NOTES TO THE FINANCIAL STATEMENTS
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 fiscal year ended December 31, 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 $321,788 and $748,715 classified as cash
and cash equivalents as of December 31, 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.
The Company is commencing legal action
against two clients for breach of contract, adding a significant value into its receivables for fees that had been 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.
The following is the Company’s assets
and liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 2018 and December 31, 2017, using
quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant
unobservable inputs (Level 3):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Level 3 – Non-Marketable Securities – Non-recurring
|
|
$
|
2,199,344
|
|
|
$
|
–
|
|
Non-Marketable Securities at Fair Value
on a Nonrecurring Basis
— Certain assets are measured at fair value on a nonrecurring basis. The level 3 position consist
of investments accounted for under the cost method. The Level 3 position consists of investments in equity securities held in
private companies.
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, consulting and cultivation max revenues
are recorded at the time the milestone is achieved resulting in the funds being due, services are delivered, and payment is reasonably
assured. Licensing, consulting and cultivation max revenues are generally collected from 30 to 60 days after the invoice is sent.
As of December 31, 2018, and December 31, 2017, the Company had accounts receivable of $2,587,380 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 December 31, 2018 the accounts
receivable for this matter totals $1,281,511 and the revenue earned as of December 31, 2018 is $1,518,099. 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).
Long 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. As of December 31, 2018, the Company has written off 100% or $250,000 of this balance
plus accrued interest of $49,018. Due to this bad debt expense not being a part of the Company’s normal business this expense
is categorized in other income and expense on the income statement. Management is currently in discussions on how to recover this
loan. Additionally, as a part of the above-mentioned contract with CHV, the Company also provided CHV with a matching lending
facility of $500,000 CAD in $125,000 CAD increments. As of 12.31.18, the Company has loaned CHV $125,000 CAD or $92,888. The Company
had $92,888 and $191,111 classified as long-term note receivable as of December 31, 2018, and December 31, 2017, respectively.
Other assets (current and non-current):
Other assets at December 31, 2018, and December 31, 2017 were $50,824 and $57,319, respectively including $29,005 in prepaid
expenses and $21,819 in two security deposits.
Accounts payable:
Accounts payable
at December 31, 2018, and December 31, 2017 were $273,827 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 December 31, 2018, and December 31, 2017 were $291,084 and $56,495, respectively. At
December 31, 2018, this was comprised of $163,568 in customer deposits, $21,330 in deferred rent expense and $106,185 in accrued
payroll.
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.
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.
Intellectual Property Master Licensing
Agreement with ABBA Medix Corp.
On July 17, 2018, Medicine Man Technologies,
Inc. the “Company” entered into an intellectual property license agreement with Abba Medix Corp. (AMC), a wholly-owned
subsidiary of publicly-traded Canada House Wellness Group, Inc. (CHV).
The license agreement granted AMC the right
to use products and processes related to high-efficiency cultivation of cannabis, as well as various inventions, ideas, discoveries,
algorithms, designs, hardware, prototypes, copyrights, processes, mask works, trade secrets, know-how, calculations, testing results,
technical data, documentation, potential customer contracts, marketing ideas and other technology in the cannabis cultivation industry,
in addition to all related trademarks, from the Company. The license was granted as of the effective date of the agreement for
an 18-month period and shall automatically renew for successive 18-month periods until the agreement is otherwise terminated.
As consideration for granting the license
to AMC, the Company received the following:
|
·
|
$3,500,000 in shares of CHV common stock;
and
|
|
·
|
Ongoing licensing fees calculated as a
percentage of AMC’s sales revenue directly related to the Company’s intellectual property.
|
ASC 606 provides guidance in determining
the proper accounting treatment for the license of the intellectual property requiring the Company had to complete a sequence of
analyses. These analyses include the following: (i) sale versus licensing transactions; (ii) distinct performance obligations;
(iii) the nature of the license; and (iv) the timing of recognition based on the nature of the license. Based on an analysis of
ASC 606, the Company determined the following:
|
·
|
The license agreement establishes AMC’s
right to use the intellectual property; it does not transfer any of the Company’s ownership in the assets. Therefore, the
agreement is clearly identified as a licensing transaction.
|
|
·
|
The license agreement grants AMC the right
to use the intellectual property immediately and does provide for the transfer of any other goods or services to AMC. The property
is capable of being distinct, and the promise to transfer the property is distinct within the context of the contract. The Company
recognized its license as distinct and a separate performance obligation.
|
|
·
|
The intellectual property is functional
intellectual property as it has significant standalone functionality. The license agreement with AMC grants them with the exclusive
right to use the Company’s intellectual property immediately upon the date of the agreement. This date clearly represents
a transfer of control to the customer. Further upon its effectiveness, the Company established the right to payment and the customer
accepted the asset. As control has been transferred to the customer, the Company has satisfied its performance obligation and,
as such, is entitled to immediately recognize the $4,650,000 in revenue associated with the granting of the licensing rights.
|
Additionally, under the terms of the agreement,
the Company agreed to provide a loan facility to AMC under the following terms:
“The Licensor (the Company) shall
provide a lending facility to the Licensee (AMC) in $125,000 increments of up to $500,000; noting that any increment over the initial
$250,000 advanced shall only be funded upon the Licensee’s funding of the second $575,000 amount to the Licensor. Such lending
facilities shall bear a nominal interest rate and carry terms, to be agreed to by both parties. Both parties agree that each of
the Licensor’s advances shall be first money in and first money to be repaid in accordance with the terms mutually agreed
to.
The purpose of this lending facility was
to provide financing support to AMC, the licensee of the Company’s intellectual property, for investing in capital expenses
that would allow them to generate revenue that would result in a royalty being paid to Medicine Man Technologies, Inc. The Company
is entitled to receive 4% of the gross revenues associated with the sale of Success Nutrients ® by AMC over the term of the
agreement. The Company considered the guidance under ASC 606 in determining whether or not the facility had any impact on the Company’s
ability to recognize revenue from the licensing agreement. Based upon the Company’s analysis, the Company determined the
business purpose of the financing facility that it provided to AMC, was a separate agreement with distinct responsibilities from
the Company’s performance obligations under the intellectual property license agreement. The Company considered the scope
exceptions highlighted in 606-10-15-2(c) and determined that Topic 825, Financial Instruments more appropriately applied. The amount
of revenue of $4,650,000 that the Company recognized, was not reduced by the amount of the $500,000 facility which the Company
determined is a standalone contract with commercial substance and collectability. As of December 31, 2018, the Company recorded
a trade accounts receivable on its balance sheet due from AMC of $250,000.
On July 31, 2018, the license agreement
was amended solely to eliminate the equal $1,000,000 million-dollar stock swap element. Based upon the Company’s analysis
of ASC 606-10-25-13, the Company determined the modification represented the elimination of a stock swap between the Company and
its customer’s parent company, CHV. While the consideration had a defined value, the result of the modification does not
beneficially or negatively impact either the Company or its customer. The Company determined that the remaining goods or services
as of the time of the modification are not distinct and, form part of a single performance obligation that was partially, if not
fully, satisfied. As the consideration represented an exchange of equal value between the two parties, the Company did not record
any revenue adjustments (either as an increase or a reduction) due to the elimination of the stock swap.
Cultivation License Payment
On August 6, 2018, the Company entered
into a license agreement with a client that was comprised of two basic elements:
Element One
The Company was hired to act as project
management due to the Company’s industry knowledge to help a client prepare to cultivate their crop. The Company completed
all of its work to get them growing by December 31, 2018. This element of the Company’s contract was simply charging an agreed
upon fee for services performed. All fees were considered fully earned and were billed and collected in 2018.
Element Two
The second part of the license
agreement called for the Company to receive a bonus equal to “
25% of the value of the product grown over 2 pounds
per light”
for the next 5 years. “2 pounds per light” is a marijuana industry standard meaning that if
the crop yield was above that standard, it would indicate that due to the Company’s expertise that the client crop was
“above standard”. Under that clause, the Company would be sharing in the extra profit if it was achieved, because
the expert advice provided by the Company would enable the client to generate a significant level of profit above industry
standard. On December 14, 2018, the Company entered into an amendment to amend the terms of the August 6, 2018 license
agreement:
|
·
|
The term for receiving 25% of the value
grown over 2 pounds per light, was reduced from
five
years to
three
years
|
|
·
|
The 25% level was reduced to 5%
|
|
·
|
In return, the Company received a $1,000,000
fee which it billed in 2018 and collected in full in January 2019. Specifically, the wording in the addendum stated, “
The
aforementioned fee of $1,000,000 shall be deemed earned by the Licensor (Medicine Man) upon the execution of this Addendum and
shall be payable before January 15, 2019”.
The Company met all contractual terms prior to December 31, 2018 and have
no ongoing contractual responsibility to provide consulting services in order to earn this fee. The client limited their exposure
for potentially higher future payments by agreeing to a one-time payment of $1,000,000.
|
The amendment also provided that the client
will reimburse the Company up to $11,000 a month for the cost of its employees if they are needed at the client’s locations.
The Company considered this a pass thru item where no profit was recognized. Under the guidelines of ASC 606-10-25-27, an entity
transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over
time, if one of the following criteria is met:
a. The customer simultaneously receives
and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs 606-10-55-5 through
55-6).
b. The entity’s performance creates
or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (see paragraph
606-10-55-7).
c. The entity’s performance does
not create an asset with an alternative use to the entity (see paragraph 606-10-25-28), and the entity has an enforceable right
to payment for performance completed to date (see paragraph 606-10-25-29).
As a result of the contractual consulting
services the Company provided for Element One, control of the services has been transferred to the customer. These services enhanced
The client’s crop output capabilities and clearly meet criteria (a) and (b) above, and, therefore were recorded as revenue
in 2018.
With respect to Element Two in terms of
considering revenue the method of recognition under 606, the following characteristics of the transaction were considered:
|
·
|
The Company had no further performance
obligations
|
|
·
|
The customer contractually deemed this
fee as earned
|
|
·
|
The future potential value of the reduction
from 25% over five years, to 5% over three years, is an asset that legally passed to the client.
|
|
·
|
The customer paid the fee
|
Based on the analysis performed, the Company determined “control”
at a point in time, transferred immediately to the client upon the signing of the amendment. As a result, the Company recorded
a trade receivable of $1,000,000 on its balance sheet as of December 31, 2018, and $1,000,000 of revenue in its statement of operations
for the year ended December 31, 2018. This $1,000,000 receivable was fully received in January of 2019.
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 were $291,711 and $183,782 during the twelve-month periods ended December 31, 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 $1,457,250 in expenses for stock-based compensation
to employees and consultants during the nine months ended December 31, 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 expect the adoption of ASU 2016-02 to have an impact on our consolidated financial statements starting January
1, 2019.
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.
4.
|
Stockholders’ Equity
:
|
The Company’s initial authorized
stock at inception was 1,000,000 Common Shares, par value $0.001 per share. In 2016 the Company subsequently amended its Articles
of Incorporation to increase its authorized shares to 90,000,000 Common Shares, par value $0.001 per share and 10,000,000 Preferred
Shares, par value $0.001 per share.
As of December 31, 2017, the Registrant
had 22,991,137 shares of Common Stock issued and outstanding.
On July 9, 2018, the Company issued 625,000
shares of Common Stock under its 2017 Qualified Incentive Plan to various individuals in consideration of their services rendered
in support of the Company.
On December 14, 2018, the Company issued
175,000 shares of Common Stock under its 2017 Qualified Incentive Plan to various individuals in consideration of their services
rendered in support of the Company.
On or about March 31, 2018, the Company
had $2,100,318 in issued warrants exercised for 1,091,197 shares of Common Stock, this was a cashless exercise.
On or about September 17, 2018, the Company
issued 1,933,329 shares of its Common Stock as part of the consideration in acquiring Two JS LLC.
On or about June 1, 2018, the Company sold
937,647 shares of Common Stock to a private investor of the Company.
As of December 31, 2018, the Company
had 27,753,310 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:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Furniture & Fixtures
|
|
$
|
98,395
|
|
|
$
|
107,945
|
|
Marketing Display
|
|
|
36,900
|
|
|
|
36,900
|
|
Vehicles
|
|
|
34,900
|
|
|
|
6,000
|
|
Office Equipment
|
|
|
74,361
|
|
|
|
81,240
|
|
|
|
$
|
243,655
|
|
|
$
|
232,085
|
|
Less: Accumulated Depreciation
|
|
|
(149,015
|
)
|
|
|
(82,038
|
)
|
|
|
$
|
94,640
|
|
|
$
|
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 twelve-month
periods ending December 31, 2018 and 2017 was $75,446 and $59,117 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
asset, 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.
|
|
December 31, 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
|
|
|
(13,903
|
)
|
|
|
(7,388
|
)
|
|
|
$
|
81,197
|
|
|
$
|
87,712
|
|
Amortization expense for the twelve-month
periods ending December 31, 2018 and 2017 was $6,515 and $4,620, 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 noteholder’s 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 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 December
31, 2018 is $0.
8.
|
Related Party Transactions:
|
As of December 31, 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 December 31, 2018, the Company had
net sales from Super Farm LLC totaling $264,103 and $88,063 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 December 31, 2018, the Company had accounts receivable balance
with Super Farm LLC totaling $61,110 and $20,503 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 $69,714.
As of December 31, 2018, the Company had
sales from Future Vision dba Medicine Man Denver totaling $158,805, and an accounts receivable balance of $28,893. As of December
31, 2018, the Company had an accounts receivable balance owed from Future Vision totaling $2,986. As of December 31, 2018, the
Company had sales from Med Pharm Iowa totaling $10,026 and $34,438 in sales from Med Pharm Holdings. The Company had an accounts
receivable balance owed from Med Pharm Iowa totaling $1,195 and $10,425 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 December 31, 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 December 31, 2018, the Company had an independent third-party
valuation group perform an impairment analysis on our consolidated goodwill balance. It was noted that as of December 31, 2018,
no impairment was needed.
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 December 31, 2018, the Company recognized
an unrealized loss on investment of $398,766 and initial revenue of $3,518,322 due to this transaction.
As of December 31, 2018, and December 31,
2017, the Company had $489,239 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 December 31, 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 (Medicine Man Technologies)
– 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:
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:
2019 fiscal year
|
|
|
77,808
|
|
2020 fiscal year
|
|
|
38,904
|
|
The Company notes that this lease is accelerated
and the deferred rent expense at December 31, 2018 is $21,330. This amount is booked in “Accrued expenses” and is noted
above in “Note 1.”
During the period ended December 31, 2017,
the Company issued 2,000,000 common stock purchase warrants to three employees of the Company with an exercise price of $1.445
per share for a period of time expiring on December 31, 2019. As of December 31, 2018, all of the warrants were exercised. Stock-based
compensation expense recognized for warrants during the twelve-month period ended December 31, 2018 was $2,100,318.
During the period ended December 31, 2018,
the Company issued 250,000 common stock purchase warrants to one employee of the Company with an exercise price of $1.49 per share
for a period of time expiring on December 31, 2021. The Company accounts for its warrants issued in accordance with the US GAAP
accounting guidance under ASC 480. We estimated the fair value of these warrants at the respective balance sheet dates using the
Black-Scholes option pricing model as described in the stock-based compensation section above, based on the estimated market value
of the underlying common stock at the valuation measurement date of $1.49, the remaining contractual term of the warrant of 3 years,
risk-free interest rate of 2.48% 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 period ended December 31, 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 December 31, 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 issued zero common stock purchase warrants.
|
|
Number of shares
|
|
|
Exercise Price
|
|
Balance as of December 31, 2017
|
|
|
3,500,566
|
|
|
|
–
|
|
Warrants issued
|
|
|
937,647
|
|
|
$
|
1.33
|
|
Warrants issued
|
|
|
209,248
|
|
|
$
|
1.49
|
|
Warrants exercised
|
|
|
2,000,000
|
|
|
|
–
|
|
Balance as of December 31, 2018
|
|
|
2,647,461
|
|
|
|
|
|
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 of 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 December 31, 2017 and December 31, 2016. The Company had a net loss during the year ended December 31, 2017 and the deferred
tax asset has a full valuation against it.
The Company is registered in the State
of Colorado and is subject to the United States of America tax law. As of December 31, 2018, the Company had incurred income on
a tax basis resulting in the Company calculating that it owed $477,626 to the federal government at December 31, 2018 and $0 at
December 31, 2017. In addition, the Company owed the State of Colorado $105,305 in 2018 and $0 at December 31, 2017.
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 twelve months ended December 31, 2018, two customers
accounted for 48% of revenue, one with 37% and another with 11%. For the twelve months ended December 31, 2018, three customers
accounted for 88% of accounts receivable, one with 11%, one with 38% and another with 39%. The Company is currently pursuing litigation
against two of these customers to receive contractual amounts owed. See “Part II, Item 1, Legal Proceedings” for further
explanation.
The Company has two identifiable segments
as of December 31, 2018; licensing/consulting and products. The products segment sells merchandise directly to customers via e-commerce
portals, through our proprietary websites and retail location. The licensing/consulting segment sales derives its revenue from
licensing/consulting agreements with cannabis related entities. The following information represents segment activity for the
twelve-month periods ended December 31, 2018 and 2017.
|
|
For the twelve
months ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Products
|
|
|
License/Cons.
|
|
|
Cultivation Max
|
|
|
Master Licensing
Fee
|
|
|
Other
|
|
|
Total
|
|
|
Products
|
|
|
License/Cons.
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
|
2,031,603
|
|
|
|
2,271,275
|
|
|
|
1,539,317
|
|
|
|
3,518,322
|
|
|
|
82,038
|
|
|
|
9,442,555
|
|
|
|
1,083,208
|
|
|
|
2,356,663
|
|
|
|
89,713
|
|
|
|
3,529,584
|
|
Intangible assets amortization
|
|
|
5,987
|
|
|
|
528
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
6,515
|
|
|
|
4,090
|
|
|
|
530
|
|
|
|
–
|
|
|
|
4,620
|
|
Depreciation
|
|
|
5,848
|
|
|
|
69,598
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
75,446
|
|
|
|
4,320
|
|
|
|
54,797
|
|
|
|
–
|
|
|
|
59,117
|
|
Income (loss) from operations
|
|
|
878,067
|
|
|
|
(275,576
|
)
|
|
|
346,424
|
|
|
|
–
|
|
|
|
–
|
|
|
|
948,915
|
|
|
|
(71,561
|
)
|
|
|
(5,309,611
|
)
|
|
|
–
|
|
|
|
(5,381,172
|
)
|
Segment assets
|
|
|
5,361,127
|
|
|
|
12,860,478
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
18,221,605
|
|
|
|
566,681
|
|
|
|
10,820,260
|
|
|
|
–
|
|
|
|
11,386,941
|
|
Purchase of assets
|
|
|
32,500
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
32,500
|
|
|
|
27,594
|
|
|
|
–
|
|
|
|
–
|
|
|
|
27,594
|
|
18.
|
Future Minimum Lease Payments:
|
The adoption of ASU 2016-02 will have a
significant impact on our balance sheet as we will record material assets and obligations primarily related to our corporate office
and equipment leases. We expect to record operating lease liabilities of approximately $375,000 based on the present value of the
remaining minimum rental payments using discount rates as of the effective date. We expect to record corresponding right-of-use
assets of approximately $350,000, based upon the operating lease liabilities adjusted for prepaid and deferred rent, unamortized
initial direct costs, liabilities associated with lease termination costs and impairment of right-of-use assets recognized in retained
earnings as of January 1, 2019. We do not expect a material impact on our statement of income or our statement of cash flows.
19.
|
Earnings per share (Basic and Dilutive):
|
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 following is a reconciliation of the
numerator and denominator used in the basic and diluted earnings per share ("EPS") calculations for the twelve months
December 31, 2018 and 2017.
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
948,915
|
|
|
$
|
(5,381,172
|
)
|
Less: Gain in fair value of derivative liabilities, net of interest expense for convertible notes
|
|
|
–
|
|
|
|
(14,459
|
)
|
Adjusted net income (loss)
|
|
$
|
948,915
|
|
|
$
|
(5,395,631
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock
|
|
|
25,121,896
|
|
|
|
22,991,137
|
|
Dilutive effect of warrants
|
|
|
2,647,461
|
|
|
|
–
|
|
Diluted weighted-average of common stock
|
|
|
27,769,357
|
|
|
|
22,991,137
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.04
|
|
|
|
(0.23
|
)
|
Diluted
|
|
|
0.03
|
|
|
|
(0.23
|
)
|
As of the filing date of this report,
there are no material subsequent events.