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 it had developed, implemented and practiced at its 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) 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, d/b/a Purplebee’s.
On April 20, 2020, the Company rebranded and since
then 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 acquired the
assets of (i) Starbuds Pueblo LLC, and (ii) Starbuds Alameda LLC under separate asset purchase agreements. On December 18, 2020, the Company
acquired the assets of (i) Starbuds Commerce City LLC, (ii) Lucky Ticket LLC, (iii) Starbuds Niwot LLC, and (iv) LM MJC LLC under separate
asset purchase agreements. On February 4, 2021, the Company acquired the assets of (i) Colorado Health Consultants LLC, and (ii) Mountain
View 44th LLC under separate asset purchase agreements. 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 separate asset purchase agreements. The
Company refers to the counterparties to these transactions as “Star Buds” and this series of acquisitions as the “Star
Buds Acquisition.”
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 our Series A Cumulative Convertible Preferred Stock, par value $0.001 per share (the “Preferred Stock”).
On July 21, 2021, the Company acquired the assets
of Southern Colorado Growers under the applicable asset purchase agreement.
On December 3, 2021, the Company and all the Subsidiary
Guarantors (as defined in the Indenture (as defined below)) entered into a Securities Purchase Agreement with 31 accredited investors
(the “Note Investors”), pursuant to which the Company agreed to issue and sell to the Note Investors 13% senior secured convertible
notes due December 7, 2026 (the “Investor Notes”) in an aggregate principal amount of $95,000,000 for an aggregate purchase
price of $93,100,000 (reflecting an original issue discount of $1,900,000, or 2%) in a private placement. On December 7, 2021, the Company
consummated the private placement and issued and sold the Investor Notes pursuant to the Indenture entered into among the Company, Chicago
Admin, LLC, as collateral agent, Ankura Trust Company, LLC, as trustee, and the Subsidiary Guarantors party thereto (the “Indenture”).
The Company received net proceeds of approximately $92 million at the closing, after deducting a commission to the placement agent and
estimated offering expenses. The Investor Notes will mature five years after issuance unless earlier repurchased, redeemed, or converted.
The Investor Notes bear interest at 13% per year paid quarterly commencing March 31, 2022 in cash for an amount equal to the amount payable
on such date as if the Investor Notes were subject to an annual interest rate of 9%, with the remainder of the accrued interest payable
as an increase to the principal amount of the Investor Notes. The proceeds from the Investor Notes are required to be used to fund previously
identified acquisitions and other growth initiatives.
On December 21, 2021, the Company acquired the
assets of Smoking Gun Apothecary (“Smoking Gun”) under the applicable asset purchase agreement.
On January 26, 2022, the Company acquired the
assets BG3 Investments, LLC, dba Drift (“Drift”), and Black Box Licensing, LLC under the applicable asset purchase agreement.
On February 8, 2022, the Company acquired its
New Mexico business under the terms of a Purchase Agreement, dated November 29, 2021, with Nuevo Holding, LLC and Nuevo Elemental Holding,
LLC, both of which are indirect wholly-owned subsidiaries of the Company (collectively, the “Nuevo Purchasers”), Reynold Greenleaf
& Associates, LLC (“RGA”), Elemental Kitchen and Laboratories, LLC (“Elemental”), the equity holders of RGA
and Elemental, and William N. Ford, in his capacity as Representative, as amended on February 8, 2022 (the “Nuevo Purchase Agreement”).
The Nuevo Purchasers acquired substantially all of the operating assets of RGA and all of the equity of Elemental and assumed specified
liabilities of RGA and Elemental. Pursuant to existing laws and regulations in New Mexico, the cannabis licenses for certain facilities
managed by RGA are held by two not-for-profit entities: Medzen Services, Inc. (“Medzen”) and R. Greenleaf Organics, Inc. (“R.
Greenleaf” and together with Medzen, the “NFPs”). At the closing, Nuevo Holding, LLC gained control over the NFPs by
becoming the sole member of each of the NFPs and replacing the directors of the two NFPs with Justin Dye, the Company’s Chief Executive
Officer and one of its directors, Nancy Huber, the Company’s Chief Financial Officer, and Dan Pabon, the Company’s General
Counsel, Chief Government Affairs Officer and Corporate Secretary. The business acquired from RGA consists of serving as a branding, marketing
and consulting company, licensing certain intellectual property related to the business of THC-based products to Elemental and the NFPs,
providing consulting services to Elemental and the NFPs, and supporting Elemental and the NFPs to promote, support, and develop sales
and distribution of products. Elemental is engaged in the business of creating and distributing cannabis-derived products to licensed
cannabis producers. Elemental and the NFPs are in the business of cultivating, processing and dispensing marijuana in New Mexico, with
10 dispensaries, four cultivation facilities (three operating and one under development) and one manufacturing facility. The dispensaries
are located in Albuquerque, Santa Fe, Roswell, Las Cruces, Grants and Las Vegas, New Mexico. The cultivation and manufacturing facilities
are located in Albuquerque, New Mexico and consists of approximately 70,000 square feet of cultivation and 6,000 square feet of manufacturing.
On the same date, Nuevo Holding, LLC entered into two separate Call Option Agreements containing substantially identical terms with each
of the NFPs. Each Call Option Agreement gives Nuevo Holding, LLC the right to acquire 100% of the equity or 100% of the assets of the
applicable NFP for a purchase price of $100 if, in the future, the New Mexico legislature adopts legislation that permits a NFP to (i)
convert to a for-profit corporation and maintain its cannabis license or (ii) sell its assets (including its cannabis license) to a for-profit
corporation. The aggregate closing consideration for the acquisitions was approximately (i) $27.7 million in cash, and (ii) $17.0 million
in the form of an unsecured promissory note issued by Nuevo Holding, LLC to RGA, the principal amount of which is payable on February
8, 2025 with interest payable monthly at an annual interest rate of 5%. The Nuevo Purchasers may be required to make a potential “earn-out”
payment of up to $4.5 million in cash to RGA and William N. Ford (as Representative) based on the EBITDA of the acquired business for
calendar year 2021.
On February 9, 2022, the Company acquired MCG,
LLC (“MCG”) pursuant to the terms of an Agreement and Plan of Merger, dated November 15, 2021, with Emerald Fields Merger
Sub, LLC, a wholly-owned subsidiary of the Company, MCG, MCG’s owners, and Donald Douglas Burkhalter and James Gulbrandsen in their
capacity as the Member Representatives, as amended on February 9, 2022.
On February 15, 2022, Double Brow, LLC (“Double
Brow”) acquired substantially all of the operating assets of Brow 2, LLC (“Brow”) related to its indoor cannabis cultivation
operations located in Denver, Colorado (other than assets expressly excluded) and assumed certain liabilities for contracts acquired pursuant
to the terms of the Asset Purchase Agreement, dated August 20, 2021, among Double Brow, Brow, and Brian Welsh, as the owner of Brow.
On March 11, 2022, the Company entered into an
Asset and Personal Goodwill Purchase Agreement (the “Urban Purchase Agreement”) with Double Brow, Urban Health & Wellness,
Inc. d/b/a Urban Dispensary (“Urban Dispensary”), Productive Investments, LLC (“Productive Investments”), and
Patrick Johnson (together with Productive Investments, the “Equityholders”), pursuant to which the Double Brow will purchase
(i) all of Urban Dispensary’s assets used or held for use in Urban Dispensary’s business of owning and operating a retail
marijuana store and a grow facility, each located in Denver, Colorado, and (ii) all of Equityholders’ personal goodwill arising
from Equityholders’ independent, separate, individual and personal efforts relating to Urban Dispensary’s business on the
terms and subject to the conditions set forth in the Urban Purchase Agreement (the “Urban Asset Purchase”), and assume obligations
under contracts acquired as part of the Urban Asset Purchase. The aggregate consideration for the Urban Asset Purchase will be up to $1,317,500
million in cash and shares of Common Stock in an amount equal to $1,900,000 divided by the price per share of the Common Stock as of market
close on the first trading day immediately before the closing. The Company will deposit $30,000 of the cash portion of the purchase price
as an earnest money deposit with Urban Dispensary. The Company will hold back $288,000 of the stock consideration at closing as collateral
for potential claims for indemnification from Urban Dispensary under the Urban Purchase Agreement. Any portion of the held back cash consideration
not used to satisfy indemnification claims will be released to Urban Dispensary on the 18-month anniversary of the closing date of the
Urban Asset Purchase.
On March 17, 2022, the Company announced that
its Common Stock was approved for listing on the NEWO, a tier one Canadian Stock exchange based in Toronto, Ontario. The Common Stock
began trading on the NEO on March 23, 2022.
1. |
Liquidity and Capital Resources |
During the quarters ended March 31, 2022 and 2021,
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 $47,688,094 and $106,400,216 classified as cash and cash equivalents
as of March 31, 2022, and December 31, 2021, respectively.
The Company maintains its cash balances with financial
institutions. 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.
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 (“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, 2021 and 2020, as presented in the Company’s Annual Report on Form 10-K filed
on March 31, 2022 with the SEC.
Basis of Presentation
These accompanying financial statements have been
prepared in accordance with 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 GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty
involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications had no impact on the Company’s 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, notes receivable, accounts payable 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, including notes payable,
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 March 31, 2022 and December 31, 2021, using quoted prices
in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs
(Level 3):
Schedule of fair value measurement
| |
| | |
| |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Level 1 - Marketable Securities Available-for-Sale - Recurring | |
| 485,004 | | |
| 493,553 | |
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.
The following table depicts the composition of
our accounts receivable as of March 31, 2022, and December 31, 2021:
Schedule of Accounts Receivable
| |
| | | |
| | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Accounts receivable - trade | |
$ | 4,331,579 | | |
$ | 4,001,874 | |
Accounts receivable - litigation, non-current | |
| 290,648 | | |
| 303,086 | |
Allowance for doubtful accounts | |
| (135,046 | ) | |
| (135,046 | ) |
Total accounts receivable | |
$ | 4,487,181 | | |
$ | 4,169,914 | |
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.
Notes Receivable
On March 12, 2021, the Company sold equipment
to Colorado Cannabis Company LLC (“Colorado Cannabis”). Colorado Cannabis is obligated to pay $215,000, payable in equal monthly
installments for 24 months commencing 30 days from the date of taking possession of the equipment pursuant to the Purchase and Sale Agreement,
dated January 29, 2021. As of March 31, 2022, the outstanding balance, including penalties for late payments, on the receivable
from Colorado Cannabis totaled $107,500.
Prepaid Expenses and Other Assets (Current
and Non-Current)
Prepaid expenses and other assets as of March
31, 2022 and December 31, 2021 were $4,393,189 and $3,038,176,
respectively. As of March 31, 2022, this balance included $3,516,659
in prepaid expenses and $876,530
in security deposits. As of December 31, 2021, other assets included $2,523,215
in prepaid expenses and $514,962
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 3
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, 2021, 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, 2022, 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, 2021, 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, 2022 and December
31, 2021 were $3,106,503 and $2,585,705, 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, 2022 and December 31, 2021 were $15,308,676 and $5,592,222, respectively. As of March 31, 2022, this was comprised of accrued payroll
of $1,010,690, operating expenses of $13,797,986, and escrow payable of $500,000 which bears a 3% interest related to the Brow acquisition.
As of December 31, 2021, this was comprised of accrued payroll of $301,312 and operating expenses of $5,290,910.
Revenue Recognition
The Company’s revenue recognition policy
is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required
to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until the criteria are
met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Revenue contracts
are identified when accepted from customers and represent a single performance obligation to sell the Company’s products to a customer.
The Company has three main revenue streams: retail;
wholesale; and other.
The Company’s retail and wholesale segment
revenues 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.
The Company’s other segment revenue consists
of other income 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 products and services.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as
incurred and totaled $723,574 for the three months ended March 31, 2022, as compared to $11,685 for the three months ended March 31, 2021.
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 96-18 when stock
or options are awarded for previous or current service without further recourse.
Share-based expense paid through direct stock
grants is expensed as occurred. Since the 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 (the “FASB”) issued ASU 2018-07 which simplifies the accounting for share-based payments granted to nonemployees for
goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based
payments granted to employees. Previously, share-based payment arrangements to nonemployees were accounted for under ASC 718, while nonemployee
share-based payments issued for goods and services were accounted for under ASC 505-50. Before the amendment, the major difference for
the Company (but not limited to) was the determination of measurement date, which generally is the date on which the measurement of equity
classified share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified
nonemployee share-based payment awards are no longer measured at the earlier of the date which a commitment for performance by the counterparty
is reached or the date at which the counterparty’s performance is complete. They are now measured at the grant date of the award,
which is the same as share-based payments for employees. The Company adopted the requirements of the new rule as of January 1, 2019, the
effective date of the new guidance.
The Company recognized $991,083 in expense for
stock-based compensation from Common Stock options and Common Stock issued to employees, officers, and directors during the three months
ended March 31, 2022, and $1,483,806 in expenses for stock-based compensation from the issuance of Common Stock to employees, officers,
directors and/or contractors during the three months ended March 31, 2021.
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 Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct
expenses directly related to sales, manufacturing or cultivation 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 ASU 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. 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. Pronouncements that are not applicable to the Company
or where it has been determined do not have a significant impact on the financial statements have been excluded herein.
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:
Property and equipment table
| |
| | | |
| | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Furniture and fixtures | |
$ | 1,256,324 | | |
$ | 300,798 | |
Leasehold improvements | |
| 912,724 | | |
| 853,599 | |
Vehicles, machinery, and tools | |
| 2,208,794 | | |
| 2,152,129 | |
Land | |
| 35,000 | | |
| 35,000 | |
Servers & Office Equipment | |
| 91,373 | | |
| – | |
Software, servers and equipment | |
| 2,320,576 | | |
| 2,550,154 | |
Land Improvements | |
| 2,784,932 | | |
| – | |
Building | |
| 2,910,976 | | |
| 2,910,976 | |
PC & Peripherals | |
| 385,387 | | |
| – | |
Construction in process | |
| 6,086,532 | | |
| 3,439,543 | |
Total Asset Cost | |
$ | 18,992,618 | | |
$ | 12,242,199 | |
Less: Accumulated depreciation | |
| (2,390,922 | ) | |
| (1,988,973 | ) |
Total property and equipment, net of depreciation | |
$ | 16,601,696 | | |
$ | 10,253,226 | |
Depreciation on equipment is provided on a straight-line
basis over its expected useful lives at the following annual rates.
Schedule of property and equipment useful lives
|
|
Furniture and fixtures |
|
3-5 years |
Leasehold improvements |
|
Lesser of the lease term or estimated useful life |
Vehicles, machinery and tools |
|
3-5 years |
Land |
|
Indefinite |
Software, servers and equipment |
|
3 years |
Building |
|
39 years |
Depreciation expense for the three months ended
March 31, 2022 and 2021 was $401,949 and $194,637, respectively.
Intangible assets as of March 31, 2022 and December
31, 2021 were comprised of the following:
Schedule of intangible assets
| |
| | | |
| | | |
| | | |
| | |
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Gross Carrying Amount | | |
Accumulated Amortization | |
License Agreements | |
$ | 94,230,280 | | |
$ | (7,067,406 | ) | |
$ | 94,230,280 | | |
$ | (5,496,902 | ) |
Tradename | |
| 4,560,000 | | |
| (1,073,667 | ) | |
| 4,560,000 | | |
| (845,667 | ) |
Customer Relationships | |
| 5,150,000 | | |
| (1,176,119 | ) | |
| 5,150,000 | | |
| (933,690 | ) |
Non-compete | |
| 1,205,000 | | |
| (444,472 | ) | |
| 1,205,000 | | |
| (348,056 | ) |
Product License and Registration | |
| 57,300 | | |
| (18,918 | ) | |
| 57,300 | | |
| (17,963 | ) |
Trade Secret | |
| 32,500 | | |
| (11,014 | ) | |
| 32,500 | | |
| (10,472 | ) |
Total | |
$ | 105,235,080 | | |
$ | (9,791,597 | ) | |
$ | 105,235,080 | | |
$ | (7,652,750 | ) |
Amortization expense for the three months ended
March 31, 2022 and 2021 was $2,138,847 and $1,595,931, respectively.
Employee Common Stock
During the year ended December 31, 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 would have vested at such time that that the Company’s
stock price appreciated to $8.00 per share with defined minimum average daily trading volume thresholds. This right expired on January
8, 2022 and all expense had been recognized as of December 31, 2021.
On June 11, 2019, the Company granted the right
to receive 1,000,000 shares of restricted Common Stock to an officer, 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. This right expired January 8, 2022
and all expense had been recognized as of December 31, 2021.
The Company accounts for derivative instruments
in accordance with the GAAP accounting guidance under ASC 815 Derivatives and Hedging Activities. The Company estimated the fair
value of these derivatives at the respective balance sheet dates using the Black-Scholes option pricing model based upon the following
inputs: (i) stock price on the date of grant ranging between $1.32 - $3.75, (ii) the contractual term of the derivative instrument ranging
between 2.25 - 3 years, (iii) a risk-free interest rate ranging between 1.87% - 2.57% and (iv) an expected volatility of the price of
the underlying Common Stock ranging between 145% - 158%.
The fair value of these derivative liabilities
is $0 as of March 31, 2022 and December 31, 2021, respectively.
Investor Note
The Company issued Investor Notes in an aggregate
principal amount of $95,000,000
on December 7, 2021. A reconciliation of the beginning and ending balances of the derivative liabilities for the periods ended
March 31, 2022 and December 31, 2021 were as follows:
Schedule of derivative liabilities
| |
| | |
Balance as of January 1, 2021 | |
$ | – | |
| |
| | |
Fair value of derivative liabilities on issuance date | |
| 48,936,674 | |
Gain on derivative liability | |
| (14,013,661 | ) |
| |
| | |
Balance as of December 31, 2021 | |
$ | 34,923,013 | |
| |
| | |
Loss on derivative liability | |
| 13,417,472 | |
| |
| | |
Balance as of March 31, 2021 | |
$ | 48,340,485 | |
The Company accounts for derivative instruments
in accordance with the GAAP accounting guidance under ASC 815 Derivatives and Hedging Activities. In accordance with GAAP, a contract
to issue a variable number of equity shares fails to meet the definition of equity and must instead be classified as a derivative liability
and measured at fair value with changes in fair value recognized in the consolidated statements of operations at each period-end. The
Company utilizes a Monte Carlo simulation in determining the appropriate fair value. The derivative liability will ultimately be converted
into the Company’s equity when the Investor Notes are converted or will be extinguished on the repayment of the Investor Notes.
The derivative liability will not result in the outlay of any additional cash by the Company. Upon initial recognition, the Company recorded
a derivative liability and debt discount of $48,936,674 in relation to the derivative liability portion of the Investor Notes. The Company
recorded $1,756,173 and $458,885 in amortization related to the debt discount for the periods ended March 31, 2022 and December 31, 2021,
respectively.
7. |
Related Party Transactions |
Transactions Involving Former Directors, Executive
Officers or Their Affiliated Entities
During the year ended December 31, 2019,
the Company made loans to MedPharm Holdings LLC (“MedPharm”) totaling $767,695 evidenced by promissory notes with original
maturity dates ranging from September 21, 2019 through January 19, 2020 and all bearing interest at 8% per annum. On August 1, 2020, the
Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with MedPharm pursuant to which
(i) the parties agreed that the outstanding amount owed by MedPharm to the Company was $767,695 of principal and $47,161 in accrued and
unpaid interest, (ii) MedPharm paid the Company $100,000 in cash, (iii) Andrew Williams returned 175,000 shares of Common Stock to the
Company, as partial repayment of the outstanding balance at a value of $1.90 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 was to be paid out in bi-weekly
installments of product by scheduled deliveries through June 30, 2021. This amount was paid off on April 19, 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 Capital Cann Holdings II, LLC (“Dye Cann
II”). Justin Dye, the Company’s Chief Executive Officer, one of its directors, and the largest beneficial owner of Common
Stock and 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 our 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 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 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 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 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 the Company’s Annual Report
on Form 10-K for the year ended December 31, 2021. The Company issued and sold to Dye Cann II 7,700 shares of Preferred Stock on December
16, 2020, 1,450 shares of Preferred Stock on December 18, 2020, 1,300 shares of Series Preferred Stock on December 22, 2020, 3,100 shares
of Preferred Stock on February 3, 2021, 3,800 shares of Preferred Stock on March 2, 2021 and 4,000 shares of Preferred Stock on March
30, 2021. As a result, the Company issued and sold an aggregate of 21,350 shares of 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 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 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
Preferred Stock in the Company’s Current Report on Form 8-K filed on December 23, 2020.
During the year ended December 31, 2020, the Company
recorded expenses of $66,264 with Tella Digital. As of December 31, 2021 the Company recorded expenses of $214,908. Tella Digital provides
on-premise digital experience solutions for our retail dispensary locations. Mr. Dye is an indirect partial owner of and serves as Chairman
of Tella Digital. Nirup Krishnamurthy, the Company’s Chief Operating Officer and one of its directors, is also an indirect partial
owner of Tella Digital.
Transactions with Entities Affiliated with Jeffrey Cozad
On February 26, 2021, the Company entered into
a Securities Purchase Agreement (the “CRW SPA”) with CRW Cann Holdings, LLC (“CRW”) pursuant to which the Company
issued and sold 25,350 shares of 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 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 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 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 $12,500. 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 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.
On December 7, 2021, the Company entered into
a Securities Purchase Agreement with Cozad Investments, L.P. pursuant to which the Company issued an Investor Note in the aggregate principal
amount of $245,000 to Cozad Investments, L.P. for $250,000 in cash. The Investor Note bears interest at 13% per year payable quarterly
commencing March 31, 2022 in cash for an amount equal to the amount payable on such date as if the Investor Note was subject to an annual
interest rate of 9% with the remainder of the accrued interest payable as an increase to the principal amount of the Note. Mr. Cozad is
a manager and majority owner of Cozad Investments, L.P. and a member of the Board.
Transactions with Entities Affiliated with
Marc Rubin
On February 26, 2021, the Company entered into
the CRW SPA with CRW, of which Marc Rubin is a beneficial owner. On December 7, 2021, the Company entered into a Securities Purchase Agreement
with The Rubin Revocable Trust U/A/D 05/09/2011 pursuant to which the Company issued an Investor Note in the aggregate principal amount
of $98,000 to The Rubin Revocable Trust for $100,000 in cash. The Investor Note bears interest at 13% per year payable quarterly commencing
March 31, 2022 in cash for the amount equal to the amount payable on such date as if the Investor Note was subject to an annual interest
rate of 9% with the remainder of the accrued interest payable as an increase to the principal amount of the Note. Mr. Rubin is a majority
owner of The Rubin Revocable Trust and a beneficial owner of CRW.
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, a beneficial owner of more than 5% of the Common Stock
and a beneficial owner of more than 5% of the Preferred Stock.
Between December 17, 2020 and March 2, 2021, the
Company’s wholly-owned subsidiary SBUD LLC consummated the Star Buds Acquisition. 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
Acquisition 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 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 the applicable sellers
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 Common Stock to the sellers. As of March 31, 2022, the Company owed an aggregate principal amount of $44,250,000
under the seller notes. The Company has not paid any principal and has paid an aggregate of $5,665,887 of interest on the seller notes
as of March 31, 2022. Mr. Ruden’s interest in the aggregate purchase price for the Star Buds Acquisition 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 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 Common Stock to Mr. Ruden. The Company has paid Mr. Ruden an aggregate of $1,753,562 in interest on his seller
notes as of March 31, 2022.
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, 46% 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, Niwot, Commerce City, Lakeside, Arapahoe and Aurora locations, SBUD LLC entered into a lease with each of 428 S.
McCulloch LLC, Colorado Real Estate Holdings LLC, 5844 Ventures LLC, 5238 W 44th LLC, 14655 Arapahoe LLC and Montview Real
Estate 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 Colorado Real Estate
Holdings LLC and 5844 Ventures LLC is for the Company’s Niwot and Commerce City Star Buds locations, respectively, and was effective
on December 18, 2020. The lease with 5238 W 44th LLC is for the Company’s Lakeside Star Buds location and was effective
on February 3, 2021. The lease with 14655 Arapahoe LLC and Montview Real Estate LLC is for the Company’s Arapahoe and Aurora locations,
respectively, and was effective on March 2, 2021. The 428 S McCulloch LLC, 5844 Ventures LLC and 5238 W 44th LLC provides for
a monthly rent payment of $5,000 with an aggregate of $180,000 during the initial term of the leases. The Colorado Real Estate Holdings
LLC lease provides for a monthly rent payment of $6,779 with an aggregate of $244,044 during the initial term of the lease. The 14655
Arapahoe LLC lease provides for a monthly rent payment of $12,367 with an aggregate of $445,212 during the initial term of the lease.
The Montview Real Estate LLC lease provides for a monthly rent of $6,250 with an aggregate of $225,000 during the initial term of the
lease. During 2020, SBUD LLC made aggregate rent payments of $10,000. SBUD LLC made aggregate rent payments of $121,188 and $449,297 for the
periods ending March 31, 2022 and December 31, 2021, respectively. 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 with escalation. 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 entire Star Buds Acquisition. 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 Acquisition,
the Company granted Mr. Ruden and Naser Joudeh the right designate individuals for election or appointment to the Board.
Transactions with Jeff Garwood
On December 7, 2021, the Company entered into
a Securities Purchase Agreement with Jeff Garwood pursuant to which the Company issued an Investor Note in the aggregate principal amount
of $294,000 to Mr. Garwood for $300,000 in cash. The Investor Note bears interest at 13% per year paid quarterly commencing March 31,
2022 in cash for an amount equal to the amount payable on such date as if the Note was subject to an annual interest rate of 9% with the
remainder of the accrued interest payable as an increase to the principal amount of the Note. Mr. Garwood is a member of the Board.
Transactions with Pratap Mukharji
On December 7, 2021, the Company entered into
a Securities Purchase Agreement with Pratap Mukharji pursuant to which the Company issued an Investor Note in the aggregate principal
amount of $196,000 to Mr. Mukharji for $200,000 in cash. The Investor Note bears interest at 13% per year paid quarterly commencing March
31, 2022 in cash for an amount equal to the amount payable on such date as if the Note was subject to an annual interest rate of 9% with
the remainder of the accrued interest payable as an increase to the principal amount of the Note. Mr. Mukharji is a member of the Board.
The Company accounts for acquisitions in which
it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated to
the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The
excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year
from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and
liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the
transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company
evaluates the existence of goodwill or a gain from a bargain purchase.
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 to value assets acquired,
which values such assets at approximately fair market value. 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. The Company utilized purchase price accounting to value assets acquired,
which values such assets at approximately fair market value. The purchase price accounting resulted in $3,003,226 of goodwill.
On September 17, 2018, the Company acquired The
Big Tomato. The Company issued an aggregate of 1,933,329 shares of its Common Stock for 100% ownership of Big Tomato. The Company utilized purchase price accounting to value assets acquired,
which values such assets at approximately fair market value. The purchase price accounting
resulted in the Company valuing the investment as $3,000,000 of goodwill.
On April 20, 2020, the Company acquired Mesa Organics.
The aggregate purchase price after working capital adjustments was $2,609,500 of cash and 2,554,750 shares of Common Stock. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately
fair market value. 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 acquired thirteen Star Buds dispensaries and one cultivation facility. The aggregate purchase price was $118,000,000. The
Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value.
The purchase price accounting resulted in the Company valuing the investment as $27,054,025
of goodwill.
On July 21, 2021, the Company acquired the
assets of Southern Colorado Growers. The Company utilized purchase price accounting to value assets acquired, which values such
assets at approximately fair market value. The purchase price accounting resulted in $1,810,323
of goodwill.
On December 21, 2021, the Company acquired the
assets of Smoking Gun Apothecary. The Company utilized purchase price accounting to value assets acquired, which values such assets at
approximately fair market value. The purchase price accounting resulted in $3,947,582 of goodwill.
On January 26, 2022, the Company acquired
the assets of Drift. The Company utilized purchase price accounting to value assets acquired, which values such assets at
approximately fair market value. The purchase price accounting resulted in $3,344,555
of goodwill and intangibles, however valuation has not been finalized.
On February 8, 2022, the Company acquired
the assets of RGA and 100% of the equity of Elemental. The Company utilized purchase price accounting to value assets acquired,
which values such assets at approximately fair market value. The purchase price accounting resulted in $34,933,869
of goodwill and intangibles, however valuation has not been finalized.
On February 9, 2022, the Company acquired
MCG. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market
value. The purchase price accounting resulted in $27,422,594
of goodwill and intangibles, however valuation has not been finalized.
On February 15, 2022, the Company acquired
the assets of Brow. The Company utilized purchase price accounting to value assets acquired, which values such assets at
approximately fair market value. The purchase price accounting resulted in $5,733,850
of goodwill and intangibles, however valuation has not been finalized.
As of March 31, 2022, the Company had
$118,698,717 of goodwill, which consisted of $6,301,080 from
Success Nutrients and Pono Publications, $3,003,226 from
Denver Consulting Group, $3,000,000 from
The Big Tomato, $2,147,613 from
Mesa Organics, $27,054,025 from
Star Buds, $1,810,323 from
Southern Colorado Growers, $3,947,582 from Smoking Gun Apothecary, $3,344,555 from Drift, $34,933,869 from
RGA, $27,422,594
from MCG, $5,733,850
from Brow.
During the quarter ended March 31, 2022, the Company
acquired cannabis brands and other assets of Drift, RGA, MCG and Brow and 100% of the equity of Elemental.
These transactions were accounted for as a business
combination in accordance with ASC 805, Business Combinations (“ASC 805”). In consideration of the sale and transfer
of the acquired assets the Company paid as follows:
Schedule of aggregate purchase price
| |
| | | |
| | | |
| | |
| |
Nuevo Holding LLC | | |
Emerald Fields Merger Sub, LLC | | |
Other Acquisitions | |
Cash | |
$ | 32,202,123 | | |
$ | 18,873,166 | | |
$ | 8,615,750 | |
Seller notes | |
| 17,000,000 | | |
| – | | |
| – | |
Common stock | |
| – | | |
| 11,600,000 | | |
| 1,600,000 | |
Total purchase price | |
$ | 49,202,123 | | |
$ | 30,473,166 | | |
$ | 10,215,750 | |
As of March 31, 2022, the Company’s allocation
of purchase price is as follows:
Schedule of allowance of purchase price
| |
| | | |
| | | |
| | |
Description | |
Nuevo Holding LLC | | |
Emerald Fields Merger Sub, LLC | | |
Other Acquisitions | |
Assets acquired: | |
| | | |
| | | |
| | |
Cash | |
$ | 2,860,706 | | |
$ | 695,095 | | |
$ | 1,500 | |
Accounts receivable | |
| – | | |
| 196,879 | | |
| – | |
Other assets | |
| – | | |
| – | | |
| 590,000 | |
Inventory | |
| 9,632,130 | | |
| 1,716,900 | | |
| 538,371 | |
Fixed assets | |
| 2,137,002 | | |
| 1,926,706 | | |
| 7,474 | |
Other long-term assets | |
| 2,500 | | |
| – | | |
| – | |
Intangible assets | |
| 34,933,869 | | |
| 27,422,594 | | |
| 9,078,405 | |
Total assets acquired | |
$ | 49,566,207 | | |
$ | 31,958,174 | | |
$ | 10,215,750 | |
Liabilities and equity assumed: | |
| | | |
| | | |
| | |
Accounts payable | |
$ | 295,043 | | |
$ | 458,622 | | |
$ | – | |
Accrued liabilities | |
| 69,041 | | |
| 1,026,386 | | |
| – | |
Total liabilities and equity assumed | |
| 364,084 | | |
| 1,485,008 | | |
| – | |
Estimated fair value of net assets acquired | |
$ | 49,202,123 | | |
$ | 30,473,166 | | |
$ | 10,215,750 | |
As of March 31, 2022, and December 31, 2021,
respectively, the Company had $5,476,905
and $5,573,329 of
finished goods inventory. As of March 31, 2022, the Company had $8,227,858
of work in process and $2,676,002
of raw materials. As of December 31, 2021, the Company had $5,535,992
of work in process and $12,676 of
raw materials. The Company uses the FIFO inventory valuation method. As of March 31, 2022 and December 31, 2021, the Company did not
recognize any impairment for obsolescence within its inventory.
Term Loan — On February 26, 2021,
the Company entered into a Loan Agreement with SHWZ Altmore, LLC, as lender, and GGG Partners LLC, as collateral agent. Upon execution
of the Loan Agreement, the Company received $10,000,000 of loan proceeds. In connection with the Company’s acquisition of Southern
Colorado Growers, the Company received an additional $5,000,000 of loan proceeds under the Loan Agreement. The term loan incurs 15% interest
per annum, payable quarterly on March 1, June 1, September 1, and December 1 of each year. The Company will be required to make principal
payments beginning on June 1, 2023 in the amount of $750,000, payable quarterly with the remainder of the principal due upon maturity
on February 26, 2025.
Under the terms of the loan, the Company must
comply with certain restrictions. These include customary events of default and various financial covenants including, maintaining
(i) a consolidated fixed charge coverage ratio of at least 1.3 at the end of each fiscal quarter beginning in the first quarter of 2022,
and (ii) a minimum of $3,000,000 in a deposit account in which the lender has a security interest. As of March 31, 2022, the Company was
in compliance with the requirements described above.
Seller Notes — As part of the Star
Buds Acquisition, the Company entered into a deferred payment arrangement with the sellers in an aggregate amount of $44,250,000. The
deferred payment arrangement incurs 12% interest per annum, payable on the 1st of every month through November 2025. Principal
payments are due as follows: $13,901,759 on December 17, 2025, $3,474,519 on February 3, 2026, and $26,873,722 on March 2, 2026.
As part of the acquisition under the Nuevo Purchase
Agreement, the company entered into a deferred payment arrangement with the sellers in an aggregate amount of $17,000,000.
The deferred payment arrangement incurs 5% interest per year, payable
on the first of each month.
As part of the Brow acquisition, the Company
entered into an escrow payable with the sellers in an aggregate amount of $500,000.
The escrow payable incurs 3% interest payable 12 months from acquisition.
Investor Notes – On December 3, 2021,
the Company and the Subsidiary Guarantors entered into a Securities Purchase Agreement with the Note Investors pursuant to which the Company
agreed to issue and sell to the Note Investors Investor Notes in a private placement. On December 7, 2021, the Company consummated the
private placement and issued and sold the Investor Notes pursuant to the Indenture. The Company received net proceeds of approximately
$92,000,000 at the closing, after deducting a commission to the placement agent and estimated offering expenses associated with the private
placement payable by the Company. The Investor Notes will mature five years after issuance unless earlier repurchased, redeemed, or converted.
The Investor Notes bear interest at 13% per year paid quarterly commencing March 31, 2022 in cash for an amount equal to the amount payable
on such date as if the Investor Notes were subject to an annual interest rate of 9%, with the remainder of the accrued interest payable
as an increase to the principal amount of the Investor Notes. The proceeds from the Investor Notes are required to be used to fund previously
identified acquisitions and other growth initiatives. The principal is due December 7, 2026.
The Indenture includes customary affirmative and
negative covenants, including limitations on liens, additional indebtedness, repurchases and redemptions of any equity interest in the
Company or any Subsidiary Guarantor (as defined in the Indenture), certain investments, and dividends and other restricted payments, and
customary events of default. Starting on December 7, 2022, the Company must maintain a Consolidated Fixed Charge Coverage Ratio (as defined
in the Indenture) of no less than 1.30 to 1.00 as of the last day of each quarter, and the Company and the Subsidiary Guarantors are required
to have at least $10,00,000 in cash (in aggregate) on the last day of each quarter in deposit accounts for which the collateral agent
has a perfected security interest in. The Company and the Subsidiary Guarantors are restricted from making certain payments, including
but not limited to (i) payment of dividends, (ii) repurchase, redemption, retire, or otherwise acquire any equity interest, option, or
warrant of the Company or any Subsidiary Guarantor, and (iii) payment to any equity holder of the Company or a Subsidiary Guarantor for
services provided pursuant to management, consulting, or other service agreement (the “Restricted Payments”) but the Company
may declare and pay dividends if payable solely in its own equity, or, in the case of the Subsidiary Guarantors, amounts payable to such
subsidiaries with respect to its applicable equity ownership. Provided the Company is not in default under the terms of the Indenture,
the Company may make Restricted Payments not otherwise permitted thereunder (a) in an amount not to exceed $500,000 until discharge of
the Indenture, or (b) after December 7, 2024, so long as the Company’s Consolidated Leverage Ratio (as defined in the Indenture)
is between 1.00 and 2.25 for the applicable reference period at the time of the Restricted Payment after giving pro forma effect thereto.
The Indenture contains restrictions and limitations
on the Company’s ability to incur additional debt and grant liens on its assets. The Company and its Subsidiary Guarantors are not
permitted to incur additional debt or issue Disqualified Equity Interests (as defined in the Indenture) unless the Company’s Consolidated
Leverage Ratio is between 1.00 and 2.25 after giving pro forma effect thereto. In addition, the Company is not permitted to grant a senior
lien on its assets (excluding acquisition target assets that are identified in the Indenture) to secure indebtedness unless and until
(a) at least $80,000,000 of the net proceeds from the Notes (plus the proceeds of certain sale-leaseback transactions) have been used
to consummate Permitted Acquisitions prior to the granting of any such lien, and (b) the Consolidated Leverage Ratio for the applicable
reference period, calculated on a pro forma basis giving effect to such acquisition and all related transactions, is less than 1.40 to
1.00. The Indenture provides that the Company and its Subsidiary Guarantors may incur debt under certain circumstances, including but
not limited to, (i) debt incurred related to certain acquisitions and dispositions, including capital lease obligations and sale-leaseback
transactions not to exceed $5,500,000 (plus up to an additional $2,200,000 in connection with certain transactions identified prior to
the Issuance Date) in the aggregate at any time, (ii) certain transactions in the ordinary course of business, and (iii) any other unsecured
debt not to exceed $1,000,000 at any time.
The following tables sets forth our indebtedness
as of March 31, 2022 and December 31, 2021, respectively, and future obligations:
Schedule of debt
| |
| | | |
| | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Term loan dated February 26, 2021, in the original amount of $10,000,000. An additional
$5,000,000 was added to the term loan on July 28, 2021. Interest of 15% per annum, due quarterly. Principal payments begin
June 1, 2023. | |
$ | 15,000,000 | | |
$ | 15,000,000 | |
| |
| | | |
| | |
Seller notes dated December 17, 2020 in the original amount of $44,250,000. Interest of 12% per annum, due monthly. Principal payments begin December 17, 2025 | |
| 44,250,000 | | |
| 44,250,000 | |
| |
| | | |
| | |
Convertible notes dated December 7, 2021, in the original amount of $95,000,000. Interest of 13% per annum, 9% payable in cash and 4% accreting to the principal amount. | |
| 96,203,333 | | |
| 95,000,000 | |
| |
| | | |
| | |
Seller note dated February 7, 2022 in the original amount of $17,000,000. Interest of 5% per annum, due monthly. Principal balance is due February 7, 2025 | |
| 17,000,000 | | |
| – | |
| |
| | | |
| | |
Less: unamortized debt issuance costs | |
| (7,868,231 | ) | |
| (8,289,743 | ) |
Less: unamortized debt discount | |
| (46,721,616 | ) | |
| (48,477,789 | ) |
| |
| | | |
| | |
Total long term debt | |
| 117,863,486 | | |
| 97,482,468 | |
Less: current portion of long term debt | |
| – | | |
| – | |
| |
| | | |
| | |
| |
| | | |
| | |
Long term debt and unamortized debt issuance costs | |
$ | 117,863,486 | | |
$ | 97,482,468 | |
Schedule of Maturities of Long-term Debt
| |
| | | |
| | | |
| | | |
| | |
| |
Principal Payments | | |
Unamortized Debt Issuance Costs | | |
Unamortized Debt Discount | | |
Total Long Term Debt | |
| |
| | |
| | |
| | |
| |
2022 | |
| | | |
$ | 1,264,536 | | |
$ | 5,728,440 | | |
$ | (5,728,440 | ) |
2023 | |
| 2,250,000 | | |
| 1,686,048 | | |
| 8,523,493 | | |
| (6,273,493 | ) |
2024 | |
| 3,000,000 | | |
| 1,686,048 | | |
| 9,734,935 | | |
| (6,734,935 | ) |
2025 | |
| 40,651,759 | | |
| 1,686,048 | | |
| 11,057,799 | | |
| 29,593,960 | |
2026 | |
| 109,551,574 | | |
| 1,545,551 | | |
| 11,676,949 | | |
| 97,874,625 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 155,453,333 | | |
$ | 7,868,231 | | |
$ | 46,721,616 | | |
$ | 108,731,717 | |
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, retail, cultivation, and manufacturing facilities. 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 Classification Table
| |
| |
| | |
| |
Balance Sheet Line | |
March 31, 2022 | |
Asset | |
| |
| | |
Operating lease right of use assets | |
Noncurrent assets | |
$ | 13,721,007 | |
Liabilities | |
| |
| | |
Lease liabilities | |
Noncurrent liabilities | |
$ | 14,082,673 | |
Maturities of Lease Liabilities
Maturities of lease liabilities as of March
31, 2022 are as follows:
Maturities of Lease Liabilities | |
| | |
2021 fiscal year | |
$ | 24,706,524 | |
Less: Interest | |
| 374,001 | |
Present value of lease liabilities | |
$ | 24,332,523 | |
The following table presents the Company’s future minimum lease
obligation under ASC 842 as of March 31, 2022:
Future minimum lease obligations
| |
| | |
2022 fiscal year | |
$ | 3,325,483 | |
2023 fiscal year | |
| 3,843,353 | |
2024 fiscal year | |
| 3,949,553 | |
2025 fiscal year | |
| 3,989,432 | |
2026 fiscal year | |
| 2,971,217 | |
Total | |
$ | 18,079,038 | |
13. |
Commitments and Contingencies |
Definitive Agreement to Acquire the Colorado-Based
Urban Health & Wellness, Inc.
On March 11, 2022,
the Company entered into an Asset and Personal Goodwill Purchase Agreement with Double Brow, Urban Health & Wellness, Inc. d/b/a Urban
Dispensary (“Urban Dispensary”), Productive Investments, LLC (“Productive Investments”), and Patrick Johnson (together
with Productive Investments, the “Equityholders”), pursuant to which Double Brow will purchase (i) all of Urban Dispensary’s
assets used or held for use in Urban Dispensary’s business of owning and operating a retail marijuana store and a grow facility,
each located in Denver, Colorado, and (ii) all of the Equityholders’ personal goodwill arising from Equityholders’ independent,
separate, individual and personal efforts relating to Urban Dispensary’s business on the terms and subject to the conditions set
forth in the purchase agreement, and assume obligations under contracts acquired as part of the asset purchase. The aggregate consideration
for the asset purchase will be up to $1,317,500 million in cash and shares of Common Stock in an amount equal to $1,900,000 divided by
the price per share of Common Stock as of market close on the first trading day immediately before the closing. The Company deposited
$30,000 of the cash portion of the purchase price as an earnest money deposit with Urban Dispensary in March 2022. At the closing, (i)
the Company will use the cash portion of the purchase price to pay off certain indebtedness and transaction expenses of Urban Dispensary
and then pay the balance to Urban Dispensary, and (ii) the Company will issue the stock portion of the purchase price directly to the
Equityholders. The stock consideration is subject to post-closing reduction if any of the actual marijuana product inventory, marijuana
plant inventory or cash at closing is less than certain targets stated in the purchase agreement. The Company will hold back $288,000
of the stock consideration at closing as collateral for potential claims for indemnification from Urban Dispensary under the purchase
agreement. Any portion of the held back cash consideration not used to satisfy indemnification claims will be released to Urban Dispensary
on the 18-month anniversary of the closing date of the asset purchase.
The Company is authorized to issue two classes
of stock, 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 or series as the Board 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 82,594 shares of Preferred Stock
issued and outstanding and 4,400 in escrow as of March 31, 2022 and December 31, 2021. Among other terms, each share of 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 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. Accumulated
preferred dividends were $9,089,597 and $7,346,153 as of March 31, 2022 and December 31, 2021, respectively.
Common Stock
The Company is authorized to issue 250,000,000
shares of Common Stock, par value $0.001 per share. The Company had 58,684,314 shares of Common Stock issued, 57,945,870 shares of Common
Stock outstanding, 517,044 shares of Common Stock in treasury, and 221,400 shares of Common Stock in escrow as of March 31, 2022, and
45,455,490 shares of Common Stock issued, 44,717,046 shares of Common Stock outstanding, 517,044 shares of Common Stock in treasury,
and 221,400 shares of Common Stock in escrow as of December 31, 2021.
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
For the year ended December 31, 2021, the Company
issued 323,530 shares of Common Stock valued at $637,233 to employees and directors as compensation.
For the three months ended March 31, 2022, the
Company has not issued shares of Common Stock as compensation to employees and directors.
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.
The Company issued shares of Preferred Stock in
connection with the Star Buds Acquisition as follows: (i) on December 17, 2020 the Company issued 2,862 shares of Preferred Stock valued
at $2,861,994, of which 430 shares of Preferred Stock valued at $387,000 were placed in escrow, (ii) on December 18, 2020 the Company
issued 6,404 shares of Preferred Stock valued at $6,403,987, of which 959 shares of Preferred Stock valued at $863,100 were placed in
escrow, (iii) on February 3, 2021 the Company issued 2,319 shares of Preferred Stock valued at $2,318,998, of which 349 shares of Preferred
Stock valued at $314,100 were placed in escrow, and (iv) on March 3, 2021 the Company issued 17,921 shares of Preferred Stock valued at
$17,920,982, of which 2,690 shares of Preferred Stock valued at $2,421,000 were placed in escrow.
On July 21, 2021, the Company issued 2,213,994
shares of Common Stock valued at $5,377,786, of which 221,400 shares valued at $537,779 were placed in escrow for the acquisition of Southern
Colorado Growers.
On December 21, 2021, the Company issued 100,000
shares of Common Stock valued at $197,000 for the acquisition of the assets of Smoking Gun.
On January 26, 2022, the Company issued 1,066,666
shares of Common Stock valued at $1,600,000 for the acquisition of the assets of Drift.
On February 9, 2022, the Company issued 7,116,564
shares of Common Stock valued at $11,600,000 for the acquisition of MCG.
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.
For the year ended December 31, 2021, the Company
issued warrants to purchase an aggregate of 3,793,530 shares of Common Stock as consideration for the Star Buds Acquisition. These warrants
have an exercise price of $1.20 per share and expiration dates five years from the dates of issuance. In addition, the Company issued
a warrant to purchase an aggregate of 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 and $2.50, respectively, (ii) the contractual term of the warrant of five years, (iii) a risk-free interest
rate ranging between 0.21% - 1.84% and (iv) an expected volatility of the price of the underlying Common Stock ranging between 157.60%
- 194.56%. No warrants were issued during the period ended March 31, 2022.
The following table reflects the change in Common
Stock purchase warrants for the period ended March 31, 2022:
Schedule of warrant activity
| |
| | |
| |
Number of shares | |
Balance as of December 31, 2021 | |
| 17,018,750 | |
Warrants exercised | |
| – | |
Warrants forfeited | |
| – | |
Warrants issued | |
| – | |
Balance as of March 31, 2022 | |
| 17,018,750 | |
Conversion of Preferred Stock to Common
Stock
On December 20, 2021, a holder of Preferred Stock
converted 272 shares of Preferred Stock into 245,017 shares of Common Stock.
The Company has three identifiable segments as
of March 31, 2022; (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, cultivation, and
wholesale business which sells merchandise to customers via e-commerce portals, a retail location, and a 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 months ended March 31, 2022 and March 31, 2021:
| |
| | | |
| | | |
| | | |
| | |
Schedule of Segment Reporting Information | |
| |
| |
For The Three Months Ended | |
| |
March 31, 2022 | |
| |
Retail | | |
Wholesale | | |
Other | | |
Total | |
Revenues | |
| 26,525,716 | | |
| 5,207,388 | | |
| 44,450 | | |
| 31,777,554 | |
Cost of goods and services | |
| (15,905,610 | ) | |
| (4,871,587 | ) | |
| (62,854 | ) | |
| (20,840,051 | ) |
Gross profit | |
| 10,620,106 | | |
| 335,801 | | |
| (18,404 | ) | |
| 10,937,503 | |
Intangible assets amortization | |
| 1,939,791 | | |
| 198,475 | | |
| 581 | | |
| 2,138,847 | |
Depreciation | |
| 64,617 | | |
| 128,098 | | |
| 209,234 | | |
| 401,949 | |
Net income (loss) | |
| 3,761,943 | | |
| (421,864 | ) | |
| (30,118,781 | ) | |
| (26,778,702 | ) |
Segment assets | |
| 184,138,812 | | |
| 64,813,396 | | |
| 69,054,427 | | |
| 318,006,635 | |
Segment assets from Other mainly related to cash from the Investor
Notes.
The following table summarizes the Company’s
income tax expense and effective tax rates for the three months ended March 31, 2022 and March 31, 2021:
Components of income tax expense
| |
| | | |
| | |
| |
For the Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Income (loss) before income taxes | |
$ | (25,518,808 | ) | |
$ | (4,106,121 | ) |
Income tax expense | |
| 1,259,894 | | |
| 456,614 | |
Effective tax rate | |
| -4.94% | | |
| -11.12% | |
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 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, 2022 varies from the three months ended March 31, 2021 primarily due to IRC Section 280E (“280E”) due to increase
of subsidiaries subject to the limitation of 280E. In April 2020, the Company acquired its first plant-touching business, Mesa Organics,
subjecting the Company to 280E for the first time.
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, 2022.
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, 2022 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.