NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL
STATEMENTS
Organization and Nature of Operations
Medicine Man Technologies, Inc. (“we,”
“us,” “our” or the “Company”) was incorporated in Nevada on March 20, 2014. On May 1, 2014, we entered
into a non-exclusive Technology License Agreement with Futurevision, Inc., f/k/a Medicine Man Production Corp., dba Medicine Man Denver
(“Medicine Man Denver”) pursuant to which Medicine Man Denver granted us a license to use all of the proprietary processes
that they had developed, implemented and practiced at their cannabis facilities relating to the commercial growth, cultivation, marketing
and distribution of medical and recreational marijuana pursuant to relevant state laws and the right to use and to license such information,
including trade secrets, skills and experience (present and future) (the “License Agreement”) for 10 years.
In 2017, the Company acquired additional cultivation
intellectual property through the acquisition of Success Nutrients™ and Pono Publications, including the rights to the book titled
“Three A Light” and its associated cultivation techniques, which have been part of the Company’s products and services
offerings since the acquisition. The Company acquired Two J’s LLC d/b/a The Big Tomato (“The Big Tomato”) in
2018, which operates a retail location in Aurora, Colorado. It has been a leading supplier of hydroponics and indoor gardening supplies
in the metro Denver area since May 2001. The Company was focused on cannabis dispensary and cultivation consulting and providing equipment
and nutrients to cannabis cultivators until its first plant touching acquisition in April of 2020. In 2019, due to the changes in Colorado
law permitting non-Colorado resident and publicly traded investment into “plant-touching” cannabis companies, the Company
made a strategic decision to move toward direct plant-touching operations. The Company developed a plan to roll up a number of direct
plant-touching dispensaries, manufacturing facilities, and cannabis cultivations with a target to be one of the largest seed to sale cannabis
businesses in Colorado. In April 2020, the Company acquired its first plant-touching business, Mesa Organics Ltd. (“Mesa Organics”),
which consists of four dispensaries and one manufacturing infused products facility (“MIP”), d/b/a Purplebee’s.
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 December 17, 2020, the Company closed on the
acquisition of (i) Starbuds Pueblo LLC; and (ii) Starbuds Alameda LLC. On December 18, 2020, the Company closed on the acquisition of
(i) Starbuds Commerce City LLC; (ii) Lucky Ticket LLC; (iii) Starbuds Niwot LLC; and (iv) LM MJC LLC under the applicable Asset Purchase
Agreements (“APAs”).
On February 4, 2021, the Company acquired the
assets of Colorado Health Consultants LLC and Mountain View 44th LLC under the applicable APAs.
On March 2, 2021, the Company acquired the assets
of (i) Starbuds Aurora LLC, (ii) SB Arapahoe LLC; (iii) Citi-Med LLC; (iv) Starbuds Louisville LLC; and (v) KEW LLC under the applicable
APAs.
From December 2020 through March 2021 the Company
completed a private placement of Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) for aggregate
gross proceeds of $57.7 million dollars. In the private placement, the Company
issued and sold an aggregate of 57,700 shares of Series A Preferred Stock at a price of $1,000 per share under securities purchase agreement
with Dye Capital Cann Holdings II, LLC (“Dye Cann II”) and CRW Cann Holdings, LLC (“CRW”) as well as subscription
agreements with unaffiliated investors. Among other terms, each share of Series A Preferred Stock (i) earns an annual dividend of 8% on
the “preference amount,” which initially is equal to the $1,000 per-share purchase price and subject to increase, by having
such dividends automatically accrete to, and increase, the outstanding preference amount; (ii) is entitled to a liquidation preference
under certain circumstances, (iii) is convertible into shares of the Company’s common stock by dividing the preference amount by
$1.20 per share under certain circumstances, and (iv) is subject to a redemption right or obligation under certain circumstances.
In
addition, on December 16, 2020, the Company issued and sold a Convertible Promissory Note and Security Agreement in the original principal
amount of $5,000,000 to Dye Capital & Company, LLC (“Dye Capital”). On February 26, 2021, Dye Capital converted all outstanding
amounts under the note into 5,060 shares of Preferred Stock.
The Company is focused on growing through internal
growth, acquisition, and new licenses in the Colorado cannabis market. The Company is focused on building the premier vertically integrated
cannabis company in Colorado. The company's leadership team has deep expertise in mainstream consumer packaged goods, retail, and product
development at Fortune 500 companies as well as in the cannabis sector. The Company has a high-performance culture and a focus on analytical
decision making, supported by data. Customer-centric thinking inspires the Company’s strategy and provides the foundation for the
Company’s operational playbooks.
The Company’s operations are organized into
three different segments as follows: (i) retail, consisting of retail locations for sale of cannabis products, (ii) wholesale, consisting
of manufacturing and sale of wholesale cannabis products, nutrients for cannabis, and hydroponics and indoor gardening supplies, and (iii)
other, consisting of all other income and expenses, including those related to licensing and consulting services, facility design services,
facility management services, and corporate operations.
1.
|
Liquidity and Capital Resources:
|
During the quarters ended March 31, 2021 and 2020,
the Company primarily used revenues from its operations 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 $22,966,320 and $1,231,235 classified as cash and cash equivalents
as of March 31, 2021 and December 31, 2020, respectively.
The Company
maintains its cash balances with a high-credit-quality financial institution. At times, such cash may be more than the insured limit of
$250,000. 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.
To mitigate credit risk, the Company may purchase
highly liquid investments with an original maturity of three months or less. As of March 31, 2020, the Company had one United States Treasury
Bill with a maturity date of April 7, 2020 and bearing interest at a rate of approximately 0.65%. The Company did not have any such United
States Treasury Bills as of March 31, 2021.
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 unaudited
consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation
of the Company’s 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 unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of December 31, 2020 and 2019, as presented in the Company’s Annual
Report on Form 10-K filed on March 31, 2021 with the SEC.
Basis of Presentation
These accompanying financial statements have been
prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC for interim financial statements. All
intercompany accounts and transactions are eliminated in consolidation.
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
During the quarter ended March 31, 2021, we changed
our segments based on the way management discusses and reviews financial information. Certain prior year amounts have been reclassified
to conform to the current year presentation. These reclassifications had no impact on the Company’s net (loss) 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, notes 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 the year, using Level 3 inputs.
The following is the Company’s assets and
liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2021 and December 31, 2020, using quoted prices
in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level
3):
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Level 1 – Marketable Securities Available-for-Sale – Recurring
|
|
|
491,412
|
|
|
|
276,782
|
|
|
|
|
|
|
|
|
|
|
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., a publicly-traded
company whose securities are actively quoted on the Toronto Stock Exchange.
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. This accounts receivable relates to the Company’s wholesale and other revenue segments. Accounts
receivable is recorded when a milestone is reached at point in time resulting in funds being due for delivered goods or services, and
where payment is reasonably assured. Wholesale revenues are generally collected within 14 to 30 days after invoice is sent. 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 March 31, 2021, and December 31, 2020:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Accounts receivable – trade
|
|
$
|
2,524,718
|
|
|
$
|
1,315,188
|
|
Accounts receivable – related party
|
|
|
–
|
|
|
|
80,494
|
|
Accounts receivable – litigation, non-current
|
|
|
3,063,968
|
|
|
|
3,063,968
|
|
Allowance for doubtful accounts
|
|
|
(159,656
|
)
|
|
|
(44,808
|
)
|
Total accounts receivable
|
|
$
|
5,429,031
|
|
|
$
|
4,414,842
|
|
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. As of March 31, 2021 and December 31, 2020, the Company recorded an allowance for doubtful accounts of $159,656 and
$44,808, 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.. 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 March 31, 2021 and December 31, 2020, the outstanding
balance, including accrued interest, on the notes receivable with AMC totaled $248,025 and $246,765, respectively. As of March 31, 2021
and December 31, 2020, the Company has recorded a full allowance on the note receivable balance.
Other Assets (Current and Non-Current)
Other assets as of March 31, 2021 and December
31, 2020 were $1,050,726 and $666,079, respectively. As of March 31, 2021, this balance included $627,016 in prepaid expenses and $423,710
in security deposits. As of December 31, 2020, other assets included $345,777 in prepaid expenses, $268,423 in tax receivable, and $51,879
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
as of December 31, 2020, 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 as of March 31, 2021 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, 2020 on its subsidiaries with material amounts on their respective balance sheets and determined that
no impairment exists.
Accounts Payable
Accounts payable as of March 31, 2021 and December
31, 2020 were $2,522,695 and $3,557,460, 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 as of March
31, 2021 and December 31, 2020 were $8,298,446 and $2,705,445, respectively. As of March 31, 2021, this was comprised of customer deposits
of $24,958, accrued payroll of $1,402,814, and operating expenses of $6,870,674. As of December 31, 2020, accrued expenses and other liabilities
was comprised of customer deposits of $26,826, accrued payroll of $1,154,887, and operating expenses of $1,523,732.
Revenue Recognition and Related Allowances
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 is 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: retail;
wholesale; and other.
Retail and wholesale 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.
Other revenue consists of other income and expenses,
including related to, licensing and consulting services, facility design services, facility management services, the Company’s Three
A Light™ publication, and corporate operations. Revenue 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 or 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 were $111,685 and $129,267 during the quarter ended March 31, 2021 and 2020, 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 options 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 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 common stock is publicly traded, the value is determined based on the number
of shares of common stock issued and the trading value of the common stock on the date of the transaction.
On June 20, 2018, the Financial Accounting Standards
Board (“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 $1,483,806 in expense for
stock-based compensation from common stock options and common stock issued to employee, officers, and directors during the three months
ended March 31, 2021, and $1,252,731 in expense for stock-based compensation from common stock options issued to employees during the
three months ended March 31, 2020.
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 are regularly assessed to
determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is
more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to
recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors
reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history
of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible
and prudent tax planning strategies.
The Company assesses all material positions taken
in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge
by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability,
and the tax benefit to be recognized is measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. We recognize the impact of a tax position in our financial statements only if that position is more likely than
not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly
examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions.
Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from
our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision
for income taxes in the period in which they are determined.
As the Company operates in the cannabis industry,
it is subject to the limits of the Internal Revenue Code (IRC) Section 280E under which the Company is only allowed to deduct expenses
directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable
under IRC Section 280E.
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
ROU assets and operating lease liabilities, current and non-current, on the Company's consolidated balance sheets.
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:
In January 2017 the FASB issued ASU 2017-01, Clarifying
the Definition of a Business (Topic 805), which 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 became effective for public companies with fiscal years beginning
after December 15, 2020. 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:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Furniture and fixtures
|
|
$
|
294,204
|
|
|
$
|
228,451
|
|
Leasehold improvements
|
|
|
656,314
|
|
|
|
90,314
|
|
Machinery and Tools
|
|
|
1,401,752
|
|
|
|
1,456,752
|
|
Office equipment
|
|
|
69,983
|
|
|
|
104,059
|
|
Software
|
|
|
1,308,387
|
|
|
|
1,308,387
|
|
Work in process
|
|
|
390,598
|
|
|
|
269,414
|
|
|
|
$
|
4,121,239
|
|
|
$
|
3,457,377
|
|
Less: Accumulated depreciation
|
|
|
(1,032,211
|
)
|
|
|
(872,579
|
)
|
Total property and equipment, net of depreciation
|
|
$
|
3,089,027
|
|
|
$
|
2,584,798
|
|
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
|
Vehicles
|
3 years
|
Office equipment
|
3 years
|
Depreciation expense for the three months ended
March 31, 2021 and 2020 was $194,637 and $4,465 respectively.
Intangible assets as
of March 31, 2021 and December 31, 2020 were comprised of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Licenses
|
|
$
|
88,745,700
|
|
|
$
|
1,667,000
|
|
Tradename
|
|
|
4,270,000
|
|
|
|
350,000
|
|
Customer relationships
|
|
|
5,150,000
|
|
|
|
1,055,000
|
|
Non-compete
|
|
|
1,130,000
|
|
|
|
120,000
|
|
Product license and registration
|
|
|
57,300
|
|
|
|
57,300
|
|
Trade secret – intellectual property
|
|
|
32,500
|
|
|
|
32,500
|
|
|
|
$
|
99,385,500
|
|
|
$
|
3,282,500
|
|
Less: accumulated amortization
|
|
|
(1,796,386
|
)
|
|
|
(200,456
|
)
|
Total intangible assets, net of amortization
|
|
$
|
97,589,114
|
|
|
$
|
3,082,044
|
|
Amortization expense for the three months ended
March 31, 2021 and 2020 was $1,595,931 and $1,648, respectively.
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) a risk-free interest rate ranging between 1.87% - 2.57%,
and (iii) an expected volatility of the price of the underlying common stock ranging between 145% - 158%.
As of March 31, 2021, the fair value of these
derivative liabilities is $2,301,295. The change in the fair value of derivative liabilities for the three months ended March 31, 2021
was $1,253,814 resulting in an aggregate unrealized loss on derivative liabilities.
7.
|
Related Party Transactions
|
Transactions Involving Former Directors, Executive
Officers or Their Affiliated Entities
During the year ended December 31, 2020, the Company
recorded sales to Medicine Man Denver, totaling $997,262. The Company had an accounts receivable balance with Medicine Man Denver totaling
$72,109 as of December 31, 2020. The Company’s former Chief Executive Officer, Andy Williams, maintains an ownership interest in
Medicine Man Denver. Effective February 25, 2020 he was no longer an officer of the Company and therefore no longer a related party. As
such, he is not included as a related party with respect to sales and accounts receivable from Medicine Man Denver during the period ended
March 31, 2021.
During the year ended December 31, 2020, the Company
recorded sales to MedPharm Holdings LLC (“MedPharm”) totaling $73,557. The Company had a net accounts receivable balance
with MedPharm totaling $5,885 as of December 31, 2020. The Company’s former Chief Executive Officer, Andy Williams, maintains an
ownership interest in MedPharm. Effective February 25, 2020 he was no longer an officer of the Company and therefore no longer a related
party. As such, he is not included as a related party with respect to sales and accounts receivable from MedPharm during the period ended
March 31, 2021.
Also, during the year ended December 31, 2019,
the Company issued various notes receivable to MedPharm totaling $767,695 with original maturity dates ranging from September 21, 2019
through January 19, 2020 and all bearing interest at 8% per annum. All notes extended to May 2020 by mutual agreement between the Company
and noteholder. On August 1, 2020, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
with MedPharm. Pursuant to the terms of the Settlement Agreement, the Company and MedPharm agreed that the amount of the settlement to
be furnished to the Company by MedPharm shall be $767,695 in principal and $47,161 in accrued interest. The Company received a $100,000
cash payment from MedPharm on August 1, 2020. On September 4, 2020, Andrew Williams, a member of the MedPharm Board of Directors and the
Company’s former Chief Executive Officer, returned 175,000 shares of the Company’s common stock to the Company, as equity
consideration at a price of $1.90 per share, a mutually agreed upon price per share. These shares are held in treasury. The remaining
outstanding principal and interest of $181,911 due and payable by MedPharm under the Settlement Agreement will be paid out in bi-weekly
installments of product by scheduled deliveries through March 31, 2021. As of March 31, 2021, the remaining outstanding principal and
interest was $40,231.
During the year ended December 31, 2020, the Company
recorded sales to Baseball 18, LLC (“Baseball”) totaling $14,605, to Farm Boy, LLC (“Farm Boy”) totaling $16,125,
to Emerald Fields LLC (“Emerald Fields”) totaling $16,605, and to Los Sueños Farms (“Los Sueños”)
totaling $52,244. As of December 31, 2020 the Company had net accounts payable balances with Baseball of $31,250, and with Farm Boy of
$93,944. One of the Company’s former directors, Robert DeGabrielle, owns the Colorado retail marijuana cultivation licenses for
Farm Boy, Baseball, Emerald Fields, and Los Sueños. Effective June 19, 2020 he was no longer an officer of the Company and therefore
no longer a related party. As such, he is not included as a related party with respect to sales and accounts receivable from Baseball,
Farm Boy, Emerald Fields, or Los Sueños during the period ended March 31, 2021.
Transactions with Entities Affiliated with
Justin Dye
The Company has participated in several transaction
involving Dye Capital, Dye Capital Cann Holdings, LLC (“Dye Cann I”) and Dye Cann II. Justin Dye, the Company’s Chief
Executive Officer, one of our directors, and the largest beneficial owner of the Company’s common stock and Series A Preferred Stock,
controls Dye Capital and Dye Capital controls Dye Cann I and Dye Cann II. Dye Cann I is the largest holder of the Company’s outstanding
common stock. Dye Cann II is a significant holder of the Series A Preferred Stock. Mr. Dye has sole voting and dispositive power over
the securities held by Dye Capital, Dye Cann I, and Dye Cann II.
The Company entered into a Securities Purchase
Agreement with Dye Cann I on June 5, 2019, (as amended, the “Dye Cann I SPA”) pursuant to which the Company agreed to sell
to Dye Cann I up to between 8,187,500 and 10,687,500 shares of the Company’s common stock in several tranches at $2.00 per share
and warrants to purchase 100% of the number of shares of common stock sold at a purchase price of $3.50 per share. At the initial closing
on June 5, 2019, the Company sold to Dye Cann I 1,500,000 shares of common stock and warrants to purchase 1,500,000 shares of common stock
for gross proceeds of $3,000,000, and the Company has consummated subsequent closings for an aggregate of 9,287,500 shares of common stock
and warrants to purchase 9,287,500 shares of common stock for aggregate gross proceeds of $18,575,000 to the Company. The terms of the
Dye Cann I SPA are disclosed in the Company’s Current Report on Form 8-K filed on June 6, 2019. The Company and Dye Cann I entered
into a first amendment to the Dye Cann I SPA on July 15, 2019, as described in the Company’s Current Report on Form 8-K filed on
July 17, 2019, a second amendment to the Dye Cann I SPA on May 20, 2020, as described in the Company’s Current Report on Form 8-K
filed on May 22, 2020, and a Consent, Waiver and Amendment on December 16, 2020, as described in the Company’s Current Report on
Form 8-K filed on December 23, 2020. At the time of the initial closing under the Dye Cann I SPA, Justin Dye became a director and the
Company’s Chief Executive Officer.
The Company granted Dye Cann I certain demand
and piggyback registration rights with respect to the shares of common stock sold under the Dye Cann I SPA and issuable upon exercise
of the warrants sold under the Dye Cann I SPA. The Company also granted Dye Cann I the right to designate one or more individuals for
election or appointment to the Company’s board of directors (the “Board”) and Board observer rights. Further, under
the Dye Cann I SPA, until June 5, 2022, if the Company desires to pursue debt or equity financing, the Company must first give Dye Cann
I an opportunity to provide a proposal to the Company with the terms upon which Dye Cann I would be willing to provide or secure such
financing. If the Company does not accept Dye Cann I’s proposal, the Company may pursue such debt or equity financing from other
sources but Dye Cann I has a right to participate in such financing to the extent required to enable Dye Cann I to maintain the percentage
of the Company’s common stock (on a fully-diluted basis) that it then owns, in the case of equity securities, or, in the case of
debt, a pro rata portion of such debt based on the percentage of the Company’s common stock (on a fully-diluted basis) that it then
owns.
The Company entered into a Securities Purchase
Agreement (as amended, the “Dye Cann II SPA”) with Dye Cann II on November 16, 2020 pursuant to which the Company agreed to
sell to Dye Cann II shares of Series A Preferred Stock in one or more tranches at a price of $1,000 per share. The terms of the Dye Cann
II SPA are disclosed in the Company’s Current Report on Form 8-K filed on December 23, 2020. The Company and Dye Cann II entered
into an amendment to the Dye Cann II SPA on December 16, 2020, as described in the Company’s Current Report on Form 8-K filed on
December 23, 2020, a second amendment to the Dye Cann II SPA on February 3, 2021, as described in the Company’s Form 8-K filed on
February 9, 2021, and a third amendment to the Dye Cann II SPA on March 30, 2021, as described under Item 9B of this Report. The Company
issued and sold to Dye Cann II 7,700 shares of Series A Preferred Stock on December 16, 2020, 1,450 shares of Series A Preferred Stock
on December 18, 2020, 1,300 shares of Series Preferred Stock on December 22, 2020, 3,100 shares of Series A Preferred Stock on February
3, 2021, 3,800 shares of Series A Preferred Stock on March 2, 2021 and 4,000 shares of Series A Preferred Stock on March 30, 2021. As
a result, the Company issued and sold an aggregate of 21,350 shares of Series A Preferred Stock to Dye Cann II for aggregate gross proceeds
of $21,350,000.
The Company granted Dye Cann II certain demand
and piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Series A Preferred Stock
under the Dye Cann II SPA. Further, the Company granted Dye Can II the right to designate one or more individuals for election or appointment
to the Board and Board observer rights.
On December 16, 2020, the Company entered into
a Secured Convertible Note Purchase Agreement with Dye Capital and issued and sold to Dye Capital a Convertible Note and Security Agreement
in the principal amount of $5,000,000 as described in the Company’s Current Report on Form 8-K filed on December 23, 2020. On February
26, 2021, Dye Capital elected to convert the $5,000,000 principal amount and the $60,250 of accrued but unpaid interest under the Convertible
Promissory Note and Security Agreement under its terms and Dye Capital and the Company entered into a Conversion Notice and Agreement
pursuant to which the Company issued 5,060 shares of Series A Preferred Stock to Dye Capital and also paid Dye Capital $230.97 in cash
in lieu of issuing any fractional shares of Series Preferred Stock upon conversion, as described in the Company’s Current Report
on Form 8-K filed on March 4, 2021.
The Company previously reported the terms of the Series A Preferred
Stock in the Company’s Current Report on Form 8-K filed on December 23, 2020 and under Item 1 of this Report, which disclosure is
incorporated herein by reference.
During the year ended December 31, 2020, the Company
recorded expenses of $66,264 with Tella Digital. During the quarter ended March 31, 2021, the Company recorded expenses of $170,119 with
Tella Digital. Tella Digital provides on-premise digital experience solutions for our retail dispensary locations. Mr. Dye serves as Chairman
of Tella Digital and has super majority rights.
Transactions with CRW and Affiliated Entities
On February 26, 2021, the Company entered into
a Securities Purchase Agreement (the “CRW SPA”) with CRW pursuant to which the Company issued and sold 25,350 shares of Series
A Preferred Stock to CRW at a price of $1,000 per share for aggregate gross proceeds of $25,350,000. The transaction made CRW a beneficial
owner of more than 5% of the Company’s common stock. The Company granted CRW certain demand and piggyback registration rights with
respect to the shares of common stock issuable upon conversion of the Series A Preferred Stock under the CRW SPA. On the same date, the
Company entered into a letter agreement with CRW, granting CRW the right to designate one individual for election or appointment to the
Board and Board observer rights. Under the letter agreement, for as long as CRW has the right to designate a Board member, if the Company,
directly or indirectly, plans to issue, sell or grant any securities or options to purchase any of its securities, CRW has a right to
purchase its pro rata portion of such securities, based on the number of shares of Series A Preferred Stock beneficially held by CRW on
the applicable date on an as-converted to common stock basis divided by the total number of shares of common stock outstanding on such
date on an as-converted, fully-diluted basis (taking into account all outstanding securities of the Company regardless of whether the
holders of such securities have the right to convert or exercise such securities for common stock at the time of determination). Further,
under the letter agreement, the Company will pay CRW Capital, LLC, the sole manager of CRW and a holder of a carried interest in CRW,
a monitoring fee equal to $150,000 in monthly installments of $10,000. On March 14, 2021, the Board appointed Jeffrey A. Cozad as a director
to fill a vacancy on the Board. Mr. Cozad is a manager and owns 50% of CRW Capital, LLC, and he shares voting and disposition power over
the shares of Series A Preferred Stock held by CRW. Mr. Cozad and his family members indirectly own membership interests in CRW. The Company
previously reported the terms of the CRW SPA and the CRW letter agreement in the Company’s Current Report on Form 8-K filed March
4, 2021.
Transactions with Entities Affiliated with Brian Ruden
The Company has participated in several transactions
involving entities owned or affiliated with Brian Ruden, one of its directors and a beneficial owner of more than 5% of the Company’s
common stock and a beneficial owner of more than 5% of the Series A Preferred Stock.
Between December 17, 2020 and March 2, 2021, the
Company’s wholly-owned subsidiary SBUD, LLC acquired the Star Buds assets. The Company previously reported the terms of the applicable
purchase agreements and related amendments in the Company’s Current Reports on Form 8-K filed June 8, 2020, September 21, 2020,
December 22, 2020, and March 8, 2021.
The aggregate purchase price for the Star Buds
assets was $118,000,000, paid as follows: (i) $44,250,000 in cash at the applicable closings, (ii) $44,250,000 in deferred cash, also
referred to in this Report as “seller note(s),” (iii) 29,500 shares of Series A Preferred Stock, of which 25,075 shares were
issued at the applicable closings and 4,425 shares are held in held in escrow and will be released post-closing to either Star Buds or
the Company depending on post-closing adjustments to the purchase price. In addition, the Company issued warrants to purchase an aggregate
of 5,531,250 shares of the Company’s common stock to the sellers. As of March 31, 2021, the Company owed an aggregate principal
amount of $44,250,000 under the seller notes and accrued but unpaid interest of $425,162. The Company has not paid any principal and has
paid an aggregate of $810,887 of interest on the seller notes as of March 31, 2021. Mr. Ruden’s interest in the aggregate purchase
price for the Star Buds assets is as follows: (i) $13,727,490 in cash at the applicable closings, (ii) $13,727,490 in seller notes, (iii)
9,152 shares of Series A Preferred Stock, of which 7,779 shares were issued at the applicable closings and 1,373 shares are held in held
in escrow and will be released post-closing to either Mr. Ruden or the Company depending on post-closing adjustments to the purchase price.
In addition, the Company issued warrants to purchase an aggregate of 1,715,936 shares of the Company’s common stock to Mr. Ruden
and paid Mr. Ruden an aggregate of $111,824 in interest on his seller notes.
Mr. Ruden was a part-owner of each of the Star
Buds companies that sold assets to SBUD, LLC. Mr. Ruden owned 50% of Colorado Health Consultants LLC, 50% of Starbuds Aurora LLC, 50%
of Starbuds Pueblo LLC, 50% of Starbuds Alameda LLC, 48% of SB Arapahoe LLC, 36% of Starbuds Commerce City LLC, 30% of Starbuds Louisville
LLC, 25% of Starbuds Niwot LLC, 16.66% of Lucky Ticket LLC, 15% of KEW LLC, and 10% of LM MJC LLC.
In connection with acquiring the Star Buds assets
for our Pueblo West and Commerce City locations, SBUD LLC entered into a lease with each of 428 S. McCulloch LLC and 5844 Ventures LLC
on substantially the same terms.
Each of the leases is for an initial three-year
term. The lease with 428 S. McCulloch LLC is for the Company’s Pueblo West Star Buds location and was effective on December 17,
2020. The lease with 45844 Ventures LLC is for the Company’s Commerce City Star Buds location and was effective on December 18,
2020. Each lease provides for a monthly rent payment of $5,000. SBUD LLC expect to pay each landlord an aggregate of $180,000 during the
initial term of the leases. During 2020, SBUD LLC made aggregate rent payments of $10,000. Between January 1, 2021 and March 31, 2021,
SBUD LLC made aggregate rent payments of $30,000. In addition, SBUD LLC must pay each landlord’s expenses and disbursements incurred
in connection with the ownership, operation, maintenance, repair and replacement of the premises. SBUD LLC has the option to renew each
lease for two additional three-year terms. The rent increase to $5,500 per month during the first three-year renewal period, and to $6,050
during the second three-year renewal period. The Company has an option to purchase the premises at fair market value at any time during
the lease term and also has a right of first refusal if the landlords desire to sell the premises to a third party.
On December 17, 2020, SBUD, LLC entered into a
Trademark License Agreement with Star Brands LLC under which Star Brands LLC licenses certain trademarks to SBUD, LLC effective as of
the closing of the acquisitions of all of the Star Buds assets. SBUD LLC has no payment obligation under this agreement. Mr. Ruden is
a part-owner of Star Brands LLC.
In connection with the Star Buds acquisitions,
the Company granted Mr. Ruden and Naser Joudeh the right designate individuals for election or appointment to the Board.
As of March 31, 2021, and December 31, 2020, respectively,
the Company had $3,345,353 and $2,090,887 of finished goods inventory. As of March 31, 2021 the Company had $911,246 of work in process
and $1,331,658 of raw materials. As of December 31, 2020, the Company had $500,917 of work in process and $27,342 of raw materials. The
Company uses the FIFO inventory valuation method. As of March 31, 2021 and December 31, 2020, the Company did not recognize any impairment
for obsolescence within its inventory.
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.
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.
On September 17, 2018, we closed the acquisition
of The Big Tomato. The Company issued an aggregate of 1,933,329 shares of its common stock for 100% ownership of The 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.
On April 20, 2020, the
Company closed the acquisition of Mesa Organics. 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. 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 $2,147,613 of goodwill.
From December 2020 through March 2021, the Company
closed the acquisition of thirteen Star Buds dispensaries and one cultivation facility. The aggregate purchase price was $118,000,000.
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 $26,080,991 of goodwill.
As of March 31, 2021, the Company had $40,532,910
of goodwill which consisted of $6,301,080 from Success Nutrients and Pono Publications, $3,003,226 from DCG, $3,000,000 from The Big Tomato,
$2,147,613 from Mesa Organics, and $26,080,991 from Star Buds.
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 an 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 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 less than two 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 computations ranged between 6% and 12%.
Balance Sheet Classification of Operating Lease Assets and Liabilities
|
|
Balance Sheet Line
|
|
March 31, 2021
|
|
Asset
|
|
|
|
|
|
|
Operating lease right of use assets
|
|
Noncurrent assets
|
|
$
|
4,242,124
|
|
Liabilities
|
|
|
|
|
|
|
Lease liabilities
|
|
Noncurrent liabilities
|
|
$
|
4,342,018
|
|
Lease Costs
The table below summarizes the components of lease costs for the three
months ended March 31, 2021.
|
|
Three Months Ended
March 31, 2021
|
|
Operating lease costs
|
|
$
|
278,117
|
|
Maturities of Lease Liabilities
Maturities of lease liabilities as of March 31,
2021 are as follows:
2021 fiscal year
|
|
$
|
4,418,867
|
|
Less: Interest
|
|
|
(76,848
|
)
|
Present value of lease liabilities
|
|
$
|
4,342,018
|
|
The following table presents the Company’s future minimum lease
obligation under ASC 840 as of March 31, 2021:
2021 fiscal year
|
|
|
1,109,215
|
|
2022 fiscal year
|
|
|
1,479,393
|
|
2023 fiscal year
|
|
|
1,354,595
|
|
2024 fiscal year
|
|
|
723,590
|
|
2025 fiscal year
|
|
|
333,356
|
|
2026 fiscal year
|
|
|
178,648
|
|
Total
|
|
|
5,178,796
|
|
The Company is authorized to issue two classes
of stock, 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.
The Company had 87,266 shares of Series A Preferred
Stock issued and outstanding as of March 31, 2021 and 19,716 shares of Series A Preferred Stock issued and outstanding as of December
31, 2020. Among other terms, each share of Series A Preferred Stock (i) earns an
annual dividend of 8% on the “preference amount,” which initially is equal to the $1,000 per-share purchase price and subject
to increase, by having such dividends automatically accrete to, and increase, the outstanding preference amount; (ii) is entitled to a
liquidation preference under certain circumstances, (iii) is convertible into shares of the Company’s common stock by dividing the
preference amount by $1.20 per share under certain circumstances, and (iv) is subject to a redemption right or obligation under certain
circumstances.
Common Stock
The Company is authorized to issue 250,000,000
shares of common stock at a par value of $0.001. The Company had 42,819,815 shares of common stock issued and 42,331,595 shares of common
stock outstanding as of March 31, 2021, and 42,601,773 shares of common stock issued and 42,169,041 shares of common stock outstanding
as of December 31, 2020.
Common Stock Issued in Private Placements
During the year ended December 31, 2020, the Company
issued 187,500 shares of common stock and warrants to purchase 187,500 shares of common stock, for gross proceeds of $375,000.
Common Stock Issued as Compensation to Employees,
Officers, and Directors
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.
During the year ended December 31, 2020, the Company
issued 406,895 shares of common stock valued at $497,301 to employees, officers, and directors as compensation.
During the quarter ended March 31, 2021, the Company
issued 218,042 shares of common stock valued at $444,806 to employees, and directors as compensation.
Common and Preferred Stock Issued as Payment
for Acquisitions
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.
On December 17, 2020, the Company issued 2,862
shares of Series A Preferred Stock valued at $2,861,994 and on December 18, 2020, the Company issued 6,404 shares of Series A Preferred
Stock valued at $6,403,987 for the acquisition of Star Buds assets.
On February 3, 2021, the Company issued 2,319
shares of Series A Preferred Stock valued at $2,318,998 and on March 3, 2021, the Company issued 17,921 shares of Series A Preferred Stock
valued at $17,920,982 for the acquisition of Star Buds assets.
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 quarter ended March 31, 2021, the Company
issued warrants to purchase an aggregate of 3,793,530 shares of common stock as purchase consideration for the acquisition of certain
Star Buds assets. These warrants have an exercise price of $1.20 per share and expiration dates five years from the date of issuance.
In addition, the Company issued a warrant to purchase an aggregate 1,500,000 shares of common stock to an accredited investor in connection
with entering into a loan agreement. This warrant has an exercise price of $2.50 per share and expires five 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 $1.20 of $2.50, respectively, (ii) the contractual term of the warrant of 5 years, (iii)
a risk-free interest rate ranging between 0.46% - 0.75% and (iv) an expected volatility of the price of the underlying common stock ranging
between 192.71% - 195.00%.
The following table reflects the change in common
stock purchase warrants for the three months ended March 31, 2021.
|
|
Number of shares
|
|
Balance as of January 1, 2021
|
|
|
11,725,220
|
|
Warrants exercised
|
|
|
–
|
|
Warrants forfeited
|
|
|
–
|
|
Warrants issued
|
|
|
5,293,530
|
|
Balance as of March 31, 2021
|
|
|
17,018,750
|
|
Option Repricing
On December 15, 2020, the Board repriced certain
outstanding stock options issued to the Company’s current employees. The repriced stock options had original exercise prices ranging
from $1.52 per share to $3.83 per share. All of these stock options to current employees were repriced to have an exercise price of $1.26
per share, which was the closing price of the Company’s common stock on December 15, 2020. Each of the options has a new 10-year
term from the repricing date.
The Company has three identifiable segments as
of March 31, 2021; (i) retail, (ii) wholesale and (iii) and other. The retail segment represents our dispensaries which sell merchandise
directly to customers via retail locations and e-commerce portals. The wholesale segment represents our manufacturing and wholesale business
which sell merchandise to customers via e-commerce portals, a retail location, and manufacturing facility. The other segment 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 following information represents segment activity
for the three-month periods ended March 31, 2021 and March 31, 2020:
|
|
For the
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Retail
|
|
|
Wholesale
|
|
|
Other
|
|
|
Total
|
|
|
Retail
|
|
|
Wholesale
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
11,816,200
|
|
|
|
7,446,265
|
|
|
|
77,650
|
|
|
|
19,340,115
|
|
|
$
|
–
|
|
|
$
|
2,528,931
|
|
|
$
|
674,203
|
|
|
$
|
3,203,134
|
|
Cost of goods and services
|
|
$
|
(7,500,757
|
)
|
|
|
(4,483,694
|
)
|
|
|
(102,660
|
)
|
|
|
(12,087,111
|
)
|
|
$
|
–
|
|
|
$
|
(1,896,226
|
)
|
|
$
|
(252,309
|
)
|
|
$
|
(2,148,535
|
)
|
Gross profit
|
|
$
|
4,315,443
|
|
|
|
2,962,571
|
|
|
|
(25,010
|
)
|
|
|
7,253,004
|
|
|
$
|
–
|
|
|
$
|
633,705
|
|
|
$
|
421,894
|
|
|
$
|
1,054,599
|
|
Intangible assets amortization
|
|
$
|
1,594,302
|
|
|
|
1,497
|
|
|
|
133
|
|
|
|
1,595,931
|
|
|
$
|
–
|
|
|
$
|
1,513
|
|
|
$
|
135
|
|
|
$
|
1,648
|
|
Depreciation
|
|
$
|
84,298
|
|
|
|
3,641
|
|
|
|
106,699
|
|
|
|
194,637
|
|
|
$
|
–
|
|
|
$
|
1,233
|
|
|
$
|
3,232
|
|
|
$
|
4,465
|
|
Net income (loss)
|
|
$
|
1,398,651
|
|
|
|
2,814,014
|
|
|
|
(7,862,172
|
)
|
|
|
(3,649,507
|
)
|
|
$
|
–
|
|
|
$
|
446,499
|
|
|
$
|
(1,825,809
|
)
|
|
$
|
(1,379,310
|
)
|
Segment assets
|
|
$
|
132,931,035
|
|
|
|
21,326,258
|
|
|
|
26,761,858
|
|
|
|
181,019,151
|
|
|
$
|
–
|
|
|
$
|
12,935,074
|
|
|
$
|
17,094,217
|
|
|
$
|
30,029,291
|
|
The following table summarizes the Company’s
income tax expense and effective tax rates for the three months ended March 31, 2021 and March 31, 2020:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Income (Loss) before Income Taxes
|
|
|
(3,192,891
|
)
|
|
|
(1,379,310
|
)
|
Income Tax Expense
|
|
|
456,614
|
|
|
|
–
|
|
Effective Tax Rate
|
|
|
-14.30%
|
|
|
|
0%
|
|
The Company has computed its provision for income
taxes under the discrete method which treats the year-to-date period as if it were the annual period and determines the income tax expense
or benefit on that basis. The discrete method is applied when application of the estimated annual effective tax rate is impractical because
it is not possible to reliably estimate the annual effective tax rate. We believe that, at this time, the use of this discrete method
is more appropriate than the annual effective tax rate method as the estimated annual effective tax rate method is not reliable due to
the high degree of uncertainty in estimating annual pre-tax income due to the early growth stage of the business.
Due to its cannabis operations, the Company is
subject to the limitations of Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct
expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses
deemed non-allowable under IRC Section 280E.
The effective tax rate for the three months ended March 31, 2021 varied from the three months ended March 31, 2020 primarily due to IRC Section
280E. The Company acquired plant-touching cannabis operations during 2020 and 2021 and these plant-touching operations are subject to
the limitations of IRC Section 280E. As of March 31, 2020, the Company had not yet acquired these cannabis plant-touching operations
and the Company was not subject to IRC Section 280E.
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company's valuation allowance represents the amount of tax benefits that are likely to not be realized. Management assesses the need
for a valuation allowance each period and continues to have a full valuation allowance on its deferred tax assets as of March 31, 2021.
The Federal statute of limitation remains open
for the 2017 tax year to present. The state statute of limitation remains open for the 2016 tax year to present.
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to March 31, 2021 to the date these unaudited consolidated financial statements
were issued, and has determined that it does not have any material subsequent events to disclose in these unaudited consolidated financial
statements, except as follows:
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 all bearing interest at 8% per annum. All notes extended to May 2020 by mutual agreement between the Company and
noteholder. On August 1, 2020, the Company entered into the Settlement Agreement with MedPharm. As of March 31, 2021, the remaining outstanding
principal and interest was $40,231. This amount was paid off on April 19, 2021.
On June 11, 2019, the Company granted the right to receive 1,000,000 shares of restricted common stock to an officer (former
officer as of December 4, 2019), which would have vested at such time that the Company’s stock price appreciated to $8.00 per share
with defined minimum average daily trading volume thresholds. On May 3, 2021, the former officer and the Company entered into a separation
agreement under which the former officer agreed to forfeit the 1,000,000 shares of restricted common stock. The former officer was entitled
to $75,000 in bonus payments under the separation agreement. This payment was made on May 4, 2021.