INDUSTRY OVERVIEWS

Cannabis Industry

In the United States, the use and possession of cannabis is illegal under federal law for any purpose, by way of the Controlled Substances Act of 1970. Under the CSA, cannabis is classified as a Schedule I substance, determined to have a high potential for abuse and no accepted medical use – thereby prohibiting even medical use of the drug. At the state level, however, policies regarding the medical and recreational use of cannabis vary greatly, and in many states conflict significantly with federal law.

The medical use of cannabis is legalized (with a doctor's recommendation) in 33 states, four out of five permanently inhabited U.S. territories, and the District of Columbia. Fourteen other states have laws that limit THC content, for the purpose of allowing access to products that are rich in cannabidiol (CBD), a non-psychoactive component of cannabis. Although cannabis remains a Schedule I drug, the Rohrabacher–Farr amendment prohibits federal prosecution of individuals complying with state medical cannabis laws.

The recreational use of cannabis is legalized in 11 states (Alaska,  California,  Colorado,  Illinois,  Maine,  Massachusetts,  Michigan,  Nevada, Oregon, Vermont, and Washington) the District of Columbia, the Northern Mariana Islands, and Guam. Another 15 states and the U.S. Virgin Islands have decriminalized Commercial distribution of cannabis is allowed in all jurisdictions where cannabis has been legalized, except Vermont and the District of Columbia. Prior to January 2018, the Cole Memorandum provided some protection against the enforcement of federal law in states that have legalized, but it was rescinded by former Attorney General Jeff Sessions.

Although the use of cannabis remains federally illegal, some of its derivative compounds have been approved by the Food and Drug Administration for prescription use. Cannabinoid drugs which have received FDA approval are Marinol (THC), Syndros (THC), Cesamet (nabilone), and Epidiolex (cannabidiol). For non-prescription use, cannabidiol derived from industrial hemp is legal at the federal level but legality (and enforcement) varies by state.

The dichotomy between federal and state laws has also limited the access to banking and other financial services by marijuana businesses. The U.S. Department of Justice and the U.S. Department of Treasury issued guidance for banks considering conducting business with marijuana dispensaries in states where those businesses are legal, pursuant to which banks must now file a Marijuana Limited Suspicious Activity Report that states the marijuana business is following the government’s guidelines with regard to revenue that is generated exclusively from legal sales. However, since the same guidance noted that banks could still face prosecution if they provide financial services to marijuana businesses, it has led to the widespread refusal of the banking industry to offer banking services to marijuana businesses operating within state and local laws.

E-Cig Industry

The e-cigarette market was valued at $11.5 billion in 2018 and is anticipated to register a CAGR of 21.6% during 2019-2024. Rising awareness pertaining to harmful effects of smoking is one of the major drivers observed in the market. Moreover, changing consumer preferences, increasing number of vape shops and designated stores, as well as new product innovations are propelling the growth of the e-cigarette market.

Based on product, the e-cigarette market is categorized into cig-a-like, vaporizer, T-Vapor and vape mod; of which, vaporizer category accounted for the highest share in 2018, owing to its moderate cost, dense aerosol production, and flexibility where it can be used with different type of flavors. Development in vaping technology and increased flavor offerings are further expected to attract more users to the existing customer base. Furthermore, e-cigarette manufacturers have been promoting their offerings as an economical alternative to the traditional tobacco cigarettes, which might attract more users.

On the basis of distribution channel, e-cigarette market has been categorized into tobacconist, hypermarket/supermarket, vape shops, online, and others. Among these, tobacconist category has led the distribution channel, closely followed by vape shops. However, market for online channels is expected to witness the highest CAGR during the forecast period, owing to the increasing adoption of e-commerce; where manufacturers are either selling their product through online partner channels like Amazon, Alibaba, Craigslist or through their own online portals.

On the basis of region, Europe has been observed as the largest e-cigarette market, globally. Majority of the revenues can be attributed to the U.K., France, and Russian markets. The level of e-cigarette usage is increasing across the region, where according to European Union (EU), one in seven traditional cigarette smokers classify themselves as current e-cigarette smokers.

In the United States, in 2016, the Food and Drug Administration (“FDA”) finalized a rule extending the regulatory authority to cover all tobacco  products, including vaporizers, vape pens, hookah pens, electronic cigarettes (E-Cigarettes), e-pipes, and all other Electronic Nicotine Delivery Systems (“ENDS”). FDA now regulates the manufacture, import, packaging, labeling, advertising, promotion, sale, and distribution of ENDS. This includes components and parts of ENDS but excludes accessories.

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Under the new guidance, all companies that make, modify, mix, manufacture, fabricate, assemble, process, label, repack, relabel, or import any tobacco product are considered  tobacco product manufacturers.  Importers of finished tobacco products may be distributors and manufacturers of tobacco products.  Importers who do not own or operate a domestic establishment engaged in the manufacture, preparation, compounding or processing of a tobacco product are not required to register their establishment or provide product listing. However, they must comply with all other applicable tobacco product manufacturer requirements.

More than 95% of our e-cig sales are international sales. 

Cannabidiol (CBD) Industry

Since 1992, when the Endocannabinoid System (ECS) was discovered, many different studies have been conducted on the role it plays in our health and disease management. Since we all possess an ECS, it makes logical sense that we would all benefit in some way with the inclusion of CBD and other cannabinoids in our daily lives.

This research coupled with the spreading legalization of recreational and medical cannabis is why CBD has become mainstream. The increasing worldwide access to CBD products is dispelling many of the myths around it. People who are new to cannabis are recognizing its benefits. The continued growth of the cannabis industry will rely on educating people who are unfamiliar or wary about the plant.

Additionally, the 2018 Farm Bill legalized hemp farming, removing this plant rich in CBD from the Controlled Substance Act and restoring it to its traditional place as an agricultural commodity. This bill will allow states to regulate hemp farming and move forward the industrialization of the hemp plant. As this scale up hemp-based CBD products will become ever more common. The hemp-CBD market is projected to grow from just under $600 million in 2018 to $22 billion by 2022.

Hemp Industry

There are an estimated 25,000 products derived from hemp, that fall into nine submarkets: agriculture, textiles, recycling, automotive, furniture, food and beverages, paper, construction materials, and personal care. 

The estimated total retail value of hemp products sold in the U.S. in 2016 was $688 million, a 20% increase from the previous year.  There is an average of 15% annual growth in U.S. retail sales from 2010-2105.  China is the largest importer of raw and processed hemp fiber in the U.S.  Canada is the predominant importer of hemp seed and oil cake.

DESCRIPTION OF SUBSIDIARIES

mCig Internet Sales, Inc.

On June 1, 2016, the Company incorporated mCig Internet Sales, Inc., (“mCig Internet”) in the state of Florida in order to operate our CBD business and to consolidate all wholesale and online retail sales from various websites.  mCig Internet is a wholly owned subsidiary of the Company.  

VitaCig, Inc.

On May 26, 2016 we incorporated VitaCig, Inc., (“VitaCig”) in the state of Florida.  VitaCig headquarters our global e-cig operations.  VitaCig, Inc., is a wholly owned subsidiary of the Company.

Tuero Asset Management, Inc.

We incorporated Tuero Asset Management, Inc., in which to manage all our intellectual and intangible assets.

CAL Acres  Foundation (FKA Newco2, Inc)

Cal Foundation was created on January 19, 2018 as a California not-for-profit company.  We own 80% of the not-for-profit business.  Cal Foundation maintains three cannabis licenses in the State of California.

CAAcres, Inc.

CAAcres, Inc., (“CAAcres”) was incorporated on May 10, 2018 under the laws of the state of California.  CAAcres was created to participate in the Joint Venture with Cal Foundation for the cultivation, manufacturing, and distribution of cannabis products within the state of California.  CAAcres is an agriculture venture for the cultivation, manufacturing and distribution of cannabis products. We are currently assessing the requirements for the build out of the land acquired in California City, California for this project. 

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Vapolution, Inc.

On January 23, 2014, the Company entered into a Stock Purchase Agreement acquiring 100% ownership in Vapolution, Inc., which manufactures and retails home-use vaporizers. As part of this transaction, .mCig, Inc. issued 5,000,000 common shares to shareholders of Vapolution, Inc. in two separate payments of 2,500,000 common shares. The shareholders of Vapolution, Inc. retained the right to rescind the transaction, which expired on January 23, 2015 but was extended to May 23, 2015. Subsequently, on August 25, 2015, the final payment to the shareholders of Vapolution as extended to September 30, 2015 and the right to rescind the transaction was extended to June 30, 2017.  On April 30, 2015 the Company impaired the $625,000 initial investment into Vapolution, Inc., but maintains the $67,500 investment on its balance sheet for the second payment.

On January 23, 2014, Paul Rosenberg, CEO of mCig, Inc. cancelled an equal amount (2,500,000 shares) of common shares owned by him resulting in a net non-dilutive transaction to existing mCig, Inc. shareholders. The remaining 2,500,000 of common shares owned by Paul Rosenberg were cancelled to offset the 2,500,000 new shares issued from the treasury to complete the purchase of Vapolution, Inc.

On January 17, 2017 the Company entered into a settlement agreement with the previous owners of Vapolution, Inc., whereby they returned to the Company 1,700,000 shares of MCIG common stock, $961 in cash, and $40,541 in inventory. Prior to this, Vapolution was not incorporated in to the consolidated financial statements of the Company.  Effective January 17, 2017 we began consolidating Vapolution with the Company’s financial reports.  Vapolution, Inc., is wholly owned by mCig, Inc. 

Cannabiz Supply, LLC

On June 30, 2019 the company elected to exercise its option to acquired Cannabiz Supply with an effective date of May 1, 2019.  The purchase price was $3,457,796.

Critical Accounting Policies and Estimates

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 our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies.  

We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances.  These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain.  If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Our operating results for the three months ended July 31, 2019 and 2018 are summarized as follows:

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Results of Operations

Revenue

Our revenue from operations for the three months ended July 31, 2019 was $497,400 compared to $630,676, a decrease of $133,276 from the three months ended July 31, 2018.  This decrease is primarily a result of the elimination of construction income along with a decrease of $63,276 in retail revenue for the three months ended July 31, 2018.  

Cost of Goods Sold

Our cost of goods sold for the three months ended July 31, 2019 was $245,453 compared to $611,423 for the three months ended July 31, 2018. The decrease is primarily elimination of construction cost of goods of $149,195 along with a decrease in amortization and depreciation previously associated with OBITX for the period ending July 31, 2018 but is no longer consolidated in the quarter ending July 31, 2019.

Gross Profit

Our gross profit for the three months ended July 31, 2019 was $251,947 compared to $19,253 for the three months ended July 31, 2018. The gross profit of $251,947 for the three months ended July 31, 2019 represents approximately 51% as a percentage of total revenue. The gross profit of $19,253 for the three months ended July 31, 2018 represents approximately 3% as a percentage of total revenue. This increase in the gross profit is primarily attributed to the exclusion of amortization of assets directly associated with sales through OBITX which is no longer consolidated. 

Operating Expenses

Our operating expenses decreased by $131,907 to $468,256 for the three months ended July 31, 2019, from $600,163 for the three months ended July 31, 2018.

The decrease was primarily due to the decrease in professional fees of $36,825, marketing fees of $2,922, consulting fees of $225,022, and amortization and depreciation of $6,247 offset with an increase in selling, general, and administration of $56,947 and stock based compensation of $79,010

Our total operating expenses for the three months ended July 31, 2019 of $468,256 consisted of $129,061 of selling, general and administrative expenses, $108,000 in stock based compensation, $18,594 of professional fees, consulting expense of $103,957, marketing expense of $35,697, bad debts of $3,152 and $69,795 of amortization and depreciation expenses. Our general and administrative expenses consist of bank charges, telephone expenses, meals and entertainments, computer and internet expenses, postage and delivery, office supplies and other expenses.

Net (Loss)

Our net loss of $297,769 for the three months ended July 31, 2019 from a net loss of $580,387 for the three months ending July 31, 2018 represents a reduction of loss of $282,618. The decrease in net loss compared to the prior period net loss is primarily a result of the gross profit increase of $232,694, a decrease in operating expenses of $131,907 offset with other expenses increase of $81,983.

Liquidity and Capital Resources

Introduction

During the three months ended July 31, 2019 we had $132,555 in cash provided by our operating activities. Our cash on hand as of July 31, 2019 was $195,439.

Cash Requirements

We had cash available of 195,439 as of July 31, 2019.  Based on our revenues, cash on hand and current monthly burn rate, around break-even, we believe that our operations are sufficient to fund operations through April 2019.

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Sources and Uses of Cash

Operations

We gained $132,555 in cash by operating activities for the three months ended July 31, 2019, as compared to the use of $919,609 for the three months ended July 31, 2018.

Net cash gained by operations consisted primarily of the net loss of $320,423 offset by non-cash expenses of $69,795 in depreciation and amortization of intangible assets, $108,000 in stock based compensation, and $103,888 in minority interest earnings of subsidiaries, net offset by $157,192 in net affect to cash flow caused by the non-consolidation of OBITX. Additionally, changes in assets and liabilities consisted of decreases of $48,467 in accounts receivable, prepaid expenses of $10,100, accounts payable of $138,022, and other receivables of $307, with decreases in deferred revenue of $20,977, and inventory of $429,226.

Investments

We used $168,298 in investing activities for the three months ended July 31, 2019 compared to a gain in investing activities of $38,523 for the three months ended July 31, 2018. Our investing activities was primarily the purchase of new equipment in CBJ Distributing.

Financing

We utilized $50,649 in financing activities for the three months ended July 31, 2019 compared to receiving $818,888 for the three months ended July 31, 2018.  Our financing activities consisted of an increase of $2,459 of advances made by a related party offset by a reduction of $53,108 in notes payable. 

Our adjusted operating results for the three months ended July 31, 2019 and 2018 are summarized as follows:

Adjusted Results of Operations

Adjusted Revenue

Our adjusted revenue from operations for the three months ended July 31, 2019 was $497,400 compared to $630,676, a decrease of $133,276 from the three months ended July 31, 2018.  This decrease is primarily a result of the elimination of construction income along with a decrease of $63,276 in retail revenue for the three months ended July 31, 2018.  

Adjusted Cost of Goods Sold

Our adjusted cost of goods sold for the three months ended July 31, 2019 was $245,453 compared to $490,606 for the three months ended July 31, 2018. The decrease is primarily elimination of construction cost of goods.

Adjusted Gross Profit

Our adjusted gross profit for the three months ended July 31, 2019 was $251,947 compared to $140,070 for the three months ended July 31, 2018. The gross profit of $251,947 for the three months ended July 31, 2019 represents approximately 51% as a percentage of total revenue. The gross profit of $140,070 for the three months ended July 31, 2018 represents approximately 22% as a percentage of total revenue. This increase in the gross profit is primarily attributed to the exclusion of construction cost of goods.

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Adjusted Operating Expenses

Our adjusted operating expenses decreased by $283,864 to $287,309 for the three months ended July 31, 2019, from $571,176 for the three months ended July 31, 2018.

The decrease was primarily due to the decrease in professional fees of $36,825, marketing fees of $2,922, consulting fees of $225,022, and amortization and depreciation of $67,042 offset with an increase in selling, general, and administration of $56,947.

Our total operating expenses for the three months ended July 31, 2019 of $287,309 consisted of $129,061 of selling, general and administrative expenses, $18,594 of professional fees, consulting expense of $103,957, marketing expense of $35,697. Our general and administrative expenses consist of bank charges, telephone expenses, meals and entertainments, computer and internet expenses, postage and delivery, office supplies and other expenses.

Adjusted Net (Loss)

Our net loss of $35,362 for the three months ended July 31, 2019 from a net loss of $431,103 for the three months ending July 31, 2018 represents a reduction of loss of $395,741. The decrease in net loss compared to the prior period net loss is primarily a result of the gross profit increase of $111,844, and a decrease in operating expenses of $283,864.

Off-Balance Sheet Arrangements

We have 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 we consider material.

Going Concern

Our financial statements are prepared using generally accepted accounting principles, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. Because the business is relatively new and has a short history and relatively few sales, no certainty of continuation can be stated. The accompanying financial statements for the three months ended July 31, 2019 have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company has suffered losses from operations and has an accumulated deficit, which raises substantial doubt about its ability to continue as a going concern

As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.

Changes in internal controls over financial reporting

There have been no changes in our internal control over financial reporting during the quarter ended July 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls  

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.