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 services related to cost efficient cannabis cultivation
technologies focusing on quality as well as safety, retail operations related to the delivery of cannabis related products, and
other related business lines as described in our operating strategic vision outlines below.
Brand Warehouse Development
–
With recent 8K filings, the Company has signaled that it intends to aggregate new business opportunities into its corporate fabric
in a manner that does not diminish the various companies or brands it is partnering with, but rather enhances it. Suitable candidates
for consideration will have ongoing operations within various industry segments, such as the Pono Publications and Success Nutrient
acquisitions as already noted in the Company’s 8K filings on or about August 12
th
and October 20
th
of 2016. Over time, the Company expects to expand its presence within the industry through the development of an ‘intelligent
acquisition’ process.
Intelligent Acquisition
–
This term is meant to define a selection and due diligence process that will enable both the Company as well as the acquisition
to benefit mutually in that each may better 1) establish a more stable method of continual valuation through direct contact with
the public marketplace wherein with the related growth of the enterprise as a whole it will eventually be able to achieve a higher
listing status within the NYSE as a capital markets member based upon prevailing regulations, 2) market themselves collectively
thus taking advantage of certain cost savings strategies through shared participation in various events and advertising opportunities,
3) take advantage of other operating and reporting cost efficiencies available to the Company through aggregation of such acquisitions,
4) continue to work develop a full spectrum of products and services deliverable to the general cannabusiness marketplace through
careful segmentation of the marketplace as a whole, and 5) continue to work collaboratively within the industry to achieve both
transparency as well as a strong positive reputation for ethical behavior when working both internally within its collective as
well as externally with others in the industry.
1.
|
Liquidity and Capital Resources
:
|
Cash Flows
– During the
quarters ending March 31, 2017 and 2016, 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 $161,258 and $351,524 classified as cash
and cash equivalents as of March 31, 2017 and December 31, 2016, respectively.
2.
|
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.
Fair Value Measurements:
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered
observable and the last unobservable, as follows:
Level 1 – Quoted
prices in active markets for identical assets or liabilities.
Level 2 – Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the
assets or liabilities.
Our financial instruments include cash,
accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial instruments
approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the
interest rates on these instruments approximate the interest rate on debt with similar terms available to us. Our derivative liability
was adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
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 March 31, 2017, and 2016, the Company
had accounts receivable of $358,094 and $25,000, respectively. The company wrote off $0 of its accounts receivable in the current
quarter. Allowance for doubtful accounts is currently zero as all receivables are less than 60 days old. The company will continue
to evaluate the need for recognizing an additional allowance in the future.
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 its marketable
securities as short-term. Our investment securities at March 31, 2017 consist of available-for-sale instruments which include
$26,948 of equity in publicly traded companies. All our available-for-sale securities are Level 2 due to limited trading volume. 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 $250,000 loan with $21,413 of accrued interest for a total loan value of $271,413 issued to the organization
that owns Funk Sack, Inc. This loan was extended with the option of negotiating an agreement to acquire the entirety of the company
through a stock swap. However, in the fourth quarter of 2016 the Company determined that it would not complete the acquisition
of the company and instead will hold the investment and it will be repaid. The loan was issued May 6, 2016 and was is due to be
repaid November 1, 2017. As the note is still current and the Funk Sacks organization is continuing to operate and grow this note
is considered to be fully collectable.
Other assets:
Other assets at March
31, 2017 and December 31, 2016 were $69,894 and $27,479, respectively and as of March 31, 2017 included $4,542 in prepaid rent,
$50,852 in prepaid registrations fees for major cannabis events the Company is sponsoring and advertising costs and $14,500 in
a security deposit.
Accounts payable:
Accounts payable at
March 31, 2017 and December 31, 2016 was $0 and $0, respectively.
Accrued tax and other liabilities:
Accrued
tax and other liabilities at March 31, 2017 and December 2016 were $24,616 and $175. At March 31, 2017 this was comprised of accrued
interest expense of $22,339 and $2,276 in accrued expense.
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 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 $33,484 and $12,492 during the three months ended March 31, 2017 and 2016,
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 $0 in expenses for stock based compensation
to employees during the three months ended March 31, 2017.
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.
Management fee contracts:
In February
2017, the Company entered into a Merger Agreement with Pono Publications Ltd. (“Pono”), as well as a Share Exchange
Agreement with Success Nutrients, Inc. (“SN”), each a Colorado corporation, in order to facilitate our acquisition
of both of these entities. The ratification of the acquisition of these companies requires the approval of the holders of a majority
of the Company’s shareholders, which will be submitted for such approval at the Company’s annual shareholder meeting
to be held in May 2017. If approved the relevant agreements provide that the effective date for accounting purposes will be March
1, 2016. Success Nutrients will become a wholly owned subsidiary of Medicine Man Technologies, Inc. and the business conducted
by Pono will be incorporated into a newly formed wholly owned subsidiary, Medicine Man Consulting, Inc., which is also where we
will continue to conduct the Company’s consulting service business. In March 2017, the Company integrated Pono Publications
and Success Nutrients into its operations including a lease for approximately 10,000 square feet of space located at 6660 East
47th Street, Denver, CO 80216. This integration also included four (4) full time team members as well as several independent contractors.
From March 1, 2017 until such time as the acquisition can be complete the Company has agreed to manage the acquirees through a
management fee agreement whereby all cash collected will is recognized as revenue and all cash expenses are direct cost of the
project. As of March 31, 2017, the management contract resulted in cash collections of approximately $100,000 and cash expenditures
of approximately $170,000 resulting in a net loss of $70,257 which was presented on a net basis as a loss in the other income
portion of our income statement.
3.
|
Recent Accounting Pronouncements
|
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, 2017, 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, 2016.
Early adoption is permitted. The Company has adopted this amendment effective this current fiscal year.
4.
|
Stockholders’ Equity
:
|
The Company’s initial authorized stock
at inception was 1,000,000 common shares, par value $0.001 per share. In 2016 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.
During the three months ended March 31,
2017, the Company issued 145,587 shares of Common Stock upon conversion of convertible notes in the aggregate amount of $254,777.
At March 31, 2017, the Company had 10,548,087
common shares outstanding.
5.
|
Property and Equipment
:
|
Property and equipment are recorded at cost,
net of accumulated depreciation and are comprised of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Furniture & Fixtures
|
|
$
|
56,527
|
|
|
$
|
11,526
|
|
Marketing Display
|
|
|
36,900
|
|
|
|
42,681
|
|
Office Equipment
|
|
|
41,409
|
|
|
|
10,838
|
|
|
|
$
|
134,836
|
|
|
$
|
65,045
|
|
Less: Accumulated Depreciation
|
|
|
(33,098
|
)
|
|
|
(22,919
|
)
|
|
|
$
|
101,738
|
|
|
$
|
42,126
|
|
Depreciation on equipment is provided
on a straight-line basis over its expected useful lives at the following annual rates.
Furniture & Fixtures
|
3 years
|
|
Marketing Display
|
3 years
|
|
Leasehold Improvements
|
Term of the lease
|
Depreciation expense for the three month periods
ending March 31, 2017 and 2016 was $10,177 and $4,133 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.
Amortization expense for the periods ending
March 31, 2017 and 2016 was $133 and $133, respectively.
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
License Agreement
|
|
$
|
5,300
|
|
|
$
|
5,300
|
|
Less: accumulated amortization
|
|
|
(1,725
|
)
|
|
|
(1,592
|
)
|
|
|
$
|
3,575
|
|
|
$
|
3,708
|
|
7.
|
Convertible Notes and Derivative Liability:
|
At December 31, 2016 the Company had raised
$810,000 through a private placement of promissory convertible notes with certain accredited investors, bearing interest at 12%,
with interest and principal due January 1, 2019. During the quarter ended March 31, 2017 the Company raised an additional $179,777
with the same terms for a total of $989,777. In the period ended March 31, 2017 the Company converted $254,777 of promissory convertible
notes with certain accredited investors, bearing interest at 12%, with interest and principal due January 1, 2019, into 145,587
shares of common stock.
Upon issuance, each of the notes is immediately
convertible at the noteholders election into the company’s common stock at $1.75 per share or 90% of the VWAP of the five
days following the notice of conversion, whichever is lower. Since the conversion rate can be tied to an underlying item, the warrants
are considered to be a derivative that is recorded as a liability at fair value and adjusted to fair value at the conclusion of
each reporting period. The underlying assumptions used in the Black Scholes model to determine the fair value of the derivative
liability were based on the individual date the notes were closed and were the following:
|
|
Upon issuance
|
|
|
March 31, 2017
|
|
Current stock price
|
|
|
$ 1.66 to $4.35
|
|
|
$
|
1.88
|
|
Risk-free interest rate
|
|
|
67%
|
|
|
|
67%
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
Expected term (in years)
|
|
|
2.39 to 2.09
|
|
|
|
2.00
|
|
Expected volatility
|
|
|
85% to 114%
|
|
|
|
122%
|
|
|
|
|
|
|
|
|
|
|
Changes in the derivative liability were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
$
|
294,002
|
|
|
|
|
|
Gain on derivative liability
|
|
|
(49,009
|
)
|
|
|
|
|
March 31, 2017
|
|
$
|
244,993
|
|
|
|
|
|
8.
|
Related Party Transactions:
|
During 2015 and 2016 through September 30, 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. While this agreement
was in place through the balance of this, the 3
rd
quarter of operations the Company will be adding new employees as
well as converting such other employees from these two common contributors directly to its own payroll as described in the subsequent
event notes as needed to further its operating as well as growth requirements. It should also be noted that in August of the third
quarter one of the ChineseInvestors.COM team members converted to full time employment with the Company increasing the number
of full time paid team members to three.
During 2016, the Company received two
short term loans bearing 12% annual interest from related parties, which were repaid in full along with interest. The Company
borrowed $25,000 from Chineseinvestors.com, Inc. in July, which was repaid along with $250 interest in August. In that same period
the Company borrowed $50,000 from Brett Roper, the COO and director, which was repaid along with $1,299 in interest in October.
9.
|
Net Income (Loss) per Share
|
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 quarterly earnings
for the period ended March 31, 2017 and 2016 basic and diluted earnings/(loss) per share $0.01 and $0.01, respectively.
10.
|
Commitments and Concentrations
:
|
Office Lease – Denver, Colorado
–
The Company entered into a lease for office space at 4880 Havana Street, Suite 200, Denver, Colorado 80239. The lease period started
March 1, 2017 and will terminate February 29, 2020, resulting in the following future commitments:
2017 fiscal year
|
|
$
|
95,947
|
|
2018 fiscal year
|
|
|
154,174
|
|
2019 fiscal year
|
|
|
171,000
|
|
2020 fiscal year
|
|
|
29,000
|
|
The Company had no tax provisions as of March 31, 2017
and December 31, 2016. The company had net income in the quarter ending March 31, 2017, however currently has an adequate net
loss carryforward to cover any liability generated in the current quarter.
Subsequent to quarter end the Company executed
a Term Sheet whereby we have reached an agreement to acquire Denver Consulting Group LLC, (“DCG”), a Colorado limited
liability company that is engaged in cannabis consulting throughout the United States. The consideration for this acquisition will
be the issuance of 2,258,065 shares of our Common Stock valued at $3.5 million based upon the closing price of our Common Stock
on the date the Term Sheet was executed.
The agreement is subject to our due diligence
as well as execution of definitive agreements, which shall contain customary representations. Due diligence is expected to be completed
within 60 days from the date of the Term Sheet. It is also anticipated that we will retain the services of several of the principals
of DCG, as well as its current employees.