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
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Naturaleaf agreed to sell or assign to the Company, and the Company purchased and was the assignee of 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.
The aggregate consideration paid for the Assets was
On
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.
Preliminary Valuation Analysis as of
The Company performed a preliminary valuation analysis of the fair market value of Naturaleaf's assets reported in its 2021 Form 10-K. The following table summarizes the preliminary 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 8
The Company's preliminary assessment of goodwill from the acquisition primarily related to the future economic benefits arising from the assets acquired which are consistent with the Company's stated intentions and strategy. Other assets include inventory and fixed assets.
The fair value of Naturaleaf's identifiable intangible assets was
The preliminary estimated fair values were assigned to identifiable assets acquired, and the preliminary assumptions were based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed.
Final Valuation Analysis
The Company performed a final evaluation of Naturaleaf tangible and intangible
assets and goodwill as of the acquisition date. The following table summarizes
the final fair value allocation of the purchase price as of
Current Assets$ 15,000 Inventory 72,172 Property, Plant and Equipment 26,715 Other Assets 6,000 Total Tangible Assets 119,887 Tradenames and Trademarks 660,000 Licenses 800,000 Total Intangible Assets 1,460,000 Goodwill 1,332,113 Total Consideration$ 2,912,000 Results of Operations
Year ended
The following table presents our operating results for the year ended
AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31, December 31, Increase
2022 2021 (Decrease)
Revenues
Consulting Services $ 475,837 $ 381,094 94,743
Product & Equipment 17,539,377 1,037,962 16,501,415
Cannabis Products 793,331 1,006,148 (212,817 )
Total Revenues 18,808,545 2,425,204 16,338,341
Cost of Revenues
Cost of Consulting Services 61,246 36,179 25,067
Cost of Products and Equipment 15,230,648 758,940 14,471,708
Cost of Cannabis Products 979,437 573,937 405,500
Total Cost of Revenues 16,271,331 1,369,056 14,902,275
Gross Profit 2,537,214 1,056,148 1,436,066
Operating Expenses
General and Administrative 2,833,140 2,050,272 782,868
Selling and Marketing 225,950 199,968 25,982
Bad Debt Expense 5,438 54,435 (48,997 )
Litigation Settlement Expense - 350,000 (350,000 )
Stock Based Compensation Expense 78,342 42,206 36,136
Total Operating Expenses 3,142,870 2,696,881 445,989
Loss from Operations (605,656 ) (1,640,733 ) 1,035,077
Other Income (Expense)
Interest (expense) (78,086 ) (75,374 ) (2,712 )
Debt Forgiveness - 240,975 (240,975 )
Other income 50,550 35,883 14,667
Total Other (Expense) Income (27,537 ) 201,484 (229,021 )
Net Loss (633,192 ) (1,439,249 ) 806,057
Income Tax Expense - - -
NET LOSS $ (633,192 ) $ (1,439,249 ) 806,057
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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 consulting services were
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 consist 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
Operating Expenses
Total operating expenses were
10 Other Income (Expense)
Other expenses 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 in operating activities for the years ended
Investing Activities
For the years ended
Financing Activities
During the year ended
Off-Balance Sheet Arrangements
As of
Non-GAAP Financial Measures
A reconciliation of net income(loss) to Adjusted EBITDA is provided below:
Year Ended Year Ended
December 31, 2022 December 31, 2021
Adjusted EBITDA reconciliation:
Net loss $ (633,192 ) $ (1,439,249 )
Bad Debt Expense 5,438 54,435
Depreciation and Amortization 57,631 95,262
Interest Expense 78,806 75,374
Stock-based compensation to employees 32,135 42,207
Stock issued for services - -
Adjusted EBITDA $ (459,182 ) $ (1,171,971 )
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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
Operating Leases Right-of-use Assets
The Company recognizes its leases in accordance with ASC 842 - Leases. Under ASC
842, operating lease right-of-use ("ROU") assets and liabilities are recognized
at the commencement date based on the present value of lease payments over the
lease term. ROU assets represent our right to use an underlying asset for the
lease term, and lease liabilities represent our obligation to make lease
payments arising from the lease. The initial lease liability equals the future
fixed minimum lease payments discounted using the Company's incremental
borrowing rate on a secured basis. The lease term includes option renewal
periods and early termination payments when it is reasonably certain that the
Company will exercise those rights. The initial measurement of the ROU asset
equals the initial lease liability plus any initial direct costs and
prepayments, less any lease incentives. The Company elected the short-term lease
exemption for contracts with lease terms of 12 months or less. The Company
accounts for the lease and non-lease components of its leases as a single lease
component. Lease expense is recognized on a straight-line basis over the lease
term. The Company had no leases as of
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Property and Equipment, net
Property and Equipment are 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 for the years ended
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, the 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 years ended
Revenue Recognition
We adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12 "Revenue from Contracts with Customers (Topic 606). Due to the nature of our contracts with customers, adopting the new accounting principles did not have a significant impact on our prior period results of operations, cash flows or financial position.
Our service and product revenues arise from contracts with customers. Service revenue includes Operations Divisions consulting revenue. Product revenue includes (a) Operations Division product sales (So-Hum Living Soils), (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, the title has
been 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 the
customer or us under FASB ASC Topic 606. During the years ended
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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 the 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 the 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
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Costs of Revenues
Our policy is to recognize costs of revenue in the same manner in conjunction with revenue recognition. Cost of revenues includes the costs directly attributable to revenue recognition and includes compensation and fees for services, travel, and other expenses for services and costs of products and equipment. Selling, general and administrative expenses are charged to expense as incurred.
Advertising and Promotion Costs
Advertising and promotion costs are included as a component of selling and
marketing expense and are expensed as incurred. During the year ended
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 the 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.
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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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