NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Nature of Operations:
Business Description
–
Business Activity
:
Medicine Man Technologies Inc. (the "Company") is a Nevada 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 outlined below.
Brand Warehouse Development
– The Company 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 Denver Consulting Group LLC. 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 national
exchange listing status, 2) market themselves collectively, 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 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 throughout industry.
Our Three Current Business Groups
As we evolve our various business lines
and branding strategies, we are working to align our service offerings into logical groupings (3 at this time) that will allow
our potential clients as well as investors a better understanding of how we operate currently as well as into the future. In FY
2017, we intend to break down our income in the following groupings so that our shareholders as well as possible investors may
have a better understanding of our general operations.
As the industry’s competitive landscape
is very fluid and conditions within both new states as well as existing states with cannabis related regulations are everchanging,
we price our services according to market conditions as well as competitive influences and are continually managing our pricing
structures on a very frequent basis to insure a best rate to value ratio is clearly maintained.
Since general consulting and new state
initiatives typically involve these elements and are generally related to the startup phase of any new cannabis business in a new
state adopting either medical or adult use initiative, we have elected to include these elements in one grouping. The specifics
of these newly established groups are as follows:
Education, Design, Business Plan,
and New State Initiatives (Group 1)
Private Consultation Services
2-Hour Private Consulting Package
3-Hour Private Consulting Package
We also offer customized consulting
services on a project needs basis related to
:
|
•
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Business Plan Generation
|
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•
|
Customized Bid Based Service Offerings, Specific State Regulation Based
|
Seminar Offering Services
Facility Design
Financial Modeling
New State Application Process Support
Services (Template Support Based)
Licensing Services, Existing or New
State Based (Full Service)
Three-A-Light Publication (Home Version)
Three-A-Light Publication (Professional
Version)
Existing Cultivation and Dispensary
Operation (Group 2)
Cultivation Max Services
Managed Facility Services
Products (Group 3)
Success Nutrients
Three-A-Light Publication (Home Version)
Three-A-Light Publication (Professional
Version)
It should be noted that our Three-A-Light
Professional Version is only made available to licensed or operational clients utilizing full cultivation support (Cultivation
MAX).
Competitive Advantage
As we continue to grow, amassing additional
experience and knowledge (similar to our recent substantial gains in as represented by Three-A-Light and Success Nutrients) we
believe we will continue to enjoy a competitive advantage within the industry over any other business providing a group of service
offerings similar to our own.
With our focus on the fulfillment of a
brands warehouse concept, wherein we can commonly acquire, market, value, and cross promote various Cannabusiness enterprises we
believe that over time we will be able to achieve a more economical cost of operations (public company) while delivering highest
quality goods and services that generate strong shareholder returns in terms of our stock value in this nascent space.
As with our latest new product, Cultivation
MAX we are now working with existing underperforming cultivation facility ownership groups wherein we provide access to our advanced
knowledge as well as proprietary nutrients wherein we are only compensated on the delta achieved over their existing performance
(generally less than 1.5 pounds a light or 350 grams of dried cured flower per square foot of flower canopy) while also guaranteeing
through payment reduction that their existing cost per pound to cultivate will not increase.
While
no assurances of specific performance can be provided, the Company’s revenue expectations for a typical Cultivation MAX deployment
is based upon the simple premise that the Company gets paid when our client achieves higher than historical yields for its
cultivation operation based upon, 1) wholesale price net of state and local taxes, 2) at a cost per pound to grow that is
equal to or less than what the client was experiencing, and 3) as a modest percentage of the improvement delta achieved.
As an example
of how this revenue stream to our Company will evolve, we look to the following performance assumption basics:
|
·
|
Five (5) harvests per year average
|
|
·
|
A two (2) pound per light of 70 grams per square foot of flower canopy baseline
|
|
·
|
Achieving three (3) pounds per light or an improvement of at least one (1) pound per light or 35 grams per square foot of flower
|
Based
upon the above, and assuming we receive 25% of the improvement delta and the wholesale value of flower is $1,000 (net of taxes),
we would receive $250 per light per harvest in revenues or $1,250 per light annually. If a facility had 500 lights (flowering),
we would achieve $625,000 of gross revenues annually and our client would achieve eleven (11) times that value or $6.875M in wholesale
revenues which if costs per pound remain at or less than prior experience, would generate $1.875M more revenue to the Client.
Unlike most ‘consultants’ in
this industry, we have proven that we do not know it all and as we continue to be ready to learn from others (through acquisition
and or cooperation), we believe that ability in and of itself will allow us to continue to expand our client base and revenues
substantially.
General Client Summary
Medicine Man Technologies has been actively
involved in the state application process on behalf of our clients. To date we have actively participated in an application process
in the following states: Colorado, California, Florida, Illinois, Nevada, New York, Maryland, Hawaii, Oregon, Pennsylvania and
Puerto Rico. As with most consultants, we have won and lost in pursuit of a license application process. To date we have assisted
clients in securing the following licenses or have active clients as follows:
|
•
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Five Arkansas cultivation license applications
|
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•
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Four Arkansas dispensary license applications
|
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•
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Five (CUP authorized or in process status) California Cultivation Licenses
|
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•
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Two Colorado cultivation licenses (one greenhouse)
|
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•
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Three Colorado dispensary licenses (Denver, Aurora, Thornton)
|
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•
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Two Illinois cultivation licenses
|
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•
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Four Illinois dispensary licenses
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•
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One Nevada cultivation licenses
|
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•
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Two Nevada Cultivation MAX Client Licenses
|
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•
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One Maryland processing license
|
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•
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One Maryland cultivation license
|
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•
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Three Maryland dispensary licenses
|
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•
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Three Michigan cultivation licenses
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•
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Three Ohio cultivation applications
|
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•
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Three Ohio dispensary applications
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•
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One Hawaii vertically integrated license (Applicant top score in Kauai, later removed for unknown
reason by DOH)
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•
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One Oregon Tier II Cultivation License and One Oregon Medical Cultivation License (outdoor)
|
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•
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We have one active cultivation client and two pending Puerto Rico cultivation applications (deferred
due to hurricane)
|
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•
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We have one German cultivation client
|
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•
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We have one Canadian LP Cultivation Client
|
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•
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We have one Australian cultivation client
|
We have already begun to generate new business
opportunities in Michigan, Ohio, Florida, and Arkansas and have more recently initiated Cultivation MAX support services for two
larger Nevada clients (500 light and 400 light) which, over time should generate significant income for the Company.
We are extending our service offerings
to international clients having in the third quarter generated new clients in Australia, Germany, and Canada. We currently have
active proposals out in both Canada as well as Australia.
Related Parties
– Related
parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause
the direction of the management and policies of the Company. The Company disclose related party transactions that are outside
of normal compensatory agreements, such as salaries or director fees. The Company has related party transactions with the
following individuals / companies:
|
·
|
Super
Farm LLC
– Joshua Haupt, Chief Cultivation
Officer of the Company, has a 20% ownership
|
|
·
|
De Best Inc
.– Joshua Haupt,
Chief Cultivation Officer of the Company, has a 20% ownership
|
|
·
|
Medicine Man Denver
– Andy
Williams, Director of the Company, has a 38% ownership
|
|
·
|
Josh Haupt
– Chief Cultivation
Officer of the Company of Medicine Man Technologies
|
|
·
|
Future Vision
– Andy Williams,
Director of the Company, has a 38% ownership
|
1.
|
Liquidity and Capital Resources
:
|
Cash Flows
– During
the nine-month period ending September 30, 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 $927,884 and $351,524 classified as cash
and cash equivalents as of September 30, 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 interim 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 has been 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 September 30,
2017, and December 31, 2016, the Company had accounts receivable of $398,902 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.
The Company’s investment securities at September 30, 2017 and December 31, 2016 consisted of available-for-sale instruments
of $0 and $13,998, respectively, 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:
Notes
receivable is comprised of a $250,000 loan with $36,455 of accrued interest for a total loan value of $286,455 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 is due to be repaid
December 1, 2017. As the note is still current and the Funk Sacks organization is continuing to operate and grow this note is fully
collectable.
Other assets:
Other assets at September
30, 2017 and December 31, 2016 were $106,811 and $27,479, respectively and as of September 30, 2017 included $67,241 in prepaid
registrations fees for major cannabis events the Company is sponsoring and advertising costs, $24,500 in two security deposits,
$9,732 in prepaid inventory and $5,337 in prepaid insurance.
Accounts payable:
Accounts payable
at September 30, 2017 and December 31, 2016 was $53,965 and $0, respectively.
Other liabilities:
Other liabilities
at September 30, 2017 and December 31, 2016 were $14,700 and $175, respectively. At September 30, 2017, this was comprised of $14,700
in customer deposits for future contractual work.
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 and consulting 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. Revenue from product sales either being nutrients or book sales are recognized when the goods are
transferred.
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 $136,436 and $61,541 during the nine months ended September 30, 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 $4,644,318 in expenses for stock based compensation
to employees and consultants during the nine months ended September 30, 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 the 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 was submitted for such approval at the Company’s annual shareholder meeting held
on May 2017. The relevant agreements provide that the effective date for accounting purposes would be April 1, 2017. Success Nutrients
became a wholly owned subsidiary of Medicine Man Technologies, Inc. and the business conducted by Pono was incorporated into a
newly formed wholly owned subsidiary, Medicine Man Consulting, Inc., which is also where the Company will continue to conduct its
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 April 1, 2017 to September 30, 2017 the Company has agreed to manage the acquirees through a management fee agreement
whereby all cash collected was recognized as other income and all cash expenses were direct costs 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 the Company’s
income statement. As of April 1, 2017, the Company’s consolidated financial statements included these two entities.
3.
|
Recent Accounting Pronouncements
|
FASB ASU 2014-09 “Revenue from
Contracts with Customers (Topic 606)”
– In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition.
ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in
the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15,
2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods
therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of
the date of adoption. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related to
our consulting, licensing and product sales will remain consistent with our current practice. Because we do not anticipate a change
in our pattern of revenue recognition, we anticipate that neither method will have a material impact on our consolidated financial
statements.
FASB ASU 2016-02 “Leases (Topic
842)”
– In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02").
ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and
corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new
guidance will classify leases as either finance or operating (similar to current standard’s “capital” or “operating”
classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early
adoption permitted. The Company does not expect the adoption of ASU 2016-02 to have an impact on our consolidated financial statements
FASB ASU 2017-01 “Clarifying the
Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1. The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is
not a business. The guidance also requires a business to include at least one substantive process and narrows the definition
of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting
periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected
to have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15 “Statement of
Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a
diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash
flows.
FASB ASU 2016-11 “Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815)”
– In May 2016, the FASB issued 2016-11, which clarifies guidance
on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity
reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15,
2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on
our consolidated results of operations, cash flows and financial position.
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.
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.
On June 3, 2017, the Company issued 1,400,000 shares of Common
Stock to various individuals in consideration of their services rendered in support of the Company resulting in recognizing compensation
expense of $2,380,000 based upon the closing stock price on September 2, 2017 at $1.70 per share.
On June 3, 2017, the Company issued an aggregate of 7,000,000
shares of Common Stock in consideration for the acquisition of Success Nutrients and Pono Publications.
On June 19, 2017, the Company issued 2,000,000 warrants to purchase
Common Stock to three individuals. See Note 15 for further explanation.
During the three months ended June 30, 2017, the Company issued
44,151 shares of Common Stock upon conversion of convertible notes in the aggregate amount of $60,000.
On July 21, 2017, the Company issued 2,258,065 shares of Common
Stock in consideration for the acquisition of Denver Consulting Group.
During the three months ended September 30, 2017, the Company
issued 34,533 shares of Common Stock in exchange for services, at a value of $1.39 per share on July 28, 2017.
During the three months ended September 30, 2017, the Company
sold 937,647 shares of Common Stock to a private investor of the Company, at a value of $1.0665 per share on August 20, 2017.
During the three months ended September 30, 2017, the Company
issued 100,000 shares of Common Stock in exchange for services, at a value of $1.16 per share on August 29, 2017.
During the three months ended September 30, 2017, the Company
sold 25,000 shares of Common Stock to Andy Williams, Director of the Board of the Company, at a value of $1.0665 per share on September
20, 2017.
During the three months ended September 30, 2017, the Company
sold 30,000 shares of Common Stock to Brett Roper, CEO of the Company, at a value of $1.0665 per share on September 20, 2017.
At September 30, 2017, the Company had 21,875,011 common shares
outstanding.
5.
|
Property and Equipment
:
|
Property and equipment are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Furniture & Fixtures
|
|
$
|
101,212
|
|
|
$
|
11,526
|
|
Marketing Display
|
|
|
36,900
|
|
|
|
42,681
|
|
Vehicles
|
|
|
6,000
|
|
|
|
–
|
|
Office Equipment
|
|
|
74,996
|
|
|
|
10,838
|
|
|
|
$
|
219,108
|
|
|
$
|
65,045
|
|
Less: Accumulated Depreciation
|
|
|
(63,579
|
)
|
|
|
(22,919
|
)
|
|
|
$
|
155,529
|
|
|
$
|
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
|
|
|
Vehicles
|
3 years
|
|
|
Office Equipment
|
3 years
|
Depreciation expense for the nine-month
periods ending September 30, 2017 and 2016 was $40,659 and $12,399 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.
During 2016, the
Company attained two intangible assets, Product Agreement & Registration and a Trade Secret. These two intangible assets were
acquired due to the result of the acquisition of Success and Pono on September 30, 2017. Refer to the Note 9 for further explanation
of the purchase price accounting. The Company’s procurement of product registration during the year was within five states
and Canada. The Company’s product was registered in California, Oregon, Colorado, Michigan, Arizona, Washington and all of
Canada. The registration allows the Company to sell their product within the confines of that region. The registration fees capitalized
are the initial costs to obtain the license. The licenses have nominal annual renewal costs. These subscriptions are amortized
over a 15-year period.
During 2016, the Company incurred an
intangible asset due to the development of the products nutrient recipe. The nutrient recipe development was a onetime fee, paid
to the Company’s developer. The intellectual property is amortized over a 15-year economic life of the asset. The economic
life of the asset is shorter than the indefinite life considered the legal life of the assets so 15 years is deemed the economic
life of the asset.
During 2016, the
Company attained one additional intangible assets, Product Agreement & Registration. The Company’s procurement of product
registration during the year was within seven states. The Company’s product was registered in Florida, Illinois, Maine, Massachusetts,
Minnesota, Nevada and Ohio. The registration allows the Company to sell their product within the confines of that region. The registration
fees capitalized are the initial costs to obtain the license. The licenses have nominal annual renewal costs. These subscriptions
are amortized over a 15-year period.
Amortization expense for the periods ending
September 30, 2017 and 2016 was $1,463 and $266, respectively.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
License Agreement
|
|
$
|
5,300
|
|
|
$
|
5,300
|
|
Product License and Registration
|
|
|
57,300
|
|
|
|
–
|
|
Trade Secret - IP
|
|
|
32,500
|
|
|
|
–
|
|
|
|
$
|
95,100
|
|
|
$
|
5,300
|
|
Less: accumulated amortization
|
|
|
(5,760
|
)
|
|
|
(1,592
|
)
|
|
|
$
|
89,340
|
|
|
$
|
3,708
|
|
7.
|
Convertible Notes and Derivative Liability:
|
At December 31, 2016 the Company had raised
$810,000 through a private placement of convertible promissory notes with certain accredited investors, bearing interest at 12%,
with interest and principal due January 1, 2019. During the quarter ended September 30, 2017 the Company did not raise any additional
capital with the same terms. In the period ended September 30, 2017 the Company converted $0 of promissory convertible notes with
certain accredited investors, bearing interest at 12%, with interest and principal due January 1, 2019. As of September 30, 2017,
the convertible debt balance was $675,000.
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 notes
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
|
|
|
September 30, 2017
|
|
Current stock price
|
|
$
|
1.66 to $4.35
|
|
|
$
|
1.01
|
|
Risk-free interest rate
|
|
|
67%
|
|
|
|
147%
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
Expected term (in years)
|
|
|
2.39 to 2.09
|
|
|
|
2
|
|
Expected volatility
|
|
|
85% to 114%
|
|
|
|
130%
|
|
Changes in the derivative liability were as follows:
January 1, 2017
|
|
$
|
294,002
|
|
Gain on derivative liability
|
|
|
4,706
|
|
Conversion of notes - APIC
|
|
|
(139,603
|
)
|
September 30, 2017
|
|
$
|
159,105
|
|
8.
|
Related Party Transactions:
|
As of September 30, 2017, the Company had
five related parties, Medicine Man Denver, Josh Haupt, Future Vision, De Best Inc. and Super Farm LLC. One of the Officers of the
Company, Joshua Haupt, currently owns 20% of both De Best and Super Farm. During the nine months ended September 30, 2017, the
Company had net sales from Super Farm LLC totaling $80,021 and $28,985 sales from De Best Inc. The Company give’s a larger
discount to related parties than non-related parties. As of September 30, 2017, the Company had accounts receivable balance with
Super Farm LLC totaling $33,832 and $8,130 accounts receivable from De Best Inc. During the nine months ended September 30, 2017,
the Company had cost of sales associated with Super Farm LLC totaling $16,789 and $6,367 from De Best Inc.
Additionally, one of the Directors of the
Company, Andy Williams, currently owns 38% of Medicine Man Denver. During the nine months ended September 30, 2017, the Company
had net sales from Medicine Man Denver totaling $75,705 and cost of sales totaling $17,170. As of September 30, 2017, the Company
had an accounts payable balance owed to Josh Haupt totaling $6,752 and $3,024 owed to Future Vision. Additionally, one of the Directors
of the Company, Andy Williams, currently owns 38% of Future Vision.
9.
|
Goodwill and Acquisition accounting:
|
On June 3, 2017, the Company issued an
aggregate of 7,000,000 shares of its common stock for 100% ownership of both Success Nutrients and Pono Publications. The Company
utilized purchase price accounting stating that net book value approximates fair market value of the assets acquired. The purchase
price accounting resulted in $6,301,080 of Goodwill. The ASC at 350-20-35-3A directs that “An entity may assess qualitative
factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting
unit is less than its carrying amount, including goodwill. The Company had a valuation done at this time and the value exceeded
the purchase price indicating that there would not be any impairment.
On July 21, 2017, the Company issued 2,258,065
shares of its Common Stock for 100% ownership of Denver Consulting Group (“DCG”). The Company utilized purchase price
accounting stating that net book value approximates fair market value of the assets acquired. The purchase price accounting resulted
in $3,003,226 of Goodwill. The ASC at 350-20-35-3A directs that “An entity may assess qualitative factors to determine whether
it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying
amount, including goodwill”. The Company obtained an independent valuation of the DCG on July 21, 2017. The fair market value
on July 21, 2017 of DCG was $3,650,000, thus creating a fair market value greater than the carrying value of Goodwill. The ASC
at 350-20-35-3D directs that “If an entity determines that it is not more likely that the fair value of a reporting unit
is less than its carrying amount, then Goodwill impairment is unnecessary.”
Denver Consulting Group Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value
|
|
|
|
Fair Value
|
|
|
|
|
|
Book Value
|
|
|
|
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Cash
|
|
|
43,797
|
|
|
|
43,797
|
|
|
Customer deposits
|
|
|
43,797
|
|
|
|
43,797
|
|
|
|
|
43,797
|
|
|
|
43,797
|
|
|
|
|
|
43,797
|
|
|
|
43,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,258,065 * 1.33)
|
|
|
|
|
|
|
3,003,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: BV of Assets
|
|
|
|
|
|
|
(43,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: BV of Liabilities
|
|
|
|
|
|
|
43,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
3,003,226
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017, the Company’s
Goodwill has a balance of $9,304,306. This amount consisted of $3,003,226 from the DCG acquisition and $6,301,080 from the Pono
and Success acquisition.
As of September 30, 2017, and December
31, 2016, respectively, the Company had $87,685 and $0 of finished goods inventory. The Company only has finished goods within
inventory because it does not produce any of its products. All inventory is produced by a third party. The inventory valuation
method that the Company uses is the FIFO method. During 2017 and 2016, the company had $0 obsolescence within their inventory.
As of September 30, 2017, and December
31, 2016, the Company had a note payable balance of $58,280 and $0, respectively. The note payable is a balance that is due to
an officer of the Company, Joshua Haupt.
12.
|
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 September 30, 2017 and 2016 basic and diluted earnings/(loss) per share $(0.22) and $(0.02), respectively.
13.
|
Commitments and Concentrations
:
|
Office Lease – Denver, Colorado
–
The Company entered into a lease for office space at 4880 Havana Street, Suite 201, 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
|
|
Office and Warehouse Lease –
Denver, Colorado
– The Company entered into a lease for office and warehouse space at 6660 E. 47
th
Ave Drive, Denver, Colorado 80216. The lease commitment is split between both Success Nutrients and Pono Publications. The lease
period started December 1, 2016 and will terminate November 30, 2020, resulting in the following future commitments:
2017 fiscal year
|
|
$
|
115,328
|
|
2018 fiscal year
|
|
|
118,528
|
|
2019 fiscal year
|
|
|
121,728
|
|
2020 fiscal year
|
|
|
124,928
|
|
The Company notes that this lease is accelerated,
and the deferred amount isn’t booked due to immateriality.
The Company had no tax provisions as of
September 30, 2017 and December 31, 2016. The company had a net loss in the quarter ending September 30, 2017 and the deferred
tax asset has a full valuation against it.
The Company issued one round of warrants
related to various equity transactions that was approved by the Board on June 3, 2017 and issued on June 19, 2017. Since the terms
weren’t established until June 19, 2017, these were valued on this date per the signed agreements and issuance on June 19,
2017. The Company accounts for its warrants issued in accordance with the US GAAP accounting guidance under ASC 480. We estimated
the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing model as described
in the stock-based compensation section above, based on the estimated market value of the underlying common stock at the valuation
measurement date of $1.50, the remaining contractual term of the warrant of 2.5 years, risk-free interest rate of 1.38% and expected
volatility of the price of the underlying common stock of 126%. There is a moderate degree of subjectivity involved when using
option pricing models to estimate the warrants and the assumptions used in the Black Scholes option-pricing model are moderately
judgmental.
|
|
Number of shares
|
|
|
Exercise Price
|
|
Balance as of March 31, 2017
|
|
|
–
|
|
|
|
–
|
|
Warrants issued
|
|
|
2,000,000
|
|
|
$
|
1.445
|
|
Settlements
|
|
|
–
|
|
|
|
–
|
|
Balance as of September 30, 2017
|
|
|
2,000,000
|
|
|
|
|
|
During the nine months ended September
30, 2017, the Company issued 2,000,000 common stock purchase warrants to three employees of the Company with an exercise price
of $1.445 per share for a period of time expiring on December 31, 2019. As of September 30, 2017, none of the warrants were exercised.
Stock-based compensation expense recognized for warrants during the nine-month period ended September 30, 2017 was $2,100,318.
The Company received notice from two holders
of their request for conversion of debt as described herein related to Convertible Notes valued at $45,000, to convert into an
aggregate of 46,249 of Common Shares at a conversion price of $0.973 per share.