The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017, AND THE YEAR ENDED DECEMBER 31, 2017
(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 decriminalized 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 nonexclusive customer products commonly used in the industry.
American Cannabis Company, Inc. is a publicly listed company quoted on the OTC Pink Tier 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 longlived
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 SX. 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 writeoffs 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 June 30, 2018, and December 31, 2017, the Company’s
allowance for doubtful accounts was $41,567 and $21,581, respectively. The Company recorded bad debt expense during the three
months ended June 30, 2018 of $3,553 and $42,401 during the three months ended June 30, 2017.
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 endcustomers. 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 June 30, 2018, and December 31, 2017, 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 June 30, 2018, three customers individually accounted for $99,720 of the Company’s total revenues
equaling approximately 55.94% of the Company’s total 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 straightline method over the estimated useful lives of the assets, ranging from two to
seven years. Costs associated with inprogress 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 LongLived Assets.” The Company did not capitalize any interest as of June 30, 2018.
Accounting for the Impairment
of LongLived Assets
The Company
evaluates longlived 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 longlived 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 longlived assets as of June 30, 2018
or December 31, 2017.
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
For annual
reporting periods after December 15, 2017, the Financial Accounting Standards Board (“FASB”) made effective ASU 2014-09
“Revenue from Contracts with Customers” to supersede previous revenue recognition guidance under current U.S. GAAP.
Revenue is now recognized in accordance with FASB ASC Topic 606, Revenue Recognition. The guidance presents a single five-step
model for comprehensive revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. Two options are available for implementation of the standard which is either the retrospective approach
or cumulative effect adjustment approach. The guidance becomes effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period, with early adoption permitted. We determined to implement the
cumulative effect adjustment approach to our implementation of FASB ASC Topic 606, with no restatement of the comparative periods
presented. We intend to apply this method to any incomplete contracts we determine are subject to FASB ASC Topic 606 prospectively.
As is more fully discussed below, we are of the opinion that none of our contracts for services or products contain significant
financing components that require revenue adjustment under FASB ASC Topic 606.
In accordance
with FASB ASC Topic 606, Revenue Recognition, we will recognize revenue when persuasive evidence of a significant financing component
exists in our consulting and product sales contracts. We examine and evaluate when our customers become liable to pay for goods
and services; how much consideration is paid as compared to the cash selling price of the goods or services; and, the length of
time between our performance and the receipt of payment.
Product
Sales
Revenue from
product and equipment sales, including delivery fees, is recognized when an order has been obtained from the customer, the price
is fixed and determinable when the order is placed, the product is shipped, title has transferred and collectability is reasonably
assured. Generally, our suppliers’ drop-ship orders to our clients with shipping-point or destination terms. For any shipments
with destination terms, the Company defers revenue until delivery to the customer. Given the facts that (1) our customers exercise
discretion in determining the timing of when they place their product order; and, (2) the price negotiated in our product sales
contracts is fixed and determinable at the time the customer places the order, we are not of the opinion that our product sales
indicate or involve any significant financing that would materially change the amount of revenue recognized under the contract,
or would otherwise contain a significant financing component for us or the customer under FASB ASC Topic 606. During the six months
ended June 30, 2018, sales returns were $160 comprised of a cancelled contract and product returns and replacement.
Consulting
Services
We also generate
revenues from professional services consulting agreements. These arrangements are generally entered into: (1) on an hourly basis
for a fixed-fee; or, (2) on a contingent fee basis. Generally, we require a complete or partial prepayment or retainer prior to
performing services.
For hourly
based fixed fee service contracts, we utilize and rely upon the proportional performance method, which recognizes revenue as services
are performed. Under this method, in order to determine the amount of revenue to be recognized, we calculate the amount of completed
work in comparison to the total services to be provided under the arrangement or deliverable. We segregate upon entry into a contract
any advances or retainers received from clients for fixed fee hourly services into a separate “Advances from Clients”
account, and only recognize revenues as we incur and charge billable hours, and then deposit the funds earned into our operating
account. Because our hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual
performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing,
that would materially change the amount of revenue we recognize under the contract or would otherwise contain a significant financing
component under FASB ASC Topic 606.
Occasionally,
our fixed-fee hourly engagements are recognized under the completed performance method. Some fixed fee arrangements are for completion
of a final deliverable or act which is significant to the arrangement as a whole. These engagements do not generally exceed a
one-year term. If the performance is for a final deliverable or act, we recognize revenue under the completed performance method,
in which revenue is recognized once the final act or deliverable is performed or delivered for a fixed fee. 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.
FASB ASC Topic 606 provides a practical expedient to disregard the effects of a financing component if the period between payment
and performance is one year or less. As, our fixed fee hourly engagements do not exceed one year, no significant customer-based
financing is implicated under FASB ASC Topic 606. During the year ended December 31, 2017, and December 31, 2016, we have incurred
no losses from fixed fee engagements that terminate prior to completion. We believe if an engagement terminates prior to completion,
we can recover the costs incurred related to the services provided.
We occasionally
enter into arrangements for which fixed and determinable revenues are contingent and agreed 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.
Our 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 our accounting policies for the elements as described above (see Product
Sales). 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 fixed and determinable as we also sell 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.
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 is 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.
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 June 30, 2018 and June 30, 2017, these costs were $71,711 and $39,069, respectively.
Shipping and Handling Costs
For product and equipment sales,
shipping and handling costs are included as a component of cost of revenues.
StockBased 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 straightline basis over the requisite vesting period of the award. During the three months ended June 30, 2018 and
June 30, 2017, the Company had stockbased compensation expense of $25,242 and $102,809, 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 BlackScholes
valuation model. During the three and six months ended June 30, 2018 and June 30, 2017, there was $0 and $0 in compensation expense
for warrants or stock options respectively.
Income Taxes
The Company’s
corporate status changed from an SCorporation, which it had been since inception, to a CCorporation during the year ended December
31, 2014. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes, SCorporations are not subject to
corporate income taxes; instead, the owners are taxed on their proportionate share of the SCorporation’s taxable income.
Accordingly, we were not subject to income taxes for the three months ended June 30, 2018. 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 June 30, 2018, 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 June 30, 2018, and December 31, 2017, 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.
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 antidilutive effect
on earnings.
Due
to the Company’s net losses for the three months ended June 30, 2018, 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 June 30, 2018 and December 31, 2017:
|
|
June 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Gross accounts receivable
|
|
$
|
145,559
|
|
|
$
|
168,385
|
|
Less: allowance for doubtful accounts
|
|
|
(41,567
|
)
|
|
|
(21,581
|
)
|
Accounts receivable, net
|
|
$
|
103,992
|
|
|
$
|
146,804
|
|
The Company had bad debt expense
during the three months ended June 30, 2018 of $3,553.
Note 4. Inventory
Inventory as of June 30, 2018 and
December 31, 2017 consisted of the following:
|
|
June
30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
17,643
|
|
|
$
|
—
|
|
Work in progress
|
|
|
—
|
|
|
|
—
|
|
Finished goods
|
|
|
76,644
|
|
|
|
35,757
|
|
Total
|
|
$
|
94,287
|
|
|
$
|
35,757
|
|
Note 5. Property and Equipment
Property and equipment, net, was
comprised of the following as of June 30, 2018 and December 31, 2017:
|
|
June 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Office equipment
|
|
$
|
8,482
|
|
|
$
|
9,275
|
|
Furniture and fixtures
|
|
|
7,240
|
|
|
|
10,175
|
|
Machinery and equipment
|
|
|
7,336
|
|
|
|
2,337
|
|
Property and equipment, gross
|
|
|
23,058
|
|
|
|
21,787
|
|
Less: accumulated depreciation
|
|
|
(13,274
|
)
|
|
|
(11,276
|
)
|
Property and equipment, net
|
|
$
|
9,784
|
|
|
$
|
11,782
|
|
Note 6. Other Assets
Other assets were comprised of
the following as of June 30, 2018 and December 31, 2017:
|
|
June 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Deposits
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
Joint venture investments
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
|
|
|
|
|
|
|
|
|
Deposits as of June 30, 2018 and
December 31, 2017 reflect down payments made to vendors and service providers.
Note 7. Accrued and Other Current
Liabilities
Accrued and other current liabilities
was comprised of the following at June 30, 2018 and December 31, 2017:
|
|
June 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Accrued payroll liabilities
|
|
|
8,751
|
|
|
|
8,323
|
|
Other accruals
|
|
|
37,658
|
|
|
|
44,029
|
|
Accrued and other current liabilities
|
|
$
|
46,409
|
|
|
$
|
52,352
|
|
|
|
|
|
|
|
|
|
|
Note 8. Related Party Transactions
During
the six months ended June 30, 2018, the Company incurred $15,000 of expense payable to Prince & Tuohey CPA, Ltd., a company
in which J. Michael Tuohey, the Company’s former Chief Financial Officer, is an owner.
Note 9. Stockbased 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 equitybased incentives are also intended to attract, retain and motivate personnel upon whose judgment, initiative
and effort the Company’s success is largely dependent.
During the
six months ended June 30, 2018 and 2017, the Company granted 29,014 and 439,182 restricted shares, and incurred total stock based
compensation expense of $25,242 and $401,809 respectively.
Warrants
As of June
30, 2018, and December 31, 2017, the Company issued fullyvested 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 BlackScholes valuation model, was $0.59 per share. There were no outstanding unvested
warrants or new issuances of warrants during the three months ended June 30, 2018; consequently, no stockbased compensation
expense associated with warrants was recorded during the three months ended June 30, 2018.
As of June
30, 2018, and December 31, 2017, 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 June 30, 2018, and December 31, 2017, the warrants had 1.4 years and
1.9 years remaining until expiration respectively. No warrants were issued or outstanding during or preceding the three months
ended June 30, 2018.
As of December
31, 2017, the Company issued cashless warrants to employees to purchase an aggregate of 915,800 shares. The warrants exercisable
within three (3) years of the date of issuance, expiring February 23, 2021. The grant date fair value of the warrants, as calculated
based on the BlackScholes valuation model, was $0.87 per share. As of June 30, 2018, and December 31, 2017, as the exercise price
per share exceeded the price per share of our common shares, there was no aggregate intrinsic value of outstanding warrants.
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. As of the
quarter ended June 30, 2018, no options have been issued.
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 June 30, 2018, 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 June 30, 2018, and 2017 respectively.
Common Stock
American Cannabis Company, Inc.
is authorized to issue 100,000,000 common shares at $0.00001 par value per share.
Note 11. Subsequent Events
On August
16, 2018, the Company dismissed its principal accountant Malone Bailey.
On August
21, 2018, the Company’s Chief Financial Officer, R. Leslie Hymers, III, resigned his position. On August 21, 2018, the Company
appointed Michael Schwanbeck its Chief Financial Officer.
On September
10, 2018, the Company issued 50,000 common shares to R. Leslie Hymers, III, based on contract.
On August
22, 2018, the Company engaged L&L CPAs as its principal accountant to audit the Company’s financial statements.
On October
2, 2018, the Company entered into a consulting agreement with Redbud Growers, Inc., an Oklahoma corporation. Redbud is a licensed
cannabis operator in the State of Oklahoma. The Company agreed to provide discounted consulting services in exchange for a non-dilutive
15% equity position in Redbud, and a 5% royalty payable to the Company to recover its total consulting costs $302,750.
On October
4, 2018, the Company entered into a consulting agreement with Pharm + House, Inc., an Oklahoma corporation. Pharm + House is a
licensed cannabis operator in the State of Oklahoma. The Company agreed to provide discounted consulting services in exchange
for a non-dilutive 25% equity position in Pharm + House.
On October
4, 2018, the Company entered into a consulting agreement with Beyond Honey Oil Farms, LLC, an Oklahoma limited liability company.
Beyond Honey Oil is a licensed cannabis operator in the State of Oklahoma. The Company agreed to provide discounted consulting
services in exchange for a non-dilutive 10% equity position in Beyond Honey Oil Farms, LLC.
On January
16, 2019, the Company issued 39,708 common shares to Gayle Barr for services rendered.
On January
16, 2019, the Company issued 400,000 shares of common stock to the Terry L. Buffalo Revocable Living Trust for conversion of a
cashless warrant.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The statements
contained in this report that are not statements of historical fact, including without limitation, statements containing the words
“believes,” “expects,” “anticipates” and similar words, constitute forwardlooking statements
that are subject to a number of risks and uncertainties. From time to time we may make other forwardlooking statements. Investors
are cautioned that such forwardlooking statements are subject to an inherent risk that actual results may materially differ as
a result of many factors, including the risks discussed from time to time in this report, including the risks described under
“Risk Factors” in any filings we have made with the SEC.
Our discussion
and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On
an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement
income, bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There
can be no assurance that actual results will not differ from those estimates.
Background
American Cannabis
Company, Inc. and subsidiary company, Hollister & Blacksmith, Inc., doing business as American Cannabis Consulting (“American
Cannabis Consulting”), (collectively “the “Company”, “we”, “us”, or “our”)
are based in Denver, Colorado and operate a fullyintegrated business model that features endtoend solutions for businesses operating
in the regulated cannabis industry in states and countries where cannabis is regulated and/or has been decriminalized for medical
use and/or legalized for recreational use. The Company provides advisory and consulting services specific to this industry, manufactures
proprietary industry solutions including; the Satchel™, SoHum Living Soils™, Cultivation Cube™ and the
High Density Cultivation System.™ The Company also sells 3rd party industryspecific products 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 OTC Markets Pink Tier under the symbol “AMMJ”.
We were incorporated
in the State of Delaware on September 24, 2001 under the name Naturewell, Inc. to develop and market clinical diagnostic products
using immunology and molecular biologic technologies.
On March 13,
2013, Naturewell, Inc. completed a merger transaction whereby it acquired 100% of the issued and outstanding share capital of
Brazil Interactive Media, Inc. (“BIMI”), which operated as a Brazilian interactive television company and television
production company through its wholly owned Brazilian subsidiary company, EsoTV Brasil Promoção Publicidade Licenciamento
e Comércio Ltda. (“EsoTV”). Naturewell’s Articles of Incorporation were amended to reflect a new name:
Brazil Interactive Media, Inc.
On May 15,
2014, BIMI entered into a merger agreement (“the Merger Agreement”) to acquire 100% of the issued and outstanding
American Cannabis Consulting while simultaneously disposing of 100% of the issued share capital EsoTV (“the Separation Agreement”).
Both the merger with American Cannabis Consulting and disposal of EsoTV were completed on September 29, 2014. BIMI subsequently
amended its Articles of Incorporation to change its name to American Cannabis Company, Inc. On October 10, 2014, American Cannabis
Company, Inc changed its stock symbol from BIMI to AMMJ.
Results of Operations
For the three months and six months
ended June 30, 2018 compared to three and six months ended June 30, 2017.
Revenues
Total revenues
were $178,256 for the three months ended June 30, 2018 as compared to $952,780 for the three months ended June 30, 2017, a decrease
of $774,524. Total revenues for the six months ended June 30, 2018 were $457,666 as compared to $1,569,938 for the six months
ended June 30, 2017. Consulting service revenues were $97,090 or 54.5% of total revenues for the three months ended June 30, 2018,
versus $841,762 or 88.3% of total revenues for the three months ended June 30, 2017. Consulting service revenues for the six months
ended June 30, 2018 were $182,692 or 39.9% of total revenues, as comparted to $1,415,059 or 90.1% of total revenues for the six
months ended June 30, 2017. Our product and equipment revenues for the three months ended June 30, 2018 were $81,166 or 45.5%
of total revenues, versus $111,018 or 11.7% of total revenues for three months ended June 30, 2017. For the six months ended June
30, 2018, our product and equipment revenues were $274,974 or 60.1% of total revenues, as compared to $154,879, 9.9% of total
revenues for the six months ended June 30, 2017. The increase in equipment revenue was attributed to increased client orders with
the company experiencing spikes in product revenues during facility design and buildouts. The company was not performing any facility
buildouts for the three and six months ended June 30, 2018, while two facility buildouts were inprogress during the three and
six months ended June 30, 2017. The decrease in our consulting services revenues for the three and six months ended June 30 2018,
reflects fewer states enacting legislation during the period legalizing cannabis.
Costs of Revenues
Costs of revenues
primarily consist of labor, travel, cost of equipment and soil sold, and other costs directly attributable to providing services
or products. During the three months ended June 30, 2018, our total costs of revenues were $78,540, or 44.1% of total revenues.
This compares to total costs of revenues for the three months ended June 30, 2017 of $133,397 or 14% of total revenues. For the
six months ended June 30, 2018, total cost of revenues were $222,611 or 48.6% of total revenues, as comparted to $280,281 or 17.9%
of total revenues for the six months ended June 30, 2017. For the three months ended June 30, 2018, consulting related costs were
$24,711, or 13.9% of total revenue, as compared to costs of $87,251, or 9.2% of revenue for the three months ended June 30, 2017.
For the six months ended June 30, 2018, consulting related costs were $81,772 or 17.9% of total revenues, as compared to $149,076
or 9.5% of total revenues for the six months ended June 30, 2017. Costs associated with products and equipment were $53,829, or
30.2% of total revenue for the three months ended June 30, 2018 as compared to $46,146, or 4.8% of total revenue for the three
months ended June 30, 2017. Costs associated with products and services were $140,839 or 30.7% of total revenues for the six months
ended June 30, 2018 as compared to $131,205 or 8.4% of total revenues for the six months ended June 30, 2017. As a percentage
of revenues, the increase in costs associated with product sales during the three and six months ended June 30, 2018, was attributed
to spikes in product revenues resulting from completed design and facility buildouts during the three and six months ended June
30, 2017.
Gross Profit
Total gross
profit was $99,716 for the three months ended June 30, 2018, comprised of consulting services gross profit of $72,379 and products
and equipment gross profit of $27,337. This compares to total gross profit of $819,383 for the three months ended June 30, 2017,
comprised of consulting services gross profit of $754,511 and products and equipment gross profit of $64,682. For the six months
ended June 30, 2018, gross profits were $235,055, comprised gross profits for consulting services of $100,920 and product and
equipment $134,135, as compared to gross profits for the six months ended June 30, 2017 of $1,289,657, comprised of consulting
services gross profits of $1,265,983 and product equipment $23,674. Total gross profits of the six months ended June 30, 2018
as comparted to 2017 reflect a decrease of $1,054,602. The decrease in our consulting services gross profits reflects fewer states
enacting legislation during the period legalizing cannabis, and so there is a corresponding decrease in the demand for our consulting
services. The increase in gross profits for products and equipment was due to the Company expanding its product sales to existing
clients during the period. As a percentage of total revenues, gross profit was 55.9% and 51.4% for the three and six months ended
June 30, 2018, as compared to 86% and 82.1% for the three and six months ended June 30, 2017.
Operating Expenses
Total
operating expenses were $276,400, or 155% of total revenues for the three months ended June 30, 2018, and $569,532 or 124.4%
for the six months ended June 30, 2018, as compared to $344,887, or 36% of total revenues for the six months ended June 30,
2017, and $699,911 for the period ending June 30, 2017. This decrease was primarily due to a reduction in general and
administrative expenses for the relevant time periods.
Other Income (Expense)
Other income
(expense) for the three months ended June 30, 2018 was expense of $28,074 as compared with expense of $144,670 for the three months
ended June 30, 2017. For the six months ended June 30, 2018, other income (expense) was $41,465 as compared to $465,920 for the
six months ended June 30, 2017. The reduction in our other income (expense) was due to a reduction in our stock compensation expense
of $376,567.
Net Income (Loss)
As a result
of the factors discussed above, net (loss) for the three months ended June 30, 2018 was $(204,758) or (114.9%) of total revenues
for the period, as compared to net income of $329,826, or 34.62% of total revenues for the three months ended June 30, 2017. For
the six months ended June 30, 2018, the net (loss) was ($375,942) or (82.1%) of total revenues for the period, as compared to
net income of $123,826, or 7.9% of total revenues for the six months ended June 30, 2017.
Liquidity and Capital Resources
As of June
30, 2018, our primary internal sources of liquidity were our working capital, which included cash and cash equivalents of $1,299,452
and accounts receivable of $103,992. Additionally, considering that our fixed overhead costs are low, we have the ability to issue
stock to compensate employees and management, and the level of future revenue we expect to generate from executed client contracts,
we believe our liquidity and capital resources to be adequate to fund our operational and general and administrative expenses
for at least the next 12 months without needing to raise additional debt or equity funding. There is no guarantee we will have
the ability to raise additional capital as needed through external equity financing transactions if required.
Operating Activities
Net cash used
by operating activities for the six months ended June 30, 2018 was a use of $(348,635), consisting of increases in inventory costs
of ($58,531), compared to net cash provided by operating activities of $322,077, for the six months ended June 30, 2017.
Investing Activities
For
the six months ended June 30, 2018 and 2017, investing activities were a use of cash of $0 and $0 respectively.
Financing Activities
For the three months ended June
30, 2018 and 2017, the net cash from financing activities was $0 and $602,693 respectively.
Off Balance Sheet Arrangements
As of June
30, 2018, and December 31, 2017, we did not have any offbalance 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.
NonGAAP Financial Measures
We use Adjusted
EBITA, a nonGAAP metric, to monitor our overall business performance. We define Adjusted EBITA as net income (loss) before interest
expense, net, provision for (benefit from) income taxes, stockbased compensation and certain nonrecurring expenses, which to date
have been limited to costs associated with the Reverse Merger. We believe that such adjustments to arrive at Adjusted EBITA provides
us with a more comparable measure for managing our business. We also believe that it is a useful measure for securities analysts,
investors, and other interested parties in the evaluation of our Company.
A reconciliation of net income
(loss) to Adjusted EBDITA is provided below.
|
|
Six Months Ended
|
|
Six Months Ended
|
|
|
June 30,
2018
|
|
June 30,
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Adjusted EBITA reconciliation:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(375,942
|
)
|
|
$
|
123,826
|
|
Stock-based compensation to employees
|
|
|
—
|
|
|
|
401,809
|
|
Stock-based compensation to service providers
|
|
|
25,242
|
|
|
|
—
|
|
Depreciation expense
|
|
|
1,998
|
|
|
|
2,676
|
|
Adjusted EBITA
|
|
$
|
(348,702
|
)
|
|
$
|
528,311
|
|
ITEM
|
|
3.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are a smaller
reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under
this item.
ITEM
|
|
4.
CONTROLS AND PROCEDURES
|
Management
of the Company is responsible for maintaining disclosure controls and procedures that are designed to ensure that financial information
required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange
Act”) is recorded, processed, summarized and reported within the timeframes specified in the Securities and Exchange Commission’s
rules and forms, consistent with Items 307 and 308 of Regulation SK.
In addition,
the disclosure controls and procedures must ensure that such financial information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required financial and other required disclosures.
As of June
30, 2018, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e)
and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) was carried out under the supervision
and with the participation of our Chief Executive Officer, Chief Financial Officer, and other persons carrying out similar functions
for the Company. Based on the evaluation of the Company’s disclosure controls and procedures, the Company concluded that
during the period covered by this report, such disclosure controls and procedures were effective.
The Company
continues to employ and refine a structure in which critical accounting policies, issues and estimates are identified, and together
with other complex areas, are subject to multiple reviews by accounting personnel. In addition, the Company evaluates and assesses
its internal controls and procedures regarding its financial reporting, utilizing standards incorporating applicable portions
of the Public Company Accounting Oversight Board’s 2009 Guidance for Smaller Public Companies in Auditing Internal Controls
Over Financial Reporting as necessary and on an ongoing basis.
Because of
its inherent limitations, internal control over financial reporting cannot provide absolute assurance of the prevention or detection
of misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls
The Company had no reportable changes
to its internal controls over financial reporting for the period covered by this report.
The Company
will continually enhance and test its internal controls over financial reporting on a continuing basis. Additionally, the Company’s
management, under the control of its Chief Executive Officer and Chief Financial Officer, will increase its review of its disclosure
controls and procedures on an ongoing basis. Finally, the Company plans to designate, in conjunction with its Chief Financial
Officer, individuals responsible for identifying reportable developments and the process for resolving compliance issues related
to them. The Company believes these actions will focus necessary attention and resources in its internal accounting functions.
PART II—OTHER
INFORMATION
ITEM
|
|
1.
LEGAL PROCEEDINGS
|
None.
We are a smaller
reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under
this item.
ITEM
|
|
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
No transactions meeting the reporting
requirements of this item occurred during the periods covered by this report.
ITEM
|
|
3.
DEFAULTS UPON SENIOR SECURITIES
|
No senior securities were issued
and outstanding during the three and nine months ended June 30, 2018 or 2017.
ITEM
|
|
5.
OTHER INFORMATION
|
None.
This list is intended to constitute
the exhibit index.
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*Pursuant
to Rule 406T of Regulation ST, these interactive data files are deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities and Exchange Act of 1934, and
otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of
the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
American Cannabis Company, Inc.
Date: February 13, 2019
By:
/s/ Terry Buffalo
Terry Buffalo, Chief Executive
Officer
(Principal Executive Officer)
Date: February 13, 2019
By:
/s/ Michael Schwanbeck
Michael Schwanbeck, Chief Financial
Officer
(Principal Financial Officer)