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MCIG, INC. - 10-Q - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements This report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements. Business Overview mCig, Inc. (mCig) was incorporated in the State of Nevada on December 30, 2010 originally under the name Lifetech Industries, Inc. Effective August 2, 2013, our name was changed from "Lifetech Industries, Inc." to "mCig, Inc." reflecting our new business model. Since October 2013, mCig, Inc. has positioned itself 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 (2) The adoption of electronic vaporizing cigarettes (commonly known as "eCigs") by the world's 1.2 Billion smokers. On January 23, 2014, the Company completed the investment acquisition of Vapolution, Inc. by acquiring all of its' issued and outstanding shares in exchange for 5,000,000 shares of mCig's common stock at a market value of $0.25 per share on the date of the acquisition, where Vapolution became controlled subsidiary. 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 will be cancelled on the one year anniversary of the agreement on January 23, 2015, to offset the 2,500,000 new shares to be issued from the treasury for the completion of the acquisition of Vapolution. Since only half of the agreed upon shares had been paid out by mCig, Inc. to the previous owners of Vapolution, Inc. as on July 31, 2014 as part of the agreed upon purchase price, only half of the purchase price ($625,000) was reported on the Company's balance sheet as Investment in Vapolution, Inc. at the quarter end date. The remaining purchase price of 2,500,000 shares will be recognized in the amount of $625,000 on the Company's balance sheet on the commencement date of January 23, 2015. At that time, mCig intends to satisfy all requirements necessary to consolidate Vapolution's audited year-end results as part of its financials. On May 23, 2014, the parties to the agreement agreed to amend the original Stock Purchase Agreement. Per the amended Stock Purchase Agreement executed as of May 23, 2014, a clarification was made to the agreement that more appropriately expresses the spirit of the transaction as agreed upon by management of mCig and the previous owners of Vapolution, Inc. As a result, one of the changes in the agreement is the disclosure that all of Vapolution's assets were in-fact purchased by mCig as part of this agreement. The following is a summary of the changes to the agreement: 1. In the amended agreement, former Vapolution, Inc. shareholders have autonomous control over the day-to-day operations of the Company (subsequently revised to permit day to day oversight but have mCig and the Vapolution retain the ultimate control over the business)while the Board of Directors of mCig, Inc. will have ultimate control over the business decisions within Vapolution, Inc. This differs from the original agreement whereby Vapolution, Inc. former shareholders had the ability to veto any decision made by mCig, Inc. 2. The Amended Agreement states that as part of the acquisition, all tangible and intangible assets of Vapolution, Inc. are included as part of the acquisition. This differs from the original agreement whereby the assets of Vapolution, Inc. were not acquired by mCig, Inc. 3. In the amended agreement, former Vapolution, Inc. shareholders have just one (1) year to rescind the agreement and return to full ownership of the Company as opposed to five (5) in the original agreement. On August 7, 2014, a further amendment was made to permit the Board of Directors of mCig to appoint their designee as the only members of the Board of Directors of Vapolution. mCig appointed Paul Rosenberg as the sole director of Vapolution. mCig agreed to provide employment or consulting agreements to the prior owners of Vapolution in order for them to manage the day to day operations. 16 -------------------------------------------------------------------------------- Risk Factors While the amended Vapolution, Inc. acquisition agreement provides mCig, Inc. with control of Vapolution, Inc. and its assets, several risk factors must still be considered: 1. mCig's role is one that mirrors an administrator while the prior management runs the day-to-day operations of the Vapolution, Inc. As such, we run the risk that previous management in-charge of the day-to-day operations at Vapolution, make decisions that are not aligned with the vision of mCig's Board of Directors or Vapolution, Inc.'s Board of Directors. 2. There is no way to guarantee that the previous owners of Vapolution, Inc. will make decisions that are in the best interest of Vapolution, Inc. as an mCig, Inc. controlled subsidiary. To ensure themselves in the best manner possible, the previous owners of Vapolution are guaranteed the first $110,000 of Earnings before Interest Tax Depreciation and Amortization from the yearly profits of Vapolution, Inc. 3. Since the entire transaction for the purchase of Vapolution was in the form of 5,000,000 shares of mCig, Inc. common stock shares, the Board of Directors believes that it would be in the management's best interest to improve Vapolution, Inc.'s performance, since this would directly have a moderate effect on the price of mCig, Inc.'s common stock share price. 4. After the one year period, the previous owners of Vapolution may rescind the purchase agreement and retain full ownership of Vapolution. After January 23, 2015, the previous owners will be unable to rescind the agreement. The primary reasons for the acquisition of Vapolution per ASC 805-10-50-2(d) can be summarized by the following: 1. We believe Vapolution has been a leader in its industry since the company's inception in the early 2000's. After years of sustained success and consistent revenue streams and profitability, financial performance peaked and for the first time since inception, revenues fell flat. At this stage, management realized that unless fundamental changes were implemented and the trend reversed significant market share could be lost permanently. That is why the transaction with mCig made sense for both parties. In its acquisition of Vapolution, mCig acquired more than just a successful brand and an exemplary product. mCig also acquired a team of two fantastic engineers that were very familiar with the industry and well respected by their peers. Vapolution, Inc. management recognized that by aligning with mCig, Inc. the combined companies would be stronger, have substantial cost-synergies, as well as growth-synergies. Meanwhile, administration, accounting, and fulfillment could be streamlined and consolidated while the team at Vapolution could return to what they do best which was creating great products. 2. By agreeing to join forces with mCig, Vapolution's management agreed to allow mCig to run the marketing side, while they turned all of their focus on developing the third generation Vapolution product. Since mCig is not a direct competitor to Vapolution, this acquisition made further sense as it added another revenue stream for the company while allowing mCig, Inc. to expand into the home-use vaporizer segment. Government Regulation Based on the December 2010 U.S. Court of Appeals for the D.C. Circuit's decision in Sottera, Inc. v. Food & Drug Administration, 627 F.3d 891 (D.C. Cir. 2010), the United States Food and Drug Administration (the "FDA") is permitted to regulate electronic cigarettes as "tobacco products" under the Family Smoking Prevention and Tobacco Control Act of 2009 (the "Tobacco Control Act"). Under this Court decision, the FDA is not permitted to regulate electronic cigarettes as "drugs" or "devices" or a "combination product" under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes. Because we do not market our electronic cigarettes for therapeutic purposes, and our electronic cigarettes do not contain nicotine, we believe that our products should not fall under the regulatory oversight of the FDA. Nevertheless we believe it is important for any existing or potential investors to understand recent trends in government regulation relating to nicotine-based electronic cigarettes. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero. 17 -------------------------------------------------------------------------------- The Tobacco Control Act also requires establishment, within the FDA's new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products. The Tobacco Control Act imposes significant new restrictions on the advertising and promotion of tobacco products. For example, the law requires the FDA to finalize certain portions of regulations previously adopted by the FDA in 1996 (which were struck down by the Supreme Court in 2000 as beyond the FDA's authority). As written, these regulations would significantly limit the ability of manufacturers, distributors and retailers to advertise and promote tobacco products, by, for example, restricting the use of color, graphics and sound effects in advertising, limiting the use of outdoor advertising, restricting the sale and distribution of non-tobacco items and services, gifts, and sponsorship of events and imposing restrictions on the use for cigarette or smokeless tobacco products of trade or brand names that are used for non-tobacco products. The law also requires the FDA to issue future regulations regarding the promotion and marketing of tobacco products sold or distributed over the internet, by mail order or through other non-face-to-face transactions in order to prevent the sale of tobacco products to minors. It is likely that the Tobacco Control Act could result in a decrease in tobacco product sales in the United States, including sales of our electronic cigarettes. While the FDA has not yet mandated electronic cigarettes be regulated as tobacco products, during 2012, the FDA indicated that it intends to regulate electronic cigarettes under the Tobacco Control Act through the issuance of deeming regulations that would include electronic cigarettes under the definition of a "tobacco product" under the Tobacco Control Act subject to the FDA's jurisdiction. The FDA initially announced that it would issue proposed deeming regulations by April 2013 and then extended the deadline to October 31, 2013. As of the date of this prospectus, the FDA had not taken such action. The application of the Tobacco Control Act to electronic cigarettes could impose, among other things, restrictions on the content of nicotine in electronic cigarettes, the advertising, marketing and sale of electronic cigarettes, the use of certain flavorings and the introduction of new products. We cannot predict the scope of such regulations or the impact they may have on our company specifically or the electronic cigarette industry generally, though if enacted, they could have a material adverse effect on our business, results of operations and financial condition. In this regard, total compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Control Act. Costs, however, could be substantial and could have a material adverse effect on our business, results of operations and financial condition. In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on our business, financial condition and results of operations and ability to market and sell our products. At present, we are not able to predict whether the Tobacco Control Act will impact us to a greater degree than competitors in the industry, thus affecting our competitive position. State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom and by whom tobacco products can be sold and where tobacco products may or may not be smoked. Certain municipalities have enacted local ordinances which preclude the use of electronic cigarettes where traditional tobacco burning cigarettes cannot be used and certain states have proposed legislation that would categorize electronic cigarettes as tobacco products, equivalent to their tobacco burning counterparts. If these bills become laws, electronic cigarettes may lose their appeal as an alternative to cigarettes; which may have the effect of reducing the demand for our products and as a result have a material adverse effect on our business, results of operations and financial condition. The Tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization's Framework Convention on Tobacco Control ("FCTC"). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include: • the levying of substantial and increasing tax and duty charges; • restrictions or bans on advertising, marketing and sponsorship; • the display of larger health warnings, graphic health warnings and other labeling requirements; • restrictions on packaging design, including the use of colors and generic packaging; • restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; • requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels; • requirements regarding testing, disclosure and use of tobacco product ingredients; • increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors; • elimination of duty free allowances for travelers; and • encouraging litigation against tobacco companies. 18 -------------------------------------------------------------------------------- If electronic cigarettes are subject to one or more significant regulatory initiates enacted under the FCTC, our business, results of operations and financial condition could be materially and adversely affected. Results of Operations Our operating results and cash flows are presented for the three months ended July 31, 2014 and 2013. Our operating results for the three months ended July 31, 2014 and 2013 are summarized as follows: For the three months ended For the three months ended July 31, 2014 July 31, 2013 Revenue $ 195,565 $ 12,500 Cost of Goods Sold 97,434 0 Gross Profit 98,131 12,500 Expenses 1,154,956 19,587 Net Loss $ (1,056,825) $ (7,087) Revenue and Cost of Goods Sold Revenues Our revenues increased to $195,565 for the three months ended July 31, 2014 compared to $12,500 for the three months ended July 31, 2013, and for an increase of $183,065. The increase in revenue is attributed to the launch of our primary product the mCig 2.0 in January 2014. Revenues consist primarily of results from the sales of the electronic cigarettes, components for electronic cigarettes and related accessories. Sales of the electronic cigarettes of mCig for the three months ended July 31, 2014 and 2013 were $107,446 and $0, respectively. Significant increase in sales is mainly due to the launch of the new mCig's products. Sales of the VitaCig electronic vaporizing cigarettes for the three months ended July 31, 2014 and 2013 were $88,119 and $0, respectively. The Company was incorporated on January 22, 2014 and has launched its product in April. These sales do not include any sales for Vapolution, Inc. which is being held as an investment. Our revenue recognition policy is in accordance with generally accepted accounting principles, which requires the recognition of sales when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectability of revenue is reasonably assured. Cost of Goods Sold Cost of goods sold for the three months ended July 31, 2014 and 2013 were $97,435 and $0 respectively. The increase is primarily due to the launch of our new business and sales of the mCig's and VitaCig's electronic cigarettes. Cost of goods sold for mCig, Inc. for the three months ended July 31, 2014 and 2013 were $49,876 and $0, respectively. And cost of goods sold for VitaCig, Inc. for the three months ended July 31, 2014 and 2013 were $47,558 and $0, respectively. 19 -------------------------------------------------------------------------------- Operating Expenses Our total operation expenses for the three months ended July 31, 2014 and 2013 were $1,154,956 and $19,587, respectively, an increase of $1,135,369, or approximately 98%. The increase is primarily due to the increase of the professional fees, stock-based compensation and general and administrative expenses. Our total operation expenses for the three months ended July 31, 2014 consisted of $15,416 of professional fees, $1,624 of travel expenses, $1,859 of amortization, $91,101 of general and administrative expenses and $1,044,956 of share-based compensation. Our general and administrative expenses consist of bank charges, advertising and promotion, rent, computer and internet expenses, postage and delivery and other expenses. For the three months ended July 31, 2013 our incurred total operation expenses consisted of $9,225 of professional fees, $1,294 of amortization, and $9,068 of general and administrative expenses. Total operating expenses for mCig, Inc. for the three months ended July 31, 2014 were $1,121,910 and consisted of $10,600 of professional fees, $1,626 of amortization, $1,624 of travel, $63,104 of general and administrative expenses and $1,044,956 of stock based compensation. Total operating expenses for VitaCig, Inc. for the three months ended July 31, 2014 were $33,046 and consisted of $4,816 of professional fees, $233 of amortization and $27,997 of general and administrative expenses. The general and administrative expenses consist of bank charges, computer and internet expenses, postage and delivery and telephone expenses. Net loss for the three months ended July 31, 2014 and 2013 was $1,056,825 and $7,087, respectively, an increase of $1,049,738 as a result of the items discussed above. Liquidity and Financial Condition Working Capital As at As at Change July 31, July 31, 2014 2013 Current Assets $ 2,162,672 $ 3,874 $ 2,158,798 Current Liabilities $ 6,943 $ 64,175 $ (57,232) Working Capital $ 2,155,729 $ (60,301) $ 2,216,030 Cash Flows For the Three For the Three Months Ended Months Ended July 31, 2014 July 31, 2013 Net Cash Used in Operating $ (130,044) $ (20,293) Activities Net Cash Used by Investing $ (2,800) $ (3,733) Activities Net Cash Provided by (Used In) $ - $ 24,300 Financing Activities Net Increase (Decrease) in Cash $ (132,844) $ 274 During the Period Off-Balance Sheet Arrangements As of July 31, 2014, we had no off balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. |