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.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2015 and 2014
Note 1. Description of
the Business
American Cannabis Company, Inc. and its subsidiary Company, Hollister
& Blacksmith, Inc., doing business as American Cannabis Consulting (“American Cannabis Consulting”), (collectively
“the “Company”) are based in Denver, Colorado and operate a fully-integrated business model that features end-to-end
solutions for businesses operating in the regulated cannabis industry in states and countries where cannabis is regulated and/or
has been de-criminalized for medical use and/or legalized for recreational use. We provide advisory and consulting services specific
to this industry, design industry-specific products and facilities, and sell both exclusive and non-exclusive customer products
commonly used in the industry.
American Cannabis Company, Inc. is a publicly listed Company quoted
on the OTCQB under the symbol “AMMJ”.
American Cannabis Company, Inc. was 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 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 shares of 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.
The foregoing descriptions of the Merger Agreement and Separation Agreement
do not purport to be complete and are qualified in their entirety by the terms of such agreements, which are filed as exhibits
to the Current Report on Form 8-K filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) on
October 3, 2014.
Immediately following the completion of the Merger Agreement, former
shareholders of American Cannabis Consulting owned 31,710,628 shares of American Cannabis Company, Inc.’s common stock representing
78.44% of American Cannabis Company, Inc.’s issued and outstanding share capital. Accordingly, American Cannabis Consulting
was deemed to have been the accounting acquirer in a Reverse Merger which resulted in a recapitalization of the Company. Consequently,
the Company’s financial statements reflect the results of American Cannabis Consulting since Inception (March 5, 2013) and
of American Cannabis Company, Inc. (formerly BIMI) from September 29, 2014 to December 31, 2014.
See Note 14. “Stockholders’ Equity” for further information
regarding the accounting related to the Reverse Merger.
Note 2. Summary of Significant
Accounting Policies
Basis of Accounting
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP"). The Company has elected a fiscal year ending
on December 31.
Use of Estimates in Financial Reporting
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods
presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects
of revisions are reflected in the financial statements in the period they are deemed to be necessary. Significant estimates made
in the accompanying financial statements include but are not limited to following: those related to revenue recognition, allowance
for doubtful accounts and unbilled services, lives and recoverability of equipment and other long-lived assets, contingencies
and litigation. The Company is subject to uncertainties, such as the impact of future events, economic, environmental and political
factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a
given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued.
Accordingly, the accounting estimates used in the preparation of the Company's financial statements will change as new events
occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes.
Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected
in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the financial
statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents are held in operating accounts at a major financial
institution.
The company maintains its cash balances in three national financial
institutions. Accounts at these institutions are insured by Federal Deposit Insurance Corporation insurance for up to $250,000
per institution. For the years ended December 31, 2015 and 2014, the Company had uninsured balances of $267,238 and $0, respectively.
Management believes that these financial institutions are financially sound and the risk of loss is minimal.
Restricted Cash
Restricted cash is recorded at cost, which approximates fair value.
There was no restricted cash included in current assets on our balance sheets as of December 31, 2015 and December 31, 2014. Restricted
cash previously related to remaining proceeds from a short-term note entered into on March 21, 2014 and fully satisfied on May
15, 2014 (see Note 7. Convertible Notes Payable).
Inventory
Inventory is comprised of products and equipment owned by the Company
to be sold to end-customers. Inventory is valued at cost, based on the specific identification method, unless and until the market
value for the inventory is lower than cost, in which case an allowance is established to reduce the valuation to market value.
As of December 31, 2014, market values of all of the Company’s inventory were greater than cost, and accordingly, no such
valuation allowances was recognized. As of December 31, 2015 and December 31, 2014, the Company had capitalized $57,170 and $40,
051 of costs associated with the construction of demo inventory, including but not limited to parts for the assembly of scalable
cultivation systems; and accordingly, no amortization or depreciation expense was recorded related to this asset for each year,
then ended.
Deposits
Deposits is comprised of advance payments made to third parties, primarily
for inventory for which the Company has not yet taken title. When the Company takes title to inventory for which deposits are
made, the related amount is classified as inventory, then recognized as a cost of revenues upon sale (see “Costs of Revenues”
below).
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets is primarily comprised of
advance payments made to third parties for independent contractors’ services or other general expenses. Prepaid services
and general expenses are amortized over the applicable periods which approximate the life of the contract or service period.
Accounts Receivable
Accounts receivable are recorded at the net value of face amount less
an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and, based on a method
of specific identification of any accounts receivable for which it deems the net realizable value to be less than the gross amount
of accounts receivable recorded, establishes an allowance for doubtful accounts for those balances. In determining its need for
an allowance for doubtful accounts, the Company considers historical experience, analysis of past due amounts, client creditworthiness
and any other relevant available information. However, the Company’s actual experience may vary from its estimates. If the
financial condition of its clients were to deteriorate, resulting in their inability or unwillingness to pay the Company’s
fees, it may need to record additional allowances or write-offs in future periods. This risk is mitigated to the extent that the
Company receives retainers from its clients prior to performing significant services.
The allowance for doubtful accounts, if any, is recorded as a reduction
in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the
provision relates to a client's inability to make required payments on accounts receivables, the provision is recorded in operating
expenses. As of December 31, 2015 and December 31, 2014 our allowance for doubtful accounts was $8,419 and $9,338, respectively.
For December 31, 2015 and December 31, 2014, we recorded bad debt expense of $30,753 and $9,338, respectively, which is reflected
as a component of general and administrative expenses on the consolidated statement of operations.
Significant Customers
On a geographical basis, for the year ended December 31, 2015, approximately 91% and 9% of our total revenues
were generated from the United States and Canada, respectively. For the year ended December 31, 2014, approximately 70% and 30%
of our total revenues for the period were generated from the United States and Canada, respectively.
On a geographical basis, for the year ended December 31, 2015,
approximately 91% and 9% of our total revenues were generated from the United States and Canada, respectively. For the year
ended December 31, 2014, approximately 70% and 30% of our total revenues for the period were generated from the United States
and Canada, respectively.
Property and Equipment, net
Property and Equipment is stated at net book value, cost less depreciation.
Maintenance and repairs are expensed as incurred. Depreciation of owned equipment is provided using the straight-line method over
the estimated useful lives of the assets, ranging from two to seven years. Depreciation of capitalized construction in progress
costs, a component of property and equipment, net, begins once the underlying asset is placed into service. Property and equipment
is reviewed for impairment as discussed below under “Accounting for the Impairment of Long-Lived Assets.” The Company
had not capitalized any interest as of December 31, 2014 and 2013.
Accounting for the Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability
of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted net cash flows
expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived
assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash
flows, appraised values or management's estimates, depending upon the nature of the assets. The Company did not record any impairment
charges related to long-lived assets during the year ended December 31, 2015 and December 31, 2014.
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provides
for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by the Company as a debt discount pursuant to Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ACF”) Topic 470-20
Debt with Conversion and Other Options
.
In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the
discount to interest expense over the life of the debt using the effective interest method.
Revenue Recognition
Revenue is recognized in accordance with FASB ASC Topic 605,
Revenue
Recognition
. The Company recognizes revenue when persuasive evidence of an arrangement exists, the related services are rendered
or delivery has occurred, the price is fixed or determinable and collectability is reasonably assured.
The Company primarily generates revenues from professional services
consulting agreements. These arrangements are generally entered into on a time basis, for a fixed-fee or on a contingent fee basis.
Generally, a prepayment or retainer is required prior to performing services.
Revenues from time-based engagements are recognized as the hours are
incurred by the Company.
Revenues from fixed-fee engagements
are recognized under the completed or proportional performance methods. Management reviews arrangement to determine whether or
not the fixed-fee is for a final deliverable or act which is significant to the arrangement as a whole. If it is, revenue is recognized
under the completed performance method, in which revenue is recognized once the final act or deliverable is performed or delivered.
Revenue recognized under the proportional performance method is recognized as services are performed. Under this method, the Company
estimates the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable
in order to determine the amount of revenue to be recognized. Revenue recognition is affected by a number of factors that change
the estimated amount of work required to complete the deliverable, such as changes in scope, timing, awaiting notification of
license award from local government, and the level of client involvement. Losses, if any, on fixed-fee engagements are recognized
in the period in which the loss first becomes probable and reasonably estimable. During the year ended December 31, 2015 and December
31, 2014, no such losses have occurred. The Company believes if an engagement terminates prior to completion it can recover the
costs incurred related to the services provided.
The Company occasionally enters into arrangements for which revenues
are contingent upon achieving a pre-determined deliverable or future outcome. Any contingent revenue for these arrangements is
not recognized until the contingency is resolved and collectability is reasonably assured.
The Company’s arrangements with clients may include terms to deliver
multiple services or deliverables. These contracts specifically identify the services to be provided with the corresponding deliverable.
The value for each deliverable is determined based on the prices charged when each element is sold separately or by other vendor-specific
objective evidence (“VSOE”), or estimates of stand-alone selling prices. Revenues are recognized in accordance with
the Company’s accounting policies for the elements as described above. The elements qualify for separation when the deliverables
have value on a stand-alone basis and the value of the separate elements can be established by VSOE or an estimated selling price.
While assigning values and identifying separate elements requires judgment,
selling prices of the separate elements are generally readily identifiable as the Company also sells those elements individually
outside of a multiple services engagement. Contracts with multiple elements typically incorporate a fixed-fee or hourly pricing
structure. Arrangements are typically terminable by either party upon sufficient notice and do not include provisions for refunds
relating to services provided.
Differences between the timing of billings
and the recognition of revenue are recognized as either unbilled revenue (a component of accounts receivable) or deferred revenue
on the consolidated balance sheet. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled
revenue.
Reimbursable expenses, including those relating to travel, other out-of-pocket
expenses and any third-party costs, are included as a component of revenues. Typically, an equivalent amount of reimbursable expenses
are included in total direct client service costs. Reimbursable expenses related to time and materials and fixed-fee engagements
are recognized as revenue in the period in which the expense is incurred and collectability is reasonably assured. Taxes collected
from customers and remitted to governmental authorities are presented in the statement of operations on a net basis.
Revenue from product and equipment sales, including delivery fees, is
recognized when an order has been obtained, the price is fixed and determinable, the product is shipped, title has transferred
and collectability is reasonably assured. Generally, our suppliers’ drop-ship orders to our clients with origin terms. For
any shipments with destination terms, the Company defers revenue until delivery to the customer. During the year ended December
31, 2015 and December 31, 2014, sales returns were not significant and as such, no sales return allowance had been recorded as
of December 31, 2015 nor at December 31, 2014. During the year ended December 31, 2015, the Company generated revenue from the
sale of products to a company managed by a Director of the Company.
Costs of Revenues
The Company’s policy is to recognize costs of revenue in the same
manner in conjunction with revenue recognition. Cost of revenue includes the costs directly attributable to revenue recognition
and includes compensation and fees for services, travel and other expenses for services and costs of products and equipment. Selling,
general and administrative expenses are charged to expense as incurred.
Advertising and Promotion Costs
Advertising and promotion costs are included as a component of selling
and marketing expense and are expensed as incurred. During the year ended December 31, 2015 and December 31, 2014, these costs
were $79,989 and $29,858, respectively.
Shipping and Handling Costs
For product and equipment sales, shipping
and handling costs are included as a component of cost of revenues.
Stock-Based Compensation
Restricted shares are awarded to employees and service providers and entitle the grantee to receive shares
of common stock at the end of the established vesting period. The fair value of the grant is based on the stock price on the date
of grant. We recognize related compensation costs on a straight-line basis over the requisite vesting period of the award, which
to date has been one year from the grant date. During the years ended December 31, 2015 and December 31, 2014, stock-based compensation
expense for restricted shares was $319,187 and $3,370,128, respectively. Compensation expense for warrants and options is based
on the fair value of the instruments on the grant date, which is determined using the Black-Scholes valuation model, and are expensed
over the expected term of the awards. During the year ended December 31, 2015 and December 31, 2014, compensation expense for warrants
and options was $0 and $146,551, respectively.
Income Taxes
Our corporate status changed from an S-Corporation, which it had been
since inception, to a C-Corporation during the year ended December 31, 2014. As provided in Section 1361 of the Internal Revenue
Code, for income tax purposes, S-Corporations are not subject to corporate income taxes; instead, the owners are taxed on their
proportionate share of the S-Corporation’s taxable income. Accordingly, we were only subject to income taxes for a portion
of 2014. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included
in the financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes,
using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation
allowance when necessary to reduce deferred tax assets to the amount expected to be realized. For the year ended December
31, 2015 and December 31, 2014, 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 December 31, 2015 and December
31, 2014, we had no liabilities related to federal or state income taxes and the carrying value of our deferred tax asset was
zero. The years 2010 to 2015 remain subject to examination by the Company’s major tax jurisdictions
Net Income (Loss) Per Common Share
The Company reports net income (loss) per common share in accordance
with FASB ASC 260, “Earnings per Share”. This statement requires dual presentation of basic and diluted earnings with
a reconciliation of the numerator and denominator of the earnings per share computations. Basic net income (loss) per share is
computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding
during the period and excludes the effects of any potentially dilutive securities. Diluted net income (loss) per share gives effect
to any dilutive potential common stock outstanding during the period. The computation does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on earnings.
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.
Material related party transactions are required to be disclosed in
the consolidated financial statements, other than compensation arrangements, expense allowances, and other similar items in the
ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined
financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods
for which statements of operations are presented and the effects of any change in the method of establishing the terms from that
used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and,
if not otherwise apparent, the terms and manner of settlement. During the year ended December 31, 2015, the Company generated
revenue from the sale of products to a company managed by a Director of the Company.
See Note 10. Related Party Transactions for associated disclosures.
Reclassifications
Certain balance sheet reclassifications have been made to prior period
balances to reflect the current period’s presentation format; such reclassifications had no impact on the Company’s
consolidated statements of operations or consolidated statements of cash flows and had no material impact on the Company’s
consolidated balance sheets.
Recent Accounting Pronouncements
In August 2014, the FASB issued
ASU 2014-15 “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). By incorporating and expanding upon
certain principles that are currently in U.S. auditing standards, ASU 2014-15 requires management to assess whether there is substantial
doubt about the entity’s ability to continue as a going concern . Specifically, ASU 2014-15 (1) provides a definition of
the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles
for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is
alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when
substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial
statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016,
and for annual periods and interim periods thereafter. Early application is permitted. The Company has not elected to early adopt
the provisions of ASU 2014-15, and accordingly, the requirements of ASU 2014-15 will apply beginning with the year ended December
31, 2016. The Company is currently evaluating the effects, if any, that the application of ASU 2014-15 will have on disclosures
associated with its consolidated financial statements.
In May 2014, the FASB issued ASU
2014-9 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-9”), which provides a comprehensive
new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to
a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This
guidance is effective for annual reporting and interim periods beginning after December 15, 2016 and allows for either full
retrospective or modified retrospective application, with early adoption not permitted. Accordingly, the standard becomes effective
for the Company on January 1, 2017. The Company is currently evaluating the adoption method it will apply and the impact
that this guidance will have on its consolidated financial statements and related disclosures.
Note 3. Accounts Receivable,
net
Accounts receivable, net, was
comprised of the following:
|
|
December 31, 2015
|
|
December 31, 2014
|
Gross accounts receivable
|
|
$
|
56,704
|
|
|
$
|
66,980
|
|
Less: allowance for doubtful accounts
|
|
|
(8,419
|
)
|
|
|
(9,338
|
)
|
Accounts receivable, net
|
|
$
|
48,285
|
|
|
$
|
57,642
|
|
For the years ended December 31,
2015 and December 31, 2014, the Company had bad debt expense of $30,753 and $9,338, respectively.
Note 4. Deposits
Deposits was comprised of the following as of December 31, 2015 and
2014:
|
|
December 31, 2015
|
|
December 31, 2014
|
Inventory deposits
|
|
$
|
9,345
|
|
|
$
|
179,941
|
|
Operating lease deposits
|
|
|
0
|
|
|
|
2,000
|
|
Deposits
|
|
$
|
9,345
|
|
|
$
|
181,941
|
|
Inventory deposits reflect down payments made to suppliers or manufacturers
under inventory purchase agreements.
Note 5. Inventory
Inventory as of December 31, 2015 and December 31, 2014 of $67,435 and
$44,606 was comprised of finished goods in-transit to customers and also costs associated with the construction of demo inventory,
including but not limited to parts for the assembly of scalable cultivation systems. The cost of this demo inventory was 57,170
as of December 31, 2015 and $40,051 as of December 31, 2014.
Note 6. Property and Equipment,
net
Property and equipment, net, was comprised of the following:
|
|
December 31, 2015
|
|
December 31, 2014
|
Office equipment
|
|
$
|
7,472
|
|
|
$
|
5,742
|
|
Furniture and fixtures
|
|
|
8,777
|
|
|
|
2,935
|
|
Machinery and equipment
|
|
|
2,336
|
|
|
|
1,250
|
|
Property and equipment, gross
|
|
|
18,585
|
|
|
|
9,927
|
|
Less: accumulated depreciation
|
|
|
(5,137
|
)
|
|
|
(1,562
|
)
|
Property and equipment, net
|
|
$
|
13,448
|
|
|
$
|
8,365
|
|
For the year
ended December 31, 2015 and December 31, 2014, the Company recorded depreciation expense of $3,575 and $1,077, respectively.
Note 7.
Convertible Notes Payable
On April 24, 2014, Brazil Interactive Media, Inc. issued convertible
notes payable in the total amount of $395,000. The convertible notes payable have a maturity date of April 24, 2016, pay zero
interest, and are convertible until maturity at the holders’ discretion into shares of the Company’s common stock
at $0.08 per share. Brazil Interactive Media, Inc.’s share price on April 24, 2014 was $0.24 and accordingly, the intrinsic
value of the beneficial conversion feature attached to these convertible notes payable was $590,000. However, as the amount of
debt discount to be recognized cannot exceed the face value of the convertible notes payable, the convertible notes payable were
discounted by the maximum permissible amount of $395,000 due to the intrinsic value of the beneficial conversion option.
During the period from April 24, 2014
through the effective date of the Merger, September 29, 2014, no convertible notes payable were converted into shares of Brazil
Interactive Media, Inc. common stock and $84,836 debt discount was amortized during the period. Accordingly as at the effective
date of the Reverse Merger, September 29, 2014, a total of $395,000 of convertible notes payable and unamortized debt discount
of $310,164 was recognized in the Company’s consolidated financial statements.
During the period from September 29,
2014 to December 31, 2014, $323,500 of the convertible notes payable were converted into 4,043,750 shares of common stock and
$263,215 of debt discounted was amortized in the period. The balance of unamortized debt discount outstanding in respect of convertible
notes payable that converted into shares of American Cannabis Company, Inc. common stock was amortized in full at the date of
conversion.
As of December 31, 2015, the convertible
notes payable had a $71,500 face value and a discount of $11,248, for a net carrying value of $60,252 which is reflected on the
Company’s balance sheet as convertible notes payable, net. As of December 31, 2014, the convertible notes payable had a
$71,500 face value and a discount of $46,949, for a net carrying value of $24,551 that is reflected on the Company’s balance
sheet as Convertible notes payable, net. The convertible notes payable are convertible into 893,750 shares of American Cannabis
Company, Inc. common stock. As of April 11
th
, 2016, the maturity date on this note has been renegotiated to April 24
th
,
2018. On April 12, 2016
, the Company received
notice of partial conversion of this note in the amount $58,000 convertible into 725,000 shares of restricted common stock at a
price of $0.08 per share.,
On May 15, 2014, as a result of the
issuance of the convertible notes payable, a secured promissory note that American Cannabis Consulting had originally entered
into on March 21, 2014 was deemed to be fully satisfied. This secured promissory note had a principal amount of $35,000 and an
interest rate of 5% per annum. The Company recorded interest expense related to this note of $260 during the year ended December
31, 2014. The Company recorded a gain on debt extinguishment of $35,000 during the year ended December 31, 2014.
Note 8. Accrued and Other Current
Liabilities
Accrued
and other current liabilities consisted of the following:
|
|
December 31, 2015
|
|
December 31, 2014
|
Accrued legal fees
|
|
$
|
0
|
|
|
|
0
|
|
Accrued payroll liabilities
|
|
|
18,185
|
|
|
|
11,522
|
|
Accrued accounting fees
|
|
|
0
|
|
|
|
5,000
|
|
Due to directors
|
|
|
0
|
|
|
|
1,999
|
|
Accrual for inventory products sold and shipped (in transit)
|
|
|
64,050
|
|
|
|
0
|
|
Other
|
|
|
11,233
|
|
|
|
5,488
|
|
Accrued and other current liabilities
|
|
$
|
93,468
|
|
|
$
|
125,518
|
|
Note 9. Net
Income (Loss) per Common Share
The
following is a reconciliation of weighted common shares outstanding used in the calculation of basic and diluted net income (loss)
per common share:
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2015
|
|
December 31, 2014
|
Net income (loss)
|
|
$
|
(515,653
|
)
|
|
$
|
(3,619,192
|
)
|
Weighted average shares used for basic net income (loss) per common share
|
|
|
44,637,046
|
|
|
|
32,542,940
|
|
Incremental diluted shares
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares used for diluted net income (loss) per common share
|
|
|
44,637,046
|
|
|
|
32,542,940
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.01
|
)
|
As of December 31,
2015, no potentially dilutive shares were issued or outstanding. As a result of the net loss for the period, the Company excluded
681,569 total shares from its calculation of diluted net income (loss) per common share for the year ended December 31, 2014 because
their effect would have been antidilutive. These shares were comprised of 38,255 shares of common stock, 26,289 of warrants and
617,055 of share equivalents associated with convertible notes payable.
Note 10.
Related Party Transactions
Previously, the Company purchased inventory
and equipment from Baroud Development Group, in which Anthony Baroud, the Company’s former Chief Technology Officer and
a former Director of the Company, is an owner. During the year ended December 31, 2014, such purchases totaled $40,715. No such
transactions occurred during 2015. For the year ended December 31, 2015, the Company generated revenue from the sale of products to an entity
controlled by a Director.
During the year ended December 31, 2014, prior to the Reverse Merger,
the Company distributed a total of $4,000 to its co-founders and owners, Corey Hollister and Ellis Smith.
During the year ended December 31,
2015 and December 31, 2014, the Company incurred $38,360 and $30,227, respectively, of expense payable to New Era CPAs, an accounting
firm in which Antonio Migliarese, the Company’s former Chief Financial Officer, was a partner.
During the year ended December 31,
2015 and December 2014, the Company sold $25,214 and $0, respectively, of equipment and supplies to a customer managed by a Director
of the Company. As of December 31, 2015 and December 2014, the Company was owed $17,512 and $0, respectively, from this customer.
Note 11.
Commitments and Contingencies
Under the terms of our agreement with
the manufacturer of our exit packing product, the Satchel
TM
, we were committed to the purchase of a total of 500,000
units. During 2015 the Company met its purchase obligation, and on September 2015 the Company exercised its contractual right
to purchase additional units at a negotiated price.
Under the terms of the Company’s
various consulting agreements with clients, the Company is obligated to perform certain future services.
On
January 20, 2016, we were named as a defendant in a civil suit entitled: Anthony Baroud vs. Hollister & Blacksmith, Inc.,
dba American Cannabis Company filed in the Circuit Court of Cook County, Illinois. The lawsuit seeks damages of $100,000 related
to an employment contract. The Company filed a motion to compel contractual arbitration that has yet to be ruled on by the Court.
On April 14, 2014, the Company entered
into a 106 day lease of office space to house its corporate offices which converted to a month to month lease at the end of the
lease term. Under the terms of the lease, payments were $2,000 during the lease term and $4,000 per month after the lease term
expired.
On July 28, 2015, the Company entered
into a 5 year lease for 6,500 square feet of office space to house its corporate offices. Under the terms of the lease, payments
are $4,500 per month for the first 36 months of the lease, and escalate thereafter.
The following table summarizes the
Company’s future lease obligations:
Year
|
|
Amount
|
|
2016
|
|
|
$
|
54,000
|
|
|
2017
|
|
|
$
|
54,000
|
|
|
2018
|
|
|
$
|
54,000
|
|
|
2019
|
|
|
$
|
56,320
|
|
|
2020
|
|
|
$
|
33,610
|
|
|
Total
|
|
|
$
|
251,930
|
|
During the years ended December 31,
2015 and 2014, the company incurred $53,800 and $20,933, respectively, in rent expense.
Note 12.
Stock-based Compensation
During the years ended December 31, 2015 and December 31,
2014, the Company recorded a total of $319,187 and $3,370,128, respectively, of stock-based compensation expense, which was the
result of the following activity:
Restricted
Shares
From time
to time, the Company grants certain employees restricted shares of its common stock to provide further compensation in-lieu of
wages and to align the employee’s interests with the interests of its stockholders. Because vesting is based on continued
employment, these equity-based incentives are also intended to attract, retain and motivate personnel upon whose judgment, initiative
and effort the Company’s success is largely dependent.
The following
table summarizes the Company’s restricted share award activity during the year ended December 31, 2015:
|
|
Restricted Shares
|
|
Weighted Average
|
|
|
Common Stock
|
|
Grant Date Fair Value
|
|
Outstanding unvested at December 31, 2014
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
150,000
|
|
|
|
0.94
|
|
|
Vested restricted shares
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding unvested at December 31, 2015
|
|
|
|
150,000
|
|
|
|
0.94
|
|
|
Granted
|
|
|
|
164,981
|
|
|
|
0.21
|
|
|
Vested restricted shares
|
|
|
|
(100,000
|
)
|
|
|
0.94
|
|
|
Forfeited
|
|
|
|
(50,000
|
)
|
|
|
0.94
|
|
|
Outstanding unvested at December 31, 2015
|
|
|
|
164,981
|
|
|
$
|
0.94
|
|
During the year ended December 31, 2015, the Company granted
164,981 restricted shares and recognized $124,099 in associated employee stockbased compensation expense. There were 150,000 restricted
shares granted as of December 31, 2014 and recognized $40,903 in associated employee stockbased compensation expense. The fair
value of restricted stock units is determined based on the quoted closing price of the Company’s common stock on the date
of grant.
Warrants
In connection
with his appointment to the Company’s board of directors, the Company granted its independent board member, Vincent “Tripp”
Keber, warrants to purchase up to two hundred and fifty thousand (250,000) shares of common stock at an exercise price of sixty-three
cents ($0.63) per share, exercisable within five (5) years of the date of issuance on November 19, 2014. Additionally, Mr. Keber
shall be eligible to receive options for 400,000 shares of common stock under the Company’s incentive plan, as and when
duly approved by the Board of Directors.
The Company uses the Black-Scholes valuation model to determine the
fair value of warrants as of the grant date. Assumptions used in this calculation for the warrant award to purchase 250,000 shares
of common stock include expected volatility of 160.7%, based on an average of historical data of the Company’s stock price
and the stock prices of three comparable companies that are also included in the marijuana index, a risk-free rate of 1.62%, based
on U.S. Treasury yields as published by the Federal Reserve, a dividend yield of 0.0%, as the Company has not historically
paid dividends nor does it have any plans to do so in the foreseeable future, and an expected term of five years. The grant date
fair value of the warrants, as calculated based on these assumptions, was $0.59 per share.
During 2015
and 2014, the Company had the following warrant activity:
|
|
Common Stock Warrants
|
|
Weighted Average Grant Date
Fair Value
|
Outstanding unvested at December 31, 2013
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
250,000
|
|
|
|
0.59
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding unvested at December 31, 2014
|
|
|
250,000
|
|
|
|
0.59
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding unvested at December 31, 2015
|
|
|
250,000
|
|
|
$
|
0.59
|
|
Vested at December 31, 2015
|
|
|
250,000
|
|
|
$
|
0.59
|
|
Unvested at December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
Compensation
expense associated with warrants was $146,551 for the year ended December 31, 2015 and is reflected on the consolidated statement
of operations as a component of general and administrative expenses. No warrants were issued or outstanding during 2015, and accordingly,
there was no compensation expense associated with warrants for the year ended December 31, 2015.
As of December 31, 2015, the exercise price per share exceeded
the price per share of our common shares. There was no aggregate intrinsic value of outstanding warrants.
Note 13.
Income Taxes
As part of
the Reverse Merger, the Company’s corporate status changed from an S-Corporation, which it had been since inception, to
a C-Corporation. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes, S-Corporations are not subject
to corporate income taxes; instead, the owners are taxed on their proportionate share of the S-Corporation’s taxable income.
Accordingly, the Company was not subject to income tax for the year ended December 31, 2015 and was only subject to income taxes
for a portion of the year ended December 31, 2014.
The following
table displays a reconciliation from the U.S. statutory rate to the effective tax rate and the provision for (benefit from) income
taxes for the years ended December 31, 2015 and 2014, respectively:
|
|
December 31, 2015
|
|
December 31, 2014
|
Tax benefit at the US statutory rate of 34%
|
|
$
|
175,322
|
|
|
$
|
1,230,525
|
|
State income tax benefit
|
|
|
23,875
|
|
|
$
|
167,569
|
|
Non-deductible expenses including non-deductible pre-merger losses
|
|
|
(773
|
)
|
|
|
(2,057
|
)
|
Change in valuation allowance
|
|
|
(198,424
|
)
|
|
|
(1,396,037
|
)
|
Total income tax benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax
assets (liabilities) consisted of the following:
Due to cumulative
net losses since the change in our corporate status to a C-Corporation, the Company determined that it is not more likely than
not that its deferred tax asset would be realizable. Accordingly, the Company recorded a valuation allowance for the full amount
of its deferred tax asset, resulting in a zero carrying value of the Company’s deferred tax asset and no benefit from or
provision for income taxes for the year ended December 31, 2015 and December 31, 2014. As of December 31, 2014, the carrying value
of the Company’s deferred tax assets was zero due to the valuation allowance. Federal and state operating loss carry forwards
of $198,369 as of December 31, 2016 begin expiring on 2034. The years 2010 to 2015 remain subject to examination by the Company’s
major tax jurisdictions.
Utilization of the net operating loss carry forwards and credits may
be subject to a substantial annual limitation due to ownership change limitations provided by Section 382 of the Internal Revenue
Code of 1986, as amended, and similar state provisions.
The American Cannabis Company, Inc.
is authorized to issue 5,000,000 shares of preferred stock at $0.01 par value.
No shares of preferred stock were issued
and outstanding during the year ended December 31, 2015 or the period from Inception (March 5, 2013) to December 31, 2013.
In connection with the September 29,
2014 Reverse Merger as described in Note 1. “Description of the Business”, American Cannabis Consulting was deemed
to have been the accounting acquirer in accordance with U.S. GAAP. Consequently, the Company’s consolidated financial
statements reflect the results of American Cannabis Consulting since Inception (March 5, 2013) and of American Cannabis Company,
Inc. (formerly BIMI) from September 29, 2014 to December 31, 2014.
As a reverse triangular merger, the
Reverse Merger resulted in a recapitalization of American Cannabis Company, Inc. (formerly BIMI). This recapitalization included
retrospective restatement of all stock issuance by American Cannabis Consulting from Inception (March 5, 2013), whereby the issued
and outstanding shares of American Cannabis Consulting common stock were retrospectively restated for a 1:3,171.0628 forward share
split to recognize the exchange ratio associated with the Reverse Merger, and for the change in the par value of shares issued
in connection with the Reverse Merger.
On the date of the Reverse Merger,
an additional 8,714,372 shares were issued, and accordingly, $87 of common stock was recorded (8,714,372 shares issued multiplied
by the $0.00001 par value) and additional paid-in capital of $5,258 was recorded, reflecting the net assets assumed from Brazil
Interactive Media, Inc. in connection with the Reverse Merger.
As a result of the transactions described
above, as of December 31, 2015, the balances of common stock and additional paid-in capital were $448 and $4,268,708, respectively.
As a result of the transactions described above, as of December 31, 2014, the balances of common stock and additional paid-in
capital were $446 and $3,699,526, respectively. American Cannabis Company, Inc. is authorized to issue 100,000,000 common shares
at $0.00001 par value per share and 5,000,000 shares of preferred stock at $0.01 par value.
The Company has no reportable segments
as it only operates in the regulated cannabis industry, as a provider of professional consulting services, products and equipment.