NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Nature of Operations:
Business Description
–
Business Activity:
Medicine Man Technologies Inc. (the "Company") is a Colorado corporation incorporated on
March 20, 2014. The Company is a cannabis consulting company providing consulting services for cannabis growing technologies and
methodologies, as well as retail operations of cannabis products.
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1.
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Liquidity and Capital Resources
:
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Cash Flows
– During the
quarters ending June 30, 2016 and 2015, the Company primarily utilized cash and cash equivalents and profits from operations to
fund its operations.
Cash and cash equivalents are carried at cost
and represent cash on hand, deposits placed with banks or other financial institutions and all highly liquid investments with an
original maturity of three months or less as of the purchase date. The Company had $37,612 and $262,146 classified as cash and
cash equivalents as of June 30, 2016 and December 31, 2015, respectively.
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2.
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Critical Accounting Policies and Estimates
:
|
Basis of Presentation:
These accompanying
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for annual financial statements.
Use of Estimates:
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be
based upon amounts that differ from these estimates.
Accounts receivable:
The Company extends
unsecured credit to its customers in the ordinary course of business. Accounts receivable related to licensing revenues are recorded
at the time the milestone result in the funds being due being achieved, services are delivered and payment is reasonably assured.
Licensing revenues are generally collected from 30 to 60 days after the invoice is sent. As of June 30, 2016 and 2015, the Company
had accounts receivable of $13,292 and $83,739, respectively. There is no allowance for doubtful accounts as the Company has historically
collected 100% of receivables due to the nature of the ongoing relationship with clients.
AFS Securities:
Investments available
for sale is comprised of publicly traded stock purchased as an investment. The Company considers the securities to be liquid and
convertible to cash in under a year. The Company has the ability and intent to liquidate any security that the Company holds to
fund operations over the next twelve months, if necessary, and as such has classified all of its marketable securities as short-term.
Our investment securities at June 30, 2016 consist of available-for-sale instruments which include $34,400 of equity in publicly
traded companies. All of our available-for-sale securities are Level 1. Realized gains and losses on these securities will be included
in “other income (expense)” in the consolidated statements of income using the specific identification method. Unrealized
gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated
OCT).
Short term note receivable:
Note receivable
were comprised of a $100,000 loan issued to an organization that owns Funk Sack, Inc. This loan will convert into an investment
and will not be repaid if the Company acquires Funk Sack, Inc. The loan was issued May 6, 2016 and was initially due to be repaid
60 days later if the acquisition did not move forward. Subsequent to year-end the company extended the term of this loan through
completion of due diligence.
Other assets:
Other assets at June 30,
2016 and December 31, 2015 were $65,486 and $38,721, respectively and included $63,678 in prepaid expenses related to prepaid rent
and prepaid registrations fees for major cannabis event the Company is sponsoring and $1,808 in accrued interest due as of June
30, 2016.
Accounts payable:
Accounts payable at
June 30, 2016 and December 31, 2015 was $8,999 and $8,715, respectively and were comprised of operating accounts payable for various
professional services incurred during the ordinary course of business.
Accrued tax and other liabilities:
Accrued
liabilities was comprised of accrued taxes of $487 and $13,200 on June 30, 2016 and December 31, 2015.
Fair Value of Financial Instruments:
The
carrying amounts of cash and current assets and liabilities approximate fair value because of the short-term maturity of these
items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Available for sale securities
are recorded at current market value as of the date of this report.
Revenue recognition and related allowances:
Revenue
from licensing services is recognized when the obligations to the client are fulfilled which is determined when particular milestones
in the contract are achieved. Revenue from seminar fees is related to one day seminars and is recognized as earned at the completion
of the seminar. All revenue is measured at fair value.
Costs of Services Sold
– Costs
of services sold are comprised of direct salaries and related expenses incurred while supporting the implementation of licensing
agreements and related services.
General & Administrative Expenses –
General and administrative expense are comprised of all expenses not linked to the production or advertising of the Company’s
services.
Advertising and Marketing Costs:
Advertising
and marketing costs are expensed as incurred and were $21,672 and $30,829 during the six months ended June 30, 2016 and 2015, respectively.
Stock based compensation:
The Company
accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company records compensation
expense for share-based awards based upon an assessment of the grant date fair value for stock and restricted stock awards using
the Black-Scholes option pricing model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and EITF 96-18 when stock or options are
awarded for previous or current service without further recourse. The Company issued stock options to contractors and external
companies that had been providing services to the Company upon their termination of services. Under ASC 718 and EITF 96-18 these
options were recognized as expense in the period issued because they were given as a form of payment for services already rendered
with no recourse.
Share based expense paid to through direct
stock grants is expensed as occurred. Since the Company’s stock has become publicly traded, the value is determined based
on the number of shares issued and the trading value of the stock on the date of the transaction. Prior to the company’s
stock being traded the Company used the most recent valuation. The company recognized $49,200 in expenses for stock based compensation
to employees through direct stock grants of 120,000 shares in the six month period ended June 30, 2016 and $50,000 in expenses
from the issuance of 50,000 shares in the similar period ended June 30, 2015.
Income taxes:
The Company has
adopted SFAS No. 109 – “Accounting for Income Taxes”. ASC Topic 740 requires the use of the asset and liability
method of accounting for income taxes. Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled.
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3.
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Recent Accounting Pronouncements
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During May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers, which provides new guidance on the recognition of revenue and states that an entity should
recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The standard will be effective for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted.
The Company is currently evaluating the impact of the adoption of this accounting standard update on the financial position and
the results of operations.
On September 10, 2014, The Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-10,
Development Stage
Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, including an Amendment to Variable
Interest Entities Guidance in Topic 810, consolidation
removes all incremental financial reporting requirements from GAAP
for development stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. For the
first annual period beginning after December 15, 2014, the presentation and disclosure requirements in Topic 915 will no
longer be required for the public business entities. The revised consolidation standards are effective one year later, in
annual periods beginning after December 15, 2015. Early adoption is permitted. The Company has adopted this amendment
effective this current fiscal year.
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4.
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Stockholders’ Equity
:
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The Company’s initial authorized stock
at inception was 1,000,000 common shares, par value $0.001 per share. In 2015 the company subsequently amended its Articles of
Incorporation to increase its authorized shares to 90,000,000 Common Shares, par value $0.001 per share and 10,000,000 preferred
shares, par value $0.001 per share.
During the time in which the Company was establishing
its operations it issued 4,199,000 shares of Common Stock to various individuals as founders for prior services completed which
was valued at par value, resulting in the Company booking stock based expense of $4,199.
During the time in which the Company was establishing
it operations it issued 5,331,000 shares of Common Stock to various individuals for a license agreement valued at par value resulting
in the Company recognizing a purchased asset of $5,331.
Commencing in November 2014, the Company commenced
a private offering of its Common Stock at an offering price of $1.00 per share. At December 31, 2014, it had accepted subscription
from 26 investors and received net proceeds of $260,000 therefrom.
In December 2014, the Company issued 50,000
shares of its Common Stock for legal fees and recognized an expense for this issuance of $50,000 based upon the prior sale in November
2014 of its Common Stock.
At December 31, 2014, the Company had 9,840,000
shares outstanding.
On March 17, 2015, 10,000 shares of Common
Stock were sold to one investor as part of the private offering commencing in November 2014 in exchange for $10,000 cash.
During the second quarter of 2015, the Company
issued 50,000 shares of Common Stock to an individual in consideration for their services rendered in support of the Company resulting
in the Company recognizing compensation expense of $50,000 based upon a per share price of $1.00 per share realized in the most
recent private offering.
On July 1, 2015, the Company issued 72,500
shares of Common Stock to four different individuals in consideration for their services rendered in support of the Company, resulting
in recognizing compensation expense of $29,725 based upon an independent valuation determining the value of shares at $0.41 per
share.
At December 31, 2015, the Company had 9,972,500
shares outstanding.
On January 4, 2016, the Company issued 120,000
shares of Common Stock to various individuals in consideration of their services rendered in support of the Company resulting in
recognizing compensation expense of $49,200 based upon an independent valuation determining the value of shares at $0.41 per share.
At June 30, 2016, the Company had 10,092,500
common shares outstanding.
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5.
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Property and Equipment
:
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Property and equipment are recorded at cost,
net of accumulated depreciation and are comprised of the following:
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June 30, 2016
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December 31, 2015
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Furniture & Fixtures
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$
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11,526
|
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$
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11,526
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Marketing Display
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$
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42,681
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$
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42,681
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$
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54,207
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$
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54,207
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Less: Accumulated Depreciation
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$
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(14,354
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)
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$
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(6,088
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)
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$
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39,853
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|
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$
|
48,119
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Depreciation on equipment is provided on a
straight line basis over its expected useful lives at the following annual rates.
Furniture & fixtures
|
3 years
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Marketing Display
|
3 years
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Leasehold improvements
|
Term of the lease
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Depreciation expense for the six month periods
ending June 30, 2016 and 2015 was $8,266 and $266, respectively.
On May 1, 2014, the
Company entered into a non-exclusive Technology License Agreement with Futurevision, Inc., f/k/a Medicine Man Production Corporation,
a Colorado corporation, dba Medicine Man Denver (“Medicine Man Denver”), a company owned and controlled by affiliates
of the Company, whereby Medicine Man Denver granted a license to use all of their proprietary processes they have developed, implemented
and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical
marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including
trade secrets, skills and experience (present and future). As payment for the license rights the Company issued Medicine Man Denver
(or its designees) 5,331,000 shares of the Company’s common stock. The Company accounted for this license in accordance with
ASC 350-30-30 “Intangibles – Goodwill and Other by recognizing the fair value of the amount paid by the company for
the asset at the time of purchase. Since the Company has a limited operating history, management determined to use par value as
the value recognized for the transaction. Since the term of the initial license agreement is ten (10) years, the cost of the asset
will be recognized on a straight line basis over the life of the agreement. In addition, each period the Company will evaluate
the intangible asset for impairment. As of December 31, 2014 no impairment was deemed necessary.
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June 30, 2016
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December 31, 2015
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License Agreement
|
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$
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5,300
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$
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5,300
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Less: accumulated amortization
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(1,326
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)
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|
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(1,060
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)
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$
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3,974
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|
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$
|
4,240
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Amortization expense for the periods ending
June 30, 2016 and 2015 was $133 and $133, respectively.
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7.
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Related Party Transactions:
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The Company operates from offices at 4880 Havana
St, Suite 100S, Denver CO 80239, which consists of an executive office and access to a conference room via an oral sub-lease with
one of its founding partners, ChineseInvestors.COM.
During 2015 and 2016 the Company had a verbal
agreement with Chineseinvestors.com Inc. and Futurevistion to share employees time while the majority of their salary was covered
by these related companies. Medicine Man Technologies also paid the individuals a modest stipend for their time. This agreement
is currently still in place which allows the Company to utilize employees at a lower cost than would otherwise be possible.
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8.
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Net Income (Loss) per Share
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In accordance with ASC Topic 280 – “Earnings
Per Share”, the basic earnings per common share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding. Diluted earnings per common share is computed similar to basic loss per common
share except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common shares were dilutive. The Company's June 30, 2016 and
2015 basic and diluted earnings/(loss) per share $(0.02) and $0.01, respectively.
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9.
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Commitments and Concentrations
:
|
At June 30, 2016 and December 31, 2015 the
Company had no financially material commitments or concentrations.
The effective tax rate in the periods represented
is the results of various tax jurisdictions that apply a broad range of income tax rate.
The Company is registered in the State of Colorado
and is subject to the United States of America tax law. As of December 31, 2015, the Company had incurred income on a tax basis
resulting in the Company calculating that it owed $9,744 to the federal government at December 31, 2015 and $2,418 at December
31, 2014. In addition, the Company owed the State of Colorado $2,731 at December 31, 2015. The Federal tax is shown on the income
statement as tax expense and accrued as a current accrued liability on the balance sheet. Federal and state taxes due were paid
in the second quarter of 2015 and reduced the accrued tax reflected on the balance sheet.
As the Company generated a loss from operations
in the six-month period ended June 30, 2016 the Company did not recognize any additional tax expense.
Subsequent to quarter end the Company modified
the loan with Capital G Ltd and issued an additional $30,000 loan toward the total $250,000 it has committed to make available
to the group that owns Funk Sac. The company has committed to extend an additional $120,000 by October 15
th
2016 as
part of its acquisition of this entity. However, if the company terminates its plans to acquire this entity it is not required
to loan the additional $120,000.
Subsequent to quarter end the Company entered
an agreement to acquire Pono Publications, Ltd. And Success Nutrients pending completion of due diligence currently projected to
be in fourth quarter of the current year. The Company has agreed to issue seven million (7,000,000) shares of its common stock
to complete these acquisitions.
Subsequent
to this filing, the Company has entered into a commitment to raise additional capital through a convertible debt (two year term)
and having a conversion privilege based upon the lower cost of 1) $1.75 per share or 2) upon notice, 10% discount to any trailing
five day average volume weighted average price (VWAP) and has already secured commitments for the 1
st
$500,000 in funding
from four accredited investors, of which $150,000 has already been deposited.