Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.09pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-
Not scored
Net-tone change vs last year's 10-K.
MD&A
-0.09pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
No section text extracted for this filing. The 10-K may use a non-standard template that the parser doesn't recognize - the original doc is still linked in the Stats tab.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
impairment+2
decline+2
termination+2
disclosing+1
Positive rising
No words rose this year.
MD&A (Item 7)
5,891 words
ITEM 7. 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 that such forward-looking statements are subject to an inherent risk that actual results may materially differ as a result of many factors, including the risks discussed from time to time in this report, including the risks described under “Risk Factors” in any filings we have made with the SEC.
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement income, bad debts, impairment, net lease intangibles, contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.
Background
American Cannabis Company, Inc. and its subsidiary is a publicly listed company quoted on the OTC Markets OTCQB Trading Tier under the symbol “AMMJ.” We are based in Colorado Springs, Colorado, and operate within the regulated cannabis industry with four operation divisions: (i) consulting and professional services; (ii) the sale of products and equipment commonly utilized in the cultivation, processing, transportation or retail sale of cannabis; and, (iii) our licensed owner-operator medical marijuana dispensaries and cultivation facilities located in Colorado Springs, Colorado under the trade name “Naturaleaf.” Our operations are limited to only those state jurisdictions where medical and/or recreational cannabis business has been legalized. 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 ("Medihemp"), and its wholly-owned subsidiary SLAM Enterprises, LLC ("SLAM"), and Medical Cannabis Caregivers, Inc. ("Medical Cannabis"), each an entity organized and operating under the laws of the State of Colorado, and all doing business as “Naturaleaf” operating in the medicinal cannabis industry in Colorado.
Medihemp and SLAM, respectively, owned fixed assets and operate two retail Medical Marijuana Centers 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.
Naturaleaf agreed to sell or assign to the Company, and the Company purchased and was the assignee of the following assets:
Three Medical Marijuana (MMC) Store Licenses;
One Marijuana Infused Product Licenses (MIPS); and,
One Option Premises Cultivation License (OPC); and,
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 $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.
On April 30, 2022, the Company and Medihemp, SLAM, and Medical Cannabis amended the material definitive agreement to restructure the remaining payments due to be made by the Company under the Note. The parties agreed that in consideration of the Company's payment of $550,000 and outstanding interest of $110,000, a new promissory note in the principal amount of $550,000 and 12% interest accruing annually, due April 29, 2023, resolved all of the Company's payment obligations for the purchase price. The parties executed the amendment, and the Company paid the consideration of $550,000 in principal and $110,000 in interest.
Results of Operations
Year ended December 31, 2023 compared to year ended December 31, 2022
The following table presents our operating results for the year ended December 31, 2023, compared to December 31, 2022:
AMERICAN CANNABIS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
December 31,
Increase
(Decrease)
Revenues
Consulting Services
Product & Equipment
Cannabis Products
Total Revenues
Cost of Revenues
Cost of Consulting Services
Cost of Products and Equipment
Cost of Cannabis Products
Total Cost of Revenues
Gross Profit
Operating Expenses
General and Administrative
Selling and Marketing
Bad Debt Expense
Goodwill impairment
Stock Based Compensation Expense
Total Operating Expenses
Loss from Operations
Other Income (Expense)
Interest (expense)
Debt Forgiveness
Other income
Total Other (Expense)Income
Net Loss
Income Tax Expense
NET LOSS
Revenues
Total revenues were $2,476,185 for the year ending December 31, 2023, compared to $18,808,545 for the year ending December 31, 2022. The decrease in total revenue of $16,332,360 for the year ended December 31, 2023, was primarily a result of a decrease of $16,515,186 in product and equipment sales associated with the design and build projects for which the Company offers the design, management, and installation of associated products sold for the construction of cultivation and dispensary facilities. The Company's cannabis product sales from its licensed dispensaries and cultivation facility for the year ended December 31, 2023, were $756,905, as compared to $793,331 for the year ended December 31, 2022, reflecting the general decline in the market for Cannabis in Colorado that began in 2022.
Costs of Revenues
Costs of revenues primarily consist of labor, travel, cost of equipment and soil sold, and other costs directly attributable to providing services or 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 December 31, 2023, our total costs of revenues were 1,434,302, as compared to $16,271,331 for the year ended December 31, 2022, a decrease of $14,837,029. The decrease was due to costs incurred purchasing equipment for projects which the Company sold in conjunction with its design, management and installation of associated products for the construction of cultivation and dispensary facilities. Our costs of revenues related to our cannabis products also decreased from $594,296 for the year ended December 31, 2023, compared to $979,437 for the year ended December 31, 2022, a decrease of $385,411, reflecting the general decline in the market for Cannabis in Colorado that began in 2022.
Consulting Services
Consulting service revenues for the year ended December 31, 2023, were $695,089, compared to $475,837 for the year ended December 31, 2022, an increase of $219,252. The increase was due to three states legalizing cannabis during fiscal 2022 and other activities for consulting services clients whose projects are in development.
Costs of consulting services were $115,085 for the year ended December 31, 2023, as compared to $61,246 for the year ended December 31, 2022, an increase of $53,839. The increase was due to the growth in consulting activity during the period.
Product and Equipment Revenues
Our product and equipment revenues for the year ended December 31, 2023, were $1,024,091 as compared to $17,539,377 for the year ended December 31, 2022, a decrease of $16,515,186. The decrease in product and equipment sales was primarily the result of the termination of a contract that the company first secured in 2021. Under this contract, the Company was retained to provide equipment sales, design, management, and installation services for the construction of multiple cultivation and dispensary facilities throughout the fiscal year ending December 31, 2022. The termination of the aforementioned contract had a significant impact on our product and equipment revenues for the fiscal year ended December 31, 2023, with the Company experiencing a substantial reduction in project-related sales and service revenues as compared with equipment sales and facility construction services provided during the previous fiscal year.
Costs of Products and Equipment were $724,921 for the fiscal year ending December 31, 2023, compared to $15,230,648 for the year ending December 31, 2022, a decrease of $14,505,727. Costs associated with products and equipment decreased as a result of decreased equipment sales during the year ended December 31, 2023.
Cannabis Product Revenues
Cannabis product revenues during the year ended December 31, 2023, were $756,905, as compared to $793,330 for the year ended December 31, 2022, a decrease of $36,426. The decrease was due to the general decline in the market for Cannabis in Colorado in 2023 and 2022, with Colorado's annual 2023 total sales of $1.5 billion representing a 16% decline from 2022's $1.76 billion sales total.
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 December 31, 2023, such costs were $594,296, as compared to $979,437 for the year ended December 31, 2022, a decrease of $426,101. This decrease was due to the elimination of costs associated with improvements, including upgrading and replacing machinery and equipment in the Company's Colorado Springs cultivation facility and maintenance to the Company's Colorado Springs dispensary facilities.
Gross Profit
Total gross profit was $1,041,882 for the year ended December 31, 2023, comprised of consulting services gross profit of $580,004, products and equipment gross profit of $299,170, and cannabis products gross profit of $162,609, as compared to $2,537,214 for the year ended December 31, 2022, comprised of consulting services gross profit of $414,591, products and equipment gross profit of $2,308,729, and a gross profit (loss) of ($186,107) for cannabis products.
Operating Expenses
Total operating expenses were $48,93,035 for the year ended December 31, 2023, compared with $3,142,870 for the year ended December 31, 2022, an increase of $1,750,165. The increase is mainly attributed to a reduction in general and administrative expenses of $1,182,642, offset by the impairment of goodwill and increase stock based compensation during the year.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2023 was $190,736 compared to $(27,356) for the year ended December 31, 2021. The increase is a direct result of increases in interest expenses resulting from travel and miscellaneous referral fees due for the sale of products and equipment.
Net Loss
Net loss for the year ended December 31, 2023, was $3,660,416 as compared to $633,192 for the year ended December 31, 2022. The decrease in losses directly results from the decline in cannabis product sales.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2023, our primary internal sources of liquidity were our working capital, which included cash and cash equivalents of $21,085 and accounts receivable of $234,330. Additionally, considering that our fixed overhead costs are low, we have the ability to issue stock to compensate employees and management. Management believes that it will need to raise short-term capital to mitigate any periodic delays in receipt of accounts receivable, as payments from third-party vendors are scheduled on a less-than-periodic timetable. Management believes this strategy will adequately provide the necessary liquidity and capital resources to fund our operational general, and administrative expenses for at least the next 12 months.
During the year ended December 31, 2023, the Company issued 79,250,000 common shares.
Operating Activities
Net cash used by operating activities for the year ended December 31, 2023, was $49,792, compared to $198,965 for the year ended December 31, 2022. Increases in cash used were a result of increases in accrued and other current liabilities, and an increase in operating lease liability.
Investing Activities
For the years ended December 31, 2023, and December 31, 2022, investing activities used cash of 39,103 and $103,675, respectively. The decrease represents less cash spent for the purchase of property and equipment.
Financing Activities
During the year ended December 31, 2023, cash used in financing activities were $14,567 compared to $250,236 for the year ended December 31, 2022. The Funds used during the year ended December 31, 2023 werefrom paymest made onnotes payable.
Off-Balance Sheet Arrangements
As of December 31, 2023, and December 31, 2022, 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
A reconciliation of net income(loss) to Adjusted EBITDA is provided below:
Year Ended
Year Ended
December 31, 2023
December 31, 2022
Adjusted EBITDA reconciliation:
Net loss
Bad Debt Expense
Depreciation and Amortization
Interest Expense
Stock-based compensation to employees
Stock issued for services
Adjusted EBITDA
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 the 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, the 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.
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, 2023, and December 31, 2022, our inventory's market values were greater than cost, and accordingly, no such valuation allowances were recognized.
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 December 31, 2023, and December 31, 2022, our allowance for doubtful accounts was $4,071 and $64,344, respectively. For December 31, 2023, and December 31, 2022, we recorded bad debt expenses of $20,933 and $5,438, respectively.
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 December 31, 2023, and 2022 that had financing components.
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 as of December 31, 2023, and as of December 31, 2022.
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 year ended December 31, 2023, and December 31, 2022.
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:
Identify the contract with the Customer. Our customary practice is to obtain written evidence, typically in the form of a contract or purchase order.
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.
Determination of the transaction price. Prices are typically fixed, and no price protections or variables are offered.
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.
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 Client 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 Client 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 December 31, 2023, and 2022, sales returns were $0.
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
We utilize and rely upon the proportional performance method for hourly-based fixed-fee service contracts, which recognize revenue as services are completed. Under this method, to determine the amount of revenue to be recognized, we calculate the amount of completed work compared 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 when 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 December 31, 2022, and 2021, we incurred no losses from fixed fee engagements that terminate prior to completion. We believe that 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 per our accounting policies for the elements 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 December 31, 2023, and 2022.
Costs of Revenues
Our policy is to recognize costs of revenue in the same manner as 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 expenses and are expensed as incurred. During the year ended December 31, 2023, and December 31, 2022, these costs were $154,470 and $225,950 respectively.
Shipping and Handling Costs
For product and equipment sales, shipping and handling costs are included as a component of the 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 the 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 December 31, 2023, and December 31, 2022, stock-based compensation expenses for restricted shares for Company employees were $17,021 and $78,342, respectively. Compensation expense for warrants is based on the fair value of the instruments on the grant date, which is determined using the Black-Scholes valuation model and is expensed over the expected term of the awards. During the year ended December 31, 2023, and 2022, no warrants were issued as stock compensation.
Income Taxes
Our corporate status changed from an S-Corporation, which it had been since inception, to a C-Corporation during the year ended December 31, 2014. As provided in Section 1361 of the Internal Revenue Code, for income tax purposes, S-Corporations are not subject to corporate income taxes; instead, the owners are taxed on their proportionate share of the S-Corporation’s taxable income. Accordingly, we were only subject to income taxes for a portion of 2014. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. For the year ended December 31, 2023 and December 31, 2022, 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 December 31, 2023, and December 31, 2022, we had no liabilities related to federal or state income taxes, and the carrying value of our deferred tax asset was zero. The years 2010 to 2023 remain subject to examination by the Company’s major tax jurisdictions.
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 a net loss per common share in accordance with FASB ASC 260, “Earnings per Share.” This statement requires a 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.
Related Party Transactions
We follow FASB ASC subtopic 850-10, “Related Party Transactions,” for identifying related parties and disclosing 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.
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.
