Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Information
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should”, “could”, “predicts”, “potential”, “proposed”, or “continue” or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of operations, impact of competition and other risks detailed below as well as those discussed elsewhere in this Form 10-Q and from time to time in the Company’s Securities and Exchange Commission filings and reports. In addition, general economic and market conditions and growth rates could affect such statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
General
These unaudited interim consolidated financial statements should be read in conjunction with the annual financial statements for the Company most recently completed fiscal year ended December 31, 2016. These unaudited interim consolidated financial statements do not include all disclosures required in annual financial statements, but rather are prepared in accordance with recommendations for interim financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited interim consolidated financial statements have been prepared using the same accounting policies and methods as those used by the Company in the annual audited financial statements for the year ended December 31, 2016.
Discussion on the Company’s Operations and Recent Event
MariJ Pharmaceuticals, Inc.
MariJ Pharma has a mobile CO2, supercritical extraction unit which was USDA certified Organic on September 28th, 2016, by
OneCert
, under the US National Organic Program; 7 CFR PART 205. MariJ Pharma extracts and processes very high quality, high-cannabinoid profile content medical grade cannabis oils from medicinal cannabis plants. As such, MariJ Pharma is authorized to process directly for certified organic farms and is able to produce
certified organic
cannabis oils.
The Company intends to acquire, through its MariJ Pharma subsidiary, portions or complete ownership of licenses and grow operations in one or more states and seeking to cultivate, organically extract and process its medicinal cannabis crops year round in indoor facilities. The acquisition of these licenses is anticipated to provide the Company with the opportunity to compound medicinal products using mixtures of high cannabinoid profile oils that have very little hallucinogenic properties but have significantly improved medicinal properties.
In addition, MariJ Pharma has the technical expertise and capability to process and formulate the oils and to employ them in its compounding operations. MariJ Pharma will seek to become engaged as owner or co-owner of a grow facility in Florida or other location(s) such as to produce its own plants for processing. MariJ Pharma has also been preparing for its newly-developed, proprietary GeoTraking Technology that is fully compliant with the Health Insurance Portability and Accountability standard (“HIPAA”) utilizing its “
plant to patient
” solution. This GeoTraking Technology is designed to provide a full-channel patient care tracking system that is fully compliant under today’s strict HIPAA regulations that require privacy and security of the patients’ information. Beginning with RFID labeling and tracking of every single seed employed in the grow program and continuing through the sale of prescription products in a sophisticated retail Point of Sale delivery system, the GeoTraking Technology will be one of the most advanced system available.
The Company’s primary source of revenue is from the extraction of medicinal cannabis oil, from a non-psychoactive cannabis plant.
All extraction services are currently limited to the State of Colorado, as the Company is attempting to attain various licenses for business in the State of Florida.
It is anticipated that MariJ Pharma could generate revenues from the following activities:
1)
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Cannabis oil extraction and processing - MariJ Pharma has a unique mobile cannabis oil processing and extraction unit designed into a heavy-duty truck chassis. The unit has already begun performing extractions and processing of medical hemp oils at various sites in Colorado, and MariJ Pharma is currently developing additional contracts for services.
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2)
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Wholesale sale of raw and processed medical cannabis oils.
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3)
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Laboratory testing and certification services – As the demand for these services grows in the medical cannabis industry, MariJ Pharma is uniquely positioned to fulfill the growing demand for these services by utilizing its existing mobile laboratory and testing unit built on a heavy-duty truck chassis.
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4)
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Licensing and support of the Company’s GeoTraking Technology systems.
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5)
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Processing and compounding services for medical grade cannabis oils.
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The Company is preparing to seek additional investments and financing to pay the costs of constructing its second mobile oil extraction and processing unit, to finance final construction of its mobile laboratory and testing unit for the same industry, and to complete the roll-out of its GeoTraking Technology system. However, there can be no assurance that the Company will be successful in its plans to generate the required capital.
Canna-Cures Research and Development Center, Inc.
In August 2016, Canna-Cures began engaging in product development activities as well as retail distribution of medicinal Hemp products in Colorado. In July 2017, Canna-Cures closed its retail operations in Colorado and retained all its inventory as the Company begins to focus its developmental activities in Tennessee.
Eufloria Medical of Tennessee, Inc.
In addition to our current extraction operations in the State of Colorado, the Company has been invited to be part of the hemp pilot program in Tennessee. This program provides the Company the license to grow, manufacture, and dispense USDA organic hemp oil in Tennessee and represents the first step in moving its operations to the east coast of the United States. The Company plans on participating in this pilot program through this new, wholly-owned subsidiary.
The Company also acquired land in Tennessee and has completed excavation and other cleanup activities to prepare the land for its intended use.
EMT will seek to align itself with institutions of higher learning in working to develop new products and to identify and develop additional uses for its medical cannabis products. It is anticipated that EMT could generate revenues from the following activities:
1)
|
EMT will seek to enter into product development projects with institutions of higher learning in efforts to develop new and better strains of medical cannabis related products for dispensing as medications, nutraceuticals, cosmeceuticals, and probably dietary supplements. EMT anticipates participating in state and federal grants in conjunction with one or more universities as a means to defray part of its costs in these efforts.
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2)
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Private label packaging services - the Company has obtained a majority of the equipment required to engage in the business of packaging and labeling of medical cannabis oils, oil-infused products, and related items.
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3)
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Retail sales of medical cannabis oils, oil-infused products, and other merchandise through its web-based portal or retail dispensaries planned for that purpose. These activities are dependent in large part upon meeting FDA regulations and criteria relating to the sale and distribution of cannabis-infused products, and the Company is currently in the process of determining the status of those criteria.
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4)
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Retail and wholesale sales of cosmeceutical and nutraceutical products and dietary supplements containing its high-quality cannabis oil extracts, subject to compliance with FDA and other regulations.
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5)
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Growing high quality cannabis plants and extracting oil for sale or for manufacturing of oil-infused products.
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The Company will require additional capital to execute these plans and there can be no assurance that the Company will be successful in its plans to generate that capital.
Operating results for the three months ended September 30, 2017 and 2016:
For the three months ended September 30, 2017, the Company generated revenues of $63,772 from operations, compared to $9,726 for the three months ended September 30, 2016, an increase of $54,046 or 556%. Revenues from 2016 were from the sales of the Company’s retail store in Colorado which opened in the third quarter of 2016. Revenues from 2017 were primarily from extraction services performed.
For the three months ended September 30, 2017, costs of goods sold was $18,997, compared to $47,251 for the three months ended September 30, 2016, a decrease of $28,254, or 60%. The decrease in our costs is primarily related to the non-recognition and reversal of non-cash stock based compensation expense from a unvested restricted stock award granted to our extraction technician. In addition, salary expense for extraction technicians also decreased due to completion of an extraction services contract during the three months ended September 30, 2017.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross profit increased from a loss of $37,525 for the three months ended September 30, 2016 to $44,775, or 70% of revenues for the three months ended September 30, 2017.
For the three months ended September 30, 2017, selling, general and administrative expenses were $186,328, compared to $325,711 during the three months ended September 30, 2016, a decrease of $139,383, or 43%. The decrease in these expenses are attributable to (1) a decrease in employee compensation expenses due to higher executive compensation in prior period and the closing of our Colorado retail operation, and (2) a decrease in general administrative expenses primarily due to fewer legal activities during the current period.
During the three months ended September 30, 2017, the Company incurred interest expense of $13,178, compared to $10 for the three months ended September 30, 2016. During the current period, the Company accrued $13,178 of interest expense on the notes payable to related party. There were no such liabilities existed at September 30, 2016.
As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $154,218 for the three months ended September 30, 2017, compared to a net loss of $363,106 for the three months ended September 30, 2016.
The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the cannabis industry grows, additional expenses are anticipated to be incurred in complying with various state and federal regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Operating results for the nine months ended September 30, 2017 and 2016:
For the nine months ended September 30, 2017, the Company generated revenues of $344,133 from operations, compared to $235,092 for the nine months ended September 30, an increase of $109,041 or 46%. The increase in revenues is primarily attributable to the increase in processing and revenues generated from its retail store operations in Colorado.
For the nine months ended September 30, 2017, costs of goods sold was $183,738, compared to $160,315 for the nine months ended September 30, 2016, an increase of $23,423, or 15%. The increase in our costs is primarily related to production based bonuses, recognition of non-cash stock based compensation expense from a restricted stock award granted to our extraction technician and costs of goods sold in our retail store in Colorado.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross profit increased from $74,777 for the nine months ended September 30, 2016 to $160,395, or 47% of revenues for the nine months ended September 30, 2017.
For the nine months ended September 30, 2017, selling, general and administrative expenses were $1,114,883, compared to $960,369 during the nine months ended September 30, 2016, an increase of $154,514, or 16%. The increase in these expenses are attributable to (1) an increase in employee compensation expenses in Canna-Cures which did not begin operations until third quarter of 2016, the hiring of additional administrative staff, stock based compensation to employee, and accrual of bonuses for current management, and (2) an increase in general administrative expenses primarily due to stock based compensation to board of directors, third party vendors and outside counsel, and increase in professional fees.
During the nine months ended September 30, 2017, the Company incurred interest expense of $416,311, compared to $48 for the nine months ended September 30, 2016. During the current period, the Company paid interest in the amount of $5,000 to the convertible note holder, accrued $23,961 of interest expense on the notes payable to related party, issued common stock valued at $366,400 as interest to a related party for working capital advances and as debt issuance costs related to the issuance of the convertible note payable and $20,950 as cash debt discount. There were no such liabilities existed at September 30, 2016.
As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $1,373,536 for the nine months ended September 30, 2017, compared to a net loss of $928,487 for the nine months ended September 30, 2016.
The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the cannabis industry grows, additional expenses are anticipated to be incurred in complying with various state and federal regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Liquidity and Capital Resources
The Company’s cash position at September 30, 2017 decreased by $6,995 to $36,883, as compared to a balance of $43,878, as of December 31, 2016. The net decrease in cash for the nine months ended September 30, 2017 was attributable to net cash used in operating activities of $492,849, net cash used in investing activities of $6,196, offset by net cash provided by financing activities of $492,050.
As of September 30, 2017, the Company had negative working capital of $759,684 compared to negative working capital of $191,435, at December 31, 2016, a decrease of $568,249, attributable primarily to issuance of notes payable to its CEO and amounts owed to related parties for working capital advances.
Net cash used in operating activities of $492,849 during the nine months ended September 30, 2017, was lower compared to the prior period of $739,264, primarily due to higher net loss, offset by (i) non-cash items such as common stock issued for services and interest and amortization of debt discount and (ii) changes in operating assets and liabilities, including an increase in payable to related parties.
Net cash used in investing activities of $6,196 for the nine months ended September 30, 2017 was lower compared to $35,414 for the nine months ended September 30, 2016. This is primarily due to purchases of extraction equipment in the prior period as the Company began to provide extraction services for its customer.
Net cash provided by financing activities of $492,050 during the nine months ended September 30, 2017 decreased by $198,954 compared to $691,004 during the nine months ended September 30, 2016. The decrease in net cash provided by financing activities was primarily attributable to a reduction in net proceeds from the reverse acquisition.
During the nine months ended September 30, 2017, the Company also issued 41,266 shares of its common stock to acquire, prepare, and cleanup a parcel of land from one of its directors. These shares are valued at $50,723. The Company also issued 144,000 shares of its common stock as costs directly related to entering into the equity purchase agreement with an investor. These shares were valued at $240,900. In addition, accrued interest on notes payable to related party of $21,117, accrued expense of $2,234 and related party advances of $130,050, totaling $153,400 was consolidated with existing notes payable to related party of $405,000, into one single note payable to related party of $558,000.
During the three months ended September 30, 2017, the board of directors approved the Company to enter into a consolidated note payable agreement to consolidate notes and advances received from a related party, including accrued interests on these notes.
Note Date
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Note Amount
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Accrued Interest
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January 2017
|
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$
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300,000
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$
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16,504
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June 2017
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105,000
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2,048
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June 2017
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130,050
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2,564
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Total notes and accrued interest
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$
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556,166
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Expenses owed to related party
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2,234
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$
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558,400
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The consolidated note payable bears interest at 8% and is due and payable on demand or first from any capital raised. The note is secured by a first lien on the assets of the Company and its subsidiaries.
As reported in the accompanying consolidated financial statements, for the nine months ended September 30, 2017 and 2016, the Company incurred net losses of $1,373,536 and $928,487, respectively. The Company did not produce significant revenues in the periods presented and has sustained operating losses since inception. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital, obtain licenses to commence operations in states outside of Colorado and achieve a level of profitability. Until recently where the Company obtained working capital from convertible notes financing and equity purchase agreement with an outside investor, the Company has financed its activities principally from working capital advances from related parties and issuing notes payable to its CEO since inception. It intends to finance its future operating activities and its working capital needs largely from proceeds from the convertible notes agreement, the sale of equity securities, combined with additional funding from its CEO. The sale of equity and convertible notes financing agreements may result in dilution to stockholders and those securities may have rights senior to those of common shares. If the Company raises additional funds through the issuance of convertible notes or other debt financing, these activities or other debt could contain covenants that would restrict the Company’s operations. Any other third-party funding arrangements could require the Company to relinquish valuable rights. The Company will require additional capital beyond its currently anticipated needs. Additional capital, if available, may not be available on reasonable terms or at all.