$AMMJ Form 10-K

Background

American Cannabis Company, Inc. and subsidiary is a publicly listed company quoted on the OTCQB under the symbol “AMMJ”. We 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 manage a strategic group partnership that offers both exclusive and non-exclusive customer products commonly used in the industry.

The Company was incorporated in the State of Delaware on September 24, 2001 under the name “Naturewell, Inc.” On March 13, 2013, the Company completed a merger transaction whereby it acquired Brazil Interactive Media, Inc. (“BIMI”), a Brazilian interactive television company and television production company. The Company’s Articles of Incorporation were amended to reflect a new name:
Brazil Interactive Media, Inc. On May 15, 2014 the Company entered into an Agreement and Plan of Merger with Cannamerica Corp. (the “Merger Sub”), a wholly-owned subsidiary of BIMI, and Hollister & Blacksmith, Inc. doing business as American Cannabis Consulting (“American Cannabis Consulting”). The merger was completed on September 29, 2014, resulting in American Cannabis Consulting being merged with and into the Merger Sub (the “Reverse Merger”). The Company subsequently amended its Articles of Incorporation to change its name to “American Cannabis Company, Inc.” Upon the closing of the Reverse Merger, all of the Company’s officers and directors appointed designee officers and directors from American Cannabis Consulting and resigned. Consistent with the Merger Agreement, the Company consummated a complete divestiture of BIMI, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, pursuant to a Separation and Exchange Agreement dated May 16, 2014 (the “Separation Agreement”) between the Company, BIMI, Inc., and Brazil Investment Holding, LLC (“Holdings”), a Delaware limited liability company. On October 10, 2014, the Company changed its stock symbol from BIMI to AMMJ.

The foregoing descriptions of the Merger Agreement and Separation Agreement do not purport to be complete and are qualified in their entirety by the terms of such agreements, which are filed as exhibits to the Current Report on Form 8-K filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) on October 3, 2014.

Year ended December 31, 2014 compared to period of March 5, 2013 (date of inception) through December 31, 2013

The following table presents our consolidated operating results for the year ended December 31, 2014 compared to the period from Inception (March 5, 2013) through December 31, 2013:

                                  Year Ended                           March 5, 2013
                                 December 31,                       (Inception) Through
                                     2014          % of Revenues     December 31, 2013     % of Revenues    $ Change
Revenues
Consulting services            $      692,265              55.0     $          70,273              93.3     $    621,992
Products and equipment                566,747              45.0                 5,063               6.7          561,684
Total revenues                      1,259,012             100.0                75,336             100.0        1,183,676
Costs of revenues
Cost of consulting services           322,134              25.6                19,197              25.5          302,937
Cost of products and
equipment                             449,342              35.7                 4,060               5.4          445,282
Total cost of revenues                771,476              61.3                23,257              30.9          748,219
Gross Profit                          487,536              38.7                52,079              69.1          435,457
Operating expenses
General and administrative          3,675,313             291.9                13,530              18.0        3,661,783
Selling and marketing                 190,164              15.1                19,608              26.0          170,556
Research and development               12,863               1.0                    -                 -            12,863
Total operating expenses            3,878,340             308.0                33,138              44.0        3,845,202
Income (loss) from
operations                         (3,390,804 )          (269.3 )              18,941              25.1       (3,409,745 )
Other income (expense)
Gain on extinguishment of
debt                                   35,000               2.8                    -                 -            35,000
Interest income (expense)            (263,388 )           (20.9 )                  -                 -          (263,388 )
Total other income (expense)         (228,388 )           (18.1 )                  -                 -          (228,388 )
Net income (loss) before
income taxes                       (3,619,192 )          (287.5 )              18,941              25.1       (3,638,133 )
Income tax expense (benefit)               -                 -                     -                 -                -
Net income (loss)              $   (3,619,192 )          (287.5 )   $          18,941              25.1     $ (3,638,133 )

Total revenues were $1,259,012 for the year ended December 31, 2014, compared to $75,336 for the period from Inception (March 5, 2013) through December 31, 2013, an increase of $1,183,676. This increase was primarily due to growth in our client base and volume of operations as our business has matured following commencement of business operations in April 2013, including further establishment of our products and equipment sales. For the year ended December 31, 2014, consulting services revenue was $692,265, or 55.0% of total revenue, compared to $70,273, or 93.3% of total revenues for the period from Inception (March 5, 2013) through December 31, 2013. For the year ended December 31, 2014, products and equipment revenue was $566,747, or 45.0% of total revenues, compared to $5,063, or 6.7% of total revenues for the period from Inception (March 5, 2013) through December 31, 2013.

To date, consulting services revenues have been driven in large part by work on state cannabis business license applications. We also commonly earn a bonus in the event that a client’s license application is approved. During the year ended December 31, 2014, we worked on 14 license applications, nine of which were approved, for a success rate of 64%. This was an improvement compared to the period from Inception (March 5, 2013) through December 31, 2013, during which we worked on four license applications, two of which were approved, for a success rate of 50%.

Costs of revenues primarily consist of labor, travel, and other costs directly attributable to providing services or products. During the year ended December 31, 2014, our total costs of revenues were $771,479, or 61.3% of total revenues. This compares to total costs of revenues for the period from Inception (March 5, 2013) through December 31, 2013 of $23,257, or 30.9% of total revenues. The increase in costs of revenues was primarily due to the increase in sales volume discussed above. As a percentage of total revenues, the increase was due to changes in product mix, as sales of products and equipment, which have a lower gross margin compared to consulting and advisory services, made up a higher percentage of revenues and costs of revenues during the year ended December 31, 2014 as compared to the period from Inception (March 5, 2013) through December 31, 2013. For the year ended December 31, 2014, consulting related costs were $322,134, or 25.6% of total revenue, and costs associated with products and equipment were $449,342, or 35.7% of total revenue. For the period from Inception (March 5, 2013) through December 31, 2013, consulting related costs were $19,197, or 25.5% of total revenue, and costs associated with products and equipment were $4,060, or 5.4% of total revenue.

Gross Profit

Gross profit was $487,536 for the year ended December 31, 2014, as compared to $52,079 for the period from Inception (March 5, 2013) through December 31, 2013. This increase was primarily due to growth in our client base and volume of operations as our business has matured following commencement of business operations in April 2013. As a percentage of total revenues, gross profit was 38.7% for the year ended December 31, 2014 and 69.1% for the period from Inception (March 5, 2013) through December 31, 2013. This decrease was primarily due to the year ended December 31, 2014 having a higher proportion of total revenues from product and equipment sales as compared to consulting services, as product and equipment sales have a lower profit margin compared to revenues generated by consulting and advisory services.

Operating Expenses

Total operating expenses were $3,878,340, or 308.0% of total revenues for the year ended December 31, 2014, compared to $33,138, or 44.0% of total revenues for the period from Inception (March 5, 2013) through December 31, 2013, an increase of $3,845,202. Of this increase, $3,279,425 was due to stock-based compensation expense recorded during the period. Stock-based compensation expense reflected four grants for which the awards immediately vested. The remaining increase of $565,777 was primarily due to the combined effect of the increase in business volume following our April 2013 commencement of business operations, costs associated with increased headcount, higher professional fees driven by the Reverse Merger that became effective on September 29, 2014 as well as higher operating expenses associated with becoming an SEC registrant. Professional fees, which include legal, investor relations, auditing and accounting expenses, were $269,270 for the year ended December 31, 2014 compared to total professional fees of $5,011 for the period from Inception through December 31, 2013.

Other Income (Expense)

Other income (expense) for the year ended December 31, 2014 was expense of $228,388, which was due to $263,215 of interest expense due to the amortization of the discount on our convertible notes payable, partially offset by a $35,000 gain on debt extinguishment related to short-term notes payable of $35,000 that were deemed fully satisfied as an aspect of the issuance of convertible notes payable. There was no other income (expense) during the period from Inception (March 5, 2013) through December 31, 2013.

Income Tax Expense (Benefit)

We did not have any income tax expense or benefit for the year ended December 31, 2014 or for the period from Inception (March 5, 2013) through December 31, 2013. Although our tax status changed from a non-taxable pass-through entity (S-Corporation) to a taxable entity (C-Corporation) during the year ended December 31, 2014, due to cumulative losses since we became a C-Corporation, we recorded a valuation allowance against our related deferred tax asset which netted our deferred tax asset and benefit for income taxes to zero. We were an S-Corporation throughout the period from Inception (March 5, 2013) through December 31, 2013, and accordingly, no provision or benefit for income taxes was applicable.

As a result of the factors discussed above, net income (loss) for the year ended December 31, 2014 was net loss of $3,619,192, or 287.5% of total revenues for the period, as compared to net income of $18,941, or 25.1% of total revenues for the period from Inception (March 5, 2013) through December 31, 2013.

Liquidity and Capital Resources

As of December 31, 2014, our primary internal sources of liquidity were cash and cash equivalents of $165,213 and accounts receivable of $57,642. We also have the ability to raise additional capital as needed through external equity financing transactions. For the year ended December 31, 2014, the Company generated net operating cash flows of $74,113 despite generating a net loss of $3,619,192. The net loss was primarily due to non-cash expenses of $3,633,343 during the period, comprised of $3,320,328 of stock-based compensation, $263,215 of interest expense recorded upon conversion of our convertible notes payable, and $49,800 of expenses related to professional services compensated by the issuance of shares of common stock in lieu of cash. Due to these factors, and considering that our fixed overhead costs are low, we have the ability to issue stock to compensate employees and management, and the level of future revenue we expect to generate from executed client contracts, we believe our liquidity and capital resources to be adequate to fund our operational and general and administrative expenses for at least the next 12 months.

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2014 was $74,113, consisting of net loss of $3,619,192, non-cash adjustments reconciling net income (loss) to net cash provided by operating activities of $3,599,420 and a net source of cash of $93,885 from changes in operating assets and liabilities. The net non-cash adjustments of $3,599,420 were due to stock-based compensation expense of $3,320,328, amortization of the discount on convertible notes payable of $263,215, professional services of $49,800 that were funded by the issuance of common shares, and $1,077 of depreciation expense, partially offset by $35,000 of gain on extinguishment of debt. Changes in operating assets and liabilities, a net source of cash of $93,885, were the result of an increase in deferred revenue of $162,419, an increase in accrued and other current liabilities of $120,381 and an increase in accounts payable of $61,780, partially offset by $181,941 used for deposits on inventory and an operating lease, an increase in accounts receivable of $56,392 due to increased business volume for both consulting and advisory services and product and equipment sales, an increase in prepaid expenses and other current assets of $7,807 and an increase in inventory of $4,555 from products in-transit to customers.

For the period from Inception (March 5, 2013) through December 31, 2013, net cash provided by operating activities was $27,403, which consisted of net income of $18,941, non-cash adjustments reconciling net income to net cash provided by operating activities of $486 (depreciation expense), an increase in deferred revenue of $11,109, an increase in accrued and other current liabilities of $2,333 and an increase in accounts payable of $152, partially offset by an increase in prepaid expenses and other current assets of $4,368 and an increase in accounts receivable of $1,250.

Investing Activities

Investing activities were a source of cash of $42,453 for the year ended December 31, 2014. This was primarily the result of $90,181 of net cash received in connection with the reverse merger with Brazil Interactive Media Inc., which went effective on September 29, 2014 and resulted in our becoming a public company and SEC registrant. These funds represented the residual remaining balance of cash that Brazil Interactive Media, Inc. held after it raised $395,000 from convertible notes payable and paid down expenses. We also spent $47,728 on purchases of property and equipment during the period, which primarily reflects $40,051 of construction in progress costs related to the construction of a demonstration inventory unit.

For the period from Inception (March 5, 2013) through December 31, 2013, investing activities were a use of cash of $2,250, reflecting purchases of property and equipment.

Financing activities were a source of cash of $31,050 for the year ended December 31, 2014. This was primarily due to $35,000 raised upon issuance of short term notes payable and $50 received in connection with stock-based compensation; both transactions occurred prior to the reverse merger by which we became publicly traded as an SEC registrant. We also distributed $4,000 to stockholders during the period. For the period from Inception (March 5, 2013) through December 31, 2013, financing activities were a use of $7,556, as $11,362 distributed to owners was partially offset by $3,006 provided by directors and $800 of proceeds from the issuance of common shares.

We had cash and cash equivalents of $165,213 as of December 31, 2014.

Off Balance Sheet Arrangements

As of December 31, 2014 and December 31, 2013, we did not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Non-GAAP Financial Measures

We use Adjusted EBITA, a non-GAAP metric, to monitor our overall business performance. We define Adjusted EBITA as net income (loss) before interest expense, net, provision for (benefit from) income taxes, stock-based compensation and certain non-recurring expenses, which for the year ended December 31, 2014 were limited to costs associated with the Reverse Merger. We believe that such adjustments to arrive at Adjusted EBITA provides us with a more comparable measure for managing our business. We also believe that it is a useful measure for securities analysts, investors, and other interested parties in the evaluation of our company.

A reconciliation of net income (loss) to Adjusted EBITA is provided below.

                                                             March 5, 2013
                                           Year               (Inception)
                                          Ended                 Through
                                    December 31, 2014      December 31, 2013
Adjusted EBITA Reconciliation:
Net income (loss)                  $       (3,619,192 )   $           18,941
Interest expense, net                         263,388                     -
Tax expense (benefit)                              -                      -
Stock-based compensation expense            3,320,328                     -
Reverse merger-related expenses               105,542                     -
Adjusted EBITA                     $           70,066     $           18,941

As of December 31, 2014, our remaining convertible notes payable had a face value of $71,500 and discount of $46,949, for carrying amount of debt of $24,551. Should these notes remain unconverted, we will be obligated to pay the full $71,500 face value in 2016.

Under the terms of our agreement with the manufacturer of our exit packing product, the Satchel� we were committed to the purchase of a total of 500,000 units at a price of $1.00. As of December 31, 2014, a total of 444,000 units had yet to be received, for a remaining purchase commitment of $444,000. As of the date of this report, the manufacturer has not met the delivery schedule established under the agreement, which represents a material breach of the agreement under its terms.

No other contractual obligations existed as of December 31, 2014, as we were party to only one operating lease (for our office space) that included month to month terms.

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, or cash flows.

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 U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect amounts reported in those statements. We have made our best estimates of certain amounts contained in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. However, application of our accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties, and, as a result, actual results could differ materially from these estimates. Management believes that the estimates, assumptions, and judgments involved in the accounting policies described below have the most significant impact on our consolidated financial statements.

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.

Restricted Cash

Restricted cash is recorded at cost, which approximates fair value. There was no restricted cash included in current assets on our consolidated balance sheets as of December 31, 2014 and December 31, 2013. Restricted cash previously related to remaining proceeds from a short-term note entered into on March 21, 2014 and fully satisfied on May 15, 2014 (see Note 7. “Convertible Notes Payable” of Item
8 “Financial Statements and Supplementary Data” to this form 10-K for further information).

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 December 31, 2014, market values of all of our inventory were greater than cost, and accordingly, no such valuation allowances was recognized. We did not hold any inventory as of December 31, 2013.

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

Accounts receivable are recorded at the net value of face amount less an allowance for doubtful accounts. We evaluate our accounts receivable periodically based on 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; in theses cases, 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 December 31, 2014 our allowance for doubtful accounts was $9,338 and there was no allowance for doubtful accounts as of December 31, 2013. We recorded bad debt expense of $9,338 during the year ended December 31, 2014, which is reflected as a component of general and administrative expenses on the consolidated statement of operations, and did not record any bad debt expense during the period from Inception (March 5, 2013) through December 31, 2013.

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. As of December 31, 2014, the Company had capitalized $40,051 of costs associated with the construction of a demonstration inventory unit; this asset had yet to be placed into service as of December 31, 2014, and accordingly, no depreciation expense was recorded related to this asset during the year ended December 31, 2014. Property and equipment is reviewed for impairment as discussed below under “Accounting for the Impairment of Long-Lived Assets.” We did not capitalize any interest as of December 31, 2014 or 2013.

Accounting for the Impairment of Long-Lived Assets

We evaluate long-lived assets for impairment whenever events or changes in . . .