NOTES TO UNAUDITED CONDENSED INTERIM
FINANCIAL STATEMENTS
Organization and Nature of Operations
Business Description –
Business Activity
Medicine Man Technologies Inc. (the “Company”)
incorporated in Nevada on March 20, 2014. On May 1, 2014, the Company entered into an exclusive technology license agreement with
Medicine Man Denver, Inc., f/k/a Medicine Man Production Corporation, a Colorado corporation (“Medicine Man Denver”)
whereby Medicine Man Denver granted it a license to use all of their proprietary processes they have developed, implemented and
practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical marijuana
and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including trade
secrets, skills and experience (present and future) (the “Medicine Man Denver License Agreement”).
The Company commenced its business on May
1, 2014 and generated revenues from consulting activities for prospective clients interested in entering the cannabis industry
as well as sponsoring seminars offered to the cannabis industry and other business endeavors related to its core competencies.
In 2019, due to the changes in Colorado
law permitting outside investment, the Company made a strategic decision to move toward direct plant-touching operations. Following
that decision by executive leadership, the Company issued binding term sheets to several Colorado acquisition targets across the
value chain. It believes that these targets are high quality, and the Company’s successful acquisition of these potential
targets would allow it to become one of the largest vertically integrated seed-to-sale operators in the United States cannabis
industry. These term sheets were announced in several Current Reports on Form 8-K during 2019. If successfully completed, the Company,
post-transactions, will be able to offer retail, cultivation and extraction services. Management believes that the current company
combined with the acquisition targets in its Colorado “roll-up” strategy will have the potential to create a vertically
integrated company, which would further enjoy a competitive advantage operating in the Colorado market against incumbent operators.
In addition to the contemplated business-integration benefits, management believes the sharing of best practices amongst the Company
and the acquisition targets will allow for improved operations, revenue enhancements and increased profitability. Scale may also
afford the ability to create an integrated back office system, providing a differentiated technology backbone to support the Company’s
operations and enhance its overall management and operating capabilities. There can be no assurance that any of the proposed acquisitions
will be consummated.
On April 20, 2020, the Company rebranded
and conducts its business under the trade name, Schwazze. The corporate name of the Company continues to be Medicine Man Technologies,
Inc. Effective April 21, 2020, the Company commenced trading under the OTC ticker symbol SHWZ.
On April 20, 2020 the Company completed
its first acquisition of a Colorado plant touching entity, acquiring Mesa Organics, Ltd (“Mesa”) and its subsidiaries.
These four entities include a Manufacturing Infusing Products (MIP) facility and four dispensaries. All are located in Southeastern
Colorado. These acquisitions are included in our Products segment reporting.
1.
|
Liquidity and Capital Resources
|
During the quarters ending June 30, 2020
and 2019, 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 $5,418,317 and
$11,853,627 classified as cash and cash equivalents as of June 30, 2020, and December 31, 2019, respectively. The Company
anticipates it will need additional funds for the Star Buds acquisition and working capital and are exploring capital raising
transactions in the form of equity and debt.
The
Company maintains its cash balances with a high-credit-quality financial institutions. At times, such cash may be more than the
insured limit of $250,000. As of June 30, 2020 and December 31, 2019 respectively, the cash balance was $5,168,317 and $486,101
over the insured limit. The Company has not experienced any losses in such accounts, and management believes the Company is not
exposed to any significant credit risk on its cash and cash equivalents.
The following table depicts the composition
of the Company’s cash and cash equivalents as of June 30, 2020, and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Deposits placed with banks
|
|
$
|
5,418,317
|
|
|
$
|
736,101
|
|
United States Treasury Bills
|
|
|
–
|
|
|
|
11,117,526
|
|
Total cash and cash equivalents
|
|
$
|
5,418,317
|
|
|
$
|
11,853,627
|
|
2.
|
Critical Accounting Policies and Estimates
|
Management’s Representation
of Interim Financial Statements
The accompanying unaudited consolidated
financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed
or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management
are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and
recurring nature. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements at December 31, 2019 and 2018, as presented in
the Company’s Annual Report on Form 10-K filed on March 30, 2020 with the SEC.
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 financial statements.
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.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial
position.
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 June 30, 2020 and December 31, 2019, using quoted
prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable
inputs (Level 3):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Level 1 – Marketable Securities Available-for-Sale – Recurring
|
|
|
517,514
|
|
|
|
406,774
|
|
Marketable Securities at Fair Value
on a Recurring Basis
Certain assets are measured at fair value
on a recurring basis. The Level 1 position consists of an investment in equity securities held in Canada House Wellness Group,
Inc. (CHV), a publicly-traded company whose securities are actively quoted on the Toronto Stock Exchange. At both June 30, 2020
and December 31, 2019, the Company owned 17,650,540 shares of CHV common stock. The closing share price of CHV’s common stock
on June 30, 2020 was CAD$0.040 per share.
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.
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.
The following table depicts the composition
of our accounts receivable as of June 30, 2020, and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts receivable – trade
|
|
$
|
1,332,878
|
|
|
$
|
384,202
|
|
Accounts receivable – related party
|
|
|
124,856
|
|
|
|
72,658
|
|
Accounts receivable – litigation
|
|
|
3,063,968
|
|
|
|
3,063,968
|
|
Allowance for doubtful accounts
|
|
|
(41,796
|
)
|
|
|
(70,885
|
)
|
Total accounts receivable
|
|
$
|
4,479,906
|
|
|
$
|
3,449,943
|
|
The
Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables.
A considerable amount of judgment is required in assessing the amount of the allowance. The Company makes judgments about the creditworthiness
of each customer based on ongoing credit evaluations and monitors current economic trends that might impact the level of credit
losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments,
a specific allowance will be required. At June 30, 2020 and December 31, 2019, the Company recorded an allowance for doubtful accounts
of $41,796 and $70,885, respectively. During the six months ended June 30, 2020 and June 30, 2019, the Company recorded a bad debt
expense of $29,089 and $0, respectively.
Notes Receivable
On July 17, 2018, 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 Company agreed to provide a lending facility to AMC in CAD$125,000 increments of up to CAD$500,000.
The lending facility is for a term of 36 months and bears interest at a rate of 2%. As of June 30, 2020 and December 31, 2019,
the outstanding balance, including accrued interest, on the notes receivable with AMC totaled $292,101 and $241,711, respectively.
The Company classified these loans as noncurrent notes receivable on its consolidated balance sheets as of June 30, 2020 and December
31, 2019, respectively.
Other Assets (Current and Non-Current)
Other assets at June 30, 2020 and December
31, 2019 were $463,879 and $529,416, respectively. As of June 30, 2020, this balance included $422,000 in prepaid expenses and
$41,879 in security deposits. At December 31, 2019, other assets included $480,881 in prepaid expenses, $21,085 in interest receivable
and $27,450 in security deposits. Prepaid expenses were primarily comprised of insurance premiums, membership dues, conferences
and seminars, and other general and administrative costs.
Goodwill and Intangible Assets
Goodwill represents the future economic
benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising
from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets
consist of licensing agreements, product licenses and registrations, and intellectual property or trade secrets. Their estimated
useful lives range from 10 to 15 years.
Goodwill and indefinite-lived assets are
not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company
performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events
or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment
testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to
its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches.
The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the
reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting
unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the
discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest
rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s
size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal
value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use
key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting
unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair
value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair
value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value
of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the
reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired
on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in
an amount equal to the excess.
Determining the fair value of a reporting
unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic
plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions
made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions
and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value
assessment at December 31, 2019, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance
sheets and determined that no impairment exists. No additional factors or circumstances existed at June 30, 2020 that would indicate
impairment.
Long-Lived Assets
The Company evaluates the recoverability
of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived
asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows
of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value
of the assets, the assets are written down to the estimated fair value.
The Company evaluated the recoverability
of its long-lived assets on December 31, 2019 on its subsidiaries with material amounts on their respective balance sheets and
determined that no impairment exists. No additional factors or circumstances existed at June 30, 2020 that would indicate impairment.
Accounts Payable
Accounts payable at June 30, 2020 and December
31, 2019 were $2,808,718 and $699,961, respectively and were comprised of trade payables for various purchases and services rendered
during the ordinary course of business.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities
at June 30, 2020 and December 31, 2019 were $1,848,933 and $1,091,204, respectively. At June 30, 2020, this was comprised of customer
deposits of $81,441, accrued payroll of $961,891, and operating expenses of $805,601. At December 31, 2019, accrued expenses and
other liabilities was comprised of customer deposits of $148,109, accrued payroll of $714,220, and operating expenses of $228,875.
Revenue Recognition and Related Allowances
The Company adopted Accounting Standards
Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. The Company recognizes
revenues, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied
– at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five step analysis
outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue
when (or as) performance obligations are satisfied.
The Company’s 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
the criteria are met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded.
Revenue contracts are identified when accepted from customers and represent a single performance obligation to sell the Company’s
products to a customer.
The Company has three main revenue streams:
product sales; licensing and consulting fees; and other operating revenues from seminars, reimbursements and other miscellaneous
sources.
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,
the Company considers several indicators, including significant risks and rewards of products, its 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 licensing and consulting services
is recognized when the obligations to the client are fulfilled which is determined when milestones in the contract are achieved
and target harvest yields are exceeded. At June 30, 2020, all milestones for contracts were satisfactorily reached and no further
performance obligations were outstanding on contracts through the period.
Revenue from seminar fees is related to
one-day seminars and is recognized as earned upon the completion of the seminar. 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 the Company’s products and services.
General and 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 totaled $336,529 and $465,796 for the three and six months ended June 30, 2020, respectively, as compared to $73,088
and $128,489, respectively, for the three and six months ended June 30, 2019.
Stock Based Compensation
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and Emerging Issues Task Force (“EITF”)
96-18 when stock or options are awarded for previous or current service without further 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.
On June 20, 2018, the FASB issued ASU 2018-07
which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of
the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.
Previously, share-based payment arrangements to nonemployees were accounted for under ASC 718, while nonemployee share-based payments
issued for goods and services were accounted for under ASC 505-50. Before the amendment, the major difference for the Company (but
not limited to) was the determination of measurement date, which generally is the date on which the measurement of equity classified
share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified
nonemployee share-based payment awards are no longer measured at the earlier of the date which a commitment for performance by
the counterparty is reached or the date at which the counterparty’s performance is complete. They are now measured at the
grant date of the award, which is the same as share-based payments for employees. The Company adopted the requirements of the new
rule as of January 1, 2019, the effective date of the new guidance.
The Company recognized $3,109,091 and $4,361,822 in expense
for stock-based compensation from common stock options issued to employees during the three and six months ended June 30, 2020,
and $2,225,406 and 2,980,406 in expenses for stock-based compensation from the issuance of common stock to employees, officers,
directors and/or contractors during the three and six months ended June 30, 2019.
Income Taxes
ASC 740, Income Taxes requires the use
of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC 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.
Right of Use Assets and Lease Liabilities
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). The standard requires lessees to recognize almost all leases on the balance sheet as a Right-of-Use
(“ROU”) asset and a lease liability and requires leases to be classified as either an operating or a finance type lease.
The standard excludes leases of intangible assets or inventory. The standard became effective for the Company beginning January
1, 2019. The Company adopted ASC 842 using the modified retrospective approach, by applying the new standard to all leases existing
at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are
presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical
accounting under ASC 840. The Company elected the package of practical expedients permitted under the standard, which also allowed
the Company to carry forward historical lease classifications. The Company also elected the practical expedient related to treating
lease and non-lease components as a single lease component for all equipment leases as well as electing a policy exclusion permitting
leases with an original lease term of less than one year to be excluded from the ROU assets and lease liabilities.
Under ASC 842, the Company determines if
an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value
of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable
at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company estimated the incremental
borrowing rate in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to
commencement and is recorded net of any lease incentives received. The Company’s lease terms may include options to extend
or terminate the lease when it is reasonably certain that the Company will exercise such options.
Operating leases are included in operating
lease Right-of-Use assets and operating lease liabilities, current and non-current, on the Company's consolidated balance sheets.
Basic and Diluted Net Income (Loss)
Per Share
The Company computes net income (loss)
per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic
and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income
(loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the
period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock
method and convertible preferred stock using the if-converted method. These potential dilutive shares include 3,474,500 shares
from vested stock options and 9,987,500 stock purchase warrants. In computing diluted EPS, the average stock price for the period
is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS
excludes all dilutive potential shares if their effect is anti-dilutive.
3.
|
Recent Accounting Pronouncements
|
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations except
as noted below:
FASB ASU 2017-01, Clarifying the Definition
of a Business (Topic 805) – In January 2017, the FASB issued 2017-01. 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 did not have a significant impact on the Company’s consolidated
results of operations, cash flows and financial position.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including
requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes
in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies
with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this
amendment on its consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases
(Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13
and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15,
2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate
a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its
consolidated financial statements.
4.
|
Property and Equipment
|
Property and equipment are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Furniture and fixtures
|
|
$
|
129,927
|
|
|
$
|
98,903
|
|
Leasehold improvements
|
|
|
84,679
|
|
|
|
40,953
|
|
Machinery and tools
|
|
|
1,947,949
|
|
|
|
34,000
|
|
Office equipment
|
|
|
75,848
|
|
|
|
33,833
|
|
Software
|
|
|
110,677
|
|
|
|
–
|
|
Work in process
|
|
|
884,067
|
|
|
|
190,743
|
|
|
|
$
|
3,233,147
|
|
|
$
|
398,432
|
|
Less: Accumulated depreciation
|
|
|
(670,535
|
)
|
|
|
(159,354
|
)
|
Total property and equipment, net of depreciation
|
|
$
|
2,562,612
|
|
|
$
|
239,078
|
|
Depreciation on equipment is provided on
a straight-line basis over its expected useful lives at the following annual rates.
Furniture and fixtures
|
3 years
|
Leasehold improvements
|
Lesser of the lease term or estimated useful life
|
Machinery and tools
|
3 years
|
Office equipment
|
3 years
|
Software
|
3-5 years
|
Depreciation expense for the three and
six months ended June 30, 2020 was $86,510 and $90,974, respectively, compared to $14,966 and $25,617, respectively, for the three
and six months ended June 30, 2019.
Intangible assets
at June 30, 2020 and December 31, 2019 were comprised of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
License agreement
|
|
$
|
5,300
|
|
|
$
|
5,300
|
|
Product license and registration
|
|
|
57,300
|
|
|
|
57,300
|
|
Trade secret – intellectual property
|
|
|
32,500
|
|
|
|
32,500
|
|
Subtotal
|
|
$
|
95,100
|
|
|
$
|
95,100
|
|
Less: accumulated amortization
|
|
|
(23,106
|
)
|
|
|
(19,811
|
)
|
Total intangible assets, net of amortization
|
|
$
|
71,994
|
|
|
$
|
75,289
|
|
Amortization expense for the three and
six months ended June 30, 2020 was $1,647 and $3,295, respectively, compared to $1,729 and $3,425, respectively, for the three
and six months ended June 30, 2019.
In 2019, the Company entered into certain
employment agreements with key officers that contained contingent consideration provisions based upon the achievement of certain
market condition milestones. The Company determined that each of these vesting conditions represented derivative instruments.
On January 8, 2019, the Company granted
the right to receive 500,000 shares of restricted common stock to an officer and director, which will vest at such time that the
Company’s stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
On April 23, 2019, the Company granted
the right to receive 1,000,000 shares of restricted common stock to an officer and director, which will vest at such time that
the Company’s stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds. On
February 25, 2020, the director resigned from his remaining positions with the Company and forfeited his right to the contingent
consideration. As a result, the Company recorded a gain of $1,462,636 as a component of other income (expense), net on its financial
statements.
On June 11, 2019, the Company granted the
right to receive 1,000,000 shares of restricted common stock to an officer, which will vest at such time that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
The Company accounts for derivative instruments
in accordance with the US GAAP accounting guidance under ASC 815, Derivatives and Hedging Activities. The Company estimated
the fair value of these derivatives at the respective balance sheet dates using the Black-Scholes option pricing model based upon
the following inputs: (i) stock price on the date of grant ranging between $1.32 - $3.75, (ii) the contractual term of the derivative
instrument ranging between 2.25 - 3 years, (iii) a risk-free interest rate ranging between 1.56% - 2.57% and (iv) an expected volatility
of the price of the underlying common stock ranging between 136% - 158%.
As of June 30, 2020, the fair value of
these derivative liabilities is $1,467,318. The change in the fair value of derivative liabilities for the three months ended June
30, 2020 was $(348,535), resulting in an aggregate unrealized loss on derivative liabilities. The change in the fair value of the
derivative liabilities for the six months ended June 30, 2020 was 843,428, resulting in an aggregated unrealized gain on derivative
liabilities.
7.
|
Related Party Transactions
|
During the year ended December 31, 2019,
the Company’s Chief Cultivation Officer, Joshua Haupt, who currently owns 20% of both Super Farm and De Best, was an Officer
of the Company and therefore a related party. Effective December 4, 2019, he was no longer an Officer and therefore no longer a
related party. As such, he is not included as a related party with respect to sales and accounts receivable to Super Farm or De
Best during the period ended June 30, 2020.
During the six months ended June 30, 2020,
the Company had sales from Medicine Man Denver totaling $170,106. There were no sales discounts during the six months ended June
30, 2020. As of June 30, 2020, the Company had an accounts receivable balance with Medicine Man Denver totaling $83,679. The Company’s
former Chief Executive Officer, Andy Williams, maintains an ownership interest in Medicine Man Denver.
During the six months ended June 30, 2020,
the Company did not record any sales from MedPharm Holdings LLC (“MedPharm Holdings”). As of June 30, 2020, the Company
had a net accounts receivable balance with MedPharm Holdings totaling $3,326. Also, during the year ended December 31, 2019, the
Company issued various notes receivable to MedPharm Holdings totaling $767,695 with original maturity dates ranging from September
21, 2019 through January 19, 2020 and bearing interest between 8-10% per annum. All notes extended to July 2020 by mutual agreement
between the Company and noteholder. The Company’s former Chief Executive Officer, Andy Williams, maintains an ownership interest
in MedPharm Holdings.
During the six months ended June 30, 2020,
the Company did not record any sales from Baseball 18, LLC (“Baseball”), Farm Boy, LLC (“Farm Boy”), Emerald
Fields LLC (“Emerald Fields”), or Los Sueños Farms (Los Sueños). During the six months ended June 30,
2020, the Company had a net accounts payable balance of $156,318 with Baseball, $245,953 with Farm Boy, $114,838 with Emerald Fields,
and $51,237 with Los Sueños. One of the Company’s former directors, Robert DeGabrielle, owns the Colorado retail marijuana
cultivation licenses for Farm Boy, Emerald Fields and Baseball, all doing business as Los Sueños Farms.
On May 20, 2020, the Company entered into
a second amendment (the “Amendment”) to that certain securities purchase agreement (the “Agreement”) dated
as of June 5, 2019 by and between the Company and Dye Capital Cann Holdings, LLC, a Delaware limited liability company (the “Investor”
and together with the Company the “Parties”) as described in a Current Report on Form 8-K filed with the Securities
and Exchange Commission (the “SEC”) on June 6, 2019, as amended by the first amendment to the Agreement dated as of
July 15, 2019 (the “First Amendment”) and as described in a Current Report on Form 8-K filed with the SEC on July
17, 2019. The Agreement, as amended by the First Amendment, contemplated, among other things, the sale by the Company to the Investor
in three separate tranches of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”),
together with warrants to purchase the number of shares of Common Stock purchased in each tranche closing (the “Warrants”).
At the time of the closing of the initial transactions contemplated in the Agreement, Justin Dye, principal of the Purchaser,
became a Director and Chief Executive Officer of the Company; the Purchaser is currently the Company’s largest shareholder
and Mr. Dye has voting and dispositive power over the securities held by the Purchaser. The Amendment provides, pursuant to the
terms and subject to the conditions set forth therein, that in addition to the shares of Common Stock and Warrants previously
purchased by the Investor in connection with the Agreement as amended by the First Amendment, the Investor shall purchase in a
private placement 187,500 shares of Common Stock at a price of $2.00 per share together with 187,500 Warrants at an exercise price
of $3.50 per share (the “Transaction”). The Transaction closed on May 21, 2020.
As of June 30, 2020, and December 31, 2019,
respectively, the Company had $1,977,572 and $684,940 of inventory. At December 31, 2019 all inventory was finished goods inventory.
At June 30, 2020, $849,153 was finished goods inventory and $1,128,419 was raw materials. The Company uses the FIFO inventory valuation
method. As of June 30, 2020 and December 31, 2019, the Company did not recognize any impairment for obsolescence within its inventory.
On April 20, 2020, the Company closed the
acquisition of Mesa Organics, Ltd (“Mesa”). The aggregate purchase price after working capital adjustments was $2,609,500
of cash and 2,554,750 shares of the Company’s common stock, par value $0.001 per share. The Company accounted for the
transaction utilizing purchase price accounting stating that the book value approximates the fair market value of the assets acquired.
The purchase price accounting resulted in the Company valuing the investment as $5,141,537 of goodwill. The purchase price allocation
is preliminary. The purchase price allocation will continue to be preliminary until a third-party valuation is finalized and the
fair value and useful life of the assets acquired is determined. The amounts from the final valuation may significantly differ
from the preliminary allocation.
The following table sets forth the changes
in the carrying value of the Company’s goodwill at June 30, 2020 and December 31, 2019:
Balance, December 31, 2019
|
|
|
$
|
12,304,306
|
|
Acquisition of Mesa
|
|
|
|
5,141,537
|
|
Balance, June 30, 2020
|
|
|
$
|
17,445,843
|
|
Leases with an initial term of 12 months
or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease
term. Leases with a term greater than one year are recognized on the balance sheet at the time of lease commencement or modification
of a right of use (“ROU”) operating lease asset and a lease liability, initially measured at the present value of the
lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line basis. ROU assets represent
our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising
from the lease.
The Company's leases consist of real estate
leases for office, commercial retail, and storage spaces. The Company elected to combine the lease and related non-lease components
for its operating leases.
The Company’s operating leases
include options to extend or terminate the lease, which are not included in the determination of the ROU asset or lease
liability unless reasonably certain to be exercised. The Company's operating leases have remaining lease terms of three to
five years. The Company’s lease agreements do not contain any material residual value guarantees or material
restrictive covenants.
As the Company's leases do not provide
an implicit rate, we used an incremental borrowing rate based on the information available at the lease commencement date in determining
the present value of lease payments. The discount rate used in the computation is 6%.
Balance Sheet Classification of Operating Lease Assets
and Liabilities
|
|
Balance Sheet Line
|
|
June 30, 2020
|
|
Asset
|
|
|
|
|
|
Operating lease right of use assets
|
|
Noncurrent assets
|
|
$
|
1,747,109
|
|
Liabilities
|
|
|
|
|
|
|
Lease liabilities
|
|
Noncurrent liabilities
|
|
$
|
1,770,742
|
|
Lease Costs
The table below summarizes the components of lease costs for
the six months ended June 30, 2020.
|
|
Six Months Ended
June 30, 2020
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
101,568
|
|
Maturities of Lease Liabilities
Maturities of lease liabilities as of June
30, 2020 are as follows:
2020 fiscal year
|
|
$
|
1,793,866
|
|
Less: Interest
|
|
|
(23,124
|
)
|
Present value of lease liabilities
|
|
$
|
1,770,742
|
|
The following table presents the Company’s future minimum
lease obligation under ASC 840 as of June 30, 2020:
2020 fiscal year
|
|
$
|
225,732
|
|
2021 fiscal year
|
|
|
451,464
|
|
2022 fiscal year
|
|
|
451,464
|
|
2023 fiscal year
|
|
|
410,232
|
|
2024 fiscal year
|
|
|
369,000
|
|
2025 fiscal year
|
|
|
123,000
|
|
Total
|
|
$
|
2,030,892
|
|
11.
|
Commitments and Contingencies
|
Binding Term Sheets to Acquire Certain
Businesses
Over the past three years, the Company
has supported legislation in Colorado to allow licensed cannabis companies in Colorado to trade their securities, provided they
are reporting companies under the Exchange Act, as amended. HB19-1090 titled, “Publicly Licensed Marijuana Companies”
was signed into law on May 29, 2019 and went into effect on November 1, 2019. The bill repeals the provision that prohibits publicly
traded corporations from holding a marijuana license in Colorado.
Effective January 10, 2019, the Company
entered into binding term sheets to acquire three cannabis and cannabis related companies, including the following:
|
·
|
FutureVision 2020, LLC and FutureVision Ltd., Inc. dba Medicine
Man Denver (in the aggregate, “Medicine Man Denver”), owners of several licensed dispensaries and a cultivation
facility in the Denver, Colorado metro area. It is also a leading cultivator, retailer and one of the best-known brands in
the cannabis sector, winning over a dozen industry awards. Medicine Man Denver operates out of a 35,000 square foot
cultivation operation and has four popular retail locations across the Denver metropolitan area. This term sheet expires on August 31, 2020 and the Company communicated
it was terminating the term sheet on Friday, August 14, 2020;
|
|
·
|
MedPharm Holdings, a company that develops and manages intellectual property related to the manufacture and formulation of products containing cannabinoid extracts. Management believes that this acquisition will bring world-class processing and pharmaceutical-grade products to the company; and
|
|
·
|
MX LLC, the holder of the license that allow it to be a manufacturer of marijuana infused products in the Denver metro area. It also has a research license that has been issued by the state of Colorado and the local jurisdiction approval is in process.
|
The term sheets provide for the issuance
of shares of common stock to the targets at an initial price per share of $1.32, with the final price to be determined based on
the fair market valuation, which is subject to an independent valuation assessment. The Company’s former Chief Executive
Officer, Andrew Williams, serves as an officer/manager and has an ownership interest in each of the targets above.
On August 15, 2019, the Company entered
into a binding term sheet with Medically Correct, LLC (“Medically Correct”), an edible, extract and topical company,
setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Medically Correct. As consideration,
the Company shall pay a total purchase price of $17,250,000 consisting of $3,450,000 cash and 4,677,967 shares of its common stock,
par value $0.001 per share. The 4,677,967 shares were determined by averaging the closing price of Company’s common stock
for the five (5) days prior to August 8, 2019.
On September 5, 2019, the Company entered
into a binding term sheet dated September 2, 2019 with RSFCG, LLC, RFSCA LLC, RFSCB, LLC, RFSCEV, LLC, RFSCED LLC, RFSCLV, LLC,
RFSCG-1 LLC, and RFSCLVG LLC, which entities operate under the name Roots RX (“Roots RX”) pursuant to which the Company
will purchase the membership interests of Roots RX. As consideration, the Company shall pay a total purchase price of $15,000,000
consisting of $9,750,000 in cash and 1,779,661 shares of its common stock, par value $0.001 per share. The 1,779,661 shares were
determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 29, 2019.
On September 9, 2019, the Company entered
into a binding term sheet with Canyon, LLC (“Canyon”) and It Brand Enterprises, LLC (“It Brand”) pursuant
to which the Company will purchase 100% of the capital stock or assets of Canyon and certain assets of It Brand. As consideration,
the Company shall pay a total purchase price of $5,130,000 consisting of (i) a cash component which in no case will be greater
than $2,565,000, and (ii) an equity component, which will consist of shares of the Company’s common stock, par value $0.001
per share, for the balance of the purchase price. The number of shares that make up the equity component will be determined by
dividing the balance of the Purchase Price by the average closing price of Company’s common stock for the five (5) days prior
to September 7, 2019.
Definitive Agreement to Acquire the
Colorado-Based Star Buds Branded Dispensaries
On June 5, 2020, the Company and SBUD,
LLC, a Colorado limited liability company and wholly owned subsidiary of the Company (the “Purchaser”) entered into
thirteen separate purchase agreements (each individually the “CHC Agreement” the “Citi Agreement” the
“Lucky Agreement” the “Kew Agreement” the “Aurora Agreement” the “Arapahoe Agreement”
the “Alameda Agreement” the “44th Agreement” the “Pueblo Agreement” the “Louisville
Agreement” the “Niwot Agreement” the “Longmont Agreement” and the “Commerce City Agreement,”
and collectively the “Agreements”) together with each of Colorado Health Consultants, LLC, CitiMed, LLC, Lucky Ticket
LLC, Kew LLC, SB Aurora LLC, SB Arapahoe LLC, SB Alameda LLC, SB 44th LLC, Star Buds Pueblo LLC, Star Buds Louisville LLC, Star
Buds Niwot LLC, Star Buds Longmont LLC, and Star Buds Commerce City LLC (any one a “Star Buds Company” and collectively
the “Star Buds Group”) whereby the Purchaser agreed to purchase substantially all of the assets of the Star Buds Group
from each individual Star Buds Company pursuant to the Agreements (the “Purchase”). As previously disclosed in a Current
Report on Form 8-K filed September 3, 2019, the Company and the Star Buds Group entered into a binding term sheet whereby the
Company agreed to purchase the membership interests of each member of each Star Buds Company (the “Proposed Transaction”);
the Agreements were entered into in lieu of the Proposed Transaction.
The aggregate purchase price for the assets
of the Star Buds Group is approximately $118 million, subject to adjustment upon the closing of the Purchase based on, among other
things, the target inventory as opposed to actual inventory and target working capital as opposed to net working capital of each
member of the Star Buds Group, and shall be payable to the Star Buds Group and the members a mix of cash and shares of the Company’s
common stock, par value $0.001 per share (the “Purchase Price”). The Purchaser will not assume any liabilities of
the Star Buds Group other than accounts payable by Star Buds Group, liabilities in respect of any contractual arrangements assigned
to the Purchaser by the Star Buds Group, and liabilities in connection with administrative fees associated with obtaining necessary
governmental approvals or waivers of such approvals. The Purchaser has also agreed to pay certain transfer taxes in connection
with the Purchase. The closing of the Purchase is subject to customary closing terms and conditions, and the closing of the purchase
of the assets by the Purchaser of any Star Buds Company is subject to additional closing conditions as set forth in the Agreements.
Prepaid acquisition costs
The Company has entered into a number of
sales transactions with companies above for which it has executed binding term sheets to acquire. The Company expects to settle
each of these outstanding balances with the respective entity at the time of, or shortly following, their acquisition.
The contemplated acquisitions detailed
above are conditioned upon the satisfaction or mutual waiver of certain closing conditions, including, but not limited to:
|
·
|
regulatory approval relating to all applicable filings and expiration or early termination of any applicable waiting periods;
|
|
·
|
regulatory approval of the Marijuana Enforcement Division and applicable local licensing authority approval;
|
|
·
|
receipt of all material necessary, third party, consents and approvals;
|
|
·
|
each party's compliance in all material respects with the respective obligations under the term sheet;
|
|
·
|
a tax structure that is satisfactory to both the Company and the targets;
|
|
·
|
the execution of leases and employment agreements that are mutually acceptable to each party; and
|
|
·
|
the execution of definitive agreements between the respective parties.
|
There can be no assurance that the Company
will be able to consummate any of the proposed acquisitions.
Departure of Officers
On February 25, 2020, Andy Williams resigned
from the positions of President and member of the Board of Directors of the Company. Mr. Williams’s resignation was not the
result of any disagreement with the Company on any matter relating to the company’s operations, policies or practices. Simultaneously,
the Company entered into a Severance Agreement and Release (the “Severance Agreement”) with Mr. Williams.
The Severance Agreement provides that as
severance and in consideration of a customary release against the Company and other customary covenants, Mr. Williams will receive
(i) continued salary in the amount of $300,000, half of which to be paid within ten days of the execution of the Severance Agreement,
and the remaining half is to be paid in 26 equal disbursements in accordance with the Company’s regular payroll periods,
(ii) bonus payment in the amount of $25,000, (iii) one year family health care coverage, (iv) stock options to purchase 350,000
shares of the Company’s common stock, which may be exercised on a cashless basis and which vest immediately on the date of
termination at a price of $1.80 per share and valued at $582,228, and (v) stock options to purchase 15,000 shares of the Company’s
common stock, which may be exercised on a cashless basis at a price of $1.80 per share, valued at $27,000, at the one year anniversary
of the termination date if Mr. Williams is compliant with the terms of the Severance Agreement.
On June 19, 2020, the Company received the resignation of Robert
DeGabrielle from the positions of Chief Operating Officer and member of the Board of Directors of the Company. Mr. DeGabrielle’s
resignation was not the result of any disagreement with the Company on any matters relating to the Company’s operations,
policies, or practices.
On December 10, 2019, the shareholders
approved an amendment to the Company’s articles of incorporation increasing the number of authorized shares of common stock
from 90,000,000 shares to 250,000,000 shares.
The Company is authorized to issue two
classes of shares, designated preferred stock and common stock.
Preferred Stock
The number of shares of preferred stock
authorized is 10,000,000, par value $0.001 per share. The preferred stock may be divided into such number of series as the Company’s
Board of Directors may determine. The Board is authorized to determine and alter the rights, preferences, privileges and restrictions
granted and imposed upon any wholly unissued series of preferred stock, and to fix the number and designation of shares of any
series of preferred stock. The Board, within limits and restrictions stated in any resolution of the Board, originally fixing the
number of shares constituting any series may increase or decrease, but not below the number of such series then outstanding, the
shares of any subsequent series.
Common Stock
The Company is authorized to issue 250,000,000
shares of common stock at a par value of $0.001 and had 42,194,878 shares of common stock issued and 41,937,146 shares of common
stock outstanding as of June 30, 2020, and 39,952,628 shares of common stock issued and outstanding as of December 31, 2019.
Common Stock Issued in Connection
with the Exercise of Warrants
During
the six months ended June 30, 2019, the Company issued 452,426 shares of common stock for proceeds of $601,725 under a series of
stock warrant exercises with an exercise price of $1.33 per share.
During the six months ended June 30, 2020,
the Company issued 187,500 shares of common stock for proceeds of $375,000 under a series of stock warrant exercises with an exercise
price of $2.00 per share.
Common Stock Issued as Compensation
to Employees, Officers, Directors and Contractors
On January 8, 2019, the Company granted
to an officer of the Company, Paul Dickman, 500,000 shares of common stock, valued at $660,000.
On March 14, 2019, the Company granted
50,000 shares of common stock to James Toreson upon his resignation as a member of its board of directors for his service. These
shares were valued at $95,000. Concurrent with his resignation, the Company issued 50,000 shares of its common stock to Mr. Toreson
in connection with a consulting agreement having a service period extending through May 31, 2020. These shares were valued at $95,000.
On April 3, 2020, the Company cancelled
500,000 shares of common stock, with vesting conditions represented as derivative instruments. These shares were incorrectly issued
as restricted shares instead of restricted stock units to an officer of the Company, Paul Dickman, on January 8, 2019. The return
of these shares had no impact on EPS for the quarter ended June 30, 2020.
Common Stock Issued as Payment for
Acquisition
On April 20, 2020, the Company issued 2,554,750
shares of common stock valued at $4,167,253 for the acquisition of Mesa Organics, Ltd.
Warrants
The Company accounts for common stock purchase
warrants in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock, Distinguishing Liabilities from Equity. The Company estimates the fair value of warrants at date
of grant using the Black-Scholes option pricing model. 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 year ended December 31, 2019,
the Company issued 9,800,000 common stock purchase warrants to various accredited investors with an exercise price of $3.50 per
share with an expiration date of three years from the date of issuance. On May 20, 2020, the Company issued an additional 187,500
common stock purchase warrants with an exercise price of $3.50 per share with an expiration date of three years from the date of
issuance. The Company estimated the fair value of these warrants at date of grant using the Black-Scholes option pricing model
using the following inputs: (i) stock price on the date of grant of $3.50, (ii) the contractual term of the warrant of 3 years,
(iii) a risk-free interest rate ranging between 0.21% - 1.84% and (iv) an expected volatility of the price of the underlying common
stock ranging between 158% - 173%.
The following table reflects the change
in common stock purchase warrants for the six months ended June 30, 2020. All stock warrants are exercisable for a period of three
years from the date of issuance.
|
|
Number of shares
|
|
|
|
|
|
Balance as of January 1, 2020
|
|
|
9,800,000
|
|
Warrants exercised
|
|
|
–
|
|
Warrants forfeited
|
|
|
–
|
|
Warrants issued
|
|
|
187,500
|
|
Balance as of June 30, 2020
|
|
|
9,987,500
|
|
The Company has three identifiable segments
as of June 30, 2020; (i) products, (ii) consulting and licensing and (iii) corporate, infrastructure and other. The products segment
sells merchandise directly to customers via e-commerce portals, through the Company’s proprietary websites and retail location.
The licensing and consulting segment sales derives its revenue from licensing and consulting agreements with cannabis related entities,
in addition to fees from seminars and expense reimbursements included in other revenue on the Company’s financial statements.
The corporate, infrastructure and other segment represents new resources added in anticipation of various acquisition transactions
and other corporate related costs.
The following information represents segment
activity for the three-month periods ended June 30, 2020 and June 30, 2019:
|
|
For
the Three Months Ended
|
|
|
For
the Three Months Ended
|
|
|
|
30-June-2020
|
|
|
30-June-2019
|
|
|
|
Products
|
|
|
Consulting
and Licensing
|
|
|
Corporate,
Infrastructure and Other
|
|
|
Total
|
|
|
Products
|
|
|
Consulting
and Licensing
|
|
|
Corporate,
Infrastructure and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,838,654
|
|
|
$
|
585,675
|
|
|
$
|
–
|
|
|
$
|
5,424,329
|
|
|
$
|
1,301,735
|
|
|
$
|
456,084
|
|
|
$
|
–
|
|
|
$
|
1,757,819
|
|
Cost of goods and services
|
|
$
|
(2,833,244
|
)
|
|
$
|
(273,442
|
)
|
|
$
|
–
|
|
|
$
|
(3,106,686
|
)
|
|
$
|
(319,229
|
)
|
|
$
|
(767,184
|
)
|
|
$
|
–
|
|
|
$
|
(1,086,412
|
)
|
Gross profit
|
|
$
|
2,005,410
|
|
|
$
|
312,233
|
|
|
$
|
–
|
|
|
$
|
2,317,643
|
|
|
$
|
982,506
|
|
|
$
|
(311,100
|
)
|
|
$
|
–
|
|
|
$
|
671,406
|
|
Intangible assets amortization
|
|
$
|
1,514
|
|
|
$
|
133
|
|
|
$
|
–
|
|
|
$
|
1,647
|
|
|
$
|
1,597
|
|
|
$
|
132
|
|
|
$
|
–
|
|
|
$
|
1,729
|
|
Depreciation
|
|
$
|
79,809
|
|
|
$
|
6,701
|
|
|
$
|
–
|
|
|
$
|
86,510
|
|
|
$
|
1,700
|
|
|
$
|
13,266
|
|
|
$
|
–
|
|
|
$
|
14,966
|
|
Income (loss) from operations
|
|
$
|
925,258
|
|
|
$
|
313,028
|
|
|
$
|
(7,833,993
|
)
|
|
$
|
(6,595,707
|
)
|
|
$
|
237,239
|
|
|
$
|
(197,465
|
)
|
|
$
|
(8,862,424
|
)
|
|
$
|
(8,822,650
|
)
|
Segment assets
|
|
$
|
9,578,911
|
|
|
$
|
(6,240,425
|
)
|
|
$
|
2,645,188
|
|
|
$
|
5,983,674
|
|
|
$
|
222,826
|
|
|
$
|
(9,269,203
|
)
|
|
$
|
12,646,902
|
|
|
$
|
3,600,525
|
|
The following information represents segment
activity for the six-month periods ended June 30, 2020 and June 30, 2019:
|
|
For
the Six Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
30-June-20
|
|
|
30-June-19
|
|
|
|
|
Products
|
|
|
|
License/Cons.
|
|
|
|
Corporate
Infrastructure and Other
|
|
|
|
Total
|
|
|
|
Products
|
|
|
|
License/Cons.
|
|
|
|
Corporate Infrastructure and Other
|
|
|
|
Total
|
|
Revenues
|
|
|
7,367,585
|
|
|
|
1,259,878
|
|
|
|
–
|
|
|
|
8,627,463
|
|
|
|
2,880,042
|
|
|
|
881,253
|
|
|
|
–
|
|
|
|
3,761,295
|
|
COGS
|
|
|
(4,729,470
|
)
|
|
|
(525,751
|
)
|
|
|
–
|
|
|
|
(5,255,221
|
)
|
|
|
(1,729,670
|
)
|
|
|
(955,455
|
)
|
|
|
–
|
|
|
|
(2,685,125
|
)
|
Gross profit
|
|
|
2,638,115
|
|
|
|
734,127
|
|
|
|
|
|
|
|
3,372,242
|
|
|
|
1,150,372
|
|
|
|
(74,202
|
)
|
|
|
–
|
|
|
|
1,076,170
|
|
Intangible assets amortization
|
|
|
3,027
|
|
|
|
268
|
|
|
|
–
|
|
|
|
3,295
|
|
|
|
3,160
|
|
|
|
265
|
|
|
|
–
|
|
|
|
3,425
|
|
Depreciation
|
|
|
81,041
|
|
|
|
9,933
|
|
|
|
–
|
|
|
|
90,974
|
|
|
|
3,400
|
|
|
|
22,217
|
|
|
|
–
|
|
|
|
25,617
|
|
Income (loss) from operations
|
|
|
1,371,757
|
|
|
|
467,455
|
|
|
|
(9,814,229
|
)
|
|
|
(7,975,017
|
)
|
|
|
179,552
|
|
|
|
(394,681
|
)
|
|
|
(11,519,339)
|
|
|
|
(11,734,468
|
)
|
Segment assets
|
|
|
22,513,985
|
|
|
|
247,170
|
|
|
|
13,251,810
|
|
|
|
36,012,965
|
|
|
|
5,435,508
|
|
|
|
287,359
|
|
|
|
15,642,009
|
|
|
|
21,364,876
|
|
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 recorded no tax provision as
of June 30, 2020. As of June 30, 2020, the Company had federal, state and local net operating loss carryforwards of approximately
$10.2 million that are available to offset future liabilities for income taxes. The Company has generally established a valuation
allowance against these carryforwards based on an assessment that it is more likely than not that these benefits will not be realized
in future years. The federal and state net operating loss carryforwards expire in 2039.
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to June 30, 2020 to the date these consolidated financial statements
were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial
statements, except as follows:
Termination of Proposed Acquisitions
On July 1, 2020, the
Company terminated the binding term sheet (the “Dabble Term Sheet”) with Cold Baked, LLC and Golden Works, LLC (d/b/a
“Dabble”), each a Colorado limited liability company, which term sheet had set forth the terms of the acquisition by
the Company of 100% of the capital stock and assets of Dabble. The Dabble Term Sheet was previously described in the Company’s
Current Report on Form 8-K filed on August 12, 2019, and incorporated herein by reference.
On July 1, 2020, the
Company terminated the binding term sheet (the “Los Suenos Term Sheet”) with Los Suenos, LLC (“Los Suenos”)
and Emerald Fields Grow, LLC (“Emerald”), each a Colorado limited liability company, which term sheet had set forth
the terms of the acquisition by the Company of 100% of the capital stock and assets of Los Suenos and Emerald, respectively. The
Los Suenos Term Sheet was previously described in the Company’s Current Report on Form 8-K filed on June 6, 2019, and incorporated
herein by reference.
On July 1, 2020, the
Company terminated the binding term sheet (the “Farm Boy Term Sheet”) with Farm Boy, LLC (“Farm Boy”) and
Baseball 18, LLC (“Baseball”), each a Colorado limited liability company, which term sheet had set forth the terms
of the acquisition by the Company of 100% of the capital stock and assets of Farm Boy and Baseball, respectively. The Farm Boy
Term Sheet was previously described in the Company’s Current Report on Form 8-K filed on June 6, 2019, and incorporated herein
by reference.
On July 27, 2020,
the Company received notice of termination from Medically Correct, LLC (“MC”) terminating the term sheet to acquire
MC. The term sheet was previously described in the Company’s Current Report on Form 8-K filed on August 20, 2019, and incorporated
herein by reference.
On August 14, 2020
the Company terminated the term sheet with FutureVision 2020, LLC and FutureVision Ltd., Inc. dba Medicine Man Denver (in the
aggregate, “Medicine Man Denver”), owners of several licensed dispensaries and a cultivation facility in the Denver,
Colorado metro area. But for the termination on August 14, 2020, the Medicine Man Denver term sheet would have expired on August
31, 2020.
Note Receivable
On August 1, 2020,
the Company entered into a Settlement Agreement and Mutual Release (“Settlement Agreement”) with MedPharm Holdings,
Inc. The Parties agreed that the amount of the settlement is $767,695 in principal and $47,161 in accrued interest, thru July 31,
2020. The Company received a $100,000 payment from MedPharm, which was to be paid by August 1, 2020. In addition to the immediate
$100,000 principal payment, Andrew Williams, a member of the MedPharm Board of Directors, will deliver and transfer to Schwazze
175,000 shares of Schwazze common stock as equity consideration by August 15, 2020 at a price of $1.90 per share. The remaining
outstanding receivable will be paid out in bi-weekly installments of product by scheduled deliveries through March 31, 2021.