NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30,2018
Organization and Nature of Operations:
Business Description
–
Business Activity
:
Medicine Man Technologies Inc. (the "Company") is a Nevada corporation incorporated
on March 20, 2014. The Company is a cannabis consulting company providing services related to cost-efficient cannabis cultivation
technologies focusing on quality as well as safety, retail operations related to the delivery of cannabis related products, and
other related business lines as described in the Company’s operating strategic vision outlined below.
1.
|
Liquidity and Capital Resources
:
|
Cash Flows
– During
the quarters ending September 30, 2018 and 2017, the Company primarily used revenues from its operation supplemented by cash to
fund its operations.
Cash and cash equivalents are carried at
cost and represent cash on hand, deposits placed with banks or other financial institutions and all highly liquid investments with
an original maturity of three months or less as of the purchase date. The Company had $529,674 and $748,715 classified as cash
and cash equivalents as of September 30, 2018, and December 31, 2017, respectively.
The Company has recently elected to accelerate
its organic growth path through additional marketing, team development, synergistic acquisitions, and other corporate activities
wherein it expects to generate negative cash flow and an additional demand for capital to fuel such growth as described in it subsequent
events notes.
The Company is commencing legal action
against one client for breach of contract, adding a significant value into its receivables for fees that had been accrued but not
booked due to forbearance grants by the Company that were subsequent violated, causing the Company to increase its receivables
accordingly (see Part II, Item 1, Legal Proceedings).
2.
|
Critical Accounting Policies and Estimates
:
|
Basis of Presentation:
These accompanying
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for annual financial statements.
Fair Value Measurements:
Fair value
is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement
date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable
inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last
unobservable, as follows:
Level 1 – Quoted
prices in active markets for identical assets or liabilities.
Level 2 – Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the
assets or liabilities.
The Company’s financial instruments
include cash, accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial
instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates
fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available
to us. The Company’s derivative liability was adjusted to fair market value at the end of each reporting period, using Level
3 inputs.
Use of Estimates:
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be
based upon amounts that differ from these estimates.
Accounts receivable:
The Company
extends unsecured credit to its customers in the ordinary course of business. Accounts receivable related to licensing and consulting
revenues are recorded at the time the milestone result in the funds being due being achieved, services are delivered, and payment
is reasonably assured. Licensing and consulting revenues are generally collected from 30 to 60 days after the invoice is sent.
As of September 30, 2018, and December 31, 2017, the Company had accounts receivable of $2,053,873 and $487,062, respectively.
The Company wrote off $0 of its accounts receivable in 2018. Due to the low volume of write offs, the Company uses the direct
write off method versus having an allowance for uncollectible debts. The Company continues to accrue values for fees it would
normally be earning during this quarter and as related to the ongoing legal action it initiated after the Client in question refused
to pay fees due the Company in accordance with the Client acknowledged executed agreement. At September 30, 2018 the accounts
receivable for this matter totals $990,864 and the revenue earned as of September 30, 2018 is $1,015,154. Further, the Company
provided services to this Client for a period of thirteen months, agreeing conditionally to three modifications to forego certain
revenue sharing payments in accordance with the agreement taking place in December of 2017, March of 2018, and May of 2018 which
the Client subsequently violated. In July of this year the Company secured legal counsel in Clark County Nevada to pursue
this Client's default of payments as legally due the Company. (See Part II, Item 1, Legal Proceedings)
.
Short term note receivable:
In July
2016, the Company executed a non-binding Term Sheet 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. The agreement was subject to the Company’s due diligence
as well as execution of definitive agreements. In January 2017, the parties agreed not to proceed with this transaction. As part
of the term sheet the Company agreed to loan Capital G the principal balance of $250,000 pursuant to the terms of a convertible
note which accrues interest at the rate of 12% per annum and which became due November 1, 2017. As of September 30, 2018, this
note has not been repaid when it became due. The Company is currently in negotiations with Capital G about repayment terms. As
of September 30, 2018, the Company has reserved 35% or $102,906 of this balance. The Company had $188,550 and $191,111 classified
as short-term note receivable as of September 30, 2018, and December 31, 2017, respectively.
Other assets (current and non-current):
Other assets at September 30, 2018, and December 31, 2017 were $60,899 and $57,319, respectively including $34,582 in prepaid
expenses and $26,317 in two security deposits.
Accounts payable:
Accounts payable
at September 30, 2018, and December 31, 2017 were $225,360 and $278,428, respectively and were comprised of operating accounts
payable for various professional services incurred during the ordinary course of business.
Accrued expenses and other liabilities:
Accrued expenses and other liabilities at September 30, 2018, and December 31, 2017 were $47,684 and $56,495, respectively. At
September 30, 2018, this was comprised of $23,688 in customer deposits and $23,996 in deferred rent expense.
Fair Value of Financial Instruments:
The carrying amounts of cash and current assets and liabilities approximate fair value because of the short-term maturity of
these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Available
for sale securities are recorded at current market value as of the date of this report.
Revenue recognition and related allowances:
Our revenue
recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain
criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred
until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded.
Our revenue contracts are identified when accepted from customers and represent a single performance obligation to sell our products
to a customer.
The Company has five main revenue streams, product sales, licensing
and consulting, cultivation max, reimbursements, investment and others.
Revenue from cultivation max, licensing and consulting services
is recognized when the obligations to the client are fulfilled which is determined when milestones in the contract are achieved.
Product Sales are recorded at the time that control of the products
is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several
indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based
on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
Revenue from seminar fees is related to one-day seminars and
is recognized as earned at the completion of the seminar. The Company also recognizes expense reimbursement from clients as revenue
for expenses incurred during certain jobs.
Licenses (Investment Income w/ CHV). Under
ASC 606, licenses of IP must be analyzed to determine whether they provide: (a) a right to access the entity’s IP (in which
case revenue is recognized over time) or (b) a right to use the entity’s IP (in which case revenue is recognized at a point
in time). This analysis depends on whether the IP subject to the license has significant standalone functionality. If the IP has
significant standalone functionality (e.g., software), it is considered functional IP, and a license for functional IP is a right
to use the IP for which revenue is recognized at a point in time under ASC 606, unless certain narrowly-focused criteria are met.
If the IP does not have significant standalone functionality (e.g., a trade name), it is considered symbolic, and a license for
symbolic IP is a right to access the IP for which revenue is recognized over time under ASC 606. While there are some industry-specific
revenue recognition models in legacy GAAP that provide guidance on how to account for licenses and rights to use specific types
of IP (e.g., software, motion pictures, franchises), these models are very different from the model in ASC 606.
The revenues generated relative to the licensing agreement entered
into with CHV relate to that company's right to not only access but use with our support over the duration all of our related IP
as well as Success Nutrient's formulations to deliver to the Canadian marketplace. We also will receive revenues related to licensing
and sales of our IP over the duration of the agreement which provides for ongoing income, aside from the payments made in July
in the form of stock and cash.
The Company notes no change in our pattern of revenue recognition due to the adoption of FASB ASU 2014-09
“Revenue from Contracts with Customers (Topic 606)”. The Company believes that the revenue recognition related to
our consulting, licensing and product sales are consistent with our current practice.
Costs of Goods and Services Sold
– Costs of goods and services sold are comprised of related expenses incurred while supporting the implementation and sales
of Company’s products and services.
General & Administrative Expenses
–
General and administrative expense are comprised of all expenses not linked to the production or advertising of the
Company’s services.
Advertising and Marketing Costs:
Advertising
and marketing costs are expensed as incurred and were $109,650 and $136,436 during the nine-month periods ended September 30, 2018
and 2017, respectively.
Stock based compensation:
The Company
accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company records compensation
expense for share-based awards based upon an assessment of the grant date fair value for stock and restricted stock awards using
the Black-Scholes option pricing model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and EITF 96-18 when stock or options are
awarded for previous or current service without further recourse. The Company issued stock options to contractors and external
companies that had been providing services to the Company upon their termination of services. Under ASC 718 and EITF 96-18 these
options were recognized as expense in the period issued because they were given as a form of payment for services already rendered
with no recourse.
Share based expense paid to through direct
stock grants is expensed as occurred. Since the Company’s stock has become publicly traded, the value is determined based
on the number of shares issued and the trading value of the stock on the date of the transaction. Prior to the Company’s
stock being traded the Company used the most recent valuation. The Company recognized $837,500 in expenses for stock-based compensation
to employees and consultants during the nine months ended September 30, 2018.
Income taxes:
The Company has
adopted SFAS No. 109 – “Accounting for Income Taxes”. ASC Topic 740 requires the use of the asset and liability
method of accounting for income taxes. Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled.
Management fee contracts:
In February
2017, the Company entered into a Merger Agreement with Pono Publications Ltd. (“Pono”), as well as a Share Exchange
Agreement with Success Nutrients, Inc. (“SN”), each a Colorado corporation, in order to facilitate the acquisition
of both of these entities. The ratification of the acquisition of these companies requires the approval of the holders of a majority
of the Company’s shareholders, which was approved at the Company’s annual shareholder meeting held in May 2017. The
relevant agreements provide that the effective date for accounting purposes would be April 1, 2017. Success Nutrients became a
wholly owned subsidiary of Medicine Man Technologies, Inc. and the business conducted by Pono was incorporated into a newly formed
wholly owned subsidiary, Medicine Man Consulting, Inc., which is also where the Company conducts its consulting service business.
In March 2017, the Company integrated
Pono Publications and Success Nutrients into its operations including a lease for approximately 10,000 square feet of space located
at 6660 East 47th Street, Denver, CO 80216. This integration also included four (4) full time team members as well as several
independent contractors. From April 1, 2017 to September 30, 2017, the Company has agreed to manage the acquirees through a management
fee agreement whereby all cash collected was recognized as other income and all cash expenses were direct costs of the project.
As of September 30, 2017, the management contract resulted in cash collections of approximately $100,000 and cash expenditures
of approximately $170,000 resulting in a net loss of $70,257 which was presented on a net basis as a loss in the other income
portion of the Company’s income statement. As of April 1, 2017, the Company’s consolidated financial statements included
these two entities.
3.
|
Recent Accounting Pronouncements:
|
FASB ASU 2016-02 “Leases (Topic
842)”
– In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02").
ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and
corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance
will classify leases as either finance or operating (similar to current standard’s “capital” or “operating”
classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.
The Company does not expect the adoption of ASU 2016-02 to have an impact on our consolidated financial statements.
FASB ASU 2016-11 “Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815)”
– In May 2016, the FASB issued 2016-11, which clarifies guidance
on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports
revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the
option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated
results of operations, cash flows and financial position
FASB ASU 2016-15 “Statement of
Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity
in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective
for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.
FASB ASU 2017-01 “Clarifying the
Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1. The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is
not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of
outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods
beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant
impact on our consolidated results of operations, cash flows and financial position
At June 30, 2018, the Company had 25,019,981
Common Shares outstanding.
During the three months ended September
30, 2018, the Company issued 1,933,329 shares of its Common Stock as part of the consideration in acquiring Two JS LLC.
During the three months ended September
30, 2018, the Company issued 625,000 shares of its Common Stock to employees. These shares were valued at $1.34 per share, the
closing price of the Company’s Common Stock on the day the shares were issued.
At September 30, 2018, the Company had
27,578,310 Common Shares issued and outstanding.
5.
|
Property and Equipment:
|
Property and equipment are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Furnitures & Fixtures
|
|
$
|
98,394
|
|
|
$
|
107,945
|
|
Marketing Display
|
|
|
36,900
|
|
|
|
36,900
|
|
Vehicles
|
|
|
–
|
|
|
|
6,000
|
|
Office Equipment
|
|
|
80,604
|
|
|
|
81,240
|
|
|
|
$
|
215,898
|
|
|
$
|
232,085
|
|
Less: Accumulated Depreciation
|
|
|
(131,405
|
)
|
|
|
(82,038
|
)
|
|
|
$
|
84,493
|
|
|
$
|
150,047
|
|
Depreciation on equipment is provided on
a straight-line basis over its expected useful lives at the following annual rates.
Furniture & Fixtures
|
3 years
|
Marketing Display
|
3 years
|
Vehicles
|
3 years
|
Office Equipment
|
3 years
|
Depreciation expense for the nine-month
periods ending September 30, 2018 and 2017 was $56,275 and $40,659 respectively.
On May 1, 2014,
the Company entered into a non-exclusive Technology License Agreement with Futurevision, Inc., f/k/a Medicine Man Production Corporation,
a Colorado corporation, dba Medicine Man Denver (“Medicine Man Denver”), a company owned and controlled by affiliates
of the Company, whereby Medicine Man Denver granted a license to use all of their proprietary processes they have developed, implemented
and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical
marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including
trade secrets, skills and experience (present and future). As payment for the license rights the Company issued Medicine Man Denver
(or its designees) 5,331,000 shares of the Company’s common stock. The Company accounted for this license in accordance with
ASC 350-30-30 “Intangibles – Goodwill and Other by recognizing the fair value of the amount paid by the company for
the asset at the time of purchase. Since the Company has a limited operating history, management determined to use par value as
the value recognized for the transaction. Since the term of the initial license agreement is ten (10) years, the cost of the asset
will be recognized on a straight-line basis over the life of the agreement. In addition, each period the Company will evaluate
the intangible asset for impairment.
During 2017, the
Company obtained two intangible assets, Product Agreement & Registration and a Trade Secret. These two intangible assets were
acquired due to the result of the acquisition of Success and Pono on September 30, 2017. Refer to the Note 9 for further explanation
of the purchase price accounting. The Company’s procurement of product registration during the year was within five states
and Canada. The Company’s product was registered in California, Oregon, Colorado, Michigan, Arizona, Washington and all of
Canada. The registration allows the Company to sell their product within the confines of that region. The registration fees capitalized
are the initial costs to obtain the license. The licenses have nominal annual renewal costs. These subscriptions are amortized
over a 15-year period.
During 2017, the
Company incurred an intangible asset due to the development of the product’s nutrient recipe. The nutrient recipe development
was a one-time fee, paid to the Company’s developer. The intellectual property is amortized over a 15-year economic life
of the asset. The economic life of the asset is shorter than the indefinite life considered the legal life of the assets so 15
years is deemed the economic life of the asset.
During 2017, the
Company attained one additional intangible assets, Product Agreement & Registration. The Company’s procurement of product
registration during the year was within seven states. The Company’s product was registered in Florida, Illinois, Maine, Massachusetts,
Minnesota, Nevada and Ohio. The registration allows the Company to sell their product within the confines of that region. The registration
fees capitalized are the initial costs to obtain the license. The licenses have nominal annual renewal costs. These subscriptions
are amortized over a 15-year period.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
License Agreement
|
|
$
|
5,300
|
|
|
$
|
5,300
|
|
Product License and Registration
|
|
|
57,300
|
|
|
|
57,300
|
|
Trade Secret - IP
|
|
|
32,500
|
|
|
|
32,500
|
|
|
|
$
|
95,100
|
|
|
$
|
95,100
|
|
Less: Accumulated Amortization
|
|
|
(12,275
|
)
|
|
|
(7,388
|
)
|
|
|
$
|
82,825
|
|
|
$
|
87,712
|
|
Amortization expense for the nine-month
periods ending September 30, 2018 and 2017 was $4,886 and $2,991, respectively.
7.
|
Convertible Notes and Derivative Liability:
|
In the year ended December 31, 2016 the
Company raised $810,000 through a private placement of convertible promissory notes sold to certain accredited investors, bearing
interest at 12%, with interest and principal due January 1, 2019. Upon issuance, each of the notes is immediately convertible at
the noteholders election into the company’s common stock at $1.75 per share or 90% of the VWAP of the five days following
the notice of conversion, whichever is lower. Since the conversion rate can be tied to an underlying item, convertible notes with
warrants, are considered to be a derivative that is recorded as a liability at fair value and adjusted to fair value at the conclusion
of each reporting period. The underlying assumptions used in the Black Scholes model to determine the fair value of the derivative
liability were based on the individual date the notes were closed, volatility, the risk-free rate, the exercise price and the stock
price at conversion.
During the last three months of 2017,
all outstanding convertible note holders either converted their notes or the Company paid monies owed in full. The liability at
September 30, 2018 is $0.
8.
|
Related Party Transactions:
|
As of September 30, 2018, the Company had
six related parties, Brett Roper, Future Vision dba Medicine Man Denver, Med Pharm Holdings, Med Pharm Iowa, De Best Inc. and Super
Farm LLC. One of the Officers of the Company, Joshua Haupt, currently owns 20% of both De Best and Super Farm. Additionally, one
of the Directors of the Company, Andy Williams, currently owns 38% of Future Vision dba Medicine Man Denver. Andy Williams also
owns 10% of Med Pharm Holdings and 3% of Med Pharm Iowa. Brett Roper is the Chief Executive Officer of the Company.
As of September 30, 2018, the Company
had net sales from Super Farm LLC totaling $202,613 and $67,560 in net sales from De Best Inc. The Company gives a larger discount
on nutrient sales to related parties than non-related parties. As of September 30, 2018, the Company had accounts receivable balance
with Super Farm LLC totaling $21,400 and $6,515 accounts receivable from De Best Inc. As of September 30, 2018, the company had
an accounts payable balance to Brett Roper in the amount of $53,000.
As of September 30, 2018, the Company had
sales from Future Vision dba Medicine Man Denver totaling $137,552, and an accounts receivable balance of $20,658. As of September
30, 2018, the Company had an accounts receivable balance owed from Future Vision totaling $4,479. As of September 30, 2018, the
Company had sales from Med Pharm Iowa totaling $62,191 and $23,020 in sales from Med Pharm Holdings. The Company had an accounts
receivable balance owed from Med Pharm Iowa totaling $1,713 and $3,552 owed from Med Pharm Holdings.
9.
|
Goodwill and Acquisition Accounting:
|
On June 3, 2017, the Company issued an
aggregate of 7,000,000 shares of its common stock for 100% ownership of both Success Nutrients and Pono Publications. The Company
utilized purchase price accounting stating that net book value approximates fair market value of the assets acquired. The purchase
price accounting resulted in $6,301,080 of Goodwill. The ASC at 350-20-35-3A directs that “An entity may assess qualitative
factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting
unit is less than its carrying amount, including goodwill. The Company had a valuation done at this time and the value exceeded
the purchase price indicating that there would not be any impairment.
On July 21, 2017, the Company issued 2,258,065
shares of its Common Stock for 100% ownership of Denver Consulting Group (“DCG”). The Company utilized purchase price
accounting stating that net book value approximates fair market value of the assets acquired. The purchase price accounting resulted
in $3,003,226 of Goodwill. The ASC at 350-20-35-3A directs that “An entity may assess qualitative factors to determine whether
it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying
amount, including goodwill”. The Company obtained an independent valuation of the DCG on September 27, 2017. The fair market
value on September 27, 2017 of DCG was $3,650,000, thus creating a fair market value greater than the carrying value of Goodwill.
The ASC at 350-20-35-3D directs that “If an entity determines that it is not more likely that the fair value of a reporting
unit is less than its carrying amount, then Goodwill impairment is unnecessary.” As of December 31, 2017, the Company determined
that no impairment is necessary given the recent valuations and no change in qualitative factors.
On September 17, 2018, we closed the acquisition
of Two JS LLC, dba The Big Tomato, a Colorado limited liability company. (“Big T” or “Big Tomato”). The
Company issued an aggregate of 1,933,329 shares of its common stock for 100% ownership of Big Tomato. The Company utilized purchase
price accounting stating that net book value approximates fair market value of the assets acquired. The purchase price accounting
resulted in the Company valuing the investment as $3,000,000 of Goodwill. At September 17, 2018, the Company’s per share
value of Common Stock was $1.55. There is no requirement for Big Tomato to have independent audited financial statement for the
prior two fiscal years and any interim periods because the aggregate value of the acquisition is less than 20% of the Company’s
current assets.
Big Tomato Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book/Fair
Value
|
|
|
|
|
|
Book/Fair
Value
|
|
Assets
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Inventory
|
|
|
291,000
|
|
|
Accounts payable
|
|
|
272,266
|
|
Other assets
|
|
|
4,950
|
|
|
Customer Deposits
|
|
|
23,684
|
|
|
|
|
295,950
|
|
|
|
|
|
295,950
|
|
Purchase Price (1,933,329*1.5517)
|
|
|
|
|
|
|
3,000,000
|
|
Less: BV of Assets
|
|
|
(295,950
|
)
|
Add: BV of Liabilities
|
|
|
295,950
|
|
Goodwill
|
|
|
3,000,000
|
|
As of September 30, 2018, the Company’s
Goodwill has a balance of $12,304,306. This amount consisted of $3,003,226 from the DCG acquisition, $6,301,080 from the Pono and
Success acquisition and $3,000,000 from the Big Tomato acquisition. As of September 30, 2018, no impairment is necessary.
10.
|
Licensing agreement with Canada House Wellness Group Inc. (CSE: CHV):
|
On July 17, 2018, Medicine Man Technologies
Inc. announced an exclusive licensing agreement with Canada House Wellness Group Inc. (CSE: CHV) (“Canada House”),
through its wholly owned subsidiary Abba Medix Corp., for deployment of its intellectual property and product lines (Three a Light
®, Success Nutrients ®, General Intellectual Property) into the Canadian marketplace. The licensing agreement calls for
an initial payment of $4.65M (CAD) in the form of cash and stock for licensing of Medicine Man Technologies intellectual property,
product lines, and assignment of an existing Cultivation MAX agreement to Canada House. Medicine Man Technologies will also be
entitled to revenue-based fees related to this deployment over the duration of the license agreement and will be assisting Canada
House’s marketing efforts. This is a level 1 investment.
As of September 30, 2018, the Company
recognized a gain on investment of $2,598,110 and initial revenue of $3,518,322 due to this transaction. It should be noted that
this gain (or any future gain/loss) is based upon common stock ownership and in consideration of the closing requirements for
valuation related to each quarter, this position may vary widely and that the Company has no control position, authority, or other
relationship over CHV other than Mt. Roper’s current service as a member of CHV’s Advisory Board. Further, this new
master license agreement supersedes an existing services agreement that was nullified as the result of this new licensing agreement.
11.
|
Net Income (Loss) per Share:
|
In accordance with ASC Topic 280 –
“Earnings per Share”, the basic earnings per common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similar to basic loss
per common share except that the denominator is increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company's quarterly
earnings for the period ended September 30, 2018 and 2017 basic and diluted earnings per share $.19 and ($.22) respectively.
As of September 30, 2018, and December
31, 2017, the Company had $441,960 and $106,091 of finished goods inventory, respectively. The Company only has finished goods
within inventory because it does not produce any of its products. All inventory is produced by a third party. The inventory valuation
method that the Company uses is the FIFO method. During 2018 and 2017, the Company had $0 obsolescence within its inventory.
As of September 30, 2018, and December
31, 2017, the Company had a note payable balance of $0 and $58,280, respectively. The note payable is a balance that is due to
an officer of the Company, Joshua Haupt. This note was fully repaid in the 1
st
quarter of FY 2018.
14.
|
Commitments and Concentrations:
|
Office Lease (Medicine Man Technologies)
– Denver, Colorado
– The Company entered into a lease for office space at 4880 Havana Street, Suite 201,
Denver, Colorado 80011. The lease period started March 1, 2017 and will terminate February 29, 2020, resulting in the following
future commitments:
2018 fiscal year
|
|
$
|
39,000
|
|
2019 fiscal year
|
|
|
171,000
|
|
2020 fiscal year
|
|
|
29,000
|
|
Office Lease (Big Tomato) –
Denver, Colorado
– The Company entered into a lease for office space at 695 Billings St, Suite A-F, Aurora,
Colorado 80011. The lease period started July 1, 2017 and will terminate June 30, 2020, resulting in the following future commitments:
2018 fiscal year
|
|
$
|
19,452
|
|
2019 fiscal year
|
|
|
77,808
|
|
2020 fiscal year
|
|
|
38,904
|
|
The Company notes that this lease is accelerated
and the deferred rent expense at September 30, 2018 is $23,996. This amount is booked in “Accrued expenses” and is
noted above in “Note 1.”
The Company issued one round of warrants
related to various equity transactions that was approved by the Board on June 3, 2017 and issued on June 19, 2017. Since the terms
weren’t established until June 19, 2017, these were valued on this date per the signed agreements and issuance on June 19,
2017. The Company accounts for its warrants issued in accordance with the US GAAP accounting guidance under ASC 480. The Company
estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing model as
described in the stock-based compensation section above, based on the estimated market value of the underlying common stock at
the valuation measurement date of $1.50, the remaining contractual term of the warrant of 2.5 years, risk-free interest rate of
1.38% and expected volatility of the price of the underlying common stock of 126%. There is a moderate degree of subjectivity involved
when using option pricing models to estimate the warrants and the assumptions used in the Black Scholes option-pricing model are
moderately judgmental.
During the quarter ended June 30,
2018, the Company issued 937,647 common stock purchase warrants under the private offering with an exercise price of $1.33 per
share, expiring on March 17, 2019. As of September 30, 2018, none of the warrants were exercised. The stock purchase warrants
have been accounted for as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
During the quarter ended September 30,
2018, the Company did not issue any common stock purchase warrants.
|
|
Number of shares
|
|
Balance as of June 30, 2018
|
|
|
2,438,213
|
|
Settlements
|
|
|
–
|
|
Warrants issued
|
|
|
–
|
|
Balance as of September 30, 2018
|
|
|
2,438,213
|
|
The Company utilizes FASB ASC 740, “Income
Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based
on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established if it is more likely than not that some portion or all the deferred tax asset will not be
realized. The Company generated a deferred tax credit through net operating loss carry forwards. The Company had no tax provisions
as of September 30, 2018 and December 31, 2017. The company had net income during the quarter ended September 30, 2018, however
currently has an adequate net loss carryforward to cover any liability generated in the current quarter.
17.
|
Major Customers and Accounts Receivable:
|
The Company had certain customers whose
revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually
represented 10% or more of the Company’s total accounts receivable. For the nine months ended September 30, 2018, two customers
accounted for 74% of revenue, one with 60% and another with 14%. For the nine months ended September 30, 2018, three customers
accounted for 76% of accounts receivable, one with 14%, one with 21% and another with 60%. The Company is currently pursuing litigation
against one of these customers to receive contractual amounts owed. See “Part II, Item 1, Legal Proceedings” for further
explanation.
The Company also notes that $427,287 of the receivables as noted
in this report were related to a second required payment of the cash portion as required under the Master License Agreement with
Canada House Wellness (CSE:CHV). That value was paid in in full subsequent to the end of this reporting period in accordance
with our agreement.