the six months ended June 30, 2016. During the current period, the Company paid interest in the amount of $5,000 to the convertible note holder, accrued $10,784 of interest expense on the notes payable to related party, issued common stock valued at $366,400 as interest to a related party for working capital advances and as debt issuance costs related to the issuance of the convertible note payable and $20,950 as cash debt discount. There were no such liabilities existed at June 30, 2016.
As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $1,204,318 for the six months ended June 30, 2017, compared to a net loss of $565,381 for the six months ended June 30, 2016.
The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the cannabis industry grows, additional expenses are anticipated to be incurred in complying with various state and federal regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Liquidity and Capital Resources
The Company’s cash position at June 30, 2017 increased by $91,292 to $135,170, as compared to a balance of $43,878, as of December 31, 2016. The net increase in cash for the six months ended June 30, 2017 was attributable to net cash used in operating activities of $422,562, net cash used in investing activities of $6,196, offset in part by net cash provided by financing activities of $520,050.
As of June 30, 2017, the Company had negative working capital of $604,144 compared to negative working capital of $191,435, at December 31, 2016, a decrease of $412,709, attributable primarily to issuance of notes payable to its CEO and amounts owed to related parties for working capital advances.
Net cash used in operating activities of $422,562 during the six months ended June 30, 2017, was higher compared to the prior period of $347,693, primarily due to higher net loss, offset by (i) non-cash items such as common stock issued for services and interest and amortization of debt discount and (ii) changes in operating assets and liabilities, including a settlement payment to our former CEO.
Net cash used in investing activities did not significantly contribute to the change in cash positions for both periods.
Net cash provided by financing activities of $520,050 during the six months ended June 30, 2017 increased by $260,196 compared to $259,854 during the six months ended June 30, 2016. The increase in net cash provided from financing activities was attributable to a reduction in net proceeds from the reverse acquisition, coupled with an increase in proceeds from the issuances of notes payable to our CEO and working capital advances from related parties.
During the six months ended June 30, 2017, the Company also issued 25,746 shares of its common stock to acquire and prepare a parcel land from one of its directors. These shares are valued at $41,194. The Company also issued 144,000 shares of its common stock as costs directly related to entering into the equity purchase agreement with an investor. These shares were valued at $240,900.
As reported in the accompanying consolidated financial statements, for the six months ended June 30, 2017 and 2016, the Company incurred net losses of $1,204,318 and $565,381, respectively. The Company did not produce significant revenues in the periods presented and has sustained operating losses since inception. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital, obtain licenses to commence operations in states outside of Colorado and achieve a level of profitability. Until recently where the Company obtained working capital from convertible notes financing and equity purchase agreement with an outside investor, the Company has financed its activities principally from working capital advances from its CEO and related parties since inception. It intends to finance its future operating activities and its working capital needs largely from proceeds from the convertible notes agreement, the sale of equity securities, combined with additional funding from its CEO. The sale of equity and convertible notes financing agreements may result in dilution to stockholders and those securities may have rights senior to those of common shares. If the Company raises additional funds through the issuance of convertible notes or other debt financing, these activities or other debt could contain covenants that would restrict the Company’s operations. Any other third-party funding arrangements could require the Company to relinquish valuable rights. The Company will require additional capital beyond its currently anticipated needs. Additional capital, if available, may not be available on reasonable terms or at all.
The Company has not generated significant revenue to date, and will not generate significant revenue in the foreseeable future. The Company expects to continue to incur operating losses as it proceeds with its pursuit of operating licenses in various states. The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the cannabis industry grows, additional expenses are anticipated to be incurred in complying with various regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Financial Condition
The Company’s total assets at June 30, 2017 and December 31, 2016 were $1,023,165 and $684,783, respectively, an increase of $338,382. Total liabilities at June 30, 2017 and December 31, 2016 were $900,941 and $394,530, respectively, an increase of $506,411. The significant change in the Company’s financial condition is attributable to (i) issuance of notes payable to a related party, and (ii) increase in working capital advances from related parties. As a result of these transactions, the Company’s cash position increased from $43,878 to $135,170, from December 31, 2016 to June 30, 2017 and incurred deferred offering costs of $240,900.
Off-Balance Sheet Arrangements
We have made no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.