NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Note 1.
Principles of Consolidation.
The consolidated
financial statements 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 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 financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.
GAAP"). The Company has elected a fiscal year ending on December 31.
Use
of Estimates in Financial Reporting
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts
of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and
reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates
and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period
they are deemed to be necessary. Significant estimates made in the accompanying financial statements include but are not limited
to following: those related to revenue recognition, allowance for doubtful accounts and unbilled services, lives and recoverability
of equipment and other long-lived assets, contingencies and litigation. The Company is subject to uncertainties, such as the impact
of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results
may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent
liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company's
financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and
as the Company's operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements
in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates
are disclosed in the notes to the financial statements.
Cash
and Cash Equivalents
The Company
considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash
equivalents are held in operating accounts at a major financial institution. 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, 2017, and 2016, the Company had cash balances in excess of FDIC insured limits of $1,398,087 and $453,691, respectively.
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 market value. As of December 31, 2017, market values of all
of the Company’s inventory were greater than cost, and accordingly, no such valuation allowances was recognized.
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 occurred as research and development operating expenses. During the year ended December 31, 2017, our research and development
costs were $2,403 as compared to $2,553 for the fiscal year ended December 31, 2016.
Deposits
Deposits
is comprised of advance payments made to third parties, primarily for inventory for which the Company has not yet taken title.
When the Company takes title to inventory for which deposits are made, the related amount is classified as inventory, then recognized
as a cost of revenues upon sale (see “Costs of Revenues” below).
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets is primarily comprised of advance payments made to third parties for independent contractors’
services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate
the life of the contract or service period.
Accounts
Receivable
Accounts
receivable are recorded at the net value of face amount less an allowance for doubtful accounts. On a periodic basis, the Company
evaluates its accounts receivable and, based on a method of specific identification of any accounts receivable for which it deems
the net realizable value to be less than the gross amount of accounts receivable recorded, establishes an allowance for doubtful
accounts for those balances. In determining its need for an allowance for doubtful accounts, the Company considers historical
experience, analysis of past due amounts, client creditworthiness and any other relevant available information. However, the Company’s
actual experience may vary from its estimates. If the financial condition of its clients were to deteriorate, resulting in their
inability or unwillingness to pay the Company’s fees, it may need to record additional allowances or write-offs in future
periods. This risk is mitigated to the extent that the Company receives retainers from its clients prior to performing significant
services.
The allowance
for doubtful accounts, if any, is recorded as a reduction in revenue to the extent the provision relates to fee adjustments and
other discretionary pricing adjustments. To the extent the provision relates to a client's inability to make required payments
on accounts receivables, the provision is recorded in operating expenses. As of December 31, 2017, and December 31, 2016 our allowance
for doubtful accounts and was $21,581 and $31,421 respectively. For December 31, 2017 and December 31, 2016, we recorded bad debt
expense of $89,715 and $118,641, respectively, which is reflected as a component of general and administrative expenses on the
consolidated statement of operations.
Significant Customers
For the
year ended December 31, 2017 and December 31, 2016, three customers accounted 48.95% or more, respectively of the Company’s
total product sales revenues, and four customers accounted for 40.18% or more respectively of the Company’s total service
based revenue. For the year ended December 31, 2016, three customers accounted for 45.66% of the Company’s total revenues.
Property
and Equipment, net
Property
and Equipment is stated at net book value, cost less depreciation. Maintenance and repairs are expensed as incurred. Depreciation
of owned equipment is provided using the straight-line method over the estimated useful lives of the assets, ranging from two
to seven years. Depreciation of capitalized construction in progress costs, a component of property and equipment, net, begins
once the underlying asset is placed into service. Property and equipment is reviewed for impairment as discussed below under “Accounting
for the Impairment of Long-Lived Assets.” The Company had not capitalized any interest as of December 31, 2017 and 2016.
Accounting
for the Impairment of Long-Lived Assets
The Company
evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value,
less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending
upon the nature of the assets. The Company did not record any impairment charges related to long-lived assets during the years
ended December 31, 2017 and 2016.
Beneficial
Conversion Feature
If the
conversion features of conventional convertible debt provide for a rate of conversion that is below market value at issuance,
this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as
a debt discount pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ACF”)
Topic 470-20
Debt with Conversion and Other Options
. In those circumstances, the convertible debt is recorded net of the
discount related to the BCF, and the Company amortizes the discount to interest expense over the life of the debt using the effective
interest method.
Embedded
Conversion Features
The Company
evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine
whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at
fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under
ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of
any beneficial conversion features.
Derivative
Financial Instruments
Fair value
accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments,
and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes
option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument
is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument
is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative
financial instruments.
Once determined,
derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair
value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding
derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Revenue
Recognition
For annual
reporting periods after December 15, 2017, the Financial Accounting Standards Board (“FASB”) made effective ASU 2014-09
“Revenue from Contracts with Customers” to supersede previous revenue recognition guidance under current U.S. GAAP.
As a smaller reporting company, the Company elected to not adopt FASB ASC Topic 606, Revenue Recognition as of December 31, 2017.
Currently, revenue is now recognized in accordance with FASB ASC Topic 606. The guidance presents a single five-step model for
comprehensive revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. Two options are available for implementation of the standard which is either the retrospective approach or cumulative
effect adjustment approach. The guidance becomes effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period, with early adoption permitted. We determined to implement the cumulative effect
adjustment approach to our implementation of FASB ASC Topic 606, with no restatement of the comparative periods presented. We
intend to apply this method to any incomplete contracts we determine are subject to FASB ASC Topic 606 prospectively. As is more
fully discussed below, we are of the opinion that none of our contracts for services or products contain significant financing
components that require revenue adjustment under FASB ASC Topic 606.
In accordance
with FASB ASC Topic 606, Revenue Recognition, we will recognize revenue when persuasive evidence of a significant financing component
exists in our consulting and product sales contracts. We examine and evaluate when our customers become liable to pay for goods
and services; how much consideration is paid as compared to the cash selling price of the goods or services; and, the length of
time between our performance and the receipt of payment.
Product
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 shipped, title has transferred and collectability is
reasonably assured. Generally, our suppliers’ drop-ship orders to our clients with shipping-point or destination terms.
For any shipments with destination terms, the Company defers revenue until 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 year ended December 31, 2017, sales returns were $21,249 comprised of a cancelled contract and 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, 2017, and December 31, 2016, 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 occasionally
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 and 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
The Company’s
policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenue includes the
costs directly attributable to revenue recognition and includes compensation and fees for services, travel and other expenses
for services and costs of products and equipment. Selling, general and administrative expenses are charged to expense as incurred.
Advertising
and Promotion Costs
Advertising
and promotion costs are included as a component of selling and marketing expense and are expensed as incurred. During the year
ended December 31, 2017 and 2016, these costs were $278,542 and $88,047, 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, 2017 and 2016, stock-based compensation expense for restricted shares for Company employees
and service providers was $893,857 and $30,208, respectively. Compensation expense for warrants and options is based on the fair
value of the instruments on the grant date, which is determined using the Black-Scholes valuation model, and are expensed over
the expected term of the awards.
Income
Taxes
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 years ended December 31, 2017 and 2016, 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, 2017, and, we had no liabilities related to federal or state income taxes and the carrying value of our deferred
tax asset was zero.
Net
Income (Loss) Per Common Share
The Company
reports net income (loss) per common share in accordance with FASB ASC 260, “Earnings per Share”. This statement requires
dual presentation of basic and diluted earnings with a reconciliation of the numerator and denominator of the earnings per share
computations. Basic net income (loss) per share is computed by dividing net income attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the period and excludes the effects of any potentially dilutive
securities. Diluted earnings per share is equal to basic earnings per share because there are no potential dilutable instruments
that would have an anti-dilutive effect on earnings. 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
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. 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.
Reclassifications
Certain
balance sheet reclassifications have been made to prior period balances to reflect the current period’s presentation format;
such reclassifications had no impact on the Company’s consolidated statements of operations or consolidated statements of
cash flows and had no material impact on the Company’s consolidated balance sheets.
Recent
Accounting Pronouncements
In August
2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). By incorporating
and expanding upon certain principles that are currently in U.S. auditing standards, ASU 2014-15 requires management to assess
whether there is substantial doubt about the entity’s ability to continue as a going concern. Specifically, ASU 2014-15
(1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods,
(3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when
substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and
other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the
date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending
after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company has
not elected to early adopt the provisions of ASU 2014-15, and accordingly, the requirements of ASU 2014-15 will apply beginning
with the year ended December 31, 2017. The Company is currently evaluating the effects, if any, that the application of ASU 2014-15
will have on disclosures associated with its consolidated financial statements.
In May
2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-9”), which
provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer
of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those
goods or services. This guidance is effective for annual reporting and interim periods beginning after December 15, 2017and
allows for either full retrospective or modified retrospective application, with early adoption not permitted. Accordingly, the
standard became effective for the Company on January 1, 2018.
In February
2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Under the new guidance, the following will be required to be recognized for all leases (with the exception of short-term leases)
as of the commencement date:
|
●
|
A
lease liability, which is a lessee‘s obligation to make lease payments arising
from a lease, measured on a discounted basis; and
|
|
●
|
A
right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term.
|
|
●
|
Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements
were made to align, where necessary, lessor accounting with the lessee accounting model
and Topic 606, Revenue from Contracts with Customers.
|
|
●
|
The
new lease guidance simplified the accounting for sale and leaseback transactions primarily
because lessees must recognize lease assets and lease liabilities. Lessees will no longer
be provided with a source of off-balance sheet financing.
|
Public
business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). The Company is currently evaluating the
effects, if any, that the application of ASU 2016-02 will have on disclosures associated with its consolidated financial statements.
In March
2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation —Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments
and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based
payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity
or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments are effective for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the
amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning
after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period. The Company is currently
evaluating the effects, if any, that the application of ASU 2016-09 will have on disclosures associated with its consolidated
financial statements.
In April
2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance
obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in
Topic 606. This guidance is effective for annual reporting and interim periods beginning after December 15, 2017and allows
for either full retrospective or modified retrospective application, with early adoption not permitted. Accordingly, the standard
becomes effective for the Company on January 1, 2018.
In January
2017, FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business, clarifying the definition of a business. The amendments affect all companies and other reporting organizations
that must determine whether they have acquired or sold a business. For public companies, the amendments are effective for annual
periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating
the effects, if any, that the application of ASU 2017-01 will have on disclosures associated with its consolidated financial statements.
Note 3.
Accounts Receivable, net
Accounts
receivable, net, was comprised of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Gross
accounts receivable
|
|
$
|
168,385
|
|
|
$
|
195,872
|
|
Less:
allowance for doubtful accounts
|
|
|
(21,581
|
)
|
|
|
(31,421
|
)
|
Accounts
receivable, net
|
|
$
|
146,804
|
|
|
$
|
164,451
|
|
For the
years ended December 31, 2017 and December 31, 2016, the Company had bad debt expense of ($89,715) and $118,641 and respectively.
Note 4
Inventory
Inventory
as of December 31, 2017 and 2016 consisted of the following:
|
|
December 31, 2017
|
|
December 31, 2016
|
Raw materials
|
|
$
|
—
|
|
|
$
|
16,614
|
|
Finished goods
|
|
|
35,757
|
|
|
|
25,886
|
|
Total
|
|
$
|
35,757
|
|
|
$
|
42,500
|
|
Note 5. Property and Equipment,
net
Property
and equipment, net, was comprised of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Office
equipment
|
|
$
|
8,482
|
|
|
$
|
7,472
|
|
Furniture
and fixtures
|
|
|
7,240
|
|
|
|
8,777
|
|
Machinery
and equipment
|
|
|
7,336
|
|
|
|
4,938
|
|
Property
and equipment, gross
|
|
|
23,058
|
|
|
|
21,187
|
|
Less:
accumulated depreciation
|
|
|
(11,276
|
)
|
|
|
(10,148
|
)
|
Property
and equipment, net
|
|
$
|
11,782
|
|
|
$
|
11,639
|
|
For the
year ended December 31, 2017 and December 31, 2016, the Company recorded depreciation expense of $4,487 and $5,173, respectively.
Note 6.
Accrued and Other Current Liabilities
Accrued
and other current liabilities consisted of the following:
|
|
December 31, 2017
|
|
December 31, 2016
|
Accrued legal fees
|
|
$
|
—
|
|
|
$
|
8,835
|
|
Accrued payroll liabilities
|
|
|
8,323
|
|
|
|
12,903
|
|
Other Accrued Expenses & Payables
|
|
|
44,029
|
|
|
|
14,986
|
|
Accrued and other current liabilities
|
|
$
|
52,352
|
|
|
$
|
36,724
|
|
Note
8. Related Party Transactions
During
the year ended December 31, 2017, and 2016, the Company incurred $66,000 and $34,250 of expenses respectively to Prince &
Tuohey CPA, LTD, an accounting firm in which, the Company’s Chief Financial Officer, was a partner. As of December 31, 2017,
the Company had $5,000 due to this related party.
Note
9. Commitments and Contingencies
On July
28, 2015, the Company entered into a 5-year lease for 6,500 square feet of office space to house its corporate offices. Under
the terms of the lease, payments are $4,500 per month for the first 36 months of the lease and escalate thereafter. As part of
this lease, the Company paid a $4,500 deposit, which is classified as an Other Asset.
Rent expense
was $54,000 and, $54,084 for the years ended December 31, 2017 and 2016, respectively.
The following
table summarizes the Company’s future lease obligations:
Year
|
|
|
Amount
|
|
2017
|
|
|
$
|
54,000
|
|
2018
|
|
|
|
54,000
|
|
2019
|
|
|
|
56,320
|
|
2020
|
|
|
|
33,610
|
|
Total
|
|
|
$
|
143,930
|
|
Note
10. Stock-based Compensation
During
the year ended December 31, 2017 and December 31, 2016, the Company issued stock-based compensation for employees and service
providers pursuant to its 2015 Equity Incentive Plan. As of December 31, 2017, the Company determined to issue employees and services
providers warrants instead of common stock. During the year ended December 31, 2017 and December 31, 2016, the Company’s
expense for restricted shares to Company employees and service providers was $893,857 and, $30,208, 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. There were 430,227 shares granted as of December 31, 2017. 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.
The following
table summarizes the Company’s restricted share award activity during the years ended December 31, 2017 and 2016:
|
Restricted
Shares
|
|
|
Weighted
Average
|
|
|
Common
Stock
|
|
|
Grant
Date Fair Value
|
|
Outstanding
unvested at December 31, 2015
|
|
|
164,981
|
|
|
$
|
0.21
|
|
Granted
|
|
|
267,172
|
|
|
|
0.11
|
|
Vested restricted
shares
|
|
|
(323,553
|
)
|
|
|
0.15
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding unvested
at December 31, 2016
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
430,227
|
|
|
|
0.92
|
|
Vested restricted
shares
|
|
|
430,227
|
|
|
|
0.
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding
unvested at December 31, 2017
|
|
|
430,227
|
|
|
$
|
0.92
|
|
During the year ended December 31, 2017, the Company granted 430,227 restricted shares to Company employees and service providers
and recognized $391,702 in associated stock-based compensation expense. During the year ended December 31, 2016, the Company granted
152,500 restricted shares and recognized $16,240 in associated employee stock-based compensation expense.
Warrants
In connection
with his appointment to the Company’s board of directors, the Company granted its independent board member, Vincent “Tripp”
Keber, warrants to purchase up to two hundred and fifty thousand (250,000) shares of common stock at an exercise price of sixty-three
cents ($0.63) per share, exercisable within five (5) years of the date of issuance on November 19, 2014 with a value of $228,250,
On August
31, 2017, the Company issued Anthony Baroud warrants to purchase up to fifty thousand (50,000) shares of common stock at an exercise
price of $0.93 in a cashless transaction. The warrants expired on March 1, 2018.
The Company
used the Black-Scholes valuation model to determine the fair value of warrants as of the grant date. Assumptions used in this
calculation for the warrant award to purchase 250,000 shares of common stock include expected volatility of 144.2%, based
on an average of historical data of the Company’s stock price and the stock prices of three comparable companies that are
also included in the marijuana index, a risk-free rate of 1.23%, based on U.S. Treasury yields as published by the Federal
Reserve, a dividend yield of 0.0%, as the Company has not historically paid dividends nor does it have any plans to do so in the
foreseeable future, and an expected term of five years. The grant date fair value of the warrants, as calculated based on these
assumptions, was $0.91 per share.
During
2017 and 2016, the Company had the following warrant activity:
|
|
|
Common
Stock Warrants
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Outstanding
at December 31, 2014
|
|
|
250,000
|
|
|
$
|
0.91
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
or forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at December 31, 2015
|
|
|
250,000
|
|
|
$
|
0.91
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
or forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at December 31, 2016
|
|
|
250,000
|
|
|
$
|
0.91
|
|
Granted
|
|
|
790,000
|
|
|
|
1.13
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
Expired
or forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at December 31, 2017
|
|
|
1,040,000
|
|
|
|
$1.13
|
|
Vested
at December 31, 2017
|
|
|
1,040,000
|
|
|
$
|
|
|
As of
December 31, 2017, the price per share exceeded the exercise price per share of our common shares, resulting in an aggregate intrinsic
value of $895,860 of the outstanding warrants.
Options
On January
22, 2018, the Company awarded Mr. Keber an option to purchase three hundred thousand (300,000) shares of common stock
at an exercise price of sixty-three cents ($0.63) per share valued at $273,900. The options are effective January 22, 2018 and
terminate on November 19, 2019.
Note 11.
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 of approximately 21%.
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, 2017 and 2016, respectively:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Tax
benefit at the US statutory rate of 34%
|
|
$
|
506,081
|
|
|
$
|
205,253
|
|
State
income tax benefit
|
|
|
68,916
|
|
|
|
27,951
|
|
Non-deductible
expenses including non-deductible pre-merger losses
|
|
|
—
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
(574,997
|
)
|
|
|
(233,204
|
)
|
Total
income tax benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax assets (liabilities) consisted of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Net
operating loss carryforwards
|
|
$
|
1,354,949
|
|
|
$
|
1,141,773
|
|
Beneficial
conversion feature accumulated amortization
|
|
|
13,791
|
|
|
|
13,791
|
|
Allowance
for Doubtful Accounts
|
|
|
7,855
|
|
|
|
13,727
|
|
Valuation
allowance
|
|
|
(1,376,595
|
)
|
|
|
(1,169,291
|
)
|
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, 2017 and 2016. Federal and
state operating loss carry forwards of $1,354,949 and $1,141,773 as of December 31, 2017 and 2016, respectively, begin expiring
on 2034. The years 2010 to 2015 remain subject to examination by the Company’s major tax jurisdictions.
Utilization
of the net operating loss carry forwards and credits may be subject to a substantial annual limitation due to ownership change
limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions.
Note
12. Stockholders’ Equity
Preferred
Stock
The American
Cannabis Company, Inc. is authorized to issue 5,000,000 shares of preferred stock at $0.01 par value.
No shares
of preferred stock were issued and outstanding during the year ended December 31, 2017 and 2016.
Common
Stock
The American
Cannabis Company, Inc. is authorized to issue 100,000,000 shares of common stock at $0.00001 par value. As of December
31, 2017, and 2016, the Company had 51,434,050 and 49,847,593, shares issued and outstanding, respectively.
On January
4, 2017, the Company issued a total of 430,227 shares of restricted common stock to 9 employees and consultants pursuant to consulting
contracts and the Company’s 2015 Employee Incentive Plan.
On January
10, 2017, pursuant to the amended and restated Investment Agreement with Tangiers, the Company sold 588,841 shares of registered
common stock to Tangiers in exchange for $414,538.
On February
22, 2017, pursuant to the amended and restated Investment Agreement with Tangiers, the Company sold 320,549 registered
common shares to Tangiers in exchange for $188,146.
On June
12, 2017, pursuant to a written agreement, the Company issued 8,955 common shares to Jesus Quintero.
On August
31, 2017, pursuant to a written agreement, the Company issued Anthony Baroud 100,000 shares of common stock and a warrant to purchase
up to 50,000 shares valued at $0.76 per share, expiring on March 1, 2018.
On January
22, 2018, pursuant to a written agreement with Vincent “Tripp” Keber, the Company issued Mr. Keber an option to purchase
300,000 shares of common stock for a price of $0.63 per share. The option expires on November 19, 2019.
Note
13. Subsequent Events
Effective
January 18, 2018, Mr. Vincent “Tripp” Keber, III resigned as a director. On March 13, 2018, the Company’s Board
of Directors appointed Tad Mailander as a director.
On April
24, 2018, the Company terminated the engagement of its Chief Financial Officer, J. Michael Tuohey. On April 24, 2018, the Registrant
appointed R. Leslie Hymers, III as its Chief Financial Officer.
On June
18, 2018, R. Leslie Hymers, III, the Company’s Chief Financial Officer resigned his position. Concurrently, the Company
engaged Michael Schwanbeck as the Company’s Chief Financial Officer.
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.