AMERICAN CANNABIS COMPANY, INC. 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
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in
Background
NATURALEAF ACQUISITION
On
Medihemp and SLAM, respectively own fixed assets and operate two retail Medical
Marijuana Centers located in
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.
7
The aggregate consideration paid for the Assets was
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
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 preliminary valuation analysis of the fair market value of Naturaleaf's assets. The following table summarizes the allocation of the 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
The fair value of Naturaleaf's identifiable intangible assets was
The estimated fair values assigned to identifiable assets acquired assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. The Company believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is waiting for additional information necessary to finalize those fair values. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Results of Operations
Year ended
The following table presents our operating results for the year ended
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AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31, December 31, Increase
2021 2020 (Decrease)
Revenues
Consulting Services $ 381,094 $ 505,363 (124,269 )
Product & Equipment 1,017,361 1,064,431 (47,070 )
Cannabis Products 1,006,148 - 1,006,148
Total Revenues 2,4404,603 1,569,794 834,809
Cost of Revenues
Cost of Consulting Services 36,179 108,706 (72,527 )
Cost of Products and Equipment 758,940 740,409 18,531
Cost of Cannabis Products 553,336 - 553,336
Total Cost of Revenues 1,348,455 849,115 499,340
Gross Profit 1,056,148 720,679 335,469
Operating Expenses
General and Administrative 2,050,272 1,010,902 1,039,370
Selling and Marketing 199,968 298,937 (98,969 )
Bad Debt Expense 54,435 4,910 49,525
Litigation Settlement Expense 350,000 - 350,000
Stock Based Compensation Expense 42,206 29,970 12,236
Total Operating Expenses 2,696,881 1,344,719 1,352,162
Loss from Operations (1,640,733 ) (624,040 ) (1,016,693 )
Other Income (Expense)
Interest (expense) (75,374 ) (1,786 ) (73,588 )
Debt Forgiveness 240,975 - 240,975
Other income 35,883 93,413 (57,530 )
Total Other (Expense)Income 201,484 91,627 109,857
Net Loss (1,439,249 ) (532,413 ) (906,836 )
Income Tax Expense - - -
NET LOSS $ (1,439,249 ) $ (532,413 ) (906,836 )
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Revenues
Total revenues were
Costs of Revenues
Costs of revenues primarily consists of labor, travel, cost of equipment and
soil sold, and other costs directly attributable to providing services or soil
products. Costs of revenues related to our cannabis products include cultivation
costs, including labor, utilities, supplies and cultivation facility rent.
During the year ended
Consulting Services
Consulting service revenues during the year ended
Costs of Services were
Soil Product and Equipment Revenues
Our product and equipment revenues for the year ended
Costs of Products and Equipment were
Cannabis Product Revenues
Cannabis product revenues during the year ended
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 year
ended
Gross Profit
Total gross profit was
The decrease in our consulting services gross profits during the year ended
10 Operating Expenses
Total operating expenses were
Other Income (Expense)
Other income (expense) for the year ended
Net Loss
Net loss for the year ended
LIQUIDITY AND CAPITAL RESOURCES
As of
During the year ended
Operating Activities
Net cash used by operating activities for the year ended
Investing Activities
For the year ended
Financing Activities
During the year ended
Off Balance Sheet Arrangements
As of
Non-GAAP Financial Measures 11
A reconciliation of net income(loss) to Adjusted EBITDA is provided below:
Year Ended Year Ended
December 31, 2021 December 31, 2020
Adjusted EBITDA reconciliation:
Net loss $ (1,439,249 ) $ (532,413 )
Bad Debt Expense 54,435 4,910
Depreciation and Amortization 95,262 13,937
Interest Expense 75,374 1,786
Stock-based compensation to employees 42,207 29,970
Stock issued for services - 7,066
Adjusted EBITDA $ (1,171,971 ) $ (474,744 ) CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are held in operating accounts at a major financial institution.
Inventory
Inventory is primarily comprised of products and equipment to be sold to
end-customers. Inventory is valued at cost, based on the specific identification
method, unless and until the market value for the inventory is lower than cost,
in which case an allowance is established to reduce the valuation to market
value. As of
Deposits
Deposits is comprised of advance payments made to third parties, primarily for inventory for which we have not yet taken title. When we take title to inventory for which deposits are made, the related amount is classified as inventory, then recognized as a cost of revenues upon sale (see "Costs of Revenues" below).
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are primarily comprised of advance payments made to third parties for independent contractors' services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate the life of the contract or service period.
Accounts Receivable
Accounts receivable are recorded at the net value of face amount less any allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and, based on a method of specific identification of any accounts receivable for which we deem the net realizable value to be less than the gross amount of accounts receivable recorded, we establish an allowance for doubtful accounts for those balances. In determining our need for an allowance for doubtful accounts, we consider historical experience, analysis of past due amounts, client creditworthiness and any other relevant available information. However, our actual experience may vary from our estimates. If the financial condition of our clients were to deteriorate, resulting in their inability or unwillingness to pay our fees, we may need to record additional allowances or write-offs in future periods. This risk is mitigated to the extent that we collect retainers from our clients prior to performing significant services.
The allowance for doubtful accounts, if any, is recorded as a reduction in
revenue to the extent the provision relates to fee adjustments and other
discretionary pricing adjustments. To the extent the provision relates to a
client's inability to make required payments on accounts receivables, the
provision is recorded in operating expenses. As of
12 Operating Lease
In
We adopted this standard using a modified retrospective approach on
The Company elected the package of practical expedients permitted under ASC 842 allowing it to account for its existing operating lease that commenced before the adoption date as an operating lease under the new guidance without reassessing (i) whether the contract contains a lease; (ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC 842.
In considering its qualitative disclosure obligations under ASC 842-20-50-3, the Company examined its one lease for office space that has a fixed monthly rent with no variable lease payments and no options to extend. The lease is for an office space. The lease does not provide for terms and conditions granting residual value guarantees by the Company, or any restrictions or covenants imposed by the lease for dividends or incurring additional financial obligations by the Company. The Company also elected a short-term lease exception policy and an accounting policy to not separate non-lease components from lease components for our facility lease, as we determined our right of use asset to be zero.
Consistent with ASC 842-20-50-4, the Company calculated its total lease cost based solely on its monthly rent obligation. The Company had no cash flows arising from its lease, no finance lease cost, short term lease cost, or variable lease costs. Our office lease does not produce any sublease income, or any net gain or loss recognized from sale and leaseback transactions. As a result, the Company did not need to segregate amounts between finance and operating leases for cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows; supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets; weighted-average calculations for the remaining lease term; or the weighted average discount rate.
The adoption of this guidance resulted in no significant impact to our results of operations or cash flows.
Property and Equipment, net
Property and Equipment is stated at net book value, cost less depreciation.
Maintenance and repairs are expensed as incurred. Depreciation of owned
equipment is provided using the straight-line method over the estimated useful
lives of the assets, ranging from two to seven years. Depreciation of
capitalized construction in progress costs, a component of property and
equipment, net, begins once the underlying asset is placed into service and is
recognized over the estimated useful life. Property and equipment are reviewed
for impairment as discussed below under "Accounting for the Impairment of
Long-Lived Assets." We did not capitalize any interest as of
Accounting for the Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Upon such an occurrence, recoverability of assets to be held and
used is measured by comparing the carrying amount of an asset to forecasted
undiscounted net cash flows expected to be generated by the asset. If the
carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. For long-lived assets held for
sale, assets are written down to fair value, less cost to sell. Fair value is
determined based on discounted cash flows, appraised values or management's
estimates, depending upon the nature of the assets. We have not recorded any
impairment charges related to long-lived assets during the year ended
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). Due to the nature of our contracts with customers, adopting the new accounting principles did not have a significant impact on our prior period results of operations, cash flows or financial position.
Our service and product revenues arise from contracts with customers. Service revenue includes Operations Divisions consulting revenue. Product revenue includes (a) Operations Division product sales (So-Hum Living Soils), (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.
13
Advances from Clients deposits are contract liabilities with customers that represent our obligation to either transfer goods or services in the future, or refund the amount received. Where possible, we obtain retainers to lessen our risk of non-payment by our customers. Advances from Clients deposits are recognized as revenue as we meet specified performance obligations as detailed in the contract.
Product and Equipment Sales
Revenue from product and equipment sales, including delivery fees, is recognized
when an order has been obtained from the customer, the price is fixed and
determinable when the order is placed, the product is delivered, title has
transferred, and collectability is reasonably assured. Generally, our suppliers'
drop-ship orders to our clients with destination terms. The Company realizes
revenue upon delivery to the customer. Given the facts that (1) our customers
exercise discretion in determining the timing of when they place their product
order; and, (2) the price negotiated in our product sales contracts is fixed and
determinable at the time the customer places the order, we are not of the
opinion that our product sales indicate or involve any significant financing
that would materially change the amount of revenue recognized under the
contract, or would otherwise contain a significant financing component for us or
the customer under FASB ASC Topic 606. During the years ended
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
For hourly based fixed fee service contracts, we utilize and rely upon the proportional performance method, which recognizes revenue as services are completed. Under this method, in order to determine the amount of revenue to be recognized, we calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. We segregate upon entry into a contract any advances or retainers received from clients for fixed fee hourly services into a separate "Advances from Clients" account, and only recognize revenues as we incur and charge billable hours, and then deposit the funds earned into our operating account. Because our hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, we are of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing, that would materially change the amount of revenue we recognize under the contract or would otherwise contain a significant financing component under FASB ASC Topic 606.
Occasionally, our fixed-fee hourly engagements are recognized under the
completed performance method. Some fixed fee arrangements are for completion of
a final deliverable or act which is significant to the arrangement. These
engagements do not generally exceed a one-year term. If the performance is for a
final deliverable or act, we recognize revenue under the completed performance
method, in which revenue is recognized once the final act or deliverable is
performed or delivered for a fixed fee. Revenue recognition is affected by a
number of factors that change the estimated amount of work required to complete
the deliverable, such as changes in scope, timing, awaiting notification of
license award from local government, and the level of client involvement.
Losses, if any, on fixed-fee engagements are recognized in the period in which
the loss first becomes probable and reasonably estimable. FASB ASC Topic 606
provides a practical expedient to disregard the effects of a financing component
if the period between payment and performance is one year or less. As our fixed
fee hourly engagements do not exceed one year, no significant customer-based
financing is implicated under FASB ASC Topic 606. During the years ended
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.
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 years ended
14 Costs of Revenues
Our policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenues include the costs directly attributable to revenue recognition and includes compensation and fees for services, travel and other expenses for services and costs of products and equipment. Selling, general and administrative expenses are charged to expense as incurred.
Advertising and Promotion Costs
Advertising and promotion costs are included as a component of selling and
marketing expense and are expensed as incurred. During the year ended
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 restricted common stock at the end of the established vesting period.
The fair value of the grant is based on the stock price on the date of grant. We
recognize related compensation costs on a straight-line basis over the requisite
vesting period of the award, which to date has been one year from the grant
date. . During the years ended
Income Taxes
Our corporate status changed from an S-Corporation, which it had been since
inception, to a C-Corporation during the year ended
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
We report net loss per common share in accordance with FASB ASC 260, "Earnings per Share". This statement requires dual presentation of basic and diluted earnings with a reconciliation of the numerator and denominator of the earnings per share computations. Basic net loss per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period and excludes the effects of any potentially dilutive securities. Diluted net income (loss) per share gives effect to any dilutive potential common stock outstanding during the period. The computation does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.
15
Related Party Transactions
We follow FASB ASC subtopic 850-10, "Related Party Transactions", for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC 850-10-20, related parties include: a) affiliates of the
Material related party transactions are required to be disclosed in the consolidated financial statements, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
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