BOTS, Inc./PR - Quarter Report: 2018 July (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 JULY 31, 2018

Commission file number: 000-55986

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 [√]

         PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements

Interim Condensed Financial Statements and Notes to Interim Financial Statements

mCig, Inc.

and SUBSIDIARIES

Consolidated Balance Sheets

ASSETS

July 31,

April 30,

2018

2018

Current Assets

Cash and cash equivalents

 $              449,752

 $             511,950

Accounts receivable, net

              2,014,740

             2,159,267

Inventory

                 886,794

                  63,297

Work in Progress

                 257,728

                  64,245

Notes and other receivable

                          -

                    1,529

Prepaid expenses

                   23,956

                  90,141

Total current assets

              3,632,970

             2,890,429

Property, plant and equipment, net

              3,080,488

             3,138,019

Cost basis investment

              4,253,645

                967,608

Intangible assets, net

                 774,969

                835,320

Total assets

 $         11,742,072

 $          7,831,376

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued expenses

 $              458,217

 $             218,703

Due to shareholder

                 955,977

                571,138

Other current liabilities

                   13,433

                          -  

Reserve for uncollected accounts

                 586,525

                586,560

Reserve for legal settlements

                 750,580

                750,579

Deferred revenue

                     3,900

                    5,145

Total current liabilities

              2,768,632

             2,132,125

Total Liabilities

              2,768,632

             2,132,125

Stockholders' equity

Preferred stock, $0.0001 par value; 50,000,000 shares authorized;

                     1,135

                    1,185

11,350,000  and 11,850,000 shares issued and outstanding, as

of July 31, 2018 and April 30, 2018, respectively.

Common stock, $0.0001 par value, voting; 560,000,000 shares

                   43,376

                  41,561

authorized; 433,758,045 and 415,610,809 shares issued, and

outstanding, as of July 31, 2018 and April 30, 2018, respectively.

Treasury stock

               (680,330)

               (680,330)

Additional paid in capital

            16,526,150

           12,673,339

Accumulated deficit

            (6,656,315)

            (6,208,431)

Total stockholders' equity

              9,234,016

             5,827,324

Non-controlling interest

               (260,576)

               (128,073)

Total equity

              8,973,440

             5,699,251

Total liabilities and stockholders' equity

 $         11,742,072

 $          7,831,376

See accompanying notes to audited consolidated financial statements.

4

mCig, Inc.

and SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 For the quarter ended July 31,

     2018

2017

Sales

 $                  630,676

$                 3,172,845

Construction costs

             149,195

       2,393,623

Merchandise

             224,930

          278,381

Commissions

               44,087

            28,035

Merchant fees, shipping, and other costs

               72,394

            68,920

Amortization and depreciation as a COG

             120,817

                         -

Total Cost of Sales

             611,423

2,768,959

Gross Profit

               19,253

403,886

Selling, general, and administrative

               72,114

91,137

Professional fees

               55,419

15,286

Stock based compensation

               28,990

-

Marketing & advertising

               38,619

7,003

Consultant fees

             328,979

161,068

Amortization and depreciation

               76,042

52,471

Total operating expenses

             600,163

326,965

Income (Loss) from operations

           (580,910)

76,921

Other income (expense)

                    523

-

Net income (loss) before non-controlling interest

           (580,387)

76,921

Gain attributable to non-controlling interest

             132,503

-

Net income (loss) attributable to controlling interest

$               (447,884)

$                     76,921

Basic and diluted (Loss) per share:

Income (Loss) per share from continuing operations

             (0.0011)

            0.0002

Income (Loss) per share

             (0.0011)

            0.0002

Weighted average shares outstanding - basic and diluted

422,253,533

391,366,587

See accompanying notes to unaudited consolidated financial statements.

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mCig, Inc.

and SUBSIDIARIES

Statements of Cash Flows

For the Year Ended April 30,

2018

2017

Cash flows from operating activities:

Net (Loss)

               (580,387)

 $               76,921

Adjustments to reconcile net loss to net

Cash provided by (used in) operating activities:

Depreciation and amortization

                 196,859

                  52,471

Common stock issued for services

                   28,990

                            -

Decrease (Increase) in:

Accounts receivable, net

                 144,527

              (451,199)

Other receivable

                     1,529

                            -

Inventories

            (1,016,980)

                    6,316

Prepaid expenses and other current assets

                   66,185

                  60,600

Accounts payable, accrued expenses and taxes payable

                 240,947

                165,516

Deferred revenue

                   (1,245)

              (344,936)

Reserve for uncollectable accounts

                        (34)

                            -

Total adjustment to reconcile net income to net cash

               (339,222)

              (511,232)

Net cash provided In operating activities

               (919,609)

              (434,311)

Cash flows from investing activities:

Increase (Decrease) in:

Cost basis investments

                   50,000

                            -

Acquisition of property, plant and equipment

                   (1,925)

                (22,430)

Acquisition of intangible assets

                   (9,552)

                     (736)

Net cash received in investing activities

                   38,523

                (23,166)

Cash Flows From Financing Activities:

Borrowing from related party

                 396,839

                  10,411

Notes Payable

                            -

              (150,000)

Proceeds from Issuance of Stock, Net

                 422,049

                650,000

Net Cash Provided By Financing Activities

                 818,888

                510,411

Net Change in Cash

                 (62,198)

                  52,934

Cash at Beginning of Year

                 511,950

             1,634,662

Cash at End of Period

 $              449,752

 $          1,687,596

Supplemental Disclosure of Cash Flows Information:

Cash paid for interest

 $                         -

 $                         -

Cash paid for income taxes

 $                         -

 $                         -

Non-cash Investing and Financing Activities:

Stock issued for cannabis licenses in California

 $              292,500

 $                         -

Stock issued for purchase of CBJ Distributing

 $           3,043,537

 $                         -

Stock issued for land acquisition in California

 $                67,500

 $                         -

See accompanying notes to unaudited consolidated financial statements.

6

mCig, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Organization and Basis of Presentation

The accompanying consolidated audited financial statements of mCig, Inc., (the “Company”, “we”, “our”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”).

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All significant intercompany accounts and transactions have been eliminated.

The consolidated financial statements include the accounts of the Company and its subsidiaries:

        ·     Agri-Contractors, LLC (“AGRI”)

        ·     CAAcres, Inc., (“CAAcres”) – 80% ownership

        ·     CA Acres Foundation (FKA NewCo2, Inc.,) (“CALF”) – 80% ownership

        ·     Grow Contractors Inc., (“GROW”)

        ·     mCig Internet Sales, Inc., (“MINT”)

        ·     mCig Limited (“MCIGL”)

        ·     NYAcres, Inc., (“NYAcres”)

        ·     OBITX, Inc., (FKA GigeTech, Inc.) (“GIGE”) – 53% ownership and 95% voting control

        ·     Tuero Asset Management, Inc. (“TAMI”)

        ·     Tuero Capital, Inc., (“TUERO”)

        ·     Vapolution, Inc., (“VAPO”)

        ·     VitaCig, Inc., (“VITA”)

Description of Business

The Company was incorporated in the State of Nevada on December 30, 2010 originally under the name Lifetech Industries, Inc. Effective August 2, 2013, the name was changed from "Lifetech Industries, Inc." to "mCig, Inc." reflecting the new business model.  All agreements related to the Lifetech business were terminated and closed as of April 30, 2014. It will not have any impact on the current and future operations because all of these agreements are related to the previous business directions of the Company.

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.

The Company has been involved in the marijuana and cannabinoid (CBD), and electronic cigarette industries.  It currently markets, sales, services, and distributes cannabis wholesale supplies, CBD products, software, and electronic cigarettes, vaporizers, and accessories internationally and in the United States.

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

In 2018 we added agriculture by planting a 40 acres lot in New York state to grow Hemp.  In addition, we acquired approximately two acres of land in California City, California and obtained three cannabis licenses (cultivating, manufacturing, and distribution of cannabis products in California).

During the quarter ended July 31, 2018, we operated approximately 35 different websites (which are not incorporated as part of this Form 10Q report).   The corporate website is located at www.mciggroup.com.

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Subsidiaries of the Company

The Company currently operates, in addition to mCig, Inc., the following subsidiaries which are consolidated:

Agri-Contractors, LLC

On November 18, 2016 we acquired, through a Purchase Agreement, Agri-Contractors, LLC.  We combined the operations of Agri-Contractors with Grow Contractors Corp and expanded the services to include consulting.  We merged the operations of Agri-Contractors, LLC with Grow Contractors in December 2016.  Agri-Contractors, LLC provides consulting services to grow facilities, production companies, and dispensaries servicing the cannabis medical and recreational markets.

CAAcres, Inc.

CAAcres, Inc., (“CAAcres”) was incorporated on May 10, 2018 under the laws of the state of California.  CAAcres was created to participate in the Joint Venture with Cal Foundation for the cultivation, manufacturing, and distribution of cannabis products within the state of California.  CAAcres is an agriculture venture for the cultivation, manufacturing and distribution of cannabis products. We are currently assessing the requirements for the build out of the land acquired in California City, California for this project.

CAL Foundation (FKA Newco2, Inc)

NewCo2, Inc., was created on January 19, 2018 as a California not-for-profit company.  We own 80% of the not-for-profit business.  NewCo2, Inc., maintains three cannabis licenses in the State of California. On August 6, 2018 the name was changed to Cal Acres Foundation, Inc.

CBJ Distributing, LLC

On June 30, 2018 the company elected to exercise its option to acquired Cannabiz Supply with an effective date of May 1, 2018. The purchase price was $3,578,861.

Grow Contractors Inc

The Company incorporated Grow Contractors Inc., on December 5, 2016.  Grow Contractors Inc, operates the construction and consulting segment.  On November 18, 2016, the Company purchased Agri-Contractors, LLC and assigned the Grow Contractors name and website to Grow Contractors Inc.  Grow Contractors Inc., is a wholly owned subsidiary of the Company.

mCig Internet Sales, Inc.

On June 1, 2016, the Company incorporated mCig Internet Sales, Inc., (“mCig Internet”) in the state of Florida in order to operate our CBD business and to consolidate all wholesale and online retail sales from various websites.  mCig Internet is a wholly owned subsidiary of the Company.  

mCig Limited

We incorporated in May 2017 to provide corporate oversight to MCIG, and its subsidiaries, operations within the European theatre. mCig Limited., was incorporated in the United Kingdom. mCig Limited, is a wholly owned subsidiary of the Company.

NYAcres, Inc.

NYAcres, Inc., (“NYAcres”) was incorporated on November 20, 2017 under the laws of the state of New York.  NYAcres was created to participate in the Joint Venture NYAcres with FarmOn! Foundation.  The joint venture is an agriculture venture for the planting and growing of industrial hemp.

OBITX, Inc.

We incorporated GigETech, Inc., in the state of Delaware on April 3, 2017.  We then assigned our newly acquired social media platform software to GigETech.  We launched the social media platform on April 20, 2017. GigETech, Inc., subsequently changed its name to OBITX, Inc. Currently we have approximately 95% voting control and 53% ownership on a fully diluted basis of OBITX.  OBITX is currently filing an S-1 Registration statement to become an independent publicly traded company.

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Omni Health, Inc., (FKA - VitaCig, Inc.)

On February 24, 2014, the Company entered into a Contribution Agreement with Omni Health, Inc (“OMHE”). In accordance with this agreement, OMHE accepted the contribution by mCig, Inc. of specific assets consisting solely of pending trademarks for the term “VitaCig” filed with the USPTO and $500 in cash as contribution in exchange for 500,135,000 shares of common capital stock representing 100% of the shares outstanding of OMHE. 

On November 28, 2014, mCig completed the spin-off of OMHE (the “Spin-off”). Effective as of 11:59 p.m., New York City time, on November 28, 2014 (the “Distribution Date”), the Company distributed 270,135,000 shares of common stock of OMHE, par value $0.0001 per share (“OMHE Common Stock”), to holders of mCig’s stockholders of record as a pro rata dividend.  The record date for the dividend was November 28, 2014. The Ex-Dividend Date was set for November 25, 2014. mCig stockholders received one share of OMHE Common Stock for everyone share of common stock, par value $0.0001 per share, of mCig.  The Spin-off was completed for the purpose of legally and structurally separating OMHE from mCig. MCig retained 230,000,000 shares of common stock and remains a shareholder. The shares of common stock to be received by mCig shareholders were registered on a Form S-1 filed by OMHE and declared effective by the Securities and Exchange Commission on November 5, 2014.

On June 22, 2016, the Company and OMHE, entered into a Separation and Share Transfer Agreement whereby OMHE transferred the assets and operations of the 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 in excess of $95,000.

Omni Health, Inc., a Nevada Corporation, is a public company trading under OMHE.

Tuero Asset Management, Inc.

We incorporated Tuero Asset Management, Inc., in which to manage all our intellectual and intangible assets.

Tuero Capital, Inc.

We incorporated in May 2017 to provide financial services to our clients.  Tuero Capital provides financial services and consulting to cannabis and cryptocurrency markets.

Vapolution, Inc.

On January 23, 2014, the Company entered into a Stock Purchase Agreement acquiring 100% ownership in Vapolution, Inc., which manufactures and retails home-use vaporizers. As part of this transaction, .mCig, Inc. issued 5,000,000 common shares to shareholders of Vapolution, Inc. in two separate payments of 2,500,000 common shares. The shareholders of Vapolution, Inc. retained the right to rescind the transaction, which expired on January 23, 2015 but was extended to May 23, 2015. Subsequently, on August 25, 2015, the final payment to the shareholders of Vapolution as extended to September 30, 2015 and the right to rescind the transaction was extended to June 30, 2017.  On April 30, 2015 the Company impaired the $625,000 initial investment into Vapolution, Inc., but maintains the $67,500 investment on its balance sheet for the second payment.

On January 23, 2014, Paul Rosenberg, CEO of mCig, Inc. cancelled an equal amount (2,500,000 shares) of common shares owned by him resulting in a net non-dilutive transaction to existing mCig, Inc. shareholders. The remaining 2,500,000 of common shares owned by Paul Rosenberg were cancelled to offset the 2,500,000 new shares issued from the treasury to complete the purchase of Vapolution, Inc.

On January 17, 2017 the Company entered into a settlement agreement with the previous owners of Vapolution, Inc., whereby they returned to the Company 1,700,000 shares of MCIG common stock, $961 in cash, and $40,541 in inventory. Prior to this, Vapolution was not incorporated in to the consolidated financial statements of the Company.  Effective January 17, 2017 we began consolidating Vapolution with the Company’s financial reports.  Vapolution, Inc., is wholly owned by mCig, Inc. 

VitaCig, Inc.

On May 26, 2016 we incorporated VitaCig, Inc., (“VitaCig”) in the state of Florida.  VitaCig headquarters our global e-cig operations.  VitaCig, Inc., is a wholly owned subsidiary of the Company.

9

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the wholly owned subsidiaries of AGRI, GROW, MINT, MCIGL, NYACRES, TAMI,  TUERO, VAPO, and VITA.  We have also consolidated our subsidiaries in which we have controlling interest,  These subsidiaries include CAACRES, CALF, and GIGE. Significant intercompany balances and transactions have been eliminated.

Concentration of Credit Risk and Significant Customers

Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of temporary cash investments and accounts receivable.  The Company places its temporary cash investments with financial institutions insured by the FDIC.

Concentrations of credit risk with respect to trade receivables are limited due to the diverse group of customers to whom the Company sells. The Company establishes an allowance for doubtful accounts when events and circumstances regarding the collectability of its receivables warrant based upon factors such as the credit risk of specific customers, historical trends, other information and past bad debt history. The outstanding balances are stated net of an allowance for doubtful accounts.

For the 3 months ended July 31, 2017, sales to the Company’s primary three customers accounted for approximately 85.2% of revenues and 92.8% of accounts receivable. For the 3 months ended July 31, 2016 the Company’s recognized no significant customers.

On May 1, 2018, we adopted Topic 606, using the modified retrospective transition method applied to those contracts which were not completed as of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on February 1, 2018.

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

        ·     identification of the contract, or contracts, with a customer;

        ·     identification of the performance obligations in the contract;

        ·     allocation of the transaction price to the performance obligations in the contract; and

        ·     recognition of revenue when, or as, we satisfy a performance obligation.       

Segment Information

In accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company is required to report financial and descriptive information about its reportable operating segments. The Company identifies its operating segments as divisions based on how management internally evaluates separate financial information, business activities and management responsibility. In addition to the corporate segment, the Company segments and the subsidiaries associated with each segment are as follows:

10

We record segments as i) cultivation, manufacturing, and distribution (CMD), ii) retail sales, iii) media and technologies, iv) agriculture, and v) corporate.  We report our financial performance based on our segments described in Note 8 – Segment Information.

Business Segments

Total Revenue

Percentage of Total Revenue

Three months ended July 31,

The three months ended July 31,

2018

  2017

2016

          2018

2017

2016

CMD

 $            70,000

   $       2,704,206

 $            62,268

11.1%

85.2%

24.4%

Retail Sales

             560,676

               468,639

             192,434

88.9%

14.8%

75.6%

Media and Technologies

                        -

                         -

                         -

0.0%

0.0%

0.0%

Agriculture

                        -

                         -

                         -

0.0%

0.0%

0.0%

Corporate

                        -

                         -

                         -

0.0%

0.0%

0.0%

Total

 $          630,676

      $    3,172,845

 $          254,702

100.0%

100.0%

100.0%

Inventory

In accordance with ASU 2015-11 – Inventory (Topic 330) – Simplifying the Measurement of Inventory, the Company’s inventory consists of finished product, mCig products valued at the lower of cost or market valuation under the first-in, first-out method of costing.

As of July 31, 2018, the Company had no allowance for obsolescence.  The level of inventory maintained by the Company is insignificant and is typically ordered on an as needed basis, or just-in-time. 

Property, Plant, and Equipment

Property, plant and equipment (“PPE”) are stated at cost less accumulated depreciation and amortization.  Expenditures for maintenance and repairs are charged to expense as incurred.  Additions, improvements and major replacements that extend the life of the asset are capitalized.

Depreciation and amortization is recorded using the straight-line method over the estimated useful lives of depreciable assets, which are generally three to five years.

Accounts Receivable

The Company’s accounts receivable in its construction and retail segments.  As the retail division is either paid through credit card processing and prepaid wholesale purchases, the Company projects insignificant amounts of outstanding accounts receivable for its retail division.  The Company recognizes receipt of payment at the time the funds are deposited with the merchant services account of the Company.  When the merchant services vendor determines to maintain a reserve for potential refunds and chargebacks, the Company reviews the reserve, to i) determine if the reserve is probably uncollectible, and ii) if a loss is probable, a reasonable estimate of the amount of the loss.  We then allocate a portion of the reserve for bad debt, in accordance with FASB ASC 450-20-25-2.  Once the vendor releases the funds, the bad debt reserve is appropriately reversed.  The Company recognized $0 and $0 as an uncollectable reserve for the three months ending July 31, 2018 and July 31, 2017, respectively.   

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Intangible Assets

The Company’s intangible assets consist of certain website development costs that is amortized over their useful life in accordance with the guidelines of ASC 350-30 General Intangible Other than Goodwill and ASC 350-50 Website Development Costs. 

Basic and Diluted Net Loss Per Share

The Company follows ASC Topic 260 – Earnings Per Share, and FASB 2015-06, Earnings Per Share to account for earnings per share.  Basic earnings per share (“EPS”) calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the year.  Diluted earnings per share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.  During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. 

Basic net earnings (loss) per common share are computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common stock equivalent shares consist of Series A convertible preferred stock, convertible debentures, stock options and warrant common stock equivalent shares.

Concentration of Credit Risk 

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and trade receivables.  Concentrations of credit risk with respect to trade receivables are limited due to the clients that comprise our customer base and their dispersion across different business and geographic areas.  We estimate and maintain an allowance for potentially uncollectible accounts and such estimates have historically been within management's expectations.  

We rely almost exclusively on one Chinese factory as our principle supplier for our e-cig products. Therefore, our ability to maintain operations is dependent on this third-party manufacturer.

Our cash balances are maintained in accounts held by major banks and financial institutions located in the United States.  The Company may occasionally maintain amounts on deposit with a financial institution that are in excess of the federally insured limit of $250,000.  The risk is managed by maintaining all deposits in high quality financial institutions. The Company had $904,914 and $0 in excess of federally insured limits at April 30, 2017 and 2016.

Note 3. Going Concern

The Company's financial statements are prepared using generally accepted accounting principles, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. Because the business is new and has a limited history and relatively few sales, no certainty of continuation can be stated. The accompanying financial statements for the three months ended July 31, 2018 and 2017 have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company has suffered losses from operations and has an accumulated deficit, which raise substantial doubt about its ability to continue as a going concern.

Management is taking steps to raise additional funds to address its operating and financial cash requirements to continue operations in the next twelve months. Management has devoted a significant amount of time in the raising of capital from additional debt and equity financing. However, the Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue. There are no assurances the Company will receive the necessary funding or generate revenue necessary to fund operations. The financial statements contain no adjustments for the outcome of this uncertainty.

Note 4. Property, Plant and Equipment

The following is a detail of equipment at July 31, 2018 and April 30, 2018:

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Depreciation expense on property, plant and equipment was $451,858 and $43,921 for the three months ended July 31, 2018 and 2017, respectively.

Note 5: Work in Progress

The Company reports its agriculture crop growth as work-in-progress until such time as the crop has been harvested and either sold or utilized by the Company.

Note 6: Inventory

Inventory is primarily held in retail sales.  We maintain a small inventory of seeds in our agriculture segment.  In addition, we currently hold 62 ATM machines held for sale within the next 12 months.

Note 7:  Accounts Receivable

The Company’s accounts receivable is primarily from its direct customers.  From its direct customers, we have $559,145 in cultivation, manufacturing, and distribution in revenue; $1,250,000 from its tech and media segment, with the remaining amount from its retail sales not through credit card processing.  

We utilize high risks credit card processing companies.  Vendors tasked with accepting all credit card payments for purchases from its customers, are typically held in escrow for potential chargebacks.  As traditional credit card processing is unavailable in the cannabis markets, we utilize services that require greater holding periods and higher retention requirements.  While the Company expects these receivables to be fully collectible it has created an allowance for doubtful accounts for the period. As of July 31, 2018, we have $29,741 in accounts receivable from our retail customers.

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The Company maintains subscription receivables of $117,300 for the exercise of warrants and options.  The funds were not received prior to the filing of this report and as such are not incorporated in the balance sheet statement.  A complete breakdown of the accounts receivable and subscriptions receivable is as follows:

We have created a reserve for uncollectable accounts in the amount of $586,525.

Note 8. Intangible Assets:

Prior fiscal years we tracked finite lived Intangible Assets and infinite lived Intangible Assets.  Effective May 1, 2018 we have elected to track all intangible assets as finite lived Intangible Assets and amortize according to a three years life cycle.  The following reflects our intangible assets:

Note 9. Cost Basis Investments

The Company has invested $4,253,645 through July 31, 2018.  A breakdown of these investments include:

Cost Basis Investments

As of July 31,

2018

As of April 30, 

2018

Stony Hill Corp

$

700,000

$  

700,000

Omni Health, Inc

152,023

152,023

CBJ Distributing Option

                -

50,000

New York Hemp Pilot Program

50,000

50,000

California City Cannabis Licenses

225,585

15,585

CBJ Distributing

2,966,029

                 -

Agri-Contractors, LLC

160,008

                 -

Total acquisition cost

$

4,253,645

  $ 

967,608

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Note 10. Business Segments:

The Company operates primarily in four segments; i) cultivation, manufacturing, and distribution, ii) retail sales, iii) technology, and iv) agriculture, 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, 2018 and 2017, and the identifiable assets for the segments in which the Company operates are shown in the following table:

Note 11. 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.

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 ended July 31, 2018 and July 31, 2017, respectively.

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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 ended July 31, 2018 and July 31, 2017, respectively.

Note 12. Acquisition

On May 1, 2018, the Company exercised its option to acquire CBJ Distributing, LLC.  The Company acquired all cash, inventory, prepaid expenses, inventory, fixed assets, and intellectual property for a total of $3,578,861.  The Company issued $3,388,078 in MCIG stock at the rate of $0.29 per share and paid $190,783 in cash a\through reduction of loans, option price, and accounts receivable owed by CBJ Distributing to the Company. As a condition to this acquisition, the Company entered into Employment Agreements with Charlie Fox and Alex Levinsky.

In accordance to rule, the following table reflects the determination of the purchase price of the CBJ Distributing, LLC business:

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Note 13. Related Parties and Related Party Transactions

The Company entered a Line of Credit with Paul Rosenberg (see Subsequent Events) for up to $100,000 in funding on May 1, 2016.  During 2016, the Company had various transactions in which Paul Rosenberg, the Company’s CEO and Chairman of the Board personally paid expenses on behalf of the Company.  As of April 30, 2017, the Company borrowed $173,312 from Paul Rosenberg.  On May 1, 2017, the Company increased the amount of the Line of Credit and Convertible Promissory Note for up to $250,000 in funding by Paul Rosenberg to accurately record the day-to-day transactions of the Company and Paul Rosenberg. In February 2018 we increased the line of credit to $1,000,000.  As of April 30, 2018, the Company owed Mr. Rosenberg $949,977.76, which includes the amount of $120,000 earned, covered under his employment agreement which was not paid to Mr. Rosenberg.

Note 14. Stockholders’ Equity

Common Stock

As of July 31, 2018, the Company was authorized to issue 560,000,000 common shares at a par value of $0.0001.  As of July 31, 2018, the Company had issued and outstanding 433,758,045 common shares.   

During the three months ended July 31, 2018 the Company issued 1,621,249 under its option plan for services rendered, 5,000,000 in conversion from Series A Preferred, and 11,525,987 in an acquisition. 

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 11,350,000 issued and outstanding as of July 31, 2018.  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.

Note 15. Subsequent Events

On August 1, 2018 the Company sold 80% of Tuero Capital, Inc., to its CEO and CFO in exchange for $20,000.  Tuero Capital was originally incorporated to become a merchant service provider.  The Company has determined not to enter this segment of business at this time.

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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, 2018.

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.

HISTORY AND BACKGROUND

We were incorporated in the State of Nevada on December 30, 2010 originally under the name Lifetech Industries, Inc. All agreements related to the Lifetech business were terminated and closed as of April 30, 2014.  Effective August 2, 2013, the name was changed from "Lifetech Industries, Inc." to "mCig, Inc."  The Company’s common stock is traded under the symbol “MCIG.”  The Company is based in Jacksonville, Florida.

mCig acts as a holding company that operates 10 subsidiaries.  In FY2017 we began tracking income through segments.  In FY2018 the company tracks its services and products through four segments and corporate.  We will track our financial records going forward by the following segments: 

·  Cultivation, Manufacturing and Distribution ("CMD")

·  Retail Sales  

·  Media and Technologies

·  Agriculture

·  Corporate

GENERAL

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.

In 2018 we added agriculture by planting a 40-acre lot in New York state to grow Hemp.  In addition, we acquired approximately two acres of land in California City, California and obtained three cannabis licenses (cultivating, manufacturing, and distribution of cannabis products in California).

In addition, the Company continues to look at strategic acquisitions in product and service developments for future growth.  Subsequent to this reporting date, but prior to the filing of this annual report, we acquired a cannabis supply company in Nevada.

During this fiscal year, we operated multiple websites (which are not incorporated as part of this Form 10K report). The Company’s primary website is mciggroup.com.

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MARIJUANA INDUSTRY OVERVIEW

As of April 2017, there are a total of 29 states, plus the District of Columbia, with legislation passed as it relates to the legalization of medicinal and/or recreational 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 29 states, plus the District of Columbia, have adopted laws that either legalize cannabis for adult recreational use or legalize cannabis for adult patients under a physician’s supervision. These are collectively referred to as the states that have de-criminalized recreational and/or medicinal cannabis, although there is a subtle difference between de-criminalization and legalization, and each state’s laws are different.

Medical cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts. Legalization is generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal, and regulated source.

The dichotomy between federal and state laws has also limited the access to banking and other financial services by marijuana businesses. The U.S. Department of Justice and the U.S. Department of Treasury issued guidance for banks considering conducting business with marijuana dispensaries in states where those businesses are legal, pursuant to which banks must now file a Marijuana Limited Suspicious Activity Report that states the marijuana business is following the government’s guidelines with regard to revenue that is generated exclusively from legal sales. However, since the same guidance noted that banks could still face prosecution if they provide financial services to marijuana businesses, it has led to the widespread refusal of the banking industry to offer banking services to marijuana businesses operating within state and local laws.

In November 2016, California and Nevada voters both approved cannabis use for adults over the age of 21 without a doctor’s prescription or recommendation, so called recreational marijuana, and permitted the cultivation and sale of marijuana, in each case subject to certain limitations. We intend to seek to obtain the necessary permits and licenses to expand our existing business to cultivate and distribute marijuana in compliance with these laws, although there is no guarantee that we will be successful in doing so. Despite the changes in state laws, marijuana remains illegal under federal law.

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, all companies that make, modify, mix, manufacture, fabricate, assemble, process, label, repack, relabel, or import any tobacco product are considered  tobacco product manufacturers.  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 FDA guidelines on electronic nicotine delivery systems.

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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, various governments’/ proposals to levy hefty taxes on vaporizer products 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. 

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

CANNABIDIOL (CBD) INDUSTRY OVERVIEW

Cannabidiol (CBD) is one of of over 100 cannabinoids, including tetrahydrocannibidol (THC), found in the cannabis plant. Unlike THC, CBD does not produce a euphoric psychoactive effect. CBD is used for a variety of health and wellness purposes, and .  is present in both marijuana and industrial hemp..  It is estimated that the CBD market will grow to  $2.1 billion  in consumer sales by 2020, with $450 million of those sales coming from hemp-derived CBD. -  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 29 states plus the District of Columbia that have legalized cannabis, 15 additional states have legalized CBD products. 

Currently, the DEA classifies CBD as a Schedule I drug under the Controlled Substances Act. However, the release of a new CBD-based pharmaceutical known as Epidiolex in June of 2018, means that the DEA has until September 2018 to reclassify cannabis as either Schedule 2, 3, 4, or 5.

It is believed that the DEA’s actions violate the clear Congressional intent of not only of the Farm Bill, which defines industrial hemp as distinct from ‘marijuana’ and legalizes its cultivation and processing under licensing programs in place in 31 states; but also further violate the Consolidated Appropriations Act of 2016, which specifically prohibited federal authorities from using funds to obstruct the “transportation, processing, sale, or use of industrial hemp within or outside the State in which the industrial hemp is grown or cultivated.” Hence, the DEA may not require lawfully licensed hemp farmers or manufacturers in the U.S. to register for a permit to engage in interstate commerce of industrial hemp products.  

To further cloud the market, the FDA has placed restrictions on claims made by CBD manufacturers and issued staunch warning for those who claim to provide product with health cures without proper documentation and clinical studies.  As such, CBD products are intentionally light on details which make it difficult for consumers to know what to buy.

HEMP AGRICULTURE INDUSTRY OVERVIEW

There are an estimated 25,000 products derived from hemp, that fall into nine submarkets: agriculture, textiles, recycling, automotive, furniture, food and beverages, paper, construction materials, and personal care. 

The estimated total retail value of hemp products sold in the U.S. in 2016 was $688 million, a 20% increase from the previous year.  There is an average of 15% annual growth in U.S. retail sales from 2010-2105.  China is the largest importer of raw and processed hemp fiber in the U.S.  Canada is the predominant importer of hemp seed and oil cake.

DESCRIPTION OF SEGMENTS

CMD Segment

We provide consulting services dealing with the cultivation, manufacturing, and distribution of hemp and cannabis products.  Our services include:

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Retail Sales

Our retail sales includes all products through distribution and online. We offer products for resale in the following categories:

·  CBD products

·  Supplies for cannabis distributors, growers, and dispensaries

·  Vaporizers

Media and Technologies Segment

In 2017 we acquired 420Cloud and began operations under GigeTech, which later was changed to OBITX.  We are currently in the process of an S-1 registration for the spinoff of this business.  MCIG will retain control of the business after the effective spinoff.  For purposes of this report, the Company has determined that OBITX is a variable interest entity (VIE).

We provide advertising services in the cannabis and cryptocurrency markets.  In addition, we provide software solutions, website development, and other social media services.

Agriculture

We have planted our first 40-acres of industrial hemp under NYAcres, Inc. through a joint venture with FarmOn! Foundation.  Through our partnership with FarmOn! Foundation we are participants in the New York state sanctioned agricultural pilot program.

In addition, we have recently acquired approximately 2 acres of land in California City, California where we have obtained three licenses in the cultivation, manufacturing, and distribution of cannabis through the CAL Foundation (formerly NEWCO2, Inc., a California not-for-profit).  We have entered into a joint venture between CAL Foundation and CAAcres, Inc. for the development of the California City project.

DESCRIPTION OF SUBSIDIARIES

mCig Internet Sales, Inc.

On June 1, 2016, the Company incorporated mCig Internet Sales, Inc., (“mCig Internet”) in the state of Florida in order to operate our CBD business and to consolidate all wholesale and online retail sales from various websites.  mCig Internet is a wholly owned subsidiary of the Company.  

VitaCig, Inc.

On May 26, 2016 we incorporated VitaCig, Inc., (“VitaCig”) in the state of Florida.  VitaCig headquarters our global e-cig operations.  VitaCig, Inc., is a wholly owned subsidiary of the Company.

Grow Contractors Inc

The Company incorporated Grow Contractors Inc., on December 5, 2016.  Grow Contractors Inc, operates the construction and consulting segment.  On November 18, 2016, the Company purchased Agri-Contractors, LLC and assigned the Grow Contractors name and website to Grow Contractors Inc.  Grow Contractors Inc., is a wholly owned subsidiary of the Company.

mCig Limited

We incorporated in May 2017 to provide corporate oversight to MCIG, and its subsidiaries, operations within the European theatre. mCig Limited., was incorporated in the United Kingdom. mCig Limited, is a wholly owned subsidiary of the Company. 

21

Tuero Asset Management, Inc.

We incorporated Tuero Asset Management, Inc., in which to manage all our intellectual and intangible assets.

OBITX, Inc.

We incorporated GigETech, Inc., in the state of Delaware on April 3, 2017.  We then assigned our newly acquired social media platform software to GigETech.  We launched the social media platform on April 20, 2017. GigETech, Inc., subsequently changed its name to OBITX, Inc. Currently we have approximately 95% voting control and 53% ownership on a fully diluted basis of OBITX.  OBITX is currently filing an S-1 Registration statement to become an independent publicly traded company. 

NYAcres, Inc.

NYAcres, Inc., (“NYAcres”) was incorporated on November 20, 2017 under the laws of the state of New York.  NYAcres was created to participate in the Joint Venture NYAcres with FarmOn! Foundation.  The joint venture is an agriculture venture for the planting and growing of industrial hemp.

CAL Acres  Foundation (FKA Newco2, Inc)

Cal Foundation was created on January 19, 2018 as a California not-for-profit company.  We own 80% of the not-for-profit business.  Cal Foundation maintains three cannabis licenses in the State of California.

CAAcres, Inc.

CAAcres, Inc., (“CAAcres”) was incorporated on May 10, 2018 under the laws of the state of California.  CAAcres was created to participate in the Joint Venture with Cal Foundation for the cultivation, manufacturing, and distribution of cannabis products within the state of California.  CAAcres is an agriculture venture for the cultivation, manufacturing and distribution of cannabis products. We are currently assessing the requirements for the build out of the land acquired in California City, California for this project. 

Vapolution, Inc.

On January 23, 2014, the Company entered into a Stock Purchase Agreement acquiring 100% ownership in Vapolution, Inc., which manufactures and retails home-use vaporizers. As part of this transaction, .mCig, Inc. issued 5,000,000 common shares to shareholders of Vapolution, Inc. in two separate payments of 2,500,000 common shares. The shareholders of Vapolution, Inc. retained the right to rescind the transaction, which expired on January 23, 2015 but was extended to May 23, 2015. Subsequently, on August 25, 2015, the final payment to the shareholders of Vapolution as extended to September 30, 2015 and the right to rescind the transaction was extended to June 30, 2017.  On April 30, 2015 the Company impaired the $625,000 initial investment into Vapolution, Inc., but maintains the $67,500 investment on its balance sheet for the second payment.

On January 23, 2014, Paul Rosenberg, CEO of mCig, Inc. cancelled an equal amount (2,500,000 shares) of common shares owned by him resulting in a net non-dilutive transaction to existing mCig, Inc. shareholders. The remaining 2,500,000 of common shares owned by Paul Rosenberg were cancelled to offset the 2,500,000 new shares issued from the treasury to complete the purchase of Vapolution, Inc.

On January 17, 2017 the Company entered into a settlement agreement with the previous owners of Vapolution, Inc., whereby they returned to the Company 1,700,000 shares of MCIG common stock, $961 in cash, and $40,541 in inventory. Prior to this, Vapolution was not incorporated in to the consolidated financial statements of the Company.  Effective January 17, 2017 we began consolidating Vapolution with the Company’s financial reports.  Vapolution, Inc., is wholly owned by mCig, Inc. 

Agri-Contractors, LLC

On November 18, 2016 we acquired, through a Purchase Agreement, Agri-Contractors, LLC.  We combined the operations of Agri-Contractors with Grow Contractors Corp and expanded the services to include consulting.  We merged the operations of Agri-Contractors, LLC with Grow Contractors in December 2016.  Agri-Contractors, LLC provides consulting services to grow facilities, production companies, and dispensaries servicing the cannabis medical and recreational markets.

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Cannabiz Supply, LLC

On June 30, 2018 the company elected to exercise its option to acquired Cannabiz Supply with an effective date of May 1, 2018.  The purchase price was $3,457,796.

Critical Accounting Policies and Estimates

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 our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies.  

We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances.  These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain.  If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Our operating results for the three months ended July 31, 2018 and 2017 are summarized as follows:

Results of Operations

Revenue

Our revenue from operations for the three months ended July 31, 2018 was $630,676 compared to $3,172,845, a decrease of $2,543,169 from the three months ended July 31, 2017.  This decrease is primarily a result of the construction segment which had a decrease of $2,634,206 offset by an increase in retail sales of $92,037 for the three months ended July 31, 2017.  

Cost of Goods Sold

Our cost of goods sold for the three months ended July 31, 2018 was $611,423 compared to $2,768,959 for the three months ended July 31, 2017. The decrease is primarily due to the decrease in construction projects.

Gross Profit

Our gross profit for the three months ended July 31, 2018 was $19,253 compared to $403,886 for the three months ended July 31, 2017. The gross profit of $403,886 for the three months ended July 31, 2017 represents approximately 13% as a percentage of total revenue. The gross profit of $19,253 for the three months ended July 31, 2018 represents approximately 3% as a percentage of total revenue. This decrease in the gross profit is primarily attributed to the inclusion of amortization of assets directly associated with sales. 

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Operating Expenses

Our operating expenses increased by $273,198 to $600,163 for the three months ended July 31, 2018, from $326,965 for the three months ended July 31, 2017.

The increase was primarily due to the increase in stock based compensation of $28,990, professional fees of $40,133, marketing fees of $31,616, consulting fees of $167,911, and amortization and depreciation of $23,571.

Our total operating expenses for the three months ended July 31, 2018 of $600,163 consisted of $72,114 of selling, general and administrative expenses, $55,419 of professional fees, consulting expense of $328,979, marketing expense of $38,619, stock-based compensation of $28,990, and $76,042 of amortization and depreciation expenses. Our general and administrative expenses consist of bank charges, telephone expenses, meals and entertainments, computer and internet expenses, postage and delivery, office supplies and other expenses.

Net Income (Loss)

Our net loss of $580,910 for the three months ended July 31, 2018 from a net income of $76,921 for the three months ending July 31, 2017 represents a deficit of $657,831. The increase in net loss compared to the prior period net income is primarily a result of the gross profit decrease of $384,633, and an increase in operating expenses of $273,198.

Liquidity and Capital Resources

Introduction

During the three months ended July 31, 2018 we utilized $62,198 in cash. Our cash on hand as of July 31, 2018 was $449,752.

Cash Requirements

We had cash available of 449,752 as of July 31, 2018.  Based on our revenues, cash on hand and current monthly burn rate, around break-even, we believe that our operations are sufficient to fund operations through April 2019.

Sources and Uses of Cash

Operations

We used $919,609 in cash by operating activities for the three months ended July 31, 2018, as compared to $434,311 for the three months ended July 31, 2017.

Net cash used by operations consisted primarily of the net loss of $580,387 offset by non-cash expenses of $225,849 consisting of $196,859 in depreciation and amortization of intangible assets and $28,990 in stock-based compensation. Additionally, changes in assets and liabilities consisted of increases of $144,527 in accounts receivable, accounts payable of $240,947, other receivables of $1,529 and prepaid expenses of $66,185 with decreased in deferred revenue of $1,245, reserve for uncollectable accounts of $34 and inventory of $1,016,980.

Investments

We gained $38,523 in investing activities for the three months ended July 31, 2018 compared to using $23,166 for the three months ended July 31, 2017. Our investing activities consisted primarily of $50,000 in redemption of an option, along with $1,925 utilized in the acquisition of property, plant, and equipment and $9,552 in intangible assets. The PPE consisted of the acquisition of land of $225,000, the acquisition of farm equipment of $39,599, and the acquisition of CBJ Distributing assets of $47,758,  off set by $299,970 in PPE transferred to inventory for sale and decrease of PPE of $10,462.

Financing

We had net cash provided in financing activities of $818,888 and $510,411 for the three months ended July 31, 2018 and 2017 respectively. Our financing activities consisted of an increase in net proceeds from the issuance of stock of $422,049 and an increase of $396,839 of advances made by a related party.

Our adjusted operating results for the three months ended July 31, 2018 and 2017 are summarized as follows:

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Going Concern

Our financial statements are prepared using generally accepted accounting principles, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. Because the business is relatively new and has a short history and relatively few sales, no certainty of continuation can be stated. The accompanying financial statements for the three months ended July 31, 2018 have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company has suffered losses from operations and has an accumulated deficit, which raises substantial doubt about its ability to continue as a going concern

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.

We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2018. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures.

As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.

Changes in internal controls over financial reporting

There have been no changes in our internal control over financial reporting during the quarter ended July 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls  

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

The Company subsidiary, Grow Contractors, Inc., along with the Company and its officers was sued by APEX Management, LLC and Apex Operations, LLC (the “Solaris” project) for the return of approximately $600,000 in cash paid for services they allege were never provided.  We have countersued for the payment of approximately $425,000 in services provided that have not yet been paid for.  In addition, we have sued both Michael Sassano and Ronald Sassano individually for their roles in the alleged actions.  Currently the case is in discovery.

The Company subsidiary, Grow Contractors, Inc., was sued for alleged faulty services provided in the state of Oregon.  Grow Contractors alleges it has outstanding, unpaid invoices and services were stopped for lack of payment.

Item 1A. Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended July 31, 2017 the Company issued 1,621,249 under its option plan for services rendered, 5,000,000 in conversion from Series A Preferred, and 11,525,987 in an acquisition. 

Item 3. Defaults Upon Senior Securities

There have been no events that are required to be reported under this Item.

Item 4. Mine Safety Disclosures

There have been no events that are required to be reported under this Item.

Item 5. Other Information

There have been no events that are required to be reported under this Item.

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31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 *

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 *

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS 

XBRL Instance Document

101.SCH 

XBRL Taxonomy Extension Schema Document

101.CAL 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE 

XBRL Taxonomy Extension Presentation Linkbase Document

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.