BOTS, Inc./PR - Quarter Report: 2017 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2017

Commission file number: 333-175941

MCIG, INC.

(Exact name of registrant as specified in its charter)

27-4439285

(I.R.S. Employer Identification No.)

4720 Salisbury Road Jacksonville, FL

32256

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code

570-778-6459

2901 Highland Drive, Unit 13B, Las Vegas, NV 89109

(Former name and address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [√] Yes [ ] No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [√] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]

Accelerated filer                   [  ]

Non-accelerated filer  [  ]

Smaller reporting company   [√]

Transitional Small Business Disclosure Format     Yes [ ] No [√]

Note 7. Intangible Assets:

Intangible assets, net amortization over five years for domain names and three years for websites, consisted of the following:

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Note 8. Business Segments

The Company operates primarily in five segments; i) construction and consulting, ii) vaporizers, iii) CBD, iv) media, v) cannabis supplies, and vi) corporate. This summary reflects the Company's current segments, as described below.

Information concerning the revenues and operating income (loss) for the three months ended July 31, 2017 and 2016, and the identifiable assets for the segments in which the Company operates are shown in the following table:

Note 9. Non-GAAP Accounting and GAAP Reconciliation – Net Income and EBITDA

The Company reports all financial information required in accordance with generally accepted accounting principles (GAAP). The Company believes, however, that evaluating its ongoing operating results will be enhanced if it also discloses certain non-GAAP information because it is useful to understand MCIG’s performance that many investors believe may obscure MCIG’s ongoing operational results.

For example, MCIG uses non-GAAP net income (Adjusted Net Income), which excludes stock-based compensation, amortization of acquired intangible assets, impairment of intangible assets, costs from acquisitions, restructurings and other infrequently occurring items, non-cash deferred tax provision and litigation and related settlement costs. MCIG uses EBITDA and Adjusted Net Income, which adjusts net income (loss) for amortization of intangible assets, impairment of intangible assets, stock-based compensation, costs related to acquisitions, restructuring and other infrequently occurring items, settlement of litigation, gains or losses on dispositions, pro forma adjustments to exclude lines of business that have been acquired during the periods presented, current cash tax provision, depreciation, and interest expense (income), net.

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The company believes that excluding certain costs from Adjusted Net Income and EBITDA provides a meaningful indication to investors of the expected on-going operating performance of the company. Whenever MCIG uses such historical non-GAAP financial measures, it provides a reconciliation of historical non-GAAP financial measures to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these historical non-GAAP financial measures to their most directly comparable GAAP financial measure.

The following tables reflect the non-GAAP Consolidated Statements of Operations for the three months and six months ended October 31, 2017 and October 31, 2016, respectively.

The following table is a reconciliation of the EBITDA and Adjusted Net Income (non-GAAP measures) to the Net Income with the GAAP Consolidated Statements of Operation for the three months and six months ended October 31, 2017 and October 31, 2016, respectively.

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Note 10. Acquisition

The Company considers FASB 805-10-55, Implementation Guidance and Illustrations for Business Combinations when accounting for acquisitions. The Company has elected to implement ASU 2017-01, Clarifying the Definition of a Business although its required implementation date is for financial statements for periods beginning after December 15, 2017. The Company believes the early implementation of ASU 2017-01 has no material effect on its financial reporting.

Domain Acquisitions

On May 15, 2016 the Company acquired three domain names. The Company considers the acquisition of these domain names as a purchase of an asset, not a business. In this particular acquisition, we acquired the domain names, which at the time of acquisition had not been utilized in the market. At the time of acquisition, the assets had no operational income and could not generate revenue without the Company developing a business operation for the domain names.

The Company considers the acquisition of these domain names as a purchase of an asset, not a business. ASU 2017-01 added two major changes to the current guidance to narrow the application of its definition of a business. Under ASU 2017-01, the first analysis, referred to as the Screen states that if substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set does not qualify as a business. As such, it gets caught in the Screen and will not fall under the rules of ASC 805. In this particular acquisition, we acquired a group of similar identifiable assets, CBD domain names. 100% of the purchase price was allocated for the domain names. In accordance to rule, the following table reflects the determination of the purchase price of the domain names:

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed, and their accounting classifications, at the date of acquisition:

Omni Health, Inc., formerly known as VitaCig, Inc.

On June 22, 2016, the Company and Omni Health, Inc., FKA VitaCig, Inc., (“OMHE”) entered into a Separation and Share Transfer Agreement whereby OMHE transferred the assets and operations of its electronic cigarette (“E-Cig”) business to the Company in exchange for the return of 172,500,000 shares of OMHE Common Stock to the treasury of OMHE, and for a reduction of the amount owed to the Company by OMHE in excess of $95,000.

The Company recognized a purchase price of the E-Cig business of $68,123. In consideration of FASB 805-55-20 thru 23, Effective Settlement of a Preexisting Relationship Between the Acquirer and Acquiree in a Business Combination, the Company determined the purchase price to be $68,123, which is the amount owed by OMHE to the Company above the $95,000 convertible promissory note. In addition, the company returned 172,500,000 shares of OMHE Common Stock, which had a current market value of $1,052,250, but had no recorded net present value on the Company’s balance sheet. In accordance to rule, the following table reflects the determination of the purchase price of the E-Cig business:

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E-Cig Business Acquisition Price

Balance owed to MCIG as of April 30, 2016 (audited)

               186,276

Book value of 172,500,000 shares of OMHE common stock

                           -

Payments received between May 1 - June 21, 2016

               (23,153)

Conversion into Convertible Note on June 3, 2016

               (95,000)

Balance due on June 22, 2016 (purchase price)

                 68,123

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed, and their accounting classifications, at the date of acquisition:

The E-Cig business, along with the associated assets and liabilities were subsequently assigned to VitaCig, Inc., a wholly owned subsidiary of MCIG, Inc.

Gray Matter, LLC - Cherry Hemp Oil (CHO)

On August 15, 2016, the Company entered into an Asset Purchase Agreement with Gray Matter, LLC. The Agreement was consummated on September 1, 2016. The Company acquired all inventory and intellectual property in exchange for $30,000 in common stock. As a condition to this acquisition, the Company entered into a Consulting Agreement with John James Southard who became the President, mCig CBD Division.

The purchase price of the assets of Gray Matter, LLC – Cherry Hemp Oil (“CHO”) was $30,000. The Company recognized the purchase of the Cherry Hemp Oil business. The Company issued $30,000 in common stock of MCIG based upon the closing price of stock on the date of the entering into a definitive agreement for the acquisition of CHO (August 15, 2016). In accordance to rule, the following table reflects the determination of the purchase price of the CHO business:

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed, and their accounting classifications, at the date of acquisition:

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The CHO business, along with the associated assets and liabilities were subsequently assigned to MCIG Internet Sales, Inc., a wholly owned subsidiary of MCIG, Inc.

Agri-Contractors, LLC

On November 1, 2016, the Company entered into an Asset Purchase Agreement with Agri-Contractors, LLC. The Agreement was consummated on November 18, 2016. The Company acquired all intellectual property in exchange for $160,000 in common stock. As a condition to this acquisition, the Company entered into a Consulting Agreement with Robert Kressa II, who became the President and CEO of Grow Contractors Inc., a wholly owned subsidiary of MCIG, Inc.

The Company considers the acquisition of Agri-Contractors, LLC as a purchase of an asset, not a business. In this particular acquisition, we acquired a group of similar identifiable assets, the Grow Contractors brand and website. 100% of the purchase price was allocated for to the intangible assets of the brand and website. In accordance to rule, the following table reflects the determination of the purchase price of the Grow Contractors brand and website:

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed, and their accounting classifications, at the date of acquisition:

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Vapolution, Inc.

On January 17, 2017, the Company acquired operational control of Vapolution, Inc., through a settlement agreement. Under the terms of the settlement agreement the Company gained operational control of Vapolution, Inc., and the previous owners relinquished back to the Company 1,700,000 shares of MCIG common stock.

On January 23, 2014, the Company acquired Vapolution, Inc. for 5,000,000 shares of common stock. The Company issued 2,500,000 on October 30, 2015 with the final installment of 2,500,000 issued on October 1, 2015. In accordance with the agreement mCig, Inc. acquired 100% of Vapolution, Inc., but operational control for the following 10 years remained with the previous owners. Furthermore, the previous owners retained the right to rescind the transaction until June 30, 2017. As such, the Company continues to treat the investment into Vapolution, Inc., as an investment, not a consolidation. The Company’s non-marketable equity investment in Vapolution was recorded using the cost-basis method of accounting, and was previously classified within other long-term assets on the accompanying balance sheet as permitted by FASB ASC 325, “Cost Method Investments”. During 2016 there were no impairment losses. During 2015 the Company recorded an impairment loss of $625,000 related to the investment in Vapolution.

The settlement agreement with the previous owners of Vapolution, Inc., returned to the Company 1,700,000 shares of MCIG common stock, $961 in cash, and $40,541 in inventory. In accordance to rule, the following table reflects the determination of the purchase price of the E-Cig business:

In consideration of FASB 805-55-20 thru 23, Effective Settlement of a Preexisting Relationship Between the Acquirer and Acquiree in a Business Combination, the Company determined a preexisting contractual relationship existed, and that the purchase price would be the amount of the fair market value of the terms within the settlement agreement and subsequently reported as a gain in its financial statements.

An accounting of the transaction is as follows:

VitaCBD, LLC

On February 23, 2017, we entered into a purchase agreement with VitaCBD, LLC where we sold 20% ownership of the intellectual property rights and inventory of the VitaCig brand in exchange for 20% of VitaCBD, LLC. Prior to this, we sold 80% of the intellectual property rights associated with the VitaCBD brand to Stony Hill Corp for $850,000. (See Note 10) Stony Hill Corp incorporated VitaCBD, LLC and simultaneous with MCIG’s assignment, assigned its 80% ownership to VitaCBD, LLC, giving VitaCBD, LLC 100% ownership of the VitaCBD brand. The following chart shows the fair market value of the VitaCBD brand at the time of sale to Stony Hill:

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In consideration of FASB 805-55-20 thru 23, Effective Settlement of a Preexisting Relationship Between the Acquirer and Acquiree in a Business Combination, the Company determined a preexisting contractual relationship existed, and that the purchase price would be lesser amount of the fair market value or the net book value of the assets on our balance sheet at the time of acquisitions. The fair market value of the assets at the time of the acquisition was $212,000 and the actual book value on our balance sheet was $-0-. As such, the Company determined the purchase price of the 20% of VitaCBD, LLC was $-0-. The company treats this acquisition as a cost basis investment and as such reported as a gain on its financial statements. In according to FASB 325-20-30-2, Nonmonetary Exchange of Cost Method Investments, an accounting of the transaction is as follows:

VitaCBD, LLC Gain on Acquisition

Fair market value of VitaCBD, LLC at time of acquisition

$

                   1,062,200

Write down of MCIG 20% value

                    (212,200)

Value of VitaCBD, LLC after MCIG write down

$

                      850,000

MCIG 20% value of VitaCBD, LLC

$

                      170,000

MCIG book value contribution

                                  -

Cost basis investment - gain on asset

$

                      170,000

Vapomins Vertiebsgesellschaft mbH

On February 1, 2017, the Company acquired all the intellectual property, to include all federal and international domains, trade secrets, and trademarks, associated with the VitaStik brand. The purchase price was 1,500,000 shares of MCIG, Inc., common stock.

The Company considers the acquisition of the VitaStik brand as a purchase of an asset, not a business. In this particular acquisition, we acquired a group of similar identifiable assets, the VitaStik brand, trade secrets, and domain names. The assets have no operational income and cannot generate revenue without major consideration and effort by the Company. In accordance to rule, the following table reflects the determination of the purchase price of the VitaStik brand, trade secrets, and domain names.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed, and their accounting classifications, at the date of acquisition:

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APO Holdings, LLC

On March 31, 2017 the Company acquired software code for a cloud based social media platform to be known as 420Cloud. The Company considers the acquisition of 420Cloud as a purchase of an asset, not a business. In this particular acquisition, we acquired software code and supporting functions for five different software packages that had not been finalized, marketed, and launched at the time of acquisition. The Company expects to continue to expend a significant amount of time and capital to further develop the software. At the time of acquisition, the assets have no operational income and could not generate revenue without major consideration and effort by the Company. In accordance to rule, the following table reflects the determination of the purchase price of 420Cloud.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed, and their accounting classifications, at the date of acquisition:

420Cloud Accounting Classifications

Software - 420 Cloud - Mobile

$

      677,389

Software - 420 Cloud – Browser

315,709

Software – 420 Cloud API

90,116

Software - Whodab

67,587

Software - Ehesive

450,882

Software – 420 Cloud – Single Sign On

450,882

Software – 420 Job Search

135,173

Software – Weedistry

45,058

Software – Marketaro

112,644

Software – 420 Cue

450,882

Software – 420 Wise Guy

225,593

Software – Palm Weed

22,529

Domains

100,000

Total assets acquired

$

      3,144,444

Due to Shareholder – MCIG, Inc.

$

      3,144,444

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Note 11. Related Parties and Related Party Transactions

On September 13, 2017 the company entered into an agreement to provide social media and other advertising services to Render Payment, LLC.  Michael Hawkins, the then Chief Financial Officer, is a non-controlling member with greater than 10% ownership in Render Payment, LLC.  Under terms of the agreement, we received 5,000,000 RPM Tokens at $0.25 per token.

During 2016, the Company advanced to Omni Health, Inc., (“OMHE”) $86,012 for internet product sales, and inventory purchases bringing the total outstanding balance due to the Company to $186,276 on April 30, 2016, which was recorded as due from related party. During FY 2017 OMHE paid to the Company $23,153 towards the outstanding liability.  On June 22, 2016, the Company entered into a Separation and Share Transfer Agreement with OMHE (See Note 13) bringing the outstanding balance to $95,000 at the time of closing.  On October 31, 2016, we converted the note plus the interest earned (outstanding balance of $98,105) into 17,677,058, as per the conversion formula.  The fair market value of the stock received was $152,023 at the time of conversion.  The Company recognized a gain of $53,918.

On May 1, 2016 the Company entered into a Line of Credit Agreement for up to $100,000 with Paul Rosenberg, the Chairman and CEO.  The Company will utilize the Line of Credit as needed for day-to-day operations.  During this quarter the company utilized $200 under the Line of Credit Agreement and $2,000 was assigned to the Line of Credit from the assumed liability of the VitaCig acquisition to Paul Rosenberg (see Note 8).

On May 2, 2016 the Company sold to Paul Rosenberg the bad inventory from the past several years that was written off the previous years at cost.  Mr. Rosenberg paid for the bad inventory in cash. The Company had stored $20,730 worth of bad product it needed to destroy, which was not accounted for on its books and records. The Company booked the transaction as revenue. 

On June 3, 2016 the Company entered into a Convertible Promissory Note with VitaCig, Inc., (VTCQ) in the amount of $95,000 which was accounted for by the reduction of the balance Due from Related Party.  The terms of the Convertible Promissory Note include 8% annual interest, and a 25% reduction to the lowest conversion price of the preceding five days before election to convert. 

Between May 1, 2016 and June 22, 2016, the Company received $21,945 which was paid towards the balance Due from Related Party leaving a balance owed of $68,123 on June 22, 2016, the date of acquisition.  The Company purchased the VTCQ business for $68,183 on June 22, 2016 by writing off the remaining balance (excluding the Convertible Promissory Note of $95,000).

During the three months ended July 31, 2016, Scalable Solutions, LLC (Scalable) contracted Zoha Development, LLC (Zoha) to provide services to the construction division and paid Zoha $5,655 and has an outstanding balance owed of $10,000 at the end of the fiscal period ending July 31, 2016.  The president of Scalable is a managing member of Zoha.   

On June 7, 2016 the Company issued 2,500,000 shares of common stock ($75,000 in fair market value) to Paul Rosenberg for the acquisition of the domain url www.cbd.biz. See Note 5.

On June 8, 2016 Paul Rosenberg, the Company’s CEO and Chairman of the Board, converted 600,000 shares of Series A Preferred into 6,000,000 shares of common stock.

On June 22, 2016 the Company acquired the business of VitaCig, Inc., (VTCQ).  See Note 7.

On April 1, 2017, the Company entered into an employment agreement with Alex Mardikian, the Chief Marketing Officer.  The term of the agreement was for a period of one year.  The agreement calls for $84,000 per year base salary with various performance based incentives and bonuses.  Either party may terminate the agreement upon 30 days written notice to the other party.

Note 12. Stockholders’ Equity

Common Stock

As of October 31, 2017, the Company was authorized to issue 560,000,000 common shares at a par value of $0.0001.  As of October 31, 2017, the Company had issued and outstanding 402,810,809 common shares.   

During the three months ended October 31, 2017 the Company issued 4,000,000 under its option plan for services rendered and 2,600,000 shares through a private placement of $650,000. 

Preferred Stock

The Company has authorized 50,000,000 shares of preferred stock, of which it has designated 23,000,000 as Series A Preferred, at $0.0001 par value. The Company has 12,850,000 issued and outstanding as of October 31, 2017. There were a total of 12,850,000 issued and outstanding as of October 31, 2017. Each share of the Preferred Stock has 10 votes on all matters presented to be voted by the holders of the Company’s common stock.

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Note 13. Stock Option Plan

Weighted

Average

Exercise

Shares

Price

Options outstanding at beginning of period (May 1, 2017)

28,800,000

$

0.1362

Granted

4,000,000

0.16

Forfeited

-

-

Exercised

4,000,000

0.034

Options outstanding at October 31, 2017

28,800,000

$

0.063

There are currently 28,800,000 unissued options under the 2016 Stock Option Plan.

The following table summarizes information for stock options outstanding at October 31, 2017:

Options Outstanding

Options Exercisable

Weighted-

Weighted-

Weighted-

Range of

Number

Average

Average

Number

Average

Exercise

Outstanding

Remaining

Exercise

Exercisable

Exercise

Prices

@ 7/31/17

in years

Price

@ 7/31/17

Price

$0.034 - $0.107

27,800,000

2.67

$

0.063

4,900,000

$

0.034

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Note 14. Warrants

A summary of warrant activity for period ended October 31, 2017 is as follows:

On September 1, 2017, Michael Hawkins, the Company’s CFO exercised a warrant to acquire 5,416,551 shares of the Company’s common stock.  The stock was issued to Epic Industry Corp, a company wholly owned by Michael Hawkins. 

On September 21, 2017, Carl G. Hawkins, the Company’s corporate counsel exercised a warrant to acquire 1,000,000 shares of the Company’s common stock, at $0.025 per share for $25,000. 

Note 15. Subsequent Events

On November 1, 2017 OBITX, Inc., issued seven year warrants for the purchase of a combined total of 1,750,000 common shares to five individuals/entities at the purchase price of $1.00 per share.

On November 1, 2017, OBITX, Inc., entered into a consulting agreement with Alex Mardikian, the Chief Executive Officer and a consulting agreement with Brandy Craig, the Chief Financial Officer of the Company.  The terms of the Agreement are the same.  The agreements call for $7,000 per month for a period of one year. The payments may be booked as a note due, which may be converted into shares of the company at then current price per share.  The Company and consultant may elect to convert a portion of this into equity of the company.  In addition, each consultant was issued a seven-year warrant to acquire 250,000 shares of the Company Stock at $1.00 per share.

On November 1, 2017, OBITX, Inc., entered into a consulting agreement with the Law Offices of Carl G. Hawkins to serve as corporate counsel. The agreement calls for a one-time payment of $5,000 plus $150 per hour for legal services. The payments may be booked as a note due, which may be converted into shares of the company at then current price per share.  The Company and counsel may elect to convert a portion of this into equity of the company.  In addition, counsel was issued a seven-year warrant to acquire 250,000 shares of the Company Stock at $1.00 per share.

On November 1, 2017 OBITX, Inc., entered into an agreement with the Company, to convert the $3,043,285 owed to MCIG for the assigned  rights and obligations to the 420 Cloud Software Network to OBITX in exchange for 100,000 shares of Series A Preferred Stock and 500,000 shares of OBITX common stock.

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 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended April 30, 2017.

Certain statements in this section contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report and not clearly historical in nature are forward-looking, and the words “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) generally are intended to identify forward-looking statements. Any statements in this report that are not historical facts are forward-looking statements. Actual results may differ materially from those discussed from time to time in the Company's Securities and Exchange Commission filings. The Company undertakes no obligation to update or revise any forward-looking statement for events or circumstances after the date on which such statement is made except as required by law.

General Overview

Originally, we were formed to open and operate a full service day spa in Montrose, California.  In October 2013 we repositioned ourselves as a technology company focused on two long-term secular trends sweeping the globe: (1) The decriminalization and legalization of marijuana for medicinal or recreational purposes; and, (2) the adoption of electronic vaporizing cigarettes (commonly known as “eCigs”).

The Company initially earned revenue through wholesale and retail sales of electronic cigarettes, vaporizers, and accessories in the United States. It offered electronic cigarettes and related products through its online store at www.mcig.org, as well as through the company’s wholesale, distributor, and retail programs. We expanded operations to include the VitaCig brand in 2014.

In FY2015 we began offering hemp based cannabinoid (“CBD”) products through various websites. 

In 2016 the Company expanded its products and services to include construction. 

In 2017 we added consulting services in the cannabis industry.  In addition, we launched a social media platform, 420Cloud, in the cannabis markets. 

 The Company continues to look at strategic acquisitions and product and service developments for future growth.  We are currently incubating a cannabis supply company.

MARIJUANA INDUSTRY OVERVIEW

As of April 2017, there are a total of 28 states, plus the District of Columbia, with legislation passed as it relates to medicinal cannabis. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as having a high potential for abuse, has no currently-accepted use for medical treatment in the U.S., and lacks acceptable safety for use under medical supervision.

These 28 states, and the District of Columbia, have adopted laws that exempt patients who use medicinal cannabis under a physician’s supervision from state criminal penalties. These are collectively referred to as the states that have de-criminalized medicinal cannabis, although there is a subtle difference between de-criminalization and legalization, and each state’s laws are different.

The states that have legalized medicinal cannabis are as follows (in alphabetical order):

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 E-Cig Industry Overview

The global e-cigarette market is poised to grow over $47 billion by 2025 at a double digit CAGR from 2015 to 2025.

United States

In the United States, in 2016, the Food and Drug Administration (“FDA”) finalized a rule extending the regulatory authority to cover all tobacco products, including vaporizers, vape pens, hookah pens, electronic cigarettes (E-Cigarettes), e-pipes, and all other Electronic Nicotine Delivery Systems (“ENDS”). FDA now regulates the manufacture, import, packaging, labeling, advertising, promotion, sale, and distribution of ENDS. This includes components and parts of ENDS, but excludes accessories.

Under the new guidance, any company that make, modify, mix, manufacture, fabricate, assemble, process, label, repack, relabel, or import any tobacco product is considered a tobacco product manufacturer. Importers of finished tobacco products may be distributors and manufacturers of tobacco products. Importers who do not own or operate a domestic establishment engaged in the manufacture, preparation, compounding or processing of a tobacco product are not required to register their establishment or provide product listing. However, they must comply with all other applicable tobacco product manufacturer requirements.

Recent statements by FDA have begun to clear up the U.S. federal agency’s position on nicotine free e-liquids and synthetic nicotine. According to court statements made by the FDA, some devices that truly contain no nicotine (or only synthetic nicotine) may not be subject to the deeming regulations, depending on the circumstances in which they are likely to be used. Some disposable, closed-system devices with zero-nicotine or synthetic nicotine e-liquids may also escape regulation as tobacco products if they meet certain further criteria. However, even if products currently fall outside the scope of the deeming rule, the FDA could choose to regulate them later.

A majority of our products fall into this category and we believe are exempt from the new FDA guidelines.

International

The international markets have been largely driven by a flurry of activities including Mergers and Acquisitions, Patent Warfare, and increasing customization in products among others. Moreover, the emergence of Vape shops is increasingly engaging more users through their wide variety of products and better assistance while shopping the desired products. However, the government's proposals to levy hefty taxes on e-cigarettes are emerging as a key challenge for the market. Also, compatibility issues and the unregulated manufacturing process in China are yet other restraining factors in the e-cigarette market.

While North America, with U.S. leading the way will dominate the market throughout the forecast period, APAC will be growing at the fastest CAGR, accounting for more than 27% of the global e-cigarette market value by 2025. Significant revenue flow will be observed in China and India.

Tobacco consortiums, recently established vaping associations and regulatory bodies have a significant role to play in the global e-cigarette industry since the future growth of the market largely depends on the regulatory framework. The implementation of the Tobacco Product Directive (TPD) by the European Union (EU) is by far the most controversial directive and has taken effect from May 2016. Following the regulations, the companies are expected to bring about drastic changes in their marketing and distribution strategies, which might affect the market growth through the forecast period.

More than 95% of our e-cig sales are international sales.

CANNABIDIOL (CBD) INDUSTRY OVERVIEW

Cannabidiol (CBD) is the part of the cannabis plant that doesn't get you “high” like the THC side of the plant. It is typically used for health reasons instead of for recreational purposes. The CBD products are either derived from industrial hemp plants or marijuana plants. It is estimated that the CBD market will grow to a $2.1 billion market in consumer sales by 2020 with $450 million of those sales coming from hemp-based sources. That's a 700% increase from 2016. In 2015, the market for consumer sales of hemp-derived CBD products was $90 million, plus another $112 million in marijuana-derived CBD products which were sold through dispensaries – bringing a total CBD market to $202 million last year. In addition to the 28 states and the District of Columbia which have legalized cannabis products, 15 additional states have legalized CBD products. Many hemp based CBD products are sold in every state believing they are not subject to the law. MCIG concurs and operates under this belief.

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The US government approach towards CBD is confusing, at best. The Federal government is unclear as to oversight of these products. CBD is specifically defined under the Controlled Substances Act (“CSA”), however, the Drug Enforcement Agency (“DEA”) believes it is a Schedule 1 controlled substance. The Courts have ruled against the DEA in this assumption. The Industrial Hemp Farming Act of 2015 would amend the CSA to exclude hemp, and thus hemp-based CBD.

Historically, the DEA has made persistent efforts to regulate hemp products. In 2001, DEA issued an Interpretive Rule attempting to ban all hemp seed and hempseed oil food products that contained even minuscule, insignificant amounts of residual THC. The Hemp Industries Association immediately filed suit to stop the enforcement of this rule, which resulted in what became known as the “Hemp Food Rules Challenge.”  Ultimately, the subsequent ruling made by the Ninth Circuit issued serendipitously on February 6, 2004, found that the DEA had not followed necessary scheduling procedures to add non-psychoactive hemp to the list of Schedule I controlled substances; and additionally, that Congress clearly did not intend that hemp be prohibited by the Controlled Substance Act when it adopted language from the 1937 Marijuana Tax Act to define the drug ‘marijuana.’