The accompanying notes are an integral part
of the consolidated financial statements.
NOTES TO THE FINANCIAL STATEMENTS
Organization and Nature of Operations
Business Description
–
Business Activity
Medicine Man Technologies Inc. (the "Company")
is a Nevada corporation incorporated on March 20, 2014. The Company is a cannabis consulting company providing services related
to cost-efficient cannabis cultivation technologies focusing on quality as well as safety, retail operations related to the delivery
of cannabis related products, and other related business lines as described in our operating strategic vision outlined below.
1.
|
Liquidity and Capital Resources
|
During the quarters ending June 30, 2019
and 2018, 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 $4,347,495 and $321,788 classified
as cash and cash equivalents as of June 30, 2019, and December 31, 2018, 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.
In an effort to mitigate credit risk, the
Company may purchase highly liquid investments with an original maturity of three months or less. On June 25, 2019, the Company
purchased a United States Treasury Bill that matures on July 23, 2019 and bears interest at 2.06%.
The following table depicts the composition
of the Company’s cash and cash equivalents as of June 30, 2019, and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Deposits placed with banks
|
|
$
|
1,352,208
|
|
|
$
|
321,788
|
|
United States Treasury Bills
|
|
|
2,995,287
|
|
|
|
–
|
|
Total cash and cash equivalents
|
|
$
|
4,347,495
|
|
|
$
|
321,788
|
|
The Company has recently elected to accelerate
its organic growth path through additional marketing, team development, synergistic acquisitions, and other corporate activities
wherein it expects to generate negative cash flow and an additional demand for capital to fuel such growth.
The Company has commenced legal action
against a client for breach of contract, adding a significant value to its receivables for fees that had been booked due to forbearance
grants by the Company that were subsequently violated, causing the Company to increase its receivables accordingly (see Note 17
– Subsequent Events and Part II, Item 1, Legal Proceedings for more information).
2.
|
Critical Accounting Policies and Estimates
|
Basis of Presentation
These accompanying financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission for financial statements.
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, 2019 and December 31, 2018, 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,
2019
|
|
|
December 31,
2018
|
|
Level 3 – Non-Marketable Securities – Non-recurring
|
|
$
|
1,482,614
|
|
|
$
|
2,199,344
|
|
Non-Marketable Securities at Fair
Value on a Nonrecurring Basis
Certain assets are measured at fair value
on a nonrecurring basis. The level 3 position consist of investments accounted for under the cost method. The Level 3 position
consists of investments in equity securities held in private companies.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due
to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that
differ from these estimates.
Accounts Receivable
The Company extends unsecured credit to
its customers in the ordinary course of business. Accounts receivable related to licensing 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, 2019, and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts receivable – trade
|
|
$
|
470,584
|
|
|
$
|
1,180,757
|
|
Accounts receivable – related party
|
|
|
59,322
|
|
|
|
125,112
|
|
Accounts receivable – litigation
|
|
|
1,281,511
|
|
|
|
1,281,511
|
|
Total accounts receivable
|
|
$
|
1,811,417
|
|
|
$
|
2,587,380
|
|
The Company commenced legal action against
a customer for breach of contract, adding a significant value into its receivables for fees that had been booked due to forbearance
grants by the Company that were subsequently violated, causing the Company to increase its receivables accordingly. At June 30,
2019 and December 31, 2018, the accounts receivable for this matter totaled $1,281,511, and the revenue earned, all during the
year ended December 31, 2018, was $1,518,099. Further, the Company provided services to this Client for a period of thirteen months,
agreeing conditionally to three modifications in December of 2017, March of 2018, and May of 2018 to forego certain revenue sharing
payments in accordance with the agreement with the Client, which the Client subsequently violated. In July 2018, the Company engaged
legal counsel in Clark County Nevada to pursue the default and collect the payments due the Company pursuant to the terms of the
agreement with the Client. (See Note 17 – Subsequent Events and Part II, Item 1, Legal Proceedings for more information).
On March 22, 2019, the Company entered
into an Agreement of Sale of Future Receipts (“Factoring Agreement”) with Libertas Funding, LLC (“Purchaser”).
Under the terms of the Factoring Agreement, the Purchaser acquired $810,000 of certain future receivables from the Company for
$582,000 in net proceeds. The Company is required to repay Purchaser $24,107 weekly for an estimated term of eight months.
Due to the low volume of write offs, the
Company uses the direct write off method versus having an allowance for uncollectible debts. The Company did not write off any
of its accounts receivable in either of the six-month periods ending June 30, 2019 or 2018.
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 facilities shall bear an initial interest rate at 5.50% (representing United States Prime) and carry a term of 24 months,
unless otherwise amended by both parties.
As of June 30, 2019 and December 31, 2018,
the Company loaned to AMC a total of $237,246 and $92,888, respectively. The Company classified these loans as long-term notes
receivable on its consolidated balance sheets as of June 30, 2019, and December 31, 2018, respectively.
Other Assets (Current and Non-Current)
Other assets at June 30, 2019, and December
31, 2018 were $200,103 and $50,824, respectively and as of June 30, 2019 this balance included $180,653 in prepaid expenses and
$19,450 in two security deposits.
Accounts Payable
In June 2019, the Company requested
an early payoff amount to repay all amounts outstanding under the Factoring Agreement (see Note 2 – Critical Accounting
Policies and Estimates, Accounts Receivable) prior to the conclusion of its term. As of June 30, 2019, a balance of $436,607 remained
unpaid and was included in the Company’s accounts payable. The Company recorded $192,277 in interest expense related to
the Factoring Agreement during the six months ended June 30, 2019.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities
at June 30, 2019, and December 31, 2018 were $563,582 and $291,084, respectively. At June 30, 2019, this was comprised of customer
deposits of $163,568, accrued payroll of $122,706, and operating expenses of $277,308.
At December 31, 2018, this was comprised
of $163,568 in customer deposits, $21,330 in deferred rent expense and $106,185 in accrued payroll.
Fair Value of Financial Instruments
The carrying amounts of cash and current
assets and liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect these estimates. Available for sale securities are recorded at current market
value as of the date of this report.
Revenue Recognition and Related Allowances
Our revenue recognition policy is significant
because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met
in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration
is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified
when accepted from customers and represent a single performance obligation to sell our products to a customer.
The Company has five main revenue streams,
product sales, licensing and consulting, cultivation max, reimbursements, investment and others.
Revenue from cultivation max, licensing
and consulting services is recognized when the obligations to the client are fulfilled which is determined when milestones in the
contract are achieved.
Product Sales are recorded at the time
that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers,
we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title
of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
Revenue from seminar fees is
related to one-day seminars and is recognized as earned upon the completion of the seminar. The Company also recognizes expense
reimbursement from clients as revenue for expenses incurred during certain jobs.
Product Sales are recorded at the time
that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers,
we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title
of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
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 $73,088 and $128,489 for the three and six months ended June 30, 2019, respectively, as compared to $28,396
and $77,540, respectively, for the three and six months ended June 30, 2018.
Stock Based Compensation
The Company accounts for share-based payments
pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company records compensation expense for share-based
awards based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option
pricing model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and EITF 96-18 when stock or options are
awarded for previous or current service without further recourse. The Company issued stock options to contractors and external
companies that had been providing services to the Company upon their termination of services. Under ASC 718 and EITF 96-18 these
options were recognized as expense in the period issued because they were given as a form of payment for services already rendered
with no recourse.
Share based expense paid to through direct
stock grants is expensed as occurred. Since the Company’s stock has become publicly traded, the value is determined based
on the number of shares issued and the trading value of the stock on the date of the transaction. Prior to the Company’s
stock being traded the Company used the most recent valuation. The Company recognized $2,225,406 in expenses for stock-based compensation
to employees and consultants during both the three and six months ended June 30, 2019. The Company did not recognize any such expenses
during either the three or six months ended June 30, 2018.
Income Taxes
The Company has adopted SFAS No. 109 –
“Accounting for Income Taxes”. ASC Topic 740 requires the use of the asset and liability method of accounting for income
taxes. Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Management Fee Contracts
In February 2017, the Company entered
into a Merger Agreement with Pono Publications Ltd. (“Pono”), as well as a Share Exchange Agreement with Success Nutrients,
Inc. (“SN”), each a Colorado corporation, in order to facilitate the acquisition of both of these entities. The ratification
of the acquisition of these companies required the approval of the holders of a majority of the Company’s shareholders,
which was submitted for such approval at the Company’s annual shareholder meeting held on May 2017. The relevant agreements
provide that the effective date for accounting purposes would be April 1, 2017. Success Nutrients became a wholly owned subsidiary
of Medicine Man Technologies, Inc. and the business conducted by Pono was incorporated into a newly formed wholly owned subsidiary,
Medicine Man Consulting, Inc., which is also where the Company continues to conduct its consulting service business.
3.
|
Recent Accounting Pronouncements
|
FASB ASU 2016-02 “Leases
(Topic 842)”
– In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) ("ASU
2016-02"). ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record
right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease
arrangements. The new guidance will classify leases as either finance or operating (similar to current standard’s
“capital” or “operating” classification), with classification affecting the pattern of income
recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years, with early adoption permitted. The Company has adopted this
pronouncement and has reflected the value of all leases within the Balance Sheet of the Company.
FASB ASU 2016-15 “Statement of
Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity
in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective
for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted. Adoption of this ASU did not have a significant impact on our statement of cash flows.
FASB ASU 2017-01 “Clarifying the
Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1. The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is
not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of
outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods
beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU did not have a significant
impact on our consolidated results of operations, cash flows and financial position.
4.
|
Property and Equipment
|
Property and equipment are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Furniture & Fixtures
|
|
$
|
103,747
|
|
|
$
|
98,395
|
|
Marketing Display
|
|
|
36,900
|
|
|
|
36,900
|
|
Vehicles
|
|
|
34,000
|
|
|
|
34,000
|
|
Office Equipment
|
|
|
76,321
|
|
|
|
74,361
|
|
|
|
$
|
250,968
|
|
|
$
|
243,655
|
|
Less: Accumulated Depreciation
|
|
|
(174,633
|
)
|
|
|
(149,015
|
)
|
|
|
$
|
76,355
|
|
|
$
|
94,640
|
|
Depreciation on equipment is provided on
a straight-line basis over its expected useful lives at the following annual rates.
Furniture & Fixtures
|
3 years
|
Marketing Display
|
3 years
|
Vehicles
|
3 years
|
Office Equipment
|
3 years
|
Depreciation expense for the three and
six months ended June 30, 2019 was $14,966 and $25,617, respectively, compared to $18,693 and $31,375, respectively, for the three
and six months ended June 30, 2018.
On May 1, 2014,
the Company entered into a non-exclusive Technology License Agreement with Futurevision, Inc., f/k/a Medicine Man Production Corporation,
a Colorado corporation, dba Medicine Man Denver (“Medicine Man Denver”), a company owned and controlled by affiliates
of the Company, whereby Medicine Man Denver granted a license to use all of its proprietary processes it developed, implemented
and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical
marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including
trade secrets, skills and experience (present and future). As payment for the license rights, the Company issued Medicine Man
Denver (or its designees) 5,331,000 shares of the Company’s common stock. The Company accounted for this license in accordance
with ASC 350-30-30 “Intangibles – Goodwill and Other by recognizing the fair value of the amount paid by the company
for the asset at the time of purchase. Since the Company has a limited operating history, management determined to use par value
as the value recognized for the transaction. Since the term of the initial license agreement is ten (10) years, the cost of the
asset will be recognized on a straight-line basis over the life of the agreement. In addition, each period the Company will evaluate
the intangible asset for impairment. As of June 30, 2019, no impairment was deemed necessary.
During 2017, the
Company acquired two intangible assets as part of the acquisition of Success and Pono. The Company acquired product registrations
in California, Oregon, Colorado, Michigan, Arizona, Washington and Canada. The registrations allow the Company to sell its products
within each of the regions. Registration fees are capitalized based upon the initial costs incurred to obtain the license. The
licenses have nominal annual renewal costs. These subscriptions are amortized over a 15-year period.
During 2017, the
Company acquired an intangible asset related to the development of a product nutrient recipe. The intellectual property is being
amortized over its 15-year economic life. The intangible asset is considered an indefinite lived asset; however, the Company elected
to treat it as an amortizable asset based upon its estimated useful life.
During
2017, the Company acquired an additional intangible asset The Company acquired product license and registration rights in
Florida, Illinois, Maine, Massachusetts, Minnesota, Nevada and Ohio. The registrations allow the Company to sell their
product within each of the region. Registration fees are capitalized based upon the initial costs incurred to obtain the
license. The licenses have nominal annual renewal costs. These subscriptions are amortized over a 15-year period.
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
License Agreement
|
|
$
|
5,300
|
|
|
$
|
5,300
|
|
Product License and Registration
|
|
|
63,300
|
|
|
|
57,300
|
|
Trade Secret – IP
|
|
|
32,500
|
|
|
|
32,500
|
|
|
|
$
|
101,100
|
|
|
$
|
95,100
|
|
Less: accumulated amortization
|
|
|
(17,328
|
)
|
|
|
(13,903
|
)
|
|
|
$
|
83,772
|
|
|
$
|
81,197
|
|
Amortization expense for the three and
six months ended June 30, 2019 was $1,729 and $3,425, respectively, compared to $1,628 and $3,257, respectively, for the three
and six months ended June 30, 2018.
During the six months ended June 30, 2019,
the Company entered into employment agreements with certain 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, which will vest at such time that 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, which will vest at such time that that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds. Similarly, 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 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 from $1.32 - $3.75, (ii) the contractual term of
the derivative instrument of 3 years, (iii) a risk-free interest rate ranging between 1.71% - 2.57% and (iv) an expected volatility
of the price of the underlying common stock ranging between 219% - 274%.
As of June 30, 2019, the fair value of
these derivative liabilities is $5,655,123. The change in the fair value of derivative liabilities for the six months ended June
30, 2019 was $254,564 resulting in an aggregate loss on derivative liabilities.
7.
|
Related Party Transactions
|
During the six months ended June 30, 2019,
the Company had sales from Super Farm LLC totaling $306,280 and $96,260 sales from De Best Inc. One of the officers of the Company,
Joshua Haupt, currently owns 20% of both De Best and Super Farm. The Company gives a larger discount on nutrient sales to related
parties than non-related parties. As of June 30, 2019, the Company had accounts receivable balance with Super Farm LLC totaling
$9,552 and $3,885 accounts receivable from De Best Inc. During the six months ended June 30, 2019, the Company had discount of
sales associated with Super Farm LLC totaling $153,140 and $48,130 from De Best Inc.
During the six months ended June 30, 2019,
the Company had sales from Future Vision dba Medicine Man Denver totaling $143,005 and discount of sales totaling $71,503. As
of June 30, 2019, the Company had an accounts receivable balance owed from Future Vision totaling $40,690. As of June 30, 2019,
the Company had sales from Med Pharm Holdings totaling $14,795 and discount of sales totaling $7,498. As of June 30, 2019, the
Company had an accounts receivable balance owed from Med Pharm Holdings totaling $5,195. Our Chief Executive Officer, Andy Williams,
currently owns 38% of Future Vision dba Medicine Man Denver. Andy Williams also owns 10% of Med Pharm Holding.
8.
|
Goodwill and Acquisition Accounting
|
On September 17, 2018, we closed the acquisition
of Two JS LLC, dba The Big Tomato, a Colorado limited liability company. (“Big T” or “Big Tomato”). The
Company issued an aggregate of 1,933,329 shares of its common stock for 100% ownership of Big Tomato. The Company accounted for
the transaction utilizing purchase price accounting stating that net book value approximates fair market value of the assets acquired.
The purchase price accounting resulted in the Company valuing the investment as $3,000,000 of Goodwill. At September 17, 2018,
the Company’s per share value of Common Stock was $1.55. There is no requirement for Big Tomato to have independent audited
financial statement for the prior two fiscal years and any interim periods because the aggregate value of the acquisition is less
than 20% of the Company’s current assets.
Big Tomato Balance Sheet
|
|
|
Book/Fair Value
|
|
|
|
|
|
Book/Fair Value
|
|
Assets
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Inventory
|
|
|
291,000
|
|
|
Accounts payable
|
|
|
272,266
|
|
Other assets
|
|
|
4,950
|
|
|
Customer Deposits
|
|
|
23,684
|
|
|
|
|
295,950
|
|
|
|
|
|
295,950
|
|
Purchase Price (1,933,329*1.5517)
|
|
|
|
|
|
|
3,000,000
|
|
Less: BV of Assets
|
|
|
(295,950
|
)
|
Add: BV of Liabilities
|
|
|
295,950
|
|
Goodwill
|
|
|
3,000,000
|
|
The following table sets forth the changes
in the carrying amount of the Company’s goodwill at June 30, 2019, and December 31, 2018:
Balance, December 31, 2017
|
|
$
|
9,304,306
|
|
Acquisition of Big Tomato
|
|
|
3,000,000
|
|
Balance, December 31, 2018
|
|
$
|
12,304,306
|
|
Activity for the period ended June 30, 2019
|
|
|
–
|
|
Balance June 30, 2019
|
|
$
|
12,304,306
|
|
As of June 30, 2019, the Company determined
that no impairment is necessary.
9.
|
Net Income (Loss) per Share
|
In accordance with ASC Topic 280 –
“Earnings per Share”, the basic earnings per common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similar to basic loss
per common share except that the denominator is increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company's earnings
(loss) per share on a basic and diluted basis were $(0.30) and $0.01 for the three months ended June 30, 2019 and 2018, respectively,
and $(0.40) and $0.01 for the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019, and December 31, 2018,
respectively, the Company had $533,083 and $489,239 of finished goods inventory. The Company only has finished goods within inventory
because it does not produce any of its products. All inventory is produced by a third party. The Company uses the FIFO inventory
valuation method. As of June 30, 2019 and December 31, 2018, the Company did not have any obsolescence within its inventory.
The Company had a note payable to an officer
of the Company, Joshua Haupt. The balance of the note as of December 31, 2017 totaled $58,280 and was repaid in full during the
quarter ended March 31, 2018.
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. For those leases with a term greater than one year, the Company recognizes 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 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 was 6%.
Balance Sheet Classification of Operating
Lease Assets and Liabilities
|
|
Balance Sheet Line
|
|
June 30, 2019
|
|
Asset
|
|
|
|
|
|
|
Operating lease asset
|
|
Non-Current Assets
|
|
$
|
203,505
|
|
Liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Non-Current Liabilities
|
|
$
|
179,610
|
|
Lease Costs
The table below summarizes the components of lease costs for
the six months ended June 30, 2019.
|
|
Six Months Ended
June 30, 2019
|
|
Operating lease costs
|
|
$
|
79,178
|
|
Maturities of Lease Liabilities
Maturities of lease liabilities as of June
30, 2019 are as follows:
2019 fiscal year
|
|
$
|
124,404
|
|
2020 fiscal year
|
|
|
67,904
|
|
Total lease payments
|
|
|
192,308
|
|
Less: Interest
|
|
|
(12,698
|
)
|
Present value of lease liabilities
|
|
$
|
179,610
|
|
The following table presents the Company’s future minimum
lease obligation under ASC 840 as of December 31, 2018:
2019 fiscal year
|
|
$
|
248,808
|
|
2020 fiscal year
|
|
$
|
67,904
|
|
13.
|
Commitments and Contingencies
|
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 Securities Exchange Act of 1934, as amended. HB19-1090 titled, “Publicly Licensed Marijuana
Companies” is currently under consideration in the Colorado legislature. The bill, if signed into law, repeals the provision
that prohibits publicly traded corporations from holding a marijuana license in Colorado. Should this legislation be adopted,
the Company intends to acquire cannabis licensed companies within 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 (in the aggregate, “Medicine Man”), owners of several licensed dispensaries and a cultivation facility in the Denver, CO metro area. Medicine Man currently owns the only cannabis research license in the state of Colorado, with a federal research license pending. It is also a leading cultivator, retailer and one of the best-known brands in the cannabis sector, wining over a dozen industry awards. Medicine Man operates out of a 40,000-square foot cultivation operation and has four popular retail locations across the Denver metropolitan area;
|
|
·
|
MedPharm Holdings, LLC, a company that develops and manages intellectual property related to the manufacture and formulation of products containing cannabinoid extracts. Management of MDCL believes that this acquisition will bring world-class processing and pharmaceutical-grade products to the company; and
|
|
|
|
|
·
|
MX LLC, the holder of licenses that allow it to be a manufacturer of marijuana infused products (‘edibles”) in the Denver metro area. It is a licensee of MedPharm.
|
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. Our Chief Executive Officer, Andrew Williams,
serves as an officer/manager and has an ownership interest in each of the targets above.
On May 24, 2019, the Company entered into
a binding term sheet with Farm Boy, LLC (“Farm Boy”) and Baseball 18, LLC (“Baseball”) setting forth the
terms of the acquisition by the Company of 100% of the capital stock and assets of Farm Boy and Baseball, respectively. As consideration,
the Company shall pay a total purchase price of $5,937,500, subject to adjustment, consisting of $1,187,500 cash and 1,578,073
shares of its common stock, par value $0.001 per share. The 1,578,073 shares were determined by averaging the closing price of
Company’s common stock for the five (5) days prior to the execution date, which equated to $3.01 per share.
On May 24, 2019, the Company entered into
a binding term sheet with Los Suenos, LLC (“Los Suenos”) and Emerald Fields Grow, LLC (“Emerald”) setting
forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Los Suenos and Emerald, respectively.
As consideration, the Company shall pay a total purchase price of $5,937,500, subject to adjustment, consisting of $1,187,500 cash
and 1,578,073 shares of its common stock, par value $0.001 per share. The 1,578,073 shares were determined by averaging the closing
price of Company’s common stock for the five (5) days prior to the execution date, which equated to $3.01 per share.
On May 31, 2019, the Company entered into
a binding term sheet with Mesa Organics Ltd., Mesa Organics II Ltd. and Mesa Organics III Ltd. (collectively referred to herein
as “MesaPur”) setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of
MesaPur. As consideration, the Company shall pay a total purchase price of $12,012,758, subject to adjustment, consisting of $2,402,552
cash and 2,801,809 shares of its common stock, par value $0.001 per share. The 2,801,809 shares were determined by averaging the
closing price of Company’s common stock for the ten (10) days prior to the execution date, which equated to $3.43 per share.
On June 6, 2019, the Company entered into
a binding term sheet with the stockholders of Green Equity S.A.S. (“Green Equity”), a Republic of Colombia simplified
stock corporation, setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Green Equity.
Green Equity, a company based in Bogota, Columbia, holds all four licenses in Columbia allowing it to grow, process, retail and
export. As consideration, the Company shall pay a total purchase price of $5,400,000 consisting of $450,000 cash and 1,292,428
shares of its common stock, par value $0.001 per share. The 1,292,428 shares were determined by using the closing price of Company’s
common stock on the day prior to the execution date, which equated to $3.83 per share.
These acquisitions are subject to various
terms and the satisfaction of various conditions, including obtaining the approval of our shareholders, completion of financial
audits for each company proposed to be acquired demonstrating that their financial condition are consistent with the representations
made to us and execution of definitive agreements between the respective parties. In addition, because they are the holders of
cannabis licenses issued by the Marijuana Enforcement Division (“MED”) in the State of Colorado, these acquisitions,
with the exception of MedPharm, will require that proposals currently pending in the Colorado legislature to adopt and enact new
laws which will allow for public company ownership of Colorado licensed business in the marijuana industry.
Common Stock
The Company is authorized to issue 90,000,000
shares of common stock at a par value of $0.001 and had 31,769,511 and 27,753,310 shares of common stock issued and outstanding
as of June 30, 2019, and December 31, 2018, respectively.
Common Stock Issued in Private Placements
During the six months ended June 30, 2018,
the Company sold 937,647 shares of common stock to an accredited investor in a private placement.
On June 5, 2019, the Company entered into
a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Investor”).
Pursuant to the Purchase Agreement, the Company agreed to sell to the Investor and the Investor agreed to purchase, in a private
placement, up to 7,000,000 shares of the Company’s common stock, at a price of $2.00 per share and warrants to purchase
100% of the number of shares of common stock sold. The warrants are for a term of three years and are exercisable at a price of
$3.50.
At the initial closing on June 5, 2019,
the Company issued and sold 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.
The Purchase Agreement contemplates the
sale of additional shares of common stock, subject to certain closing conditions set forth in the Purchase Agreement, as follows:
(i) 3,500,000 shares of common stock and warrants to purchase 3,500,000 shares of common stock at a second closing to be held on
or before July 15, 2019; (ii) 1,000,000 shares of common stock and warrants to purchase 1,000,000 shares of common stock at a third
closing; and (ii) 1,000,000 shares of common stock and warrants to purchase 1,000,000 shares of common stock at a fourth closing.
The Purchase Agreement was subsequently
amended as described below in Note 18 - Subsequent Events.
During the six months ended June 30, 2019,
the Company issued an additional 700,000 shares of common stock and warrants to purchase 700,000 shares of common stock, for gross
proceeds of $1,400,000.
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.
Common Stock Issued as Compensation
to Employees, Officers and Directors
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.
During the six months ended June 30, 2019,
the Company issued an additional 640,000 shares of common stock valued at $1,969,900 to employees, officers and directors as compensation.
Common Stock Issued in Exchange for
Consulting, Professional and Other Services
Concurrent with his resignation as described
above, 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.
During the six months ended June 30, 2019,
the Company issued an additional 123,775 shares of common stock valued at $210,521 to contractors and professionals in exchange
for services provided.
Warrants
The Company accounts for common stock purchase
warrants in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock, Distinguishing Liabilities from Equity. 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, 2017,
the Company issued 1,500,566 common stock purchase warrants with an exercise price of $1.33 per share, expiring on March 17, 2019.
During the six months ended June 30, 2019, an aggregate of 452,426 of these warrants were exercised while the remaining warrants
were forfeited.
During the period ended December 31, 2017,
the Company issued 2,000,000 common stock purchase warrants to three employees of the Company with an exercise price of $1.445
per share, expiring on December 31, 2019. As of June 30, 2018, all these warrants were exercised.
During the year ended December 31, 2018,
the Company issued 250,000 common stock purchase warrants to one employee of the Company with an exercise price of $1.49 per share
for a period of time expiring on December 31, 2021. The Company 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 $1.49, (ii) the contractual
term of the warrant of 3 years, (iii) a risk-free interest rate of 2.48% and (iv) an expected volatility of the price of the underlying
common stock of 126%.
During the six months ended June
30, 2019, the Company issued 2,200,000 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. 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 of 1.81% and (iv) an expected
volatility of the price of the underlying common stock of 158%.
|
|
Number of shares
|
|
Balance as of January 1, 2019
|
|
|
2,647,461
|
|
Warrants exercised
|
|
|
(452,426
|
)
|
Warrants forfeited
|
|
|
(1,007,388
|
)
|
Warrants issued
|
|
|
2,200,000
|
|
Balance as of June 30, 2019
|
|
|
3,387,647
|
|
The Company has two identifiable segments
as of June 30, 2019; (i) licensing and consulting and (ii) products. The products segment sells merchandise directly to customers
via e-commerce portals, through our proprietary websites and retail location. The licensing and consulting segment sales derives
its revenue from licensing and consulting agreements with cannabis related entities.
The following information represents segment
activity for the six-month periods ended June 30, 2019 and 2018:
|
|
For the Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Products
|
|
|
Licensing and Consulting
|
|
|
Total
|
|
|
Products
|
|
|
Licensing and Consulting
|
|
|
Total
|
|
Revenues
|
|
$
|
2,880,041
|
|
|
$
|
881,253
|
|
|
$
|
3,761,295
|
|
|
$
|
830,034
|
|
|
$
|
1,788,690
|
|
|
$
|
2,628,724
|
|
Intangible assets amortization
|
|
$
|
3,160
|
|
|
$
|
265
|
|
|
$
|
3,425
|
|
|
$
|
2,993
|
|
|
$
|
264
|
|
|
$
|
3,257
|
|
Depreciation
|
|
$
|
3,400
|
|
|
$
|
22,217
|
|
|
$
|
25,617
|
|
|
$
|
3,628
|
|
|
$
|
34,656
|
|
|
$
|
38,284
|
|
Income (loss) from operations
|
|
$
|
179,552
|
|
|
$
|
(11,914,020
|
)
|
|
$
|
(11,734,468
|
)
|
|
$
|
(34,367
|
)
|
|
$
|
205,566
|
|
|
$
|
171,199
|
|
Segment assets
|
|
$
|
5,435,508
|
|
|
$
|
15,929,368
|
|
|
$
|
21,364,876
|
|
|
$
|
1,376,223
|
|
|
$
|
10,647,405
|
|
|
$
|
12,023,628
|
|
The company utilizes FASB ASC 740, “Income
Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based
on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established if it is more likely than not that some portion or all of the deferred tax asset will not
be realized. The Company generated a deferred tax credit through net operating loss carry forwards. The Company had no tax provisions
as of June 30, 2019 and December 31, 2018. The company had a net loss during the quarter ended June 30, 2019, increased the net
loss carryforward.
In accordance with FASB ASC 855-10 Subsequent
Events, the Company has analyzed its operations subsequent to June 30, 2019 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.
On July 15, 2019,
the Company entered into an amendment (the “Amendment”) to that certain securities purchase agreement (the “Purchase
Agreement”) dated as of June 5, 2019, entered into between the Company and an accredited investor (the “Investor”).
Pursuant to the Amendment, among other things, the Purchase Agreement was amended to provide for the sale, at the third closing,
of a minimum of 3,000,000 shares of the Company’s common stock, with the Investor having the option to acquire up to an additional
2,500,000 shares of common stock for an aggregate of up to 5,500,000 shares of common stock and warrants to purchase 100% of the
number of shares of common stock sold at the third closing.
The Amendment
also removed as a closing condition to the second closing, the requirement that the Company shall have entered into definitive
agreements for the acquisitions of each of (a) MedPharm LLC, (b) Futurevision 2020, LLC, Futurevision Ltd, and Medicine Man Longmont,
LLC, collectively, (c) MX, LLC, (d) Los Sueños Farms, LLC, and (e) Farm Boy LLC and Baseball 18, LLC.
In addition, the
Amendment removed all references to a fourth closing and the conditions for such closing, which were outlined in the Purchase Agreement.
On July 16, 2019,
the Company issued and sold 3,500,000 shares of common stock and warrants to purchase 3,500,000 shares of common stock pursuant
to the terms of the Purchase Agreement, as amended, for gross proceeds of $7,000,000.
On August 2, 2019,
a jury in the District Court of Clark County, Nevada found in favor of the Company and against Vegas Valley Growers (“VVG”)
and awarded the Company damages totaling $2,773,321 with respect to a complaint filed by the Company against VVG which alleged
the breach by VVG of that certain Technologies License Agreement dated April 27, 2017 entered into between the parties.