UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year
ended December 31, 2019
or
☐ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition
period from ______to______
Commission file number:
033-33263
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JACKSAM CORPORATION
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(Exact name of Company
as specified in its charter)
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Nevada
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46-3566284
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(State or Other
Jurisdiction of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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30191 Avenida De
Las Banderas Suite B
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Rancho Santa
Margarita, CA
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92688
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(Address of Principal
Executive Offices)
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(Zip Code)
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Company’s telephone
number, including area code: (800) 605-3580
Securities registered
pursuant to Section 12(b) of the Act: None
Securities registered
pursuant to Section 12(g) of the Act:
Common Stock,
par value $0.001 per share
(Title of class)
Indicate by check mark
if the Company is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark
if the Company is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes ☐ No
☒
Indicate by check mark
whether the Company (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate by check mark
whether the Company has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405) during the preceding 12 months. Yes
☒ No ☐
Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of the Company’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark
whether the Company is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting
company)
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Smaller reporting company
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☒
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Emerging growth company
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Indicate by check mark
whether the Company is a shell company (as defined in Rule 12b-2 of
the Act): Yes ☒ No ☐
If an emerging growth
company, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. ☒
As of April 16, 2020,
there were 63,348,163 shares of company’s common stock, par value
$0.001 per share, outstanding.
Jacksam
Corporation
Form
10-K
For the Fiscal
Year Ended December 31, 2019
TABLE OF
CONTENTS
Forward-Looking
Statements
For purposes of this
report, unless otherwise indicated or the context otherwise
requires, all references herein to “Jacksam Corporation”, “the
Company”, “we,” “us,” and “our,” refer to Jacksam Corporation, a
Nevada corporation.
Forward-Looking
Statements
This Annual Report on
Form 10-K, or this Report, contains forward-looking statements. Any
and all statements contained in this Report that are not statements
of historical fact may be deemed forward-looking statements. Terms
such as “may,” “might,” “would,” “should,” “could,” “project,”
“estimate,” “pro-forma,” “predict,” “potential,” “strategy,”
“anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,”
“continue,” “intend,” “expect,” “future” and terms of similar
import (including the negative of any of the foregoing) may be
intended to identify forward-looking statements. However, not all
forward-looking statements may contain one or more of these
identifying terms. Forward-looking statements in this Report may
include, without limitation, statements regarding (i) the plans and
objectives of management for future operations, including plans or
objectives relating to the development of our cartridge filling
machines, cartridge capping machines and cartridges, (ii) a
projection of income (including income/loss), earnings (including
earnings/loss) per share, capital expenditures, dividends, capital
structure or other financial items, (iii) our future financial
performance, including any such statement contained in a discussion
and analysis of financial condition by management or in the results
of operations included pursuant to the rules and regulations of the
Securities and Exchange Commission, or the SEC, and (iv) the
assumptions underlying or relating to any statement described in
points (i), (ii) or (iii) above.
The forward-looking
statements are not meant to predict or guarantee actual results,
performance, events or circumstances and may not be realized
because they are based upon our current projections, plans,
objectives, beliefs, expectations, estimates and assumptions and
are subject to a number of risks and uncertainties and other
influences, many of which we have no control over. Actual results
and the timing of certain events and circumstances may differ
materially from those described by the forward-looking statements
as a result of these risks and uncertainties. Factors that may
influence or contribute to the inaccuracy of the forward-looking
statements or cause actual results to differ materially from
expected or desired results may include, without limitation:
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market acceptance of our key
products, primarily our eShark cartridge filling machine, 710 Shark
cartridge filling machine, 710 Captain capping machine, and
cartridges; |
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U.S. Federal and foreign regulation
of cannabis laws; |
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litigation by States affected by
cannabis legalization; |
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our customers’ ability to access
the services of banks; |
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competition from existing
technologies or products, or new technologies and products that may
emerge; |
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the implementation of our business
model and strategic plans for our business; |
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estimates of our future revenue,
expenses, capital requirements and our need for additional
financing; |
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our financial performance; |
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consumer responses to the impact of
the vaping lung illness, which peaked in September 2019 and has
since declined; |
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inventory supply of our machines
and cartridges made in China, subject to the impact of the
COVID-19; |
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developments relating to our
competitors; and |
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other risks and uncertainties,
including those listed under the section titled “Risk
Factors.” |
PART I
Item 1.
Business
Company and
Product Overview
Jacksam Corporation dba
Convectium is a technology company focused on developing and
commercializing products of vaporizer cartridge filling, capping,
and automation systems. We service the medical and recreational
cannabis, hemp and CBD segments of the larger e-cigarette and
vaporizer markets. Prior to July 2019, our product line primarily
consisted of the 710 Shark cartridge filling machine, the 710
Captain cartridge capping machine, and our proprietary cartridges.
Since then, we have added the eShark cartridge filling machine into
our product line, discontinued the sales of our old proprietary
cartridges, and entered into a partnership with Jupiter Research,
which enabled us to distribute their C-Cell cartridges under a
profit-sharing agreement. Our customers are primarily businesses
operating in jurisdictions that have some form of cannabis
legalization. These businesses include medical and recreational
dispensaries, large and small-scale processors and growers,
multi-state operators, and distributors. We expect continued growth
as we take measures to invest in our intellectual property. We
utilize our direct sales force, Jupiter Research’s sales force, our
website, independent sales representatives, and a wide range of
referral network to sell our products.
Our current flagship
product is the eShark cartridge filling machine, which was
introduced to the market in the second half of 2019. The eShark was
developed based on our prior flagship product - the 710 Shark
cartridge filling machine. The eShark features electric motor
system, oil heating mechanics, and advanced automation software
system. eShark machines are designed to inject oil into various
cartridges (glass, plastic and PODS), while also having the
capability to fill bottles and other form factors. eShark machines
can fill 100 traditional cartridges in approximately 60 seconds,
saving our customers’ valuable time and labor expense over the hand
filling method, which is currently the industry norm. We estimate
that, in most applications, the eShark will have a 50x faster rate
than hand filling. The eShark is currently produced in USA. The
eShark has the UL Certification. UL stands for Underwriter
Laboratories, a third-party product safety certification company
that has operated for over a century.
Our prior flagship
product is the 710 Shark cartridge filling machine, which is now on
its seventh version. The 710 Shark has pneumatic motor system, oil
heating mechanics, and automation software system. It can inject
oil into various cartridges (glass, plastic and PODS), while also
having the capability to fill bottles and other form factors. It
can fill 100 traditional cartridges in approximately 60 seconds.
The 710 Shark is currently produced in China. The 710 Shark is sold
at a lower price point compared to the eShark to meet the demand
from a wider group of customers.
In the second quarter
of 2018, we introduced our 710 Captain cartridge capping machine.
It is designed to affix caps to the cartridges filled by our eShark
and 710 Shark filling machines and matches their production
capacity of 100 cartridges in approximately 30 seconds. It is
pneumatically operated. The 710 Captain is currently produced in
USA.
In July 2019, we
discontinued the sales of our old proprietary cartridges and
batteries designed to match those cartridges.
In December 2019, we
entered into a strategic partnership with Jupiter Research, a
subsidiary of TILT Holdings. This partnership enabled our company
to distribute Jupiter Research’s C-Cell cartridges and enabled
Jupiter Research to distribute our filling and capping machines
under a profit-sharing agreement.
As the first and only
company in our industry, we introduced a pre-racked tray solution
to the market in late 2019. As Figure 1 illustrated, our customers
will receive boxes of trays preloaded with empty C-Cell cartridges.
Using our automated machines, our customers can finish filling and
capping 100 cartridges in less than 2 minutes. As the last step,
our customers made new orders, and boxed of pre-racked cartridges
will be delivered to their facilities. Customers using our
pre-racked tray solution together with our automated capping and
filling machines can save significant production time and labor
cost, compared to using the traditional hand filling method or
using our competitor’s machines.
Figure 1. Workflow
of using Convectium Pre-Racked Solution
Source: Jacksam
Corporation
The majority of our
sales are direct B2B sales of our products, namely the eShark, 710
Shark, 710 Captain, and cartridges, to customers in North America.
Our primary customers are medical and recreational dispensaries,
large and small-scale processors and growers, multi-state
operators, and distributors.
We have three major
distribution channels used to sell our products – our direct sales
force, Jupiter Research sales force, and our website
Convectium.com. Additionally, we engage independent sales
representatives and a wide range of referral network.
Our employed sales
force consists of three representatives. We anticipate continued
expansion of our sales team throughout North America as the demand
for our products continues to expand.
We also entered into
referral and reseller agreements to expand our market footprint
across North America. This network includes extraction companies,
wholesalers, distributors, independent sales representatives, and
individuals with significant industry contacts. We intend to expand
the number of referral and reseller network. These agreements
typically provide a commission or referral fee to the source upon a
completed sale.
Our marketing efforts
include attending industry trade shows. In 2019, we participated in
ten such trade shows. We believe attending those trade shows helped
generate a significant amount of business and marketing
opportunities. We typically have a 10’ x 20’ booth with demo
machines and cartridges that we sell.
We also advertise on
social media, industry magazines, and other regional events where
both B2B and B2C opportunities exist. We plan to expand our
marketing efforts to new jurisdictions as they pass medical and
recreational cannabis use laws. We also believe we have a large
opportunity in the Canadian marketplace as it passed the stage of
Cannabis 2.0.
Corporate
History and Background
The Company was
originally incorporated under the laws of the State of Nevada on
September 21, 1989, under the name of Fulton Ventures, Inc. On
September 19, 2002, management at that time changed the name of
Fulton Ventures, Inc. to Asia Premium Television Group, Inc. On
November 16, 2009, management at that time changed the name of Asia
Premium Television Group, Inc. to China Grand Resorts, Inc. to more
accurately reflect their new business efforts. Commencing in 2002,
management at that time acquired and sold a series of subsidiary
entities that were incorporated in various foreign jurisdictions,
including the People’s Republic of China, or PRC, Macau, Hong Kong
and the British Virgin Islands. From 2002 to 2009, these
subsidiaries engaged in a variety of businesses, including,
principally, marketing, brand management, advertising, media
planning, public relations and direct marketing services to clients
in the PRC.
Management at that time
discontinued filing periodic reports under the Exchange Act, after
it filed a quarterly report on Form 10-Q for the period ended June
30, 2014 (the “June 2014 10-Q”) on August 14, 2014. As reported in
the Company’s annual report on Form 10-K for the year ended
September 20, 2013 (the last periodic audited report filed under
the Exchange Act, with which the Company furnished audited
financial statements) and the June 2014 10-Q, management at that
time engaged the Company, through its subsidiaries, in the
provision of mobile phone based services in the PRC through Sun New
Media Transaction Services Ltd., a Hong Kong corporation, and real
estate investment in the PRC through Key Proper Holdings Limited, a
British Virgin Islands corporation.
Since the filing of the
June 2014 10-Q, current management is not aware of any contact
between the Company and management at that time as of the filing of
the June 2014 10-Q, nor does current management have any knowledge
or information relating to the business operations conducted by the
Company or its subsidiaries as of that date, other than as reported
in the periodic reports filed with the SEC.
On April 4, 2016, Mr.
Bryan Glass was appointed to serve as the custodian of the Company,
which was under the name of China Grand Resorts, Inc. at that time,
pursuant to an order of the District Court of Clark County, Nevada.
During the course, Mr. Glass was issued 30 million shares of common
stock and became the controlling owner of the Company. Current
management does not have any records of the Company prior to Mr.
Glass became the controlling owner of the Company in April 2016,
other than the documents filed with or furnished to the SEC.
Jacksam was a company
originally founded in August 2013, as a Delaware corporation, under
the name of Jacksam Corporation. On September 14, 2018, current
management entered into an Agreement and Plan of Merger and
Reorganization (the “Merger”) that resulted in the acquisition of
the operational business of Jacksam, by the Jacksam Acquisition
Corp, or the Acquisition Sub, a corporation formed in the State of
Nevada on September 11, 2018.
Prior to the Merger,
the Company was a dormant company without any active operation and
was a “shell company” as such term is defined in Exchange Act Rule
12b-2.
On November 5, 2018,
current management merged Jacksam Acquisition Corp into the parent
Company, China Grand Resorts, Inc, or the Company. In connection
with the transaction, current management amended the articles of
incorporation of the Company and changed its name from China Grand
Resorts, Inc. to Jacksam Corporation dba Convectium.
Since the Merger, the
Company has been operated under the control of current management
and continued to operate the business of Jacksam Corporation,
described herein, as our sole business.
Immediately prior to
the Merger, we had 33,272,311 shares of our common stock issued and
outstanding and no shares of preferred stock or any securities
convertible into any class of our capital stock issued and
outstanding. Per the Merger, each of the 149,870 shares of the
pre-Merger Jacksam’s common stock issued and outstanding
immediately prior to the Merger was converted into shares of our
common stock at a ratio of 1:300.26023 for a total of 45,000,000
shares of our common stock. Additionally, (i) the rights to
purchase common stock of the Company as contained in those certain
Convertible Debentures (the “2017 Notes”) originally issued between
November 2017 and January 2018 in total principal amount of
$1,718,500 and issued and outstanding immediately prior to the
closing of the Merger were converted into a corresponding right to
purchase shares of our common stock at a conversion price of $0.20
per share, or 8,592,500 shares in total; (ii) the rights to
purchase common stock of the Company as contained in those certain
Convertible Notes (the “2018 Notes”) originally issued in 2018 in
total principal amount of $1,500,000 and issued and outstanding
immediately prior to the closing of the Merger were converted into
a corresponding right to purchase shares of our common stock at a
conversion price of $0.73 per share, or 2,062,160 shares in total;
and (iii) the warrant held by Altar Rock Capital (the “Altar Rock
Warrant”) to purchase 16,652 shares of common stock of the Company
was converted into the right to purchase 5,000,000 shares of our
common stock at an exercise price of $0.001 per share for a total
exercise price of $5,000.00. As a result, an aggregate of
60,654,660 shares of our common stock, including rights pursuant to
the 2017 Notes, the 2018 Notes, and the Altar Rock Warrant to
acquire our common stock, were issued to the pre-Merger holders of
the Company’s capital stock and convertible securities; provided,
however, that the number of shares of our common stock issuable to
any holder of a 2017 Notes and to the holder of the Altar Rock
Warrant may not, in any instance, exceed 4.99% of our then issued
and outstanding common stock. Finally, 30 million shares of our
common stock, purchased by the Company from Bryan Glass on
September 14, 2018 for total consideration of $340,000, the former
controlling shareholder, were returned to treasury by the Company
and cancelled.
Following the Merger
and the related share issuances and cancellations, we had a total
of 48,272,311 shares of our common stock issued and outstanding,
plus rights to acquire an additional 15,654,660 shares of our
common stock outstanding, for a total potential share count of
63,926,971 shares of our common stock in the event that all of the
2017 Notes, the 2018 Notes and the Altar Rock Warrants were to be
converted into our common stock.
The 2017 Notes and the
associated Registration Rights Agreement required us to file a
registration statement covering the resale of the 8,592,500 shares
of our common stock issuable upon conversion of the 2017 Notes. The
terms of the Altar Rock warrant similarly require us to file a
registration statement covering the 5,000,000 shares of our common
stock issuable upon exercise of the Altar Rock Warrant.
The Company determined
that the 2018 Notes qualified as conventional convertible
instruments. Further, the Company evaluated the conversion feature
and determined that there was no beneficial conversion feature or
derivative liabilities. During the quarter ended March 31, 2019,
the Company issued 2,062,161 shares of common stock to convert
these notes in full.
In June and July 2019,
the Company issued convertible notes to 10 investors with a
principal amount of $2,388,889, receiving $1,791,666 in net cash
proceeds (the “June 2019 Notes”). The June 2019 Notes had an
original issue discount of $238,889, and the Company incurred an
interest charge deducted from the gross proceeds of $358,333, based
on a 15% stated rate. The total of $597,222 was recorded as debt
discount. The June 2019 Notes mature on March 25, 2020 and are
convertible into the Company’s common stock at a per share price of
$0.35 at any time subsequent to the issuance date. The June 2019
Notes contain a down round feature, whereby any sale of common
stock or common stock equivalent at a price per share lower than
the conversion price of the June 2019 Notes will result in the
conversion price being lowered to the new price. As of December 31,
2019, the June 2019 Notes were convertible into 5,785,714 shares of
common stock. The notes holders also received warrants to purchase
a total of 3,685,714 shares of the Company’s common stock at an
exercise price of $0.35 per share for a term of five years. The
warrants contain the same down round feature as the notes.
In December 2019, the
Company issued convertible notes to an institutional investor with
a principal amount of $560,000 (the “December 2019 Notes”) with an
original issue discount of $56,000 and a maturity date of June 10,
2020. The Company paid $44,000 of deferred finance costs. The
Company also issued 186,667 shares of common stock to the lender of
the December 2019 Notes as deferred finance costs, valued at
$81,200 based on the closing price of the stock at the date of
borrowing. This lender also received 933,333 shares of common stock
valued at $406,000 as a share lending arrangement, which the
company recorded as contra-equity. The shares may be returned to
the Company if the debt is satisfied in full by the maturity date.
If the debt is not repaid by the maturity date, the shares are
concerned fully earned, and the fair value of the shares will be
amortized in full to expense.
Products
Details
Our principal products
include the eShark cartridge filling machine, 710 Shark cartridge
filling machine, 710 Captain cartridge capping machine, and C-Cell
cartridges.
eShark Cartridge
Filling Machine
Details:
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Up to 100 Cartridge or
Disposable Fills in approximately 60 seconds
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Built in air
compressor; electric operated
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Ability to create and
store up to 20 product/cartridge recipes for accelerated production
changes
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4-in-1 Filling:
Plastic, Ceramic, and Stainless Cartridges or Disposables
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Dual Heated Injection
System for the thickest of oils - temps up to 100C
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Size: 76”H x 25.5”W x
24”D
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Fill Range: 0.1ml - 3ml
per cartridge with a 0.01ml resolution (x100)
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Weight: 275 lbs
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UL certification
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710 Shark Cartridge
Filling Machine
Details:
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Up to 100 Cartridge or
Disposable Fills in approximately 60 seconds
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4-in-1 Filling:
Plastic, Ceramic, and Stainless Cartridges or Disposables
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Dual Heated Injection
System for the thickest of oils - temps up to 100C
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Size: 52”H x 24”W x
14.5”D
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Fill Range: 0.1ml - 3ml
per cartridge with a 0.01ml resolution (x100)
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Weight: 115 lbs
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710 Captain
Cartridge Capping Machine
Details:
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Caps up to 100 of
cartridges in approximately 30 seconds
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Built in air
compressor; pneumatically operated
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No calibration
required, plug & play
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Customizable per
customer requirements
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Manual 2-step press
process to properly align and lock mouthpieces in place
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76”H X 26”D x
24.25”W
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UL Listed
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Weight: 275lbs
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C-Cell Cartridges
and Pre-Racked Trays
We currently distribute
C-Cell cartridges under a profit-sharing agreement with Jupiter
Research. We discontinued the sales of our old proprietary
cartridges and batteries in July 2019. Our C-Cell cartridges are
shipped directly to customers pre-racked in customizable trays,
which are under additional charge.
Our Business
Strategy
Our overall goal is to
become a leading technology company in the segment of the vaporizer
cartridge filling, capping, and automation systems. We focus on
serving the medical and recreational cannabis, hemp and CBD
industries. We develop and commercialize products utilizing an
open-source platform.
Our immediate term
goals are:
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Execute the
Jupiter Research strategic partnership. We intend to focus
on the plan and execution for the best utilization of the sales
force and other resources of both companies.
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Create new
products and maintain technology leadership. We intend to
continue to develop increasing efficient and faster iterations of
our Shark filling machines and Captain capping machine.
Additionally, we intend to continue to develop and introduce
automation solutions to the market.
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Increase our
domestic and international presence. As more states and
countries approve legalized cannabis use, we plan to hire
additional sales personnel where appropriate to take advantage of
the new markets. We also plan to continue to grow our distributor
and affiliate networks to meet expected additional demand for our
products.
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Existing or
Probable Governmental Regulation
Because cannabis
remains illegal under U.S. federal law and our products are
primarily purchased by providers of cannabis to consumers in those
states that have legalized medical or recreational cannabis, a
change in U.S. federal enforcement priorities could adversely
affect our customers and our business.
Our products and
business are not otherwise subject to material governmental
regulation other than those laws and regulations of general
application.
Market
Competition
The automated cartridge
filling and packaging industry in the cannabis, hemp and CBD
marketplace is relatively nascent. We believe that we are the
largest manufacturer of cannabis-focused filling machines, with an
approximately 50% market share by units sold. Our automated filling
machine is designed to fill 100 cartridges per minute. Most
cartridge filling operations are still done by using the hand
filling method at present, with a throughput rate of approximately
5 per minute. Hand-filling remains our largest competitor. We also
believe we offer the highest efficient automated capping machine in
the marketplace. Our automated capping machine is designed to cap
100 cartridges per minute, matching the production capability of
our filling machines. Lastly, we believe we are the first and only
company offering a pre-racked tray solution to customers.
The competition in the
cannabis-focused filling machine market consists of a few players
that are focused on regional markets and small growers. Our most
direct competitors include Thompson-Duke, ATG Pharma, and Cooljarz.
Thompson-Duke is based in Oregon. We estimate its filling machine
will fill approximately 12 cartridges per minute. ATG Pharma is
based in Canada. We estimate its filling machine will fill
approximately 20 cartridges per minute. Cooljarz is based in
California. We estimate its filling machine will fill approximately
eight cartridges per minute. None of these competitors appears to
offer capping machines that can match the production capability of
our automated capping machine.
Additionally, there are
a few manufacturers that manufacture and distribute machines
directly from China, none of which appears to have gained
significant market share.
Our most substantial
competitive threat would be from the large tobacco e-cigarette
manufacturers and the large medical equipment manufacturers, should
either decide to enter the automated cartridge filling and
packaging industry for cannabis, hemp and CBD products. Many of
these companies possess substantially greater manufacturing, sales,
marketing, research and development, and financial resources. As of
the date of this report, however, none has entered the market, nor
are we aware of any with immediate plans to do so. We believe the
changing Federal and state laws that regulate the cannabis industry
have an impact on the decisions of those larger manufacturers. Were
any large tobacco e-cigarette manufacturer or medical equipment
manufacturer to enter the market, our business and prospects would
be adversely affected.
Intellectual
Property Rights
We currently have one
U.S. patent filed with the United States Patent and Trademark
Office (USPTO), number 16682977, issued on November 13, 2019 and
valid for 20 years. We also have one Certificate of Design Patent
from the People’s Republic of China, number ZL201630571863.4,
issued on May 31, 2017 and valid for 10 years. We have not filed
for any other patent, but continue to examine whether, and where,
it may be advantageous for us to do so.
In addition, we also
rely upon trade secrets, know-how, trademarks, copyright
protection, and continuing technological opportunities to develop
and maintain our competitive position. We have periodically
monitored and continue to monitor the activities of our competitors
and other third parties with respect to their use of our
intellectual property. We require our employees, consultants, and
third-party collaborators to execute confidentiality and invention
assignment agreements upon commencing employment or consulting
relationships with us.
Research and
Development
Our research and
development team was originally formed by Jacksam’s founder, Daniel
Davis, and three employed engineers. The founder separated from the
Company on May 31, 2019. The three engineers remained with the
Company and continue research and development activities. The three
engineers also work with our manufacturers to design new
products.
Employees
Presently, we have 10
full-time employees. Three employees are engaged in sales and
business development, three employees are engaged in research and
development and engineering, and four are engaged in business
operations including project management, manufacturing, logistics,
marketing, financing and accounting, and general management and
administration. We have no collective bargaining agreements with
our employees, and we have not experienced any work stoppages. We
consider our relations with our employees to be good.
Item 1A. Risk
Factors
As a smaller reporting
company, we are not required to include Risk Factors in our 10-K
filing.
Item 1B. Unresolved
Staff Comments
None.
Item 2.
Properties
At present, we do not
hold any title to any real estate property. Our property is leased.
We do not have any mortgages, liens or encumbrances against any
such properties.
Rancho Santa
Margarita Lease
On April 30, 2017, we
entered into a lease with Pacific Margarita LLC for premises
consisting of approximately 3,145 square feet located at 30191
Avenida De Las Banderas Suite B, Rancho Santa Margarita,
California. The lease commenced on April 1, 2017 and is for a term
of 37 calendar months. We received the first month at no cost and
the lease expense was $3,082 for months 2-12 and increases
according to the following schedule: $3,617 for months 13-25, and
then $3,761 for months 26-37. We have an option to extend for an
additional two (2) years under the same terms and conditions as the
original lease, but subject to an adjustment of the rental rate to
the then fair market value.
Item 3. Legal
Proceedings
We are not aware of any
pending legal proceedings, to which we are a party or of which any
of our property is the subject, nor are we aware of any such
proceedings that are contemplated by any governmental authority.
From time to time, we may become involved in various lawsuits and
legal proceedings that arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to
time and harm our business.
Item 4. Mine Safety
Disclosures
Not applicable.
PART II
Item 5. Market for
Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market
Information
Our common stocks are
traded on the Pink Tier of the OTC Markets Group, Inc. under the
symbol “JKSM”. The following table sets forth the high and low sale
prices for our common stock for each quarterly period within the
two most recent fiscal years.
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2019
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2018
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|
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High
|
|
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Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter ended
March 31
|
|
$ |
3.20 |
|
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$ |
1.35 |
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|
$ |
0.15 |
|
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$ |
0.15 |
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|
Second Quarter ended
June 30
|
|
$ |
1.50 |
|
|
$ |
0.34 |
|
|
$ |
0.20 |
|
|
$ |
0.15 |
|
|
Third Quarter ended
September 30
|
|
$ |
1.20 |
|
|
$ |
0.35
|
|
|
$ |
1.25 |
|
|
$ |
0.20 |
|
|
Fourth Quarter ended
December 31
|
|
$ |
0.75 |
|
|
$ |
0.21 |
|
|
$ |
3.90 |
|
|
$ |
0.30 |
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Holders
As of April 16, 2020,
we had 167 stockholders of record of our common stock.
Dividend Policy
We have not previously
declared nor paid any cash dividend on any share of our common
stock, nor have we determined to pay dividends on such shares in
the foreseeable future. We currently intend to retain future
earnings, if any, to finance the expansion of our business plan and
objectives. The permissibility to pay dividends on our shares is
restricted by Section 78.288 of the Nevada Revised Statutes, which
provides that a company may not issue a dividend if the result of
such dividend would be to make the company have negative retained
earnings. There can be no assurance that our operations will result
in sufficient revenue to enable us to operate at profitable levels
or to generate positive cash flow. Furthermore, there is no
assurance that our Board of Directors will declare dividends even
if profitable. Our Dividend Policy is subject to the Nevada Revised
Statutes and the discretion of our Board of Directors and will
depend on, among other things, our earnings, financial condition,
capital requirements and other factors that our Board of Directors
considers significant.
Item 6. Selected Financial
Data
Not applicable.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Cautious
Statement Concerning Forward-Looking
Statements
This Management’s
Discussion and Analysis of Financial Condition and Results of
Operations include a number of forward-looking statements that
reflect management’s current views with respect to future events
and financial performance. You can identify these statements by
forward-looking words such as “may,” “will,” “expect,”
“anticipate,” “believe,” “estimate” and “continue,” or similar
words. Those statements include statements regarding the intent,
belief or current expectations of us and members of management team
as well as the assumptions on which such statements are based.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve
risk and uncertainties, and that actual results may differ
materially from those contemplated by such forward-looking
statements.
Readers are urged
to carefully review and consider the various disclosures made by us
in this report and in our other reports filed with the SEC.
Important factors currently known to management could cause actual
results to differ materially from those in forward-looking
statements. We undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes in the future
operating results over time. We believe that our assumptions are
based upon reasonable data derived from and known about our
business and operations. No assurances are made that actual results
of operations or the results of our future activities will not
differ materially from our assumptions. Factors that could cause
differences include, but are not limited to, expected market demand
for our products, fluctuations in pricing of our products, and
competition.
The following
discussion provides information that management believes is
relevant to an assessment and understanding of our past financial
condition and plan of operations. The discussion below should be
read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this report.
Overview
The Company was
incorporated in the State of Nevada on September 21, 1989 under the
name of Fulton Ventures, Inc. Since incorporated, the Company has
engaged in a variety of businesses, but has been inactive since
late 2014 through the Merger that closed on September 14, 2018.
Since the Merger, the Company has been operated under the control
of current management and continued to operate the business of
Jacksam Corporation, described herein, as our sole business. Our
sole business has been the design, manufacturing and sale of
vaporizer cartridge filling machines, capping machines, and
cartridges to customers in the medical and recreational cannabis,
hemp, and CBD industries.
Critical
Accounting Policies
We prepare our
consolidated financial statements in accordance with U.S. Generally
Accepted Accounting Principles (US GAAP). In doing so, we make
estimates and assumptions that affect our reported amounts of
assets, liabilities, revenues, expenses, gains and losses, as well
as related disclosure of contingent assets and liabilities.
Accordingly, actual results could differ materially from our
estimates. To the extent that there are material differences
between these estimates and actual results, our financial condition
or results of operations will be affected. We base our estimates on
past experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates
on an ongoing basis. We refer to accounting estimates of this type
as critical accounting policies and estimates, which we discuss
further below.
Accounts Receivable
and Allowance for Doubtful Accounts
Accounts receivable are
recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by performing
credit checks and actively pursuing past due accounts. The Company
recognizes an allowance for losses on accounts receivable in an
amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt
experience, current receivables aging, and expected future bad
debts, as well as an assessment of specific identifiable customer
accounts considered at risk or uncollectible. The Company recorded
an allowance of $74,000 as of December 31, 2019.
Inventory
Inventories are stated
at the lower of cost, determined on the first-in, first-out (FIFO)
method or net realizable value. Cost principally consists of the
purchase price (adjusted for lower of cost or market), customs,
duties, and freight. The Company periodically reviews historical
sales activity to determine potentially obsolete items and
evaluates the impact of any anticipated changes in future
demand.
The December 31, 2019
and 2018 inventory consisted entirely of finished goods. The
Company will maintain an allowance based on specific inventory
items that have shown no activity over a 24-month period. The
Company tracks inventory as it is disposed, scrapped or sold at
below cost to determine whether additional items on hand should be
reduced in value through an allowance method. As of December 31,
2019, and December 31, 2018, the Company has determined that no
allowance is required.
During the year ended
December 31, 2019, the Company recognized a write-off of inventory
of $402,662, recorded as a component of cost of goods sold on the
consolidated statement of operations.
Property, Plant and
Equipment
Property and equipment
is measured at cost, less accumulated depreciation, and is reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Depreciation of property and equipment is provided utilizing the
straight-line method over the estimated useful lives, ranging from
5 to 7 years of the respective assets. Expenditures for maintenance
and repairs are charged to expense as incurred. Upon sale or
retirement of property and equipment, the related cost and
accumulated depreciation are removed from the accounts and any gain
or loss is reflected in the statements of operations.
Fair Value of
Financial Instruments
The Company measures
assets and liabilities at fair value based on an expected exit
price as defined by the authoritative guidance on fair value
measurements, which represents the amount that would be received on
the sale of an asset or paid to transfer a liability, as the case
may be, in an orderly transaction between market participants. As
such, fair value may be based on assumptions that market
participants would use in pricing an asset or liability. The
authoritative guidance on fair value measurements establishes a
consistent framework for measuring fair value on either a recurring
or nonrecurring basis whereby inputs, used in valuation techniques,
are assigned a hierarchical level.
The following are the
hierarchical levels of inputs to measure fair value:
Level
1 – Observable inputs that reflect quoted market prices in
active markets for identical assets or liabilities.
Level
2 - Inputs reflect quoted prices for identical assets or
liabilities in markets that are not active;
Quoted
prices for similar assets or liabilities in active markets; Inputs
other than quoted prices that are observable for the assets or
liabilities; or inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
Level
3 – Unobservable inputs reflecting the Company’s assumptions
incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market
participant assumptions that are reasonably available.
The carrying amounts of
the Company’s financial assets and liabilities, such as cash,
prepaid expenses, other current assets, accounts payable &
accrued expenses, certain notes payable and an approximate of their
fair values because of the short maturity of these instruments.
Binomial
Calculation model
The Company uses a
binomial calculator model to determine fair market value of
warrants and options issued.
Net Loss Per Common
Share
Basic net loss per
common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the
period. Potential common stock equivalents are determined using the
treasury stock method. For diluted net loss per share purposes, the
Company excludes stock options and other stock-based awards,
including shares issued as a result of option exercises that are
subject to repurchase by the Company, whose effect would be
anti-dilutive from the calculation. During the year ended December
31, 2019 and 2018, common stock equivalents were excluded from the
calculation of diluted net loss per common share, as their effect
was anti-dilutive due to the net loss incurred. Therefore, basic
and diluted net loss per share was the same in all periods
presented.
The Company had
13,153,968 and 15,654,660 potentially dilutive securities that have
been excluded from the computation of diluted weighted-average
shares outstanding as of December 31, 2019 and 2018, respectively,
as they would be anti-dilutive. Additionally, 933,333 shares of
common stock issued during the year ended December 31, 2019 under a
share lending arrangement are excluded from the calculation of
weighted-average shares outstanding.
Issuance Costs
Related to Equity and Debt
The Company allocates
issuance costs between the individual freestanding instruments
identified on the same basis as proceeds were allocated. Issuance
costs associated with the issuance of stock or equity contracts
(i.e., equity-classified warrants and convertible preferred stock)
are recorded as a charge against the gross proceeds of the
offering. Any issuance costs associated with the issuance of
liability-classified warrants are expensed as incurred. Issuance
costs associated with the issuance of debt (i.e., convertible debt)
is recorded as a direct reduction of the carrying amount of the
debt liability but limited to the notional value of the debt. The
Company accounts for debt as liabilities measured at amortized cost
and amortizes the resulting debt discount to interest expense using
the effective interest method over the expected term of the notes
pursuant to ASC 835, Interest (“ASC 835”). To the extent
that the reduction from issuance costs of the carrying amount of
the debt liability would reduce the carrying amount below zero,
such excess is recorded as interest expense.
Embedded Conversion
Features
The Company evaluates
embedded conversion features within convertible debt under ASC 815
“Derivatives and Hedging” to determine whether the embedded
conversion feature(s) should be bifurcated from the host instrument
and accounted for as a derivative at fair value with changes in
fair value recorded in earnings. If the conversion feature does not
require derivative treatment under ASC 815, the instrument is
evaluated under ASC 470-20 “Debt with Conversion and Other
Options.” Under the ASC 470-20, an entity must separately account
for the liability and equity components of the convertible debt
instruments that may be settled entirely or partially in cash upon
conversion in a manner that reflects the issuer’s economic interest
cost. The effect of ASC 470-20 on the accounting for our
convertible debt instruments is that the equity component is
required to be included in the additional paid-in capital section
of stockholders’ equity on the consolidated balance sheets and the
value of the equity component is treated as original issue discount
for purposes of accounting for the debt component of the notes. As
a result, we are required to record non-cash interest expense as a
result of the amortization of the discounted carrying value of the
convertible debt to their face amount over the term of the
convertible debt. We report higher interest expense in our
financial results because ASC 470-20 requires interest to include
both the current period’s amortization of the debt discount and the
instrument’s coupon interest.
For conventional
convertible debt where the rate of conversion is below market
value, the Company records a “beneficial conversion feature”
(“BCF”) and related debt discount. When the Company records a BCF,
the relative fair value of the BCF is recorded as a debt discount
against the face amount of the respective debt instrument (offset
to additional paid in capital) and amortized to interest expense
over the life of the debt.
Revenue
Recognition
The Company derives
revenues from the sale of machines and other product income.
Revenues are recognized when control of the promised goods or
services is transferred to the customer in an amount that reflects
the consideration the Company expects to be entitled to in exchange
for transferring those goods or services.
Revenue is recognized
based on the following five step model:
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•
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Identification of the
contract with a customer
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•
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Identification of the
performance obligations in the contract
|
|
|
|
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•
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Determination of the
transaction price
|
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•
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Allocation of the
transaction price to the performance obligations in the
contract
|
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|
•
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Recognition of revenue
when, or as, the Company satisfies a performance obligation
|
Derivatives and
Hedging
On July 1, 2017, the
Company early adopted ASU 2017-11, “Earnings Per Share (Topic
260) Distinguishing Liabilities from Equity (Topic 480) Derivatives
and Hedging (Topic 815),” which addresses the complexity of
accounting for certain financial instruments with down round
features. The Company has concluded that the retroactive provisions
of ASU 2017-11 had no impact on the accounting for the Company’s
previously outstanding warrant which had been issued to the warrant
holder as stock compensation.
ASU 2017-11 changes the
classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock. ASU
2017-11 also clarifies existing disclosure requirements for equity-
classified instruments. As a result, a freestanding equity-linked
financial instrument (or embedded conversion option) no longer
would be accounted for as a derivative liability at fair value as a
result of the existence of a down round feature. For freestanding
equity classified financial instruments, the amendments require
entities that present earnings per share (EPS) in accordance with
Topic 260 to recognize the effect of the down round feature when it
is triggered. That effect is treated as a dividend and as a
reduction of income available to common shareholders in basic EPS.
Convertible instruments with embedded conversion options that have
down round features are now subject to the specialized guidance for
contingent beneficial conversion features (in Subtopic 470-20,
“Debt—Debt with Conversion and Other Options”), including related
EPS guidance (ASC 260). Part II of ASU 2017-11 recharacterize the
indefinite deferral of certain provisions of ASC 480 that now are
presented as pending content in the ASC, to a scope exception.
Those amendments do not have an accounting effect.
Prior to the early
adoption of ASU 2017-11, an equity-linked financial instrument with
a down round feature that otherwise is not required to be
classified as a liability under the guidance in ASC 480 is
evaluated under the guidance in ASC 815, “Derivatives and Hedging,”
to determine whether it meets the definition of a derivative. If it
meets that definition, the instrument (or embedded feature) is
evaluated to determine whether it is indexed to an entity’s own
stock as part of the analysis of whether it qualifies for a scope
exception from derivative accounting. Generally, for warrants and
conversion options embedded in financial instruments that are
deemed to have a debt host (assuming the underlying shares are
readily convertible to cash or the contract provides for net
settlement such that the embedded conversion option meets the
definition of a derivative), the existence of a down round feature
results in an instrument not being considered indexed to an
entity’s own stock. This results in a reporting entity being
required to classify the freestanding financial instrument or the
bifurcated conversion option as a liability, which the entity must
measure at fair value initially and at each subsequent reporting
date.
ASU 2017-11 revises the
guidance for instruments with down round features in ASC 815-40,
“Derivatives and Hedging—Contracts in Entity’s Own Equity,” which
is considered in determining whether an equity-linked financial
instrument qualifies for a scope exception from derivative
accounting. An entity still is required to determine whether
instruments would be classified in equity under the guidance in ASC
815-40 in determining whether they qualify for that scope
exception. If they do qualify, freestanding instruments with down
round features are no longer classified as liabilities and embedded
conversion options with down round features are no longer
bifurcated.
For entities that
present EPS in accordance with ASC 260, and when the down round
feature is included in an equity-classified freestanding financial
instrument, the value of the effect of the down round feature is
treated as a dividend when it is triggered and as a numerator
adjustment in the basic EPS calculation. This reflects the
occurrence of an economic transfer of value to the holder of the
instrument, while alleviating the complexity and income statement
volatility associated with fair value measurement on an ongoing
basis. Convertible instruments are unaffected by ASU 2017-11.
Part I of ASU 2017-11
are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is
permitted for all entities, including adoption in an interim
period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of
the fiscal year that includes that interim period. ASU 2017-11 Part
1 should be applied retrospectively to outstanding financial
instruments with a down round feature for each prior reporting
period presented in accordance with the guidance on accounting
changes in paragraphs ASC 250-10-45-5 through 45-10.
The Company has
determined that there were no previously outstanding financial
instruments that fall under the scope of ASU 2017-11. Therefore,
the Company has not determined and has not recorded a
cumulative-effect adjustment to the balance sheet.
ASU 2017-11 Part II
does not require any transition guidance because those amendments
do not have an accounting effect.
The Company considered
the impact of Part 1 of ASU 2017-11 and determined the Company had
no financial instruments previously carried as derivative
liabilities that were deemed to be such on the basis of embedded
features containing down round provisions, resulting in the strike
price being reduced on the basis of the pricing of future equity
offerings. As a result, upon the early adoption provisions of ASU
2017-11, the Company did not record any adjustment to its books to
account for any transition accounting issues.
Stock Based
Compensation
The Company accounts
for stock-based compensation in accordance with the Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 718, Stock Compensation (“ASC 718”),
which requires that stock-based compensation be measured and
recognized as an expense in the financial statements and that such
expense be measured at the grant date fair value.
For awards that vest
based on service conditions, the Company uses the straight-line
method to allocate compensation expense to reporting periods. The
grant date fair value of options granted is calculated using the
Black-Scholes option pricing model, which requires the use of
subjective assumptions including volatility, expected term and the
fair value of the underlying common stock, among others.
The Company
periodically issues performance-based awards. For these awards,
vesting will occur upon the achievement of certain milestones. When
achievement of the milestone is deemed probable, the Company
expenses the compensation of the respective awards over the
implicit service period.
Stock awards to
non-employees are accounted for in accordance with ASC 505-50,
Equity-Based Payments to Non-Employees (“ASC 505-50”). The
measurement date for non-employee awards is generally the date
performance of services required from the non-employee is complete.
For non-employee awards that vest based on service conditions, the
Company expenses the value of the awards over the related service
period, provided they expect the service condition to be met. The
Company records the expense of services rendered by non- employees
based on the estimated fair value of the stock option using the
Black-Scholes option pricing model over the contractual term of the
non-employee. The fair value of unvested non-employee awards is
remeasured at each reporting period and expensed over the vesting
term of the underlying stock options on a straight-line basis. The
Company adopted ASU No. 2016-09 Compensation—Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment
Accounting during the year ended December 31, 2017.
The stock-based
compensation plans provide that grantees may have the right to
exercise an option prior to vesting. Shares purchased upon the
exercise of unvested options will be subject to the same vesting
schedule as the underlying options and are subject to repurchase at
the original exercise price by the Company should the grantee
discontinue providing services to the Company for any reason, prior
to becoming fully vested in such shares.
Income Tax
Provision
Since inception of the
Company on August 29, 2013 through March 5, 2017, the Company was
taxed as a pass-through entity for federal and state income tax
purposes as an S Corporation. For federal and state Income tax
purposes, income and losses are passed through to the shareholders.
As a pass-through entity, the Company was subject to California
state income tax.
On March 6, 2017, the
Company inadvertently terminated its S-election by issuing common
stock to an ineligible shareholder. On March 6, 2016 and
thereafter, the Company is taxed as a C corporation. The Company is
subject to income taxes in the United States.
The Company accounts
for income taxes under Section 740-10-30 of the FASB Accounting
Standards Codification, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the
extent management concludes it is more likely than not that the
assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the Statements of Operations in the period that includes the
enactment date.
ASC 740 prescribes a
comprehensive model for how companies should recognize, measure,
present, and disclose in their financial statements uncertain tax
positions taken or expected to be taken on a tax return. Under ASC
740, tax positions must initially be recognized in the financial
statements when it is more likely than not the position will be
sustained upon examination by the tax authorities. Such tax
positions must initially and subsequently be measured as the
largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and relevant
facts.
The Company recognizes
interest and penalties related to unrecognized tax benefits within
income tax expense. Accrued interest and penalties are included
within the related tax liability.
Contingencies
The Company follows
subtopic 450-20 of the FASB Accounting Standards Codification to
report accounting for contingencies. Certain conditions may exist
as of the date the financial statements are issued, which may
result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. The Company
assesses such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against
the Company or un-asserted claims that may result in such
proceedings, the Company evaluates the perceived merits of any
legal proceedings or un-asserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought
therein.
If the assessment of a
contingency indicates that it is probable that a material loss has
been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s
Financial Statements. If the assessment indicates that a
potentially material loss contingency is not probable but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, and an estimate of the
range of possible losses, if determinable and material, would be
disclosed.
Loss contingencies
considered remote are generally not disclosed unless they involve
guarantees, in which case the guarantees would be disclosed.
However, there is no assurance that such matters will not
materially and adversely affect the Company’s business, financial
position, and results of operations or cash flows.
Subsequent
Events
The Company evaluates
events occurring after the date of its consolidated balance sheet
for potential recognition or disclosure in its consolidated
financial statements. There have been no subsequent events that
occurred through the date the Company issued its consolidated
financial statements that require disclosure in or adjustment to
its consolidated financial statements.
Marketable
Securities
We report investments
in marketable equity securities, and certain other equity
securities, at fair value. Unrealized gains and losses on
available-for-sale investment securities are included in
shareowners’ equity, net of applicable taxes and other adjustments.
We currently do not have any available for sale securities.
Realized gains and
losses are accounted for on the specific identification method.
Unrealized gains and losses on investment securities classified as
trading are included in earnings.
We regularly review
investment securities for impairment using both quantitative and
qualitative criteria. If we do not expect to recover the entire
cost basis of the security, we consider the security to be
other-than-temporarily impaired (OTTI), and we record the
difference between the security’s amortized cost basis and its
recoverable amount in earnings and the difference between the
security’s recoverable amount and fair value in other comprehensive
income. If we intend to sell the security or it is more likely than
not we will be required to sell the security before recovery of its
amortized cost basis, the security is also considered OTTI and we
recognize the entire difference between the security’s amortized
cost basis and its fair value in earnings. For equity securities,
we consider the length of time and magnitude of the amount that
each security is in an unrealized loss position. If we do not
expect to recover the entire amortized cost basis of the security,
we consider the security to be OTTI, and we record the difference
between the security’s amortized cost basis and its fair value in
earnings.
Recently Issued
Accounting Pronouncements
From time to time, new
accounting pronouncements are issued by the FASB or other standard
setting bodies that are adopted by the Company as of the specified
effective date. Unless otherwise discussed, the Company believes
that the effect of recently issued standards that are not yet
effective will not have a material effect on its consolidated
financial position or results of operations upon adoption.
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02).
Under ASU No. 2016-2, an entity is required to recognize
right-of-use assets and lease liabilities on its balance sheet and
disclose key information about leasing arrangements. ASU No.
2016-02 offers specific accounting guidance for a lessee, a lessor
and sale and leaseback transactions. Lessees and lessors are
required to disclose qualitative and quantitative information about
leasing arrangements to enable a user of the financial statements
to assess the amount, timing and uncertainty of cash flows arising
from leases. For public companies, The Company adopted this
standard on January 1, 2019 using the modified retrospective
method. The new standard provides a number of optional practical
expedients in transition. The Company elected the ‘package of
practical expedients’, which permitted the Company not to reassess
under the new standard its prior conclusions about lease
identification, lease classification and initial direct costs; and
all of the new standard’s available transition practical
expedients.
On adoption, the
Company recognized a right of use asset of $44,138, operating lease
liabilities of $46,545 with a cumulative effect adjustment to
accumulated deficit of $2,407, based on the present value of the
remaining minimum rental payments under current leasing standards
for its existing operating lease.
The new standard also
provides practical expedients for a company’s ongoing accounting.
The Company elected the short-term lease recognition exemption for
its leases. For those leases with a lease term of 12 months or
less, the Company will not recognize right of use assets or lease
liabilities.
In August
2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement
(Topic 820).” This standard modifies disclosure requirements
related to fair value measurement and is effective for all entities
for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted.
Implementation on a prospective or retrospective basis varies by
specific disclosure requirement. The standard also allows for early
adoption of any removed or modified disclosures upon issuance while
delaying adoption of the additional disclosures until their
effective date. The Company is currently assessing the impact of
adopting this standard on its consolidated financial
statements.
In December
2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting
for Income Taxes (Topic 740)”. This standard simplifies the
accounting for income taxes. This standard is effective for fiscal
years beginning after December 15, 2020, including interim periods
within those fiscal years. Early adoption is permitted for all
entities. The Company is currently assessing the impact of adopting
this standard on its consolidated financial statements.
Components of
Statements of Operations
Revenue
Product revenue
consists of sales of our eShark filling machine, 710 Shark filling
machine, 710 Captain capping machine, cartridges, accessories,
warranty, service and freight charges, net of returns, discounts
and allowances. Once a sales order is negotiated and received by a
sales representative, we generally collect a 50% deposit from the
customer. When the product is ready to be shipped, the customer
will generally pay the remaining balance. We recognize the revenue
when the product leaves the warehouse on the way to the
customer.
For the filling and
capping machines, training is coordinated with the customers in
accordance with their availability but generally completed within a
week or two of the shipment. Standard warranties are offered at no
cost to customers to cover parts (3 years), labor and maintenance
for one year for product defects.
Cost of Goods
Sold
Cost of goods sold
represents costs directly related to supplies and materials,
machines, freight and delivery, commissions, printing, packaging
and other costs.
We expect our cost of
goods sold per unit to decrease as we continue to scale our
operations, improve product designs and work with our third-party
suppliers to lower costs.
Operating
Expenses
Sales and
Marketing. Sales and marketing expenses consist primarily of
compensation, benefits, travel and other costs for our direct sales
force and project managers. Sales and marketing expenses also
include costs associated with our business development efforts with
our distributors and partners and costs related to trade shows and
other marketing programs. We expense sales and marketing costs as
incurred. We expect sales and marketing expenses to increase in
future periods as we expand our sales and marketing teams and
increase our participation in global trade shows and other
marketing programs.
General and
Administrative. Our general and administrative expenses
consist primarily of compensation, benefits, travel and other costs
for employees with non-sales roles. In addition, general and
administrative expenses include third-party consulting, legal,
audit, accounting services, and allocations of overhead costs, such
as rent, facilities and information technology. In the near term,
we expect general and administrative expenses to decrease driven by
our cost reduction initiatives. In the long term, we expect general
and administrative expenses to increase as we grow our
business.
Interest
Expense
Interest expense
consists primarily of interest from notes due to debtholders.
Results of
Operations – Twelve Month Periods
The following set
forth our results of operations for the Fiscal Years ended December
31, 2019 and December 31, 2018:
Revenue
Total revenue during
the twelve months ended December 31, 2019 were $4,590,977
(comprised of $2,441,524 of machine sales and $2,149,453 of
cartridges and other consumables. Compared to the year-ended
December 31, 2018 which had $6,628,919 (comprised of $3,759,917 of
machine sales and $2,869,002 of cartridges and other consumables).
Three major factors contributed to the decrease in revenue. First,
media reports and governmental temporary ban of certain vaping
products adversely impacted our business in the second half of the
year. Second, we phased out our old proprietary cartridges business
and discontinued its sales since July 2019. In addition, the
quality issues of our old proprietary cartridges, which were made
by an oversea supplier, have caused some customers to not re-order.
The amount of lost business from a lack of re-orders is not
quantifiable, but we believe that it is significant.
Cost of Goods
Sold
Total cost of goods
sold was $3,584,525 during the twelve months ended December 31,
2019 compared to $4,859,153 during the twelve months ended December
31, 2018. The decrease in cost of goods sold was primarily driven
by the decreased sales in 2019.
We recognized a
write-off of inventory of the old proprietary cartridges of
$402,662, recorded as a component of cost of sales. Gross margin
decreased from 27% during the twelve months ended December 31, 2018
to 22% during the twelve months ended December 31, 2019, primarily
attributable to this inventory write-off. Without this write-off,
gross margin would have been 30% during the twelve months ended
December 31, 2019.
Operating
Expenses
Sales, General and
Administrative Expenses. Sales, general and administrative
expenses during the during the twelve months ended December 31,
2019 increased to $4,524,113 (comprised of $2,467,474 in salaries
and $2,056,639 of other expenses), compared to December 31, 2018
that produced expenses $3,567,222 (comprised of $1,772,348 in
salaries and $1,794,874 of other expenses). The increase was
primarily attributed to higher legal fee and cash payment to settle
the termination of the employment agreement with Daniel Davis.
There were no other expenses greater than 10% in either period.
Interest
Expense
Interest expense during
the twelve months ended December 31, 2019 was $1,315,764, compared
to $135,914 for the twelve months ended December 31, 2018. The
increase was mainly due to increased debt amortization, which is an
accounting treatment and none-cash item.
Derivative
Gain
The Company recognized
a derivative gain of $1,302,886 for the year ended December 31,
2019 related to the convertible notes issued during the year.
Liquidity and
Capital Resources
Since Jacksam’s
inception in 2013 as a Delaware corporation, we have incurred net
losses and negative cash flows from operations. During the twelve
months ended December 31, 2018 and December 31, 2019, we had net
losses of $1,939,873 and $3,544,880, respectively. At December 31,
2019, we had an accumulated deficit of $8,066,784.
At December 31, 2019,
we had cash and cash equivalents of $453,623. As of the date of
this report, we have financed our operations principally through
borrowing on credit facilities, debt of $594,000, issuance of
equity of $457,500, issuances of Convertible Debt of $6,109,166 and
receipts of customer deposits for new orders and payments from
customers for our products.
On November 8, 2018, we
entered into a Line of Credit Agreement with Bass Point Capital,
LLC, a Massachusetts limited liability company controlled by Doug
Leighton, who is also a principal in Altar Rock Capital, one of our
shareholders and the holder of the Altar Rock Warrant. The Line of
Credit Agreement allows us, at the discretion of the lender, to
borrow up to $250,000 by making specific requests therefor which
draws, if any, will be due and payable on individually determined
terms. Bass Point Capital, LLC is under no obligation to honor any
request we may make for an advance under the Line of Credit
Agreement.
On December 31, 2019,
we entered into an inventory financing arrangement with a single
lender, whereby $150,000 was paid by the lender directly to a
vendor to secure inventory for sale a customer in January 2020. We
plan to repay $164,835 of principal and interest by February 29,
2020.
In December 2019, we
issued convertible notes to an institutional investor with a
principal amount of $560,000 (the “December 2019 Notes”) with an
original issue discount of $56,000 and a maturity date of June 10,
2020. The shares may be returned to the Company if the debt is
satisfied in full by the maturity date. If the debt is not repaid
by the maturity date, the shares are concerned fully earned, and
the prepaid expense will be amortized in full.
We anticipate that we
will need additional financing to continue as an ongoing entity
over the next 12 months. Over the course of the next 12 months, we
plan to raise capital to support our business plan through equity
financing, debt financing, or other sources, which may result in
further dilution in the equity ownership of our shares. There is no
assurance that we will be able to maintain operations at a level
sufficient for an investor to obtain a return on their investment
in our common stock, or that we will be able to raise sufficient
capital required to implement our business plan on acceptable
terms, if at all. Even if we are successful in raising sufficient
capital to implement our business plan, we may continue to be
unprofitable.
We anticipate our cash
requirements to be as follows:
|
Estimated
Funding Required During the Next Twelve Months
|
|
Expense
|
|
Amount
|
|
|
General operating
expenses
|
|
|
900,000 |
|
|
Additional staff
|
|
|
400,000 |
|
|
Increased marketing and
advertising costs
|
|
|
200,000 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,500,000 |
|
*Estimated expense
Operating
Activities
We have historically
experienced negative cash outflows as we developed and sold our
eShark filling machine, 710 Shark filling machine, 710 Captain
capping machine, and cartridges. Our net cash used in operating
activities primarily results from our operating losses combined
with changes in working capital components as we have grown our
business and is influenced by the timing of cash payments for
inventory purchases and cash receipts from our customers. Our
primary source of cash flow from operating activities is cash down
payments and final payments for our products. Our primary uses of
cash from operating activities are employee-related expenditures
and amounts due to vendors for purchased components. Our cash flows
from operating activities will continue to be affected principally
by our working capital requirements, the extent to which we build
up our inventory balance, and increased spending on personnel and
other operating activities as our business grows.
Several of our products
are produced in China, specifically our 710 Shark filling machines
and cartridges. We do not have firm purchase or minimum quantity
commitments with any of our Chinese suppliers. Certain of our
Chinese suppliers require a deposit in the range of 25% to 30% of
the total cost of an order before beginning production. All of our
Chinese suppliers require that the entirety of the purchase price
of an order be sent prior to shipment to us. However, since we
generally require that our customers make a deposit of not less
than half of any order of the products, including the products
produced in China, as a condition of accepting an order from our
customers, we typically have on hand sufficient funds to cover the
entirety of the amounts owed to our Chinese suppliers in advance.
The timing of cash payment obligations is thus coordinated to not
to create a cash flow or liquidity problem for us.
During the twelve
months ended December 31, 2019 and 2018, cash used in operating
activities was $2,296,288 and $1,406,681, respectively.
Investing
Activities
During the twelve
months ended December 31, 2019 and 2018, cash used in investing
activities was $0 and $193,500, respectively.
Financing
Activities
During the twelve
months ended December 31, 2019, cash provided by financing
activities was $1,675,806, primarily from $2,295,666 of proceeds
from new convertible debt. The Company also made payments of
$70,912 on notes payable, $181,848 on debt issuance costs, and
$370,000 on convertible notes.
During the twelve
months ended December 31, 2018, cash provided by financing
activities was $1,140,912. The Company also made $94,088 of
payments to pay down notes payable and $340,000 related to reverse
acquisition and repurchase common stock.
Off-Balance
Sheet Arrangements
During the year ended
December 31, 2019, we did not have any off-balance sheet
arrangements as defined by applicable SEC regulations.
Going
Concern
None of the reports
from our auditor L&L CPAs, PA on our financial statements for
either of the past two years or subsequent interim period contained
an adverse opinion or disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope or accounting
principles.
Seasonality
In the past, our
operating results and operating cash flows historically have not
been subject to seasonal variations. At this time, we do not
anticipate having any seasonal fluctuations in sales.
Item 7A. Quantitative and
Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial
Statements and Supplementary Data
INDEX TO FINANCIAL
STATEMENTS
|
|
FL Office
7951 SW 6th Street, Suite
216
Plantation, FL
33324
Tel: 954-424-2345
Fax: 954-424-2230
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of
Jacksam Corporation
Opinion on the
Financial Statements
We have audited the
accompanying balance sheets of Jacksam Corporation (“the Company”)
as of December 31, 2019 and December 31, 2018 and the related
statements of operations, stockholders’ deficit, cash flow and the
related notes to consolidated financial statements (collectively
referred to as the consolidated financial statements) for the year
ended December 31, 2019 and December 31, 2018. In our opinion, the
consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31,
2019 and December 31, 2018, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We
are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit
in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our
audits, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our audit included
performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
The Company’s Ability to Continue as
a Going Concern
The accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has an
accumulated deficit, recurring losses, and expects continuing
future losses, and has stated that substantial doubt exists about
the Company’s ability to continue as a going concern. Management’s
evaluation of the events and conditions and management’s plans
regarding these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The firm has served
this client since January 2018.
/s/ L&L CPAS, PA
L&L CPAS, PA
Certified Public Accountants
Plantation, FL
The United States of America
April 20, 2020
|
Jacksam
Corporation
|
|
Consolidated Balance Sheets
|
|
For
the Years Ended December 31, 2019 and 2018
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
453,623 |
|
|
$ |
1,074,105 |
|
|
Accounts receivable, net
|
|
|
105,510 |
|
|
|
25,485 |
|
|
Inventory, net
|
|
|
189,841 |
|
|
|
764,095 |
|
|
Prepaid expenses
|
|
|
251,539 |
|
|
|
37,500 |
|
|
Total Current
Assets
|
|
|
1,000,513 |
|
|
|
1,901,185 |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
13,280 |
|
|
|
14,346 |
|
|
Right of-use asset - operating
lease
|
|
|
9,299 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,023,092 |
|
|
$ |
1,915,531 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$ |
696,633 |
|
|
$ |
537,601 |
|
|
Deferred revenue
|
|
|
1,343,983 |
|
|
|
906,964 |
|
|
Convertible notes payable, current portion
(net of debt discount of $1,525,906)
|
|
|
1,067,983 |
|
|
|
3,218,500 |
|
|
Notes payable (net of debt discount of
$19,504)
|
|
|
145,331 |
|
|
|
70,912 |
|
|
Right of use liability -
operating lease
|
|
|
9,837 |
|
|
|
- |
|
|
Derivative liability
|
|
|
504,750 |
|
|
|
- |
|
|
Accrued liabilities - other
|
|
|
1,642,118 |
|
|
|
1,642,118 |
|
|
Total Current
Liabilities
|
|
|
5,410,635 |
|
|
|
6,376,095 |
|
|
|
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
220,000 |
|
|
|
- |
|
|
Total
Liabilities
|
|
|
5,630,635 |
|
|
|
6,376,095 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit:
|
|
|
|
|
|
|
|
|
|
Preferred stock - 10,000,000
authorized, $0.001 par value, 0 shares issued and outstanding
|
|
|
- |
|
|
|
- |
|
|
Common stock - 90,000,000
authorized, $0.001 par value, 62,871,972 and 48,272,311 shares
issued and outstanding as of December 31, 2019 and December 31,
2018, respectively
|
|
|
62,872 |
|
|
|
48,272 |
|
|
Additional paid-in capital
|
|
|
3,396,369 |
|
|
|
10,661 |
|
|
Accumulated deficit
|
|
|
(8,066,784 |
) |
|
|
(4,519,497 |
) |
|
Total Stockholders'
Deficit
|
|
|
(4,607,543 |
) |
|
|
(4,460,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders' Deficit
|
|
$ |
1,023,092 |
|
|
$ |
1,915,531 |
|
The accompanying notes
are an integral part of these audited consolidated financial
statements
|
Jacksam
Corporation
|
|
Consolidated Statements of Operations
|
|
For
the Years Ended December 31, 2019 and 2018
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
4,590,977 |
|
|
$ |
6,628,919 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
3,584,525 |
|
|
|
4,859,153 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,006,452 |
|
|
|
1,769,766 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Salaries and wages (including
contractors)
|
|
|
2,467,474 |
|
|
|
1,772,348 |
|
|
Other selling, general and
administrative expenses
|
|
|
2,056,639 |
|
|
|
1,794,874 |
|
|
Total operating
expenses
|
|
|
4,524,113 |
|
|
|
3,567,222 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations
|
|
|
(3,517,661 |
) |
|
|
(1,797,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
Expense
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(14,341 |
) |
|
|
(6,503 |
) |
|
Derivative gain (loss)
|
|
|
1,302,886 |
|
|
|
- |
|
|
Interest expense
|
|
|
(1,315,764 |
) |
|
|
(135,914 |
) |
|
Total Other
Expense
|
|
|
(27,219 |
) |
|
|
(142,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$ |
(3,544,880 |
) |
|
$ |
(1,939,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
59,428,943 |
|
|
|
44,402,805 |
|
The accompanying notes
are an integral part of these audited consolidated financial
statements
|
Jacksam
Corporation
|
|
Consolidated Statements of Stockholders'
Deficit
|
|
For
the Years Ended December 31, 2019 and 2018
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $.001 Par Value
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2017
|
|
|
41,828,952 |
|
|
$ |
41,829 |
|
|
$ |
1,883,656 |
|
|
$ |
(2,579,624 |
) |
|
$ |
(654,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt imputed
interest
|
|
|
- |
|
|
|
- |
|
|
|
115,566 |
|
|
|
- |
|
|
|
115,566 |
|
|
Exercise of stock options
|
|
|
3,171,048 |
|
|
|
3,171 |
|
|
|
(3,171 |
) |
|
|
- |
|
|
|
- |
|
|
Repurchase of shares prior to
merger
|
|
|
- |
|
|
|
- |
|
|
|
(340,000 |
) |
|
|
- |
|
|
|
(340,000 |
) |
|
Recapitalization
|
|
|
3,272,311 |
|
|
|
3,272 |
|
|
|
(1,645,390 |
) |
|
|
- |
|
|
|
(1,642,118 |
) |
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,939,873 |
) |
|
|
(1,939,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2018
|
|
|
48,272,311 |
|
|
|
48,272 |
|
|
|
10,661 |
|
|
|
(4,519,497 |
) |
|
|
(4,460,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of ASU
2016-02
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,407 |
) |
|
|
(2,407 |
) |
|
Common stock issued for debt
conversion
|
|
|
10,579,661 |
|
|
|
10,580 |
|
|
|
3,192,920 |
|
|
|
- |
|
|
|
3,203,500 |
|
|
Extinguishment of derivative
liability due to repayment
|
|
|
- |
|
|
|
- |
|
|
|
89,311 |
|
|
|
- |
|
|
|
89,311 |
|
|
Exercise of common stock
warrant
|
|
|
2,900,000 |
|
|
|
2,900 |
|
|
|
- |
|
|
|
- |
|
|
|
2,900 |
|
|
Shares issued for deferred
finance cost
|
|
|
186,667 |
|
|
|
187 |
|
|
|
81,013 |
|
|
|
|
|
|
|
81,200 |
|
|
Shares issued under share-lending
arrangement
|
|
|
933,333 |
|
|
|
933 |
|
|
|
(933 |
) |
|
|
- |
|
|
|
- |
|
|
Convertible debt imputed
interest
|
|
|
- |
|
|
|
- |
|
|
|
23,397 |
|
|
|
- |
|
|
|
23,397 |
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,544,880 |
) |
|
|
(3,544,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2019
|
|
|
62,871,972 |
|
|
$ |
62,872 |
|
|
$ |
3,396,369 |
|
|
$ |
(8,066,784 |
) |
|
$ |
(4,607,543 |
) |
The accompanying notes
are an integral part of these audited consolidated financial
statements
|
Jacksam
Corporation
|
|
Consolidated Statements of Cash Flows
|
|
For
the Years Ended December 31, 2019 and 2018
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(3,544,880 |
) |
|
$ |
(1,939,873 |
) |
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
1,066 |
|
|
|
1,067 |
|
|
Loss on sale of marketable
securities
|
|
|
- |
|
|
|
6,504 |
|
|
Imputed interest
|
|
|
23,397 |
|
|
|
115,566 |
|
|
Amortization of debt
discount
|
|
|
1,282,643 |
|
|
|
- |
|
|
Derivative gain
|
|
|
(1,302,886 |
) |
|
|
- |
|
|
Inventory impairment
|
|
|
402,662 |
|
|
|
128,640 |
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(80,025 |
) |
|
|
(25,485 |
) |
|
Inventory
|
|
|
171,592 |
|
|
|
(768,614 |
) |
|
Prepaid expenses
|
|
|
(64,039 |
) |
|
|
- |
|
|
Right-of-use assets
|
|
|
34,840 |
|
|
|
|
|
|
Other assets
|
|
|
- |
|
|
|
(35,039 |
) |
|
Accounts payable and accrued
expenses
|
|
|
159,032 |
|
|
|
404,441 |
|
|
Right-of-use liabilities
|
|
|
(36,709 |
) |
|
|
|
|
|
Other long-term liabilities
|
|
|
220,000 |
|
|
|
- |
|
|
Deferred revenue
|
|
|
437,019 |
|
|
|
706,112 |
|
| |
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(2,296,288 |
) |
|
|
(1,406,681 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable
securities
|
|
|
- |
|
|
|
193,500 |
|
| |
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
- |
|
|
|
193,500 |
|
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes
payable
|
|
|
2,295,666 |
|
|
|
1,575,000 |
|
|
Payments on convertible notes
payable
|
|
|
(370,000 |
) |
|
|
- |
|
|
Payment of debt issuance
costs
|
|
|
(181,848 |
) |
|
|
- |
|
|
Payments on notes payable
|
|
|
(70,912 |
) |
|
|
(94,088 |
) |
|
Payments related to reverse
acquisition and re-purchase of shares
|
|
|
- |
|
|
|
(340,000 |
) |
|
Proceeds from exercise of common
stock warrants
|
|
|
2,900 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
1,675,806 |
|
|
|
1,140,912 |
|
| |
|
|
|
|
|
|
|
|
|
Net Change in
Cash
|
|
|
(620,482 |
) |
|
|
(72,269 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash, Beginning of
Period
|
|
|
1,074,105 |
|
|
|
1,146,374 |
|
| |
|
|
|
|
|
|
|
|
|
Cash, End of
Period
|
|
$ |
453,623 |
|
|
$ |
1,074,105 |
|
| |
|
|
|
|
|
|
|
|
|
Cash Paid For:
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
Interest
|
|
$ |
- |
|
|
$ |
10,408 |
|
| |
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
Common stock issued to settle
convertible notes payable
|
|
$ |
3,203,500 |
|
|
$ |
- |
|
|
Capitalization
of right of use asset for operating lease
|
|
$ |
44,138 |
|
|
$ |
- |
|
|
Derivative
liability recognized at issuance of convertible debt
|
|
$ |
1,896,947 |
|
|
$ |
- |
|
|
Reclassification
of derivative liabilities to additional paid in capital
|
|
$ |
89,311 |
|
|
|
|
|
|
Recapitalization related to
reverse merger
|
|
$ |
- |
|
|
$ |
1,642,118 |
|
The accompanying notes
are an integral part of these audited consolidated financial
statements
Jacksam
Corporation
(formerly: China
Grand Resorts, Inc.)
Notes to the
Financial Statements
Note 1:
Organization and Nature of Operations
The Company was
organized under the laws of the State of Nevada on September 21,
1989 under the name of Fulton Ventures, Inc. Effective November 16,
2009, management at that time changed the name of Fulton Ventures,
Inc. to China Grand Resorts, Inc. After the September 30, 2014 10-Q
filing, the management of China Grand Resorts, Inc. abandoned the
Company and its subsidiaries were taken back by the PRC national
companies in China who owned them. The remaining parent company,
China Grand Resorts, Inc., became a dormant company until 2016 when
a new shareholder Bryan Glass became the majority shareholder and
owner of the Company.
On September 14, 2018,
the Company’s wholly owned subsidiary, Jacksam Acquisition Corp., a
corporation formed in the State of Nevada on September 11, 2018, or
the Acquisition Sub, merged with and into Jacksam, a corporation
incorporated in the State of Delaware in August 2013.
On November 5, 2018,
current management merged Jacksam into the parent Company, China
Grand Resorts, Inc. In connection with the transaction, current
management amended our articles of incorporation to change the
Company’s name from China Grand Resorts, Inc. to Jacksam
Corporation dba Convectium.
Since the Merger, the
Company has been operated under the control of current management
and continued to operate the business of Jacksam Corporation,
described herein, as our sole business.
In accordance with the
terms of the Exchange Agreement, and in connection with the
completion of the acquisition, on the Closing Date, the Company
issued 45,000,000 shares of common stock at par value $0.001 per
share to the Jacksam shareholders in exchange for all of the issued
and outstanding shares of Jacksam. In addition, the previous owners
of China Grand Resorts, Inc. returned 30,000,000 shares of common
stock to the treasury of the Company. Following the acquisition,
there was a total of 48,272,311 shares of common stock issued and
outstanding, of which 3,272,311 were held by shareholders of the
Company prior to the merger. In connection with the above
transaction, $340,000 was paid to the former controlling
shareholder related to the return of 30,000,000 shares of common
stock.
In accordance with
“reverse merger” or “reverse acquisition” accounting treatment, the
historical financial statements of China Grand Resorts, Inc., as of
period ends and for periods ended prior to the Merger, will be
replaced with the historical financial statements of Jacksam, prior
to the Merger, in all future filings with the SEC.
Jacksam Corporation is
a technology company focused on developing and commercializing
products utilizing an open-source technology platform. We service
the medical and recreational cannabis, hemp and CBD segments of the
larger e-cigarette and vaporizer markets. Prior to July 2019, our
old product line primarily consisted of the 710 Shark cartridge
filling machine, the 710 Captain cartridge capping machine, and our
proprietary cartridges. Since then, we have added the eShark
cartridge filling machine into our existing product line,
discontinued the sales of our old proprietary cartridges, and
entered into a partnership with Jupiter Research, which enabled us
to distribute their C-Cell cartridges under a profit-sharing
agreement. Our customers are primarily businesses operating in
jurisdictions that have some form of cannabis legalization. These
businesses include medical and recreational dispensaries, large and
small-scale processors and growers, multi-state operators, and
distributors. We utilize our direct sales force, Jupiter Research’s
sales force, our website, independent sales representatives, and a
wide range of referral network to sell our products.
Note 2:
Significant Accounting Policies
Basis of
Preparation
The accompanying
financial statements of the Company have been prepared in
accordance with U.S. GAAP under the accrual basis of accounting.
These financial statements are presented in U.S. dollars and are
prepared on a historical cost basis, except for certain financial
instruments which are carried at fair value.
Principles of
Consolidation
The accompanying
consolidated financial statements include the accounts of Jacksam
Corporation and its wholly owned subsidiary. All intercompany
transactions and balances are eliminated in consolidation.
Use of
Estimates
The preparation of
financial statements is in conformity with U.S. GAAP and requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Such estimates and assumptions impact both assets and
liabilities, including but not limited to: net realizable value of
accounts receivable and inventory, estimated useful lives and
potential impairment of property and equipment, estimate of fair
value of share based payments and derivative liabilities, estimates
of fair value of warrants issued and recorded as debt discount and
estimates of the probability and potential magnitude of contingent
liabilities. Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that the
estimate of the effect of a condition, situation or set of
circumstances that existed at the date of the financial statements,
which management considered in formulating its estimate could
change in the near term due to one or more future nonconforming
events. Accordingly, actual results could differ significantly from
estimates.
Risks and
Uncertainties
The Company’s
operations are subject to risk and uncertainties including
financial, operational, regulatory and other risks including the
potential risk of business failure. The Company has experienced,
and in the future, expects to continue to experience, variability
in its sales and earnings. The factors expected to contribute to
this variability include, among others, (i) the uncertainty
associated with the commercialization and ultimate success of the
product, (ii) competition inherent at large national retail chains
where product is expected to be sold, (iii) general economic
conditions and (iv) the related volatility of prices pertaining to
the cost of sales.
Cash and Cash
Equivalents
Cash and cash
equivalents are carried at cost and consist of cash on hand and
demand deposits placed with banks or other financial institutions,
and all highly liquid investments with an original maturity of
three months or less.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are
recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by performing
credit checks and actively pursuing past due accounts. The Company
recognizes an allowance for losses on accounts receivable in an
amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt
experience, current receivables aging, and expected future bad
debts, as well as an assessment of specific identifiable customer
accounts considered at risk or uncollectible. The Company recorded
an allowance of $74,000 as of December 31, 2019.
Inventory
Inventories are stated
at the lower of cost, determined on the first-in, first-out (FIFO)
method or net realizable value. Cost principally consists of the
purchase price (adjusted for lower of cost or market), customs,
duties, and freight. The Company periodically reviews historical
sales activity to determine potentially obsolete items and
evaluates the impact of any anticipated changes in future
demand.
The December 31, 2019
and 2018 inventory consisted entirely of finished goods. The
Company will maintain an allowance based on specific inventory
items that have shown no activity over a 24-month period. The
Company tracks inventory as it is disposed, scrapped or sold at
below cost to determine whether additional items on hand should be
reduced in value through an allowance method. As of December 31,
2019 and 2018, the Company has determined that no allowance is
required. During the year ended December 31, 2019, the Company
recognized a write-off of inventory of $402,662, recorded as a
component of cost of goods sold on the consolidated statement of
operations.
Property and
Equipment
Property and equipment
is measured at cost, less accumulated depreciation, and is reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Depreciation of property and equipment is provided utilizing the
straight-line method over the estimated useful lives, ranging from
5 to 7 years of the respective assets. Expenditures for maintenance
and repairs are charged to expense as incurred. Upon sale or
retirement of property and equipment, the related cost and
accumulated depreciation are removed from the accounts and any gain
or loss is reflected in the statements of operations.
Fair Value of
Financial Instruments
The Company measures
assets and liabilities at fair value based on an expected exit
price as defined by the authoritative guidance on fair value
measurements, which represents the amount that would be received on
the sale of an asset or paid to transfer a liability, as the case
may be, in an orderly transaction between market participants. As
such, fair value may be based on assumptions that market
participants would use in pricing an asset or liability. The
authoritative guidance on fair value measurements establishes a
consistent framework for measuring fair value on either a recurring
or nonrecurring basis whereby inputs, used in valuation techniques,
are assigned a hierarchical level.
The following are the
hierarchical levels of inputs to measure fair value:
|
·
|
Level 1 –
Observable inputs that reflect quoted market prices in active
markets for identical assets or liabilities. |
|
|
|
|
·
|
Level 2 - Inputs
reflect quoted prices for identical assets or liabilities in
markets that are not active; Quoted prices for similar assets or
liabilities in active markets; Inputs other than quoted prices that
are observable for the assets or liabilities; or inputs that are
derived principally from or corroborated by observable market data
by correlation or other means. |
|
|
|
|
·
|
Level 3 –
Unobservable inputs reflecting the Company’s assumptions
incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market
participant assumptions that are reasonably available. |
The carrying amounts of
the Company’s financial assets and liabilities, such as cash,
prepaid expenses, other current assets, accounts payable &
accrued expenses, certain notes payable and an approximate of their
fair values because of the short maturity of these instruments.
Binomial
Calculation Model
The Company uses a
binomial calculator model to determine fair market value of
derivative liabilities, warrants and options issued.
Revenue
Recognition
The Company derives
revenues from the sale of machines and consumable products.
Revenues are recognized when control of the promised goods or
services is transferred to the customer in an amount that reflects
the consideration the Company expects to be entitled to in exchange
for transferring those goods or services.
Revenue is recognized
based on the following five step model:
|
|
-
|
Identification of the
contract with a customer
|
|
|
-
|
Identification of the
performance obligations in the contract
|
|
|
-
|
Determination of the
transaction price
|
|
|
-
|
Allocation of the
transaction price to the performance obligations in the
contract
|
|
|
-
|
Recognition of revenue
when, or as, the Company satisfies a performance obligation
|
Performance
Obligations
Sales of machines and
consumable products are recognized when all the following criteria
are satisfied: (i) a contract with an end user exists which has
commercial substance; (ii) it is probable the Company will collect
the amount charged to the end user; and (iii) the Company has
completed its performance obligation whereby the end user has
obtained control of the product. A contract with commercial
substance exists once the Company receives and accepts a purchase
order or once it enters into a contract with an end user. If
collectability is not probable, the sale is deferred and not
recognized until collection is probable or payment is received.
Control of products typically transfers when title and risk of
ownership of the product has transferred to the customer. The
customer has a 10-day period to inspect the equipment and may
return the product if it does not meet the agreed-upon
specifications. For contracts with multiple performance
obligations, the Company allocates the total transaction price to
each performance obligation in an amount based on the estimated
relative standalone selling prices of the promised goods or
services underlying each performance obligation. The Company uses
an observable price to determine the stand-alone selling price for
separate performance obligations or a cost-plus margin approach
when one is not available. Historically, the Company’s contracts
have not had multiple performance obligations. The large majority
of the Company’s performance obligations are recognized at a point
in time related to the sale of machines and consumable
products.
Sales, value add, and
other taxes collected concurrent with revenue-producing activities
are excluded from revenue. Incidental items that are immaterial in
the context of the contract are recognized as expense. Payment
terms between invoicing and when payment is due is less than one
year. As of December 31, 2019, none of the Company’s contracts
contained a significant financing component.
The Company elected the
practical expedient to not adjust the amount of revenue to be
recognized under a contract with an end user for the effects of
time value of money when the timing difference between receipt of
payment and recognition of revenue is less than one year.
The majority of the
Company’s contracts offer an assurance-type warranty of the
products at no additional cost for a period of 3 years.
Assurance-type warranties provide a customer with assurance that
the related product will function as the parties intended because
it complies with agreed-upon specifications. Such warranties do not
represent a separate performance obligation. At the time a sale is
recognized, the Company estimated future warranty costs, which were
trivial.
Transaction Price
Allocated to the Remaining Performance Obligations
At a given point in
time, the Company may have collected payment for future sales of
product to begin production. These transactions are deferred until
the product transfers to the customer and the performance
obligation is considered complete. As of December 31, 2019,
$1,343,982 in revenue is expected to be recognized in the future
related to performance obligations that are unsatisfied (or
partially unsatisfied) at the end of the reporting period. The
Company expects to recognize all of our unsatisfied (or partially
unsatisfied) performance obligations as revenue in the next twelve
months.
Contract
Costs
Costs incurred to
obtain a customer contract are not material to the Company. The
Company elected to apply the practical expedient to not capitalize
contract costs to obtain contracts with a duration of one year or
less, which are expensed and included within cost of goods and
services.
Critical
Accounting Estimates
Estimates are used to
determine the amount of variable consideration in contracts, the
standalone selling price among separate performance obligations and
the measure of progress for contracts where revenue is recognized
over time. The Company reviews and updates these estimates
regularly.
Disaggregation
of Revenue
All machine sales and
most consumable products sales are completed in North America.
|
|
|
Year
Ended
December
31,
2019
|
|
|
Year
Ended
December
31,
2018
|
|
|
Machine sales
|
|
$ |
2,441,524 |
|
|
$ |
3,759,917 |
|
|
Consumable product
sales
|
|
|
2,149,453 |
|
|
|
2,869,002 |
|
|
Total sales
|
|
$ |
4,590,977 |
|
|
$ |
6,628,919 |
|
Cost of Goods
Sold
Cost of goods sold
represents costs directly related to supplies and materials,
machines, freight and delivery, commissions, printing, packaging
and other costs.
Advertising and
Marketing Expenses
Advertising and
marketing expense include cost incurred in public relations, online
marketing, magazine, and social networking etc. For the years ended
December 31, 2019 and 2018 advertising and marketing expenses were
$118,774 and $175,234, respectively.
Income Tax
Provision
Since inception of the
Company on August 29, 2013 through March 5, 2017, the Company was
taxed as a pass-through entity for federal and state income tax
purposes as an S Corporation. For federal and state Income tax
purposes, income and losses are passed through to the shareholders.
As a pass-through entity, the Company was subject to California
state income tax.
On March 6, 2017, the
Company inadvertently terminated its S-election by issuing common
stock to an ineligible shareholder. On March 6, 2017 and
thereafter, the Company is taxed as a C corporation. The Company is
subject to income taxes in the United States.
The Company accounts
for income taxes under Section 740-10-30 of the FASB Accounting
Standards Codification, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the
extent management concludes it is more likely than not that the
assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the Statements of Operations in the period that includes the
enactment date.
ASC 740 prescribes a
comprehensive model for how companies should recognize, measure,
present, and disclose in their financial statements uncertain tax
positions taken or expected to be taken on a tax return. Under ASC
740, tax positions must initially be recognized in the financial
statements when it is more likely than not the position will be
sustained upon examination by the tax authorities. Such tax
positions must initially and subsequently be measured as the
largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and relevant
facts.
The Company recognizes
interest and penalties related to unrecognized tax benefits within
income tax expense. Accrued interest and penalties are included
within the related tax liability.
Contingencies
The Company follows
subtopic 450-20 of the FASB Accounting Standards Codification to
report accounting for contingencies. Certain conditions may exist
as of the date the financial statements are issued, which may
result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. The Company
assesses such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against
the Company or un-asserted claims that may result in such
proceedings, the Company evaluates the perceived merits of any
legal proceedings or un-asserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought
therein.
If the assessment of a
contingency indicates that it is probable that a material loss has
been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s
Financial Statements. If the assessment indicates that a
potentially material loss contingency is not probable but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, and an estimate of the
range of possible losses, if determinable and material, would be
disclosed.
Loss contingencies
considered remote are generally not disclosed unless they involve
guarantees, in which case the guarantees would be disclosed.
However, there is no assurance that such matters will not
materially and adversely affect the Company’s business, financial
position, and results of operations or cash flows.
Marketable
Securities
We report investments
in marketable equity securities, and certain other equity
securities, at fair value. Unrealized gains and losses on
available-for-sale investment securities are included in
shareowners’ equity, net of applicable taxes and other adjustments.
We currently do not have any available for sale securities.
Realized gains and
losses are accounted for on the specific identification method.
Unrealized gains and losses on investment securities classified as
trading are included in earnings.
We regularly review
investment securities for impairment using both quantitative and
qualitative criteria. If we do not expect to recover the entire
cost basis of the security, we consider the security to be
other-than-temporarily impaired (OTTI), and we record the
difference between the security’s amortized cost basis and its
recoverable amount in earnings and the difference between the
security’s recoverable amount and fair value in other comprehensive
income. If we intend to sell the security or it is more likely than
not we will be required to sell the security before recovery of its
amortized cost basis, the security is also considered OTTI and we
recognize the entire difference between the security’s amortized
cost basis and its fair value in earnings. For equity securities,
we consider the length of time and magnitude of the amount that
each security is in an unrealized loss position. If we do not
expect to recover the entire amortized cost basis of the security,
we consider the security to be OTTI, and we record the difference
between the security’s amortized cost basis and its fair value in
earnings.
Stock-Based
Compensation
The Company accounts
for stock-based compensation in accordance with the Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 718, Stock Compensation (“ASC 718”),
which requires that stock-based compensation be measured and
recognized as an expense in the financial statements and that such
expense be measured at the grant date fair value.
For awards that vest
based on service conditions, the Company uses the straight-line
method to allocate compensation expense to reporting periods. The
grant date fair value of options granted is calculated using the
Black-Scholes option pricing model, which requires the use of
subjective assumptions including volatility, expected term and the
fair value of the underlying common stock, among others.
The Company
periodically issues performance-based awards. For these awards,
vesting will occur upon the achievement of certain milestones. When
achievement of the milestone is deemed probable, the Company
expenses the compensation of the respective awards over the
implicit service period.
Stock awards to
non-employees are accounted for in accordance with ASC 505-50,
Equity-Based Payments to Non-Employees (“ASC 505-50”). The
measurement date for non-employee awards is generally the date
performance of services required from the non-employee is complete.
For non-employee awards that vest based on service conditions, the
Company expenses the value of the awards over the related service
period, provided they expect the service condition to be met. The
Company records the expense of services rendered by non- employees
based on the estimated fair value of the stock option using the
Black-Scholes option pricing model over the contractual term of the
non-employee. The fair value of unvested non-employee awards is
remeasured at each reporting period and expensed over the vesting
term of the underlying stock options on a straight-line basis. The
Company adopted ASU No. 2016-09 Compensation—Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment
Accounting during the year ended December 31, 2017.
The stock-based
compensation plans provide that grantees may have the right to
exercise an option prior to vesting. Shares purchased upon the
exercise of unvested options will be subject to the same vesting
schedule as the underlying options and are subject to repurchase at
the original exercise price by the Company should the grantee
discontinue providing services to the Company for any reason, prior
to becoming fully vested in such shares.
Issuance Costs
Related to Equity and Debt
The Company allocates
issuance costs between the individual freestanding instruments
identified on the same basis as proceeds were allocated. Issuance
costs associated with the issuance of stock or equity contracts
(i.e., equity-classified warrants and convertible preferred stock)
are recorded as a charge against the gross proceeds of the
offering. Any issuance costs associated with the issuance of
liability-classified warrants are expensed as incurred. Issuance
costs associated with the issuance of debt (i.e., convertible debt)
is recorded as a direct reduction of the carrying amount of the
debt liability but limited to the notional value of the debt. The
Company accounts for debt as liabilities measured at amortized cost
and amortizes the resulting debt discount to interest expense using
the effective interest method over the expected term of the notes
pursuant to ASC 835, Interest (“ASC 835”). To the extent
that the reduction from issuance costs of the carrying amount of
the debt liability would reduce the carrying amount below zero,
such excess is recorded as interest expense.
Embedded
Conversion Features
The Company evaluates
embedded conversion features within convertible debt under ASC 815
“Derivatives and Hedging” to determine whether the embedded
conversion feature(s) should be bifurcated from the host instrument
and accounted for as a derivative at fair value with changes in
fair value recorded in earnings. If the conversion feature does not
require derivative treatment under ASC 815, the instrument is
evaluated under ASC 470-20 “Debt with Conversion and Other
Options.” Under the ASC 470-20, an entity must separately account
for the liability and equity components of the convertible debt
instruments that may be settled entirely or partially in cash upon
conversion in a manner that reflects the issuer’s economic interest
cost. The effect of ASC 470-20 on the accounting for our
convertible debt instruments is that the equity component is
required to be included in the additional paid-in capital section
of stockholders’ equity on the consolidated balance sheets and the
value of the equity component is treated as original issue discount
for purposes of accounting for the debt component of the notes. As
a result, we are required to record non-cash interest expense as a
result of the amortization of the discounted carrying value of the
convertible debt to their face amount over the term of the
convertible debt. We report higher interest expense in our
financial results because ASC 470-20 requires interest to include
both the current period’s amortization of the debt discount and the
instrument’s coupon interest.
For conventional
convertible debt where the rate of conversion is below market
value, the Company records a “beneficial conversion feature”
(“BCF”) and related debt discount. When the Company records a BCF,
the relative fair value of the BCF is recorded as a debt discount
against the face amount of the respective debt instrument (offset
to additional paid in capital) and amortized to interest expense
over the life of the debt.
Derivatives and
Hedging
On July 1, 2017, the
Company early adopted ASU 2017-11, “Earnings Per Share (Topic
260) Distinguishing Liabilities from Equity (Topic 480) Derivatives
and Hedging (Topic 815),” which addresses the complexity of
accounting for certain financial instruments with down round
features. The Company has concluded that the retroactive provisions
of ASU 2017-11 had no impact on the accounting for the Company’s
previously outstanding warrant which had been issued to the warrant
holder as stock compensation.
ASU 2017-11 changes the
classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock. ASU
2017-11 also clarifies existing disclosure requirements for equity-
classified instruments. As a result, a freestanding equity-linked
financial instrument (or embedded conversion option) no longer
would be accounted for as a derivative liability at fair value as a
result of the existence of a down round feature. For freestanding
equity classified financial instruments, the amendments require
entities that present earnings per share (EPS) in accordance with
Topic 260 to recognize the effect of the down round feature when it
is triggered. That effect is treated as a dividend and as a
reduction of income available to common shareholders in basic EPS.
Convertible instruments with embedded conversion options that have
down round features are now subject to the specialized guidance for
contingent beneficial conversion features (in Subtopic 470-20,
“Debt—Debt with Conversion and Other Options”), including related
EPS guidance (ASC 260). Part II of ASU 2017-11 recharacterize the
indefinite deferral of certain provisions of ASC 480 that now are
presented as pending content in the ASC, to a scope exception.
Those amendments do not have an accounting effect.
Prior to the early
adoption of ASU 2017-11, an equity-linked financial instrument with
a down round feature that otherwise is not required to be
classified as a liability under the guidance in ASC 480 is
evaluated under the guidance in ASC 815, “Derivatives and Hedging,”
to determine whether it meets the definition of a derivative. If it
meets that definition, the instrument (or embedded feature) is
evaluated to determine whether it is indexed to an entity’s own
stock as part of the analysis of whether it qualifies for a scope
exception from derivative accounting. Generally, for warrants and
conversion options embedded in financial instruments that are
deemed to have a debt host (assuming the underlying shares are
readily convertible to cash or the contract provides for net
settlement such that the embedded conversion option meets the
definition of a derivative), the existence of a down round feature
results in an instrument not being considered indexed to an
entity’s own stock. This results in a reporting entity being
required to classify the freestanding financial instrument or the
bifurcated conversion option as a liability, which the entity must
measure at fair value initially and at each subsequent reporting
date.
ASU 2017-11 revises the
guidance for instruments with down round features in ASC 815-40,
“Derivatives and Hedging—Contracts in Entity’s Own Equity,” which
is considered in determining whether an equity-linked financial
instrument qualifies for a scope exception from derivative
accounting. An entity still is required to determine whether
instruments would be classified in equity under the guidance in ASC
815-40 in determining whether they qualify for that scope
exception. If they do qualify, freestanding instruments with down
round features are no longer classified as liabilities and embedded
conversion options with down round features are no longer
bifurcated.
For entities that
present EPS in accordance with ASC 260, and when the down round
feature is included in an equity-classified freestanding financial
instrument, the value of the effect of the down round feature is
treated as a dividend when it is triggered and as a numerator
adjustment in the basic EPS calculation. This reflects the
occurrence of an economic transfer of value to the holder of the
instrument, while alleviating the complexity and income statement
volatility associated with fair value measurement on an ongoing
basis. Convertible instruments are unaffected by ASU 2017-11.
Part I of ASU 2017-11
are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is
permitted for all entities, including adoption in an interim
period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of
the fiscal year that includes that interim period. ASU 2017-11 Part
1 should be applied retrospectively to outstanding financial
instruments with a down round feature for each prior reporting
period presented in accordance with the guidance on accounting
changes in paragraphs ASC 250-10-45-5 through 45-10.
The Company has
determined that there were no previously outstanding financial
instruments that fall under the scope of ASU 2017-11. Therefore,
the Company has not determined and has not recorded a
cumulative-effect adjustment to the balance sheet.
ASU 2017-11 Part II
does not require any transition guidance because those amendments
do not have an accounting effect.
The Company considered
the impact of Part 1 of ASU 2017-11 and determined the Company had
no financial instruments previously carried as derivative
liabilities that were deemed to be such on the basis of embedded
features containing down round provisions, resulting in the strike
price being reduced on the basis of the pricing of future equity
offerings. As a result, upon the early adoption provisions of ASU
2017-11, the Company did not record any adjustment to its books to
account for any transition accounting issues.
Net Loss Per
Common Share
Basic net loss per
common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the
period. Potential common stock equivalents are determined using the
treasury stock method. For diluted net loss per share purposes, the
Company excludes stock options and other stock-based awards,
including shares issued as a result of option exercises that are
subject to repurchase by the Company, whose effect would be
anti-dilutive from the calculation. During the year ended December
31, 2019 and 2018, common stock equivalents were excluded from the
calculation of diluted net loss per common share, as their effect
was anti-dilutive due to the net loss incurred. Therefore, basic
and diluted net loss per share was the same in all periods
presented.
The Company had
13,153,968 and 15,654,660 potentially dilutive securities that have
been excluded from the computation of diluted weighted-average
shares outstanding as of December 31, 2019 and 2018, respectively,
as they would be anti-dilutive. Additionally, 933,333 shares of
common stock issued during the year ended December 31, 2019 under a
share lending arrangement are excluded from the calculation of
weighted-average shares outstanding.
Going
Concern
The Company’s financial
statements are prepared using U.S. GAAP applicable to a going
concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business.
However, the Company has negative working capital, recurring
losses, and does not have a source of revenues sufficient to cover
its operating costs. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.
The ability of the
Company to continue as a going concern is dependent upon its
ability to successfully execute the business plan and attain
profitable operations. The accompanying financial statements do not
include any adjustments that may be necessary if the Company is
unable to continue as a going concern.
In the coming year, the
Company’s foreseeable cash requirements will relate to continual
development of the operations of its business, maintaining its good
standing and making the requisite filings with the SEC, and the
payment of expenses associated with operations and business
developments. The Company may experience a cash shortfall and be
required to raise additional capital.
Historically, it has
mostly relied upon convertible notes payable and cash flows from
operations to finance its operations and growth. Management may
raise additional capital by retaining net earnings or through
future private offerings of the Company’s stock or through loans
from private investors, although there can be no assurance that it
will be able to obtain such financing. The Company’s failure to do
so could have a material and adverse effect upon it and its
shareholders.
Recently Issued
Accounting Pronouncements
From time to time, new
accounting pronouncements are issued by the FASB or other standard
setting bodies that are adopted by the Company as of the specified
effective date. Unless otherwise discussed, the Company believes
that the effect of recently issued standards that are not yet
effective and will not have a material effect on its consolidated
financial position or results of operations upon adoption.
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02).
Under ASU No. 2016-2, an entity is required to recognize
right-of-use assets and lease liabilities on its balance sheet and
disclose key information about leasing arrangements. ASU No.
2016-02 offers specific accounting guidance for a lessee, a lessor
and sale and leaseback transactions. Lessees and lessors are
required to disclose qualitative and quantitative information about
leasing arrangements to enable a user of the financial statements
to assess the amount, timing and uncertainty of cash flows arising
from leases. For public companies, The Company adopted this
standard on January 1, 2019 using the modified retrospective
method. The new standard provides a number of optional practical
expedients in transition. The Company elected the ‘package of
practical expedients’, which permitted the Company not to reassess
under the new standard its prior conclusions about lease
identification, lease classification and initial direct costs; and
all of the new standard’s available transition practical
expedients.
On adoption, the
Company recognized a right of use asset of $44,138, operating lease
liabilities of $46,545 with a cumulative effect adjustment to
accumulated deficit of $2,407, based on the present value of the
remaining minimum rental payments under current leasing standards
for its existing operating lease.
The new standard also
provides practical expedients for a company’s ongoing accounting.
The Company elected the short-term lease recognition exemption for
its leases. For those leases with a lease term of 12 months or
less, the Company will not recognize right of use assets or lease
liabilities.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value
Measurement (Topic 820).” This standard modifies disclosure
requirements related to fair value measurement and is effective for
all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Early adoption is
permitted. Implementation on a prospective or retrospective basis
varies by specific disclosure requirement. The standard also allows
for early adoption of any removed or modified disclosures upon
issuance while delaying adoption of the additional disclosures
until their effective date. The Company is currently assessing the
impact of adopting this standard on its consolidated financial
statements.
In December 2019, the
FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income
Taxes (Topic 740)”. This standard simplifies the accounting for
income taxes. This standard is effective for fiscal years beginning
after December 15, 2020, including interim periods within those
fiscal years. Early adoption is permitted for all entities. The
Company is currently assessing the impact of adopting this standard
on its consolidated financial statements.
Note 3:
Property and Equipment
Property and equipment
consist of the following:
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
Furniture and fixtures
|
|
$ |
10,425 |
|
|
$ |
10,425 |
|
|
Equipment
|
|
|
7,579 |
|
|
|
7,579 |
|
|
Trade show display
|
|
|
2,640 |
|
|
|
2,640 |
|
|
Total
|
|
|
20,644 |
|
|
|
20,644 |
|
|
Less: Accumulated depreciation
|
|
|
(7,364 |
) |
|
|
(6,298 |
) |
|
Property and equipment, net
|
|
$ |
13,280 |
|
|
$ |
14,346 |
|
Depreciation expense
amounted to $1,066 for the years ended December 31, 2019 and 2018,
respectively.
Note 4:
Accounts Payable and Accrued Expenses
Accounts payable and
accrued expenses consist of the following:
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
347,850 |
|
|
$ |
456,163 |
|
|
Credit cards
payable
|
|
|
48,743 |
|
|
|
24,517 |
|
|
Accrued interest
|
|
|
4,778 |
|
|
|
1,049 |
|
|
Sales tax payable
|
|
|
130,262 |
|
|
|
54,272 |
|
|
Accrued officer
consulting cost
|
|
|
165,000 |
|
|
|
- |
|
|
Other
|
|
|
- |
|
|
|
1,600 |
|
|
Total Accounts payable
and Accrued expenses
|
|
$ |
696,633 |
|
|
$ |
537,601 |
|
Note 5:
Notes Payable
A summary of Notes
Payable are as follows:
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
Note payable dated
November 21, 2016, bearing interest at 12% per annum, due February
21, 2017
|
|
$ |
- |
|
|
$ |
70,912 |
|
|
Note payable dated
December 31, 2019, bearing interest at 3% monthly, maturing
February 29, 2020
|
|
|
164,835 |
|
|
|
- |
|
|
Total notes payable
|
|
|
164,835 |
|
|
|
70,912 |
|
|
Less: unamortized
discount and deferred financing cots
|
|
|
(19,504 |
) |
|
|
- |
|
|
Less: current
portion
|
|
|
(145,331 |
) |
|
|
(70,912 |
) |
|
Long-term portion of
notes payable
|
|
$ |
- |
|
|
$ |
- |
|
On December 31, 2019,
the Company entered into an inventory financing arrangement with a
single lender, whereby $150,000 was paid by the lender directly to
a vendor to secure inventory for sale a customer in January 2020.
The Company will repay $164,835 of principal and interest by
February 29, 2020. The interest and fees of $14,835 were recorded
as debt discount and are amortized through the maturity date. The
Company also paid a deferred finance cost of $5,000 which will be
amortized through the maturity date.
Note 6:
Convertible Notes Payable and Derivative
Liabilities
Convertible
Notes Payable
The following table
summarizes outstanding convertible notes as of December 31, 2019
and 2018:
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
2017 Notes, maturing December 2020, currently
past due
|
|
$ |
15,000 |
|
|
$ |
1,718,500 |
|
|
2018 Notes, matured March 2019
|
|
|
- |
|
|
|
1,500,000 |
|
|
June 2019 Notes, maturing March 25, 2020
|
|
|
2,018,889 |
|
|
|
- |
|
|
December 2019 Notes, maturing June 10,
2020
|
|
|
560,000 |
|
|
|
- |
|
|
Total
|
|
|
2,593,889 |
|
|
|
3,218,500 |
|
|
Less: Debt discount and deferred finance
costs on short-term convertible notes
|
|
|
(1,525,906 |
) |
|
|
- |
|
|
Less: Current convertible notes payable, net
of discount
|
|
|
(1,067,983 |
) |
|
|
(3,218,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total long-term convertible notes payable,
net
|
|
$ |
- |
|
|
$ |
- |
|
In December 2017, the
Company issued non-interest bearing convertible debentures (the
“2017 Notes”) to 36 investors in exchange for $1,643,500. The 2017
Notes have a three-year term and are convertible into the Company’s
common stock at a per share price of $0.20 at any time subsequent
to the issuance date. On the maturity date, if not previously
converted, the 2017 Notes are subject to a mandatory conversion to
the Company’s common stock. In January 2018, the Company issued
non-interest bearing convertible notes with the same terms as the
2017 Notes in exchange for an additional $75,000. The Company
determined that the 2017 Notes qualified as conventional
convertible instruments. The Company evaluated the conversion
feature and determined that no beneficial conversion feature
existed on the issuance dates. During the quarter ended March 31,
2019 the Company issued 8,517,500 shares of common stock to convert
these notes payable. As of December 31, 2019, the remaining
outstanding balance of these notes was $15,000.
In March 2018, the
Company issued non-interest bearing convertible notes to two
investors in exchange for $1,500,000 (the “2018 Notes”). The 2018
Notes have a one-year term and are convertible into the Company’s
common stock at a per share price of $0.90 at any time subsequent
to the issuance date. Upon either the maturity date or a successful
financing involving the Company’s common stock or a financial
instrument convertible into common stock at a valuation of
$45,000,000 or more, the 2018 Notes are subject to mandatory
conversion to the Company’s common stock, if not previously
converted. The Company determined that the 2018 Notes qualified as
conventional convertible instruments. Further, the Company
evaluated the conversion feature and determined that there was no
beneficial conversion feature or derivative liabilities. During the
quarter ended March 31, 2019, the Company issued 2,062,161 shares
of common stock to convert these notes in full.
In June and July 2019,
the Company issued convertible notes to 10 investors with a
principal amount of $2,388,889, receiving $1,791,666 in net cash
proceeds (the “June 2019 Notes”). The June 2019 Notes had an
original issue discount of $238,889, and the Company incurred an
interest charge deducted from the gross proceeds of $358,333, based
on a 15% stated rate. The total of $597,222 was recorded as debt
discount. Additionally, the Company paid $132,848 of financing
costs, which were recorded as a reduction of the carrying value of
the debt. The deferred financing costs and debt discounts are being
amortized using the effective interest method through the maturity
of the June 2019 Notes. The June 2019 Notes mature on March 25,
2020 and are convertible into the Company’s common stock at a per
share price of $0.35 at any time subsequent to the issuance date.
The June 2019 Notes contain a down round feature, whereby any sale
of common stock or common stock equivalent at a price per share
lower than the conversion price of the June 2019 Notes will result
in the conversion price being lowered to the new price. As of
December 31, 2019, the June 2019 Notes were convertible into
5,785,714 shares of common stock. The notes holders also received
warrants to purchase a total of 3,685,714 shares of the Company’s
common stock at an exercise price of $0.35 per share for a term of
five years. The warrants contain the same down round feature as the
notes.
In December 2019, the
Company issued convertible notes to an institutional investor with
a principal amount of $560,000 (the “December 2019 Notes”) with an
original issue discount of $56,000 and a maturity date of June 10,
2020. The Company paid $44,000 of deferred finance costs. The
Company also issued 186,667 shares of common stock to the lender of
the December 2019 Notes as deferred finance costs, valued at
$81,200 based on the closing price of the stock at the date of
borrowing. This lender also received 933,333 shares of common stock
valued at $406,000 as a share lending arrangement, which the
company recorded as contra-equity. The shares may be returned to
the Company if the debt is satisfied in full by the maturity date.
If the debt is not repaid by the maturity date, the shares are
concerned fully earned, and the fair value of the shares will be
amortized in full to expense.
Derivative
Liabilities
The Company evaluated
the embedded conversion features of the convertible debt
instruments and the warrants discussed above and determined that
the conversion options and the warrants should be accounted for as
derivative liabilities. A total of $1,896,947 was recorded as
additional debt discount at the issuance of the June 2019 Notes and
the December 2019 Notes for the conversion option and warrants,
based on the estimate fair value of the liabilities noted below,
resulting in a day one loss of $5,189,604. The fair values of the
conversion option and the attached warrants were estimated using a
binomial model with the following assumptions:
|
|
At Debt
Issuance
|
|
|
As of December
31, 2019
|
|
|
|
Conversion
Option
|
|
|
Warrants
|
|
|
Conversion
Option
|
|
|
Warrants
|
|
|
Volatility
|
|
|
95.36%-98.8
|
%
|
|
|
69.74%-71.58
|
%
|
|
|
86.4-94.1
|
%
|
|
77.9
|
%
|
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk-free rate
|
|
|
1.57%-1.99
|
%
|
|
|
1.74%-1.93
|
%
|
|
|
1.55-1.60
|
%
|
|
|
1.69
|
%
|
|
Expected term
|
|
0.5-0.75 years
|
|
|
5.0 years
|
|
|
0.25-1.8 years
|
|
|
4.5 years
|
|
|
Stock price
|
|
$
|
0.40-$1.22
|
|
|
$
|
0.40-$1.12
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
Exercise price
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
Derivative Liability
fair value
|
|
$
|
1,535,324
|
|
|
$
|
806,012
|
|
|
$
|
611
|
|
|
$
|
553
|
|
All fair value
measurements related to the derivative liabilities are considered
significant unobservable inputs (Level 3) under the fair value
hierarchy of ASC 820.
The table below
presents the change in the fair value of the derivative liability
during the year ended December 31, 2019:
|
Fair value as of December 31, 2018
|
|
$ |
– |
|
|
Fair value on the date of
issuance recorded as a debt discount
|
|
|
1,896,947 |
|
|
Fair value on the date of
issuance recorded as a loss on derivative
|
|
|
518,604 |
|
|
Extinguishment due to repayment
of debt
|
|
|
(89,311 |
) |
|
Gain on change in fair value of
derivatives
|
|
|
(1,821,490 |
) |
|
Fair value as of December 31, 2019
|
|
$ |
504,750 |
|
Note 7:
Income Taxes
The components of the
provision for income taxes for the years ended December 31, 2019
and 2018, respectively, consisted of the following:
|
|
|
For the year
ended
|
|
|
For the year
ended
|
|
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
|
- |
|
|
|
- |
|
|
State
|
|
$ |
800 |
|
|
$ |
800 |
|
|
|
|
|
800 |
|
|
|
800 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
- |
|
|
|
- |
|
|
State
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for (benefit from) income
taxes
|
|
$ |
800 |
|
|
$ |
800 |
|
Deferred tax assets
(liabilities) consist of the following:
|
|
|
For the year
ended
|
|
|
For the year
ended
|
|
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
Net operating losses
|
|
$ |
1,41,780 |
|
|
$ |
673,067 |
|
|
Other
|
|
|
2,040 |
|
|
|
1,900 |
|
|
Total Deferred Tax Asset
|
|
|
1,543,819 |
|
|
|
674,967 |
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(1,543,611 |
) |
|
|
(674,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
(208 |
) |
|
|
(208 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets/(Liabilities)
|
|
$ |
0 |
|
|
$ |
0 |
|
Reconciliation of the
statutory federal income tax to the Company’s effective tax:
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
Tax at Federal Statutory Rate
|
|
|
21.00 |
% |
|
|
21.00 |
% |
|
State Taxes
|
|
|
6.88 |
% |
|
|
6.77 |
% |
|
Nondeductible Items
|
|
|
-0.08 |
%
|
|
|
-0.87 |
%
|
|
Valuation Allowance
|
|
|
-27.38 |
%
|
|
|
-26.86 |
%
|
|
Other
|
|
|
-0.42 |
%
|
|
|
-0.04 |
%
|
|
Provision for Taxes
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Management assesses the
available positive and negative evidence to estimate if sufficient
future taxable income will be generated to use the existing
deferred tax assets. Based on the available objective evidence,
management believes it is not more likely than not that the net
deferred tax assets will be fully realizable for the period ending
December 31, 2019. On the basis of this evaluation, as of December
31, 2019, a full allowance has been recorded on its net deferred
tax assets.
As of December 31,
2019, the Company had $630,883 of federal and $5,541,650 of state
net operating loss carryforwards available to reduce future taxable
income which will begin to expire on December 31, 2037. As of
December 31, 2019, the Company has $4,868,032 of federal net
operating loss carryforwards available to reduce future taxable
income which carryforward indefinitely.
Federal and state laws
can impose substantial restrictions on the utilization of net
operating loss carryforwards in the event of an “ownership change”,
as defined in Section 382 of the Internal Revenue Code. The Company
is in the process of determining if significant limitations would
be placed on the utilization of its net operating loss
carryforwards due to prior ownership changes.
As of December 31,
2019, the Company does not have any unrecognized tax benefits. As
of December 31, 2019, the Company has not recognized any interest
or penalties for unrecognized tax benefits.
The Company files
income tax returns in the U.S. and California. Tax Years 2015 to
2019 remain subject to examination for federal income tax purposes,
and tax years 2014 through 2019 remain open to examination for
California income tax purposes. All net operating losses generated
to date are subject to adjustment for U.S. federal and California
income tax purposes.
Note 8:
Equity
Common
Stock
As of December 31,
2019, the authorized capital stock of the Company consisted of
100,000,000 shares, of which 90,000,000 shares were designated as
common stock and 10,000,000 shares as preferred stock.
For the year ended
December 31, 2019:
During the year ended
December 31, 2019, the Company issued 186,667 shares of common
stock to the lender of the December 2019 Notes as deferred finance
costs, valued at $81,200 based on the closing price of the stock at
the date of borrowing. This lender also received 933,333 shares of
common stock valued at $406,000 as a prepaid penalty. The shares
may be returned to the Company if the debt is satisfied in full by
the maturity date. If the debt is not repaid by the maturity date,
the shares are concerned fully earned, and the prepaid expense will
be amortized in full.
During the year ended
December 31, 2019, the Company issued 10,579,661 shares of common
stock related to the conversion of $3,203,500 of Convertible Notes
Payable.
During the year ended
December 31, 2019, the Company received $2,900 related to the
exercise of 2,900,000 stock warrants.
During the year ended
December 31, 2019, the Company had convertible debentures with a 0%
stated interest rate outstanding. As a result, imputed interest was
calculated based on a 4% rate and recorded to equity in the amount
of $23,397.
For the year ended
December 31, 2018:
In accordance with the
terms of the Exchange Agreement, and in connection with the
completion of the acquisition, on the Closing Date the Company
issued 45,000,000 shares of common stock, par value $0.001 per
share to the Jacksam shareholders in exchange for all of the issued
and outstanding Jacksam common stock. In addition, the previous
majority shareholder of China Grand Resorts, Inc. returned
30,000,000 shares of common stock to the treasury of the Company in
exchange for $340,000. Following the acquisition there was a total
of 48,272,311 shares of common stock issued and outstanding of
which 3,272,311 are held by shareholders of the Company prior to
the merger. This transaction was recorded as a recapitalization of
a negative $1,642,118.
During 2018, 3,171,048
options were exercised on a cashless basis.
During 2018 the Company
issued convertible debentures with a 0% stated interest rate. As a
result, imputed interest was calculated and recorded to equity in
the amount of $115,586.
Stock
Warrants
A summary of stock
warrant information is as follows:
|
|
|
Aggregate
Number
|
|
|
Aggregate
Exercise
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December
31, 2017
|
|
|
8,171,048 |
|
|
$ |
5,743 |
|
|
$ |
0.0007 |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,171,048 |
) |
|
|
(743 |
) |
|
|
0.0002 |
|
|
Forfeited and
cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Outstanding at December
31, 2018
|
|
|
5,000,000 |
|
|
$ |
5,000 |
|
|
$ |
0.001 |
|
|
Granted
|
|
|
3,685,714 |
|
|
|
1,290,000 |
|
|
|
0.35 |
|
|
Exercised
|
|
|
(2,900,000 |
) |
|
|
(2,900 |
) |
|
|
0.001 |
|
|
Forfeited and
cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Outstanding at December
31, 2019
|
|
|
5,785,714 |
|
|
$ |
1,292,100 |
|
|
$ |
0.22 |
|
The weighted average
remaining contractual life is approximately 3.2 years for stock
warrants outstanding with no intrinsic value on December 31, 2019.
All of the above warrants were fully vested.
Note 9:
Related Party
Mark Adams, CEO, and
David Hall, EVP of Sales invested in the June 2019 Notes. Mr. Adams
and Mr. Hall contributed $250,000 and $100,000, respectively.
During the year ended
December 31, 2018 and prior to our reverse merger, we advanced
major shareholder and former Chairman, Daniel Davis $25,000. The
advance was repaid in full by Daniel Davis on April 2, 2018.
Note 10:
Commitments
Employment
Agreement
In December 2017, the
Company entered into an employment agreement with Daniel Davis and
Mark Adams. As of the Effective Date, and for one year of the date
therefrom, the Executive’s annual salary shall be equal to $180,000
and $120,000, respectively, per annum (the “Annual Salary”). The
Annual Salary shall be paid to the Executive in equal installments
in accordance with the Company’s usual payroll practices.
Executive’s Annual
Salary shall increase automatically at the rate of five percent
(5%) per year for four years, beginning on the anniversary date of
the Effective Date. In addition to the automatic raises set forth
above, the Annual Salary may also be increased from time to time by
merit and general increases in amounts determined by the Board.
Performance Bonus. In
addition to the Annual Salary, the Executive is eligible to earn an
annual bonus of up to thirty percent (30%) of Executive’s Annual
Salary (the “Performance Bonus”). The amount of the Performance
Bonus will be determined in good faith by the Board, based upon the
following factors:
|
(a)
|
Fifty percent (50%) of
the Performance Bonus shall be based upon the achievement of the
Executive’s individual objectives, as defined in writing and
presented to Executive annually by the Board.
|
| |
|
|
(b)
|
Fifty percent (50%) of
the Performance Bonus shall be based upon the achievement of
Company objectives, which shall include specifically, meeting or
exceeding the revenue targets and other objectives as determined by
the Board.
|
The initial set of
performance objectives, both for Executive individually and for the
Company, will be reasonably established by the Board within sixty
(60) days of the Effective Date of this Agreement. Subsequent
performance objectives, both for Executive individually and for the
Company, will be reasonably established by the Board within sixty
(60) days of the beginning of the calendar year to which the
Performance Bonus relates. The Performance Bonus shall be paid to
Executive in the first regular payroll period after the Board makes
a good faith determination that such Performance Bonus has been
earned, but in no event shall the Performance Bonus be paid later
than March 1 of the calendar year immediately following the
calendar year in which the bonus was earned.
In addition to salary,
the agreement provided for the option of 1,000,000 common shares of
the Company, which shall vest at a rate of 28,000 share for each
full one-month period worked from the Effective Date. If this
Agreement is terminated pursuant to written notice by the Company
to the Executive on or before the date that is one year after the
Effective Date, all the options shall vest and the Executive shall
retain the options subject to their terms and the terms hereof. The
options may contain terms providing the issuer the right to
accelerate vesting and/or require the exercise of options prior to
the initial public offering and listing of the issuer. The Company
may arrange for the grant of additional options to the Executive
from time to time based on the Executive’s performance and other
relevant factors as the Board may determine in its discretion.
All options to purchase
Holdings Shares granted to the Executive shall be subject to the
terms of the stock option agreement pursuant to which they are
granted and the terms of the stock option plan under which they are
granted in effect from time to time. Shares issuable on exercise of
the options shall be subject to any escrow, trading restriction, or
other requirement imposed by any stock exchange or securities
regulatory authority upon initial public offering or listing of the
shares. The Executive shall take such steps and execute and deliver
such documents as may be required to affect the foregoing.
The Company may
terminate Executive’s employment for Cause immediately upon Notice
from the Company to Executive. For purposes of this Agreement,
“Cause” shall mean the occurrence of any of the following: (i)
Executive’s conviction of or plea of nolo contendere to any felony
crime involving fraud, dishonesty, or moral turpitude; (ii)
Executive’s commission of, or participation in, a fraud against the
Company. In the event Executive’s employment is terminated for
Cause, the Company shall have no further obligations to the
Executive other than to pay all compensation and expense
reimbursements owing for services rendered and reasonable business
expenses incurred by Executive prior to the effective date of such
termination.
Upon termination of
this agreement pursuant, the Company shall provide to the
Executive:
|
|
(a)
|
A lump sum payment
equal to the greater of (i) twelve (12) months’ Annual Salary at
the Executive’s then- current rate, or (ii) Executive’s Annual
Salary for the remainder of the Term;
|
|
|
|
|
|
(b)
|
if applicable, to the
extent permitted by the Company’s group insurance carrier and
applicable law, continued group insurance benefits coverage,
together with reimbursement of the individual life insurance
premium for the period of time equal to the number of months in
respect of which payment is due pursuant and;
|
|
|
|
|
|
(c)
|
any other amounts
(including but not limited to any earned Performance Bonus during
the Executive’s active employment that may be payable pursuant to
this Agreement) accrued and earned by the Executive prior to the
effective date of termination.
|
If a Change of Control
occurs and the Executive is not offered continued employment on a
comparable basis after the Change of Control, the Executive shall
be entitled to receive, within thirty (30) days after the Change of
Control, a sum equivalent to twelve (12) months’ Annual Salary,
plus an additional 4% of Annual Salary in lieu of benefits, and any
Performance Bonus that has been earned by Executive prior to the
effective date of the Executive’s termination from the Company.
Thereafter, the Company shall have no further obligations to the
Executive under this Agreement other than payment of any other
amounts accrued as owing to the Executive under this Agreement as
of the date the Change of Control occurs.
On May 31, 2019, the
Company entered into a consulting agreement with Daniel Davis
related to his departure from employment with the Company. The
agreement requires Daniel Davis to provide limited consulting
services to the Company for a period of up to three years beginning
May 1, 2019 in exchange for $165,000 per year. The Company has
recorded a current liability of $165,000, included in accounts
payable and accrued expenses on the consolidated balance sheet, and
a long-term liability of $330,000, included in other long-term
liabilities on the consolidated balance sheet. Total expense
associated with the agreement of $495,000 is included in salaries
and wages expense on the consolidated statement of operations. The
Company made payments of $110,000 through December 31, 2019,
leaving a balance of $220,000 in other long-term liabilities. In
addition, the Company entered into a lock up agreement with Daniel
Davis that restricts the number of shares Daniel Davis can
otherwise publicly sell for a period of up to three years to one
third of the volume limits set forth under SEC Rule 144. Daniel
Davis also agreed to a standstill agreement that provides that for
a period of up to three years Daniel Davis will not seek to
influence the governance of the Company, including by participation
in any solicitation of other shareholders, promotion of any
extraordinary transaction, nomination of any candidate to the Board
or by seeking the removal of any existing directors.
Leases
The Company has a
single operating lease for an office lease in Rancho Santa
Margarita, California with an initial term of 37 months. Base
monthly rent is approximately $3,200 per month plus net operating
expenses. A deposit equal to one-month rent was paid at the
commencement of the lease. The lease can be extended for a two-year
period at the then fair market value. The lease contains variable
lease payments for non-rental occupancy expenses. These non-lease
components were not included in the determination of the right of
use asset and lease liability as part of the transition to ASC 842
due to the practical expedients elected by the Company. The Company
utilizes the incremental borrowing rate in determining the present
value of lease payments unless the implicit rate is readily
determinable. The Company used an estimated incremental borrowing
rate of 10% to estimate the present value of the right of use
liability.
The Company has
right-of-use assets of $9,299 and operating lease liabilities of
$9,837 as of December 31, 2019. Operating lease expense for the
year ended December 31, 2019 was $37,852. The Company had cash used
in operating activities related to leases of $39,721 during the
year ended December 31, 2019. The lease has a remaining term of
three months.
The following table
provides the maturities of lease liabilities at December 31,
2019:
|
Maturity of
Lease Liabilities at December 31, 2019
|
|
|
|
|
2020
|
|
$ |
10,001 |
|
|
2021
|
|
|
- |
|
|
2022
|
|
|
- |
|
|
2023
|
|
|
- |
|
|
2024
|
|
|
- |
|
|
2025 and thereafter
|
|
|
- |
|
|
Total future
undiscounted lease payments
|
|
|
10,001 |
|
|
Less: Interest
|
|
|
(164 |
) |
|
Present value of lease
liabilities
|
|
$ |
9,837 |
|
Minimum lease payments
under the Company’s operating lease under ASC 840 as of December
31, 2018 for 2019 and 2020 were $48,968 and $20,600,
respectively.
The Company also
maintains short-term rental agreements for certain storage
facilities. Total rent expense for these rentals was $42,304 and
$50,750 for the years ended December 31, 2019 and 2018,
respectively.
Note 11:
Accrued Liabilities – Other
Prior to the Merger,
China Grand Resorts, Inc. recorded various liabilities that were
incurred by former related parties. The current management team is
not aware of any written agreements in place governing the terms of
the loans nor have they been in contact with the debt holders
however recognizes that China Grand Resorts, Inc. previously
reported these amounts as liabilities of the Company. In accordance
with ASC 405-20-40, the liabilities may only be removed from the
Company’s financial statements if they are paid, formally settled
or judicially released. Management believes the relevant statute of
limitations has passed and that no enforceable legal claim exists
in relation to these liabilities of $1,642,118, but does not
believes that is sufficient to remove the liability from the
financial statements. Management does not intend to remove these
liabilities of $1,642,118 from the Company’s financial statements
until such time that the liability is formally settled or
judicially released in accordance with ASC 405-20-40. Due to the
lack of written agreements and other factors noted above,
management concluded to no longer accrue interest on these
loans.
Note 12:
Subsequent Events
No material subsequent
event.
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosures.
None.
Item 9A. Controls and
procedures
Management’s
Evaluation of Disclosure Controls and Procedures
Under the supervision
and with the participation of our Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this Form 10-K, we have concluded that, based on such
evaluation, our disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and is accumulated and
communicated to our management, including our principal executive
and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding
required disclosure.
Limitations on
the Effectiveness of Controls
A control system, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all
controls systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within a company have been detected. Our disclosure controls and
procedures are designed to provide reasonable assurance of
achieving its objectives.
Changes in
Internal Control over Financial Reporting
Other than as described
above, there have not been any changes in the Company’s internal
controls over financial reporting that occurred during the
Company’s fiscal quarter ended December 31, 2019 that has
materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Item 9B. Other
Information
None.
Part III
Item
10. Directors, Executive Officers and Corporate
Governance
Set forth below is
certain information with respect to the individuals who are our
directors and executive officers as of the date of this report:
|
Name
|
|
Age
|
|
Position(s)
|
|
Date of
Appointment
|
|
Mark Adams
|
|
51
|
|
President, Chief
Executive Officer, Director
|
|
September 14, 2018
|
|
Michael Sakala
|
|
54
|
|
Chief Financial
Officer
|
|
September 14, 2018
|
|
Scott Wessler
|
|
52
|
|
Director
|
|
September 14, 2018
|
|
Theodore Winston
|
|
53
|
|
Director
|
|
September 14, 2018
|
Mark
Adams has served as our Chief Executive Officer and
Board Member since September 14, 2018 and in those same roles with
Jacksam Corporation, pre-Merger, since December 2017. From 2013 to
2017, he served as Vice President of Business Development for
eSentire, a software security firm in Boston, Massachusetts. From
2010 to 2013, he was a Partner at Torrey Hills Capital in San
Diego, California. From 2007-2009, he served as a portfolio manager
at BAM, a hedge fund in NYC. From 2005 to 2008, he served as a
portfolio manager at PT 72 in Boston, Massachusetts. From
2000-2004, he served as an analyst at Essex Investment Management
in Boston, Massachusetts. From 1996 to 2000, he served as Vice
President of Business Development at Dell-EMC. His career started
as an analyst at JP Morgan Chase from 1990 to 1994. He holds a
Bachelor of Science degree from Providence College awarded in 1990
and an M.B.A. from Harvard Business School awarded in 1996.
Michael
Sakala has served as our Chief Financial Officer
since September 14, 2018 and in those same roles with Jacksam
Corporation, pre-Merger, since May 2018. From 2017 to 2018, he
served as an independent consultant for Convectium and other hemp
and cannabis businesses. From 2012 to 2016, he served as a Senior
Manager in Ernst and Young’s Global Financial Services Advisory
practice. From 2008 to 2012, he was an independent consultant to
Hedge Funds focusing on compliance and operations. From 2005 to
2008, he was a founding Partner, CFO and CCO, of Copper Rock
Capital Partners, LLC. From 2002 to 2005, he was a Senior Vice
President and Head of the Middle Office for State Street Research
and Management. From 1997 to 1999, he was a financial consultant
for Zolfo Cooper LLC. His career started in operations at Fidelity
Investments from 1988 to 1994. He holds a Bachelor of Science
degree from the University of Massachusetts in business
administration awarded in 1988 and a Master of Science in Finance
from Bentley College awarded in 1993.
Scott
Wessler has served on our Board since September 14,
2018. Prior to the Merger, he invested in the early phases of
Jacksam Corporation and has served on Jacksam’s advisory board as a
member of its board of directors since 2017. In 2015, Scott Wessler
invested in the early phases of MJIC, a cannabis compliance and
distribution company and is currently engaged as a consultant. In
2011, Scott Wessler formed Canopi LLC, a family business focused
primarily in property management, leasing and financial management
of commercial real estate. From 2006 to present, he has served as
Chief Operating Officer of Vimpex International Corporation, a
family owned company specializing in sourcing, importing, sales and
distribution of food products in the United States. From 2004 to
2005, Scott Wessler served as Vice President of Product Development
of an early stage search portal product, Local.com, designed to
provide relevant search results for local businesses, products and
services. From 1996 to 2004, Scott Wessler worked at the Walt
Disney Internet Group where he held leadership roles in the
conception and execution of strategies for next-generation revenue
producing online initiatives. He holds a Bachelor of Arts degree in
English from the University of California, Irvine awarded in
1991.
Theodore
Winston has served as our Director since September
14, 2018 and as a director of Jacksam Corporation, pre-Merger,
since 2017. From a young age to present, Theodore Winston helped
grow a family business, Winston Flowers, the largest independent
floral retailer. He currently shares the title of President and CEO
and oversees business operations and marketing including the
utilization of web-based technology to drive online services
worldwide. Since 1999, Theodore Winston has overseen the Winston
Flowers Donations Committee, and the charitable giving program that
has raised over $2 million for over 30 non-profit organizations.
Theodore Winston holds a Bachelor of Science degree in Business
Administration from the University of Massachusetts awarded in 2013
and sits on the board of several non-profit organizations in
Boston, Massachusetts.
Board
Composition
Corporate
Governance and Director Independence
Our business and
affairs are managed under the direction of our Board of Directors,
which consist of three members.
Our two non-employee
directors, Scott Wessler and Theodore Winston, are independent
using the definition for “Independent Directors” set out in Nasdaq
Listing Rule 5605(a)(2). Under Nasdaq rules, a director will only
qualify as an “independent director” if, in the opinion of that
company’s Board of Directors, that person does not have a
relationship that would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Our Board of Directors
has undertaken a review of its composition, the composition of its
proposed committees and the independence of each director. Based
upon information requested from and provided by each director
concerning his or her background, employment and affiliations,
including family relationships, our Board of Directors has
determined that neither Scott Wessler nor Theodore Winston has any
relationships that would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director and
that each of these directors is “independent” as that term is
defined under the applicable rules and regulations of the SEC and
the listing requirements and rules of Nasdaq. In making this
determination, our Board of Directors considered the current and
prior relationships that each non-employee director has with our
Company and all other facts and circumstances our board of
directors deemed relevant in determining their independence,
including the beneficial ownership of our capital stock by each
non-employee director.
Family
Relationships
There are no family
relationships among any of our directors or executive officers.
Board
Committees
There are currently no
committees of the Board of Directors.
Board
Leadership Structure and Role in Risk Oversight
Due to the small size
and early stage of the Company, we have not adopted a formal policy
on whether the Chairman and Chief Executive Officer positions
should be separate or may be combined.
Our Board of Directors
is primarily responsible for overseeing our risk management
processes on behalf of our company. The Board of Directors receives
and reviews periodic reports from management, auditors, legal
counsel, and others, as considered appropriate regarding our
company’s assessment of risks. The Board of Directors focuses on
the most significant risks facing our company and our company’s
general risk management strategy, and also ensures that risks
undertaken by our Company are consistent with the board’s appetite
for risk. While the board oversees our company’s risk management,
management is responsible for day-to-day risk management processes.
We believe this division of responsibilities is the most effective
approach for addressing the risks facing our company and that our
board leadership structure supports this approach.
Code of
Ethics
Our board of directors
intends to adopt a code of ethics that our officers, directors and
any person who may perform similar functions will be subject
to.
Involvement in
Certain Legal Proceedings
To our knowledge, our
directors and executive officers have not been involved in any of
the following events during the past ten years:
|
|
1.
|
any bankruptcy petition
filed by or against such person or any business of which such
person was a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that time;
|
|
|
|
|
|
2.
|
any conviction in a
criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
|
|
|
|
|
3.
|
being subject to any
order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from or otherwise limiting his
involvement in any type of business, securities or banking
activities or to be associated with any person practicing in
banking or securities activities;
|
|
|
|
|
|
4.
|
being found by a court
of competent jurisdiction in a civil action, the SEC or the
Commodity Futures Trading Commission to have violated a Federal or
state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated;
|
|
|
|
|
|
5.
|
being subject of, or a
party to, any Federal or state judicial or administrative order,
judgment decree, or finding, not subsequently reversed, suspended
or vacated, relating to an alleged violation of any Federal or
state securities or commodities law or regulation, any law or
regulation respecting financial institutions or insurance
companies, or any law or regulation prohibiting mail or wire fraud
or fraud in connection with any business entity; or
|
|
|
|
|
|
6.
|
being subject of or
party to any sanction or order, not subsequently reversed,
suspended, or vacated, of any self-regulatory organization, any
registered entity or any equivalent exchange, association, entity
or organization that has disciplinary authority over its members or
persons associated with a member.
|
Item 11. Executive
Compensation
The following table
sets forth the compensation for our fiscal years ended December 31,
2019 and 2018 earned by or awarded to, as applicable, our principal
executive officer, principal financial officer and our other most
highly compensated executive officers as of December 31, 2019.
|
Summary
Compensation Table (last two complete fiscal years)
|
|
|
|
Name and Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($)
|
|
|
Option Awards
($)
|
|
|
Nonequity
incentive plan compensation ($)
|
|
|
Nonqualified
deferred compensation earnings ($)
|
|
|
All other
Compensation ($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Adams (CEO since
4/2018)
|
|
2019
|
|
$ |
11,846 |
|
|
|
- |
|
|
$ |
100,178 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
112,024 |
|
|
|
|
2018
|
|
$ |
120,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Sakala (CFO)
|
|
2019
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
2018
|
|
$ |
50,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel Davis (former CEO)
|
|
2019
|
|
$ |
165,018 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
165,018 |
|
|
|
|
2018
|
|
$ |
180,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bryan Glass (former CEO,
CFO)
|
|
2019
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no other
salaries paid in 2019 and 2018. Two executive officers received
total annual salary and bonus compensation in excess of
$100,000.
Summary of
Employment Agreements and Material Terms
Mark
Adams
We entered into a
five-year employment agreement on December 22, 2017, with Mark
Adams to serve as the Chief Operating Officer of Jacksam in
exchange for a base salary of $120,000 per annum, which shall
automatically increase at a rate of five percent per year, in
addition to any increases that our board, in its discretion, may
determine is appropriate. In addition, Mark Adams is eligible for a
performance bonus of up to thirty percent of his then-applicable
annual salary, as determined by our board in its good faith
discretion. Mark Adams’ employment agreement also provides that
Jacksam is to provide Mark Adams with a grant of options to
purchase up to 100,000 shares of Jacksam common stock at an
undetermined exercise price, to vest over three years, upon Jacksam
adopting an equity compensation plan. Jacksam did not ever adopt
such a stock option plan and the options Jacksam was obligated to
grant to Mark Adams have not been granted and, as a result of the
Merger, will not be granted. We are in the process of renegotiating
this term with Mark Adams. Mark Adams is also entitled to health
insurance and other benefits if and to the extent provided by
Jacksam to other executives.
If we terminate Mark
Adams for cause, or if he resigns for good reason (both as defined
in Mark Adams employment agreement), we owe Mark Adams his salary
and benefits for a period of twelve months following his
termination. If he dies, we owe Mark Adams’ estate six month’s
salary.
Mark Adams was promoted
to our Chief Executive Officer on April 10, 2018, by our board,
following the decision by Daniel Davis to step down from that
office.
Daniel
Davis
We entered into a
five-year employment agreement on December 22, 2017, with Daniel
Davis to serve as the Chief Executive Officer of Jacksam in
exchange for a base salary of $180,000 per annum, which shall
automatically increase at a rate of five percent per year, in
addition to any increases that our board, in its discretion, may
determine is appropriate. In addition, Daniel Davis is eligible for
a performance bonus of up to thirty percent of his then-applicable
annual salary, as determined by our board in its good faith
discretion. Daniel Davis’ employment agreement also provides that
Jacksam is to provide Daniel Davis with a grant of options to
purchase up to 100,000 shares of Jacksam common stock at an
undetermined exercise price, to vest over three years, upon Jacksam
adopting an equity compensation plan. Jacksam did not ever adopt
such a stock option plan and the options Jacksam was obligated to
grant to Daniel Davis have not been granted and, as a result of the
Merger, will not be granted. We are in the process of renegotiating
this term with Daniel Davis. Daniel Davis is also entitled to
health insurance and other benefits if and to the extent provided
by Jacksam to other executives.
If we terminate Daniel
Davis for cause, or if he resigns for good reason (both as defined
in Daniel Davis employment agreement), we owe Daniel Davis his
salary and benefits for a period of twelve months following his
termination. If he dies, we owe Daniel Davis’ estate six month’s
salary.
Daniel Davis stepped
down as our Chief Executive Officer on April 10, 2018, Daniel Davis
stepped down as our Chief Executive Officer but remains employed in
charge of new product development on the same terms and conditions
as are contained in his employment agreement.
On May 31, 2019, the
Company entered into a consulting agreement with Daniel Davis
related to his departure from employment with the Company. The
agreement requires Daniel Davis to provide limited consulting
services to the Company for a period of up to three years beginning
May 1, 2019 in exchange for $165,000 per year. The Company has
recorded a current liability of $165,000, included in accounts
payable and accrued expenses on the consolidated balance sheet, and
a long-term liability of $330,000, included in other long-term
liabilities on the consolidated balance sheet. Total expense
associated with the agreement of $495,000 is included in salaries
and wages expense on the consolidated statement of operations. The
Company made payments of $61,875 through September 30, 2019,
leaving a balance of $268,125 in other long-term liabilities. In
addition, the Company entered into a lock up agreement with Daniel
Davis that restricts the number of shares Daniel Davis can
otherwise publicly sell for a period of up to three years to one
third of the volume limits set forth under SEC Rule 144. Daniel
Davis also agreed to a standstill agreement that provides that for
a period of up to three years Daniel Davis will not seek to
influence the governance of the Company, including by participation
in any solicitation of other shareholders, promotion of any
extraordinary transaction, nomination of any candidate to the Board
or by seeking the removal of any existing directors.
Pension
Benefits and Nonqualified Deferred Compensation
We do not provide a
pension plan for our employees, and none of our named executive
officers participated in a nonqualified deferred compensation plan
in 2019.
Other than as set forth
herein, we have not entered into any employment or consulting
agreements with any of our current officers, directors or
employees.
Outstanding
Equity Awards at Fiscal Year End
The following table
sets forth information regarding outstanding stock options and
stock awards held by our named executive officers as of December
31, 2019. From inception and through the date of this report, we
have not granted any stock options or stock awards to any of our
executive officers.
|
|
|
Outstanding
Equity Awards at Fiscal Year-End (most recent)
|
|
|
|
|
|
|
|
|
|
Option
Awards
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Awards
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
Securities underlying unexercised options (#)
exercisable
|
|
|
Number of
securities underlying unexercised options (#)
un-exercisable
|
|
|
Equity incentive
plan awards: Number of securities underlying unexercised unearned
options (#)
|
|
|
Option exercise
price ($)
|
|
|
Option
expiration date
|
|
|
Number of shares
or units of stock that have not vested (#)
|
|
|
Market value of
shares of units of stock that have not vested ($)
|
|
|
Equity incentive
plan awards: Number of unearned shares, units or other rights that
have not vested (#)
|
|
|
Equity incentive
plan awards: Market or payout value of unearned shares, units or
other rights that have not vested ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Adams (CEO since
4/2018)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Michael Sakala (CFO)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Daniel Davis (former
CEO)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Bryan Glass (former CEO,
CFO)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Director
Compensation
The Company plans to
appoint additional directors and may reimburse its directors for
expenses incurred in connection with attending board meetings. The
Company has not paid any director’s fees or other cash compensation
for services rendered as a director since our inception to the date
of this filing. The Company has no formal plan for compensating its
directors for their service in their capacity as directors.
Employee
Benefit and Stock Plans
We have not adopted any
employee equity compensation plans. We provide basic health
insurance coverage to our fulltime employees. We have not adopted
any retirement or deferred compensation plans for any of our
employees.
Compensation
Committee Interlocks and Insider Participation
The Company does not
have a compensation committee. The board of directors conducts
reviews with regards to the compensation of the directors and the
Chief Executive Officer once a year. To make its recommendations on
such compensation, the board of directors does take into account
the types of compensation and the amounts paid to officers of
comparable publicly traded companies.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Beneficial ownership is
determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. In
accordance with SEC rules, shares of our common stock, which may be
acquired upon exercise of stock options or warrants which are
currently exercisable or which become exercisable within 60 days of
the date of the applicable table below are deemed beneficially
owned by the holders of such options and warrants and are deemed
outstanding for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage of ownership of any other
person.
The percentage of
shares beneficially owned is computed as of December 31, 2019, on
the basis of 62,871,972 shares of common stock outstanding. The
following table sets forth information with respect to the
beneficial ownership of our common stock as of December 31, 2019
(the “Determination Date”), by (i) each stockholder known by us to
be the beneficial owner of more than 5% of our common stock (our
only classes of voting securities), (ii) each of our directors and
executive officers, and (iii) all of our directors and executive
officers as a group. To the best of our knowledge, except as
otherwise indicated, each of the persons named in the table has
sole voting and investment power with respect to the shares of our
common stock beneficially owned by such person, except to the
extent such power may be shared with a spouse. To our knowledge,
none of the shares listed below are held under a voting trust or
similar agreement, except as noted. Other than the Merger, to our
knowledge, there is no arrangement, including any pledge by any
person of our securities or any of our parents, the operation of
which may at a subsequent date result in a change in control of the
Company.
|
Names of
Beneficial Owner
|
|
Number of Shares
Beneficially Owned
|
|
|
Percentage of
Beneficial Ownership
|
|
|
5% and Greater
Stockholders
|
|
|
|
|
|
|
|
Daniel Davis,
Founder
|
|
|
25,582,518 |
|
|
|
40.7 |
% |
|
Jeff Brady
|
|
|
4,277,807 |
|
|
|
6.8 |
% |
|
Singlepoint Inc.
|
|
|
4,175,419 |
|
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Names of
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
Mark Adams, CEO and
Director
|
|
|
7,656,636 |
|
|
|
12.2 |
% |
|
Michael Sakala, CFO
|
|
|
250,000 |
|
|
|
.4 |
% |
|
Theodore Winston,
Director
|
|
|
250,000 |
|
|
|
.4 |
% |
|
Scott Wessler,
Director
|
|
|
506,539 |
|
|
|
.9 |
% |
|
All current directors and executive officers
as a group (4 persons)
|
|
|
8,663,175 |
|
|
|
13.8 |
% |
Item 13. Certain
Relationships and Related Party Transactions, and
Director Independence
As part of the Merger,
Jacksam Corporation purchased and subsequently returned to treasury
30 million shares of our common stock from our former sole officer
and director, Bryan Glass, for total consideration of $340,000.
There has been no other
transaction since January 1, 2017, to which we have been a party,
in which the amount involved exceeded or will exceed $50,000, and
in which any of our directors, executive officers or holders of
more than 5% of Jacksam’s pre-Merger capital stock, or an affiliate
or immediate family member thereof, had or will have a direct or
indirect material interest, other than compensation and other
arrangements that are described in the section titled “Executive
Compensation.”
On November 22, 2017,
Michael Sakala purchased the 2017 Notes in the amount of $50,000.
Michael Sakala was not an officer or director of Jacksam at that
time. He became the CFO of Jacksam, pre-Merger, on April 30, 2018.
He became our CFO as of the date of the Merger, September 14,
2018.
On November 20, 2017,
Theodore Winston purchased the 2017 Notes in the amount of $50,000.
Theodore Winston was not a member of the Board of Directors at the
time. He became a member of Jacksam’s Board of Directors,
pre-Merger, on March 1, 2018, and a member of our Board of
Directors as of the date of the Merger, September 14, 2018.
On November 8, 2018, we
entered into a Line of Credit Agreement with Bass Point Capital,
LLC, a Massachusetts limited liability company controlled by Doug
Leighton, who is also a principal in Altar Rock Capital, one of our
stockholders and the holder of the Altar Rock Warrant. The Line of
Credit Agreement allows us, at the discretion of the lender, to
borrow up to $250,000 by making specific requests of draws, if any,
will be due and payable on individually determined terms.
Mark Adams, CEO, and
David Hall, EVP of Sales invested in the June 2019 Notes. Mark
Adams and David Hall contributed $250,000 and $100,000,
respectively.
Other than the
foregoing, we have not engaged in any transaction within the past
fiscal year and do not plan to engage in any transaction with a
related person or a person with a direct or indirect material
interest in an amount exceeding $120,000.
Item 14. Principal
Accounting Fees and Services
Audit Fees.
During the fiscal year ended December 31, 2019, the firm of L&L
CPAs, PA, which we refer to as L&L was our principal auditor.
Audit fees consist of fees billed for professional services
rendered for the audit of our year-end financial statements and
services that are normally provided by L&L in connection with
regulatory filings. We paid L&L $43,000 and $42,000 in
connection with our audited and reviewed financials for the fiscal
years ended December 31, 2019 and 2018, respectively.
Audit-Related
Fees. Audit-related services consist of fees billed for
assurance and related services that are reasonably related to
performance of the audit or review of our financial statements and
are not reported under “Audit Fees.” These services include attest
services that are not required by statute or regulation and
consultations concerning financial accounting and reporting
standards. There were no fees billed for audit-related services
rendered by either L&L or other parties during the last two
fiscal years.
Accounting
Fees. None
All Other
Fees. None
PART IV
Item 15. Exhibits and
Financial Statement Schedules
________
* Filed herewith.
Item 16. Form 10-K
Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
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JACKSAM CORPORATION
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Dated: May 1, 2020
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By:
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/s/ Mark Adams
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Name:
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Mark Adams
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Title:
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Chief Executive Officer
(Principal Executive Officer)
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By:
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/s/ Michael Sakala
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Name:
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Michael Sakala
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Title:
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Chief Financial Officer, Treasurer, Secretary
and Director (Principal Financial and Accounting Officer)
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