NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
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 June 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 $849,223 and $748,715 classified as
cash and cash equivalents as of June 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.
Our financial instruments include cash,
accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial instruments
approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the
interest rates on these instruments approximate the interest rate on debt with similar terms available to us. Our derivative liability
was adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
Use of Estimates:
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may
be based upon amounts that differ from these estimates.
Accounts receivable:
The Company extends unsecured credit to its customers
in the ordinary course of business. Accounts receivable related to licensing 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 June 30, 2018, and December
31, 2017, the Company had accounts receivable of $1,337,285 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 further notes a significant value increase in 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 Item 1, Legal).
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 June
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 June 30, 2018, the Company has reserved 35% or $102,906 of this balance. The Company had $195,988 and $191,111 classified
as short-term note receivable as of June 30, 2018, and December 31, 2017, respectively.
Other assets (current and non-current):
Other assets at June 30, 2018, and December 31, 2017 were $82,320 and $57,319, respectively including $67,820 in prepaid expenses and $14,500 in a security deposit.
Accounts payable:
Accounts payable
at June 30, 2018, and December 31, 2017 were $19,733 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 June 30, 2018, and December 31, 2017 were $57,619 and $56,495,
respectively. At June 30, 2018, this was comprised of $30,956 in accrued bonuses and $26,663 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:
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. Revenue from seminar fees is related
to one-day seminars and is recognized as earned at the completion of the seminar. Revenue from product sales either being
nutrients or book sales are recognized when the goods are transferred. The Company also recognizes expense reimbursement from
clients as revenue for expenses incurred during certain jobs.
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 $77,540 and $89,509 during the periods ended June 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 $0 in expenses for stock-based compensation
to employees and consultants during the six months ended June 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
on May 2017. The relevant agreements provide that the effective date for accounting purposes would be April 1, 2017. Success Nutrients
became a wholly owned subsidiary of Medicine Man Technologies, Inc. and the business conducted by Pono was incorporated into a
newly formed wholly owned subsidiary, Medicine Man Consulting, Inc., which is also where the Company 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 June 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 2014-09 “Revenue from
Contracts with Customers (Topic 606)”
– In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts
with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition.
ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in
the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December
15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods
therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of
the date of adoption. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related
to our consulting, licensing and product sales will remain consistent with our current practice. Because we do not anticipate
a change in our pattern of revenue recognition, we anticipate that neither method will have a material impact on our consolidated
financial statements.
FASB ASU 2016-02 “Leases (Topic
842)”
– In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02").
ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and
corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance
will classify leases as either finance or operating (similar to current standard’s “capital” or “operating”
classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.
The Company does not expect the adoption of ASU 2016-02 to have an impact on our consolidated financial statements.
FASB ASU 2017-01 “Clarifying
the Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1. The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities
is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition
of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods
beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a
significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15 “Statement of
Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity
in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective
for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.
FASB ASU 2016-11 “Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815)”
– In May 2016, the FASB issued 2016-11, which clarifies guidance
on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity
reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017,
with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated
results of operations, cash flows and financial position.
At March 31, 2018, the Company had 24,082,334
common shares outstanding.
During the three months ended June 30,
2018, the Company sold 937,647 units, each unit consisting of one share of the Company’s common stock and one common share
purchase warrant exercisable to purchase one share of the Company’s Common Stock at an exercise price of $1.33 per warrant,
to one private investor. The purchase price for each Unit was $1.0665 per share.
At June 30, 2018, the Company had 25,019,981
common shares outstanding.
5.
|
Property and Equipment:
|
Property and equipment are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
June 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
|
|
|
(113,413
|
)
|
|
|
(82,038
|
)
|
|
|
$
|
102,485
|
|
|
$
|
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 six-month
periods ending June 30, 2018 and 2017 was $38,284 and $23,576 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 products 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.
|
|
June 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
|
|
|
(10,646
|
)
|
|
|
(7,388
|
)
|
|
|
$
|
84,454
|
|
|
$
|
87,712
|
|
Amortization expense for the six-month
periods ending June 30, 2018 and 2017 was $3,257 and $1,463, 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. As stated above,
the liability at June 30, 2018 was $0.
8.
|
Related Party Transactions:
|
As of June 30, 2018, the Company had five
related parties, 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.
As of June 30, 2018, the Company had sales
from Super Farm LLC totaling $266,340 and $88,200 in sales from De Best Inc. The Company give’s a larger discount on nutrient
sales to related parties than non-related parties. As of June 30, 2018, the Company had accounts receivable balance with Super
Farm LLC totaling $25,746 and $23,478 accounts receivable from De Best Inc. During the six months ended June 30, 2018, the Company
had discount of sales associated with Super Farm LLC totaling $133,368 and $44,100 from De Best Inc
During the six months ended June 30, 2018,
the Company had sales from Future Vision dba Medicine Man Denver totaling $172,030, discount on sales of $86,015 and an accounts
receivable balance of $8,456. As of June 30, 2018, the Company had an accounts receivable balance owed from Future Vision totaling
$4,479. As of June 30, 2018, the Company had sales from Med Pharm Iowa totaling $6,147 and $29,925 in sales from Med Pharm Holdings.
During the six months ended June 30, 2018, the Company had discount of sales associated with Med Pharm Iowa totaling $2,458 and
$14,963 from Med Pharm Iowa.
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, 201, the Company determined
that no impairment is necessary given the recent valuations and no change in qualitative factors.
As of June 30, 2018, the Company’s
Goodwill has a balance of $9,304,306. This amount consisted of $3,003,226 from the DCG acquisition and $6,301,080 from the Pono
and Success acquisition.
10.
|
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 June 30, 2018 and 2017 basic and diluted earnings per share $.01 and ($.43), respectively.
As of June 30, 2018, and December 31,
2017, the Company had $67,567 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 June 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.
13.
|
Commitments and Concentrations:
|
Office Lease – Denver, Colorado
–
The Company entered into a lease for office space at 4880 Havana Street, Suite 201, Denver, Colorado 80239. The lease period started
March 1, 2017 and will terminate February 29, 2020, resulting in the following future commitments:
2018 fiscal year
|
|
$
|
78,000
|
|
2019 fiscal year
|
|
|
171,000
|
|
2020 fiscal year
|
|
|
29,000
|
|
The Company notes that this lease is accelerated
and the deferred rent expense at June 30, 2018 is $26,663. 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 PPM with an exercise price of $1.33 per share, expiring on
March 17, 2019. As of June 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
|
|
Number of shares
|
|
|
Balance as of March 31, 2018
|
|
|
1,500,566
|
|
|
Settlements
|
|
|
–
|
|
|
Warrants issued
|
|
|
937,647
|
|
|
Balance as of June 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 June 30, 2018 and December 31, 2017. The company had net income during the quarter ended June 30, 2018, however
currently has an adequate net loss carryforward to cover any liability generated in the current quarter.
16.
|
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 six months ended June 30, 2018, two customers
accounted for 45% of sales, one with 13% and another with 32%. For the six months ended June 30, 2018, these same two customers
accounted for 76% of accounts receivable, one with 16% 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.
Canada House Wellness Group Opportunity
Update: On or about July 17, 2018 the Company entered into a Master License Agreement with Canada House Wellness Group, a Canadian
business trading on the Canadian Securities Exchange (Symbol: CHV) for deployment of its Success Nutrients line as well as intellectual
property in Canada. The initial payments for licensing totaled $4.65M (CAD) and is being paid to the Company in the form of cash
($1.15M) and Stock ($3.5M) in Canada House Wellness which will have a significant impact on the Company’s third quarter revenues
(approximately $3.5M USD). The Company expects that his new partnership will generate significant revenues via fees related to
its license agreement paid to the Company noting the license agreement’s initial duration is for 18 months with renewal rights.
While no assurances can be provided, the
Company believes that the Canada House Wellness Group Team will be an excellent partner for deployment of its various goods and
services as the Canadian Cannabis Marketplace evolves and likely experiences significant wholesale price pressures wherein the
Company believes its efficient cultivation and operation methods will provide a distinct advantage to those operators this new
venture services.
An example of this efficiency is clearly
shown in the recent harvest yields of useable flower material of 150 plus grams per square foot related to one of the Company’s
new Southern California Cultivation MAX clients. This level of performance is expected to provide the Company’s Client with
five plus harvest cycles per year and represents a significant increase in normal productivity while generating high quality materials
that are selling very well.
Acquisition Update: The Company has
entered a binding term sheet for acquisition of a retail operator in Denver which it believes will provide its clients better
access to both consumables as well as equipment on a competitive price basis. The Company expects its due diligence and
integration planning to take six to eight weeks and once successfully completed, the acquisition will be consummated. This
event is expected to take place during the 3
rd
quarter of operations of this year.
OTC QX Update: As already announced previously,
the Company has initiated planning for application for QX status on the OTC Marketplace which it expects to complete by prior to
the conclusion of its third quarter of operations of 2018.
Capital G Ltd Debt Update: The Company
has recently entered negotiations with the Debtor to secure this obligation with additional collateral as well as undertaking consideration
of an equity position in Capital G Ltd. as it recapitalized itself with a new investor group, receiving a $10,000 good faith payment
at the end of the second quarter of FY 2018.
Client Default Update: The Company has
recently entered into pursuit of 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 subsequently
violated, causing the Company to increase its receivables accordingly. It has engaged legal counsel, to pursue this default issue
and, while there are no assurances of a favorable outcome, management believes that
a resolution in favor of the Company will be forthcoming. The Client continues to operate as of the date of this report.