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, 2017. 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, 2017.
Discussion on the Company’s Operations and Recent Event
MariJ Pharmaceuticals, Inc.
("MariJ Pharma")
MariJ Pharma engages in the extraction and processing of very high quality, high-CBD/low-THC content medical grade cannabis oils from medical hemp plants. MariJ Pharma specializes in utilizing organic strains of the hemp plant, setting itself apart from the general producers of non-organic products. 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 such as to produce its own plants for processing. 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 seeks to cultivate, organically extract and process its medicinal cannabis crops year around 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. 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 patient’s information. Beginning with RFID labeling and tracking of every single seed employed in the grow program and continuing through the sale of medicinal products in a sophisticated retail Point of Sale delivery system.
MariJ Pharma’s revenues are anticipated to be generated primarily from several activities, including but not limited to the following:
|
a.
|
Cannabis oil extraction and processing. MariJ Pharma has a unique mobile cannabis oil processing and extraction unit designed into a heavy-duty trucks. That unit has already begun performing extractions and processing of medical hemp oils at various sites and is currently developing additional contracts for services.
|
|
b.
|
Wholesale sale of raw and processed medical cannabis oils.
|
|
c.
|
Compounding and manufacturing. MariJ Pharma has begun construction of a mobile laboratory and testing unit, also on a heavy-duty truck chassis, intended to address the growing demand for these services in the medical cannabis industry.
|
|
d.
|
Licensing and support of the Company’s GeoTraking Technology systems
|
|
e.
|
Processing and compounding services for medical grade cannabis oils
|
On September 28, 2016, MariJ Pharmaceuticals, Inc. received an Organic Certification under the U.S. National Organic Program (7 CFR Part 205) for its proprietary CO2 mobile cannabis oil extraction process and handling from OneCert, Inc., the issuing authority for that certification. As such, MariJ is now authorized to process directly for certified organic farms and is able to produce
certified organic
cannabis oils.
The Company is preparing to seek additional investments and financing to pay the costs of building its second mobile oil extraction and processing unit, to finance final construction of its mobile compounding and manufacturing unit for the same industry, and to complete the roll-out of its GeoTraking Technology system. There can be no assurance the Company will be successful in its plans to generate the required capital.
Canna-Cures Research and Development Center, Inc.
("Canna-Cures")
The Company acquired the assets and the business of Canna-Cures Research & Development Center, LLC, a Florida limited liability company, on January 15, 2016. The Company utilizes this subsidiary to engage in research and development activities as well as retail and wholesale distribution of medicinal hemp products and dietary supplements in the state of Colorado, depending upon our ability to comply in each instance with FDA rules and other regulations. Canna-Cures closed its retail operations in 2017 and began to focus its efforts in its development activities in Tennessee.
Eufloria Medical of Tennessee, Inc.
("EMT")
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.
In July 2018, the Company announced that its wholly-owned subsidiary, Eufloria Medical of Tennessee, Inc. (“EMT”), an entity focused on the growing and distribution of new and proprietary medicinal hemp products for patients. EMT intends to utilize MariJ Pharma's USDA certified organic mobile processing and handling solutions for its customers, and technology solutions for the expanding physician market, has leased a 14-acre farm with 32,000 square feet of indoor growing area in southern Tennessee. EMT also acquired an option to purchase the farm upon favorable terms, which option, EMT intends to exercise as soon as possible. The farm will provide the Company’s first grow facility, allowing for improved efficiencies through growing, processing and manufacturing the Company’s own product line and building sales through dedicated distributors. The Company will grow its own plant material, process that plant material through another wholly owned subsidiary, MariJ Pharmaceuticals, Inc. (“MariJ”) and manufacture consumer products with the “EUFLORIA” branding for the dedicated distribution channels.
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.
|
2)
|
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.
|
3)
|
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.
|
4)
|
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.
|
5)
|
Growing high quality cannabis plants and extracting oil for sale or for manufacturing of oil-infused products.
|
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 June 30, 2018 and 2017:
For the three months ended June 30, 2018, the Company generated revenues of $12,671 from operations, compared to $132,715 for the three months ended June 30, 2017, a decrease of $120,044 or 90%. In 2017, revenues were primarily generated from extraction contracts and from retail sales. Revenues from 2018 were primarily from extraction services performed. The decrease in revenues was due to having fewer extraction contracts and more competitive industry condition in the extraction space driving processing pricing down in 2018. Average revenue per pound of processed flower decreased by 40% compared to 2017. The decrease in revenues is also attributable to the closing of the retail store in Colorado in July 2017. The Company will be making every effort possible to acquire extraction contracts on the east coast going forward where markets are unsaturated.
For the three months ended June 30, 2018, costs of goods sold was $52,225, compared to $69,999 for the three months ended June 30, 2017, a decrease of $17,774, or 25%. The decrease in our costs is primarily related to the completion of fewer extraction services contract during the three months ended June 30, 2018.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross profit decreased from $62,716, or 47% of revenue for the three months ended June 30, 2017 to $(39,554), or (312)% of revenue for the three months ended June 30, 2018.
For the three months ended June 30, 2018, selling, general and administrative expenses were $471,093, compared to $399,291 during the three months ended June 30, 2017, an increase of $71,802, or 18%. The increase in these expenses are attributable to (1) an increase in travel and operating expenses related to our operations in Tennessee, (2) higher stock based compensation expense, and (3) higher legal fees and accounting fees during the current period.
During the three months ended June 30, 2018, the Company incurred interest expense of $14,486, compared to $168,984 for the three months ended June 30, 2017, a decrease of $154,498, or 91%. During the three months ended June 30, 2018, interest expense was primarily related to the notes payable to related party. During the three months ended June 30, 2017, the Company issued its restricted common stock to its CEO as additional considerations for entering working capital advances.
As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $530,495 for the three months ended June 30, 2018, compared to a net loss of $509,808 for the three months ended June 30, 2017, an increase of $20,687, or 4%.
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 six months ended June 30, 201
8
and 201
7
:
For the six months ended June 30, 2018, the Company generated revenues of $104,585 from operations, compared to $280,361 for the six months ended June 30, 2017, a decrease of $175,776, or 63%. The decrease in revenues was due to having fewer extraction contracts and more competitive industry condition in the extraction space driving processing pricing down in 2018. Average revenue per pound of processed flower decreased by 40% compared to 2017. The decrease in revenues is also attributable to the closing of the retail store in Colorado in July 2017. The Company will be making every effort possible to acquire extraction contracts on the east coast going forward where markets are unsaturated.
For the six months ended June 30, 2018, costs of goods sold was $102,001, compared to $164,740 for the six months ended June 30, 2017, a decrease of $62,739, or 38%. The decrease in our costs is primarily related to the completion of fewer extraction services contract during the six months ended June 30, 2018.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross profit decreased from $115,621, or 41% of revenues, for the six months ended June 30, 2017 to $2,584, or 2% of revenues, for the six months ended June 30, 2018.
For the six months ended June 30, 2018, selling, general and administrative expenses were $934,494, compared to $913,556 during the six months ended June 30, 2017, an increase of $20,938, or 2%. The increase in these expenses are attributable to (1) an increase in travel and operating expenses related to our operations in Tennessee, (2) higher stock based compensation expense, and (3) higher legal fees and accounting fees during the current period.
During the six months ended June 30, 2018, the Company incurred interest expense of $26,013, compared to $403,134 for the six months ended June 30, 2017. During the six months ended June 30, 2018, the Company accrued interest on its notes payable to related party in the amount of $26,013. During the six months ended June 30, 2017, the Company paid interest in the amount of $5,000 to the convertible note holder, accrued $10,784 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.
As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $963,285 for the six months ended June 30, 2018, compared to a net loss of $1,204,318 for the six months ended June 30, 2017.
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 June 30, 2018 increased by $20,670 to $49,087, as compared to a balance of $28,417, as of December 31, 2017. The net increase in cash for the six months ended June 30, 2018 was attributable to net cash used in operating activities of $186,146, net cash provided by investing activities of $22,816, offset by net cash provided by financing activities of $184,000.
As of June 30, 2018, the Company had negative working capital of $1,241,453 compared to negative working capital of $972,640, at December 31, 2017, an increase of $268,813, attributable primarily to issuance of notes payable to its CEO and increased amounts owed to vendors and accrued expenses.
Net cash used in operating activities of $186,146 during the six months ended June 30, 2018, was lower compared to the prior period of $422,562, primarily due to lower net loss, fewer common stock issued for services, more common stock issued as interest expense, decrease in accounts receivable and increase in accounts payable and accrued expenses in the current period.
Net cash provided by investing activities of $22,816 for the six months ended June 30, 2018 was higher compared to $6,196 of cash used by investing activities for the six months ended June 30, 2017. This is primarily attributable to the proceeds received from the sale of property.
Net cash provided by financing activities of $184,000 during the six months ended June 30, 2018 decreased by $336,050 compared to $520,050 during the six months ended June 30, 2017. In the current period, the Company's plan of operations required a smaller amount of financing compared to the prior period.
During the six months ended June 30, 2018, the Company issued shares of its common stock valued at $17,649 to settle a related party liability and financed the purchase of a tractor in the amount of $21,794. During the six months ended June 30, 2017, the Company issued 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, the Company also issued shares of its common stock to acquire property, valued at $41,194.
As reported in the accompanying consolidated financial statements, for the six months ended June 30, 2018 and 2017, the Company incurred net losses of $963,285 and $1,204,318, 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. It intends to finance its future operating activities and its working capital needs largely from proceeds from the sale of equity securities, if any, 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.
The Company has not generated significant revenue to date, and will not generate significant revenue in the foreseeable future. The Company expects to continue to incur operating losses as it proceeds with its pursuit of operating licenses in various states. 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 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.
Financial Condition
The Company’s total assets at June 30, 2018 and December 31, 2017 were $547,338 and $606,800, respectively, a decrease of $59,462, or 10%. Total liabilities at June 30, 2018 and December 31, 2017 were $1,374,405 and $1,092,168, respectively, an increase of $282,237, or 26%. The significant change in the Company’s financial condition is attributable to (i) issuance of notes payable to a related party, (ii) increase in working capital advances from related parties, and (iii) increase in accrued expenses, including accrued interest expense on notes payable to related party. As a result of these transactions, the Company’s cash position increased from $28,417 to $49,087 during the six months ended June 30, 2018.
Off-Balance Sheet Arrangements
We have made no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.