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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION 

 

Washington, D.C. 20549 

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended June 30, 2022

   

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.)
2590 Walnut #6    
Denver, Colorado   80205
(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 ☒ 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 ☒ 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 ☒

  

At June 30, 2022 and August 15, 2022, 85,727,938 shares of common stock were outstanding, respectively. 

 

 

 

  
TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. FINANCIAL STATEMENTS:  
     
  CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2022 (UNAUDITED) AND DECEMBER 31, 2021 3
     
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2022 (UNAUDITED). 4
     
  CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED) 5
     
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED). 6
     
  NOTES TO THE UNAUDITED CONDENSEND CONSOLIDATED FINANCIAL STATEMENTS.  7
     
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
     
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
     
Item 4. CONTROLS AND PROCEDURES 36
     
PART II. OTHER INFORMATION   
   
Item 1. LEGAL PROCEEDINGS 38
     
Item 1A. RISK FACTORS 38
     
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 38
     
Item 3. DEFAULTS UPON SENIOR SECURITIES 38
     
Item 4.   MINE SAFETY DISCLOSURES 39
     
Item 5. OTHER INFORMATION 39
     
Item 6. EXHIBITS 40
   
SIGNATURES 41

 

2  

 

  

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AMERICAN CANNABIS COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS  

(UNAUDITED)

 

                 
    June 30,     December 31,  
    2022     2021  
ASSETS                
Current Assets                
Cash and Equivalents   $ 873,761     $ 670,423  
Accounts Receivable, Net     205,439       11,316  
Deposits     3,095       2,895  
Inventory     280,224       278,608  
Prepaid Expenses and Other Current Assets     106,053       51,353  
Total Current Assets     1,468,572       1,014,595  
                 
Property and Equipment - Net     351,270       375,832  
                 
Other Assets                
Intangible Assets, net amortization     708,979       745,937  
Goodwill     1,985,113       1,985,113  
Right of Use Assets - Operating Leases, net     256,730       95,722  
Long Term Deposits     38,347       6,000  
Total Other Assets     2,989,169       2,832,772  
TOTAL ASSETS   $ 4,809,011     $ 4,223,199  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities                
Accounts Payable   $ 509,669     $ 242,679  
Advances from Clients     1,389,766       111,892  
Accrued and Other Current Liabilities     167,949       161,718  
Stock payable     61,309       42,207  
Right of Use Liabilities, current     256,730       95,722  
Litigation Settlement, current     125,000       175,000  
Note payables, current     550,000       1,100,000  
Total Current Liabilities     3,060,423       1,929,218  
                 
LONG TERM LIABILITIES                
Litigation Settlement     93,750       175,000  
Right of Use Liabilities            
Total Long Term Liabilities     93,750       175,000  
TOTAL LIABILITIES     3,154,173       2,104,218  
                 
Shareholders’ Equity                
Preferred Stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively            
Common stock, $0.00001 par value; 500,000,000 shares authorized; 85,727,938 and 70,727,938 shares issued and outstanding at June 30, 2022 and December 31, 2021 , respectively     857       819  
Additional paid-in capital     11,794,476       11,565,679  
Accumulated deficit     (10,140,495 )     (9,447,517 )
Total Shareholders’ Equity     1,654,838       2,118,981  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 4,809,011     $ 4,223,199  

 

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

 

3  

 

  

AMERICAN CANNABIS COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(UNAUDITED)

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2022     20021     2022     2021  
Revenues                        
Consulting Services   $ 146,976       39,501     $ 242,048     $ 201,392  
Product & Equipment     4,360,689       273,401       4,673,834       437,489  
Cannabis Products     236,620       307,077       448,249       307,077  
Total Revenues     4,744,285       619,979       5,364,131       945,958  
                                 
Cost of Revenues                                
Cost of Consulting Services     31,515       6,006       47,922       26,706  
Cost of Products and Equipment     3,717,977       209,148       3,964,197       330,257  
Cost of Cannabis Products     354,157       146,074       543,828       146,074  
Total Cost of Revenues     4,103,649       361,228       4,555,947       503,037  
Gross Profit     640,636       258,751       808,184       442,921  
                                 
Operating Expenses                                
General and Administrative     741,418       535,641       1,333,738       870,569  
Selling and Marketing     48,425       61,006       101,527       127,743  
Stock Based Compensation Expense     34,274       13,027       65,309       28,690  
Total Operating Expenses     824,117       609,674       1,500,574       1,027,002  
Loss from Operations     (183,481 )     (350,923 )     (692,390 )     (584,081 )
                                 
Other Income (Expense)                                
Interest (expense)     (18,233 )     (18,629 )     (45,357 )     (18,810 )
Debt Forgiveness                       110,543  
Other income     30,911       900       44,769       1,799  
Total Other (Expense) Income     12,678       (17,729 )     (588 )     93,532  
Net Loss     (170,803 )     (368,652 )     (692,978 )     (490,549 )
Income Tax Expense                        
NET LOSS   $ (170,803 )   $ (368,652 )   $ (692,978 )   $ (490,549 )
Basic net loss per common share   $ (0 )   $ (0 )   $ (0.01 )   $ (0.01 )
Basic and diluted weighted average common shares outstanding     85,244,422       76,256,839       84,336,545       76,329,457  

 

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

4  

 

  

AMERICAN CANNABIS COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

 

                                                 
    Common Stock     Additional
Paid-In
    Subscription     Accumulated     Total
Shareholders’
 
    Shares     Amount     Capital     Receivable     Deficit     Equity  
Balance, March 31, 2021     76,377,938     $ 763     $ 10,632,985     $     $ (8,130,163 )   $ 2,503,585  
Stock issued for asset acquisition     3,000,000       30       689,970                   690,000  
Stock issued for cashless exercise     25,000                                
Shares issued cash     500,000       5       85,244                   85,249  
Net Loss                             (368,654 )     (368,654 )
Balance, June 30, 2021     79,902,938     $ 798     $ 11,408,199     $     $ (8,498,817 )   $ 2,910,180  

 

    Common Stock     Additional
Paid-In
    Subscription     Accumulated     Total
Shareholders’
 
    Shares     Amount     Capital     Receivable     Deficit     Equity  
Balance, March 31, 2022     84,727,938     $ 847     $ 11,729,486     $ (25,165 )   $ (9,969,692 )   $ 1,735,476  
Subscription Receivable Paid                       25,165             25,165  
Stock based compensation third party     1,000,000       10       64,990                   65,000  
Net Loss                             (170,803 )     (170,803 )
Balance, June 30, 2022     85,727,938     $ 857     $ 11,794,476     $     $ (10,140,495 )   $ 1,654,838  

 

    FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

 

    Common Stock     Additional
Paid-In
    Subscription     Accumulated     Total
Shareholders’
 
    Shares     Amount     Capital     Receivable     Deficit     Equity  
Balance, December 31, 2020     70,727,938     $ 707     $ 9,634,748     $     $ (8,008,268 )   $ 1,627,187  
Stock issued for asset acquisition     3,000,000       30       689,970                   690,000  
Stock issued for cashless exercise     125,000       1       (1 )                  
Shares issued cash     6,050,000       60       1,083,482                   1,083,542  
Net Loss                             (490,549 )     (490,549 )
Balance, June 30, 2021     79,902,938     $ 798     $ 11,408,199     $     $ (8,498,817 )   $ 2,910,180  

 

    Common Stock     Additional
Paid-In
    Subscription     Accumulated     Total
Shareholders’
 
    Shares     Amount     Capital     Receivable     Deficit     Equity  
Balance, December 31, 2021     81,902,938     $ 819     $ 11,565,679     $     $ (9,447,517 )   $ 2,118,981  
Stock based compensation to employees     325,000       3       46,204                   46,207  
Subscription Receivable Paid                       (25,651 )           (25,651 )
Stock based compensation to service provider     1,000,000       10       64,990                   65,000  
Stock issued for cash     2,500,000       25     117,603                   117,628  
Net Loss                             (692,978 )     (692,978 )
Balance, June 30, 2022     85,727,938     $ 857     $ 11,794,476     $     $ (10,140,495 )   $ 1,654,838  

 

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

 

5

 

 

AMERICAN CANNABIS COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

                 
    For the Six Months Ended  
    June 30,     June 30,  
    2022     2021  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net Loss   $ (692,978 )   $ (490,549 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     72,520       8,979  
Stock-based compensation to employees     65,306       28,692  
Stock-based compensation to service provider     13,542        
Debt Forgiveness           (109,914 )
Changes in operating assets and liabilities:                
Accounts receivable     (194,122 )     1,624  
Inventory     (1,616 )     (119,092 )
Prepaid expenses and other current assets     (3,444 )     26,230  
Right to Use Lease Asset     (161,008 )     (163,416 )
Long Term Deposits     (32,347 )      
Accounts Payable     266,991       251,314  
Advances from Clients     1,277,874       (25,396 )
Accrued and other current liabilities     6,231       87,124  
Litigation Settlement Liability     (131,250 )      
Operating Lease Liability     161,008       163,416  
Net Cash Provied by (Used In) Operating Activities   $ 646,707     $ (340,988 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     (1,122 )     (360,015 )
Acquisition of Assets           (1,100,000 )
Intangible assets     (9,876 )     (4,021 )
Net Cash Used in Investing Activities   $ (10,998 )   $ (1,464,036 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from sale of common stock     117,629       1,083,541  
Proceeds from note payable           130,186  
Payment of  note payable     (550,000 )      
Net Cash (Used) Provided by Financing Activities   $ (432,371 )   $ 1,083,541  
                 
NET INCREASE IN CASH     203,338       (721,483 )
                 
CASH AT BEGINNING OF PERIOD     670,423       1,723,132  
                 
CASH AT END OF PERIOD   $ 873,761     $ 1,131,833  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:                
Cash paid for income taxes   $     $  
Cash paid for interest   $     $  
NONCASH INVESTING AND FINANCING ACTIVITIES:                
Stock Based Compensation Third Party   $ 65,000     $  
Stock Issued for Receivables   $     $ 690,000  
Stock Issued for Acquisition   $     $ 1,100,000  

 

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

 

6

 

  

AMERICAN CANNABIS COMPANY, INC.  

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Note 1. Principles of Consolidation.

 

The unaudited condensed consolidated financial statements for the six and three months ended June 30, 2022 and 2021 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.

 

On April 30, 2021, the Company closed its acquisition of the assets of Medihemp, LLC, and its wholly owned subsidiary SLAM Enterprises, LLC, and Medical Cannabis Caregivers, Inc., each an entity organized and operating under the laws of the State of Colorado, and all doing business as “Naturaleaf” in the medicinal cannabis industry in Colorado.

 

Naturaleaf agreed to sell or assign to the Company the following assets:

 

  1. Three Medical Marijuana (MMC) Store Licenses;

 

  2. One Marijuana Infused Product Licenses (MIPS); and,

 

  3. One Option Premises Cultivation License (OPC); and,

 

  4. Related real property assets, goodwill, and related business assets.

 

The aggregate consideration paid for the Assets was $2,890,000, which consisted of (i) a cash payment of $1,100,000, (ii) the issuance of a promissory note to the owner of Naturaleaf in the principal amount of $1,100,000 (the “Seller Note”), and (iii) the issuance of 3,000,000 shares of the Company’s restricted common stock valued at $0.23 per share or $690,000. See Note 4.

 

Note 3. Summary of Significant Accounting Policies

 

Basis of Accounting

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the periods presented.

 

7

 

 

Unaudited Interim Financial Statements

 

The accompanying unaudited condensed 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 S-X. 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.

 

Going Concern

 

Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern ("ASC 205-40") requires management to assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. Under ASC 205-40, management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued.

 

Our assessment included the preparation of a detailed cash forecast that included all projected cash inflows and outflows. During 2021, we secured additional cash financings through the sales and issuances of our common stock through. However, we continue to focus on growing our revenues. Accordingly, operating expenditures may exceed the revenue we expect to receive for the foreseeable future. We, also, have a history of operating losses, negative operating cash flows, and negative working capital, and expect these trends to continue into the foreseeable future.

 

As of the date of this Quarterly Report on Form 10-q, while we believe we have adequate capital resources to complete our near-term operations, there is no guarantee that such capital resources will be sufficient until such time we reach profitability. We may access capital markets to fund strategic acquisitions or ongoing operations on terms we believe are favorable. The timing and amount of capital that may be raised is dependent on market conditions and the terms and conditions upon which investors would require to provide such capital. We may utilize debt or sell newly issued equity securities through public or private transactions.

 

8

 

There can be no assurance that we will be able to obtain additional funding on satisfactory terms or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet our capital needs and support our growth. If additional funding cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted; however, we have been successful in accessing capital markets in the past, and we are confident in our ability to access capital markets again, if needed.

 

The Company has an accumulated deficit, recurring losses, and expects continuing future losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s primary source of operating funds during the six months ended June 30, 2022 and the year ended December 31, 2021 has been from funds generated from proceeds from the sale of common stock and operations. The Company has experienced net losses from operations since its inception but expects these conditions to improve in 2022 and beyond as it develops its business model. The Company has an accumulated deficit at June 30, 2022 and requires additional financing to fund future operations.

 

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

The accompanying unaudited consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. 

  

9

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021  

(UNAUDITED)

 

Use of Estimates in Financial Reporting

 

The preparation of unaudited condensed consolidated financial statements in conformity with US 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 condensed consolidated financial statements during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period in which they are deemed to be necessary. Significant estimates made in the accompanying consolidated financial statements include but are not limited to following those related to revenue recognition, allowance for doubtful accounts and unbilled services, lives and recoverability of equipment and other long-lived assets, the allocation of the asset purchase price, contingencies, and litigation. The Company is subject to uncertainties, such as the impact of future events, economic, environmental, and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the unaudited consolidated financial statements.

 

10

 

 

AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

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 June 30, 2022 and December 31, 2021, 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 June 30, 2022, and December 31, 2021, the Company’s allowance for doubtful accounts was $69,415 and $69,415, respectively. The Company did not record a bad debt expense in either of the six or three months ended June 30, 2022 and 2021, respectively.

 

Deposits

 

Deposits is comprised of advance payments made to third parties, for rent, utilities, and inventory for which the Company has not yet taken title. When the Company takes title to inventory for which deposits are made, the related amount is classified as inventory, then recognized as a cost of revenues upon sale.

 

Inventory

 

Inventory is comprised of products and equipment owned by the Company to be sold to end-customers. The Company’s inventory as it relates to its soil products and equipment is valued at cost using the first-in first-out and specific identification methods, unless and until the market value for the inventory is lower than cost, in which case an allowance is established to reduce the valuation to net realizable value. As of June 30, 2022 and December 31, 2021, market values of all the Company’s inventory were greater than cost, and accordingly, no such valuation allowance was recognized.

 

Inventory also consists of pre-harvested cannabis plants and related end products. Inventory is valued at the lower of cost or net realizable value. Costs of inventory purchased from third party vendors for retail sales at dispensaries is determined using the first in first out method. Costs are capitalized to cultivated inventory until substantially ready for sale. Costs include direct and indirect labor, consumables, materials, packaging supplies, utilities, facilities costs, quality and testing costs, production related depreciation and other overhead costs. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items. The reserve estimate for excess and obsolete inventory is based on expected future use and on an assessment of market conditions. At June 30, 2022, the Company’s management determined that a reserve for excess and obsolete inventory was not necessary

  

11

 

AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets are primarily comprised of advance payments made to third parties for independent contractors’ services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate the life of the contract or service period.

 

Significant Clients and Customers

 

During the six months ended June 30, 2022, three customers accounted for 42.5% of the Company’s total revenues for the period.

 

During the six months ended June 30, 2021, three customers accounted for 42.5% 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. 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 June 30, 2022 and December 31, 2021.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC Topic 350, Intangibles-Goodwill and Other. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter. The Company recognized goodwill of $1,985,113 during the year ended December 31, 2021 as part of the Naturaleaf Acquisition.

 

The Company does not have any other indefinite-lived intangible assets. 

 

In accordance with FASB ASC 350, “Intangibles – Goodwill and Other,” we perform goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.

  

12

 

AMERICAN CANNABIS COMPANY, INC.  

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Intangible Assets, net

 

Definite life intangible assets at June 30, 2022 include licenses and brand names recognized as part of the Naturaleaf Acquisition. Intangible assets are record at cost. Licenses and brand names represent the estimated fair value of these items at the date of acquisition, April 30, 2021. Intangible assets are amortized on a straight-line basis over their estimated useful life. Licenses are assigned a life of 15 years and tradenames are assigned a life of 5 years. During the six months ended June 30, 2022, the Company recognized an amortization expense of $46,666.

 

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 June 30, 2022 and December 31, 2021.

 

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

 

We have adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606).

  

13

 

AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

FOR THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

 

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), (b) Equipment sales division, (c) Cannabis sales division. The majority of our revenue is derived from distinct performance obligations, such as time spent delivering a service or the delivery of a specific product.

 

We may also enter into contracts with customers that identify a single, or few, distinct performance obligations, but that also have non-distinct, underlying performance obligations. These contracts are typically fulfilled within one to six months. Only an insignificant portion of our revenue would be assessed for allocation between distinct (contractual) performance obligations and non-distinct deliverables between reporting periods and, accordingly, we do not record a contract asset for completed, non-distinct performance obligations prior to invoicing the customer.

 

We recognize revenue in accordance with ASC 606 using the following 5 steps to identify revenues:

 

  (1) Identify the contract with the Customer. Our customary practice is to obtain written evidence, typically in the form of a contract or purchase order.

 

  (2) Identify the performance obligations in the contract. We have rights to payment when services are completed in accordance with the underlying contract, or for the sale of goods when custody is transferred to our customers either upon delivery to our customers’ locations, with no right of return or further obligations.

 

  (3) Determination of the transaction price. Prices are typically fixed, and no price protections or variables are offered.

 

  (4) Allocation of the transaction price to the performance obligations in the contract. Transaction prices are typically allocated to the performance obligations outlined in the contract.
     
  (5) Recognize Revenue when (or as) the entity satisfies a performance obligation. We typically require a retainer for all or a portion of the goods or services to be delivered. We recognize revenue as the performance obligations detailed in the contract are met.

 

Advances from Clients deposits are contract liabilities with customers that represent our obligation to either transfer goods or services in the future, or refund the amount received. Where possible, we obtain retainers to lessen our risk of non-payment by our customers. Advances from Clients deposits are recognized as revenue as we meet specified performance obligations as detailed in the contract.

 

Product and Equipment Sales

 

Revenue from product and equipment sales, including delivery fees, is recognized when an order has been obtained from the customer, the price is fixed and determinable when the order is placed, the product is delivered, title has transferred, and collectability is reasonably assured. Generally, our suppliers’ drop-ship orders to our clients with destination terms. The Company realizes revenue upon delivery to the customer. Given the facts that (1) our customers exercise discretion in determining the timing of when they place their product order; and, (2) the price negotiated in our product sales contracts is fixed and determinable at the time the customer places the order, we are not of the opinion that our product sales indicate or involve any significant financing that would materially change the amount of revenue recognized under the contract, or would otherwise contain a significant financing component for us or the customer under FASB ASC Topic 606. During the six months ended June 30, 2022 and 2021, sales returns were $0.

 

14

 

AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

FOR THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

 

Consulting Services

 

We also generate revenues from professional services consulting agreements. These arrangements are generally entered into: (1) on an hourly basis for a fixed fee; or (2) on a contingent fee basis. Generally, we require a complete or partial prepayment or retainer prior to performing services. For hourly based fixed fee service contracts, we utilize and rely upon the proportional performance method, which recognizes revenue as services are completed. Under this method, in order to determine the amount of revenue to be recognized, we calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. We segregate upon entry into a contract any advances or retainers received from clients for fixed fee hourly services into a separate “Advances from Clients” account, and only recognize revenues as we incur and charge billable hours, and then deposit the funds earned into our operating account. Because our hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing, that would materially change the amount of revenue we recognize under the contract or would otherwise contain a significant financing component under FASB ASC Topic 606.

 

Occasionally, our fixed-fee hourly engagements are recognized under the completed performance method. Some fixed fee arrangements are for completion of a final deliverable or act which is significant to the arrangement. These engagements do not generally exceed a one-year term. If the performance is for a final deliverable or act, we recognize revenue under the completed performance method, in which revenue is recognized once the final act or deliverable is performed or delivered for a fixed fee. Revenue recognition is affected by a number of factors that change the estimated amount of work required to complete the deliverable, such as changes in scope, timing, awaiting notification of license award from local government, and the level of client involvement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. FASB ASC Topic 606 provides a practical expedient to disregard the effects of a financing component if the period between payment and performance is one year or less. As our fixed fee hourly engagements do not exceed one year, no significant customer-based financing is implicated under FASB ASC Topic 606. During the six months ended June 30, 2022 and 2021, we incurred no losses from fixed fee engagements that terminate prior to completion. We believe if an engagement terminates prior to completion, we can recover the costs incurred related to the services provided.

 

We primarily enter into arrangements for which fixed and determinable revenues are contingent and agreed upon achieving a pre-determined deliverable or future outcome. Any contingent revenue for these arrangements is not recognized until the contingency is resolved and collectability is reasonably assured.

 

Our arrangements with clients may include terms to deliver multiple services or deliverables. These contracts specifically identify the services to be provided with the corresponding deliverable. The value for each deliverable is determined based on the prices charged when each element is sold separately or by other vendor-specific objective evidence (“VSOE”) or estimates of stand-alone selling prices. Revenues are recognized in accordance with our accounting policies for the elements as described above (see Product Sales). The elements qualify for separation when the deliverables have value on a stand-alone basis and the value of the separate elements can be established by VSOE or an estimated selling price.

 

While assigning values and identifying separate elements requires judgment, selling prices of the separate elements are generally readily identifiable as fixed and determinable as we also sell those elements individually outside of a multiple services engagement. Contracts with multiple elements typically incorporate a fixed-fee or hourly pricing structure. Arrangements are typically terminable by either party upon sufficient notice or do not include provisions for refunds relating to services provided.

 

Reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included as a component of revenues. Typically, an equivalent amount of reimbursable expenses is included in total direct client service costs. Reimbursable expenses related to time and materials and fixed-fee engagements are recognized as revenue in the period in which the expense is incurred and collectability is reasonably assured. Taxes collected from customers and remitted to governmental authorities are recognized as liabilities and paid to the appropriate government entities.

  

15

 

   

 AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Cannabis Sales

 

Revenues consist of the retail sale of cannabis and related products. Revenue is recognized at the point of sale for retail customers. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. Sales discounts were not material during the six months ended June 30 2022.

 

Loyalty Reward Program

 

The Company offers a loyalty reward program to its dispensary customers that provides a discount on purchases based upon the total amount of a purchase, at the time of purchase. Management has determined that as there is no separate performance obligation to the reward program, i.e., the accumulation and redemption of points, and as such the Company recognizes the revenue at the time of purchase.

 

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 six months ended Jun 30, 2022 and 2021 these expenses were $30,930 and $33,238, 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 six months ended June 30, 2022 and 2021, stock-based compensation expense for restricted shares for Company employees was $65,310 and $28,690, respectively.

 

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 six months ended June 30, 2022 and 2021, our research and development costs were de minimis.

  

16

 

 

AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Income Taxes

 

The Company’s corporate status changed from an S Corporation, which it had been since inception, to a C Corporation during the year ended December 31, 2014. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes, S Corporations are not subject to corporate income taxes; instead, the owners are taxed on their proportionate share of the S Corporation’s taxable income. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. For the year ended December 31, 2021, 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 June 30, 2022 and December 31, 2021, we had no liabilities related to federal or state income taxes and the carrying value of our deferred tax asset was zero.

 

Due to its cannabis operations, the Company is subject to the limitations of Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

Net Loss Per Common Share

 

The Company reports net loss per common share in accordance with FASB ASC 260, “Earnings per Share”. This statement requires dual presentation of basic and diluted earnings with a reconciliation of the numerator and denominator of the earnings per share computations. Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share is equal to basic earnings per share because there are no potential dilatable instruments that would have an anti-dilutive effect on earnings. Diluted net loss per share gives effect to any dilutive potential common stock outstanding during the period. The computation does not assume conversion, exercise or contingent exercise of securities since that would have an anti-dilutive effect on earnings.

 

Related Party Transactions

 

The Company follows FASB ASC subtopic 850-10, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.

 

Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

  

17

 

 

AMERICAN CANNABIS COMPANY, INC.  

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Impact of COVID-19 Pandemic

 

On March 11, 2020the World Health Organization declared the current coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures had a significant adverse impact upon many sectors of the economy, including retail commerce.

 

In response to state and local measures and for protection of both employees, the Company made required changes to operations, which did not have a material impact upon operations or the financial condition of the Company.

 

While the state and local governments have eased restrictions on restrictions and activities, it is possible that a resurgence in COVID-19 cases could prompt a return to or new tighter restrictions to be instituted in the future. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of these unaudited condensed consolidated financial statements.

 

Recent Accounting Pronouncements

 

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.

  

18

 

AMERICAN CANNABIS COMPANY, INC. 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 

(UNAUDITED)

 

Note 4. Naturaleaf Asset Acquisition

 

On April 30, 2021, the Company closed its acquisition of the assets of Medihemp, LLC, and its wholly owned subsidiary SLAM Enterprises, LLC, and Medical Cannabis Caregivers, Inc., each an entity organized and operating under the laws of the State of Colorado, and all doing business as “Naturaleaf” in the medicinal cannabis industry in Colorado.

 

Naturaleaf agreed to sell or assign to the Company the following assets:

 

  1. Three Medical Marijuana (MMC) Store Licenses;

 

  2. One Marijuana Infused Product Licenses (MIPS); and,

 

  3. One Option Premises Cultivation License (OPC); and,

 

  4. Related real property assets, goodwill, and related business assets.

 

The aggregate consideration paid for the Assets was $2,890,000, which consisted of (i) a cash payment of $1,100,000, (ii) the issuance of a promissory note to the owner of Naturaleaf in the principal amount of $1,100,000 (the “Seller Note”), and (iii) the issuance of 3,000,000 shares of the Company’s restricted common stock valued at $0.23 per share or $690,000.

 

The asset acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of Medihemp LLC and Medical Cannabis Caregivers, Inc.’s (hereafter “Naturaleaf’s”) assets acquired and conformed the accounting policies of Naturaleaf to its own accounting policies. The Company expenses certain legal, auditing and licensing costs with the acquisition of $83,095. 

 

As part of the acquisition, the owners of Naturaleaf retained the outstanding cash balance on the date of the acquisition and had agreed to the payment of all outstanding accounts payables and related party advances.

 

The Company has performed a valuation analysis of the fair market value of Naturaleaf’s assets. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:

 

       
Cash   $  
Inventory     72,172  
Property, plant and equipment     26,715  
Long Term Deposits     6,000  
Identifiable intangible assets     800,000  
Goodwill     1,985,113  
Accounts payable      
Total consideration   $ 2,890,000  

 

Goodwill from the acquisition primarily relates to the future economic benefits arising from the assets acquired, the assembled workforce acquired and synergies between the cultivation and retail operations and is consistent with the Company’s stated intentions and strategy. Other assets include inventory and fixed assets.

 

19

 

The fair value of Naturaleaf’s identifiable intangible assets was $800,000 at April 30, 2021, consisting of $500,000 in licenses and $300,000 in brand names. During the six months ended June 30, 2022, the Company recognized an amortization expense of $46,666.

20

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022, AND 2021

(UNAUDITED)

 

Note 5. Accounts Receivable and Advance from Clients    

 

Accounts receivable was comprised of the following:

 

               
    June 30,
2022
    December 31,
2021
 
Accounts Receivable – Trade   $ 274,854     $ 93,856  
Less:  Allowance for Doubtful Accounts     (69,415 )     (82,540 )
Accounts Receivable, net   $ 205,439     $ 11,316  

 

The Company had bad debt expense during the six months ended June 30, 2022 and 2021 of $0, respectively.

21

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

 

Our Advances from Clients had the following activity:

             
    June 30,
2022
    December 31,
2021
 
Beginning Balance   $ 111,892     $ 88,843  
  Additional deposits received     6,207,877       404,143  
  Less: Deposits recognized as revenue     (4,930,003 )     (381,094 )
Ending Balance   $ 1,389,766     $ 111,892  

 

Note 6. Inventory

 

Inventory consisted of the following:

 

               
    June 30,
2022
    December 31,
2021
 
Raw Materials - Soil   $ 46,778     $ 60,900  
Work In Process - Cultivation     159,180       136,266  
Finished Goods - Soil     53,896       58,594  
Finished Goods - Cannabis Retail     20,370       22,848  
Total Inventory   $ 280,224     $ 278,608  

 

Note 7. Property and Equipment, net

 

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

 

               
    June 30,
2022
    December 31,
2021
 
Office equipment   $ 43,398     $ 39,574  
Software     13,204       13,204  
Furniture and Fixtures     2,328       2,328  
Machinery and Equipment     376,745       376,745  
Property and equipment, gross   $ 436,675     $ 431,851  
Less: Accumulated Depreciation     (84,405 )     (56,019 )
Property and equipment, net   $ 351,270     $ 375,832  

 

During the six months ended June 30, 2022, the Company purchased $4,824 in office equipment. 

22

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

 

Note 8. Intangibles Assets, Net

 

A significant amount of the Company’s current identified intangible assets were assumed upon consummation of the Naturaleaf acquisition on April 30, 2021. The Company has incurred capitalizable costs in connection with patent applications that it started work on. Identified intangible assets consisted of the following at the dates indicated below: 

 

 Schedule of Identified intangible assets                        
    June 30, 2022  
    Gross
carrying
amount
    Accumulated
amortization
    Carrying
value
    Estimated
useful
life
 
Licenses   $ 500,000     ($ 38,889 )   $ 461,111       15 years  
Brand   $ 300,000     ($ 70,000 )   $ 230,000       5 years  
Patent Applications   $ 17,868           $ 17,868        
Total intangible assets, net   $ 817,868     ($ 108,889 )   $ 708,979          

 

    December 31, 2021  
    Gross
carrying
amount
    Accumulated
amortization
    Carrying
value
    Estimated
useful
life
 
Licenses   $ 500,000     ($ 22,223 )   $ 477,777       15 years  
Brand   $ 300,000     ($ 40,000 )   $ 260,000       5 years  
Patent Applications   $ 8,160           $ 8,160        
Total intangible assets, net   $ 808,160     ($ 62,223 )   $ 745,937          

 

The weighted-average amortization period for intangible assets we acquired during the year ended December 31, 2021 was approximately 11.47  years. There were no intangible assets acquired during the six months ended June 30, 2022.

 

Amortization expense for intangible assets was $46,666 and $0 for the six months ended June 30, 2022 and 2021, respectively. Total estimated amortization expense for our intangible assets for the years 2022 through 2026 is as follows:

           
       

Year Ended  

December 31,

       
2022     $ 46,666  
2023     $ 93,333  
2024     $ 93,333  
2025     $ 93,333  
2026     $ 53,333  
Thereafter     $ 311,113  
TOTAL     $ 691,111  

 

23

 

Note 9. Accrued and Other Current Liabilities

 

Accrued and other current liabilities consisted of the following:

               
             
    June 30,
2022
    December 31,
2022
 
Accrued Interest   $ 9,493     $ 74,137  
Accrued Payroll     58,600       18,428  
Sales Tax Payable     5,648       592  
Other Accrued Expenses & Payables     94,208       68,561  
Accrued and other current liabilities   $ 167,949     $ 161,718  

 

  

Note 10. Operating Lease Right-of-Use Asset/Operating Lease Liability

 

The Company leases property under operating leases. Property leases include retail and cultivation space with fixed rent payments and lease terms ranging from one to two years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the lease asset or lease liability. These expenses are recognized as variable rent expense when incurred.

 

The Company’s lease portfolio consists of the following.

 

                   
Lease Name   Asset Type   Start Date   Expiration Date   Monthly Rent  
Durango Lease   Real Property   5/1/2021   5/31/2022   $ 10,200  
Lehman Lease   Real Property   5/1/2021   12/31/2022   $ 2,732  
Palmer Lease   Real Property   7/1/2022   6/30/2023   $ 5,000  
Greenspace Membership   Real Property   1/1/2022   6/30/2022   $ 1,000  
Tejon Lease   Real Property   5/1/2022   4/30/2027   $ 3,875  

 

24

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

 

On June 1, 2021 Company entered into an 8 1/2 month lease with Greenspace, LLC for an amount of $1,159 per month. In January 2022, we determined under ASC 842, due to the short-term nature of the lease that the lease membership agreement met the criteria of ASC 842-20-25-2 and as such it was not necessary to capitalize the lease and rent will be recognized on a monthly straight-line basis. The membership agreement expired on June 30, 2022.

 

On May 1, 2020, as part of the Naturaleaf Acquisition, leases for grow facilities and dispensaries were assigned to the Company. These leases were determined to be operating leases under ASC 842 and such leases was capitalized. It was determined that the Tejon lease, due to the short-term nature of the lease met the criteria of ASC 842-20-25-2 and as such it was not necessary to capitalize the lease and rent would be recognized on a straight-line basis.

 

On April 30, 2022, the Tejon Lease expired and the Company entered into a new lease for the space with a 5 year term. The new lease was determined to be an operating lease under ASC 842 and as such the lease has been capitalized.

 

On May 31, 2022, the Durango Lease expired. The Company has not entered into a new lease with the landlord and has lapsed into month-to-month payments, while it looks for a new location for this facility in Colorado Springs, CO. It was determined that due to the short-term nature of the lease met the criteria of ASC 842-20-25-2 and as such it was not necessary to capitalize the lease and rent would be recognized on a straight-line basis.

 

The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2022 was 12.5%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection is considered probable. As a result, the Company been recognizing rents as they become payable.

 

As of June 30, 2022, the aggregate remaining annual lease payments of operating leases liabilities are as follows: 

 

       
    Operating
Leases
 
2022   40,709  
Thereafter     143,429  
Total     184,138  
Less: amount representing interest     (57,928 )
Present value of future minimum lease payments     126,210  
Less: current obligations under leases     40,709  
Long-term lease obligations   $ 85,501  

   

As of June 30, 2022, the aggregate remaining minimal annual lease payments under these operating leases were as follows: 

 

           
2022       62,384  
2023       77,200  
2024       49,300  
2025       51,400  
2026       53,500  
2027       36,600  
Total     $ 330,384  

  

25

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

 

Note 11. Loans Payable 

 

Naturaleaf Seller Note

 

As part of the Naturaleaf Acquisition, the Company issued a promissory note to the owner of Naturaleaf in the principal amount of $1,100,000 (the “Seller Note”). The note originally had a term of 1 year with a due date of April 30, 2022 and did not require any payments prior to the due date. The note had an annual interest rate of 10%. On April 30, 2022, the Company entered into an Amendment to the Asset Purchase Agreement to amend the Seller Note as follows, that the due date of the Note would be extended to April 30, 2023. That interest will accrue on the outstanding principal at a rate of 12.5%. In addition, the Company agreed to pay all accrued interest at April 30, 2021 and make a principal payment of $500,000. On April 29, 2022, principal in the amount of $550,000 and accrued interest of $110,000 were paid. At June 30, 2022, principal in the amount of $550,000 was outstanding and interest of $9,493 had been accrued.

 

Note 12. Related Party Transactions

 

The Company has a related party entity, Tabular Investments, LLC (“Tabular”) which was set to assign the Company’s interest in various equity partnership. The sole member of Tabular is Tad Mailander, the Company’s outside legal counsel and Director. The Company has valued all of its equity partnership investments at $0. Neither our direct equity ownership in, nor our assignments of equity to Tabular Investments, LLC are, or are reasonably likely to allow for, substantive terms, transactions, and arrangements, whether contractual or not contractual, that will have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We have no direct or indirect majority influence or control over any entity in which we have a direct equity interest or equity interests assigned to Tabular. We do not have any direct or indirect interest in, and do not control Tabular. We have not absorbed losses from either our direct equity interests or assignments to Tabular, and we have provided no subordinated financial support to any project

26

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

 

Note 13. Stock Based Compensation

 

During the six months ended June 30, 2022, the Company issued stock-based compensation for employees and service providers pursuant to its 2015 Equity Incentive Plan.

 

Restricted Shares Compensation

 

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. The shares are not issued until the completion of the employee’s contract year or earlier in case of resignation and as such the Company has also accrued the expense until such time the stock is issued.

 

During the six months ended June 30, 2022, the Company granted 830,616 restricted shares of its common stock and recognized $61,309    in associated employee stock-based compensation expense. The fair value of restricted stock unit is determined based on the quoted closing price of the Company’s common stock on the date grant.

 

During the six months ended June 30, 2021, the Company granted 135,616 shares and recognized $28,690 in   associated employee stock-based compensation expense. The fair value of the restricted stock is determined based on the quoted closing price of the Company’s common stock on the date of grant.

 

27

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

 

   

 

Note 14. Shareholders’ Equity

 

Preferred Stock

 

American Cannabis Company, Inc. is authorized to issue 5,000,000 shares of preferred stock at $0.01 par value. No shares of preferred stock were issued and outstanding at June 30, 2022 and December 31, 2021, respectively.

 

Common Stock

 

During the six months ended June 30, 2022, the Company issued 1,000,000 restricted shares of common stock valued at $65,000 to a third party for consulting services over the next 12 months. The Company has recognized $13,542 in consulting expense during the six months ended June 30, 2022.

 

During the six months ended June 30, 2022 , the Company issued 325,000 restricted shares valued at $46,207 granted during the fiscal year ended December 31, 2021.

 

During the six months ended June 30, 2022 the Company issued 2,500,000 registered shares of common stock in exchange for net proceeds of $117,628 pursuant to the Common Stock Purchase Agreement entered into on October 11, 2019 with White Lion Capital LLC.

 

Subscription Receivable

 

On March 28, 2022, the Company issued 500,000 registered shares of its common stock in exchange for net proceeds of $25,165 pursuant to the Common Stock Purchase Agreement entered into on October 11, 2019 with White Lion Capital LLC. At March 31, 2022, the Company had not received the funds and as such recognized a subscription receivable in connection with the funds owed. The funds were paid to the Company on April 9, 2022.

 

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. At June 30, 2022, the Company did not have any warrants or options issued and outstanding.

 

Note 15. Commitments and Contingencies

 

Legal

 

In the ordinary course of its business, the Company becomes involved in various legal proceedings involving a variety of matters. The Company does not believe there are any pending legal proceedings that will have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Companies expenses legal fees in the period in which they are incurred.

28

 

AMERICAN CANNABIS COMPANY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 and 2021

(UNAUDITED)

 

Employment Litigation

 

On November 15, 2019, a civil action was filed against the Company and Mr. Terry Buffalo, our former chief executive officer and director, and Mr. Ellis Smith our chief development officer and director, in Denver County District Court, Case Number 2019CV034380. The complaint sought a declaratory judgement and damages related to Plaintiff’s allegation that she was misclassified as an independent contractor while working for the Company. Plaintiff alleged she was owed unpaid overtime, liquidated damages, wages, statutory penalties and other compensatory damages for her misclassification and alleged wrongful termination. Plaintiff’s suit against Mr. Buffalo and Mr. Smith alleges that each were the alter ego of the Company and are therefore jointly and severally liable. The Company filed a counterclaim against Plaintiff alleging misappropriation of trade secrets, breach of contract, and other claims relating to her theft of confidential and proprietary information. A Settlement Agreement was entered into by all parties in January 2022. 

 

The Settlement Agreement provides for a cash settlement of $350,000 to be paid over a 2 year period and as a result at December 31, 2021, the Company has recognized a total of liability of $350,000. During the six months ended June 30, 2022, the Company paid $131,250. At June 30, 2022, of which $218,750 is outstanding of which $125,000 is classified as current.

 

Note 16. Subsequent Events

 

In accordance with ASC 855-10, the Company has analyzed its operations after unaudited consolidated financial statements were available to be issued and has determined that there were no other significant subsequent events or transactions that would require recognition or disclosure in the unaudited condensed consolidated financial statements for the six months ended June 30, 2022, and did not find any events.

 

29

 

  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.

 

Government Regulation

 

Currently, there are thirty-six states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. There are currently sixteen states and the District of Columbia that allow recreational use of cannabis. As of June 30, 2022, the policy and regulations of the Federal Government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of state law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers of the Company’s medicinal cannabis products to invest in or buy products. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company.

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated 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, 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 OTCQB Tier under the symbol “AMMJ”.

 

Naturaleaf Acquisition

 

On April 30, 2021, the Company closed its acquisition of the assets of Medihemp, LLC, and its wholly owned subsidiary SLAM Enterprises, LLC, and Medical Cannabis Caregivers, Inc., each an entity organized and operating under the laws of the State of Colorado, and all doing business as “Naturaleaf” in the medicinal cannabis industry in Colorado.

30

 

Medihemp and SLAM, respectively own fixed assets and operate two retail Medical Marijuana Centers located in Colorado Springs, Colorado. Medical Cannabis owns fixed assets and operates a retail Medical Marijuana Center located in Colorado Springs, Colorado. Medical Cannabis also owns and operates a Medical Marijuana Optional Premises Cultivation license, and a Medical Marijuana-Infused Product Manufacturer license.

31

 

 

Naturaleaf agreed to sell or assign to the Company the following assets:

 

  1. Three Medical Marijuana (MMC) Store Licenses;

 

  2. One Marijuana Infused Product Licenses (MIPS); and,

 

  3. One Option Premises Cultivation License (OPC); and,

 

  4. Related real property assets, goodwill, and related business assets.

 

As a result, the Company has expanded its business model to include the cultivation and retail sale of cannabis in the medicinal cannabis industry.

 

RESULTS OF OPERATIONS

 

AMERICAN CANNABIS COMPANY, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS   

 

    For the Six Months Ended        
    June 30,     June 30,     Increase  
    2022     2021     (Decrease)  
Revenues                  
Consulting Services   $ 242,048     $ 201,392       40,656  
Product & Equipment     4,673,834       437,489       4,236,344  
Cannabis Products     448,249       307,077       141,172  
Total Revenues     5,364,131       945,958       4,418,173  
                       
Cost of Revenues                      
Cost of Consulting Services     47,922       26,706       21,216  
Cost of Products and Equipment     3,964,197       330,257       3,633,940  
Cost of Cannabis Products     543,828       146,074       397,754  
Total Cost of Revenues     4,555,947       503,037       4,052,910  
Gross Profit     808,184       442,921       365,263  
                       
Operating Expenses                      
General and Administrative     1,333,738       870,569       463,169  
Selling and Marketing     101,527       127,743       (26,216 )
Stock Based Compensation Expense     65,309       28,690       36,619  
Total Operating Expenses     1,500,574       1,027,002       473,572  
Loss from Operations     (692,390 )     (584,081 )     (108,309 )
                       
Other Income (Expense)                      
Interest (expense)     (45,356 )     (18,810 )     (26,546 )
Debt Forgiveness           110,543       (110,543 )
Other income     44,769       1,799       42,970  
Total Other (Expense) Income     (587 )     93,532       (94,120 )
Net Loss     (692,978 )     (490,549 )     (202,429 )
Income Tax Expense                  
NET LOSS   $ (692,978 )   $ (490,549 )     (202,429 )

 

32

 

 

Revenues

 

Total revenues were $5,364,131 for the six months ended June 30, 2022 as compared to $945,958 for the six months ended June 30, 2021. The increases in total revenue of $4,236,344 for the six months ended June 30, 2022, represents an increase of $40,656 in consulting revenue, an increase of $4,236,345 in equipment sales and the revenue stream from the sale of cannabis products of $141,172.

 

Total revenues were $4,744,286 for the three months ended June 30, 2022 as compared to $619,979 for the three months ended June 30, 2021. The increases in total revenue of $4,124,307 for the three months ended June 30, 2022, represents an increase of $107,478 in consulting revenue, an increase of $4,087,288 in equipment sales and were offset by a decrease in the revenue stream from the sale of cannabis products of $70,457.

 

Costs of Revenues

 

Costs of revenues primarily consists of labor, travel, cost of equipment and other costs directly attributable to providing equipment, soil and cannabis products. Costs of revenues related to our cannabis products include cultivation costs, including labor, utilities, supplies and cultivation facility rent. During the six months ended June 30, 2022, our total costs of revenues were $4,555,947 compared to $503,037 for the six months ended June 30, 2021. The increase of $4,052,910 in cost of revenues was a direct result of increases costs associated with equipment sales.

 

During the three months ended June 30, 2022, our total costs of revenues were $4,103,649 compared to $361,228 for the three months ended June 30, 2021. The increase of $4,372,421 in cost of revenues was a direct result of increases costs associated with equipment sales.

 

Consulting Services

 

Consulting service revenues during the six months ended June 30, 2022 were $242,048 versus $201,392 for the six months ended June 30, 2021 and $145,976 and $39,501 for the three months ended June 30, 2022 and 2021, respectively. Increases in consulting services is a result of the type of projects worked on in first quarter compared to the projects the second quarter 2021. Projects over 2021 were focused on providing assistance with licensing and providing proforma and design services. The first six months of 2022 saw an increase in projects that were the oversight and management of projects that involving the implementation of design work provided for certain clients. As a result, while consulting services sales decreased over the prior period, we did see a significant increase in sales of equipment over the prior period as these activities increased as the result of the implementation of design work.

 

Costs of Services were $47,922 compared to $26,706 for the six months ended June 30, 2022 and 2021 and $31,515 and $6,006 during the three months ended June 30, 2022 and 2021. Costs associated with consulting services increased as a result of the increase in payroll expenses that are allocated to cost of services.

 

 Soil Product and Equipment Revenues

 

Our product and equipment revenues for the six months ended June 30, 2022 were $4,673,834 versus $437,489 for the six months ended June 30, 2021 and $4,360,689 and $273,401 for the three months ended June 30, 2022 and 2021, respectively. Soil product sales decreased to $302,411 from $376,601 during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Equipment sales increased to $4,323,740 from $41,113 during the six months ended June 30, 2021. During the six months ended June 30, 2022, the Company has entered into consulting projects that are focused to the construction of or improvement of cultivation facilities. This has resulted and the Company anticipates seeing greater activity in equipment sales.

 

Costs of Products and Equipment were $3,964,197 and $330,257, during the six months ended June 30, 2022 and 2021. Costs associated with products and equipment increased as a result of the increase in equipment sales.

 

33

 

 

Cannabis Product Revenues

 

Cannabis product revenues during the six months ended June 30, 2022 were $448,249 compared to $307,007 during the six months ended June 30, 2022. The Company acquired the assets of Naturaleaf on April 30, 2021 and only began recognizing revenues from these operations on May 1, 2021. A decrease of $141,142 was seen due to a general decrease in demand as economic conditions have seen an erosion in prices of cannabis in the last nine months in Colorado.

 

Costs associated with cannabis products consists of those costs incurred in the cultivation of the plants and the retail sale of the products. During the six months ended June 30,, 2022 such costs were $543,829 compared to $146,047 during the six months ended June 30, 2022, the increase is a result of increased production combined with increases in certain costs such labor..

 

Gross Profit

 

Total gross profit was $808,184 for the six months ended June 30, 2022 and $640,637 for the three months ended June 30, 2022. Total gross profit was $442,921 for the six months ended June 30, 2021 and $258,571 for the three months ended June 30, 2021.,. The increase in the gross profit for the period in product and equipment relates to the increase in sales of equipment during the six months ended June 30, 2022.

 

Operating Expenses

 

Total operating expenses were $1,500,574, for the six months ended June 30, 2022, and $1,027,022 for the six months ended June 30, 2022. The increase in operating expenses is attributed to increases in labor and rent expenses associated with the introduction of the Naturaleaf operations on April 30, 2021. The Company has seen additional increases in depreciation and amortization expenses andrent expenses with the re-negotiation of leases during the three months ended June 30, 2022.

 

34

 

 

Other Income (Expense)

 

Other income (expense) for the six months ended June 30, 2022 was $(587) as compared with $93,532 for the six months ended June 30, 2021. The increase is a direct result of the forgiveness of the Company’s then outstanding PPP loan by the Small Business Administration offset by increases in interest expenses resulting from the promissory note issued in connection with the asset acquisition from Naturaleaf.

 

Net Loss

 

Net loss for the six months ended June 30, 2022 was ($692,978) as compared to a net loss of ($490,549) for the six months ended June 30, 2021.

 

Net loss for the three months ended June 30, 2022 was ($170,803) as compared to a net loss of ($368,652) for the three months ended June 30, 2021.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2022, our primary internal sources of liquidity were our working capital, which included cash and cash equivalents of $873,761 and accounts receivable of $205,438. Both are a result of the increase in our equipment sales activity. Additionally, considering that our fixed overhead costs have increased over the last year, management has instigated and continues to investigate opportunities for financing to support operations and growth. Management believes this strategy will adequately provide the necessary liquidity and capital resources to fund our operational and general and administrative expenses for at least the next 12 months.

 

During the six months ended June 30, 2022, the Company issued 2,500,000 registered shares of common stock in exchange for net proceeds of $117,629 pursuant to the Common Stock Purchase Agreement entered into on October 11, 2019 with White Lion Capital LLC. The Company has registered 34,000,000 million shares of its common stock to sell to White Lion Capital, LLC on as needed basis for funds to support operational activities.

 

Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2022 was $646,709, compared to net cash used by operating activities of ($340,988), for the six months ended June 30, 2021. Decreases in cash used were a result of the increase in accounts receivable by increases in accounts payable and advances from clients . All a direct result of the increased activities in equipment sales.

 

During the six months ended June 30, 2022, the Company has entered into consulting projects that are focused to the construction of or improvement of cultivation facilities. This has resulted in and the Company anticipates seeing greater activity in equipment sales and therefor will see significant changes in Advances from Clients and other associated balance sheet accounts, such as prepaid expenses, accounts receivable and accounts payable. In the case of equipment sales, the Company purchases the required equipment from 3rd party suppliers. Purchases of equipment are not made, until the Client has approved the estimates, been invoiced for the purchases and paid the invoice for the purchases. The Company will not recognize these revenues until the equipment has been delivered to and received by the client.

 

Investing Activities

 

For the six months ended June 30, 2022 and 2021, investing activities were a use of cash of ($10,998) and ($1,464,036) respectively. These funds were used in the purchase of office equipment of $1,122 and increased spending on patent applications of $9,876 during the six months ended June 30, 2022. During the six months ended June 30, 2021, funds were used in the purchase of the Naturaleaf assets of $1,100,000.

 

Financing Activities

 

During the six months ended June 30, 2022 proceeds used in financing activities was $432,371 and received from investing activities were $1,083,186 for the six months ended June 30, 2021. Funds received during the six months ended June 30, 2022 were from sales of the Company’s registered common stock. During the six months ended June 30, 2022, the Company paid down the Naturaleaf note payable. 

 

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Off Balance Sheet Arrangements

 

As of June 30, 2022 and December 31, 2021, 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 EBITDA, a Non-GAAP metric, to monitor our overall business performance. We define Adjusted EBITDA 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 EBITDA 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:

 

    Six Months     Six Months  
    Ended June 30, 2022     Ended June 30, 2021  
             
Adjusted EBITDA reconciliation:                
Net loss   $ (692,978 )   $ (490,549 )
Depreciation and Amortization     72,520       7,095  
Interest Expense     45,356        
Stock-based compensation for services     13,542        
Stock-based compensation to employees     65,309       24,162  
Adjusted EBITDA   $ (496,251 )   $ (248,053 )

 

ITEM 3. 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/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/Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022, 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. 

 

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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.

 

  we have 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.

 

Our management assessed the effectiveness of internal control over financial reporting as of March 31, 2022.  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 June 30, 2022. 

 

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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.

 

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On November 15, 2019, Erin Turoff  filed suit against the Company and Mr. Terry Buffalo, our former principal executive officer, principal financial officer and director, and Mr. Ellis Smith, our current principal executive officer and principal financial officer and director, in Denver County District Court under case number 2019CV034380. The complaint sought a declaratory judgment and damages relating to Plaintiff’s allegations that while working with the Company, she was misclassified as an independent contractor when she was allegedly an employee of the Company. Plaintiff alleged she is owed unpaid overtime, liquidated damages, wages, and other compensatory damages for her misclassification and alleged wrongful termination. Plaintiff’s suit against Mr. Buffalo and Mr. Smith personally alleged that each are the alter ego of the Company and are therefore jointly and severally liable. The Company filed a cross complaint against Plaintiff for theft of trade secrets and other tort theories. On January 24, 2022, without admitting or denying the claims and counterclaims of the parties, the parties entered into a settlement agreement and mutual release of their respective claims. In exchange for the release and dismissal of the action with prejudice, the Company, and separately Messrs. Buffalo and Smith jointly and severally, agreed to pay Plaintiff a total of $350,000 in a structured settlement consisting of an initial payment of $100,000, and monthly payments of $6,250 for 24 months, with a second lump sum payment of $50,000 due on or before the anniversary of the initial payment, and a final $50,000 payment due on or before January 24, 2023. On February 17, 2022, the parties moved the court for joint dismissal of the principal case and cross complaints. The court dismissed the case on February 18, 2022. The Company has made all payments consistent with the settlement agreement as of the date of this filing.  

 

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

 

During the six months ended June 30, 2022, the Company issued 325,000 shares of its restricted common stock to officers and directors as stock compensation earned during the year ended December 31, 2021.

 

During the six months ended June 30, 2022, the Company issued 1,000,000 shares of its restricted common stock to a third party consultant for services.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

No senior securities were issued and outstanding during the three months ended March 31, 2022 and 2021.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

39

 

 

ITEM 6. EXHIBITS

 

This list is intended to constitute the exhibit index.

 

31.1 Certification of Principal Executive & 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 & Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes0Oxley 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.

 

40

 

 

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: August 22, 2022

 

By:   /s/ Ellis Smith  

 

Ellis Smith, 

Chief Executive Officer & Chief Financial Officer

 

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