UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ For the quarterly period ended OR ☐ For the transition period from __________ to Commission File Number: 033-33263 Jacksam Corporation (Exact name of registrant as specified in its charter) Nevada 46-3566284 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 30191 Avenida De Las Banderas Suite B Rancho Santa Margarita, CA 92688 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (800) 605-3580 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 Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes As of Page PART I Item 1. Financial Statements 4 5 6 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 23 23 23 23 23 24 25 Forward-Looking Statements For purposes of this report, unless otherwise indicated or the context otherwise requires, all references herein to “Jacksam Corporation,” “the Company,” “we,” “us,” and “our,” refer to Jacksam Corporation, a Nevada corporation. This Quarterly Report on Form 10-Q, or this Report, contains forward-looking statements. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of our cartridge filling machines, cartridge capping machines and cartridges, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above. The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Consolidated Balance Sheets Consolidated Balance Sheets Consolidated Balance Sheets (Unaudited) (Audited) (Unaudited) (Audited) March 31, December 31, June 30, December 31, 2020 2019 2020 2019 Assets Assets Assets Current Assets: Cash Accounts receivable, net Inventory, net Prepaid expenses Total Current Assets Property and equipment, net Right of use asset - operating lease Total Assets Liabilities and Stockholders’ Deficit Liabilities and Stockholders’ Deficit Liabilities and Stockholders’ Deficit Current Liabilities: Accounts payable and accrued expenses Deferred revenue Convertible notes payable, current portion Notes payable Notes payable, current portion Right of use liability - operating lease Derivative liability Accrued liabilities - other Total Current Liabilities Notes payable, net of current portion Other long-term liabilities Total Liabilities Commitment Stockholders' Deficit: Preferred stock - 10,000,000 authorized, $0.001 par value, 0 shares issued and outstanding Common stock - 90,000,000 authorized, $0.001 par value, 63,348,163 and 62,871,972 shares issued and outstanding, respectively Common stock - 90,000,000 authorized, $0.001 par value, 64,246,830 and 62,871,972 shares issued and outstanding, respectively Additional paid-in capital Subscriptions payable, consisting of 8,816,661 and 0 shares of common stock as of March 31, 2020 and December 31, 2019, respectively. Shares payable, consisting of 10,069,435 and 0 shares of common stock, respectively. Accumulated deficit Total Stockholders' Deficit Total Liabilities and Stockholders' Deficit The accompanying notes are an integral part of these unaudited condensed consolidated financial statements The accompanying notes are an integral part of these unaudited condensed consolidated financial statements The accompanying notes are an integral part of these unaudited condensed consolidated financial statements Consolidated Statements of Operations For the (Unaudited) Three Months Ended Three Months Ended Three Months Ended Three Months Ended Six Months Ended Six Months Ended March 31, 2020 March 31, 2019 June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Sales Cost of Sales Gross Profit Operating Expenses Salaries and wages (including contractors) Other selling, general and administrative expenses Total Operating Expenses Loss from Operations Other Expense Other expense Other income (expense) Derivative gain (loss) Interest expense Total Other Expense Total Other Income (Expense) Net Loss Net Income (Loss) Net loss per share �� Basic and diluted Basic and diluted Net Income (Loss) Per Share Basic and Diluted Weighted Average Shares Outstanding Basic and Diluted The accompanying notes are an integral part of these unaudited condensed consolidated financial statements The accompanying notes are an integral part of these unaudited condensed consolidated financial statements The accompanying notes are an integral part of these unaudited condensed consolidated financial statements Consolidated Statements of Stockholders' Deficit For the three months ended March 31, 2020 and 2019 (Unaudited) Common Stock, $.001 Par Value Paid-In Shares Accumulated Stockholders' Shares Amount Capital Payable Deficit Deficit Balance, December 31, 2018 Cumulative effect of ASU 2016-02 Common stock issued for debt conversion Exercise of common stock warrants Convertible debt imputed interest Net loss Balance, March 31, 2019 Balance, December 31, 2019 Convertible debt imputed interest Common stock issued for debt conversion Sale of common stock units Extinguishment of derivative liability due to conversion Net loss Balance, March 31, 2020 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements Consolidated Statements of Stockholders' Deficit For the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) Common Stock, $.001 Par Value Paid-In Shares Accumulated Stockholders' Shares Amount Capital Payable Deficit Deficit Balance, December 31, 2018 Cumulative effect of ASU 2016-02 Common stock issued for debt conversion Exercise of common stock warrants Convertible debt imputed interest Net loss Balance, March 31, 2019 Exercise of common stock warrants Convertible debt imputed interest Net loss Balance, June 30, 2019 Balance, December 31, 2019 Convertible debt imputed interest Common stock issued for debt conversion Sale of common stock units Extinguishment of derivative liability due to conversion Net loss Balance, March 31, 2020 Convertible debt imputed interest Sale of common stock units Shares issued for deferred finance costs Shares issued under share-lending arrangement Shares returned under share-lending arrangement Net loss Balance, June 30, 2020 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows For the three months ended March 31, 2020 and 2019 For the Six Months Ended June 30, 2020 and 2019 For the Six Months Ended June 30, 2020 and 2019 (Unaudited) (Unaudited) (Unaudited) 2020 2019 2020 2019 Cash Flows from Operating Activities Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense Imputed interest Amortization of debt discount Derivative gain Derivative loss Inventory impairment Net change in: Accounts receivable Inventory Prepaid expenses Right of use asset Other assets Accounts payable and accrued expenses Right of use liability Other long-term liabilities Deferred revenue Net cash used in operating activities Cash Flows from Investing Activities Purchase of property and equipment Net cash provided by investing activities Net cash used in investing activities Cash Flows from Financing Activities Payment on convertible notes payable Proceeds from convertible notes payable Payments of debt issuance cost Payments on convertible notes payable Proceeds from notes payable Payment on notes payable Payments on notes payable Proceeds from sale of common stock units Proceed from exercise of common stock warrants Proceeds from exercise of common stock warrants Net cash provided by financing activities Net Change in Cash Cash Balance, Beginning of Period Cash Balance, End of Period Cash paid for: Income taxes Interest Non-cash transactions: Common stock issued to settle convertible notes payable Derivative liability recognized at issuance of warrants Extinguishment of derivative to conversion and repayment Common stock issued for deferred finance costs Capitalization of right of use asset for operating lease The accompanying notes are an integral part of these unaudited condensed consolidated financial statements The accompanying notes are an integral part of these unaudited condensed consolidated financial statements The accompanying notes are an integral part of these unaudited condensed consolidated financial statements Notes to Unaudited Condensed Consolidated Financial Statements Note 1: Organization and Nature of Operations Jacksam Corporation dba Convectium is a technology company that designs and develops high-performance automation machines and solutions for the medical and recreational cannabis, hemp and CBD segments of the larger e-cigarette and vaporizer markets. Prior to July 2019, the Company’s product line primarily consisted of the 710 Shark cartridge filling machine, the 710 Captain cartridge capping machine, and proprietary cartridges. During the fourth quarter of 2019, the Company entered into a strategic partnership with Jupiter Research, During the second quarter of 2020, the Company entered into a strategic partnership with The Company’s customers are primarily businesses operating in jurisdictions that have some form of cannabis legalization. These businesses include medical and recreational dispensaries, large and small-scale processors and growers, multi-state operators, and distributors. The Company utilizes its direct sales force, website, The Company was originally organized under the laws of the State of Nevada on September 21, 1989 under the name of Fulton Ventures, Inc. Effective November 16, 2009, management at that time changed the name of Fulton Ventures, Inc. to China Grand Resorts, Inc. After the September 30, 2014 10-Q filing, the management of China Grand Resorts, Inc. abandoned the Company and its subsidiaries were taken back by Chinese national companies in China who owned them. The remaining parent company, China Grand Resorts, Inc., became a dormant company until 2016 when a new shareholder Bryan Glass became the majority shareholder and owner of the Company. On September 14, 2018, the Company’s wholly owned subsidiary, Jacksam Acquisition Corp., a corporation formed in the State of Nevada on September 11, 2018, or the Acquisition Sub, merged with and into Jacksam, a corporation incorporated in the State of Delaware in August 2013. On November 5, 2018, current management merged Jacksam into the parent Company, China Grand Resorts, Inc. In connection with the transaction, current management amended our articles of incorporation to change the Company’s name from China Grand Resorts, Inc. to Jacksam Corporation dba Convectium. Since the Merger, the Company has been operated under the control of current management and continued to operate the business of Jacksam Corporation, described herein, as our sole business. In accordance with the terms of the Exchange Agreement, and in connection with the completion of the acquisition, on the Closing Date, the Company issued 45,000,000 shares of common stock at par value $0.001 per share to the Jacksam shareholders in exchange for all of the issued and outstanding shares of Jacksam. In addition, the previous owners of China Grand Resorts, Inc. returned 30,000,000 shares of common stock to the treasury of the Company. Following the acquisition, there was a total of 48,272,311 shares of common stock issued and outstanding, of which 3,272,311 were held by shareholders of the Company prior to the In accordance with “reverse merger” or “reverse acquisition” accounting treatment, the historical financial statements of China Grand Resorts, Inc., as of period ends and for periods ended prior to the Merger, will be replaced with the historical financial statements of Jacksam, prior to the Merger, in all future filings with the SEC. Note 2: Significant Accounting Policies Basis of Preparation The interim unaudited consolidated financial statements as of Inventory Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method or net realizable value. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand. The Revenue Recognition The Company derives revenues from the sale of machines and consumable products. Revenue is recognized based on the following five step model: Identification of the contract with a customer Identification of the performance obligations in the contract Determination of the transaction price Allocation of the transaction price to the performance obligations in the contract Recognition of revenue when, or as, the Company satisfies a performance obligation Performance Obligations Sales of machines and consumable products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. The customer has a 10-day period to inspect the equipment and may return the product if it does not meet the agreed-upon specifications. For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. Historically, the Company’s contracts have not had multiple performance obligations. Most the Company’s performance obligations are recognized at a point in time related to the sale of machines and consumable products. Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Payment terms between invoicing and when payment is due is less than one year. As of The Company elected the practical expedient to not adjust the amount of revenue to be recognized under a contract with an end user for the effects of time value of money when the timing difference between receipt of payment and recognition of revenue is less than one year. The majority of the Company’s contracts offer an assurance-type warranty of the products at no additional cost for a period of 3 years. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. At the time a sale is recognized, the Company estimated future warranty costs, which were trivial. Transaction Price Allocated to the Remaining Performance Obligations At a given point in time, the Company may have collected payment for future sales of product to begin production. These transactions are deferred until the product transfers to the customer and the performance obligation is considered complete. As of Contract Costs Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within cost of goods and services. Critical Accounting Estimates Estimates are used to determine the amount of variable consideration in contracts, the standalone selling price among separate performance obligations and the measure of progress for contracts where revenue is recognized over time. The Company reviews and updates these estimates regularly. Disaggregation of Revenue All machine sales and most consumable products sales are completed in North America. Three Months Ended March 31, 2020 Three Months Ended March 31, 2019 Three Months Ended June 30, 2020 Three Months Ended June 30, 2019 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019 Machine sales Consumable product sales Total sales Net Loss Per Common Share Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises that are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation. During the The Company had Going Concern The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have a source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon its ability to successfully execute the business plan and attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern. In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the SEC, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital. Historically, it has mostly relied upon convertible notes payable from private investors and cash flows from operations to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders. Recently Issued Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective and will not have a material effect on its consolidated financial position or results of operations upon adoption. Note 3: Property and Equipment Property and equipment consist of the following: March 31, 2020 December 31, 2019 June 30, 2020 December 31, 2019 Furniture and fixtures Equipment Trade show display Total Less: Accumulated depreciation Property and equipment net Depreciation expense amounted to Note 4: Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: March 31, 2020 December 31, 2019 June 30, 2020 December 31, 2019 Accounts payable Credit cards payable Accrued interest Sales tax payable Accrued officer consulting cost Total Accounts payable and accrued expenses Note 5: Notes Payable A summary of Notes Payable March 31, 2020 December 31, 2019 June 30, 2020 December 31, 2019 Note payable dated December 31, 2019, bearing interest at 3% monthly, maturing February 29, 2020 (amended on April 22, 2020) Note payable dated February 6, 2020, bearing interest at 3% monthly, maturing April 6, 2020 (amended on April 22, 2020) Notes payable dated December 31, 2019, bearing interest at 3% monthly, maturing February 29, 2020 (amended on April 22, 2020) Notes payable dated February 6, 2020, bearing interest at 3% monthly, maturing May 27, 2022 (amended on April 22, 2020) SBA PPP loan dated April 17, 2020, bearing interest at 1%, maturing April 17, 2022 SBA EIDL loan dated May 26, 2020, bearing interest at 3.75%, maturing May 26, 2050 Total notes payable Less: unamortized discount and deferred financing costs Less: current portion Long-term portion of notes payable On December 31, 2019, the Company entered into an inventory financing arrangement with a single lender, whereby $150,000 was paid by the lender directly to a vendor to secure inventory for the sales to customers in January 2020. The Company On June 2, 2020, the Company received $150,000 under the Small Business Administration’s Economic Injury Disaster Loan. The loan bears interest at a fixed rate of 3.75%, and The Company amortized Note 6: Convertible Notes Payable The following table summarizes outstanding convertible notes as of March 31, 2020 December 31, 2019 June 30, 2020 December 31, 2019 2017 Notes, maturing December 2020, currently past due June 2019 Notes, maturing March 25, 2020, currently past due December 2019 Notes, maturing June 10, 2020 June 2020 Notes 1, maturing June 4, 2021 June 2020 Notes 2, maturing June 24, 2021 Total Less: Debt discount and deferred finance costs on short-term convertible notes Less: Current convertible notes payable, net of discount Total long-term convertible notes payable, net In June and July 2019, the Company issued convertible notes to 10 investors with a principal amount of $2,388,889, receiving $1,583,333 in net cash proceeds (the “June 2019 Notes”). The June 2019 Notes had an original issue discount of $238,889, and the Company incurred an interest charge deducted from the gross proceeds of $358,333, based on a 15% stated rate. The total of $597,222 was recorded as debt discount. Additionally, the Company paid $132,848 of financing costs, which were recorded as a reduction of the carrying value of the debt. The deferred financing costs and debt discounts are being amortized using the effective interest method through the maturity of the June 2019 Notes. The June 2019 Notes matured on March 25, 2020 and are convertible into the Company’s common stock at a per share price of $0.35 at any time subsequent to the issuance date. The June 2019 Notes contain a down round feature, whereby any sale of common stock or common stock equivalent at a price per share lower than the conversion price of the June 2019 Notes will result in the conversion price being lowered to the new price. The warrants contain the same down round feature as the notes. As a result of a dilutive issuance during the During the In December 2019, the Company issued convertible notes to an institutional investor with a principal amount of $560,000 (the “December 2019 Notes”) with an original issue discount of $56,000 and a maturity date of June 10, 2020. The Company paid $44,000 of deferred finance costs. The Company also issued 186,667 shares of common stock to the lender of the December 2019 Notes as deferred finance costs, valued at $81,200 based on the closing price of the stock at the date of borrowing. This lender also received 933,333 shares of common stock valued at $406,000 as a share lending arrangement, which the company recorded as contra-equity. The shares were returned to the Company when the debt was repaid in full in June 2020, by the maturity date. On June 4, 2020, the Company issued a convertible note to an institutional investor with a principal amount of $175,000 (the “June 2020 Notes 1”) bearing interest at 15% with an original issue discount of $17,500 and a maturity date of June 4, 2021. The Company paid $17,100 of deferred finance costs. The Company also issued 116,667 shares of common stock to the lender of the June 2020 Notes 1 as deferred finance costs, valued at $23,333 based on the closing price of the stock at the date of borrowing. In May 2020, the Company issued 100,000 shares of common stock to an investment bank that were recorded as a deferred finance costs, valued at $15,000 based on the closing price of the stock at the date of issuances. This lender also received 583,333 shares of common stock valued at $116,667 under a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense. On June 24, 2020, the Company issued convertible notes to an institutional investor with a principal amount of $129,000 (the “June 2020 Notes 2”) bearing interest at 15% with an original issue discount of $12,900 and a maturity date of June 24, 2021. The Company paid $13,500 of deferred finance costs. The Company also issued 86,000 shares of common stock to the lender of the June 2020 Notes 2 as deferred finance costs, valued at $17,200 based on the closing price of the stock at the date of borrowing. This On June 24, 2020, the Company entered into a convertible note agreement with an institutional investor for a principal amount of $129,000 (the “June 2020 Notes 3”) bearing interest at 15% with an original issue discount of $12,900 and a maturity date of June 24, 2021. The proceeds of this loan were received in July 2020, and therefore no principal balance is reflected on the Company’s balance sheet as of June 30, 2020. The Company will pay $13,500 of deferred finance costs. In June 2020 the Company issued 86,000 shares of common stock of the June 2020 Notes 2 as deferred finance costs, valued at $17,200 based on the closing price of the stock at the date of borrowing, which were recorded as a prepaid expense. This lender also received 430,000 shares of common stock valued at $86,000 as a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense. The Company amortized The Company evaluated the embedded conversion features of the convertible debt instruments and the warrants discussed above and determined that the conversion options and the warrants should be accounted for as derivative liabilities. The fair values of the conversion option and the attached warrants were estimated using a binomial model with the following assumptions: As of March 31, 2020 As of June 30, 2020 Conversion Option Warrants Conversion Option Warrants Volatility 82.9-88.7 % 87.8-93.9 % Dividend Yield Risk-free rate 0.29-0.37% Expected term 0.50 years 3-4.25 years 0.50 years 3-4 years Stock price 0.2399-0.545 Exercise price 0.20-0.35 0.20-0.30 $0.18-0.30 Derivative liability fair value All fair value measurements related to the derivative liabilities are considered significant unobservable inputs (Level 3) under the fair value hierarchy of ASC 820. The table below presents the change in the fair value of the derivative liability during the Fair value as of December 31, 2019 Fair value on the date of issuance related to warrants issued Extinguishment due to repayment of debt Extinguishment due to conversion of debt Loss on change in fair value of derivatives Fair value as of March 31, 2020 Fair value as of December 31, 2019 Fair value on the date of issuance related to warrants issued Extinguishment due to repayment of debt Extinguishment due to conversion of debt Loss on change in fair value of derivatives Fair value as of June 30, 2020 Note 7: Equity Common Stock As of During the During the During the six months ended June 30, 2020, the Company issued a total of 388,667 shares of common stock to an investment banker and the various lenders in connection with the convertible notes payable issued during the period. These shares had a fair value of $72,733 and were recorded as deferred finance costs. Additionally, 1,443,333 shares of common stock with a fair value of $288,667 were issued to the convertible note lenders under a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense. In connection with the repayment of the December 2019 Notes in June 2020, the lender returned 933,333 shares previously issued under the share lending arrangement, which were cancelled. Stock Warrants A summary of stock warrant information is as follows: Aggregate Number Aggregate Exercise Price Weighted Average Exercise Price Aggregate Number Aggregate Exercise Price Weighted Average Exercise Price Outstanding at December 31, 2019 Granted Warrants issued due to reset provisions Warrants issued with common stock units Exercised Forfeited and cancelled Outstanding at March 31, 2020 Outstanding at June 30, 2020 The weighted average remaining contractual life is approximately Note 8: Related Party Mark Adams, CEO, and David Hall, EVP of Sales invested in the June 2019 Notes. Mr. Adams and Mr. Hall contributed $250,000 and $100,000 respectively, and converted their debt during the Note 9: Commitments Employment Agreement In December 2017, the Company entered into an employment agreement with Daniel Davis and Mark Adams. As of the Effective Date, and for one year of the date therefrom, the Executive’s annual salary shall be equal to $180,000 and $120,000, respectively, per annum (the “Annual Salary”). The Annual Salary shall be paid to the Executive in equal installments in accordance with the Company’s usual payroll practices. Executive’s Annual Salary shall increase automatically at the rate of five percent (5%) per year for four years, beginning on the anniversary date of the Effective Date. In addition to the automatic raises set forth above, the Annual Salary may also be increased from time to time by merit and general increases in amounts determined by the Board. Performance Bonus. In addition to the Annual Salary, the Executive is eligible to earn an annual bonus of up to thirty percent (30%) of Executive’s Annual Salary (the “Performance Bonus”). The amount of the Performance Bonus will be determined in good faith by the Board, based upon the following factors: (a) Fifty percent (50%) of the Performance Bonus shall be based upon the achievement of the Executive’s individual objectives, as defined in writing and presented to Executive annually by the Board. (b) Fifty percent (50%) of the Performance Bonus shall be based upon the achievement of Company objectives, which shall include specifically, meeting or exceeding the revenue targets and other objectives as determined by the Board. The initial set of performance objectives, both for Executive individually and for the Company, will be reasonably established by the Board within sixty (60) days of the Effective Date of this Agreement. Subsequent performance objectives, both for Executive individually and for the Company, will be reasonably established by the Board within sixty (60) days of the beginning of the calendar year to which the Performance Bonus relates. The Performance Bonus shall be paid to Executive in the first regular payroll period after the Board makes a good faith determination that such Performance Bonus has been earned, but in no event shall the Performance Bonus be paid later than March 1 of the calendar year immediately following the calendar year in which the bonus was earned. In addition to salary, the agreement provided for the option of 1,000,000 common shares of the Company, which shall vest at a rate of 28,000 share for each full one-month period worked from the Effective Date. If this Agreement is terminated pursuant to written notice by the Company to the Executive on or before the date that is one year after the Effective Date, all the options shall vest and the Executive shall retain the options subject to their terms and the terms hereof. The options may contain terms providing the issuer the right to accelerate vesting and/or require the exercise of options prior to the initial public offering and listing of the issuer. The Company may arrange for the grant of additional options to the Executive from time to time based on the Executive’s performance and other relevant factors as the Board may determine in its discretion. All options to purchase Holdings Shares granted to the Executive shall be subject to the terms of the stock option agreement pursuant to which they are granted and the terms of the stock option plan under which they are granted in effect from time to time. Shares issuable on exercise of the options shall be subject to any escrow, trading restriction, or other requirement imposed by any stock exchange or securities regulatory authority upon initial public offering or listing of the shares. The Executive shall take such steps and execute and deliver such documents as may be required to affect the foregoing. The Company may terminate Executive’s employment for Cause immediately upon Notice from the Company to Executive. For purposes of this Agreement, “Cause” shall mean the occurrence of any of the following: (i) Executive’s conviction of or plea of nolo contendere to any felony crime involving fraud, dishonesty, or moral turpitude; (ii) Executive’s commission of, or participation in, a fraud against the Company. In the event Executive’s employment is terminated for Cause, the Company shall have no further obligations to the Executive other than to pay all compensation and expense reimbursements owing for services rendered and reasonable business expenses incurred by Executive prior to the effective date of such termination. Upon termination of this agreement pursuant, the Company shall provide to the Executive: (a) A lump sum payment equal to the greater of (i) twelve (12) months’ Annual Salary at the Executive’s then- current rate, or (ii) Executive’s Annual Salary for the remainder of the Term; (b) if applicable, to the extent permitted by the Company’s group insurance carrier and applicable law, continued group insurance benefits coverage, together with reimbursement of the individual life insurance premium for the period of time equal to the number of months in respect of which payment is due pursuant and; (c) any other amounts (including but not limited to any earned Performance Bonus during the Executive’s active employment that may be payable pursuant to this Agreement) accrued and earned by the Executive prior to the effective date of termination. If a Change of Control occurs and the Executive is not offered continued employment on a comparable basis after the Change of Control, the Executive shall be entitled to receive, within thirty (30) days after the Change of Control, a sum equivalent to twelve (12) months’ Annual Salary, plus an additional 4% of Annual Salary in lieu of benefits, and any Performance Bonus that has been earned by Executive prior to the effective date of the Executive’s termination from the Company. Thereafter, the Company shall have no further obligations to the Executive under this Agreement other than payment of any other amounts accrued as owing to the Executive under this Agreement as of the date the Change of Control occurs. On May 31, 2019, the Company entered into a consulting agreement with Daniel Davis Leases The Company has a single operating lease for an office lease in Rancho Santa Margarita, California with an initial term of 37 months. Base monthly rent was approximately $3,200 per month plus net operating expenses. The office lease expired in February 2020, and the Company is currently continuing the lease on a month to month basis. The Company also maintains short-term rental agreements for certain storage facilities. Total rent expense for these rentals was Note 10: Accrued Liabilities – Other Prior to the Merger, China Grand Resorts, Inc. recorded various liabilities that were incurred by former related parties. The current management team is not aware of any written agreements in place governing the terms of the loans nor have they been in contact with the debt holders however recognizes that China Grand Resorts, Inc. previously reported these amounts as liabilities of the Company. In accordance with ASC 405-20-40, the liabilities may only be removed from the Company’s financial statements if they are paid, formally settled or judicially released. Management believes the relevant statute of limitations has passed and that no enforceable legal claim exists in relation to these liabilities of $1,642,118, but does not believes that is sufficient to remove the liability from the financial statements. Management does not intend to remove these liabilities of $1,642,118 from the Company’s financial statements until such time that the liability is formally settled or judicially released in accordance with ASC 405-20-40. Due to the lack of written agreements and other factors noted above, management concluded to no longer accrue interest on these loans. Note 11: Subsequent Events In Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations include several forward-looking statements that reflect management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. Important factors currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing of our products, and competition. The following discussion provides information that management believes is relevant to an assessment and understanding of our past financial condition and plan of operations. The discussion below should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Overview The Company was originally incorporated in the State of Nevada on September 21, 1989 under the name of Fulton Ventures, Inc. Since incorporated, the Company has engaged in a variety of businesses, but has been inactive since late 2014 through the Merger that closed on September 14, 2018. Since the Merger, the Company has been operated under the control of current management and continued to operate the business of Jacksam Corporation, described herein, as our sole business. Our sole business has been the design, manufacturing and sale of vaporizer cartridge filling machines, capping machines, and cartridges to customers in the medical and recreational cannabis, hemp, and CBD industries. Basis of Presentation The unaudited condensed consolidated financial statements of Jacksam Corporation as of Components of Statements of Operations Revenue Product revenue consists of sales of our eShark cartridge filling machine, 710 Shark cartridge filling machine, 710 Captain cartridge capping machine, cartridges, accessories, warranty, service and freight charges, net of returns, discounts and allowances. Once a sales order is negotiated and received by a sales representative, we generally collect a 50% deposit from the customer. When the product is ready to be shipped, the customer will generally pay the remaining balance. We recognize the revenue when the product leaves the warehouse on the way to the customer. For the filling and capping machines, training is coordinated with the customers in accordance with their availability but generally completed within a week or two of the shipment. Standard warranties are offered at no cost to customers to cover parts for three years, and labor and maintenance are offered for one year for product defects. Cost of Revenue Cost of goods sold represents costs directly related to supplies and materials, machines, freight and delivery, commissions, printing, packaging and other costs. We expect our cost of goods sold per unit to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of compensation, benefits, travel and other costs for our direct sales force and project managers. Sales and marketing expenses also include costs associated with our business development efforts with our distributors and partners and costs related to trade shows and other marketing programs. We expense sales and marketing costs as incurred. We expect sales and marketing expenses to increase in future periods as we expand our sales and marketing teams and increase our participation in global trade shows and other marketing programs. General and Administrative. Our general and administrative expenses consist primarily of compensation, benefits, travel and other costs for employees with non-sales roles. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, and allocations of overhead costs, such as rent, facilities and information technology. In the near term, we expect general and administrative expenses to decrease driven by our cost reduction initiatives. In the long term, we expect general and administrative expenses to increase as we grow our business. Interest Expense Interest expense consists primarily of interest from notes due to debtholders. Results of Operations – Three Month Periods Comparison for the three-month periods ended Revenue Total revenue during the three months ended The decrease in sales was mainly due to the Company strategically phased out selling proprietary cartridge products and now focused on providing automation solutions with our filling and capping machines and pre-racked cartridges. Cost of Revenue Total cost of revenue decreased to $239,756 during the three months ended June 30, 2020, compared to the three months ended June 30, 2019 that had costs of revenues of $1,392,021. The decrease in cost of revenue was mainly due to the Company strategically phased out selling proprietary cartridge products. During the three months ended June 30, 2019, we recognized an inventory write down of $402,844. The inventory write down consisted of mainly old proprietary cartridges that were sold at low margin. Under the Company’s current and new business model, we focus on selling high-margin automation machines. As a result, our gross margin percentage increased from -5% for the three months ended June 30, 2019 to 62% for the three months ended June 30, 2020. Operating Expenses Sales, Marketing and General and Administrative. Sales, Marketing and General and Administrative expenses during the three months ended June 30, 2020 decreased to $438,547 (comprised of Salaries of $226,568 and other SG&A expenses of $211,979), compared to the three months ended June 30, 2019 that produced $1,850,942 in expenses (comprised of $1,159,077 in salaries and other SG&A expenses of $691,865). During the three months ended June 30, 2019, we recognized one-time charges of the following: settlement fees with the founder and another former employee of approximately $600,000, legal fees associated with the settlement of approximately $100,000, and R&D fees for the eShark cartridge filling machine and new cartridge products of approximately $100,000. Excluding these one-time charges, the decrease in salaries was related to a less amount of commission paid to sales representatives as the Company phased out proprietary cartridge products. And the decrease in other SG&A expenses was comprised primarily of the following: decreased travel and trade show spending due to the COVID-19 and other operating cost disciplines. Income (loss) from Operations Total loss from operations was $44,822 during the three months ended June 30, 2020, compared to $1,916,542 for the three months ended June 30, 2019. The decreased loss from operations was primarily the result of the gross margin improvement and operating cost disciplines. Derivative Gain (loss) Derivative gain, a non-cash expense, was $2,230,298 during the three months ended June 30, 2020, due to the fair value change of the debt and warrants of the June 2019 Notes driven by the stock price decrease between March 30, 2020 and June 30, 2020, compared to a $134,813 derivative loss for the three months ended June 30, 2019. Interest Expense Interest expense increased to $159,268 during the three months ended June 30, 2020, compared to $42,950 for the three months ended June 30, 2019, primarily due to the amortization of debt discount of the June 2019 Notes and December 2019 Notes as a non-cash expense. Results of Operations – Six Month Periods Comparison for the six-month periods ended June 30, 2020 and 2019: Revenue Total revenue during the six months ended June 30, 2020 decreased to $1,286,703 (comprised of machine sales of $1,116,670 and consumable product sales of $170,033), compared to the six months ended June 30, 2019 that generated sales of $2,950,675 (comprised of machine sales of $1,162,346 and consumable product sales of $1,788,329). As described above, the decrease in sales was mainly due to the Company phased out selling proprietary cartridge products and now focused on providing automation solutions. In addition, the outbreak of COVID-19 in China since January 2020 caused a pause of shipment from China to the U.S for certain of our products manufactured in China. And the later outbreak of COVID-19 in the U.S. caused different levels of delay in the operation of the Company, vendors, and customers. These factors adversely impacted the financial performance of the Cost of Revenue Total cost of revenue decreased to As described above, the decrease in cost of revenue was Operating Expenses Sales, Marketing and General and Administrative. Sales, Marketing and General and Administrative expenses during the Income (loss) from Operations Total loss from operations was The decreased loss from operations was primarily the result of the gross margin improvement and operating cost disciplines. Derivative Loss Derivative loss, a non-cash expense, was Interest Expense Interest expense increased to Item 3. Quantitative and Qualitative Disclosure About Market Risk We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents. We consider investments that, when purchased, have a remaining maturity of ninety (90) days or less to be cash equivalents. We do not believe that a notional or hypothetical 10% change in interest rates would have a material impact on our interest income. Item 4. Controls and Procedures Management’s Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q, we have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are presently no material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it. As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Mine Safety Disclosures Not applicable. Exhibit Number Exhibit Description 101 Interactive data files pursuant to Rule 405 of Regulation S-T 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. JACKSAM CORPORATION Dated: By: /s/ Mark Adams Mark Adams Chief Executive Officer Dated: By: /s/ Michael Sakala Michael Sakala Chief Financial Officer x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 March 31,June 30, 2020¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 __________.__________x ☒ No ¨☐x☒ No ¨☐¨☐¨☐x☒x☒Growth Companygrowth companyx☒¨☐¨ ☐ No x☒June 4,July 13, 2020, the registrant had 62,514,83064,246,830 shares of common stock, $0.001 par value per share, outstanding. –— FINANCIAL INFORMATION18 1921 2221 22222222222222 2 3 Table of Contents $ 434,591 $ 453,623 $ 551,195 $ 453,623 139,318 105,510 236,995 105,510 156,742 189,841 190,498 189,841 148,613 251,539 98,418 251,539 879,264 1,000,513 1,076,836 1,000,513 13,013 13,280 4,356 13,280 - 9,299 - 9,299 $ 892,277 $ 1,023,092 $ 1,081,192 $ 1,023,092 $ 682,634 $ 696,633 $ 632,231 $ 696,633 967,183 1,343,983 938,893 1,343,983 903,000 1,067,983 657,068 1,067,983 211,662 145,331 314,400 145,331 - 9,837 - 9,837 3,714,339 504,750 1,548,761 504,750 1,642,118 1,642,118 1,642,118 1,642,118 8,120,936 5,410,635 5,733,471 5,410,635 371,803 - 178,750 220,000 110,000 220,000 8,299,686 5,630,635 6,215,274 5,630,635 - - - - 63,348 62,872 64,247 62,872 4,168,759 3,396,369 4,240,745 3,396,369 1,689,803 - 1,857,883 - (13,329,319 ) (8,066,784 ) (11,296,957 ) (8,066,784 ) (7,407,409 ) (4,607,543 ) (5,134,082 ) (4,607,543 ) $ 892,277 $ 1,023,092 $ 1,081,192 $ 1,023,092 4 Table of Contents three months ended March 31,Three and Six Months Ended June 30, 2020 and 2019$ 653,222 $ 1,624,254 $ 633,481 $ 1,326,421 $ 1,286,703 $ 2,950,675 308,018 1,130,620 239,756 1,392,021 547,774 2,522,641 345,204 493,634 393,725 (65,600 ) 738,929 428,034 253,129 544,918 226,568 1,159,077 479,697 1,703,995 154,859 590,584 211,979 691,865 366,838 1,282,449 407,988 1,135,502 438,547 1,850,942 846,535 2,986,444 (62,784 ) (641,868 ) (44,822 ) (1,916,542 ) (107,606 ) (2,558,410 ) - (2,548 ) 6,154 (11,818 ) 6,154 (14,366 ) (3,742,107 ) - 2,230,298 (134,813 ) (1,511,809 ) (134,813 ) (1,457,644 ) (24,827 ) (159,268 ) (42,950 ) (1,616,912 ) (67,777 ) (5,199,751 ) (27,375 ) 2,077,184 (189,581 ) (3,122,567 ) (216,956 ) $ (5,262,535 ) $ (669,243 ) $ 2,032,362 $ (2,106,123 ) $ (3,230,173 ) $ (2,775,366 ) $ (0.08 ) $ (0.01 ) Weighted average shares outstanding 62,294,474 52,381,005 $ 0.03 $ (0.03 ) $ (0.05 ) $ (0.04 ) 62,493,771 61,591,972 62,393,689 61,732,593 5 Table of Contents 41,828,952 $ 48,272 $ 10,661 $ - $ (4,519,497 ) $ (4,460,564 ) - - - - (2,407 ) (2,407 ) 10,579,661 10,580 3,192,920 - - 3,203,500 2,000,000 2,000 - - - 2,000 - - 22,945 - - 22,945 - - - - (669,243 ) (669,243 ) 54,408,613 $ 60,852 $ 3,226,526 $ - $ (5,191,147 ) $ (1,903,769 ) 62,871,972 $ 62,872 $ 3,396,369 $ - $ (8,066,784 ) $ (4,607,543 ) - - 151 - - 151 476,191 476 166,191 1,333,333 - 1,500,000 - - - 356,470 - 356,470 - - 606,048 - - 606,048 - - - - (5,262,535 ) (5,262,535 ) 63,348,163 $ 63,348 $ 4,168,759 $ 1,689,803 $ (13,329,319 ) $ (7,407,409 ) 48,272,311 $ 48,272 $ 10,661 $ - $ (4,519,497 ) $ (4,460,564 ) - - - - (2,407 ) (2,407 ) 10,579,661 10,580 3,192,920 - - 3,203,500 2,000,000 2,000 - - - 2,000 - - 22,945 - - 22,945 - - - - (669,243 ) (669,243 ) 60,851,972 $ 60,852 $ 3,226,526 $ - $ (5,191,147 ) $ (1,903,769 ) 900,000 900 - - - 900 - - 150 - - 150 - - - - (2,106,123 ) (2,106,123 ) 61,751,972 $ 61,752 $ 3,226,676 $ - $ (7,297,270 ) $ (4,008,842 ) 62,871,972 $ 62,872 $ 3,396,369 $ - $ (8,066,784 ) $ (4,607,543 ) - - 151 - - 151 476,191 476 166,191 1,333,333 - 1,500,000 - - - 356,470 - 356,470 - - 606,048 - - 606,048 - - - - (5,262,535 ) (5,262,535 ) 63,348,163 $ 63,348 $ 4,168,759 $ 1,689,803 $ (13,329,319 ) $ (7,407,409 ) - - 151 - - 151 - - - 168,080 - 168,080 388,667 389 72,345 - - 72,734 1,443,333 1,443 (1,443 ) - - - (933,333 ) (933 ) 933 - - - - - - - 2,032,362 2,032,362 64,246,830 $ 64,247 $ 4,240,745 $ 1,857,883 $ (11,296,957 ) $ (5,134,082 ) 6 Table of Contents $ (5,262,535 ) $ (669,243 ) $ (3,230,173 ) $ (2,775,366 ) 267 266 8,924 533 151 22,945 302 23,095 1,426,698 - 1,554,056 38,524 3,742,107 - 1,511,809 134,813 - 128,640 - 402,844 - (33,808 ) (12,554 ) (131,485 ) (76,739 ) 33,099 174,475 (657 ) 213,929 102,926 (100,565 ) 170,261 1,902 9,299 - 9,299 - - 1,785 - - (12,349 ) (130,474 ) (62,752 ) (27,327 ) (9,837 ) - (9,837 ) - (41,250 ) - (110,000 ) 330,000 (376,800 ) 189,608 (405,090 ) 507,107 (422,032 ) (395,117 ) (695,343 ) (1,226,685 ) - - - - - - - - (70,000 ) - 273,600 1,583,333 (30,600 ) (132,848 ) (630,000 ) - 43,000 - 591,900 - - (8,624 ) (74,785 ) (70,912 ) 430,000 - 662,800 - - 2,000 - 2,900 403,000 (6,624 ) 792,915 1,382,473 (19,032 ) (401,741 ) 97,572 1,229,893 453,623 1,146,374 453,623 155,788 $ 434,591 $ 744,633 $ 551,195 $ 1,229,893 $ - $ - $ - $ - $ - $ 10,408 $ 62,312 $ 10,408 $ 1,500,000 $ 3,203,500 $ 1,500,000 $ 3,203,500 $ 75,530 $ - $ 138,250 $ 1,450,485 $ 608,328 $ - $ 390,383 $ - $ 72,733 $ - $ - $ 44,138 $ - $ 44,138 7 Table of Contents AfterSince July 2019, the Company has added the eShark cartridge filling machine into its product line and discontinued the sales of proprietary cartridges, andcartridges.which enabledLLC. The partnership highlights the Companyleverage of existing customer base and sales force of both companies to distribute the Company’s automation machines and pre-rack solution, and Jupiter Research’s C-Cell cartridges under a profit-sharing agreementagreement.Jupiter Research. 14th Round Inc. The partnership highlights the sales force collaboration, equipment R&D collaboration, and marketing collaborations.Jupiter Research’sstrategic partners’ sales force, independent sales representatives, and a wide range of referral network to sell its products.8 Table of Contents merger.Merger. In connection with the above transaction, $340,000 was paid to the former controlling shareholder related to the return of 30,000,000 shares of common stock.March 31,June 30, 2020, and for the three and six months ended March 31,June 30, 2020 and 2019, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes filed with the SEC for the year ended December 31, 2019.8Table of ContentsMarch 31,June 30, 2020 and December 31, 2019 inventory consisted entirely of finished goods. The Company will maintain an allowance based on specific inventory items that have shown no activity over a 24-month period. The Company tracks inventory as it is disposed, scrapped or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. As of March 31,June 30, 2020 and December 31, 2019, the Company has determined that no allowance is required.RevenuesPursuant to ASC 606, revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services.9 Table of Contents -•-•-•-•-•March 31,June 30, 2020, none of the Company’s contracts contained a significant financing component.March 31,June 30, 2020, $967,183$938,893 in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The Company expects to recognize all of our unsatisfied (or partially unsatisfied) performance obligations as revenue in the next twelve months. 910Table of Contents $ 568,204 $ 643,002 $ 548,466 $ 578,451 $ 1,116,670 $ 1,162,346 85,018 981,252 85,015 747,970 170,033 1,788,329 $ 653,222 $ 1,624,254 $ 633,481 $ 1,326,421 $ 1,286,703 $ 2,950,675 threesix months ended March 31,June 30, 2020 and 2019, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the same in all periods presented.23,814,67613,461,883 and 3,075,00011,388,887 potentially dilutive securities that have been excluded from the computation of diluted weighted-average shares outstanding as of March 31,June 30, 2020 and 2019, respectively, as they would be anti-dilutive. Additionally, as of June 30, 2020 there were a total of 10,069,435 shares to be issued related to conversions of debt and stock unit sales during the six months ended June 30, 2020 that were excluded from the computation of weighted average shares outstanding.10Table of Contents11 Table of Contents In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820).” This standard modifies disclosure requirements related to fair value measurement and is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The standard also allows for early adoption of any removed or modified disclosures upon issuance while delaying adoption of the additional disclosures until their effective date. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”. This standard simplifies the accounting for income taxes. This standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.$ 10,425 $ 10,425 $ 10,425 $ 10,425 7,579 7,579 7,579 7,579 2,640 2,640 2,640 2,640 20,644 20,644 20,644 20,644 (7,630 ) (7,364 ) (16,288 ) (7,364 ) $ 13,013 $ 13,280 $ 4,356 $ 13,280 $267$8,659 and $265$8,924 for the three and six months ended March 31,June 30, 2020, respectively, and $268 and $533 for the three and six months ended June 30, 2019, respectively.$ 304,568 $ 347,850 $ 272,445 $ 347,850 45,431 48,743 49,462 48,743 27,332 4,778 5,021 4,778 140,303 130,262 140,303 130,262 165,000 165,000 165,000 165,000 $ 682,634 $ 696,633 $ 632,231 $ 696,633 1112Table of Contents areis as follows:$ 164,835 $ 164,835 47,253 - - $ 164,835 137,303 - 399,000 - 149,900 - 212,088 164,835 686,203 164,835 (426 ) (19,504 ) - (19,504 ) (211,662 ) (145,334 ) (314,400 ) (145,331 ) $ - $ - $ 371,803 $ - will repayshall pay $164,835 of principal and interest by February 29, 2020. The interest and fees of $14,835 were recorded as debt discount and were amortized through the maturity date. The Company also paid a deferred finance cost of $5,000 which was amortized through the maturity date. The Company entered into a second agreement on February 6, 2020 with the same lander for an additional $43,000 of funding. The Company will repay $47,253 at maturity on April 6, 2020. On April 22, 2020, these two notes payable were refinanced with the lender into a single agreement whereby the Company will make an initial repayment of $74,231 and 24 monthly payments of $7,467, for total payments of $253,439. This amendment was accounted for as a modification of the debt.AsIn April 2020, the Company received $399,000 under the Small Business Administration’s Payroll Protection Program. The loan bears interest at a fixed rate of March 31,1%, and matures on April 17, 2022, payable monthly with payments beginning six months after issuance. In accordance with the terms of the Payroll Protection Program, a portion of this loan may be forgiven if the loan proceeds are used for payroll, mortgage, rent and utility costs, but no more than 25% of the forgiveness amount can be related to nonpayroll costs. The Company recognized the $399,000 as a debt instrument, pursuant to ASC 470.December 31, 2019, accruedmatures on May 26, 2050, payable monthly with payments of $731 beginning twelve months after issuance. The loan gives the Small Business Administration a security interest on these loan outstanding balances for $27,332 and $4,776, respectively. in all assets of the Company.$23,331$23,757 of debt discount and deferred finance costs to interest expense related to notes payable.March 31,June 30, 2020 and December 31, 2019:$ 15,000 $ 15,000 $ 15,000 $ 15,000 448,888 2,018,889 448,888 2,018,889 560,000 560,000 - 560,000 175,000 - 129,000 - 1,023,889 2,593,889 767,888 2,593,889 (120,889 ) (1,525,906 ) (110,820 ) (1,525,906 ) (903,000 ) (1,067,983 ) (657,068 ) (1,067,983 ) $ - $ - $ - $ - 1213Table of Contents threesix months ended March 31,June 30, 2020, the exercise price of the remaining notes payable and the warrants is currently $0.20$0.18 per share. The convertible debt outstanding as of March 31,June 30, 2020 was convertible into 5,044,4402,493,827 shares of common stock.threesix months ended March 31,June 30, 2020, $1,500,000 of the principal on the June 2019 Notes was converted into 7,142,852 shares of common stock, of which 476,191 were issued by March 31, 2020. The remaining $448,888 of principal on these notes were in default as of March 31,June 30, 2020. On May 19, 2020, the holder of $444,444 of the notes agreed to extend the repayment period to December 31, 2020. There were no other changes to terms of the convertible notes payable.payable, and the amendment was accounted for as a debt modification.notelender also received 430,000 shares of $560,000 was paid offcommon stock valued at $86,000 as a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense.14 Table of Contents $1,405,017$1,531,618 and $38,524 of debt discount and deferred finance costs to interest expense related to convertible notes payable during the threesix months ended MarchJune 30, 2020 and 2019, respectively. Accrued interest on notes payable and convertible notes payable was $5,021 and $4,776 as of June 30, 2020 and December 31, 2020.2019, respectively.130.4 % 126.86 % 0 % 0 % 0 % 0 % 0.11 % 0.18 % 0.18 % $ $ 0.545 $ 0.23 $ 0.23 $ $ $ 0.18 $ 1,740,332 $ 1,974,007 $ 246,687 $ 1,302,074 threesix months ended March 31,June 30, 2020:$ 504,750 73,530 (2,280 ) (606,048 ) 3,744,387 $ 3,714,339 13Table of Contents$ 504,750 138,250 (356,007 ) (606,048 ) 1,867,816 $ 1,548,761 March 31,June 30, 2020, the authorized capital stock of the Company consists of 100,000,000 shares, of which 90,000,000 shares are designated as common stock and 10,000,000 shares of preferred stock.threesix months ended March 31,June 30, 2020, the Company issued 476,191 shares of common stock related to the conversion of $166,667 of Convertible Notes Payable. Additionally, principal of $1,333,333 was converted into 6,666,661 shares of common stock that have not yet been issued.15 Table of Contents threesix months ended March 31,June 30, 2020, the Company received $430,000$662,800 of cash proceeds related to sale of 2,150,0002,525,000 common stock units at $0.20 per unit and 876,664 common stock units at $0.18 per unit. Each $0.20 unit and $0.18 unit consists of a share of common stock and a warrant to purchase half a share of common stock at an exercise price of $0.30 and $0.27, respectively, for a period of three years from issuance. The common shares related to these unit sales have not yet been issued.issued as of June 30, 2020. As a result of the down round provision in the convertible debt described above, the fair value of the warrants was estimated using a binomial model and were accounted for as a derivative liability, due to the potentially unlimited number of shares that can be issued upon conversion of the debt instruments.5,785,714 $ 1,292,100 $ 0.22 5,785,714 $ 1,292,100 $ 0.22 1,075,000 322,500 0.30 3,480,953 626,572 0.18 1,701,389 493,500 0.29 - - - - - - - - - - - - 6,860,714 $ 1,061,743 $ 0.15 10,968,056 $ 1,785,600 $ 0.16 2.92.7 years for stock warrants outstanding with a total intrinsic value of $2,677,346$839,233 on March 31,June 30, 2020. All of the above warrants were fully vested. During the threesix months ended March 31,June 30, 2020, a total of 3,685,714 warrants associated with the June 2019 Notes had their exercise price reset to $0.20$0.18 as a result of the sale of common stock units described above.threesix months ended March 31,June 30, 2020 into shares of common stock of 1,388,885 and 555,555, respectively, that have not yet to be issued.14Table of Contents16 Table of Contents 15Table of Contents17 Table of Contents a former executive of the Company, related to his departure from employment with the Company. The agreement requires Daniel Davis to provide limited consulting services to the Company for a period of up to three years beginning May 1, 2019 in exchange for $165,000 per year. During the three months ended June 30, 2020, the Company and Daniel Davis agreed to accelerate the payment of a portion of the consulting agreement, with the maturity period ending three months earlier than the original agreement. The Company made payments of $41,250$110,000 during the threesix months ended March 31,June 30, 2020, leaving a balance of $165,000, included in accounts payable and accrued expenses and $178,750$110,000 in other long-term liabilities on the consolidated balance sheet. In addition, the Company entered into a lock up agreement with Daniel Davis that restricts the number of shares Daniel Davis can otherwise publicly sell for a period of up to three years to one third of the volume limits set forth under SEC Rule 144. Daniel Davis also agreed to a standstill agreement that provides that for a period of up to three years Daniel Davis will not seek to influence the governance of the Company, including by participation in any solicitation of other shareholders, promotion of any extraordinary transaction, nomination of any candidate to the Board or by seeking the removal of any existing directors.$7,858$18,542 and $5,948$21,913 for the threesix months ended March 31,June 30, 2020 and 2019, respectively.16Table of ContentsSubsequent to March 31, 2020, the Company sold an additional 625,000 common stock units (including 312,500 warrants) for proceeds of $125,000.On April 22, 2020, the single lender and holder of the notes payable of $212,088 agreed to restructure the two notes payable into a single payment arrangement, with an initial payment due of $74,231 and 24 monthly payments of $7,467.AprilJuly 2020, the Company received $399,000 undernet proceeds of $102,600 from the Small Business Administration’s Payroll Protection Program. The loan bears interest at a fixed rate of 1%, and matures on April 17, 2020, payable monthly with payments beginning six months after issuance. In accordance with the termslender of the Payroll Protection Program, a portionJune 2020 Notes 3 convertible notes payable, after original issue discount of this loan may be forgiven if the loan proceeds are used for payroll, mortgage, rent$12,900 and utility costs, but no more than 40%$13,500 of the forgiveness amount can be related to nonpayrolldeferred finance costs. See Note 6.On May 19, 2020,The Company evaluates events that have occurred after the holder of $444,444 of convertible June 2019 Notes agreed to extendbalance sheet date but before the maturity date to December 31, 2020. No other terms of this convertible note payable were changed.On June 2, 2020,financial statements are issued. Based upon the evaluation, the Company paid offdid not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the December 2019 convertible note payable of $560,000 in full.financial statements, except as disclosed. 1718Table of Contents report .report.March 31,2020,June 30, 2020, and for the three and six months ended March 31,June 30, 2020 and 2019, include a summary of our significant accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such unaudited interim periods have been included in these unaudited financial statements. All such adjustments are of a normal recurring nature.18Table of Contents19 Table of Contents 19Table of ContentsMarch 31,June 30, 2020 and 2019:March 31,June 30, 2020 decreased to $653,222$633,481 (comprised of machine sales of $568,204$548,466 and consumable product sales of $85,018)$85,015), compared to the three months ended March 31,June 30, 2019 that generated sales of $1,624,254$1,326,421 (comprised of machine sales of $643,002$578,451 and consumable product sales of $981,252)$747,970).20 Table of Contents 21 Table of Contents Company.Company for the six months ended June 30, 2020.$308,018$547,774 during the threesix months ended March 31,June 30, 2020, compared to the threesix months ended March 31,June 30, 2019 that had costs of revenues of $1,130,620. The$2,522,641. also mainly due to the Company strategically phased out selling proprietary cartridge products.The old proprietary cartridge products, which we discounted selling them in late 2019, were sold at low margin. Under the Company’s current and new business model, we focus on selling high-margin automation machines. As a result, our gross margin percentage increased from 30%15% for the threesix months ended March 31,June 30, 2019 to 53%57% for the threesix months ended March 31,June 30, 2020.threesix months ended March 31,June 30, 2020 decreased to $407,988$846,535 (comprised of Salaries of $253,129$479,697 and other SG&A expenses of $154,859)$366,838), compared to the threesix months ended March 31,June 30, 2019 that produced $1,135,502$2,986,444 in expenses (comprised of $544,918$1,703,995 in salaries and other SG&A expenses of $590,584)$1,282,449).TheExcluding the one-time charges described above, the decrease in salaries was related to a less amount of commission paid to sales representatives as the Company phased out proprietary cartridgescartridge products.The And the decrease in other SG&A expenses was comprised primarily of the following: decreased travel and trade show spending due to the COVID-19 and other operating cost disciplines.$62,784$107,606 during the threesix months ended March 31,June 30, 2020, compared to $641,868$2,558,410 for the threesix months ended March 31,June 30, 2019.$3,742,107$1,511,809 during the threesix months ended March 31,June 30, 2020, due to the fair value change of the debt and warrants of the June 2019 Notes driven by the stock price increase between December 31, 2019 and March 31, 2020. There was no derivative lossJune 30, 2020, compared to $134,813 for the threesix months ended March 31,June 30, 2019.$1,457,644$1,616,912 during the threesix months ended March 31,June 30, 2020, compared to $24,827$67,777 for the threesix months ended March 31,June 30, 2019, primarily due to the amortization of debt discount of the June 2019 Notes and December 2019 Notes as a non-cash expense.20Table of Contents 2122Table of Contents The Company relied on the SEC’s Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions From Specified Provisions of the Exchange Act and Certain Rules Thereunder dated March 4, 2020 (Release No. 34-88318), as modified on March 25, 2020 (Release No. 34-88465) (the “Order”), to delay the filing of its Form 10-Q for the quarterly period ended March 31, 2020 (the “Report”) due to the circumstances related to COVID-19.The Company was unable to file the Report by May 14, 2020 because (i) the Southern California area, including the location of the Company’s corporate headquarters, is currently at one of the epicenters of the coronavirus outbreak in the United States and the Governor of California has ordered all residents to stay at home excepting only essential travel; and (ii) historically, the Company has relies on vendors in China to manufacture certain of its principal products. The outbreak of COVID-19 has caused different levels of delay in the operation of the Company, vendors, customers and professional service providers. As a result, the Company’s books and records were not easily accessible from its Chinese manufacturer of its products, resulting in a delay in the preparation and completion of the Company’s financial statements for the Report.None. 2223Table of Contents 2324Table of Contents June 22,August 14, 2020June 22,August 14, 2020 2425