ITEM 1. BUSINESS
History
Medicine Man Technologies,
Inc. (“we,” “us,” “our” or the “Company”) was incorporated on March 20, 2014, in
the State of Nevada. On May 1, 2014, we entered into a non-exclusive Technology License Agreement with Futurevision, Inc., fka
Medicine Man Production Corp., dba Medicine Man Denver (hereinafter, “Medicine Man Denver”) whereby Medicine Man Denver
granted us 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) (the “License Agreement”) in consideration for the issuance of 5,331,000 shares of our Common Stock. We
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 us for the asset at the time of purchase. Since we had a limited operating history, management elected
to use the par value of our Common Stock as the value recognized for the transaction. Since the term of the License Agreement is
ten (10) years, the cost of the asset will be recognized on a straight-line basis over the life of the License Agreement. In addition,
we will evaluate the intangible asset for impairment every quarter. Medicine Man Denver is owned by some of our affiliates.
See
“Part II, Item 8, Financial Statements and Supplementary Data” and “Part III, Item 13, Certain Relationships
and Related Transactions.”
Between November 2014
and March 2015, we undertook a private offering of our Common Stock wherein we sold 270,000 shares of our Common Stock for gross
proceeds of $270,000 ($1.00 per share) to 4 non-accredited and 23 “accredited” investors, as that term is defined under
the Securities Act of 1933, as amended.
In April 2015, we filed
a registration statement with the Securities and Exchange Commission whereby we registered an aggregate of 1,619,000 shares of
our Common Stock, including the 270,000 shares sold in our aforesaid private offering. This registration statement became effective
on September 30, 2015. Thereafter, an application to trade our Common Stock was filed on our behalf with FINRA (Financial Industry
Regulatory Association) and our Common Stock was approved for trading on the OTCQB on December 23, 2015. See Part II, Item 5, “Market
for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.”
From October 2016 through
February 2017, we engaged in a private offering of convertible notes to 11 accredited investors (as that term is defined under
Rule 501, Regulation D of the Securities Act of 1933, as amended). These loans provide for a fixed or VWAP conversion option, bear
an annual interest rate of 12% (simple), with interest paid quarterly and mature on December 31, 2018. We issued notes totaling
$1,000,000. As of the date of this Report Convertible Notes aggregating $254,777 were converted to 155,687 shares of our Common
Stock. These conversions were computed at both the floor value of $1.75 as well as at a VWAP value as allowable under the terms
of the conversion rights. See “Notes to Financial Statements”.
License
Agreement with Medicine Man Denver
Our license with Medicine
Man Denver authorizes us to utilize certain technology relating to various proprietary processes they developed relating to the
commercial growth, cultivation, marketing and dispensing of medical and recreational marijuana. These processes were assigned to
us for establishing a business to monetize services and intellectual property related to the cannabis industry. These processes
include what we consider to be a unique cultivation facility of a Variable Capacity, Constant Harvest aseptic design, which refers
to our ability to throttle production as needed to meet demand so we can best manage our costs of operations in consideration of
the ever-changing market conditions. For example, should the market begin to show signs of slowing we can slow down our production
to meet demand while continuing to constantly (daily) harvest plants. This agreement allows Medicine Man Technologies, Inc. to
continue to access any future improvements as may be developed by Medicine Man Denver over the duration of our licensing commitment.
In early 2016, our
management recognized the business model under which we were operating had reached its initial goal in achieving a basic proof
of concept. We believe this is reflected by our consulting services provided to clients in those states which have adopted legislation
and regulations legalizing marijuana. We believe we have established a strong client base and reputation from which to begin expanding
our ‘Brand Warehouse’ concept. During the second quarter of 2016, we began to implement the next stage of our business
plan, the acquisition of synergistic cannabis companies, as well as the offering of new service lines and products.
Acquisition
of Pono Publications, Inc. and Success Nutrients, Inc.
In April 2016, we
were introduced to Joshua Haupt, a Denver based business person who had established both a positive reputation as a
Colorado-licensed cultivator, a creator of a proprietary nutrient line and the author of a publication for home growers. Our
management immediately recognized the potential mutual value offered through a consolidation of our best
practices, design skills, and general industry presence combined with Mr. Haupt’s cultivation knowledge and nutrients
line.
From our experience,
in the cannabis industry the typical annual cultivation yields on a per square foot of indoor flower cultivation space generally
have averaged 200 to 300 grams (MJardin study by Benjamin Franz published with the 2015 State of the Legal Marijuana Markets Fact
Book co-published by Arc View and New Frontier). Based upon our due diligence, the process developed by Mr. Haupt currently averages
more than twice that productivity at a much lower cost of operations.
By August 2016, the
parties had negotiated agreeable terms for the acquisition of both of Mr. Haupt’s companies, Pono Publications Inc. (“Pono”)
and Success Nutrients Inc. (“Success Nutrients”), and began to work together to develop an integration plan that would
result in several new service and product offerings. In November 2016 we entered into a binding services contract emulating the
relationship as described in our term sheet as a bridge to a final point in time wherein the acquisition could be completed.
During this interim
time (November 2016 to February 2017), we began to co-market our new relationship and service lines using the new combination of
design efficiencies for new licensing clients in several states as they began the application process and to implement our new
business lines afforded by the acquisition of Pono and Success Nutrients, more fully described below in this section.
On February 27, 2017,
we entered into a Merger Agreement with Pono Publications Ltd., as well as a Share Exchange Agreement with
Success Nutrients, Inc., 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 our shareholders,
which will be submitted for such approval at our 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 our consulting service business.
These transactions
will become effective upon the filing of Statement of Merger with the Secretary of State in Colorado and Statement of Share Exchange
and Articles of Exchange with the Colorado Secretary and State and Nevada Secretary of State, respectively, which is expected to
upon ratification by our shareholders. .
Upon
effectiveness we will issue an aggregate of 7,000,000 shares of our Common Stock to the Pono and Success Nutrients
stockholders in exchange for 100% of the issued and outstanding shares of each of their capital stock. All our current
management will remain in place, but Charles Haupt will be added as a member of our Board of Directors and Josh Haupt will
become our Chief Cultivation Officer.
Pono
provides cultivation consulting services to the cannabis industry in Colorado and elsewhere. It is also the owner of a
registered trademark, “Three A Light” through which it has published a book on how to cultivate marijuana. The
Pono Publications Inc. brand includes the Three A Light™ cultivation publication with a ‘Professional
Grade’ version used exclusively for both Three A Light™ and our current and future clients. This new cultivation
protocol has already achieved yields in the 450-gram per square foot range of flowering canopy per year and is deployable in
both greenhouse and indoor based cultivation facilities.
See “Three A Light Publication (Home Version),”
below.
The Success Nutrients brand provides one
of the key underpinnings of the cultivation methodology and is essential to the overall Three A Light™ performance metric.
With an investment of two years of research, development and intense testing, this product line was specifically formulated for
the cannabis industry.
See “Nutrient Products (Group 3),” below.
Our initial
target market was directed to those states that had recently adopting regulations to allow for a state legal cannabis
industry and helping groups or individuals successfully enter the marketplace. As a result of our pending acquisition of Pono
and Success Nutrients, we have developed several new business lines in order to expand our market to include both new and
existing cannabis businesses of any size. These new opportunities are discussed below. The combination of these two new
businesses is expected to allow us to establish a cultivation improvement offering to our existing and future cultivation
facility owners not yet able to achieve these performance levels. Adoption of this new methodology is also expected to allow
our clients the ability to vastly improve their existing cultivation performance metrics while maintaining the highest
quality product. There are no assurances this will occur.
We intend to
utilize Pono’s intellectual property relating to cannabis cultivation in our cannabis consulting efforts. We also hope
to continue to expand the distribution channels for the nutrient products offered by Success Nutrients. While no assurances
can be provided, we anticipate increased revenues from the sale of nutrients, with increased revenues derived from increased
outlets, plus revenues based upon Pono and Success Nutrients’ revenue history, from the sale of the book.
In addition, as a result of the cannabis production historically produced from Josh Haupt’s cultivation locations,
we intend to develop what we are referring to as “Cultivation Max”, which is a program we will be offering to both
existing cannabis cultivation locations, as well as new clients generated from our cannabis consulting business. Our
intention is to offer our expertise to these entities wherein we shall be paid a percentage of the increased production
arising from the implementation of our systems by our clients. As of the date of this Report we have
deployed our first Cultivation MAX client in Nevada.
Additional Acquisition Efforts
On July 26, 2016 we
executed a non-binding Term Sheet whereby we reached an agreement to acquire Capital G Ltd., an Ohio limited liability company and
its three wholly owned subsidiary companies, Funk Sac LLC, Commodogy LLC, and OdorNo LLC, in consideration for the issuance of
an aggregate of 1.3 million shares of our Common Stock. The agreement was subject to our due diligence. Effective January 13, 2017,
we mutually agreed not to proceed with this transaction.
As an additional incentive
we provided loans to Capital G Ltd. in the aggregate principal amount of $250,000. The $250,000 loan bears 12% interest, offers
an equity conversion option at our election, and matures on November 25, 2017. It is possible both parties may attempt to explore
this potential acquisition opportunity again in the future. In the process of conducting our due diligence, we assisted Capital
G Ltd. leadership to redefine its revenue model. The new revenue model is reported by their leadership to be very successful and
helping their company’s sales to grow rapidly.
Our Current Business
Groupings
As we evolve our various
business lines and branding strategies we are working to align our service offerings and earned income into logical groupings.
We have aligned them into three business units that will allow our potential clients and investors a better understanding of both
our current and future operations. The specifics of these newly established groups are as follows:
Private Consultation Services; Education,
Design, Business Plan, and New State Initiatives (Group 1)
In prior years, we have
generated revenues from our consulting activities, as well as seminars we have conducted for prospective clients interested in
entering the cannabis industry. During 2016, we began to limit these seminars and devote our resources to what we consider to be
higher upside activities, including private consultation services and related matters. We expect these services to augment our
existing seminar offerings and over time replace most of our local seminar offerings. Following is a description of these new services.
Two Hour Private Consulting Package
This package is designed
for individuals and business owners that are interested in becoming involved in the cannabis industry but need more guidance and
personal consultation when working to advance their own goals and industry knowledge to increase their chances of success
in this industry. The 2-Hour Private Consultation Package includes a private one-on-one consultation with our consulting staff
and/or ownership, as well as a private full tour of a medical and adult use dispensary operation and a 40,000 square foot cultivation
facility owned by Medicine Man Denver.
This package sets the
foundation for groups considering entering the cannabis space by providing real world examples of projects and cannabis industry
marketplaces in which we have worked. The Two-Hour Private Consultation is also the main entry point for clients considering our
services to have the opportunity to sit down with our team and learn more about our licensing services. Consultation fees collected
are credited back to clients who proceed with our full licensing packages.
This package is recommended
for individuals and business owners that need more guidance and personal consultation when working to advance their own goals in
the cannabis industry and to increase their business’s success.
Three Hour (Plus) Private Consulting
Package
Operating in the emerging
cannabis industry requires experienced partners who can help clients avoid costly mistakes. Our team of professional consultants
help clients navigate the process of becoming successful cannabis operators. Using our personal experience, expertise and proven
methods, we believe clients will avoid many of the costly pitfalls of entering and operating in the space while maximizing their
return on investment.
The Three Hour Private
Consultation Package includes a private one-on-one consultation with our consulting staff and/or ownership, a private full tour
of Medicine Man Denver’s medical and adult use dispensary operations and 40,000 square foot cultivation facility, a tour
of the Three-A-Light facility, a basic pro forma to aid in clients financial modeling, a copy of the Three-A-Light cultivation
manual written by Josh Haupt (a $500 value), and a Success Nutrients Starter Kit (a $320 Value).
This package is recommended
for individuals and business owners who:
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Are current cannabis cultivators but are not producing the yields and consistency they could be
and are in need of guidance from our senior consultants and lead cultivation staff members on how to improve their performance
and efficiencies.
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Entrepreneurs who are interested in the cannabis industry and have the capital, connections and
passion to become operators in the cannabis space but do not have intimate knowledge about the industry and need guidance in a
number of areas in order to complete the state licensure process. We provide these client groups with high level guidance as it
pertains to such things as complex state application processes, facility design, financial modeling, security, cultivation methodologies,
pesticide and nutrient management plans, dispensary operations, inventory management, packaging and labeling and much more.
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We also offer customized
consulting services on an ad-hoc project basis that may include any or all elements as identified herein.
Seminar Offering Services
We offer seminars in
emerging markets at our facilities in Denver, CO. The crash course seminars are designed to educate participants about the requirements
associated with becoming licensed operators in their own geographic market, and include guidance and tips on navigating:
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Industry opportunities
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Medical and Recreational
Market Trends
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Cultivation Methodologies
and Technology
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Processing Methodologies
and Technology
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Extraction Technology
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Dispensary Operations
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Operating Pros and
Cons
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Security Requirements
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Banking, Tax, and Finance
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Real Estate Planning
and Tips
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License Application
Planning and Tips
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Advocacy, Outreach
and Lobbying
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The Denver-based seminars
end with a tour of Medicine Man Denver’s cultivation and dispensary facilities, allowing participants to get a first-hand
view of a fully compliant medical and recreational cultivation and dispensary operation.
We have been asked
to provide key support and informational segments for the MJ Business ‘Crash Course’ to be held in Washington DC in
May 2017 and are expected to be providing such seminar support in various states this year. We have already scheduled specialty
seminars in North Carolina, Pennsylvania, and Michigan during 2017 and expect to add additional events throughout the year.
Facility Design and Financial Modeling
Services
Facility Design
Our personnel have
an aggregate of 46 years’ experience designing indoor, greenhouse and hybrid growing facilities as well as retail dispensaries.
Our design team consists of an architect and a contracting firm that have a wealth of knowledge in the medical and recreational
cannabis cultivation and retail space; having designed and constructed numerous facilities throughout the state of Colorado and
other markets. Our team will collaborate with a client’s local architect and general contractor to develop an optimal design
and construction plan that will meet all IBC and zoning codes while supporting the Variable Capacity Continuous Harvest model.
Our team will provide all blue prints, lighting, tables, shelving specs and any other pertinent intellectual property, developed
and refined by Medicine Man Denver.
We have experience
in supporting multiple facility layouts and deployments, including both existing and new buildings. We have worked through both
deployments and have extensive knowledge within industrial building environments. Based upon this experience we believe our documented
designs and floor plans will ensure that a client’s facility will operate at maximum efficiency from day one, avoiding the
multitude of costly mistakes made by many cannabis startups.
Financial Modeling
We help clients with
financial modeling and pro forma financial statement development. This is a critical activity for every cannabis business irrespective
of its age and size. For new enterprises, especially in the cannabis industry, the preparation of financial projections is integral
to the business planning process.
Financial models are
used to compile forecasts and budgets; to assess possible funding requirements; and to explore the likely financial consequences
of alternative funding, marketing or operational strategies. They can also be used for business planning, raising finance, investment
or funding appraisals, financial analysis, corporate planning etc. Used effectively, a financial model can help prevent major planning
errors; identify or evaluate opportunities; attract external funding; provide strategic guidance; evaluate financial and development
options and monitor progress.
New State Application Process Support
Services (Template Support Based)
Our primary
objective is to help clients deliver a positive customer experience with the utmost attention to product, public, and patient
safety. We educate our clients on how to produce the highest quality products with the lowest cost of production, delivered
to customers with great customer service on a consistent and safe basis. Through basic application support guidance elements
we support our client’s efforts in pursuit of state-issued operating license. Our team provides a cultivation and/or
dispensary elements as needed to demonstrate sufficiency within an application.
We have experience
working within both competitive and non-competitive application environments. We have navigated the application process in several
states, including: Colorado, Nevada, Illinois, New York, Maryland, Hawaii, Pennsylvania and Puerto Rico. As each state handles
the process differently, we believe we bring a wealth of knowledge and experience in working through an application. We engage
in an "on the ground" approach – ensuring clients receive support when it matters most. As a result, our clients
have successfully filed winning cultivation and dispensary applications across several states.
Once a client has
secured its state-issued operating license, we support their efforts to become fully operational through the licensing of
our proprietary cultivation and dispensary methodologies on an as needed basis. Our team of seasoned consultants helps
applicants navigate the process of pursuing state licensure and becoming a successful cannabis operation.
This service offering
is generally provided as an ‘assembly needed’ product wherein we provide basic guidance elements for a particular state’s
deployment initiative that can then be incorporated in to an application process.
Licensing Services (Full Service)
Through our licensing
services we support a client’s efforts within a competitive or non-competitive state application process with the goal of
securing a state-issued operating license. Once licensed, we help clients deploy state of the art facilities, train staff, implement
standard operating procedures, and become operational.
Entities
applying for medical and recreational operating licenses will have to demonstrate their ability to provide patient, product,
and public safety while also maximizing their productivity to meet the forthcoming demand with high-quality, consistent
products. As a result of the Pono and Success Nutrient acquisitions discussed above we now estimate that our cultivation
processes have increased the per light productivity to an average of 3 pounds of dried, cured flower per 1,000W fixture.
While this is applicable to the entire cannabis industry, we believe this is particularly invaluable in states which impose
limits on canopy size or plant counts, or in instances in which operators have a limited space to cultivate. We treat
cultivation like manufacturing, with the underlying principal that control of inputs, process, environment, and climate will
yield consistent output, enabled by our supporting process.
With the licensing services included throughout
the pre-application process clients are provided with the following:
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Real estate sufficiency reviews and planning.
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Facility design plans that client design build team can utilize in the creation of architectural and construction plans.
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Pro forma for financial modeling.
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Facility equipment list.
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Organizational charts and job description
information.
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List of preferred third party vendors for
consideration.
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Application checklist once the final rules
are published.
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Narrative of a company’s operating plans for use in demonstrating qualification for state licensure.
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With licensing services included throughout the post-application
process clients are provided with:
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Facility shop drawings (tables, racks, lighting
systems, etc.).
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Standard Operating Procedures.
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Further design and deployment support related
to facility construction.
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On-site training within our Denver-based
facilities.
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On-site training at their facilities once
operational.
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On-going support for a period of five years including the ongoing dissemination of process improvements or adjustments to standard
operating procedures.
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Clients who successfully
achieve state licensure may also engage us for managed facility support. This offering provides a turn-key solution for new operators,
inclusive of support with pursuit of licensure, design and deployment of their facility, and ongoing management of the facility
for a defined period.
Three-A-Light Publication (Home Version)
Pono was incorporated
in the State of Colorado on February 16, 2015. It is the holder of all intellectual property rights relating to the cannabis cultivation
of full scale commercial grow operations utilized and proposed to be utilized by our current and future clients. No patents have
been filed to protect the various methods and expertise utilized for these commercial grows due to the federal prohibition on cannabis.
“Three-A-Light”
is a tutorial for how to grow cannabis plants for the individual grower growing for his own benefit or caregiver growing for their
patients in a limited way. The book is currently offered on Amazon at a price of $500 per copy. To date, approximately 1,100 books
have been sold.
There are key differences between growing
cannabis indoors and outdoors. While outdoor crops can yield more on a gross per plant basis, the quality of indoor cannabis cannot
be matched and generally commands a premium price over indoor as well as greenhouse grown cannabis. This book teaches the secrets
of getting the greatest yield without sacrificing quality and includes a step-by-step marijuana growing guide from seed to finished
flower. It provides a simple approach to a painstaking and complex process. It contains illustrations on how to grow cannabis and
covers the nine vital components of growing marijuana indoors in order to achieve the highest average yield per light.
The sale of “Three A Light”
books advances the use of our cultivation techniques and our proprietary nutrients; provides brand exposure; and leads to potentially
significant new service provider relationships.
It should be noted that our Three A Light
Version is only made available to licensed or operational clients utilizing full cultivation support (Cultivation MAX).
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. There are no assurances that this will happen.
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 and 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.
We have demonstrated
our commitment to excellence through continuous process improvement and readily learning from others (through acquisition and or
cooperation). We believe this not only differentiates us in the marketplace, but will allow us to continue to substantially expand
our client base and revenues. There are no assurances this will occur.
Existing Cultivation and Dispensary
Operation (Group 2)
Cultivation Max Services
As the legal cannabis
marketplace evolves and the price of products stabilizes there is an increasing need to control the cost of production and maximize
a cultivation facility’s performance. Through our Cultivation Max services, our objective is to optimize an existing cultivation
operator’s existing facilities to improve yield, consistency, quality, and efficiency in order to maximize its full production
potential. The service is designed to enable existing operators to become highly efficient cultivators, allowing them to continually
compete in a highly competitive landscape. Through the implementation of our proprietary cultivation methodology, facility and
room design, plant and nutrient management we believe we can significantly improve existing performance within a client’s
facility. We understand the uniqueness of existing facilities and we customize the approach to each project to meet our objective
of mutually beneficial results.
Because we believe
our customized approach will provide greater product yields we have structured our pricing model to provide us to earn revenue
based on the delta of performance improvement beyond the baseline performance documented at the beginning of the engagement. The
term of a Cultivation Max agreement as well as the percentage of revenue is determined on a per project basis. However, in the
event we are unable to increase production to the degree we believe we can, it is possible our costs of operations will increase
and we will not generate the revenues to cover our costs of operations. To date, this has not occurred.
Based upon our experiences
to date and as an example of this performance delta over existing indoor as well as greenhouse based performance, it is generally
known that existing indoor cultivation practices are considered best practices when achieving two (2) pounds per light in terms
of dried cured flower per harvest cycle or approximately one (1) gram per watt. This is based upon five (5) to six (6) harvest
cycles per year. A greenhouse will likely mimic this level of performance but generally may achieve fewer harvests per year. According
to a recent MJardin Study (as included in the ArcView 2015 Annual Industry Report), average yields in terms of grams per square
foot of flower canopy range between 168 and 282 grams annually. Current performance for the Three-A-Light Professional cultivation
practice have generated approximately 700 grams per square foot of dried cured flower per square foot of flower space annually
(based upon 5.5 harvests per year utilizing a thirty-two square (32) foot table supporting eight (8) plants that yields approximately
nine (9) pounds per harvest or 5.5 times nine (9) pounds times 453 grams per pound divided by thirty-two (32) square feet or a
total of approximately 700 grams per square foot per annual period) which we believe represents a substantial competitive advantage
to our clients. However, while we are optimistic that future results will there are no guarantees that we will continue to generate
the production described herein from our cultivation techniques.
This level of superior
performance is based upon a proven cultivation practice that includes a very specific feeding and integrated pest management system
that is hand managed and does not (at this time) have any reliance on automated technology since the overall operating cost per
pound of dried cured flower more than offsets the use of additional labor. These results are based upon use of 1,000 watt double
ended lamps that are substantially more efficient than this use of other lower operating cost lamps of an LED or other nature that
can be three to four times more expensive from a capital deployment perspective.
Managed Facility Services
As we have grown the
volume of requests from clients and prospective clients for full facility management has increased. As a result, we have structured
a service offering to include organizational setup and interim management of client’s cultivation, processing, and dispensary
facility(s). As part of the managed facilities services, we may provide the following:
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Oversee the hiring and training of the primary facility General Manager. This General Manager will
oversee the hiring and training of market-based Cultivation Manager, Production Manager, and Dispensary Manager, as necessary,
who may all train on-site in Colorado while client facilities are under construction.
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Provide organizational charts and job descriptions to aid client management team in hiring within
their local market.
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If desired, embed a Senior Cultivation Team Member within the client’s facility for a defined
period of time, beginning at a time mutually determined between us and the client. Upon completion of the service agreement, opportunity
for full-time employment is typically made available to client.
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If desired, embed a Senior Processing Team Member within the client’s facility for a defined
period of time, beginning at a time mutually determined between us and the client. Upon completion of the service agreement, opportunity
for full-time employment is typically made available to client.
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If desired, embed a Senior Dispensary Team Member within the client’s facility for a defined
period of time, beginning at a time mutually determined between us and the client. Upon completion of the service agreement, opportunity
for full-time employment is typically made available to client.
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All costs for the above services to be covered by the client including time and expense.
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Revenue for managed
services is derived on a fee basis for ongoing support and also incentivized by production metrics tied to overall facility performance.
These services are typically provided through a custom assessment and bidding process.
Nutrient Products (Group 3)
Success Nutrients
Success Nutrients was
incorporated in Colorado on May 5, 2015. Since inception it has been engaged in the manufacturing and wholesale and retail distribution
of nine different plant nutrients for cannabis, each of which comes in three separate sizes and which has been primarily marketed
to the cannabis industry, more specifically, cultivation experts and other growers in the cannabis industry in Colorado. Each of
its nine product lines are sold in three separate sizes, with retail pricing ranging from $25-$30 for small packages up to a range
of $200-$300 for large packages.
The development of
Success Nutrients product line was the result of consolidation of all the micro and macro nutrients found to produce the most grams
of cannabis flower per square foot while achieving the highest quality possible. Until January 2017, operations were primarily
directed towards the cannabis industry in the state of Colorado. Subsequently, Success Nutrient’s products were successfully
registered with the state agricultural departments for California, Oregon, Washington, Arizona and Michigan, as well as in Canada.
Prior to obtaining this registration these products were only able to be purchased online. As a result of being registered, all
Success Nutrients products can now be displayed on retail shelves in those aforesaid states. We will continue to pursue product
registration in other states and countries prioritizing those locations that provide greater market size for these products.
The Success Nutrients
brand provides one of the key underpinnings of the cultivation methodology and is essential to the overall Three A Light TM performance
metric, which is discussed more fully below under “Business of Pono.” With an investment of two years of research,
development and intense testing, this product line was specifically formulated for the cannabis industry.
Our goal is
to revolutionize modern cannabis gardening as it is currently known with an emphasis on stronger plants, healthy flowers and
an overall cleaner product. Generally, growers of cannabis have been able to generate approximately 1.5 lbs per grow light.
By using both the nutrients offered by Success Nutrients, together with the process offered by Pono, results have more than
doubled in some cases. While no assurances can be provided that we will be able to duplicate these results, if successful we
believe that this will add substantial growth to our existing cannabis consulting operation, especially as the cannabis
industry continues to grow and expand as additional states approve the use and cultivation of medical and recreational
marijuana. We believe that if we offer prospective new clients the opportunity to learn cultivation techniques that allow
them to increase production over their competitors, our business will increase. As explained above, the combination
of Success Nutrients and Pono techniques have directly resulted in the creation of a new line of consulting services
that improve the performance of current cultivations.
Description
of our Past and Existing Client Base
We have 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. While we have won and lost in pursuit of a license, to date we have assisted clients in securing the following:
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One Colorado cultivation license
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Three Colorado dispensary licenses (Denver, Aurora, Thornton)
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Two Illinois cultivation licenses
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Four Illinois dispensary licenses
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Two Nevada cultivation licenses
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One Maryland processing license
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One Maryland cultivation license
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Three Maryland dispensary licenses
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One Hawaii vertically integrated license noting the applicant was top scored in Kauai and was subsequently removed for investor
background check violations
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One Oregon Tier II Cultivation License and One Oregon Medical Cultivation License (outdoor)
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In addition we have the following pending applications:
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Eight Pennsylvania grower/processor licenses
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Four pending Pennsylvania dispensary licenses
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One Puerto Rico cultivation license
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We are already
generating new business opportunities in Michigan, Ohio, and Arkansas and have more recently initiated Cultivation MAX
support services for a large Nevada client (500 light) which, over time may generate significant income for
us.
As of the date of this
Report we have or have had 41 fee generating clients in 14 different states and Puerto Rico.
Marketing
We conduct our marketing
efforts by providing a presence at specifically targeted industry based events, as well as through Medicine Man Denver’s
established industry presence as a successful cannabis company. We have been able to garner a substantial presence via this relationship.
Because the cannabis industry is relatively new there are very few groups and companies who can identify themselves as having industry
experience. We believe we are the exception as a result of our management’s experience with all aspects of the
industry.
See
“
Part II Item 10, Directors, Executive Officers and Corporate Governance.”
We are members of various
industry groups and attend industry based conferences which are helpful to advancing our brand and skill sets. We created a marketing
collateral materials bank and attended our first true marketing event in November 2014 at the Third National CannaBusiness Conference
and Expo in Las Vegas and have continued to remain as Platinum Level Sponsors of those two events annually. The fall event this
year (2017) will be held at the Las Vegas Convention Center and is expected to draw approximately 20,000 participants. We will
continue to market our licensing and related services to the cannabis industry through participation in various trade show events,
continual use of free public content through interviews with our principals such as currently provided on CNN and MSNBC, direct
referrals from satisfied licensees or past clients, various web presence advertising options utilizing specific industry related
web sites and google ad words, and additional measures we may choose to deploy from time to time.
We also continue to
coalesce interest and a presence within the industry through participation in various events and through direct promotion which
have become available to Medicine Man and the Williams family, including being featured in MSNBC’s ‘Pot Barons’
series and detailed inclusion in other outlets such as MSNBC, Inc. Magazine, Katie Couric Live, The Today Show, the BBC, CBS, NBC,
LeMonde, ABC, HBO, and many other national and international media. We work to continually develop earned media sources noting
elements of our licensor, Medicine Man Denver have been mentioned or featured in various national media sources many times since
our inception in March 2014. In addition, members of our team are featured regularly as subject-matter experts, and appear as guest
speakers; industry panel discussion members; and have been quoted or covered in full-feature articles in publications in both the
U.S. and abroad. In addition to other national and industry publications, our professionals have most recently been quoted in US
News and World Report, Inc. Magazine, CBE Press, and MJ Business Daily.
Joshua Haupt, via his
Success Nutrients line as well as Pono Publications (Three-A-Light) has also been featured in many trade publications as well as
at various cultivation show events nationally and has more recently been referred to as the ‘Steve Jobs’ of Marijuana
(Civilized and Dope and High Times Magazines). His experience underscored by passion has allowed him to become one of the most
prolific cultivators of cannabis in the country. More information about his businesses can be found at either www.threealight.com
or www.successnutrients.com.
As we grow and mature
with the cannabis industry we believe we will continue to identify new opportunities to expand our service offering groups. We
are already working in harmony with other consultants within the industry who lack certain experience or skills through licensure
of specific cultivation technologies, with specific protections and non-disclosure agreements in place. We do not provide our operations
manual of training to potential licensees until they have a state granted license in place.
We continue to enhance
our web presence (http://www.medicinemantechnologies.com/), including providing updates to our home page, and links to our SEC
reports (through OTC Markets) and industry partners. While no assurances can be provided, we believe these upgrades will make our
Internet presence more effective in the delivery of information related to our developing business.
We also intend to evaluate
new business opportunities as they come to our attention through these various marketing activities as we continue to expand our
brand warehouse and national presence in the cannabis industry.
See “Part II, Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
GROWTH BY ACQUISITION
As described above,
we have executed applicable agreements to acquire Pono and SNI and are expecting these agreements to become effective upon approval
from our shareholders. In the interim, we have entered into an interim service provider contract with Pono Publications and Success
Nutrients paving the way for those acquisitions. We believe these particular acquisitions will allow us to expand our service lines,
in addition to offering a proprietary cannabis specific nutrient line of our own that together with the Three-A-Light brand and
book, will allow us to expand its value substantially to our current and future clients.
Ultimately, our intent
is to become both a nationally (mid-term goal) and internationally (longer term goal) recognized cannabis company and brand warehouse.
We are continuously monitoring other public cannabis companies and their operations. It now appears there are several public companies
who generate revenue from the sale of cannabis products. Previously, we believed that it would be necessary for marijuana to be
legal on the federal level before this could occur. This no longer appears to be the case.
Ideally, the initial
transaction we would consider is the acquisition of Medicine Man Denver cultivation and dispensaries. However, in order to do
so it would be necessary that a change in the regulatory standards being imposed by the State of Colorado limiting ownership in
all cannabis related businesses to preclude public company ownership be eliminated. Until this occurs we will need to engage in
an acquisition of an existing cannabis business in a state where the state law allows for public ownership of a cannabis company.
While no assurances can be provided, we believe there are many synergistic cannabis operations both already in business and which
will enter the industry as more states continue to adopt legalization who will be interested in being acquired by us. Our ability
to eliminate duplication of general and administrative expenses; provide more centralized information marketing; and eliminate
overlapping services offered will result in economies of scale. As of the date of this Report, we are beginning to identify additional
potential acquisition opportunities but have not conducted any discussions with these companies yet. There are no definitive agreements
in place relating to our acquiring any such business, and there can be no assurances that such agreements will be executed on favorable
terms, or at all in the future.
We also plan to grow
through the acquisition of related, complimentary businesses. In doing so we expect to increase revenues and profits by providing
a broader range of services in vertical markets which are consolidated under one parent, thus realizing synergies between the brands
to increase sales on multiple fronts; reducing overhead costs by streamlining operations; and eliminating duplicitous efforts and
costs. There are no assurances that we will increase profitability if we are successful in acquiring other synergistic companies.
If we are successful,
the acquisition of related, complimentary businesses is expected to increase revenues and profits by providing a broader range
of services in vertical markets which are consolidated under one parent, thus reducing overhead costs by streamlining operations
and eliminating duplicitous efforts and costs. There are no assurances that we will increase profitability if we are successful
in acquiring other synergistic companies.
Management has begun
to seek out and evaluate related, complimentary businesses for acquisition. The integrity and reputation of any potential acquisition
candidate will first be thoroughly reviewed to ensure it meets with management’s standards. Once targeted as a potential
acquisition candidate, we will enter into negotiations with the potential candidate and commence due diligence evaluation, including
its financial statements, cash flow, debt, location and other material aspects of the candidate’s business. One of the principal
reasons for our filing of our registration statement of which this Prospectus is a part and the filing of an application to list
our securities for trading is our intention to utilize the issuance of our securities as part of the consideration that we will
pay for these proposed acquisitions. If we are successful in our attempts to acquire synergistic companies utilizing our securities
as part or all of the consideration to be paid, our current shareholders will incur dilution.
In implementing a structure
for a particular acquisition, we may become a party to a merger, consolidation, reorganization, joint venture, or licensing agreement
with another corporation or entity. We may also acquire stock or assets of an existing business.
As part of our investigation,
our officers and directors will meet personally with management and key personnel, may visit and inspect material facilities, obtain
independent analysis of verification of certain information provided, check references of management and key personnel, and take
other reasonable investigative measures, to the extent of our limited financial resources and management expertise. The manner
in which we participate in an acquisition will depend on the nature of the opportunity, the respective needs and desires of us
and other parties, the management of the acquisition candidate and our relative negotiation strength.
We will participate
in an acquisition only after the negotiation and execution of appropriate written agreements. Although the terms of such agreements
cannot be predicted, generally such agreements will require some specific representations and warranties by all of the parties
thereto, will specify certain events of default, will detail the terms of closing and the conditions which must be satisfied by
each of the parties prior to and after such closing, will outline the manner of bearing costs, including costs associated with
our attorneys and accountants, will set forth remedies on default and will include miscellaneous other terms.
Depending upon the
nature of the acquisition, including the financial condition of the acquisition company, as a reporting company under the Securities
Exchange Act of 1934 (the “34 Act”), it may be necessary for such acquisition candidate to provide independent audited
financial statements. If so required, we will not acquire any entity which cannot provide independent audited financial statements
within a reasonable period of time after closing of the proposed transaction. If such audited financial statements are not available
at closing, or within time parameters necessary to ensure our compliance with the requirements of the 34 Act, or if the audited
financial statements provided do not conform to the representations made by the candidate to be acquired in the closing documents,
the closing documents will provide that the proposed transaction will be voidable, at the discretion of our present management.
If such transaction is voided, the agreement will also contain a provision providing for the acquisition entity to reimburse us
for all costs associated with the proposed transaction.
Additional
business opportunities
The cannabis industry
is developing rapidly. As it continues to develop we believe additional business opportunities will arise.
As an example, one
aspect that we have identified is the opportunity to provide job placement services to our clients. We believe we are in a unique
position as a result of our developing extensive contacts within the cannabis industry at all levels of operations, to utilize
these contacts and industry knowledge to expand our business. As our clients move from planning to execution they have the need
to fill key positions in cultivation and dispensary operations, and operations leadership. As of the date of this report we are
currently taking initial steps to investigate the possibility of our providing a professional staffing function within Medicine
Man Technologies to fulfill that need. However, we are not currently engaged in this aspect of the business and there are no assurances
that we will expand our operations in this manner.
We are continuing to
explore other opportunities as we have the resources and fit to achieve such consideration.
government
regulations
Recent developments
in the public company sector seem to suggest that as long as such companies engaging in actual ‘touching of the plant’
1) disclose as fully as possible the risks associated with the industry, 2) maintain compliance with state and local regulations,
and 3) work to ensure any such products containing THC are restricted to an adult marketplace for those 21 years and older they
will be able to continue on as a public company entity noting recently in Pennsylvania a new state initiative for medical cannabis
included language allowing a public company to hold a Pennsylvania Permit.
In spite of the recent
industry concerns related to a change in the administration and while no assurances can be provided, we believe that the industry
will be allowed to continue its growth and new state adoptions as this new administration has been on record as being in support
of states’ rights and medical cannabis. However, in the event the federal government elects to change its current regulatory
structure, including eliminating the Cole and Ogden memorandums adopted by the Obama Administration and enforce the current federal
prohibition on cannabis, our business will be significantly negatively impacted.
Marijuana is a Schedule-I
controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its
use remains a violation of federal laws. We also should like to note that recently one public company (symbol TRTC) has recently
acquired new business lines that do generate revenues from the direct sales of cannabis products and that should this (as well
as others to be defined) practice be allowed under SEC reporting guidelines we also have begun to look at opportunities in this
space.
A Schedule I controlled
substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under
medical supervision and a high potential for abuse. The Department of Justice defines Schedule 1 controlled substances as “the
most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal
government decides to enforce the Controlled Substances Act in Colorado with respect to marijuana, persons that are charged with
distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment, the
maximum being life imprisonment and a $50 million fine. Any such change in the federal government’s enforcement of current
federal laws could cause significant financial damage to us.
As of the date of this
report, 28 states and the District of Columbia allow their citizens to use Medical Marijuana, with Texas being the most recent
state to add a medical initiative. Additionally, voters in the states of Colorado, Washington, Alaska, Oregon, California, Nevada,
Maine, and Massachusetts have all approved legalization of cannabis for adult use. The state laws are in conflict with the Federal
Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration effectively
stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding
by state-designated laws allowing the use and distribution of medical marijuana. However, there is no guarantee that the Trump
administration will not change the government’s policy regarding the low-priority enforcement of federal laws. Additionally,
any new administration that follows could change this policy and decide to rigidly enforce the federal laws. Any such change in
the federal government’s enforcement of current federal laws could cause significant financial damage to us.
Although
cultivation and distribution of marijuana for medical use is permitted in many states, provided compliance with
applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. Strict enforcement of
federal law regarding marijuana would likely result in the inability to proceed with our business plan and could expose us
and our management to potential criminal liability and subject their properties to civil forfeiture. Though the cultivation
and distribution of marijuana remains illegal under federal law, H.R. 83, enacted by Congress on December 16, 2014, provides
that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act
may be used to prevent states from implementing their own laws that authorize the use, distribution, possession, or
cultivation of medical marijuana. However, state laws do not supersede the prohibitions set forth in the
federal drug laws.
For
a comprehensive and up to date perspective on this process and current states and territories cannabis laws please refer to
the following link: http://www.mpp.org/states/key-marijuana-policy-reform.html
In order to participate
in either the medical or recreational sides of the marijuana industry in Colorado and elsewhere, all businesses and employees must
obtain licenses from the state and, for businesses, local jurisdictions. Colorado issues four types of business licenses including
cultivation, manufacturing, dispensing, and testing. In addition, all owners and employees must obtain an occupational license
to be permitted to own or work in a facility. All applicants for licenses undergo a background investigation, including a criminal
records check for all owners and employees.
Colorado has also enacted
stringent regulations governing the facilities and operations of marijuana businesses. All facilities are required to be licensed
by the state and local authorities and are subject to comprehensive security and surveillance requirements. In addition, each facility
is subject to extensive regulations that govern its businesses practices, which includes mandatory seed-to-sale tracking and reporting,
health and sanitary standards, packaging and labeling requirements, and product testing for potency and contaminants.
The Department of Justice has stated that it will continue to enforce the Controlled Substance Act with respect to
marijuana to prevent:
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the distribution of marijuana to minors;
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criminal enterprises, gangs and cartels receiving revenue from the sale of marijuana;
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the diversion of marijuana from states where it is legal under state law to other states;
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state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
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violence and the use of firearms in the cultivation and distribution of marijuana;
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driving while impaired and the exacerbation of other adverse public health consequences associated with marijuana use;
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the growing of marijuana on public lands; and
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marijuana possession or use on federal property.
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Laws and regulations
affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations. Local,
state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws,
or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. It is
also possible that regulations may be enacted in the future that will be directly applicable to our business. These ever changing
regulations could even affect federal tax policies that may make it difficult to claim tax deductions on our returns. We cannot
predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional
governmental regulations or administrative policies and procedures, when and if promulgated, could have on its business.
Since the use of marijuana
is illegal under federal law, many banks will not accept for deposit funds from businesses involved
with marijuana. Consequently, businesses involved in the marijuana industry often have trouble finding a bank willing to accept
their business. The inability to open bank accounts may make it difficult for our clients to operate.
Employees
As of the date of this
report we employees fifteen (15) full time employees and a number of specialty contractors providing support for various elements
including media, marketing, state registration of nutrient products, website evolution and new app development.
None of our employees
is represented by a labor union or a collective bargaining agreement. We consider our relations with our employees to be good.
Competition
We face competition
from an ever-increasing number of consulting service providers in the cannabis industry. We currently know of at least thirty plus
such providers in this space (down from 39 as noted in last year’s report), not including law firms and other professional
entities. We are continually monitoring their progress and presence in the industry while working to continue to demonstrate our
unique licensing offering.
Trademarks-Tradenames
We rely upon our various
trademark, trade name, and intellectual property of our license partner Medicine Man Denver and will, in the future and as appropriate,
develop such elements as we may determine valuable to our business. We also acknowledge that certain protections normally available
to us related to design or other utility patents in the cannabis industry would not currently be enforceable under federal law.
We attempt to protect our intellectual property via the deployment of non-disclosure agreements with both prospects and licensees.
There are no assurances that these non-disclosure agreements will prevent a third party from infringing upon our rights.
Pono and SNI uses a
combination of copyright, trade secret laws and confidentiality agreements to protect its proprietary intellectual property. We
intend to aggressively register for patent protection if and when the federal government eliminates cannabis prohibition. Intellectual
property counsel has advised that any effort to register a patent relating to the cultivation of marijuana would currently be unsuccessful.
Industry Analysis
Nationally, the industry
has continued to gain ground through the addition of many states and their passing of medical and or recreational provisions for
the use of cannabis. While there certainly appears to be a trend towards acceptance of cannabis, there are no assurances offered
that this business will be able to sustain itself over time if the Federal Government changes its current position related to state
legalized operations.
In November 2016, the
addition of eight (8) new states passing either a medical or adult use initiative pushes the number of states having active cannabis
based legislation up to twenty-eight (28), not including Washington DC noting eight (8) of these states now include adult use components.
While there have been
many observations and prognostications relative to the recent elections, there have been no specific new developments federally
that would signal new levels of federal engagement or enforcement.
In Colorado the state
has continued to set new sales growth related records, generating just over $1.3B in gross sales in FY 2016; a majority of those
sales related to adult use and the robust tourist industry. It is noteworthy that these record sales occurred in a marketplace
where the overall wholesale price market has experienced a significant drop off since the initiation of adult sales in early 2014.
Wholesale flower has dropped from a high in early 2014 of $4,000+ a pound to approximately $1,400 a pound according to year end
information provided by New Leaf Data Services.
While no assurances
can be provided, we believe that over the next three to five years there will be as many as thirty-five to forty states adopting
various types of cannabis legislation (medical and/or adult use) and if this happens, we believe that there will occur a certain
tipping point by which the Federal Government will have to take some sort of stand on the legal status of cannabis. We also believe
that due to the strong growth in the industry as a whole at the state level, the Federal Government will eventually de-schedule
cannabis, similar to the alcoholic beverage prohibition repeal in the mid 1930’s, and as motivated by its citizenry decriminalize
cannabis and regulate it under the auspices of some existing or newly formed agency.