ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
statements contained in this report that are not statements of historical fact, including without limitation, statements containing
the words “believes,” “expects,” “anticipates” and similar words, constitute forward-looking
statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements.
Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially
differ as a result of many factors, including the risks discussed from time to time in this report, including the risks described
under “Risk Factors” in any filings we have made with the SEC.
Our
discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
On an on-going basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement
income, bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There
can be no assurance that actual results will not differ from those estimates.
American
Cannabis Company, Inc. and subsidiary is a publicly listed company quoted on the OTC Markets OTCQB Trading Tier under the symbol
“AMMJ”. We are based in Denver, Colorado and operate a fully-integrated business model that features end-to-end solutions
for businesses operating in the regulated cannabis and hemp industries in states and countries where cannabis and hemp is regulated
and/or has been otherwise de-criminalized for medical use and/or legalized for recreational use. We provide advisory and consulting
services specific to this industry, design industry-specific products and facilities, and sell both exclusive and non-exclusive
customer products commonly used in these industries.
The
Company was incorporated in the State of Delaware on September 24, 2001 under the name “Naturewell, Inc.” On March
13, 2013, the Company completed a merger transaction whereby it acquired Brazil Interactive Media, Inc. (“BIMI”),
a Brazilian interactive television company and television production company. The Company’s Articles of Incorporation were
amended to reflect a new name: Brazil Interactive Media, Inc. On May 15, 2014, the Company entered into an Agreement and Plan
of Merger with Cannamerica Corp. (the “Merger Sub”), a wholly owned subsidiary of BIMI, and Hollister & Blacksmith,
Inc. a wholly owned subsidiary of American Cannabis Consulting (“American Cannabis Consulting”). The merger was completed
on September 29, 2014, resulting in American Cannabis Consulting being merged with and into the Merger Sub (the “Reverse
Merger”). The Company subsequently amended its Articles of Incorporation to change its name to “American Cannabis
Company, Inc.” Upon the closing of the Reverse Merger, all of the Company’s officers and directors appointed designee
officers and directors from American Cannabis Consulting and resigned. Consistent with the Merger Agreement, the Company consummated
a complete divestiture of BIMI, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, pursuant to a Separation
and Exchange Agreement dated May 16, 2014 (the “Separation Agreement”) between the Company, BIMI, Inc., and Brazil
Investment Holding, LLC (“Holdings”), a Delaware limited liability company. On October 10, 2014, the Company changed
its stock symbol from BIMI to AMMJ.
The
foregoing descriptions of the Merger Agreement and Separation Agreement do not purport to be complete and are qualified in their
entirety by the terms of such agreements, which are filed as exhibits to the Current Report on Form 8-K filed by the Company with
the U.S. Securities and Exchange Commission (“SEC”) on October 3, 2014.
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain
of a coronavirus (the “COVID-19 outbreak”). In June 2020, the WHO classified the COVID-19 outbreak as a pandemic based
on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this
report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial condition,
liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the
Company has seen decreases consulting revenue during the last half of 2020 due to the effects of the COVID-19 pandemic. The Company
expects to continue to see some depressive effect on consulting revenue but expects to see this offset by opportunities created
in states that have recently legalized marijuana in the 2020 election. The Company has implemented changes to operations as necessitate
by state and local jurisdictions, with no significant impact on operations.
Results
of Operations
Year
ended December 31, 2020 compared to year ended December 31, 2019
The
following table presents our operating results for the year ended December 31, 2020 compared to December 31, 2019:
AMERICAN
CANNABIS COMPANY, INC.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
For
the Years Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
Consulting
Services
|
|
$
|
505,363
|
|
|
$
|
1,470,245
|
|
Product
& Equipment
|
|
|
1,064,431
|
|
|
|
660,490
|
|
Total
Revenues
|
|
|
1,569,794
|
|
|
|
2,130,735
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
Cost
of Consulting Services
|
|
|
108,706
|
|
|
|
292,375
|
|
Cost
of Products and Equipment
|
|
|
740,409
|
|
|
|
499,408
|
|
Total
Cost of Revenues
|
|
|
849,115
|
|
|
|
791,783
|
|
Gross
Profit
|
|
|
720,679
|
|
|
|
1,338,952
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
1,010,902
|
|
|
|
1,049,415
|
|
Selling
and Marketing
|
|
|
298,937
|
|
|
|
309,232
|
|
Stock
Based Compensation Expense
|
|
|
29,970
|
|
|
|
73,514
|
|
Warrant
Expense
|
|
|
—
|
|
|
|
151,906
|
|
Bad
Debt Expense
|
|
|
4,910
|
|
|
|
88,749
|
|
Total
Operating Expenses
|
|
|
1,344,719
|
|
|
|
1,672,816
|
|
Loss
from Operations
|
|
|
(624,040
|
)
|
|
|
(333,864
|
)
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Interest
(expense)
|
|
|
(1,786
|
)
|
|
|
—
|
|
Other
income
|
|
|
93,413
|
|
|
|
32,122
|
|
Total
Other Income
|
|
|
91,627
|
|
|
|
32,122
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(532,413
|
)
|
|
|
(301,742
|
)
|
Income
Tax Expense
|
|
|
—
|
|
|
|
—
|
|
NET
LOSS
|
|
$
|
(532,413
|
)
|
|
$
|
(301,742
|
)
|
|
|
|
|
|
|
|
|
|
Basic
net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
57,548,474
|
|
|
|
52,468,502
|
|
Revenues
Total
revenues for the year ended December 31, 2020 and December 31, 2019, were $1,569,794 and $2,130,735 respectively, a decrease of
$560,994. This decrease was primarily due to a decrease in the demand for consulting services in 2020. For the year ended December
31, 2020 and December 31, 2019, consulting services revenue was $505,363 and $1,470,245, respectively. For the year ended December
31, 2020 and December 31, 2019, products and equipment revenues were $1,064,431 and $660,490 respectively. The decrease in our
consulting services revenue was a result of new and established businesses halting building and expansion projects due the uncertainties
presented by the COVID-19 pandemic. The increase attributable to our product revenues was due to our clients ordering more products
and a focus by our management on product sales.
Costs
of Revenues
Costs
of revenues primarily consist of labor, travel, marketing and other costs directly attributable to providing services or offering
products. For the year ended December 31, 2020 and December 31, 2019, our total costs of revenues were $849,115 and $791,783,
respectively. The increase was primarily due to higher margins on consulting services as a result of the decrease in sales and
the increase in product sales.. For the year ended December 31, 2020, consulting related costs were $108,706 or 6.9% of total
revenues, and costs associated with products and equipment were $740,409 or 47.16% of total revenues. For the year ended December
31, 2019, consulting related costs were $292,375 or 13.7% of total revenues, and costs associated with products and equipment
were $499,408 or 23.4% of total revenues.
Gross
Profit
For
the year ended December 31, 2020 and December 31, 2019, gross profit was $720,679 and $1,338,952, respectively. This decrease
of $618,273 was primarily due to a decrease in our client base and volume of operations for consulting services. As a percentage
of total revenues, gross profit was 45.9% and 62.8% for the years ended December 31, 2020 and December 31, 2019, respectively.
This decrease was primarily due to the year ended December 31, 2020 having a higher proportion of total revenues from product
and equipment sales, which have a lower profit margin than consulting sales which also had decreased during the period.
Operating
Expenses
Total
operating expenses for the years ended December 31, 2020 and December 31, 2019 was $1,344,719 and $1,672,816, respectively. This
decrease of $328,097 was attributed to a decrease in warrant expenses and stock compensation expenses combined with decreases
in sales and marketing expenses related to website work and design
Income
Tax Expense
We
did not have any income tax expense or benefit for the years ended December 31, 2020 or December 31, 2019. Although our tax status
changed from a non-taxable pass-through entity (S-Corporation) to a taxable entity (C-Corporation) during the year ended December
31, 2014, due to cumulative losses since we became a C-Corporation, we recorded a valuation allowance against our related deferred
tax asset which netted our deferred tax asset and benefit for income taxes to zero. We were an S-Corporation throughout the period
from Inception (March 5, 2013) through December 31, 2013, and accordingly, no provision or benefit for income taxes was applicable.
Net
Loss
As
a result of the factors discussed above, net loss for the year ended December 31, 2020 and December 31, 2019 was ($532,413) and
($301,742), respectively. For December 31, 2020 our net loss was 33.9% of total revenues. For December 31, 2019, our net loss
represented a 14.1% of total revenue.
Liquidity
and Capital Resources
As
of December 31, 2020, and December 31, 2019, our primary internal sources of liquidity were cash and cash equivalents of $1,723,132
and $945,181, respectively. We also have the ability to raise additional capital as needed through an external equity financing
transaction. We believe our liquidity and capital resources to be adequate to fund our operational and general and administrative
expenses for the next 12 months.
During
the year ended December 31, 2020, the Company issued 16,700,000 registered shares of common stock in exchange for net proceeds
of $1,193,566 pursuant to the Common Stock Purchase Agreement entered into on October 11, 2019 with White Lion Capital LLC.
Operating
Activities
For
the years ended December 31, 2020 and December 31, 2019, the Company had a Net Cash Used in Operating Activities of ($525,794)
and ($102,848), respectively. The decrease in Net Used In Operating Activities was attributed to delays in collections of accounts
receivable combined with decrease consulting services being billed caused a decrease in accounts receivable and funds available
for use.. Due to this factor and considering that our fixed overhead costs are relatively low, we have the ability to issue stock
and stock equivalents to compensate employees and management, and the level of future revenue we expect to generate from executed
client contracts, we believe our liquidity and capital resources to be adequate to fund our operational and general and administrative
expenses for the next 12 months.
Investing
Activities
For
the years ended December 31, 2020 and December 31, 2019, net cash provided by (used in) investing activities was $267 and $38,536,
respectively.
Financing
Activities
For
the years ended December 31, 2020 and December 31, 2019, financing activities were a source of cash of $1,303.478 and $0, respectively.
Off
Balance Sheet Arrangements
As
of December 31, 2020, and December 31, 2019, we did not have any 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.
Non-GAAP
Financial Measures
We
use Adjusted EBITA, a non-GAAP metric, to monitor our overall business performance. We define Adjusted EBITA as net income (loss)
before interest expense, net, provision for (benefit from) income taxes, stock-based compensation and certain non-recurring expenses.
We believe that such adjustments to arrive at Adjusted EBITA provides us with a more comparable measure for managing our business.
We also believe that it is a useful measure for securities analysts, investors, and other interested parties in the evaluation
of our Company.
A
reconciliation of net income to Adjusted EBITA is provided below.
Adjusted
EBITA Reconciliation
|
|
For
the Year Ended
|
|
For
the Year Ended
|
|
|
December
31, 2020
|
|
December
31, 2019
|
Net
loss
|
|
$
|
(532,413
|
)
|
|
$
|
(307,732
|
)
|
Interest
expenses
|
|
$
|
1,786
|
|
|
$
|
—
|
|
Tax
Expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
Stock
Based Compensation and Warrant expenses
|
|
$
|
29,970
|
|
|
$
|
225,420
|
|
Adjusted
EBITA
|
|
$
|
(500,657
|
)
|
|
$
|
(76,312
|
)
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect amounts reported in those statements. We have made our best estimates of certain amounts
contained in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities. However, application of our accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties, and, as a result, actual results could differ materially from these estimates. Management
believes that the estimates, assumptions, and judgments involved in the accounting policies described below have the most significant
impact on our consolidated financial statements.
We
cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations.
We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates
used to prepare our financial statements when we deem it necessary.
Cash
and Cash Equivalents
We
consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash
equivalents are held in operating accounts at a major financial institution.
Inventory
Inventory
is primarily comprised of products and equipment to be sold to end-customers. Inventory is valued at cost, based on the specific
identification method, unless and until the market value for the inventory is lower than cost, in which case an allowance is established
to reduce the valuation to market value. As of December 31, 2020, and December 31, 2019, market values of all of our inventory
were greater than cost, and accordingly, no such valuation allowances was recognized.
Deposits
Deposits
is comprised of advance payments made to third parties, primarily for inventory for which we have not yet taken title. When we
take title to inventory for which deposits are made, the related amount is classified as inventory, then recognized as a cost
of revenues upon sale (see “Costs of Revenues” below).
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets are primarily comprised of advance payments made to third parties for independent contractors’
services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate
the life of the contract or service period.
Accounts
Receivable
Accounts
receivable are recorded at the net value of face amount less any allowance for doubtful accounts. On a periodic basis, we evaluate
our accounts receivable and, based on a method of specific identification of any accounts receivable for which we deem the net
realizable value to be less than the gross amount of accounts receivable recorded, we establish an allowance for doubtful accounts
for those balances. In determining our need for an allowance for doubtful accounts, we consider historical experience, analysis
of past due amounts, client creditworthiness and any other relevant available information. However, our actual experience may
vary from our estimates. If the financial condition of our clients were to deteriorate, resulting in their inability or unwillingness
to pay our fees, we may need to record additional allowances or write-offs in future periods. This risk is mitigated to the extent
that we collect retainers from our clients prior to performing significant services.
The
allowance for doubtful accounts, if any, is recorded as a reduction in revenue to the extent the provision relates to fee adjustments
and other discretionary pricing adjustments. To the extent the provision relates to a client's inability to make required payments
on accounts receivables, the provision is recorded in operating expenses. As of December 31, 2020, and December 31, 2019 our allowance
for doubtful accounts was $57,512 and $39,677, respectively. For December 31, 2020 and December 31, 2019, we recorded bad debt
expense of $4,910 and $88,749, respectively.
Operating
Lease
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a
discounted basis, and a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which provides an optional transition method of applying the new
lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period
presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.
We
adopted this standard using a modified retrospective approach in 2019. The modified retrospective approach includes a number of
optional practical expedients relating to the identification and classification of leases that commenced before the adoption date;
initial direct costs for leases that commenced before the adoption date; and the ability to use hindsight in evaluating lessee
options to extend or terminate a lease or to purchase the underlying asset.
The
Company elected the package of practical expedients permitted under ASC 842 allowing it to account for its existing operating
lease that commenced before the adoption date as an operating lease under the new guidance without reassessing (i) whether the
contract contains a lease; (ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC
842.
In
considering its qualitative disclosure obligations under ASC 842-20-50-3, the Company examined its one lease for office space
that has a fixed monthly rent with no variable lease payments and no options to extend. The lease is for an office space. The
lease does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants
imposed by the lease for dividends or incurring additional financial obligations by the Company. The Company also elected a short-term
lease exception policy and an accounting policy to not separate non-lease components from lease components for our facility lease,
as we determined our right of use asset to be zero.
In
July 2020, our operating lease for our office space expired, at that time we fully amortized our ROU Asset for such lease. On
June 1, 2020, the Company entered into a new lease membership agreement for a one-year term for an amount of $2,895 per month.
We determined under ASC 842, due to the short term nature of the lease that the lease membership agreement met the criteria of
ASC 842-20-25-2 and as such it is not necessary to capitalize the lease and rent will be recognized on a monthly straight-line
basis.
The
adoption of this guidance resulted in no significant impact to our results of operations or cash flows.
Property
and Equipment, net
Property
and Equipment is stated at net book value, cost less depreciation. Maintenance and repairs are expensed as incurred. Depreciation
of owned equipment is provided using the straight-line method over the estimated useful lives of the assets, ranging from two
to seven years. Depreciation of capitalized construction in progress costs, a component of property and equipment, net, begins
once the underlying asset is placed into service and is recognized over the estimated useful life. Property and equipment are
reviewed for impairment as discussed below under “Accounting for the Impairment of Long-Lived Assets.” We did not
capitalize any interest as of December 31, 2020 and as of December 31, 2019.
Accounting
for the Impairment of Long-Lived Assets
We
evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value,
less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending
upon the nature of the assets. We have not recorded any impairment charges related to long-lived assets during the year ended
December 31, 2020, and December 31, 2019.
Revenue
Recognition
During
the first quarter of 2019, we adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12
“Revenue from Contracts with Customers (Topic 606). Due to the nature of our contracts with customers, adopting the
new accounting principles did not have a significant impact on our prior period results of operations, cash flows or financial
position.
Our
service and product revenues arise from contracts with customers. Service revenue includes Operations Divisions consulting
revenue. Product revenue includes (a) Operations Division product sales (So-Hum Living Soils)
and (b) Equipment Sales Division. The majority of our revenue is derived from distinct performance obligations, such as
time spent delivering a service or the delivery of a specific product.
We
may also enter into contracts with customers that identify a single, or few, distinct performance obligations, but that also have
non-distinct, underlying performance obligations. These contracts are typically fulfilled within one to six months. Only
an insignificant portion of our revenue would be assessed for allocation between distinct (contractual) performance obligations
and non-distinct deliverables between reporting periods and, accordingly, we do not record a contract asset for completed, non-distinct
performance obligations prior to invoicing the customer.
We
recognize revenue in accordance with ASC 606 using the following 5 steps to identify revenues:
|
(1)
|
Identify
the contract with the Customer. Our customary practice is to obtain written
evidence, typically in the form of a contract or purchase order.
|
|
(2)
|
Identify
the performance obligations in the contract. We have rights to payment when services
are completed in accordance with the underlying contract, or for the sale of goods when
custody is transferred to our customers either upon delivery to our customers’
locations, with no right of return or further obligations.
|
|
(3)
|
Determination
of the transaction price. Prices are typically fixed, and no price protections or
variables are offered.
|
|
(4)
|
Allocation
of the transaction price to the performance obligations in the contract. Transaction
prices are typically allocated to the performance obligations outlined in the contract.
|
|
(5)
|
Recognize
Revenue when (or as) the entity satisfies a performance obligation. We typically
require a retainer for all or a portion of the goods or services to be delivered. We
recognize revenue as the performance obligations detailed in the contract are met.
|
Advances
from Clients deposits are contract liabilities with customers that represent our obligation to either transfer goods or services
in the future, or refund the amount received. Where possible, we obtain retainers to lessen our risk of non-payment by our
customers. Advances from Clients deposits are recognized as revenue as we meet specified performance obligations as detailed
in the contract.
Product
Sales
Revenue
from product and equipment sales, including delivery fees, is recognized when an order has been delivered to the customer, the
price is fixed and determinable when the order is placed, the product is delivered, title has transferred and collectability is
reasonably assured. Generally, our suppliers’ drop-ship orders to our clients with destination terms. Given the facts that
(1) our customers exercise discretion in determining the timing of when they place their product order; and, (2) the price negotiated
in our product sales contracts is fixed and determinable at the time the customer places the order, we are not of the opinion
that our product sales indicate or involve any significant financing that would materially change the amount of revenue recognized
under the contract, or would otherwise contain a significant financing component for us or the customer under FASB ASC Topic 606.
During the year ended December 31, 2020, sales returns were $109 comprised of product returns and replacement.
Consulting
Services
We
also generate revenues from professional services consulting agreements. These arrangements are generally entered into: (1) on
an hourly basis for a fixed fee; or, (2) on a contingent fee basis. Generally, we require a complete or partial prepayment or
retainer prior to performing services.
For
hourly based fixed fee service contracts, we utilize and rely upon the proportional performance method, which recognizes revenue
as services are performed. Under this method, in order to determine the amount of revenue to be recognized, we calculate the amount
of completed work in comparison to the total services to be provided under the arrangement or deliverable. We segregate upon entry
into a contract any advances or retainers received from clients for fixed fee hourly services into a separate “Advances
from Clients” account, and only recognize revenues as we incur and charge billable hours, and then deposit the funds earned
into our operating account. Because our hourly fees for services are fixed and determinable and are only earned and recognized
as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer
based significant financing, that would materially change the amount of revenue we recognize under the contract or would otherwise
contain a significant financing component under FASB ASC Topic 606.
Occasionally,
our fixed-fee hourly engagements are recognized under the completed performance method. Some fixed fee arrangements are for completion
of a final deliverable or act which is significant to the arrangement as a whole. These engagements do not generally exceed a
one-year term. If the performance is for a final deliverable or act, we recognize revenue under the completed performance method,
in which revenue is recognized once the final act or deliverable is performed or delivered for a fixed fee. Revenue recognition
is affected by a number of factors that change the estimated amount of work required to complete the deliverable, such as changes
in scope, timing, awaiting notification of license award from local government, and the level of client involvement. Losses, if
any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable.
FASB ASC Topic 606 provides a practical expedient to disregard the effects of a financing component if the period between payment
and performance is one year or less. As, our fixed fee hourly engagements do not exceed one year, no significant customer based
financing is implicated under FASB ASC Topic 606. During the year ended December 31, 2020, and December 31, 2019, we have incurred
no losses from fixed fee engagements that terminate prior to completion. We believe if an engagement terminates prior to completion,
we can recover the costs incurred related to the services provided.
We
primarily enter arrangements for which fixed and determinable revenues are contingent and agreed upon achieving a predetermined
deliverable or future outcome. Any contingent revenue for these arrangements is not recognized until the contingency is resolved
and collectability is reasonably assured.
Our
arrangements with clients may include terms to deliver multiple services or deliverables. These contracts specifically identify
the services to be provided with the corresponding deliverable. The value for each deliverable is determined based on the prices
charged when each element is sold separately or by other vendor-specific objective evidence (“VSOE”) or estimates
of stand-alone selling prices. Revenues are recognized in accordance with our accounting policies for the elements as described
above (see Product Sales). The elements qualify for separation when the deliverables have value on a stand-alone basis and the
value of the separate elements can be established by VSOE or an estimated selling price.
While
assigning values and identifying separate elements requires judgment, selling prices of the separate elements are generally readily
identifiable as fixed and determinable as we also sell those elements individually outside of a multiple services engagement.
Contracts with multiple elements typically incorporate a fixed-fee or hourly pricing structure. Arrangements are typically terminable
by either party upon sufficient notice or do not include provisions for refunds relating to services provided.
Reimbursable
expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included as a component
of revenues. Typically, an equivalent amount of reimbursable expenses is included in total direct client service costs. Reimbursable
expenses related to time and materials and fixed-fee engagements are recognized as revenue in the period in which the expense
is incurred and collectability is reasonably assured. Taxes collected from customers and remitted to governmental authorities
are presented in the statement of operations on a net basis.
Costs
of Revenues
Our
policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenues include the
costs directly attributable to revenue recognition and includes compensation and fees for services, travel and other expenses
for services and costs of products and equipment. Selling, general and administrative expenses are charged to expense as incurred.
Stock-Based
Compensation
Restricted
shares are awarded to employees and entitle the grantee to receive shares of restricted common stock at the end of the established
vesting period. The fair value of the grant is based on the stock price on the date of grant. We recognize related compensation
costs on a straight-line basis over the requisite vesting period of the award, which to date has been one year from the grant
date. During the years ended December 31, 2020 and December 31, 2019, stock-based compensation expense for restricted shares was
$29,970 and $73,514, respectively. Compensation expense for warrants are based on the fair value of the instruments on the grant
date, which is determined using the Black-Scholes valuation model and are expensed over the expected term of the awards. During
the year ended December 31, 2020 and December 31, 2019, compensation expense for warrants was $0 and $151,906 respectively. The
decrease was attributed to the Company issuing less warrants to its consultants and employees.
Income
Taxes
Our
corporate status changed from an S-Corporation, which it had been since inception, to a C-Corporation during the year ended December
31, 2014. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes, S-Corporations are not subject to
corporate income taxes; instead, the owners are taxed on their proportionate share of the S-Corporation’s taxable income.
Accordingly, we were only subject to income taxes for a portion of 2014. We recognize deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements or tax returns in accordance
with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year
in which the differences are expected to reverse. We record a valuation allowance when necessary to reduce deferred tax assets
to the amount expected to be realized. For the year ended December 31, 2020 and December 31, 2019, due to cumulative losses since
our corporate status changed, we recorded a valuation allowance against our deferred tax asset that reduced our income tax benefit
for the period to zero. As of December 31, 2020, and December 31, 2019, we had no liabilities related to federal or state income
taxes and the carrying value of our deferred tax asset was zero. The years 2010 to 2015 remain subject to examination by the Company’s
major tax jurisdictions.
Net
Loss Per Common Share
We
report net loss per common share in accordance with FASB ASC 260, “Earnings per Share”. This statement requires dual
presentation of basic and diluted earnings with a reconciliation of the numerator and denominator of the earnings per share computations.
Basic net loss per share is computed by dividing net income attributable to common stockholders by the weighted average number
of shares of common stock outstanding during the period and excludes the effects of any potentially dilutive securities. Diluted
net income (loss) per share gives effect to any dilutive potential common stock outstanding during the period. The computation
does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.
Related
Party Transactions
We
follow FASB ASC subtopic 850-10, “Related Party Transactions”, for the identification of related parties and disclosure
of related party transactions.
Pursuant
to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities
would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and
profit sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management
of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its
own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Material
related party transactions are required to be disclosed in the consolidated financial statements, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the
dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any
change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
American Cannabis Company, Inc.
Opinion on the financial
statements
We have audited
the accompanying consolidated balance sheet of American Cannabis Company, Inc. (the “Company”) as of December 31,
2020, and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended,
and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020,
and the results of its operations and its cash flows for the year 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 entity’s management. Our responsibility is to express an opinion on the
entity’s consolidated financial statements based on our audit. 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 consolidated 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 audit 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 entity’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 consolidated 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 consolidated financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical
audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the Board of Directors and that: (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures
to which they relate.
Description of the Matter
Improper
revenue recognition in accordance with ASC 606
As
described in Note 3 to the consolidated financial statements, the majority of the Company’s consulting services revenue
is derived from distinct performance obligations, such as time spent delivering a service or the delivery of a specific product.
The Company may enter into contracts with customers that identify a single, or few, distinct performance obligations, but that
also have non-distinct, underlying performance obligations. These contracts are typically fulfilled within one to six months.
With the consideration
of the Company's service period length and complexity, the Company’s revenue recognition process requires that the performance
obligations need to be properly tracked or archived and are readily available for the purpose of revenue recognition support.
Also, the identification and evaluation of certain non-standard terms and conditions required incremental audit effort to determine
the distinct performance obligations and the timing of revenue recognition. We consider revenue recognition for consulting services
a critical audit matter.
How We Addressed the Matter
in Our Audit
To test the
Company’s recognition of revenue, we obtained approved invoices and verified that the service nature, service occurrence
period, and billed amount per invoice were consistent with the related contractual terms. We then observed the communication between
the company and its customer through the Company’s client based communication system and ensured the performance obligations
are appropriately fulfilled when the revenue is recorded. Additionally, we tested revenue recognized within accounts receivable
to ensure performance obligations had been completed, sent confirmations and evaluated subsequent cash receipts.
Macias
Gini & O’Connell LLP
We have served
as the Company's auditor since 2020.
Irvine, CA
92618
March 01, 2021
AMERICAN
CANNABIS COMPANY, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
December
31,
|
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
and Equivalents
|
|
$
|
1,723,132
|
|
|
$
|
945,181
|
|
Accounts
Receivable, Net
|
|
|
24,955
|
|
|
|
95,655
|
|
Deposits
|
|
|
2,895
|
|
|
|
4,500
|
|
Inventory
|
|
|
62,402
|
|
|
|
53,310
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
50,302
|
|
|
|
30,847
|
|
Right
to Use - Lease Asset
|
|
|
—
|
|
|
|
34,418
|
|
Total
Current Assets
|
|
|
1,863,686
|
|
|
|
1,163,911
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
|
24,655
|
|
|
|
40,042
|
|
TOTAL
ASSETS
|
|
$
|
1,888,341
|
|
|
$
|
1,203,953
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
13,154
|
|
|
$
|
9,748
|
|
Advances
from Clients
|
|
|
88,843
|
|
|
|
112,959
|
|
Accrued
and Other Current Liabilities
|
|
|
49,244
|
|
|
|
117,303
|
|
Stock
payable
|
|
|
—
|
|
|
|
49,406
|
|
Loan
Payable
|
|
|
109,914
|
|
|
|
—
|
|
Operating
Lease Liability
|
|
|
—
|
|
|
|
34,943
|
|
Total
Current Liabilities
|
|
|
261,155
|
|
|
|
324,359
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2020 and 2019
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.00001 par value; 500,000,000 shares authorized; 70,727,938 and 52,978,605 shares issued and outstanding at December
31, 2020 and 2019, respectively
|
|
|
707
|
|
|
|
529
|
|
Additional
paid-in capital
|
|
|
9,634,748
|
|
|
|
8,354,920
|
|
Accumulated
deficit
|
|
|
(8,008,268
|
)
|
|
|
(7,475,855
|
)
|
Total
Shareholders' Equity
|
|
|
1,627,187
|
|
|
|
879,594
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
1,888,342
|
|
|
$
|
1,203,953
|
|
The
accompanying notes are an integral part of these consolidated financial statements
AMERICAN
CANNABIS COMPANY, INC.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
For
the Years Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
Consulting
Services
|
|
$
|
505,363
|
|
|
$
|
1,470,245
|
|
Product
& Equipment
|
|
|
1,064,431
|
|
|
|
660,490
|
|
Total
Revenues
|
|
|
1,569,794
|
|
|
|
2,130,735
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
Cost
of Consulting Services
|
|
|
108,706
|
|
|
|
292,375
|
|
Cost
of Products and Equipment
|
|
|
740,409
|
|
|
|
499,408
|
|
Total
Cost of Revenues
|
|
|
849,115
|
|
|
|
791,783
|
|
Gross
Profit
|
|
|
720,679
|
|
|
|
1,338,952
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
1,010,902
|
|
|
|
1,049,415
|
|
Selling
and Marketing
|
|
|
298,937
|
|
|
|
309,232
|
|
Stock
Based Compensation Expense
|
|
|
29,970
|
|
|
|
73,514
|
|
Warrant
Expense
|
|
|
—
|
|
|
|
151,906
|
|
Bad
Debt Expense
|
|
|
4,910
|
|
|
|
88,749
|
|
Total
Operating Expenses
|
|
|
1,344,719
|
|
|
|
1,672,816
|
|
Loss
from Operations
|
|
|
(624,040
|
)
|
|
|
(333,864
|
)
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(1,786
|
)
|
|
|
—
|
|
Other
income
|
|
|
93,413
|
|
|
|
32,122
|
|
Total
Other Income
|
|
|
91,627
|
|
|
|
32,122
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(532,413
|
)
|
|
|
(301,742
|
)
|
Income
Tax Expense
|
|
|
—
|
|
|
|
—
|
|
NET
LOSS
|
|
$
|
(532,413
|
)
|
|
$
|
(301,742
|
)
|
|
|
|
|
|
|
|
|
|
Basic
net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
57,548,474
|
|
|
|
52,468,502
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
AMERICAN
CANNABIS COMPANY, INC.
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
Common
Stock
|
|
Paid-In
|
|
Accumulated
|
|
Shareholders'
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2018
|
|
|
51,513,064
|
|
|
$
|
515
|
|
|
$
|
8,178,919
|
|
|
$
|
(7,174,113
|
)
|
|
$
|
1,005,321
|
|
Shares issued for services
|
|
|
39,708
|
|
|
|
1
|
|
|
|
21,244
|
|
|
|
—
|
|
|
|
21,245
|
|
Warrants to employees
|
|
|
1,392,500
|
|
|
|
13
|
|
|
|
151,893
|
|
|
|
—
|
|
|
|
151,906
|
|
Stock-based compensation
to employees
|
|
|
33,333
|
|
|
|
—
|
|
|
|
2,864
|
|
|
|
—
|
|
|
|
2,864
|
|
Net
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(301,742
|
)
|
|
|
(301,742
|
)
|
Balance, Balance
December 31, 2019
|
|
|
52,978,605
|
|
|
$
|
529
|
|
|
$
|
8,354,920
|
|
|
$
|
(7,475,855
|
)
|
|
$
|
879,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2019
|
|
|
52,978,605
|
|
|
$
|
529
|
|
|
$
|
8,354,920
|
|
|
$
|
(7,475,855
|
)
|
|
$
|
879,594
|
|
Stock-based compensation
to employees
|
|
|
970,828
|
|
|
|
10
|
|
|
|
79,366
|
|
|
|
—
|
|
|
|
79,376
|
|
Stock issued for services
|
|
|
78,505
|
|
|
|
1
|
|
|
|
7,065
|
|
|
|
—
|
|
|
|
7,066
|
|
Shares issued for cash
|
|
|
16,700,000
|
|
|
|
167
|
|
|
|
1,193,397
|
|
|
|
—
|
|
|
|
1,193,564
|
|
Net
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(532,413
|
)
|
|
|
(532,413
|
)
|
Balance, December
31, 2020
|
|
|
70,727,938
|
|
|
$
|
707
|
|
|
$
|
9,634,748
|
|
|
$
|
(8,008,268
|
)
|
|
$
|
1,627,187
|
|
The
accompanying notes are an integral part of these consolidated financial statements
AMERICAN
CANNABIS COMPANY, INC.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
For
the Years Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
2020
|
|
2019
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(532,413
|
)
|
|
$
|
(301,742
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss on sale and disposal
of assets
|
|
|
1,183
|
|
|
|
—
|
|
Allowance for Bad Debt
Expenses
|
|
|
4,910
|
|
|
|
88,749
|
|
Depreciation
|
|
|
13,937
|
|
|
|
6,533
|
|
Stock-based compensation
to employees
|
|
|
29,970
|
|
|
|
73,514
|
|
Warrant Expense
|
|
|
—
|
|
|
|
151,906
|
|
Stock issued for services
|
|
|
7,066
|
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
67,395
|
|
|
|
(125,520
|
)
|
Inventory
|
|
|
(9,092
|
)
|
|
|
7,695
|
|
Prepaid expenses and
other current assets
|
|
|
(19,455
|
)
|
|
|
25,529
|
|
Right to Use Lease
Asset
|
|
|
34,418
|
|
|
|
(34,418
|
)
|
Accounts Payable
|
|
|
3,405
|
|
|
|
(23,183
|
)
|
Advances from Clients
|
|
|
(24,116
|
)
|
|
|
(34,390
|
)
|
Accrued and other current
liabilities
|
|
|
(68,059
|
)
|
|
|
27,536
|
|
Operating
Lease Liability
|
|
|
(34,943
|
)
|
|
|
34,943
|
|
Net
Cash used in Operating Activities
|
|
$
|
(525,794
|
)
|
|
$
|
(102,848
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
|
(2,233
|
)
|
|
|
(38,536
|
)
|
Proceeds
from sale of assets
|
|
|
2,500
|
|
|
|
—
|
|
Net
Cash Provided by (Used in) Investing Activities
|
|
$
|
267
|
|
|
$
|
(38,536
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from notes
payable
|
|
|
109,914
|
|
|
|
—
|
|
Proceeds
from sale of common stock
|
|
|
1,193,564
|
|
|
|
—
|
|
Net
Cash Provided by Financing Activities
|
|
$
|
1,303,478
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
777,951
|
|
|
|
(141,384
|
)
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING
OF PERIOD
|
|
|
945,181
|
|
|
|
1,086,565
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
1,723,132
|
|
|
$
|
945,181
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial statements
Note 1.
Principles of Consolidation.
The
consolidated financial statements for the years ended December 31, 2020 and 2019 include the accounts of American Cannabis Company,
Inc. and its wholly owned subsidiary, Hollister & Blacksmith, Inc., doing business as American Cannabis Company, Inc. Intercompany
accounts and transactions have been eliminated.
Note
2. Description of Business.
American
Cannabis Company, Inc. and its wholly owned subsidiary Company, Hollister & Blacksmith, Inc., doing business as American Cannabis
Consulting (“American Cannabis Consulting”), (collectively “the “Company”) are based in Denver,
Colorado and operate a fully-integrated business model that features end-to-end solutions for businesses operating in the regulated
cannabis industry in states and countries where cannabis is regulated and/or has been de-criminalized for medical use and/or legalized
for recreational use. We provide advisory and consulting services specific to this industry, design industry-specific products
and facilities, and sell both exclusive and non-exclusive customer products commonly used in the industry.
Note
3. Summary of Significant Accounting Policies
Basis
of Accounting
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, the accompanying consolidated financial statements include normal recurring adjustments that are necessary
for a fair presentation of the results for the periods presented.
Use
of Estimates in Financial Reporting
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amount of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the
consolidated financial statements during the periods presented. Actual results could differ from these estimates. Estimates and
assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in
the period in which they are deemed to be necessary. Significant estimates made in the accompanying consolidated financial statements
include but are not limited to following those related to revenue recognition, allowance for doubtful accounts and unbilled services,
lives and recoverability of equipment and other long-lived assets, contingencies, and litigation. The Company is subject to uncertainties,
such as the impact of future events, economic, environmental and political factors, and changes in the business climate;
therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other
when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the
preparation of the Company's consolidated financial statements will change as new events occur, as more experience is acquired,
as additional information is obtained and as the Company's operating environment changes. Changes in estimates are made when circumstances
warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material,
the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash
and cash equivalents are held in operating accounts at a major financial institution. Cash balances may exceed federally insured
limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to
date. As of December 31, 2020, and December 31, 2019, the Company had cash balances in excess of FDIC insured limits of $250,000.
Accounts
Receivable
Accounts
receivable are recorded at the net value of face amount less an allowance for doubtful accounts. The Company evaluates its accounts
receivable periodically based on specific identification of any accounts receivable for which the Company deems the net realizable
value to be less than the gross amount of accounts receivable recorded; in these cases, an allowance for doubtful accounts
is established for those balances. In determining its need for an allowance for doubtful accounts, the Company considers historical
experience, analysis of past due amounts, client creditworthiness and any other relevant available information. However, the Company’s
actual experience may vary from its estimates. If the financial condition of its clients were to deteriorate, resulting in their
inability or unwillingness to pay the Company’s fees, it may need to record additional allowances or write-offs in future
periods. This risk is mitigated to the extent that the Company receives retainers from its clients prior to performing significant
services.
The
allowance for doubtful accounts, if any, is recorded as a reduction in revenue to the extent the provision relates to fee adjustments
and other discretionary pricing adjustments. To the extent the provision relates to a client's inability to make required payments
on accounts receivables, the provision is recorded in operating expenses. As of December 31, 2020, and December 31, 2019, the
Company’s allowance for doubtful accounts was $57,512 and $43,116, respectively. The Company recorded bad debt expense during
the years ended December 31, 2020 and 2019 of $4,910 and $88,749 , respectively.
Deposits
Deposits
is comprised of advance payments made to third parties, for rent, utilities, and inventory for which the Company has not yet taken
title. When the Company takes title to inventory for which deposits are made, the related amount is classified as inventory, then
recognized as a cost of revenues upon sale.
Inventory
Inventory
is comprised of products and equipment owned by the Company to be sold to end-customers. Inventory is valued at cost using the
first-in first-out and specific identification methods, unless and until the market value for the inventory is lower than cost,
in which case an allowance is established to reduce the valuation to net realizable value. As of December 31, 2020, and December
31, 2019, market values of all the Company’s inventory were greater than cost, and accordingly, no such valuation allowance
was recognized.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets are primarily comprised of advance payments made to third parties for independent contractors’
services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate
the life of the contract or service period.
Significant
Clients and Customers
For
the year ended December 31, 2020, three customers accounted for 23% of the Company’s total revenues for the period. As of
December 31, 2019, one customer who accounted for 10% of the Company’s total revenues.
At
December 31, 2020, three customers account for 84.21% of accounts receivables, net. At December 31, 2019, four customers account
for 47.5% of accounts receivable, net.
Property
and Equipment, net
Property
and Equipment is stated at net book value, cost less depreciation. Maintenance and repairs are expensed as incurred. Depreciation
of owned equipment is provided using the straight-line method over the estimated useful lives of the assets, ranging from two
to seven years. Costs associated with in progress construction are capitalized as incurred and depreciation is consummated once
the underlying asset is placed into service. Property and equipment are reviewed for impairment as discussed below under “Accounting
for the Impairment of Long-Lived Assets.” The Company did not capitalize any interest as of December 31, 2020 and 2019.
Accounting
for the Impairment of Long-Lived Assets
The
Company evaluates long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing
the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying
amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. For long lived assets held for sale, assets are written down to fair
value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates,
depending upon the nature of the assets. The Company had not recorded any impairment charges related to long lived assets as of
December 31, 2020 or 2019.
Fair
Value Measurements
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered
observable and the last unobservable, as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of
the fair value of the assets or liabilities.
Our
financial instruments include cash, deposits, accounts receivable, accounts payables, advances from clients, accrued expense,
and other current liabilities. The carrying values of these financial instruments approximate their fair value due to their short
maturities.
Revenue
Recognition
During
the first quarter of 2019, we adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12
“Revenue from Contracts with Customers (Topic 606). Due to the nature of our contracts with customers, adopting the
new accounting principles did not have a significant impact on our prior period results of operations, cash flows or financial
position.
Our
service and product revenues arise from contracts with customers. Service revenue includes Operations Divisions consulting
revenue. Product revenue includes (a) Operations Division product sales (So-Hum Living Soils) and (b) Equipment Sales Division.
The majority of our revenue is derived from distinct performance obligations, such as time spent delivering a service or
the delivery of a specific product.
We
may also enter into contracts with customers that identify a single, or few, distinct performance obligations, but that also have
non-distinct, underlying performance obligations. These contracts are typically fulfilled within one to six months. Only
an insignificant portion of our revenue would be assessed for allocation between distinct (contractual) performance obligations
and non-distinct deliverables between reporting periods and, accordingly, we do not record a contract asset for completed, non-distinct
performance obligations prior to invoicing the customer.
We
recognize revenue in accordance with ASC 606 using the following 5 steps to identify revenues:
|
(6)
|
Identify
the contract with the Customer. Our customary practice is to obtain written
evidence, typically in the form of a contract or purchase order.
|
|
(7)
|
Identify
the performance obligations in the contract. We have rights to payment when services
are completed in accordance with the underlying contract, or for the sale of goods when
custody is transferred to our customers either upon delivery to our customers’
locations, with no right of return or further obligations.
|
|
(8)
|
Determination
of the transaction price. Prices are typically fixed, and no price protections or
variables are offered.
|
|
(9)
|
Allocation
of the transaction price to the performance obligations in the contract. Transaction
prices are typically allocated to the performance obligations outlined in the contract.
|
|
(10)
|
Recognize
Revenue when (or as) the entity satisfies a performance obligation. We typically
require a retainer for all or a portion of the goods or services to be delivered. We
recognize revenue as the performance obligations detailed in the contract are met.
|
Advances
from Clients deposits are contract liabilities with customers that represent our obligation to either transfer goods or services
in the future, or refund the amount received. Where possible, we obtain retainers to lessen our risk of non-payment by our
customers. Advances from Clients deposits are recognized as revenue as we meet specified performance obligations as detailed
in the contract.
Product
and Equipment Sales
Revenue
from product and equipment sales, including delivery fees, is recognized when an order has been obtained from the customer, the
price is fixed and determinable when the order is placed, the product is delivered, title has transferred, and collectability
is reasonably assured. Generally, our suppliers’ drop-ship orders to our clients with destination terms. The Company realizes
revenue upon delivery to the customer. Given the facts that (1) our customers exercise discretion in determining the timing of
when they place their product order; and, (2) the price negotiated in our product sales contracts is fixed and determinable at
the time the customer places the order, we are not of the opinion that our product sales indicate or involve any significant financing
that would materially change the amount of revenue recognized under the contract, or would otherwise contain a significant financing
component for us or the customer under FASB ASC Topic 606. During the years ended December 31, 2010 and 2019, sales returns were
$110 and $51,208 comprised of product returns and replacement, respectively, and are not recorded in revenues in said periods.
Consulting
Services
We
also generate revenues from professional services consulting agreements. These arrangements are generally entered into: (1) on
an hourly basis for a fixed fee; or (2) on a contingent fee basis. Generally, we require a complete or partial prepayment or retainer
prior to performing services.
For
hourly based fixed fee service contracts, we utilize and rely upon the proportional performance method, which recognizes revenue
as services are completed. Under this method, in order to determine the amount of revenue to be recognized, we calculate the amount
of completed work in comparison to the total services to be provided under the arrangement or deliverable. We segregate upon entry
into a contract any advances or retainers received from clients for fixed fee hourly services into a separate “Advances
from Clients” account, and only recognize revenues as we incur and charge billable hours, and then deposit the funds earned
into our operating account. Because our hourly fees for services are fixed and determinable and are only earned and recognized
as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer
based significant financing, that would materially change the amount of revenue we recognize under the contract or would otherwise
contain a significant financing component under FASB ASC Topic 606.
Occasionally,
our fixed-fee hourly engagements are recognized under the completed performance method. Some fixed fee arrangements are for completion
of a final deliverable or act which is significant to the arrangement. These engagements do not generally exceed a one-year term.
If the performance is for a final deliverable or act, we recognize revenue under the completed performance method, in which revenue
is recognized once the final act or deliverable is performed or delivered for a fixed fee. Revenue recognition is affected by
a number of factors that change the estimated amount of work required to complete the deliverable, such as changes in scope, timing,
awaiting notification of license award from local government, and the level of client involvement. Losses, if any, on fixed-fee
engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. FASB ASC Topic 606
provides a practical expedient to disregard the effects of a financing component if the period between payment and performance
is one year or less. As our fixed fee hourly engagements do not exceed one year, no significant customer-based financing is implicated
under FASB ASC Topic 606. During the years ended December 31, 2020 and 2019, we incurred no losses from fixed fee engagements
that terminate prior to completion. We believe if an engagement terminates prior to completion, we can recover the costs incurred
related to the services provided.
We
primarily enter into arrangements for which fixed and determinable revenues are contingent and agreed upon achieving a pre-determined
deliverable or future outcome. Any contingent revenue for these arrangements is not recognized until the contingency is resolved
and collectability is reasonably assured.
Our
arrangements with clients may include terms to deliver multiple services or deliverables. These contracts specifically identify
the services to be provided with the corresponding deliverable. The value for each deliverable is determined based on the prices
charged when each element is sold separately or by other vendor-specific objective evidence (“VSOE”) or estimates
of stand-alone selling prices. Revenues are recognized in accordance with our accounting policies for the elements as described
above (see Product Sales). The elements qualify for separation when the deliverables have value on a stand-alone basis and the
value of the separate elements can be established by VSOE or an estimated selling price.
While
assigning values and identifying separate elements requires judgment, selling prices of the separate elements are generally readily
identifiable as fixed and determinable as we also sell those elements individually outside of a multiple services engagement.
Contracts with multiple elements typically incorporate a fixed-fee or hourly pricing structure. Arrangements are typically terminable
by either party upon sufficient notice or do not include provisions for refunds relating to services provided.
Reimbursable
expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included as a component
of revenues. Typically, an equivalent amount of reimbursable expenses is included in total direct client service costs. Reimbursable
expenses related to time and materials and fixed-fee engagements are recognized as revenue in the period in which the expense
is incurred and collectability is reasonably assured. Taxes collected from customers and remitted to governmental authorities
are recognized as liabilities and paid to the appropriate government entities.
Costs
of Revenues
The
Company’s policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenue
includes the costs directly attributable to revenue recognition and includes compensation and fees for services, travel and other
expenses for services and costs of products and equipment. Selling, general and administrative expenses are charged to expense
as incurred.
Advertising
and Promotion Costs
Advertising
and Promotion costs are included as a component of selling and marketing expense and are expensed as incurred. During the years
ended December 31, 2020 and 2019 these costs were $9,934 and $32,071, respectively.
Shipping
and Handling Costs
For
product and equipment sales, shipping and handling costs are included as a component of cost of revenues.
Stock-Based
Compensation
Restricted
shares are awarded to employees and entitle the grantee to receive shares of common stock at the end of the established vesting
period. The fair value of the grant is based on the stock price on the date of grant. We recognize related compensation costs
on a straight-line basis over the requisite vesting period of the award, which to date has been one year from the grant date.
During the years ended December 31, 2020 and 2019, stock-based compensation expense for restricted shares for Company employees
and service providers was $29,970 and $73,514, respectively. Compensation expense for warrants are based on the fair value of
the instruments on the grant date, which is determined using the Black-Scholes valuation model and are expensed over the expected
term of the awards.
Research
and Development
As
a component of our equipment and supplies offerings, from time-to-time we design and develop our own proprietary products to meet
demand in markets where current offerings are insufficient. These products include, but are not limited to: The Satchel™,
Cultivation Cube™, So-Hum Living Soils™ and the HDCS™. Costs associated with the development of new products
are expensed as incurred as research and development operating expenses. During the years ended December 31, 2020 and 2019, our
research and development costs were de minimis.
Income
Taxes
The
Company’s corporate status changed from an S Corporation, which it had been since inception, to a C Corporation during the
year ended December 31, 2014. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes, S Corporations
are not subject to corporate income taxes; instead, the owners are taxed on their proportionate share of the S Corporation’s
taxable income. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns in accordance with applicable accounting guidance for accounting
for income taxes, using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We
record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. For the year
ended December 31, 2010, due to cumulative losses since our corporate status changed, we recorded a valuation allowance against
our deferred tax asset that reduced our income tax benefit for the period to zero. As of December 31, 2020, and 2019, we had no
liabilities related to federal or state income taxes and the carrying value of our deferred tax asset was zero.
Net
Loss Per Common Share
The
Company reports net loss per common share in accordance with FASB ASC 260, “Earnings per Share”. This statement requires
dual presentation of basic and diluted earnings with a reconciliation of the numerator and denominator of the earnings per share
computations. Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share is equal to basic earnings per share because there are no potential dilatable instruments that would
have an anti-dilutive effect on earnings. Diluted net loss per share gives effect to any dilutive potential common stock outstanding
during the period. The computation does not assume conversion, exercise or contingent exercise of securities since that would
have an anti-dilutive effect on earnings.
Related
Party Transactions
The
Company follows FASB ASC subtopic 850-10, Related Party Disclosures, for the identification of related parties and
disclosure of related party transactions.
Pursuant
to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity
securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension
and profit sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company;
e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating
policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests.
Impact
of COVID-19 Pandemic
On March
11, 2020, the World Health Organization declared the current coronavirus (“COVID-19”) outbreak
to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States,
federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial
activity to promote social distancing in an effort to slow the spread of the illness. These measures had a significant adverse
impact upon many sectors of the economy, including retail commerce.
In
response to state and local measures and for protection of both employees, the Company made required changes to operations, which
did not have a material impact upon operations or the financial condition of the Company.
While
the state and local governments have eased restrictions on restrictions and activities, it is possible that a resurgence in COVID-19 cases
could prompt a return to or new tighter restrictions to be instituted in the future. The Company is not aware of any specific
event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets
or liabilities as of the date of issuance of these consolidated financial statements.
Recent
Accounting Pronouncements
Recent
accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement
simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income
Taxes”. The pronouncement also improves consistent application of and simplify GAAP for other areas of Topic
740 by clarifying and amending existing guidance. This standard is effective for fiscal years beginning after December 15,
2020, with early adoption permitted. The Company is still evaluating the impact this guidance will have on its consolidated
financial statements.
In
January 2020, the FASB issued ASU No. 2020-01, "Investments — Equity Securities: Clarifying the Interactions between
Topic 321, Topic 323, and Topic 815" ("ASU No. 2020-01"). ASU No. 2020-01 clarifies that an entity should consider
observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying
the measurement alternative in accordance with ASC 321, "Investments — Equity Securities" immediately
before applying or upon discontinuing the equity method of accounting in ASC 323, "Investments—Equity Method and
Joint Ventures." The provisions of ASU No. 2020-01 are effective for fiscal years beginning after December 15, 2020,
and interim periods within those fiscal years with early adoption permitted, including early adoption in an interim period for
public business entities for periods for which financial statements have not yet been issued. The Company is still evaluating
the impact this guidance will have on its consolidated financial statements.
Note
4. Accounts Receivable and Advance from Clients
Accounts
receivable was comprised of the following:
|
|
December
31, 2020
|
|
December
31, 2019
|
Accounts
receivable - Trade
|
|
$
|
82,467
|
|
|
$
|
138,771
|
|
Less:
allowance for doubtful accounts
|
|
|
(57,512
|
)
|
|
|
(43,116
|
)
|
Accounts
receivable, net
|
|
$
|
24,955
|
|
|
$
|
95,655
|
|
The
Company had bad debt expense during the year ended December 31, 2020 of $4,910, whereas bad debt expense during the year ended
December 31, 2019 was $88,749.
Our Advances from Clients
had the following activity:
|
|
|
|
|
Amount
|
December
31, 2019
|
|
$
|
112,959
|
|
Additional
deposits received
|
|
|
481,237
|
|
Less:
Deposits recognized as revenue
|
|
|
(505,363
|
)
|
December
31, 2020
|
|
$
|
88,843
|
|
Note 5.
Inventory
Inventory
consisted of the following:
|
|
|
|
|
|
|
December
31, 2020
|
|
December
31, 2019
|
Raw
materials
|
|
$
|
39,746
|
|
|
$
|
23,091
|
|
Finished
goods
|
|
|
22,656
|
|
|
|
30,219
|
|
Total
|
|
$
|
62,402
|
|
|
$
|
53,310
|
|
Note
6. Property and Equipment, net
Property
and equipment, net, was comprised of the following:
|
|
December
31, 2020
|
|
December
31, 2019
|
Office
equipment
|
|
$
|
34,071
|
|
|
$
|
35,624
|
|
Furniture
and fixtures
|
|
|
—
|
|
|
|
7,240
|
|
Machinery
and equipment
|
|
|
—
|
|
|
|
7,796
|
|
Software
|
|
|
13,204
|
|
|
|
—
|
|
Work
In Progress
|
|
|
—
|
|
|
|
10,935
|
|
Property
and equipment, gross
|
|
|
47,275
|
|
|
|
61,595
|
|
Less:
accumulated depreciation
|
|
|
(22,621
|
)
|
|
|
(21,553
|
)
|
Property
and equipment, net
|
|
$
|
24,654
|
|
|
$
|
40,042
|
|
During
the year ended December 31, 2020, machinery with a book value of $2,000 was sold for cash of $2,500, a gain of $500 was recognized
on the sale.
During
the year ended December 31, 2020, as part of our move to new facilities certain fixed assets were determined to be obsolete. Property
and Equipment with books values of $288 in furniture and fixtures, $735 in office equipment and $659 in machinery were determined
to be disposed of. A loss of $1,683 was recognized on the disposals.
Note 7.
Accrued and Other Current Liabilities
Accrued
and other current liabilities consisted of the following:
|
|
December
31, 2020
|
|
December
31, 2019
|
Accrued
Bonus
|
|
$
|
—
|
|
|
$
|
1,500
|
|
Accrued
Payroll
|
|
|
—
|
|
|
|
16,173
|
|
Accrued
Interest
|
|
|
449
|
|
|
|
—
|
|
Other
Accrued Expenses & Payables
|
|
|
48,795
|
|
|
|
99,630
|
|
Accrued
and other current liabilities
|
|
$
|
49,244
|
|
|
$
|
117,303
|
|
Note
8. Stock payable
The
following summarizes the changes in common stock payable:
|
|
Amount
|
|
Number
of Shares
|
December
31, 2019
|
|
$
|
49,406
|
|
|
|
537,011
|
|
Additional
Expenses Incurred
|
|
|
29,970
|
|
|
|
163,082
|
|
Payments
Upon Issuance of Shares
|
|
|
(79,376
|
)
|
|
|
(478,261
|
)
|
December
31, 2020
|
|
$
|
—
|
|
|
|
221,832
|
|
Note
9. Operating Lease Right-of-Use Asset/Operating Lease Liability
On
June 1, 2020, the Company entered into a new lease membership agreement for a one-year term for an amount of $2,895 per month.
We determined under ASC 842, due to the short term nature of the lease that the lease membership agreement met the criteria of
ASC 842-20-25-2 and as such it is not necessary to capitalize the lease and rent will be recognized on a monthly straight-line
basis.
On
July 28, 2015, we entered into a commercial real estate lease for 6,500 square feet of retail space in Denver, CO, with an initial
term of five years and, at our option, one additional terms of five years. Rent was $6,000 per month, plus our portion of real
estate taxes and common area maintenance. We determined the present value of the future lease payments using a discount rate of
6%, our incremental borrowing rate based on outstanding debt, resulting in an initial right-of-use asset and lease liability of
$221,932, which are being amortized ratably over the term of the lease. As of December 31, 2020, the balance of the right to use
asset and the lease liability were fully amortized and had a book value of $0.
Rent
expense was $44,370 and $54,000 for the year ended December 31, 2020 and 2019, respectively.
Note
10. Loan Payable
On
March 27, 2020, the CARES Act was enacted to provide financial aid to family and businesses impacted by the COVID-19 pandemic.
The Company participated in the CARES Act, and on August 6, 2020, the Company entered into a note payable with a bank under the
Small Business Administration (“SBA”) Paycheck Protection Program (“PPP loan”) in the amount of $109,914.
This loan payable matures on August 6, 2022 with a fixed interest rate of 1% per annum with interest deferred for six months.
The PPP loan has an initial term of two years, is unsecured and guaranteed by the SBA. Under the terms of the PPP loan, the Company
may apply for forgiveness of the amount due on the PPP loan. The Company used the proceeds from the PPP loan for qualifying expenses
as defined in the PPP. The Company intends to apply for forgiveness of the PPP loan in accordance with the terms of the CARES
Act. However, the Company cannot assure at this time that the PPP loan will be forgiven partially or in full. If the loan is not
forgiven based on the PPP guidelines to be issued by the SBA, as defined, then, the monthly payment amount will be $6,186 beginning
on March 6, 2021 through August 6, 2022. The PPP loan balance as of December 31, 2020 was $109,914. During the year ended December
31, 2020, interest of $449 was accrued.
Note
11. Related Party Transactions
The
Company has a related party entity, Tabular Investments, LLC (“Tabular”) which was set to assign the Company’s
interest in various equity partnership. The sole member of Tabular is Tad Mailander, the Company’s outside legal counsel
and Director. The Company has valued all of its equity partnership investments at $0. Neither our direct equity ownership in,
nor our assignments of equity to Tabular Investments, LLC are, or are reasonably likely to allow for, substantive terms, transactions,
and arrangements, whether contractual or not contractual, that will have a current or future effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We have no direct or indirect
majority influence or control over any entity in which we have a direct equity interest or equity interests assigned to Tabular.
We do not have any direct or indirect interest in, and do not control Tabular. We have not absorbed losses from either our direct
equity interests or assignments to Tabular, and we have provided no subordinated financial support to any project
Note
12. Stock Based Compensation
During
the years ended December 31, 2020 and 2109, the Company issued stock-based compensation for employees and service providers pursuant
to its 2015 Equity Incentive Plan. During the years ended December 31, 2020, the Company’s expense for restricted shares
to Company employees and service providers was $29,970 and $73,514 which was the result of the following activity:
Restricted
Shares
From
time to time, the Company grants certain employees restricted shares of its common stock to provide further compensation in-lieu
of wages and to align the employee’s interests with the interests of its stockholders. Because vesting is based on continued
employment, these equity-based incentives are also intended to attract, retain and motivate personnel upon whose judgment, initiative
and effort the Company’s success is largely dependent.
During
the year ended December 31, 2019, the Company granted 73,041 restricted shares and recognized $24,108 in associated employee stock-based
compensation expense. No shares restricted shares were granted during the year ended 2020. The fair value of restricted stock
unit is determined based on the quoted closing price of the Company’s common stock on the date grant.
During
the year ended December 31, 2020, the Company issued 492,567 restricted shares to Company employees and recognized $29,970 in
associated stock-based compensation expense. During the year ended December 31, 2019, the Company granted 478,261 restricted shares
to Company employees and services providers and recognized $44,396 in associated stock based compensation expense. The fair value
of restricted stock units is determined based on the quoted closing price of the Company’s common stock on the date of grant.
Net
Loss Per Share
Basic
net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting
period. Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution
that could occur if dilutive securities are exercised.
Outstanding
stock options and common stock warrants are considered anti-dilutive because we are in a net loss position. Accordingly,
the number of weighted average shares outstanding for basic and fully diluted net loss per share are the same.
The
following summarizes equity instruments that may, in the future, have a dilutive effect on earnings per share:
|
|
December
31, 2020
|
|
December
31, 2019
|
Warrants
|
|
|
397,500
|
|
|
|
697,500
|
|
Stock
Payables
|
|
|
—
|
|
|
|
537,011
|
|
Total
|
|
|
397,500
|
|
|
|
1,234,511
|
|
Warrants
The
Company approved the cashless exercise of 535,000 warrants as of December 31, 2019 by employees for a total of $39,615.
As
of December 31, 2020, the Company did not issue or approve any warrants. Warrants exercisable for 300,000 shares expired during
December 31, 2020.
Note
13. Shareholders’ Equity
Preferred
Stock
American
Cannabis Company, Inc. is authorized to issue 5,000,000 shares of preferred stock at $0.01 par value. No shares of preferred stock
were issued and outstanding during the years ended December 31, 2020, and 2019, respectively.
Common
Stock
During
the year ended December 31, 2020, the Company issued 16,700,000 registered shares of common stock in exchange for net proceeds
of $1,193,564 pursuant to the Common Stock Purchase Agreement entered into on October 11, 2019 with White Lion Capital LLC.
As
of December 31, 2020, the Company did not issue or approve any warrants. Warrants exercisable for 300,000 shares expired during
December 31, 2020 . At December 31, 2020, warrants exercisable for 397,500 shares
were outstanding.
During
the year ended December 31, 2020, the Company issued 492,567 restricted shares to Company employees and recognized $29,970 in
associated stock-based compensation expense.
During
the year ended December 31, 2020, the Company issued 478,261 common shares, totaling $44,396 as part of the 2015 Equity Incentive
Plan to executive management and non-executive management personnel, for services rendered through and payable as of December
31, 2019.
Note
14. Commitments and Contingencies
Legal
In
the ordinary course of its business, the Company becomes involved in various legal proceedings involving a variety of matters.
The Company does not believe there are any pending legal proceedings that will have a material adverse effect on the Company’s
business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is
inherently unpredictable and subject to significant uncertainties. The Companies expenses legal fees in the period in which they
are incurred.
Turoff
Matter
On
November 15, 2019, Erin Turoff filed suit against the Company and Mr. Buffalo, our chief executive officer and director, and Mr.
Ellis Smith our chief development officer and director, in Denver County District Court. The complaint seeks a declaratory judgement
and damages related to Ms. Turoff’s allegation that she was misclassified as an independent contractor while working for
the Company. The action is in preliminary stage, and there is no reasonable basis to determine or reasonably calculate a contingent
legal liability expense as of the date of this filing.
Note
15. Income Taxes
The
Tax Cuts and Jobs act (the Tax legislation) in the United States enacted on December 22, 2017 significantly revised the United
States corporate income tax by, among other things, lowering the corporate income tax rate to 21% effective January 1, 2018, implementing
a modified territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings and profits of U.S.-owned
foreign subsidiaries (the Toll Charge). as a fiscal-year taxpayer, certain provisions of the Tax legislation impacted us in fiscal
2018, including the change in the corporate income tax rate, while other provisions will be effective starting at the beginning
of fiscal 2019. Accordingly, our federal statutory income tax rate for fiscal 2018 reflected a blended rate including State income
tax of approximately 26%.
The
following table displays a reconciliation from the U.S. statutory rate to the effective tax rate and the provision for (benefit
from) income taxes for the years ended December 31, 2020 and 2019, respectively:
|
|
For
the Years Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Tax
benefit at the US statutory rate of 21% for 2020 and 2019
|
|
$
|
37,221
|
|
|
$
|
14,267
|
|
State
income tax benefit
|
|
|
800
|
|
|
|
2,765
|
|
Non-deductible
expenses including non-deductible pre-merger losses
|
|
|
—
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
(38,021
|
)
|
|
|
(17,032
|
)
|
Total
Income Tax Benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax assets (liabilities) consisted of the following:
|
|
December
31,
|
|
December
31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,669,322
|
|
|
$
|
3,632,101
|
|
Beneficial
Conversion feature
|
|
|
13,791
|
|
|
|
13,791
|
|
Allowance
for Doubtful Accounts
|
|
|
57,512
|
|
|
|
37,677
|
|
Valuation
Allowance
|
|
|
(3,740,625
|
)
|
|
|
(3,683,569
|
)
|
Total
Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company determined that it is not more likely than not that its deferred tax asset would be realizable. accordingly, the Company
recorded a valuation allowance for the full amount of its deferred tax asset, resulting in a zero carrying value of the Company’s
deferred tax asset and no benefit from or provision for income taxes for the year ended December 31, 2020 and 2019. Federal and
state operating loss carry forwards are $3,669,322 and $3,632,101 as of December 31, 2020 and 2019, respectively and begin to
expire in 2034. The years 2010 to 2018 remain subject to examination by the Company’s major tax jurisdictions. Utilization
of the net operating loss carry forwards and credits may be subject to a substantial annual limitation due to ownership change
limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions.
Note
16. Subsequent Events
Stock
Issuances
From
January 1, 2021 through February 19, 20201, the Company issued 3,550,000 registered shares of common stock in exchange for net
proceeds of $598,762 pursuant to the Common Stock Purchase Agreement entered into on October 11, 2019 with White Lion Capital
LLC.
In
January 2021, the Company issued 100,000 shares of its restricted common stock in connection with the cashless exercise of a warrant
exercisable for 100,000 shares of common stock.
In
February 2021, warrants exercisable for 262,500 shares of common stock expired.
In
accordance with ASC 855-10, the Company has analyzed its operations after December 31, 2020 to the date these consolidated financial
statements were available to be issued and has determined that there were no other significant subsequent events or transactions
that would require recognition or disclosure in the consolidated financial statements for the years ended December 31, 2020 and
2019.
SUPPLEMENTARY
DATA
The
Company is a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information
required under this item.