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 that they had 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 $990,000. Subsequently
the Company has retired all of these obligations as of December 31, 2017.
Acquisition
of Pono Publications, Ltd., Success Nutrients, Inc. and Associated Intellectual Property
In August of 2016, the parties had negotiated
agreeable terms for the acquisition of both of Mr. Haupt’s companies, Pono Publications Ltd. (“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.
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 two
companies was finalized with approval through a proxy vote that was confirmed by a majority of our shareholders in June 2017 within
our annual meeting business elements.
Pono, via Medicine Man Technologies, Inc.
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
Ltd. 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 850-gram per square foot range of flowering canopy per year and is deployable in both greenhouse and indoor based cultivation
facilities.
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.
On June 3, 2017, the Company issued 7,000,000
shares of Common Stock in consideration for the acquisition of Success Nutrients and Pono Publications.
Acquisition
of the Denver Consulting Group, Inc.
In May of 2017 we entered into a Binding
Term Agreement for the acquisition of the Denver Consulting Group, Inc., a well know quality industry consultant located in Denver,
Colorado.
We believed that this business unit would
augment our existing team and over time, secured continued employment of three of their primary service provider team all of which
are still with the Company as of the date of this filing.
In June of 2017 we finalized all terms
for the acquisition and continued with our due diligence which included the generation of PCAOB compliant audited financial statements.
On or about July 26, 2017 we
completed the acquisition process noting the Company issued 2,258,065 shares of our Common Stock in consideration for the
acquisition of Denver Consulting Group.
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:
GROUP 1
– General Consulting
Services (ala carte as well as bundled services for Dispensary, Cultivation, Extraction,
and other general business operations)
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 services as they exist at the time of this filing. The Company reserves the right to modify, offer new, delete or otherwise
change any of the elements without further notice.
Private Consulting Package
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.
Seminar Offering Services
We offer seminars 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.
Facility Design Services
Our personnel have an aggregate of 50 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 (International Building Code) 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.
In July of
2017 the Company hired a full-time designer to assist with the creation of all such facility guidance and standards so that we
provide CAD format facility designs to our clients (existing property or green field)
noting that client engaged local architects and engineers provide for the generation
of all final submittal documents, MEP’s (Mechanical Electrical and Plumbing), and construction
documents. In late 2017 we engaged Orion GMP Solutions Inc. to work with the Company to ensure that
its cultivation SOP’s will be GMP, GAC compliant. This work is expected to be completed in early 2018.
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 Services
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. The Company provides disclaimers to all clients for all such materials
it provides as guidance and reference only in nature and any finalization of such guidance is made a client
discretion.
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 also provides 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 into an application process.
License and Application Support Services
(Full Service)
Through our licensing and application support
services we supplement as needed 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 acquisitions of Pono
and Success Nutrients (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.
Clients who successfully achieve state
licensure may also engage us for managed facility support as well as various deployment and training services. 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, roughly 1,900 books have been sold
or provided to our clients.
GROUP 2
- Existing Cultivation
Operations
Cultivation MAX Services - LITE
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 deployment of our Cultivation MAX services, we are able to optimize
existing cultivation operator’s existing facilities to improve yield, consistency, quality, and efficiency in order to
maximize its full production potential as well as reduce costs where possible. 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 that 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.
We have found through our first
several deployments that our customized approach will provide greater product yields because 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 – LITE agreement as well as compensation is
determined on a per project basis. There are also fees associated with various support elements through the lifetime of the
agreement including specialty work, training, and reimbursements.
Clients engaged at this level do receive
access to our proprietary cultivation SOP’s including various training videos, hard copy versions (updated as needed), and
direct training.
Cultivation MAX Services – Full
Service
This service agreement is similar to the
Cultivation MAX - LITE version but also includes our full engagement for all aspect of design, training, and deployment including
providing one of our Senior Cultivation Experts to be present at the facility on a full-time basis for a specific minimal time
period, that is negotiated based upon the client’s ability to assimilate our methodologies.
Our upfront fees are generally greatly
reduced over those of our LITE version as we are then only compensated on the specific delta in cultivation results as negotiated.
These agreements typically endure over a 3 to 5-year period with renewal options at Client election noting the fee percentages
vary with the size of the deployment. Clients engaged at this level do receive access to our proprietary cultivation SOP’s
including various training videos, hard copy versions (updated as needed), and direct training.
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.
GROUP 3
- Nutrient Products
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-$400
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 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 has directly resulted in the creation of a new line of consulting services
that improve the performance of current cultivations.
DESCRIPTION
OF OUR PAST AND PRESENT CLIENT BASE
Established in March 2014, the Company
secured its first client/licensee in April 2014. To date, the Company has provided guidance for several clients that have successfully
secured licenses to operate cannabis businesses within their state. The Company currently has or has had active clients in California,
Oregon, Colorado, Nevada, Illinois, Michigan, Arkansas, Pennsylvania, Florida, Iowa, New York, Ohio, Maryland, Massachusetts, Puerto
Rico, Canada, Germany, Australia, and South Africa.
In our 2016 Annual Report (10-K) as filed
on or about April 17, 2017, we disclosed we had generated forty-one (41) past and or existing clients since our inception in April
of 2014.
The Company added forty-seven (47) new
clients during FY 2017, representing more new clients in one year that the Company had generated in its operating history.
In the past we provided specific numbers
related to active and inactive clients that we will no longer be providing due to competitive and confidentiality concerns. We
will be providing updates on a monthly basis (elective only) via press release noting new client activity that will not include
specific active or non-active status updates from prior reporting periods or releases. Most of our clients do not wish to have
the names of their businesses disclosed publicly although from time to time some will agree to such acknowledgement.
Of special note, in late 2017 our Level
I Cultivation License Applicant in Ohio (Grow Ohio Pharma, Inc.) achieved the second highest score and is in construction mode,
planning to be ready for deployment this summer.
MARKETING
We conduct our marketing efforts by providing
a presence at specifically targeted industry-based events, as well as through Medicine Man Denver’s and Super Farm’s
established industry presence as a successful cannabis company and as such, 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 actual past as well as ongoing industry experience, so we feel we will continue to be at the top of that list
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) held at the Las Vegas Convention Center was the largest Cannabis event ever offered here in the US, drawing approximately
18,000 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, 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 successfully
completed the recent acquisitions of Pono Publications (Three-A-Light), Success Nutrients, and the Denver Consulting Group and
are actively seeking other opportunities that fit within our general business strategy.
Ultimately, our intent is to become both
a nationally (mid-term goal) and internationally (longer term goal) recognized cannabis advisory/training services company through
the advancement of our brands warehouse strategy. 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.
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 continues 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.
Recently the Company agreed to support
the possible deployment of certain new regulations in Colorado related to public company holding of Cannabis related licenses.
To this end we have engaged several various resources for support of this initiative and expect that any final resolution of passage
of this legislation (HB 18-1011) to occur no later than May of 2018. Should this initiative be successful we expect to explore
several opportunities within Colorado for potential alignment, acquisition, consulting services, or other options related to our
potential for growth in the future. There are no assurances this legislation will be adopted.
While we continue to explore opportunities
with the Williams Family (co-founders) as disclosed in prior filings, there should be no assumption that any such alignment or
acquisition will be forthcoming and that all such discussions are very preliminary in nature and should not be relied upon in any
way as indicative of such a future expansion of the existing licensure relationship.
GOVERNMENT
REGULATIONS
Marijuana is a Schedule-I controlled substance
and is illegal under federal law. Even in those states where 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 (Terra Tech Corp. 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.”
As of the date of this report, there are
29 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. If the federal government decides to enforce
the Controlled Substances Act with respect to marijuana, persons that are charged with distributing, possessing with intent to
distribute, or growing marijuana could be subject to fines and imprisonment, the maximum being life imprisonment and a $50 million
fine. Any such change in the federal government’s enforcement of current federal laws will cause significant financial damage
to us.
In a recent Forbes article, United States
Secretary of the Treasury, Steven Mnuchin, testified stating, “At the Tuesday hearing, Mnuchin confirmed that the department
is "reviewing the existing guidance." But he clarified that he doesn't want to rescind it without having an alternate
policy in place to address public safety concerns. A link to the article is below.
https://www.forbes.com/sites/tomangell/2018/02/06/trump-treasury-secretary-wants-marijuana-money-in-banks/#7dd96a9a3a53
Previously, the Obama administration
took the position that it was 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. The Trump administration
has revised this policy. Specifically, the Attorney General rescinded the Cole Memorandum in favor of deferral of any
enforcement of federal regulation to the individual states Department of Justice/US Attorney. However, certain other
protections remain in place via budgetary element embedment (Rohrabacher-Farr amendment now referred to as the
Rohrabacher-Blumenauer Amendment), which limits funding of any enforcement of anti-cannabis legislation. 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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Since the use of marijuana is illegal under
federal law, federally chartered 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. There does appears to be recent movement to allow state-chartered
banks and credit unions to provide banking to the industry, but as of the date of this report there are only nominal entities that
have been formed that offer these services.
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 six types of business licenses including cultivation,
manufacturing, dispensing, transport, research license 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 record 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.
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.
Recently, we began efforts to support pending
legislation Colorado which allows licensed cannabis companies in Colorado to trade their securities provided they are reporting
companies under the Securities Exchange Act of 1934, as amended. We have taken action to support of this initiative and expect
a decision to occur on this legislation by the end of May 2018. Should this legislation be adopted we intend to explore several
opportunities within Colorado for potential acquisition, consulting services, or other opportunities. There are no assurances this
legislation will be adopted.
EMPLOYEES
As of the date of this report, we employ
twenty-one (21) 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 are 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 professionally of at least twenty plus such
providers in this space (down from 32 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.
There are many sources of competitive influencers,
in particular one such aggregator of such lists, Marijuana Business Daily shows 492 various consultants in the industry (https://industrydirectory.mjbizdaily.com/consultant-services).
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. (See Item 3)
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 under $1.5B in gross sales in FY 2017; up from the $1.3B recorded in FY 2016
noting a much of those sales were 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 $1,200
a pound (indoor, 2017) 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 additional 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.