UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020.

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______.

 

 

 

Commission File Number 000-26108

 

 

 

AMERICAN CANNABIS COMPANY, INC.

 

(Exact name of registrant as specified in its charter)

 

Delaware   90-1116625
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
5690 Logan St. Unit A    
Denver, Colorado   80216
(Address of principal executive offices)   (Zip Code)

 

(303) 974-4770

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer  ☐
Non-accelerated filer   Smaller reporting company  ☒
Emerging growth company      

   

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒

 

As of March 31, 2020, and May 15, 2020, 53,456,866, shares of common stock were outstanding.

 
 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. FINANCIAL STATEMENTS:  
     
  CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2020 (UNAUDITED) AND DECEMBER 31, 2019. 3
     
  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED). 4
     
 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

5
     
  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED). 6
     
  NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.  7
     
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
     
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  23
     
Item 4. CONTROLS AND PROCEDURES 23
     

PART II. OTHER INFORMATION

 

 
   
Item 1. LEGAL PROCEEDINGS 25
     
Item 1A. RISK FACTORS 25
     
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
    25
Item 3. DEFAULTS UPON SENIOR SECURITIES  
     
Item 4.       MINE SAFETY DISCLOSURE 25
     
Item 5. OTHER INFORMATION 25
     
    26
Item 6. EXHIBITS  
   
SIGNATURES  27

 

 

 

 
 

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
 
      March 31,       December 31,  
      2020       2019  
      (UNAUDITED)          
ASSETS                
Current Assets                
Cash and Equivalents   $ 856,863     $ 945,181  
Accounts Receivable, Net     115,596       95,655  
Deposits     7,479       4,500  
Inventory     81,030       53,310  
Prepaid Expenses and Other Current Assets     35,638       30,847  
Right to Use - Lease Asset     21,756       34,418  
Total Current Assets     1,118,362       1,163,911  
                 
Property and Equipment - Net     39,311       40,042  
TOTAL ASSETS   $ 1,157,673     $ 1,203,953  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
Current Liabilities                
Accounts Payable   $ 60,673     $ 9,748  
Advances from Clients     157,699       112,959  
Accrued and Other Current Liabilities     161,289       117,303  
Stock payable     10,400       49,406  
Operating Lease Liability     22,056       34,943  
Total Current Liabilities     412,117       324,359  
                 
Shareholders' Equity                
Preferred Stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019     —         —    
Common stock, $0.00001 par value; 100,000,000 shares authorized; 53,456,866 and 52,978,605 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively     534       529  
Additional paid-in capital     8,398,424       8,354,920  
Accumulated deficit     (7,653,402 )     (7,475,855 )
Total Shareholders' Equity     745,556       879,594  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 1,157,673     $ 1,203,953  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements                

  3  

 

             

 

AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
    For Three Months Ended   For Three Months Ended
    March 31,   March 31,
    2020   2019
Revenues        
Consulting Services   $ 224,375     $ 161,654  
Product & Equipment     216,007       248,659  
Total Revenues     440,382       410,313  
Cost of Revenues                
Cost of Consulting Services     92,126       33,927  
Cost of Products and Equipment     136,241       192,423  
Total Cost of Revenues     228,367       226,350  
Gross Profit     212,015       183,963  
Operating Expenses                
General and Administrative     320,586       263,416  
Selling and Marketing     70,407       75,339  
Stock Based Compensation expense     4,503       43,744  
Total Operating Expenses     395,496       382,499  
Loss from Operations     (183,481 )     (198,536 )
Other income     5,934       4,250  
NET LOSS     (177,547 )     (194,286 )
                 
Basic and diluted net loss per common share   $ (0.00 )   $ (0.00 )
                 
Basic and diluted weighted average common shares outstanding     53,051,982       51,975,689  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements                

 

  4  

 

 

AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
                     
            Additional       Total
    Common Stock   Paid-In   Accumulated   Stockholders'
    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               21,244               21,244  
Exercise Cashless Warrants by employees     400,000       4       (4 )             0  
Stock-based compensation to employees     50,000       1       22,499               22,500  
Net (Loss)                             (194,286 )     (194,286 )
Balance, March 31, 2019     52,002,772     $ 520     $ 8,222,658     $ (7,368,399 )   $ 854,779  
                                         
Balance, December 31, 2019     52,978,605     $ 529     $ 8,354,920     $ (7,475,855 )   $ 879,594  
                                         
Stock-based compensation to employees     478,261       5       43,504               43,509  
Net (Loss)                             (177,547 )     (177,547 )
Balance, March 31, 2020     53,456,866     $ 534     $ 8,398,424     $ (7,653,402 )   $ 745,556  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements                                        

 

  5  

 

 

AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
    For the Three Months Ended   For the Three Months Ended
    March 31,   March 31,
    2020   2019
CASH FLOWS FROM OPERATING ACTIVITIES                
Net Loss   $ (177,547 )   $ (194,286 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Allowance for Bad Debt Expenses     22,500       2,293  
Depreciation     3,000       962  
Stock-base compensation to employees     4,503       22,500  
Stock-base compensation to service providers     —         21,244  
Changes in operating assets and liabilities:                
Accounts receivable     (42,524 )     (28,156 )
Deposits     (2,895 )     —    
Inventory     (27,720 )     15,473  
Prepaid expenses and other current assets     (4,791 )     9,400  
Right to Use Lease Asset     12,662       —    
Accounts Payable     50,925       (24,612 )
Advances from Clients     44,740       18,869  
Accrued and other current liabilities     43,985       (13,807 )
Operating Lease Liability     (12,887 )     —    
Net Cash used in Operating Activities   $ (86,049 )   $ (170,120 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (2,269 )     (2,439 )
Net Cash used in Investing Activities   $ (2,269 )   $ (2,439 )
                 
                 
NET DECREASE IN CASH     (88,318 )     (172,559 )
                 
CASH AT BEGINNING OF PERIOD     945,181       1,086,565  
                 
CASH AT END OF PERIOD   $ 856,863     $ 914,006  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements                

 

  6  

 

AMERICAN CANNABIS COMPANY, INC.

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019

 

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 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 unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations. 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 interim periods presented. These financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2019 included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures. Actual results may differ from these estimates.

 

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 the amount of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the 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 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 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.

 

  7  

 

Unaudited Interim Financial Statements

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Regulation SX. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring entries necessary for a fair statement of the periods presented for: (a) the financial position; (b) the result of operations; and (c) cash flows, have been made in order to make the financial statements presented not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year.

 

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 March 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 March 31, 2020, and December 31, 2019, the Company’s allowance for doubtful accounts was $39,677. The Company recorded bad debt expense during the three months ended March 31, 2020 of $ 22,500 and $ 2,293 during the three months ended March 31, 2019.

 

Deposits

 

Deposits are 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 for the inventory is lower than cost, in which case an allowance is established to reduce the valuation to net realizable value.

 

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.

 

  8  

 

Significant Clients and Customers

 

For the three months ended March 31, 2020, three customers accounted for 35.4 % of the Company’s total revenues for the period. In comparison for the three months ended March 31, 2019, three customers accounted for 37.2 % of the Company’s total revenue for the period.

 

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 March 31, 2020 and as of December 31, 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 March 31, 2020 or December 31, 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 2018, the Company follows accounting principles related to revenue recognition: (a) FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606).

 

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.

  9  

 

 

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 three 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 when the following criteria are met:

 

The parties to the contract have approved the contract and are committed to perform their respective obligations – our customary practice is to obtain written evidence, typically in the form of a contract or purchase order.

 

Each party’s rights regarding the goods or services have been identified – 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 shipment to or receipt at our customers’ locations, with no right of return or further obligations.

 

The payment terms for the goods or services have been identified – prices are typically fixed, and no price protections or variables are offered.

 

The contract has commercial substance – our practice is to only enter into contracts that will positively affect our future cash flows.

 

Collectability is probable – we typically require a retainer for all or a portion of the goods or services to be delivered, as well as continually monitoring and evaluating customers’ ability to pay.  Payment terms are typically zero to fifteen days within delivery of the good or service.

 

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 perform under the contract.

 

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 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 three months ended March 31, 2020 and 2019, sales returns were $ 0 comprised of product returns and replacement, respectively.

 

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.

  10  

 

 

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. 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 affectedby 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 March 31, 2020 and March 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 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 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.

  11  

 

 

Advertising and Promotion Costs

 

Selling and Marketing costs are included as a component of selling and marketing expense and are expensed as incurred. During the three months ended March 31, 2020 and March 31, 2019, these costs were $6,000 and $10,212, 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 three months ended March 31, 2020 and 2019, stock-based compensation expense for restricted shares for Company employees and service providers was $4,503 (included in Stock Payable on the consolidated balance sheet) and $43,744, 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 three months ended March 31, 2020, our research and development costs were $35 as compared to $196 for the three months ended March 31, 2019.

 

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. Accordingly, we are subject to income tax now that the Company is a C Corp. 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 three months ended March 31, 2020, 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 March 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.

 

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 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 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.

  12  

 

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.

 

Recent Accounting Pronouncements

 

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 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 has adopted this pronouncement as of January 1, 2019 and determined such adoption did not have a material effect in the Company’s 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, 2018, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for any organization in any interim or annual period. The Company has adopted this pronouncement as of January 1, 2019 and determined such adoption did not have a material effect in the Company’s consolidated financial statements.

 

In June 2018, FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvement to Non-Employee Share Based Payment Accounting This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. Adoption of this ASU did not have a significant impact on our consolidated financial statements and related disclosures.

  13  

 

 

In August 2018, FASB issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure of Fair Value Measurement. The Company has adopted this pronouncement as of January 1, 2020 and determined such adoption did not have a material effect on the Company’s consolidated financial statements.

 

Note 4. Accounts Receivable and Advance from Clients    

         

Accounts receivable was comprised of the following:

   

March 31,

2020

  December 31, 2019
Gross accounts receivable   $ 155,273     $ 135,332  
Less: allowance for doubtful accounts     (39,677 )     (39,677 )
Accounts receivable, net   $ 115,596     $ 95,655  

 

Our Advances from Clients had the following activity:    
    Amount
December 31, 2019   $ 112,959  
  Additional deposits received     246,615  
  Less: Deposits recognized as revenue     (201,875 )
March 31, 2020   $ 157,699  

 

Note 5. Inventory        
         
Inventory consisted of the following:        
         
   

March 31,

2020

  December 31, 2019
Raw materials   $ 49,369     $ 23,091  
Finished goods     31,661       30,219  
Total   $ 81,030     $ 53,310  
                 

 

Note 6. Property and Equipment, net

 

Property and equipment, net, was comprised of the following:

 

   

March 31,

2020

  December 31, 2019
Office equipment   $ 35,624     $ 35,624  
Furniture and fixtures     7,240       7,240  
Machinery and equipment     7,796       7,796  
Work In Progress     13,204       10,935  
Property and equipment, gross     63,864       61,595  
Less: accumulated depreciation     (24,553 )     (21,553 )
Property and equipment, net   $ 39,311     $ 40,042  

  

  15  

 

 

Note 7. Accrued and Other Current Liabilities        
Accrued and other current liabilities consisted of the following:        
         
         
   

March 31,

2020

  December 31, 2019
Accrued Bonus   $ —       $ 1,500  
Accrued Payroll     5,496       16,173  
Other Accrued Expenses & Payables     155,793       99,630  
Accrued and other current liabilities   $ 161,289     $ 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 Expensed Incurred     4,503       —    
  Shares Issued for Expensed Incurred     (43,509 )     (478,261 )
March 31, 2020   $ 10,400       58,750  
                 
                 

 

Note 9. Operating Lease Right-of-Use Asset/Operating Lease Liability

 

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 is $6,000 per month, as well as 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 March 31, 2020, the balance of the right-of-use asset was $21,756 and lease liability was $22,056. As of December 31, 2019, the balance of the right-of-use asset was $34,418 and lease liability was $34,943.

 

Rent expense was $13,500 and $13,500 for the three months ended March 31, 2020 and 2019, respectively.

 

In addition, the Company entered into a new lease agreement for a one-year term for an amount of $2,895 per month commencing on June 1, 2020. The new lease agreement is a 12-month lease, as such the Company has elected to use the practical expedient and therefore did not record a right-to-use asset or liability.

 

  16  

 

Note 10. 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 partnerships. 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 11. Stock Based Compensation

 

During the three months ended March 31, 2020 and March 31, 2019, the Company issued stock-based compensation for employees and service providers pursuant to its 2015 Equity Incentive Plan. As of March 31, 2019, the Company determined to issue employees and services providers warrants instead of common stock. During the three months ended March 31, 2020 and March 31, 2019, the Company’s expense for restricted shares to Company employees and service providers was $4,503 and $43,744, 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 three months ended March 31, 2020, the Company granted 478,261 restricted shares which was part of the stock payable balance as of December 31, 2019. During the three months ended March 31, 2019, the Company granted 89,708 restricted shares to Company employees and service providers. 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:

 

Warrants

 

The Company approved the cashless exercise of 489,408 warrants as of March 31, 2019 by employees and services providers for a total of $43,744. As of March 31, 2020, the Company did not issue or approve any cashless warrants.

 

Note 11. Stockholders’ 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 as of March 31, 2020, and December 31, 2019.

 

  17  

 

Common Stock

 

In January 2020, the Company entered into employment agreements with existing executive and non-executive which include a total of 225,000 shares to be fully vested and issued in January 2021. In the event of termination, the Company will issue the shares to employees on a pro-rata basis as of the date of termination. Therefore, the Company recognized $4,503 in stock-based compensation expenses for such services incurred through March 31, 2020 on a pro-rata basis. None of these shares have been fully vested or issued as of March 31, 2020.

 

Note 12.   Commitments and Contingencies

 

Legal

 

To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened

 

Note 13. COVID 19

 

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 March 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 is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. However, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020.

 

Note 14. Subsequent Events

 

On April 3, 2020, the Company’s Board of Directors approved by resolution the increase of the Company’s authorized shares from one hundred million to five hundred million common shares, par value of $0.00001 per share. On April 17, 2020, shareholders of the Company controlling 50.29 % of approved by written consent, pursuant to Title 8. Corporations Section 242, 228(a) and 103 of the General Corporation Law of the State of Delaware, an increase in the authorized shares of the company from one hundred million to five hundred million of common shares, par value of $0.00001 per share.

 

  18  

 

ITEM 2. 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 ongoing 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.

 

Background

 

American Cannabis Company, Inc. and subsidiary company, Hollister & Blacksmith, Inc., doing business as American Cannabis Consulting (“American Cannabis Consulting”), (collectively “the “Company”, “we”, “us”, or “our”) 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 decriminalized for medical use and/or legalized for recreational use. The Company provides advisory and consulting services specific to this industry, manufactures proprietary industry solutions including; the Satchel™, SoHum Living Soils™, Cultivation Cube™ and the High Density Cultivation System.™ The Company also sells 3rd party industry specific products and manages a strategic group partnership that offers both exclusive and nonexclusive customer products commonly used in the industry. American Cannabis Company, Inc. is a publicly listed company quoted on the OTC Markets Pink Tier under the symbol “AMMJ”.

 

 We are a Delaware corporation formed on September 24, 2001 with the name Naturewell, Inc., which became Brazil Interactive Media, Inc. (“BIMI”) on March 13, 2013 pursuant to a merger transaction that resulted in the Company becoming the owner of a Brazilian interactive television technology and television production company, BIMI, Inc. We became American Cannabis Company, Inc. on September 29, 2014, pursuant to an Agreement and Plan of Merger dated May 15, 2014 (the “Merger Agreement”) between the Company, Cannamerica Corp. (“Merger Sub”), a wholly-owned subsidiary of BIMI, and Hollister & Blacksmith, Inc. a wholly owned subsidiary of American Cannabis Consulting (“American Cannabis Consulting”). Pursuant to the Merger Agreement, which was consummated and became effective on September 29, 2014, Merger Sub was merged with and into American Cannabis Consulting through a reverse triangular merger transaction (the “Reverse Merger”), we changed our name to “American Cannabis Company, Inc.”, and our officers and directors in office prior to the Merger Agreement resigned and American Cannabis Consulting appointed new officers and directors to serve our Company. In concert with the Merger Agreement, we consummated a complete divestiture of BIMI, Inc. pursuant to a Separation and Exchange Agreement dated May 16, 2014 (the “Separation Agreement”) between the Company, BIMI, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, and Brazil Investment Holding, LLC (“Holdings”), a Delaware limited liability company. On October 10, 2014, we changed our 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.

  19  

 

 

Results of Operations

 

For the three months ended March 31, 2020 compared to three months ended March 31, 2019.

 

AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
    For Three Months Ended   For Three Months Ended
    March 31,   March 31,
    2020   2019
Revenues        
Consulting Services   $ 224,375     $ 161,654  
Product & Equipment     216,007       248,659  
Total Revenues     440,382       410,313  
Cost of Revenues                
Cost of Consulting Services     92,126       33,927  
Cost of Products and Equipment     136,241       192,423  
Total Cost of Revenues     228,367       226,350  
Gross Profit     212,015       183,963  
Operating Expenses                
General and Administrative     320,586       263,416  
Selling and Marketing     70,407       75,339  
Stock Based Compensation expense     4,503       43,744  
Total Operating Expenses     395,496       382,499  
Loss from Operations     (183,481 )     (198,536 )
Other income     5,934       4,250  
NET LOSS     (177,547 )     (194,286 )
                 
Basic and diluted net loss per common share   $ (0.00 )   $ (0.00 )
                 
Basic and diluted weighted average common shares outstanding     53,051,982       51,975,689  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements                

 

  20  

 

Revenues

 

Total revenues were $440,382 for the three months ended March 31, 2020 as compared to $410,313 for the three months ended March 31, 2019, an increase of $30,069. Consulting service revenues were $224,375 or 51.0% of total revenues for the three months ended March 31, 2020, versus $161,654 or 39.4% of total revenues for the three months ended March 31, 2019. Our product and equipment revenues for the three months ended March 31, 2020 were $216,007 or 49.0% of total revenues, versus $248,659 or 60.6% of total revenues for three months ended March 31, 2019. The decrease in product and equipment revenue as percentage of total revenue was attributed to decreased client equipment orders with the company. The company increased its focus towards selling soil and consulting services for the three months ended March 31, 2020, while two facility buildouts were in progress during the three months ended March 31, 2019. The increase in our consulting service revenues for the three months ended March 31, 2020, reflects more states enacting legislation legalizing cannabis during the period.

 

Costs of Revenues

 

Costs of revenues primarily consist of labor, travel, cost of equipment and soil sold, and other costs directly attributable to providing services or products. During the three months ended March 31, 2020, our total costs of revenues were $228,367, or 51.9% of total revenues. This compares to total costs of revenues for the three months ended March 31, 2019 of $226,350 or 55.2% of total revenues. For the three months ended March 31, 2020, consulting related costs were $92,126 or 20.9% of total revenue, as compared to costs of $33,927, or 8.3% of revenue for the three months ended March 31, 2019. Costs associated with products and equipment were $136,241, or 30.9% of total revenue for the three months ended March 31, 2020 as compared to $192,423, or 46.9% of total revenue for the three months ended March 31, 2019. As a percentage of revenue, the increase in costs associated to consulting services is attributed to the allocation of previous general and administrative salaries and wages to cost of consulting services. In previous years cost of consulting services was comprised of contract labor. In January 2020 management decided to employ contract labor and in addition, allocate current employees labor to cost of consulting services. As a percentage of revenues, the decrease in costs associated with product sales during the three months ended March 31, 2020, was attributed to increase in soil related product revenues and reduction in equipment related products sold during the three months ended March 31, 2019.

 

Gross Profit

 

Total gross profit was $212,015 for the three months ended March 31, 2020, comprised of consulting services gross profit of $132,249 and products and equipment gross profit of $79,766. This compares to total gross profit of $183,963 for the three months ended March 31, 2019, comprised of consulting services gross profit of $127,727 and products and equipment gross profit of $56,236. Total gross profits of the three months ended March 31, 2020 as compared to 2019 reflect an increase of $28,052. The increase in our consulting services gross profits reflects more states enacting legislation during the period legalizing cannabis, and so there is a corresponding increase in the demand for our consulting services. The increase in gross profits for products and equipment was due to the Company expanding its product sales to existing clients during the period. As a percentage of total revenues, gross profit was 48.1% for the three months ended March 31, 2020 compared to 44.8% for the three months ended March 31, 2019.

 

Operating Expenses

 

Total operating expenses were $395,496, or 89.8% of total revenues for the three months ended March 31, 2020, and $382,502 or 93.2% for the three months ended March 31, 2019. This increase in operating expenses is attributed to additional personnel and increase in bad debt expenses for the three months ended March 31, 2020.

 

Other Income

 

Other income for the three months ended March 31, 2020 was $5,934 as compared with income of $4,250 for the three months ended March 31, 2019. The increase in the Company other expense was attributed to an increase in sublease rent with existing sublease.

 

Net Loss

 

As a result of the factors discussed above, net loss for the three months ended March 31, 2020 was net loss of ($177,547) or (40.3%) of total revenues for the period, as compared to a net loss for the three months ended March 31, 2019 of ($194,286) or (47.4%) of total revenues for the period.

 

  21  

 

Liquidity and Capital Resources

 

As of March 31, 2020, our primary internal sources of liquidity were our working capital, which included cash and cash equivalents of $856,863 and accounts receivable of $115,596. Additionally, considering that our fixed overhead costs are low, we have the ability to issue stock 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 at least the next 12 months without needing to raise additional debt or equity funding. There is no guarantee we will have the ability to raise additional capital as needed through external equity financing transactions if required.

 

Operating Activities

 

Net cash used by operating activities for the three months ended March 31, 2020 was a use of ($86,049), attributed to an increase in accounts receivables of ($42,524) and inventory costs of ($27,720) and net loss of ($177,547), compared to net cash used by operating activities of ($170,120), consisting mainly of the net loss of ($194,286) for the three months ended March 31, 2019.

 

Investing Activities

 

For the three months ended March 31, 2020 and 2019, investing activities were a use of cash of $2,269 and $2,439 respectively.

 

Off Balance Sheet Arrangements

 

As of March 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 nonrecurring expenses, which to date have been limited to costs associated with the Reverse Merger. 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(loss) to Adjusted EBITDA is provided below:        
    Three Months   Three Months
    Ended March 31,   Ended March 31,
    2020   2019
         
Adjusted EBITDA reconciliation:                
Net loss   $ (177,547 )   $ (194,286 )
Bad Debt Expense     22,500       2,293  
Depreciation     3,000       962  
Stock-based compensation to employees     4,503       22,500  
Stock issued for settlement     —         0  
Stock-based compensation to service providers     0       21,244  
Adjusted EBITDA   $ (147,544 )   $ (147,287 )

 

  22  

 

 

QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020, the end of the period covered by this Report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.

 

Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets.

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management identified the following material weaknesses:

 

· we do not have an Audit Committee – While not being legally obligated to have an Audit Committee, it is the management’s view that such a committee, including a financial expert board member, is an utmost important entity level control of the Company’s financial statements. Currently the Board of Directors acts in the capacity of the Audit Committee and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities.

 

· not performed a risk assessment and mapped our processes to control objectives.
· we have not implemented comprehensive entity-level internal controls.

· we have not implemented adequate system and manual controls; and

· we do not have sufficient segregation of duties.

 

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Our management assessed the effectiveness of internal control over financial reporting as of December 31, 2019.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013).  Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting is not effective as of December 31, 2019.

 

Remediation of Material Weaknesses

 

We have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

 

· We intend to allocate resources to perform a risk assessment and map processes to control objectives and, where necessary, implement and document internal controls in accordance with COSO.

· Our entity-level controls are, generally, informal and we intend to evaluate current processes, supplement where necessary, and document requirements.

· While we have implemented procedures to identify, evaluate and record significant transactions, we need to formally document these procedures and evidence the performance of the related controls.

· We plan to evaluate system and manual controls, identify specific weaknesses, and implement a comprehensive system of internal controls.

 

Changes in Internal Controls

 

The Company had the following reportable changes to its internal controls over financial reporting for the period covered by this report.

 

· Implemented a formal quarterly review of financial information with our Chief Executive Officer, in comparison with quarterly budget with each managing director that oversees an operating segment.  These individuals provide a certification that the operating results are accurate to the best of their knowledge.

· Implementation of an Inventory Tracking system with controls in place for verification of inventory numbers and Cost of Goods Sold.

· Implementation of Revenue Recognition system with controls in place for verification of proof of deliverables and delivery of said deliverables

 

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On November 15, 2019, Erin Turoff filed suit against the Company and Mr. Buffalo, our principal 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 relating to Ms. Turoff’s allegations that while working for the Company, she was misclassified as an independent contractor when she was allegedly an employee of the Company. Ms. Turoff alleges she is owed unpaid overtime, liquidated damages, wages, and other compensatory damages for her misclassification and alleged wrongful terminations. Ms. Turoff’s suit against Mr. Buffalo and Mr. Smith alleges that each are the alter ego of the Company and are therefore jointly and severally liable. The case is currently in litigation.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

No transactions meeting the reporting requirements of this item occurred during the periods covered by this report.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

No senior securities were issued and outstanding during the three and three months ended March 31, 2020 or 2019.

 

ITEM 4. MINE SAFTEY DISCLOSURE

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

  25  

 

ITEM 6. EXHIBITS

 

This list is intended to constitute the exhibit index.

 

10.1 Amended and Restated Investment Agreement dated August 4, 2016 between the Company and Tangiers Global, LLC.
   
10.2 Amended and Restated Registration Rights Agreement dated August 4, 2016 between the Company and Tangiers Global, LLC.
   
10.3 Common Stock Purchase Agreement dated October 11, 2019 between the Company and White Lion Capital, LLC [incorporated herein by reference from the Company’s Form 8-K dated October 15, 2019 and Form S-1/A filed on October 31, 2019.
10.4 Registration Rights Agreement dated October 11, 2019 between the Company and White Lion Capital, LLC [incorporated herein by reference from the Company’s Form 8-K dated October 15, 2019 and Form S-1/A filed on October 31, 2019.
   
10.5 Office lease dated June 1, 2020, Harris & Gray, LLC dba Green Spaces
   
31.1 Certification of Principal Executive Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification of Principal Financial Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*

 

*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

  26  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

American Cannabis Company, Inc.

 

Date: May 15, 2020

 

By: /s/Terry Buffalo

 

Terry Buffalo, Chief Executive Officer

 

 

Date: May 15, 2020

 

By: /s/David M. Godfrey

 

David M. Godfrey, Chief Financial Officer

 

 

 

  27  

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