Tony
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
FORM 10-Q☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
For the quarterly period ended September 30, 20172023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________________ to _______________.
________________.
Commission File Number: Number 000-55450
Medicine Man Technologies, Inc.MEDICINE MAN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada | 46-5289499 | |
(State or Incorporation or | ( |
| ||
865 North Albion Street Suite 300 Denver, Colorado | 80220 | |
(Address of principal executive offices) | (Zip Code) |
(303)371-0387
(Registrant’s telephone number, including area code:(303) 371-0387code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨
☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated | Accelerated | ||
Non-accelerated | Smaller reporting company | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
☒
As of November 1, 2017, there were 21,875,0111st, 2023, the Registrant had 72,591,605 shares of common stock, par value $0.001 issued andCommon Stock outstanding.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 37 | ||
Quantitative and Qualitative Disclosures | 49 | ||
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2
CAUTIONARY STATEMENT ONNOTE ABOUT FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995. Forward-looking1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives for future operations, are based upon our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business.forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” “become,” “develop,” “build,” or the negative of these terms or other comparable terminology,words of similar meaning in connection with a discussion of future events or future operating or financial performance, although the absence of these words does not necessarily mean that a statement is not forward-looking. This information may involveForward-looking statements are based upon our current assumptions, expectations, and beliefs concerning future developments and their potential effect on our business. Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors which may cause actual events or our actual results, performance, or achievements to be materially different from the future events, results, performance, or achievements expressed or implied by any forward-looking statements.
There can be no assurance that future events, results, performance, or achievements will be in accordance with our expectations or that the effect of future events, results, performance, or achievements will be those anticipated by us.
Factors and risks that may cause or contribute to actual events, results, to differperformance, or achievements differing from these forward-looking statements include, but are not limited to, for example:
the following:
| ● | our ability to identify, consummate, and integrate anticipated acquisitions; |
| ● | general industry and economic conditions; |
| our ability to pay interest and principal on outstanding debt when due; |
| ● | volatility in credit and market conditions; and |
| ● | other risks and uncertainties related to the cannabis market and our business strategy. |
All forward-looking statements speak only asWe operate in very competitive and rapidly changing markets. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the dateextent to which any factor, or combination of this report. We undertake no obligationfactors, may cause actual results to updatediffer materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or other information contained herein. implied in the forward-looking statements.
3
Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements in this reportQuarterly Report on Form 10-Q are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from expectations under “Risk Factors” in our Form 10-K. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Considering these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q.statements. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether because of new information, future events, a change in events, conditions, circumstances, or assumptions underlying such statements, or otherwise.
4
Table of ContentsPART I -
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Expressed in U.S. Dollars
| | | | | | |
| | September 30, | | December 31, | ||
| | 2023 | | 2022 | ||
|
| (Unaudited) |
| (Audited) | ||
ASSETS |
| |
|
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 19,624,615 | | $ | 38,949,253 |
Accounts receivable, net of allowance for doubtful accounts | |
| 5,049,869 | |
| 4,471,978 |
Inventory | |
| 32,767,841 | |
| 22,554,182 |
Note receivable - current, net | |
| — | |
| 11,944 |
Marketable securities, net of unrealized loss of $1,816 and loss of $39,270, respectively | |
| 456,099 | |
| 454,283 |
Prepaid expenses and other current assets | |
| 6,485,896 | |
| 5,293,393 |
Total current assets | |
| 64,384,320 | |
| 71,735,033 |
Non-current assets | |
|
| |
|
|
Fixed assets, net accumulated depreciation $8,065,794 and $4,899,977, respectively | |
| 32,139,192 | |
| 27,089,026 |
Investments | | | 2,000,000 | | | 2,000,000 |
Goodwill | |
| 76,578,654 | |
| 94,605,301 |
Intangible assets, net accumulated amortization of $28,828,713 and $16,290,862, respectively | |
| 168,822,669 | |
| 107,726,718 |
Note receivable – noncurrent, net | |
| 1,313 | |
| — |
Deferred tax assets, net | | | 50,467 | | | — |
Other noncurrent assets | |
| 1,298,950 | |
| 1,527,256 |
Operating lease right of use assets | |
| 25,315,122 | |
| 18,199,399 |
Total non-current assets | |
| 306,206,367 | |
| 251,147,700 |
Total assets | | $ | 370,590,687 | | $ | 322,882,733 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 11,665,499 | | $ | 10,701,281 |
Accounts payable - related party | |
| 22,073 | |
| 22,380 |
Accrued expenses | |
| 9,430,875 | |
| 7,462,290 |
Derivative liabilities | |
| 2,022,248 | |
| 16,508,253 |
Lease liabilities - current | |
| 4,721,713 | |
| 3,139,289 |
Current portion of long term debt | | | 4,250,000 | | | 2,250,000 |
Income taxes payable | |
| 18,283,784 | |
| 7,297,815 |
Total current liabilities | |
| 50,396,192 | |
| 47,381,308 |
Long term debt, net of debt discount and issuance costs | |
| 150,878,200 | |
| 125,521,520 |
Lease liabilities | | | 23,525,633 | | | 17,314,464 |
Deferred income taxes, net | |
| — | |
| 502,070 |
Total long-term liabilities | |
| 174,403,833 | |
| 143,338,054 |
Total liabilities | | $ | 224,800,025 | | $ | 190,719,362 |
| | | | | | |
Stockholders' equity | |
|
| |
|
|
Preferred stock, $0.001 par value. 10,000,000 shares authorized; 86,494 shares issued and 86,494 shares outstanding as of September 30, 2023, and 86,994 shares issued and 86,994 shares outstanding as of December 31, 2022. | |
| 87 | |
| 87 |
Common stock, $0.001 par value. 250,000,000 shares authorized; 72,607,621 shares issued and 72,591,605 shares outstanding as of September 30, 2023, and 56,352,545 shares issued and 55,212,547 shares outstanding as of December 31, 2022. | |
| 72,607 | |
| 56,353 |
Additional paid-in capital | |
| 199,177,342 | |
| 180,381,641 |
Accumulated deficit | |
| (51,426,247) | |
| (46,241,583) |
Common stock held in treasury, at cost, 920,150 shares held as of September 30, 2023, and 920,150 shares held as of December 31, 2022. | |
| (2,033,127) | |
| (2,033,127) |
Total stockholders' equity | |
| 145,790,662 | |
| 132,163,371 |
Total liabilities and stockholders' equity | | $ | 370,590,687 | | $ | 322,882,733 |
| September 30, 2017 | December 31, 2016 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 927,884 | $ | 351,524 | ||||
| Accounts receivable, net | 356,940 | 25,000 | ||||||
| Accounts receivable - related party | 41,962 | – | ||||||
| Available for sale securities | – | 13,998 | ||||||
| Short-term note receivable | 286,455 | 264,016 | ||||||
| Inventory | 87,685 | – | ||||||
| Other assets | 106,811 | 27,479 | ||||||
| Total current assets | 1,807,737 | 682,017 | ||||||
| Non-current assets | ||||||||
| Fixed assets, net accumulated depreciation of $63,579 | 155,529 | 42,126 | ||||||
| Intangible assets, net accumulated amortization of $5,760 | 89,340 | 3,708 | ||||||
| Goodwill | 9,304,306 | – | ||||||
| Total non-current assets | 9,549,175 | 45,834 | ||||||
| Total assets | $ | 11,356,912 | $ | 727,851 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 44,189 | $ | – | ||||
| Accounts payable - related party | 9,776 | – | ||||||
| Derivative liability | 159,105 | 294,002 | ||||||
| Other liabilities | 14,700 | 175 | ||||||
| Total current liabilities | 227,770 | 294,177 | ||||||
| Long-term liabilities | ||||||||
| Note payable - related party | 58,280 | – | ||||||
| Convertible loan | 675,000 | 810,000 | ||||||
| Total long-term liabilities | 733,280 | 810,000 | ||||||
| Total liabilities | 961,050 | 1,104,177 | ||||||
| Commitments and contingencies, note 13 | ||||||||
| Shareholders’ equity | ||||||||
| Common stock $0.001 par value. 90,000,000 authorized, 21,875,011 and 10,402,500 were issued and outstanding September 30, 2017 and December 31, 2016, respectively. | 22,504 | 10,403 | ||||||
| Additional paid-in capital | 14,346,342 | 1,026,052 | ||||||
| Additional paid-in capital - Warrants | 2,100,318 | – | ||||||
| Accumulated other comprehensive (loss) | – | (4,303 | ) | |||||
| Retained earnings | (6,073,302 | ) | (1,408,478 | ) | ||||
| Total shareholders' equity (deficit) | 10,395,862 | (376,326 | ) | |||||
| Total liabilities and stockholders’ equity | $ | 11,356,912 | $ | 727,851 | ||||
See accompanying notes to the condensed consolidated financial statements
5
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) AND INCOME
For the Three and Nine MonthsPeriods Ended September 30, 20172023 and 20162022
Expressed in U.S. Dollars
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
| | 2023 | | 2022 | | 2023 | | 2022 | | ||||
|
| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
| ||||
Operating revenues |
| |
|
| |
|
| |
|
| |
|
|
Retail | | $ | 41,951,969 | | $ | 39,759,734 | | $ | 115,871,037 | | $ | 104,386,464 | |
Wholesale | |
| 4,701,268 | |
| 3,335,252 | |
| 13,034,676 | |
| 14,661,268 | |
Other | |
| 93,698 | |
| 96,000 | |
| 217,258 | |
| 184,200 | |
Total revenue | |
| 46,746,935 | |
| 43,190,986 | |
| 129,122,971 | |
| 119,231,932 | |
Total cost of goods and services | |
| 25,308,972 | |
| 20,715,192 | |
| 60,133,091 | |
| 60,661,933 | |
Gross profit | |
| 21,437,963 | |
| 22,475,794 | |
| 68,989,880 | |
| 58,569,999 | |
Operating expenses | |
|
| |
|
| |
|
| |
|
| |
Selling, general and administrative expenses | |
| 9,639,268 | |
| 6,594,311 | |
| 28,693,517 | |
| 20,114,335 | |
Professional services | |
| 767,822 | |
| 1,507,149 | |
| 2,443,046 | |
| 5,609,579 | |
Salaries | |
| 4,545,439 | |
| 3,159,578 | |
| 17,700,403 | |
| 15,697,294 | |
Stock based compensation | |
| (2,438,073) | |
| 99,898 | |
| 622,162 | |
| 1,788,823 | |
Total operating expenses | |
| 12,514,456 | |
| 11,360,936 | |
| 49,459,128 | |
| 43,210,031 | |
Income from operations | |
| 8,923,507 | |
| 11,114,858 | |
| 19,530,752 | |
| 15,359,968 | |
Other income (expense) | |
|
| |
|
| |
|
| |
|
| |
Interest expense, net | |
| (8,320,397) | |
| (8,500,235) | |
| (23,956,691) | |
| (23,312,088) | |
Unrealized gain on derivative liabilities | |
| 4,516,237 | |
| 4,816,668 | |
| 14,486,005 | |
| 28,104,960 | |
Other loss | |
| — | |
| — | |
| — | |
| 20,400 | |
Unrealized gain (loss) on investments | |
| — | |
| (28,541) | |
| 1,816 | |
| (42,353) | |
Total other income (expense) | |
| (3,804,160) | |
| (3,712,108) | |
| (9,468,870) | |
| 4,770,919 | |
Pre-tax net income | | | 5,119,347 | | | 7,402,750 | | | 10,061,882 | | | 20,130,887 | |
Provision for income taxes | |
| 5,441,809 | |
| 5,593,513 | |
| 15,246,546 | |
| 11,259,369 | |
Net income (loss) | | $ | (322,462) | | $ | 1,809,237 | | $ | (5,184,664) | | $ | 8,871,518 | |
| | | | | | | | | | | | | |
Less: Accumulated preferred stock dividends for the period | |
| (1,547,369) | |
| (1,784,113) | |
| (5,930,646) | |
| (5,294,132) | |
Net income (loss) attributable to common stockholders | | $ | (1,869,831) | | $ | 25,124 | | $ | (11,115,310) | | $ | 3,577,386 | |
| | | | | | | | | | | | | |
Earnings (loss) per share attributable to common shareholders | |
|
| |
|
| |
|
| |
|
| |
Basic (loss) earnings per share | | $ | (0.02) | | $ | — | | $ | (0.14) | | $ | 0.07 | |
Diluted (loss) earnings per share | | $ | (0.03) | | $ | — | | $ | (0.14) | | $ | 0.03 | |
| | | | | | | | | | | | | |
Weighted average number of shares outstanding – basic | |
| 87,202,537 | |
| 51,232,943 | |
| 78,635,841 | |
| 50,615,437 | |
Weighted average number of shares outstanding – diluted | |
| 87,202,537 | |
| 137,954,532 | |
| 78,635,841 | |
| 137,337,027 | |
Comprehensive (loss) income | | $ | (322,462) | | $ | 1,809,237 | | $ | (5,184,664) | | $ | 8,871,518 | |
| Three Months Ended September 30, | Nine Months Ended September, 30 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Operating revenues | ||||||||||||||||
| Product sales | $ | 278,495 | $ | – | $ | 506,900 | $ | – | ||||||||
| Product sales - related party | 61,768 | – | 184,711 | – | ||||||||||||
| Licensing fees | 347,504 | 227,500 | 848,816 | 564,135 | ||||||||||||
| Consulting fees | 238,480 | 6,000 | 805,086 | 6,000 | ||||||||||||
| Seminar fees | 2,017 | 3,093 | 6,239 | 15,253 | ||||||||||||
| Total revenue | 928,264 | 236,593 | 2,351,752 | 585,388 | ||||||||||||
| Cost of services | ||||||||||||||||
| Cost of services | 282,894 | 83,209 | 694,018 | 264,826 | ||||||||||||
| Cost of services - related party | 14,291 | – | 40,327 | – | ||||||||||||
| Total cost of services | 297,185 | 83,209 | 734,345 | 264,826 | ||||||||||||
| Gross profit | 631,079 | 153,384 | 1,617,407 | 320,562 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 331,764 | 99,891 | 735,018 | 411,523 | ||||||||||||
| Professional services | 144,796 | – | 384,278 | – | ||||||||||||
| Acquisition costs | 42,600 | – | 141,301 | – | ||||||||||||
| Stock based compensation expense | 164,000 | – | 4,644,318 | 49,200 | ||||||||||||
| Officers/Directors incentive compensation | 90,823 | – | 90,823 | – | ||||||||||||
| Advertising | 49,592 | 39,869 | 136,436 | 61,541 | ||||||||||||
| Salaries | 127,250 | – | 220,365 | – | ||||||||||||
| Total operating expenses | 950,825 | 139,760 | 6,352,539 | 522,264 | ||||||||||||
| Income from operations | (319,746 | ) | 13,624 | (4,735,132 | ) | (201,702 | ) | |||||||||
| Other income/expense | ||||||||||||||||
| Interest income | (7,562 | ) | (5,128 | ) | (22,439 | ) | (6,936 | ) | ||||||||
| Net loss on derivative | 136,088 | – | 4,706 | – | ||||||||||||
| Interest expense related to convertible notes | 22,636 | – | 66,965 | – | ||||||||||||
| Loss on management fee contracts | – | – | 70,257 | – | ||||||||||||
| Net realized loss on available for sale securities | 14,719 | – | 14,457 | – | ||||||||||||
| Other income | – | – | (219 | ) | – | |||||||||||
| Total other expense | 165,881 | (5,128 | ) | 133,727 | (6,936 | ) | ||||||||||
| Net (loss) income | $ | (485,627 | ) | $ | 18,752 | $ | (4,868,859 | ) | $ | (194,766 | ) | |||||
| . | ||||||||||||||||
| Earnings per share attributable to common shareholders: | ||||||||||||||||
| Basic and diluted (loss)/earnings per share | $ | (0.02 | ) | $ | 0.00 | $ | (0.22 | ) | $ | (0.02 | ) | |||||
| Weighted average number of shares outstanding - basic and diluted | 21,883,853 | 9,976,146 | 21,883,853 | 9,997,664 | ||||||||||||
| Other comprehensive (loss), net of tax | ||||||||||||||||
| Net unrealized (loss) on available for sale securities | – | – | – | – | ||||||||||||
| Total other comprehensive income (loss), net of tax | – | – | – | – | ||||||||||||
| Comprehensive (loss) gain | $ | (485,627 | ) | $ | 18,752 | $ | (4,868,859 | ) | $ | (194,766 | ) | |||||
See accompanying notes to the condensed consolidated financial statements
6
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 20172023 and 20162022
Expressed in U.S. Dollars
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid in | | Accumulated | | Treasury Stock | | Stockholders’ | ||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | ||||||
Balance, December 31, 2021 | | 86,994 | | $ | 87 | | 45,484,314 | | $ | 45,485 | | $ | 162,815,097 | | $ | (27,773,968) | | 517,044 | | $ | (1,517,036) | | $ | 133,569,665 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) |
| — | |
| — |
| — | |
| — | |
| — | |
| 8,871,518 |
| — | |
| — | |
| 8,871,518 |
Issuance of stock as payment for acquisitions |
| — | |
| — |
| 9,742,204 | |
| 9,742 | |
| 15,090,258 | |
| — |
| — | |
| — | |
| 15,100,000 |
Issuance of common stock as compensation to employees, officers and/or directors |
| — | |
| — |
| 510,525 | |
| 374 | |
| 615,057 | |
| — |
| — | |
| — | |
| 615,431 |
Return of common stock as compensation to employees, officers and/or directors | | — | | | — | | — | | | — | | | — | | | — | | 369,415 | | | (473,642) | |
| (473,642) |
Stock based compensation expense related to common stock options |
| — | |
| — |
| 196,085 | |
| 196 | |
| 1,834,208 | |
| — |
| — | |
| — | |
| 1,834,404 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2022 |
| 86,994 | | $ | 87 |
| 55,933,128 | | $ | 55,797 | | $ | 180,354,620 | | $ | (18,902,450) |
| 886,459 | | $ | (1,990,678) | | $ | 159,517,376 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid in | | Accumulated | | Treasury Stock | | Stockholders’ | ||||||||||||
|
| Shares |
| Value |
| Shares |
| Value | | Capital |
| Deficit |
| Shares |
| Cost |
| Equity | ||||||
Balance, December 31, 2022 | | 86,994 | | $ | 87 | | 56,352,545 | | $ | 56,353 | | $ | 180,381,641 | | $ | (46,241,583) | | 920,150 | | $ | (2,033,127) | | $ | 132,163,371 |
| | | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) |
| — | |
| — | | — | |
| — | |
| | |
| (5,184,664) |
| — | |
| — | |
| (5,184,664) |
Issuance of stock as payment for acquisitions |
| — | |
| — | | 14,992,354 | |
| 14,992 | |
| 17,277,998 | |
| — |
| — | |
| — | |
| 17,292,990 |
Issuance of common stock as compensation to employees, officers and/or directors |
| — | |
| — | | 748,210 | |
| 748 | | | 682,870 | |
| — |
| — | |
| — | |
| 683,618 |
Conversion of preferred stock to common stock |
| (500) | |
| (1) | | 514,512 | |
| 515 | |
| (514) | |
| — |
| — | |
| — | |
| — |
Stock based compensation expense related to common stock options |
| — | |
| — | | — | |
| | | | 835,347 | |
| |
| — | |
| — | |
| 835,347 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2023 |
| 86,494 | | $ | 87 | | 72,607,621 | | $ | 72,607 | | $ | 199,177,342 | | $ | (51,426,247) |
| 920,150 | | $ | (2,033,127) | | $ | 145,790,662 |
| 2017 | 2016 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss for the period | $ | (4,868,859 | ) | $ | (194,766 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Loss (gain) on derivative, net | 4,706 | – | ||||||
| Stock based compensation | 4,644,318 | 49,200 | ||||||
| Depreciation and amortization | 43,650 | 12,797 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Short term note receivable | (22,439 | ) | (210,000 | ) | ||||
| Accounts receivable | (373,902 | ) | 58,739 | |||||
| Inventory | (87,685 | ) | – | |||||
| Other assets | (65,331 | ) | (32,729 | ) | ||||
| Accounts payable and other liabilities | 68,490 | (3,439 | ) | |||||
| Net cash used in operating activities | (657,052 | ) | (320,198 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of assets | (242,685 | ) | – | |||||
| Acquisition investment | 233,357 | – | ||||||
| Short term debt | – | 150,000 | ||||||
| Loss from sale of AFS securities | 4,303 | – | ||||||
| Net cash used in investing activities | (5,023 | ) | 150,000 | |||||
| Cash flows from financing activities | ||||||||
| Cash raised by sale of convertible debt | 179,777 | – | ||||||
| Common stock | 1,058,658 | – | ||||||
| Net cash earned for financing activities | 1,238,435 | – | ||||||
| Net increase (decrease) in cash and cash equivalents | 576,360 | (170,198 | ) | |||||
| Cash and cash equivalents - beginning of period | 351,524 | 262,146 | ||||||
| Cash and cash equivalents - end of period | $ | 927,884 | $ | 91,948 | ||||
See accompanying notes to the condensed consolidated financial statements
7
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended September 30, 2023 and 2022
Expressed in U.S. Dollars
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid in | | Accumulated | | Treasury Stock | | Stockholders’ | ||||||||||||
|
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | ||||||
Balance, June 30, 2022 | | 86,994 | | $ | 87 |
| 55,449,065 | | $ | 55,450 | | $ | 179,979,063 | | $ | (20,711,687) |
| 886,459 | | $ | (1,990,678) | | $ | 157,332,235 |
| | | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) |
| — | |
| — | | — | |
| — | |
| — | |
| 1,809,237 |
| — | |
| — | |
| 1,809,237 |
Issuance of stock as payment for acquisitions |
| — | |
| — | | — | | | — | | | — | |
| — |
| — | |
| — | |
| — |
Issuance of common stock as compensation to employees, officers and/or directors |
| — | |
| — | | 287,978 | |
| 151 | |
| 230,273 | |
| — |
| — | |
| — | |
| 230,424 |
Stock based compensation expense related to common stock options |
| — | |
| — | | 196,085 | |
| 196 | |
| 145,284 | |
| — |
| | | | | |
| 145,480 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2022 |
| 86,994 | | $ | 87 | | 55,933,128 | | $ | 55,797 | | $ | 180,354,620 | | $ | (18,902,450) |
| 886,459 | | $ | (1,990,678) | | $ | 159,517,376 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid in | | Accumulated | | Treasury Stock | | Stockholders’ | ||||||||||||
|
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | ||||||
Balance, June 30, 2023 | | 86,994 | | $ | 87 | | 71,730,449 | | $ | 71,730 | | $ | 201,116,605 | | $ | (51,103,785) | | 920,150 | | $ | (2,033,127) | | $ | 148,051,510 |
| | | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) |
| — | |
| — | | — | |
| — | |
| — | |
| (322,462) |
| — | |
| — | |
| (322,462) |
Issuance of stock as payment for acquisitions |
| — | |
| — | | — | |
| — | |
| | |
| — |
| — | |
| — | |
| — |
Issuance of common stock as compensation to employees, officers and/or directors |
| — | |
| — | | 362,660 | |
| 363 | |
| 286,139 | |
| — |
| — | |
| — | |
| 286,501 |
Conversion of preferred stock to common stock |
| (500) | |
| (1) | | 514,512 | |
| 515 | |
| (514) | |
| — |
| — | |
| — | |
| — |
Stock based compensation expense related to common stock options |
| — | |
| — | | — | |
| — | |
| (2,224,888) | |
| |
| — | |
| — | |
| (2,224,888) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2023 |
| 86,494 | | $ | 87 | | 72,607,621 | | $ | 72,607 | | $ | 199,177,342 | | $ | (51,426,247) |
| 920,150 | | $ | (2,033,127) | | $ | 145,790,662 |
See accompanying notes to the condensed consolidated financial statements
8
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Periods Ended September 30, 2023 and 2022
| | | | | | |
| | For the Nine Months Ended | ||||
| | September 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities |
| |
|
| |
|
Net income (loss) for the period | | | (5,184,664) | | | 8,871,518 |
Adjustments to reconcile net income (loss) to cash for operating activities | |
| | |
|
|
Depreciation and amortization | | | 15,703,668 | |
| 8,329,767 |
Non-cash interest expense | | | 3,003,386 | | | 3,137,021 |
Non-cash lease expense | | | 5,756,492 | |
| 3,910,679 |
Deferred taxes | | | (552,537) | |
| — |
Change in derivative liabilities | | | (14,486,005) | |
| (28,104,960) |
Amortization of debt issuance costs | | | 1,264,537 | | | 1,264,538 |
Amortization of debt discount | | | 6,269,584 | | | 5,505,420 |
(Gain) loss on investment, net | | | (1,816) | |
| 42,353 |
Stock based compensation | | | 835,347 | |
| 811,897 |
Changes in operating assets and liabilities (net of acquired amounts): | | | | |
| |
Accounts receivable | | | 206,179 | |
| (1,100,055) |
Inventory | | | (4,883,659) | |
| 2,898,959 |
Prepaid expenses and other current assets | | | (1,192,503) | |
| (3,377,844) |
Other assets | | | 228,306 | |
| (179,072) |
Change in operating lease liabilities | | | (5,078,622) | |
| (11,938,634) |
Accounts payable and other liabilities | | | (4,124,458) | |
| 8,802,231 |
Income taxes payable | | | 10,985,969 | |
| 1,560,630 |
Net cash provided by (used in) operating activities | |
| 8,749,202 | |
| 434,448 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Collection of notes receivable | | | 10,631 | |
| — |
Cash consideration for acquisition of business, net of cash acquired | | | (15,813,028) | |
| (56,875,923) |
Purchase of fixed assets | | | (6,766,759) | |
| (12,511,389) |
Purchase of intangible assets | | | (2,700,000) | | | (2,825) |
Net cash provided by (used in) investing activities | |
| (25,269,156) | |
| (69,390,137) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Payment on notes payable | |
| (3,488,302) | |
| — |
Proceeds from issuance of common stock, net of issuance costs | |
| 683,618 | |
| 1,280,660 |
Net cash provided by (used in) financing activities | |
| (2,804,684) | |
| 1,280,660 |
| | | | | | |
Net (decrease) in cash and cash equivalents | |
| (19,324,638) | |
| (67,675,029) |
Cash and cash equivalents at beginning of period | |
| 38,949,253 | |
| 106,400,216 |
Cash and cash equivalents at end of period | | $ | 19,624,615 | | $ | 38,725,187 |
| | | | | | |
Supplemental disclosure of cash flow information: | |
|
| |
|
|
Cash paid for interest | | $ | 13,271,618 | | $ | 13,239,685 |
Cash paid for income taxes | |
| 5,000,000 | |
| 9,840,000 |
| | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | |
| | |
|
|
Lease liability arising from right of use asset | | | 8,135,776 | | | 14,105,320 |
Issuance of stock as payment for acquisitions | | | 17,292,990 | | | 15,100,450 |
Issuance of debt for acquisition | | | 20,307,475 | | | 17,000,000 |
Acquisitions: | | | | | | |
Tangible and intangible assets acquired, net of cash | | | 47,092,129 | | | 30,996,424 |
Liabilities assumed | | | 3,536,384 | | | 1,837,221 |
Goodwill | |
| 14,958,205 | |
| 59,816,720 |
See accompanying notes to the condensed consolidated financial statements
9
MEDICINE MAN TECHNOLOGIES, INC.
NOTES TO THEUNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.Organization and Nature of Operations:Operations
Business Description –Business Activity:Medicine Man Technologies, Inc. (the "Company"(“we,” “us,” “our” or the “Company”) is awas incorporated in Nevada corporation incorporated on March 20, 2014. The Company is a cannabis consulting company providing services related to cost-efficient cannabis cultivation technologies focusing on quality as well as safety, retail operations related to the delivery of cannabis related products, and other related business lines as described in our operating strategic vision outlined below.
Brand Warehouse Development – The Company intends to aggregate new business opportunities into its corporate fabric in a manner that does not diminish the various companies or brands it is partnering with, but rather enhances it. Suitable candidates for consideration will have ongoing operations within various industry segments, such as the Denver Consulting Group LLC. Over time, the Company expects to expand its presence within the industry through the development of an ‘intelligent acquisition’ process.
Intelligent Acquisition –This term is meant to define a selection and due diligence process that will enable both the Company as well as the acquisition to benefit mutually in that each may better 1) establish a more stable method of continual valuation through direct contact with the public marketplace wherein with the related growth of the enterprise as a whole it will eventually be able to achieve a national exchange listing status, 2) market themselves collectively, taking advantage of certain cost savings strategies through shared participation in various events and advertising opportunities, 3) take advantage of other operating and reporting cost efficiencies available to the Company through aggregation of such acquisitions, 4) continue to develop a full spectrum of products and services deliverable to the general cannabusiness marketplace through careful segmentation of the marketplace as a whole, and 5) continue to work collaboratively within the industry to achieve both transparency as well as a strong positive reputation for ethical behavior when working both internally within its collective as well as externally with others throughout industry.
Our Three Current Business Groups
As we evolve our various business lines and branding strategies, we are working to align our service offerings into logical groupings (3 at this time) that will allow our potential clients as well as investors a better understanding of how we operate currently as well as into the future. In FY 2017, we intend to break down our income in the following groupings so that our shareholders as well as possible investors may have a better understanding of our general operations.
As the industry’s competitive landscape is very fluid and conditions within both new states as well as existing states with cannabis related regulations are everchanging, we price our services according to market conditions as well as competitive influences and are continually managing our pricing structures on a very frequent basis to insure a best rate to value ratio is clearly maintained.
Since general consulting and new state initiatives typically involve these elements and are generally related to the startup phase of any new cannabis business in a new state adopting either medical or adult use initiative, we have elected to include these elements in one grouping. The specifics of these newly established groups are as follows:
Education, Design, Business Plan, and New State Initiatives (Group 1)
Private Consultation Services
2-Hour Private Consulting Package
3-Hour Private Consulting Package
We also offer customized consulting services on a project needs basis related to:
Seminar Offering Services
Facility Design
Financial Modeling
New State Application Process Support Services (Template Support Based)
Licensing Services, Existing or New State Based (Full Service)
Three-A-Light Publication (Home Version)
Three-A-Light Publication (Professional Version)
Existing Cultivation and Dispensary Operation (Group 2)
Cultivation Max Services
Managed Facility Services
Products (Group 3)
Success Nutrients
Three-A-Light Publication (Home Version)
Three-A-Light Publication (Professional Version)
It should be noted that our Three-A-Light Professional Version is only made available to licensed or operational clients utilizing full cultivation support (Cultivation MAX).
Competitive Advantage
As we continue to grow, amassing additional experience and knowledge (similar to our recent substantial gains in as represented by Three-A-Light and Success Nutrients) we believe we will continue to enjoy a competitive advantage within the industry over any other business providing a group of service offerings similar to our own.
With our focus on the fulfillment of a brands warehouse concept, wherein we can commonly acquire, market, value, and cross promote various Cannabusiness enterprises we believe that over time we will be able to achieve a more economical cost of operations (public company) while delivering highest quality goods and services that generate strong shareholder returns in terms of our stock value in this nascent space.
As with our latest new product, Cultivation MAX we are now working with existing underperforming cultivation facility ownership groups wherein we provide access to our advanced knowledge as well as proprietary nutrients wherein we are only compensated on the delta achieved over their existing performance (generally less than 1.5 pounds a light or 350 grams of dried cured flower per square foot of flower canopy) while also guaranteeing through payment reduction that their existing cost per pound to cultivate will not increase.
While no assurances of specific performance can be provided, the Company’s revenue expectations for a typical Cultivation MAX deployment is based upon the simple premise that the Company gets paid when our client achieves higher than historical yields for its cultivation operation based upon, 1) wholesale price net of state and local taxes, 2) at a cost per pound to grow that is equal to or less than what the client was experiencing, and 3) as a modest percentage of the improvement delta achieved.
As an example of how this revenue stream to our Company will evolve, we look to the following performance assumption basics:
Based upon the above, and assuming we receive 25% of the improvement delta and the wholesale value of flower is $1,000 (net of taxes), we would receive $250 per light per harvest in revenues or $1,250 per light annually. If a facility had 500 lights (flowering), we would achieve $625,000 of gross revenues annually and our client would achieve eleven (11) times that value or $6.875M in wholesale revenues which if costs per pound remain at or less than prior experience, would generate $1.875M more revenue to the Client.
Unlike most ‘consultants’ in this industry, we have proven that we do not know it all and as we continue to be ready to learn from others (through acquisition and or cooperation), we believe that ability in and of itself will allow us to continue to expand our client base and revenues substantially.
General Client Summary
Medicine Man Technologies has been actively involved in the state application process on behalf of our clients. To date we have actively participated in an application process in the following states: Colorado, California, Florida, Illinois, Nevada, New York, Maryland, Hawaii, Oregon, Pennsylvania and Puerto Rico. As with most consultants, we have won and lost in pursuit of a license application process. To date we have assisted clients in securing the following licenses or have active clients as follows:
We have already begun to generate new business opportunities in Michigan, Ohio, Florida, and Arkansas and have more recently initiated Cultivation MAX support services for two larger Nevada clients (500 light and 400 light) which, over time should generate significant income for the Company.
We are extending our service offerings to international clients having in the third quarter generated new clients in Australia, Germany, and Canada. We currently have active proposals out in both Canada as well as Australia.
Related Parties – Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company. The Company disclose related party transactions that are outside of normal compensatory agreements, such as salaries or director fees. The Company has related party transactions with the following individuals / companies:
Cash Flows – During the nine-month period ending September 30, 2017 and 2016, the Company primarily utilized cash and cash equivalents and profits from 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 $927,884 and $351,524 classified as cash and cash equivalents as of September 30, 2017 and December 31, 2016, respectively.
Basis of Presentation: These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements.
Fair Value Measurements: Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities.
Our financial instruments include cash, accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us. Our derivative liability was adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Accounts receivable:The Company extends unsecured credit to its customers in the ordinary course of business. Accounts receivable related to licensing revenues are recorded at the time the milestone result in the funds being due has been achieved, services are delivered, and payment is reasonably assured. Licensing revenues are generally collected from 30 to 60 days after the invoice is sent. As of September 30, 2017, and December 31, 2016, the Company had accounts receivable of $398,902 and $25,000, respectively. The company wrote off $0 of its accounts receivable in the current quarter. Allowance for doubtful accounts is currently zero as all receivables are less than 60 days old. The company will continue to evaluate the need for recognizing an additional allowance in the future.
AFS Securities:Investments available for sale is comprised of publicly traded stock purchased as an investment. The Company considers the securities to be liquid and convertible to cash in under a year. The Company has the ability and intent to liquidate any security that the Company holds to fund operations over the next twelve months, if necessary, and as such has classified all its marketable securities as short-term. The Company’s investment securities at September 30, 2017 and December 31, 2016 consisted of available-for-sale instruments of $0 and $13,998, respectively, of equity in publicly traded companies. All our available-for-sale securities are Level 2 due to limited trading volume. Realized gains and losses on these securities will be included in “other income (expense)” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated OCT).
Short term note receivable:Notes receivable is comprised of a $250,000 loan with $36,455 of accrued interest for a total loan value of $286,455 issued to the organization that owns Funk Sack, Inc. This loan was extended with the option of negotiating an agreement to acquire the entirety of the company through a stock swap. However, in the fourth quarter of 2016 the Company determined that it would not complete the acquisition of the company and instead will hold the investment and it will be repaid. The loan was issued May 6, 2016 and is due to be repaid December 1, 2017. As the note is still current and the Funk Sacks organization is continuing to operate and grow this note is fully collectable.
Other assets: Other assets at September 30, 2017 and December 31, 2016 were $106,811 and $27,479, respectively and as of September 30, 2017 included $67,241 in prepaid registrations fees for major cannabis events the Company is sponsoring and advertising costs, $24,500 in two security deposits, $9,732 in prepaid inventory and $5,337 in prepaid insurance.
Accounts payable: Accounts payable at September 30, 2017 and December 31, 2016 was $53,965 and $0, respectively.
Other liabilities:Other liabilities at September 30, 2017 and December 31, 2016 were $14,700 and $175, respectively. At September 30, 2017, this was comprised of $14,700 in customer deposits for future contractual work.
Fair Value of Financial Instruments:The carrying amounts of cash and current assets and liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Available for sale securities are recorded at current market value as of the date of this report.
Revenue recognition and related allowances: Revenue from licensing and consulting services is recognized when the obligations to the client are fulfilled which is determined when milestones in the contract are achieved. Revenue from seminar fees is related to one-day seminars and is recognized as earned at the completion of the seminar. Revenue from product sales either being nutrients or book sales are recognized when the goods are transferred.
Costs of Services Sold – Costs of services sold are comprised of direct salaries and related expenses incurred while supporting the implementation of licensing agreements and related services.
General & Administrative Expenses –General and administrative expense are comprised of all expenses not linked to the production or advertising of the Company’s services.
Advertising and Marketing Costs: Advertising and marketing costs are expensed as incurred and were $136,436 and $61,541 during the nine months ended September 30, 2017 and 2016, respectively.
Stock based compensation:The Company accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company records compensation expense for share-based awards based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option pricing model.
Stock compensation expense for stock options is recognized over the vesting period of the award or expensed immediately under ASC 718 and EITF 96-18 when stock or options are awarded for previous or current service without further recourse. The Company issued stock options to contractors and external companies that had been providing services to the Company upon their termination of services. Under ASC 718 and EITF 96-18 these options were recognized as expense in the period issued because they were given as a form of payment for services already rendered with no recourse.
Share based expense paid to through direct stock grants is expensed as occurred. Since the Company’s stock has become publicly traded, the value is determined based on the number of shares issued and the trading value of the stock on the date of the transaction. Prior to the Company’s stock being traded the Company used the most recent valuation. The Company recognized $4,644,318 in expenses for stock based compensation to employees and consultants during the nine months ended September 30, 2017.
Income taxes: The Company has adopted SFAS No. 109 – “Accounting for Income Taxes”. ASC Topic 740 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Management fee contracts: In February 2017, the Company entered into a Merger Agreement with Pono Publications Ltd. (“Pono”), as well as a Share Exchange Agreement with Success Nutrients, Inc. (“SN”), each a Colorado corporation, in order to facilitate the acquisition of both of these entities. The ratification of the acquisition of these companies requires the approval of the holders of a majority of the Company’s shareholders, which was submitted for such approval at the Company’s annual shareholder meeting held on May 2017. The relevant agreements provide that the effective date for accounting purposes would be April 1, 2017. Success Nutrients became a wholly owned subsidiary of Medicine Man Technologies, Inc. and the business conducted by Pono was incorporated into a newly formed wholly owned subsidiary, Medicine Man Consulting, Inc., which is also where the Company will continue to conduct its consulting service business.
In March 2017, the Company integrated Pono Publications and Success Nutrients into its operations including a lease for approximately 10,000 square feet of space located at 6660 East 47th Street, Denver, CO 80216. This integration also included four (4) full time team members as well as several independent contractors. From April 1, 2017 to September 30, 2017 the Company has agreed to manage the acquirees through a management fee agreement whereby all cash collected was recognized as other income and all cash expenses were direct costs of the project. As of March 31, 2017, the management contract resulted in cash collections of approximately $100,000 and cash expenditures of approximately $170,000 resulting in a net loss of $70,257 which was presented on a net basis as a loss in the other income portion of the Company’s income statement. As of April 1, 2017, the Company’s consolidated financial statements included these two entities.
FASB ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” – In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Upon adoption of this new standard, the Company believes that the timing of revenue recognition related to our consulting, licensing and product sales will remain consistent with our current practice. Because we do not anticipate a change in our pattern of revenue recognition, we anticipate that neither method will have a material impact on our consolidated financial statements.
FASB ASU 2016-02 “Leases (Topic 842)” – In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance will classify leases as either finance or operating (similar to current standard’s “capital” or “operating” classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of ASU 2016-02 to have an impact on our consolidated financial statements
FASB ASU 2017-01 “Clarifying the Definition of a Business (Topic 805)” – In January 2017, the FASB issued 2017-1. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15 “Statement of Cash Flows (Topic 230)” –In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.
FASB ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)” – In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
The Company’s initial authorized stock at inception was 1,000,000 Common Shares, par value $0.001 per share. In 2016 the Company subsequently amended its Articles of Incorporation to increase its authorized shares to 90,000,000 Common Shares, par value $0.001 per share and 10,000,000 Preferred Shares, par value $0.001 per share.
At December 31, 2015, the Company had 9,972,500 shares outstanding.
On January 4, 2016, the Company issued 120,000 shares of Common Stock to various individuals in consideration of their services rendered in support of the Company resulting in recognizing compensation expense of $49,200 based upon an independent valuation determining the value of shares at $0.41 per share.
During the three months ended March 31, 2017, the Company issued 145,587 shares of Common Stock upon conversion of convertible notes in the aggregate amount of $254,777.
On June 3, 2017, the Company issued 1,400,000 shares of Common Stock to various individuals in consideration of their services rendered in support of the Company resulting in recognizing compensation expense of $2,380,000 based upon the closing stock price on September 2, 2017 at $1.70 per share.
On June 3, 2017, the Company issued an aggregate of 7,000,000 shares of Common Stock in consideration for the acquisition of Success Nutrients and Pono Publications.
On June 19, 2017, the Company issued 2,000,000 warrants to purchase Common Stock to three individuals. See Note 15 for further explanation.
During the three months ended June 30, 2017, the Company issued 44,151 shares of Common Stock upon conversion of convertible notes in the aggregate amount of $60,000.
On July 21, 2017, the Company issued 2,258,065 shares of Common Stock in consideration for the acquisition of Denver Consulting Group.
During the three months ended September 30, 2017, the Company issued 34,533 shares of Common Stock in exchange for services, at a value of $1.39 per share on July 28, 2017.
During the three months ended September 30, 2017, the Company sold 937,647 shares of Common Stock to a private investor of the Company, at a value of $1.0665 per share on August 20, 2017.
During the three months ended September 30, 2017, the Company issued 100,000 shares of Common Stock in exchange for services, at a value of $1.16 per share on August 29, 2017.
During the three months ended September 30, 2017, the Company sold 25,000 shares of Common Stock to Andy Williams, Director of the Board of the Company, at a value of $1.0665 per share on September 20, 2017.
During the three months ended September 30, 2017, the Company sold 30,000 shares of Common Stock to Brett Roper, CEO of the Company, at a value of $1.0665 per share on September 20, 2017.
At September 30, 2017, the Company had 21,875,011 common shares outstanding.
Property and equipment are recorded at cost, net of accumulated depreciation and are comprised of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Furniture & Fixtures | $ | 101,212 | $ | 11,526 | ||||
| Marketing Display | 36,900 | 42,681 | ||||||
| Vehicles | 6,000 | – | ||||||
| Office Equipment | 74,996 | 10,838 | ||||||
| $ | 219,108 | $ | 65,045 | |||||
| Less: Accumulated Depreciation | (63,579 | ) | (22,919 | ) | ||||
| $ | 155,529 | $ | 42,126 | |||||
Depreciation on equipment is provided on a straight-line basis over its expected useful lives at the following annual rates.
Depreciation expense for the nine-month periods ending September 30, 2017 and 2016 was $40,659 and $12,399 respectively.
On May 1, 2014, the Company entered into a non-exclusivean exclusive Technology License Agreement with Futurevision, Inc., f/k/a Medicine Man Production Corporation, Corp. d/b/a Colorado corporation, dba Medicine Man Denver (“Medicine Man Denver”), a company owned and controlled by affiliates of the Company, whereby Medicine Man Denver granted us a license to use all of theirthe proprietary processes they have developed, implemented and practiced at itstheir cannabis facilities relating to the commercial growth, cultivation, marketing, and distribution of medical marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including trade secrets, skills and experience (present and future). As paymentThe Company’s operations are organized into three different segments, as follows: (i) Retail, consisting of retail locations for the license rightssale of cannabis products in Colorado and New Mexico, (ii) Wholesale, consisting of manufacturing, cultivation and sale of wholesale cannabis and non-cannabis products, and (iii) Other, consisting of all other income and expenses, including those related to certain in-store marketing and promotional activities and corporate operations.
On April 20, 2020, the Company issuedrebranded, and now conducts its business under the trade name, Schwazze. The corporate name of the Company continues to be Medicine Man Denver (or its designees) 5,331,000 sharesTechnologies, Inc. The Company’s common stock is listed for trading in the United States on the OTCQX Best Market under the symbol “SHWZ” and also listed for trading in Canada on the NEO Exchange under the symbol “SHWZ.”
The accompanying unaudited interim condensed 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 interim consolidated financial statements include all the adjustments, which in the opinion of management, are necessary to present a fair presentation of the Company’s common stock. The Company accountedfinancial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for this licensea full year. These unaudited consolidated financial statements should be read in accordanceconjunction with ASC 350-30-30 “Intangibles – Goodwill and Other by recognizing the fair value of the amount paid by the company for the asset at the time of purchase. Since the Company has a limited operating history, management determined to use par valueaudited consolidated financial statements as the value recognized for the transaction. Since the term of the initial license agreement is ten (10) years, the cost of the asset will be recognized on a straight-line basis over the life of the agreement. In addition, each period the Company will evaluate the intangible asset for impairment. As of December 31, 2014,2022, and 2021, as presented in the Company’s Annual Report on Form 10-K filed on March 29, 2023 with the SEC. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impairment was deemed necessary.impact on the Company’s net earnings and financial position.
During 2016,2.Accounting Policies and Estimates
There have been no changes in the Company’s accounting policies as described in Note 2, “Accounting Policies and Estimates,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
3.Recently Adopted 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 attained two intangible assets, Product Agreement & Registrationor where it has been determined to 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 (ASU). 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments have been effective for the Company since December 15, 2022. As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), the adoption of this ASU did not have a Trade Secret. These two intangible assets were acquired duematerial impact on the Company’s consolidated financial statements.
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On August 5, 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
4.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 18 months commencing 30 days from the date of taking possession of the equipment pursuant to the result of the acquisition of SuccessPurchase and Pono on September 30, 2017. Refer to the Note 9 for further explanation of the purchase price accounting. The Company’s procurement of product registration during the year was within five states and Canada. The Company’s product was registered in California, Oregon, Colorado, Michigan, Arizona, Washington and all of Canada. The registration allowsSale Agreement, dated January 29, 2021, between the Company to sell their product within the confines of that region. The registration fees capitalized are the initial costs to obtain the license. The licenses have nominal annual renewal costs. These subscriptions are amortized over a 15-year period.
During 2016, the Company incurred an intangible asset due to the development of the products nutrient recipe. The nutrient recipe development was a onetime fee, paid to the Company’s developer. The intellectual property is amortized over a 15-year economic life of the asset. The economic life of the asset is shorter than the indefinite life considered the legal life of the assets so 15 years is deemed the economic life of the asset.
During 2016, the Company attained one additional intangible assets, Product Agreement & Registration. The Company’s procurement of product registration during the year was within seven states. The Company’s product was registered in Florida, Illinois, Maine, Massachusetts, Minnesota, Nevada and Ohio. The registration allows the Company to sell their product within the confines of that region. The registration fees capitalized are the initial costs to obtain the license. The licenses have nominal annual renewal costs. These subscriptions are amortized over a 15-year period.
Amortization expense for the periods ending September 30, 2017 and 2016 was $1,463 and $266, respectively.
| September 30, 2017 | December 31, 2016 | |||||||
| License Agreement | $ | 5,300 | $ | 5,300 | ||||
| Product License and Registration | 57,300 | – | ||||||
| Trade Secret - IP | 32,500 | – | ||||||
| $ | 95,100 | $ | 5,300 | |||||
| Less: accumulated amortization | (5,760 | ) | (1,592 | ) | ||||
| $ | 89,340 | $ | 3,708 | |||||
At December 31, 2016 the Company had raised $810,000 through a private placement of convertible promissory notes with certain accredited investors, bearing interest at 12%, with interest and principal due January 1, 2019. During the quarter ended September 30, 2017 the Company did not raise any additional capital with the same terms. In the period ended September 30, 2017 the Company converted $0 of promissory convertible notes with certain accredited investors, bearing interest at 12%, with interest and principal due January 1, 2019.Colorado Cannabis. As of September 30, 2017,2023 and December 31, 2022, the convertible debtoutstanding balance, was $675,000.including penalties for late payments, on the receivable from Colorado Cannabis totaled $0 and $11,944, respectively.
5.Inventory
Upon issuance, eachThe Company’s inventory consists of the notes is immediately convertible at the noteholders election into the Company’s common stock at $1.75 per share or 90%following as of the VWAP of the five days following the notice of conversion, whichever is lower. Since the conversion rate can be tied to an underlying item, the notes are considered to be a derivative that is recorded as a liability at fair valueSeptember 30, 2023 and adjusted to fair value at the conclusion of each reporting period. The underlying assumptions used in the Black Scholes model to determine the fair value of the derivative liability were based on the individual date the notes were closed and were the following:December 31, 2022:
| Upon issuance | September 30, 2017 | |||||||
| Current stock price | $ | 1.66 to $4.35 | $ | 1.01 | ||||
| Risk-free interest rate | 67% | 147% | ||||||
| Expected dividend yield | 0 | 0 | ||||||
| Expected term (in years) | 2.39 to 2.09 | 2 | ||||||
| Expected volatility | 85% to 114% | 130% | ||||||
| | | | | |
| | September 30, | |
| December 31, |
Raw materials | $ | 5,418,341 | | $ | 2,325,482 |
Work in process | | 11,280,895 | | | 14,504,490 |
Finished goods | | 16,068,605 | | | 5,724,210 |
Total inventories | $ | 32,767,841 | | $ | 22,554,182 |
Changes in the derivative liability were as follows:
| January 1, 2017 | $ | 294,002 | ||
| Gain on derivative liability | 4,706 | |||
| Conversion of notes - APIC | (139,603 | ) | ||
| September 30, 2017 | $ | 159,105 |
As of September 30, 2017,2023 and December 31, 2022, the Company had five related parties, Medicine Man Denver, Josh Haupt, Future Vision, De Best Inc.did not recognize any adjustment to net realizable value within its inventory.
6.Property and Super Farm LLC. OneEquipment
Property and equipment are recorded at cost, net of accumulated depreciation and are comprised of the Officers offollowing:
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Land | | $ | 3,716,438 | | $ | 3,716,438 |
Building | |
| 4,830,976 | |
| 4,830,976 |
Leasehold improvements | |
| 11,498,900 | |
| 4,100,165 |
Furniture and fixtures | | | 679,685 | | | 655,698 |
Vehicles, machinery, and tools | |
| 5,049,408 | |
| 3,796,695 |
Software, servers and equipment | |
| 4,576,946 | |
| 4,132,621 |
Construction in progress | |
| 9,852,632 | |
| 10,756,410 |
Total asset cost | | $ | 40,204,986 | | $ | 31,989,003 |
Less: accumulated depreciation | |
| (8,065,794) | |
| (4,899,977) |
Total property and equipment, net of depreciation | | $ | 32,139,192 | | $ | 27,089,026 |
Construction in progress is related to both cultivation and manufacturing facilities and includes costs related to finished goods not yet completed or otherwise not ready for use.
Depreciation expense for the Company, Joshua Haupt, currently owns 20% of both De Bestthree and Super Farm. During the nine months ended September 30, 2017,2023 was $1,057,905 and $3,165,817, respectively and $798,354 and $2,022,061 for the Company had net sales from Super Farm LLC totaling $80,021three and $28,985 sales from De Best Inc. The Company give’s a larger discount to related parties than non-related parties. As of September 30, 2017, the Company had accounts receivable balance with Super Farm LLC totaling $33,832 and $8,130 accounts receivable from De Best Inc. During the nine months ended September 30, 2017,2022, respectively.
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7.Business Combinations and Asset Acquisitions
Business Combinations
On January 26, 2022, the Company had cost of sales associatedacquired two retail dispensaries located in Boulder, Colorado pursuant to an asset purchase agreement dated June 25, 2021, with Super FarmDouble Brow, LLC, totaling $16,789 and $6,367 from De Best Inc.
Additionally, one of the Directorsa wholly-owned subsidiary of the Company Andy Williams, currently owns 38%(“Double Brow”), BG3 Investments, LLC d/b/a Drift (“Drift”), Black Box Licensing, LLC, and Brian Searchinger, as the sole equity holder of Medicine Man Denver. DuringDrift, as amended on October 28, 2021. The acquired assets included (i) the nine months ended September 30, 2017,assets used in or related to Drift’s business of distributing, marketing, and selling recreational cannabis products and (ii) the Company had net sales from Medicine Man Denver totaling $75,705leases for two retail dispensaries located in Boulder, Colorado. The aggregate closing consideration for the acquisition was (i) $1.92 million in cash, and cost of sales totaling $17,170. As of September 30, 2017, the Company had an accounts payable balance owed to Josh Haupt totaling $6,752 and $3,024 owed to Future Vision. Additionally, one of the Directors of the Company, Andy Williams, currently owns 38% of Future Vision.
On June 3, 2017, the Company issued an aggregate of 7,000,000(ii) 1,146,099 shares of its common stock for 100% ownership of both Success Nutrients and Pono Publications.Common Stock issued to Drift. The Company utilized purchase price accounting stating that net bookto value approximatesassets acquired, which values such assets at approximately fair market value of the assets acquired.value. The purchase price accounting for the Drift acquisition resulted in $6,301,080$2,138,270 of Goodwill.goodwill and $1,030,000 of intangibles.
On February 8, 2022, the Company acquired its New Mexico business pursuant to a purchase agreement with Nuevo Holding, LLC, a wholly-owned subsidiary of the Company (“Nuevo Purchaser”), Nuevo Elemental Holding, LLC (“Elemental Purchaser” and together with Nuevo Purchaser, the “Nuevo Purchasers”), Reynold Greenleaf & Associates LLC (“RGA”), Elemental Kitchen and Laboratories, LLC, a wholly-owned subsidiary of RGA (“Elemental”), the equity holders of RGA and Elemental, and William N. Ford, in his capacity as Representative, as amended on February 9, 2022 (the “Nuevo Purchase Agreement”). The ASC at 350-20-35-3A directs that “An entity may assess qualitative factorsNuevo Purchasers acquired substantially all the operating assets of RGA and all of the equity of Elemental and assumed specified liabilities of RGA and Elemental. Pursuant to determine whether it is more likely than not (that is,existing laws and regulations in New Mexico, the cannabis licenses for certain facilities managed by RGA were held by two not-for-profit entities (“NFP”): Medzen Services, Inc. (“Medzen”) and R. Greenleaf Organics, Inc. (“R. Greenleaf” and together with Medzen, the “Nuevo NFPs”). At the closing, Nuevo Purchaser gained control over the Nuevo NFPs by becoming the sole member of each of the Nuevo NFPs and replacing the directors of the two Nuevo NFPs with executive officers of the Company. The business acquired from RGA was a likelihood of more than 50%) thatmanagement company, providing branding, marketing, and consulting services, licensing certain intellectual property related to the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company had a valuation done at this timebusiness, and supporting Elemental and the value exceededNuevo 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 Nuevo NFPs are in the business of cultivating, processing, and dispensing marijuana in New Mexico. At the closing of the Nuevo Purchase Agreement, Nuevo Purchaser entered into two separate Call Option Agreements containing substantially identical terms with each of the Nuevo NFPs. Each Call Option Agreement gives Nuevo Purchaser the right to acquire 100% of the equity or 100% of the assets of the applicable Nuevo NFP for a purchase price indicatingof $100 if, in the future, the New Mexico legislature adopts legislation that there would not be any impairment.
On July 21, 2017,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 Companyacquisitions was approximately (i) $32.2 million in cash, which included a $4.5 million cash earn-out based on EBITDA of the acquired businesses for the calendar year 2021, and (ii) $17.0 million in the form of an unsecured promissory note issued 2,258,065 sharesby Nuevo Purchaser to RGA, the principal amount of its Common Stock for 100% ownershipwhich is payable on February 8, 2025 with interest payable monthly at an annual interest rate of Denver Consulting Group (“DCG”5% (the “Nuevo Note”). The Company utilized purchase price accounting statingto value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the RGA acquisition resulted in $6,196,571 of goodwill and $28,785,000 of intangibles.
On February 9, 2022, the Company acquired MCG, LLC (“MCG”), which operates two dispensaries located in Denver and Manitou Springs, Colorado 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 (“Emerald Fields”), MCG, MCG’s owners and Donald Douglas Burkhalter and James Gulbrandsen in their capacity as the Member Representatives, as amended on February 9, 2022 (the “MCG Merger Agreement”). Under the MCG Merger Agreement, MCG merged with and into Emerald Fields, with Emerald Fields continuing as the surviving entity. The aggregate closing consideration for the merger was $29.0 million, consisting of: (i) $16.0 million in cash; (ii) 7,145,724 shares of the Common Stock issued to the members of MCG; and (iii) an aggregate of $2.32 million was held back as collateral for potential claims for indemnification under the MCG Merger Agreement. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the MCG acquisition resulted in $19,852,080 of goodwill and $12,400,000 of intangibles.
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On February 15, 2022, the Company 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 (the “Brow Purchase Agreement”). The acquired assets included a 37,000 square foot building, the associated lease, and equipment designed for indoor cultivation. After purchase price adjustments for pre-closing inventory, the aggregate consideration was $6.7 million, of which Double Brow paid $6.2 million at closing and held back $500,000 as collateral for potential claims for indemnification under the Brow Purchase Agreement. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the Brow acquisition resulted in $1,792,000 of goodwill and $3,970,000 of intangibles.
On May 31, 2022, the Company acquired substantially all of the operating assets of Urban Dispensary, which operates a dispensary and indoor cultivation in Colorado, pursuant to the terms of an Asset and Personal Goodwill Purchase Agreement, dated March 11, 2022, with Double Brow, Urban Health & Wellness, Inc. d/b/a Urban Dispensary (“Urban Dispensary”), Productive Investments, LLC, and Patrick Johnson (the “Urban Purchase Agreement”). Urban Dispensary operated an indoor cannabis cultivation facility and a single retail dispensary, each located in Denver, Colorado. The aggregate consideration for the Urban Dispensary acquisition was $1.32 million in cash and 1,670,230 shares of Common Stock. The Company held back 219,847 shares from the stock consideration at closing as collateral for potential claims for indemnification from Urban Dispensary under the Urban Purchase Agreement. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the Urban Dispensary acquisition resulted in $398,148 of goodwill and $2,490,000 of intangibles.
On December 15, 2022, the Company acquired substantially all of the operating assets associated with two retail dispensaries located in Denver and Aurora, Colorado owned by Lightshade Labs LLC (“Lightshade”) pursuant to the terms of two Asset Purchase Agreements, dated September 9, 2022, among Double Brow, the Company, Lightshade, and Lightshade’s owners, Thomas Van Alsburg, Steve Brooks, and John Fritzel, as amended on December 15, 2021 (the “Lightshade Purchase Agreements”). After purchase price adjustments for transaction and related expenses, the aggregate consideration for the acquisition was approximately $2.75 million, all of which was paid in cash. The Company deposited $300,000 of the purchase price in escrow as collateral for potential claims for indemnification from Lightshade under the Lightshade Purchase Agreements. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The Lightshade Dispensary acquisition resulted in $776,959 of intangibles and $1,812,905 of goodwill, however, valuation has not been finalized. Amortization of $38,847 was recorded at September 30, 2023 to selling, general and administrative expenses.
On May 11, 2023, the Company acquired certain of the operating assets of Cannabis Care Wellness Centers, LLC (d/b/a Smokey’s) and Green Medicals Wellness Center #5, LLC (d/b/a Smokey’s) (together referenced herein as “Smokey’s”), and assumed specific obligations of Smokey’s, pursuant to the terms of the Asset Purchase Agreement, dated January 25, 2023, among Smoke Holdco, LLC, a wholly-owned subsidiary of the Company (“Smokey’s Buyer”), Smokey’s, Jeremy Lewchuk, Thomas Wilczynski, T&B Holdings, LLC, and Thomas Wilczynski, as Representative (the “Smokey’s Purchase Agreement”). Pursuant to the Smokey’s Purchase Agreement, Smokey’s Buyer acquired substantially all of Smokey’s’ assets related to its retail and medical cannabis stores located in Garden City, Colorado and Fort Collins, Colorado. After purchase price adjustments for transaction and related expenses, the aggregate consideration for the Smokey’s acquisition was approximately $7.5 million, of which approximately $3.75 million was paid in cash and $3.75 million was paid in Company common stock at a share price of $1.092 per share. Total shares issued at closing equaled 2,884,615 shares of Company common stock. The stock consideration is subject to post-closing reduction if any of the actual cannabis product inventory or cash at closing is less than certain targets stated in the Smokey’s Purchase Agreement. The Company held back from issuance $600,000 from the stock consideration and $150,000 from the cash consideration as collateral for potential claims for indemnification from Smokey’s under the Smokey’s Purchase Agreement. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the Smokey’s acquisition resulted in $2,155,155 of goodwill and $5,276,415 of intangibles, however, valuation has not been finalized.
On June 1, 2023, the Company acquired 14 retail dispensaries, one cultivation facility, and one manufacturing facility in New Mexico pursuant to an Asset Purchase Agreement, dated April 21, 2023, between Evergreen Holdco, LLC, a wholly-
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owned subsidiary of the Company (“Everest Purchaser”), Sucellus, LLC (“Everest Seller”), James Griffin, Brook Laskey, William Baldwin, Andrew Dolan, and Greg Templeton, and Brook Laskey, as Representative, as amended on June 1, 2023 (the “Everest Purchase Agreement”). Everest Purchaser acquired substantially all of the operating assets of Everest Seller and assumed specified liabilities of Everest Seller, subject to the terms and conditions set forth in the Everest Purchase Agreement (the “Everest Acquisition”). Pursuant to existing laws and regulations in New Mexico, the cannabis licenses for the facilities managed by Everest Seller are held by a NFP, Everest Apothecary, Inc., (“Everest”). At the closing, Everest Purchaser gained control over Everest by replacing the officers and directors of Everest with officers of the Company. On the same date, Everest Purchaser entered into a separate Call Option Agreement that gives Everest Purchaser the right to acquire 100% of the equity or 100% of the assets of Everest for a purchase price of $100 if, in the future, the New Mexico legislature adopts legislation that permits NFPs 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. After purchase price adjustments and subject to post-closing adjustments, the aggregate purchase price for Everest Acquisition paid at closing was approximately $41 million, of which $12.5 million was paid in cash, $17.5 million was paid in the form of an unsecured promissory note issued by Everest Purchaser to Everest Seller (the “Everest Note”), $8 million was paid in Company common stock in the amount of 7,619,047 shares and $3.0 million is payable in two installment payments of $1,250,000 due to Everest Seller on August 30, 2023 and November 28, 2023 (the “Everest Deferred Purchase Price”). The Everest Note is payable on the last day of the calendar quarter following the fourth anniversary of the closing of the Everest Acquisition with interest payable quarterly at an annual interest rate of 5%. The Company is required to make installment payments of principal and interest on the Everest Note starting June 30, 2025, and the total outstanding principal will be due on May 31, 2027. In addition to the foregoing, Everest Purchaser may be required to make a potential “earn-out” payment of up to an additional $8 million, payable in Company common stock priced at closing of the Everest Acquisition. The earn-out is based on the revenue performance of certain retail stores of Everest for the 12-month period following such stores opening for business and is revalued quarterly. Management currently estimates the expected earn-out payment to equal approximately $2.1 million based on current projections. Indemnification claims permitted under the Everest Purchase Agreement will be offset against the Everest Note. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the Everest acquisition resulted in $11,055,767 of goodwill and $25,128,876 of intangibles, however, valuation has not been finalized.
On June 15, 2023, the Company acquired substantially all of the operating assets of Standing Akimbo, LLC (“Standing Akimbo”) related to its medical cannabis store located in Denver, Colorado pursuant to the terms of the Asset Purchase Agreement, dated April 13, 2023 (the “Akimbo Purchase Agreement”), between Double Brow, Standing Akimbo, Spencer Kirson, and John Murphy (together with Spencer Kirson and John Murphy, the “Akimbo Equityholders”). The aggregate consideration for the acquisition was approximately $9.3 million, of which $3.8 million is payable in cash (“Akimbo Cash Consideration”) and approximately $5.5 million payable in the form of Company common stock (“Akimbo Stock Consideration” and together with the Akimbo Cash Consideration, the “Akimbo Purchase Price”). At the closing of the acquisition, the Company paid $1 million of the Akimbo Purchase Price in cash, and approximately $4.5 million of the Akimbo Purchase Price in Company common stock for a total of 4,488,691 shares at a per share price of $1.00 per share. The Company is obligated to pay the remainder of the Akimbo Cash Consideration over 12 fiscal quarters starting on July 15, 2023 as set forth in the Akimbo Purchase Agreement (the “Akimbo Deferred Purchase Price”). The Company also reserved from issuance approximately $1 million from the Akimbo Stock Consideration as collateral for potential claims for indemnification from Standing Akimbo and the Akimbo Equityholders under the Akimbo Purchase Agreement. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting for the acquisition of Standing Akimbo resulted in $1,768,633 of goodwill and $7,249,732 of intangibles, however, valuation has not been finalized.
The Company estimates intangible assets for current acquisitions based on prior valuations of acquisitions of similar size. The Company’s policy is to record amortization on the intangible assets beginning on the purchase date. Upon the completion of valuation, the Company revises the intangible assets and related amortization as necessary.
These transactions were accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”) in the period acquired. Refer to the Company’s business combination note as described in Note 7, “Business Combinations,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
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In consideration of the foregoing business combinations entered into during the nine month period ending September 30, 2023, the Company paid as follows:
| | | | | | | | | |
|
| Evergreen Holdco, LLC |
| Standing Akimbo, LLC |
| Smoke Holdco, LLC | |||
Cash |
| $ | 12,500,000 | | $ | 1,000,000 | | $ | 3,750,000 |
Akimbo Deferred Purchase Price | | | — | | | 2,807,475 | | | — |
Everest Deferred Purchase Price | | | 3,000,000 | | | — | | | — |
Seller notes | |
| 17,500,000 | |
| — | |
| — |
Common stock | |
| 8,000,000 | |
| 5,542,990 | |
| 3,750,000 |
Expected earn-out | | | 2,100,457 | | | — | | | — |
Total purchase price | | $ | 43,100,457 | | $ | 9,350,465 | | $ | 7,500,000 |
As of September 30, 2023, the Company’s allocation of the purchase price is as follows:
| | | | | | | | | |
Description |
| Evergreen Holdco, LLC |
| Standing Akimbo, LLC |
| Smoke Holdco, LLC | |||
Assets acquired: | | |
| | | | | |
|
Cash | | $ | 1,412,722 | | $ | 2,100 | | $ | 800 |
Accounts receivable | | | 716,440 | | | — | | | 67,630 |
Inventory | |
| 5,000,000 | |
| 330,000 | |
| — |
Fixed assets | |
| 1,443,149 | |
| — | |
| — |
Intangible assets | |
| 25,128,876 | |
| 7,249,732 | |
| 5,276,415 |
Goodwill | |
| 11,055,767 | |
| 1,768,633 | |
| 2,155,155 |
Operating lease right of use assets | | | 1,879,887 | | | — | | | — |
Total assets acquired | | $ | 46,636,841 | | $ | 9,350,465 | | $ | 7,500,000 |
Liabilities and Equity assumed: | |
|
| |
|
| |
| |
Accounts payable and accrued expenses | | $ | 1,656,497 | | $ | — | | $ | — |
Lease liability | | | 1,879,887 | | | — | | | — |
Total liabilities assumed | |
| 3,536,384 | |
| — | |
| — |
Estimated fair value of net assets acquired | | $ | 43,100,457 | | $ | 9,350,465 | | $ | 7,500,000 |
The goodwill, which is not expected to be deductible for income tax purposes, consists largely of synergies, assembled workforce, and economies of scale expected from combining the operations of the acquired entities with the Company.
The following unaudited pro forma financial information set forth below gives effect to the Evergreen Holdco, LLC acquisition as if it had occurred on January 1, 2022. Pro forma financial information is not presented for Standing Akimbo, LLC and Smoke Holdco, LLC as such results are immaterial, individually and in aggregate, to both the current and prior periods. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative
15
of the result of operations that would have been achieved had the transaction been consummated as of that time, nor does it purport to be indicative of future financial operation results.
| | | | | | | |
| | For The Three Months Ended | |||||
| | September 30, 2023 | |||||
| | Medicine Man Technologies | | Evergreen Holdco, LLC | | | Total |
| | (unaudited) | | (unaudited) | | | (unaudited) |
| | | | | | | |
Pro forma revenue | $ | 46,746,935 | | - | | $ | 46,746,935 |
Pro forma net income: | | | | | | | |
Pre- acquisition net income | | | | - | | | |
Pro forma adjustments: | | | | | | | |
(a) Transaction costs | | | | - | (a) | | |
(b) Interest expense on Everest Note | | | | - | (b) | | |
(c) Depreciation and intangible amortization | | | | - | (c) | | |
(d) Income tax expense | | | | - | (d) | | |
Total pro forma adjustments | | | | - | | | |
Total pro forma net income | $ | (322,462) | | - | | $ | (322,462) |
a) Includes removal of transaction costs associated with the acquisition as they will be reflected as of the beginning of the earliest period presented (January 1, 2022). These costs were included as selling, general and administrative expenses in the statement of comprehensive (loss) income.
b) To record interest on Everest Note of 5% per annum.
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
d) To record provision for income tax based on the estimated effective tax rate of 28.6% applied to income taxable under IRC Section 280E.
| | | | | | | |
| | For The Nine Months Ended | |||||
| | September 30, 2023 | |||||
| | Medicine Man Technologies | | Evergreen Holdco, LLC | | | Total |
| | (unaudited) | | (unaudited) | | | (unaudited) |
| | | | | | | |
Pro forma revenue | $ | 129,122,971 | | 9,152,029 | | $ | 138,275,000 |
Pro forma net income: | | | | | | | |
Pre- acquisition net income | | | | 1,697,236 | | | |
Pro forma adjustments: | | | | | | | |
(a) Transaction costs | | | | 232,853 | (a) | | |
(b) Interest expense on Everest Note | | | | (91,146) | (b) | | |
(c) Depreciation and intangible amortization | | | | (783,042) | (c) | | |
(d) Income tax expense | | | | (1,025,000) | (d) | | |
Total pro forma adjustments | | | | (1,666,335) | | | |
Total pro forma net income | $ | (5,184,664) | | 30,901 | | $ | (5,153,763) |
a) Includes removal of transaction costs associated with the acquisition as they will be reflected as of the beginning of the earliest period presented (January 1, 2022). These costs were included as selling, general and administrative expenses in the statement of comprehensive (loss) income.
b) To record interest on Everest Note of 5% per annum.
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
d) To record provision for income tax based on the estimated effective tax rate of 28.6% applied to income taxable under IRC Section 280E.
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| | | | | | | |
| | For The Three Months Ended | |||||
| | September 30, 2022 | |||||
| | Medicine Man Technologies | | Evergreen Holdco, LLC | | | Total |
| | | | (unaudited) | | | (unaudited) |
| | | | | | | |
Pro forma revenue | $ | 43,190,986 | | 6,471,507 | | $ | 49,662,493 |
Pro forma net income: | | | | | | | |
Pre- acquisition net income | | | | 3,177,750 | | | |
Pro forma adjustments: | | | | | | | |
(a) Transaction costs | | | | (232,853) | (a) | | |
(b) Interest expense on Everest Note | | | | (54,688) | (b) | | |
(c) Depreciation and intangible amortization | | | | (469,825) | (c) | | |
Total pro forma adjustments | | | | (757,366) | | | |
Total pro forma net income | $ | 1,809,237 | | 2,420,384 | | | 4,229,621 |
a) Includes transaction costs related to the acquisition (reflected as of January 1, 2022).
b) To record interest on Everest Note of 5% per annum.
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
| | | | | | | |
| | For The Nine Months Ended | |||||
| | September 30, 2022 | |||||
| | Medicine Man Technologies | | Evergreen Holdco, LLC | | | Total |
| | | | (unaudited) | | | (unaudited) |
| | | | | | | |
Pro forma revenue | $ | 119,231,932 | | 15,968,040 | | $ | 135,199,972 |
Pro forma net income: | | | | | | | |
Pre- acquisition net income | | | | 5,655,000 | | | |
Pro forma adjustments: | | | | | | | |
(a) Transaction costs | | | | (232,853) | (a) | | |
(b) Interest expense on Everest Note | | | | (164,063) | (b) | | |
(c) Depreciation and intangible amortization | | | | (1,409,477) | (c) | | |
Total pro forma adjustments | | | | (1,806,393) | | | |
Total pro forma net income | $ | 8,871,518 | | 3,848,608 | | | 12,720,126 |
a) Includes transaction costs related to the acquisition (reflected as of January 1, 2022).
b) To record interest on Everest Note of 5% per annum.
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
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| | | | | | | |
| | For The Year Ended | |||||
| | December 31, 2022 | |||||
| | Medicine Man Technologies | | Evergreen Holdco, LLC | | | Total |
| | | | (unaudited) | | | (unaudited) |
| | | | | | | |
Pro forma revenue | $ | 159,379,219 | | 22,439,548 | | $ | 181,818,767 |
Pro forma net income: | | | | | | | |
Pre- acquisition net income | | | | 3,878,250 | | | |
Pro forma adjustments: | | | | | | | |
(a) Transaction costs | | | | (232,853) | (a) | | |
(b) Interest expense on Everest Note | | | | (218,750) | (b) | | |
(c) Depreciation and intangible amortization | | | | (1,879,302) | (c) | | |
Total pro forma adjustments | | | | (2,330,905) | | | |
Total pro forma net income | $ | (18,467,615) | | 1,547,345 | | | (16,920,270) |
a) Includes transaction costs related to the acquisition (reflected as of January 1, 2022).
b) To record interest on Everest Note of 5% per annum.
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
Asset Acquisitions
In two separate closings on June 16, 2023 and September 13, 2023, the Company acquired a retail marijuana license and a medical marijuana license, respectively, from Vertical Investment Group LLC d/b/a Stellar Cannabis Co. (“Stellar”). Pursuant to the terms of the License Transfer Agreement, as amended and restated on April 17, 2023, the aggregate consideration for the Stellar medical and retail licenses was $3 million in cash. The Company held back $300,000 from the cash consideration as collateral for potential claims for indemnification from Stellar.
8.Goodwill Accounting
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.
| | | | | | | | | | | | |
|
| Retail |
| Wholesale |
| Other |
| Total | ||||
| | | | | | | | | | | | |
Balance as of January 1, 2023 | | $ | 52,583,794 | | $ | 7,219,936 | | $ | 34,801,571 | | $ | 94,605,301 |
Goodwill acquired during the period | | | 14,979,555 | | | — | | | — | | | 14,979,555 |
Measurement-period adjustment to prior year acquisition | | | (4,221,202) | | | — | | | (28,785,000) | | | (33,006,202) |
Balance as of September 30, 2023 | | $ | 63,342,147 | | | 7,219,936 | | $ | 6,016,571 | | $ | 76,578,654 |
The Company performed its annual fair value assessment as of December 31, 2022 on its subsidiaries with material goodwill on their respective balance sheets and recognized a goodwill impairment charge of $11,719,306 during 2022. No
18
such impairment existed as of September 30, 2023. Impairment is recorded when the carrying values of the reporting units exceed the estimated fair value.
| | | | | | | | | | | | |
|
| Retail |
| | Wholesale |
| | Other |
| | Total | |
| | | | | | | | | | | | |
Balance as of January 1, 2022 | | $ | 26,349,025 | | | 13,964,016 | | $ | 3,003,226 | | $ | 43,316,267 |
Goodwill acquired during the period | | | 25,594,768 | | | 1,792,000 | | | 34,981,571 | | | 62,368,339 |
Measurement-period adjustment to prior year acquisition | | | 640,001 | | | — | | | — | | | 640,001 |
Goodwill Impairment during 2022 | | | — | | | (8,536,080) | | | (3,183,226) | | | (11,719,306) |
Balance as of December 31, 2022 | | $ | 52,583,794 | | | 7,219,936 | | $ | 34,801,571 | | $ | 94,605,301 |
9.Intangible Asset
Intangible assets as of September 30, 2023 and December 31, 2022 were comprised of the following:
| | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 | ||||||||
| | Gross | | | | | Gross | | | | ||
| | Carrying | | Accumulated | | Carrying | | Accumulated | ||||
|
| Amount |
| Amortization |
| Amount |
| Amortization | ||||
License agreements |
| $ | 182,617,082 | | $ | (21,950,559) | | $ | 111,491,280 | | $ | (12,154,237) |
Tradename | | | 7,771,500 | |
| (3,333,467) | |
| 6,021,500 | |
| (1,862,242) |
Customer relationships | | | 5,150,000 | |
| (2,026,190) | |
| 5,150,000 | |
| (1,474,405) |
Non-compete | | | 2,023,000 | |
| (1,479,583) | |
| 1,265,000 | |
| (765,556) |
Product license and registration | | | 57,300 | |
| (24,648) | | | 57,300 | |
| (21,783) |
Trade secret | | | 32,500 | |
| (14,266) | |
| 32,500 | |
| (12,639) |
Total Intangible Assets | | $ | 197,651,382 | | $ | (28,828,713) | | $ | 124,017,580 | | $ | (16,290,862) |
Amortization expense was $3,808,047 and $12,537,851 for the three and nine months ended September 30, 2023 and $2,138,846 and $4,277,693 for the three and nine months ended September 30, 2022, respectively.
The following table presents the Company's future projected annual amortization expense as of September 30, 2023:
| | | |
Remainder of 2023 | | $ | 3,732,712 |
2024 | |
| 14,661,621 |
2025 | |
| 14,361,459 |
2026 | |
| 13,587,682 |
2027 | |
| 12,983,048 |
Thereafter | | | 109,496,147 |
Total future projected annual amortization expense | | $ | 168,822,669 |
10.Derivative Liability
Investor Notes
On December 3, 2021, the Company and its subsidiaries, as guarantors (the “Subsidiary Guarantors”) 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 between the Company, the Subsidiary Guarantors, Chicago Atlantic Admin, LLC, as collateral agent, and Ankura Trust Company, LLC, as trustee (as may be supplemented and/or amended from time to time, the “Indenture”). The Company received net bookproceeds of
19
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 pursuant to the Indenture. 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.
A reconciliation of the beginning and ending balances of the derivative liabilities for the periods ended September 30, 2023 and December 31, 2022 were as follows:
| | | |
Balance as of January 1, 2022 | | $ | 34,923,013 |
Loss on derivative liability | |
| (18,414,760) |
Balance as of December 31, 2022 | | $ | 16,508,253 |
Loss on derivative liability | |
| (8,501,685) |
Balance as of March 31, 2023 | | $ | 8,006,568 |
Loss on derivative liability | |
| (1,468,083) |
Balance as of June 30, 2023 | | $ | 6,538,485 |
Loss on derivative liability | |
| (4,516,237) |
Balance as of September 30, 2023 | | $ | 2,022,248 |
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 approximateswith changes in fair value recognized in the consolidated statements of operations at each period-end. The Company utilizes a Monte Carlo simulation to determine 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 $16,508,253 in relation to the derivative liability portion of the Investor Notes. The Company recorded expenses related to amortization of the debt discount of $2,088,386 and $6,269,584 for the three and nine months ended September 30, 2023 respectively, and $1,915,403 and $5,505,420 for the three and nine months ended September 30, 2022, respectively.
11.Debt
Term Loan — On February 26, 2021, the Company entered into a Loan Agreement with SHWZ Altmore, LLC (“Altmore”), as lender, and GGG Partners LLC, as collateral agent (the “Loan Agreement”). 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 is 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 September 30, 2023, 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 first 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.
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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. A holder of an Investor Note may convert all or any portion of the Investor Note into shares of Common Stock at any time until the close of business on the business day immediately preceding the maturity date of the Inventor Notes, at a conversion price equal to $2.24 per share (“Conversion Price”). The Conversion Price will be adjusted in the event of any change in the outstanding Common Stock by way of stock subdivision (including a stock split), stock combination, issuance of stock or cash dividends, distributions of other securities or assets and other corporate actions. The number of shares issuable upon conversion of the Investor Notes will be equal to the principal amount of the Investor Note plus accrued interest divided by the conversion price (the “Conversion Rate”).
The Company may, at its option, elect to redeem all, but not less than all, of the Investor Notes for cash, subject to certain conditions, at a repurchase price equal to the principal amount of the Notes plus accrued and unpaid interest thereon on such date as more fully discussed in the agreement.
On the fourth anniversary of the issuance date, the Note Investors will have the right, at their option, to require the Company to repurchase some or all their Notes for cash in an amount equal to the principal amount of the Investor Notes being repurchased plus accrued and unpaid interest up to the date of repurchase.
On or after the second anniversary of the issuance date, the Company may, at its option, convert up to 12.5% of the outstanding Investor Notes each quarter, if (i) the last reported sale price of the Common Stock exceeds 150% of the applicable Conversion Price, (ii) either (a) the Common Stock is listed on a Permitted Exchange (as defined in the Indenture) or (b) the Company’s daily volume weighted average price for the Common Stock exceeds $2,500,000, in each case for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date of conversion for the Conversion Price plus accrued and unpaid interest and (iii) there is an effective registration statement covering the resale by the holders of the Investor Notes of all Common Stock to be received in such conversion. The Company will be required to pay a Make-Whole Premium (as defined in the Indenture), payable in cash or Common Stock, to the Investors if the Investor Notes are voluntarily converted before the third anniversary of the Issuance Date and the Company’s daily volume weighted average price for the Common Stock does not exceed 175% of the Conversion Rate during the five consecutive trading days immediately preceding the date of conversion.
The Investor Notes have a contingent redemption feature that involves a substantial premium, requiring the same to be bifurcated as a derivative liability.
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 $10,000,000 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,
21
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. As of September 30, 2023, the Company expended all of the proceeds from the Investor Notes on acquisitions. 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.
Nuevo Note – On February 8, 2022, in connection with the Nuevo Purchase Agreement, Nuevo Purchaser issued the Nuevo Note to RGA, requiring the Company to make payments on an aggregate amount of $17,000,000. The deferred Nuevo Note incurs 5% interest per year, payable on the first of each month. The principal is due February 7, 2025.
Everest Note – On June 1, 2023, in connection with the Everest Purchase Agreement, Everest Purchaser issued the Everest Note to Everest Seller, requiring the Company to make payments on an aggregate amount of $17,500,000. The Everest Note incurs 5% interest per year, payable quarterly starting June 30, 2023. Two initial principal and interest payments of $1,250,000 are due on August 30, 2023 and November 28, 2023. The Company is required to make installment payments of principal and interest starting June 30, 2025, and the total outstanding principal is due and payable on May 31, 2027.
Akimbo Deferred Purchase Price– On June 15, 2023, in connection with the Akimbo Purchase Agreement, the Company entered into an agreement to pay $2.8 million of the Akimbo Cash Consideration over 12 fiscal quarters starting on July 15, 2023. The Akimbo Deferred Purchase Price arrangement incurs 5% of imputed interest payable over four years starting on July 15, 2023.
22
The following tables sets forth our indebtedness as of September 30, 2023 and December 31, 2022, respectively, and future obligations:
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
| | | | | | |
Term loan dated February 26, 2021, in the original amount of $10,000,000. An additional $5,000,000 was added to the loan agreement on July 28, 2021. Interest of 15% per annum, due quarterly. Principal payments begin June 1, 2023. |
| $ | 13,500,000 | | $ | 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 |
| | | | | | |
Investor note dated December 3, 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. | |
| 102,121,777 | |
| 99,118,391 |
| | | | | | |
Nuevo 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 | | | 17,000,000 |
| | | | | | |
Everest note dated June 1, 2023, in the original amount of $17,500,000. Interest of 5% per annum, due quarterly. Principal payments begin August 30, 2023. | | | 16,250,000 | | | — |
| | | | | | |
Akimbo Deferred Purchase Price effective June 15, 2023, in the original amount of $2,807,474. Imputed interest of 5% per annum. Principal payments begin July 15, 2023. | | | 2,069,173 | | | — |
| | | | | | |
Less: unamortized debt issuance costs | |
| (5,339,158) | |
| (6,603,695) |
Less: unamortized debt discount | |
| (34,723,592) | |
| (40,993,176) |
| | | | | | |
Total long term debt | |
| 155,128,200 | |
| 127,771,520 |
Less: current portion of long term debt | | | (4,250,000) | | | (2,250,000) |
| | | | | | |
Long term debt and unamortized debt issuance costs | | $ | 150,878,200 | | $ | 125,521,520 |
| | | | | | | | | | | | |
| | | | | Unamortized | | | | | | | |
| | Principal | | Debt Issuance | | Unamortized | | Net Long | ||||
|
| Payments |
| Costs |
| Debt Discount |
| Term Debt | ||||
2023 | |
| 2,000,000 | |
| 421,512 | |
| 2,253,909 | |
| (675,421) |
2024 | |
| 3,547,011 | |
| 1,686,049 | |
| 9,734,935 | |
| (7,873,973) |
2025 | |
| 28,226,380 | |
| 1,686,049 | |
| 11,057,799 | |
| 15,482,532 |
2026 | |
| 148,514,649 | |
| 1,545,548 | |
| 11,676,949 | |
| 135,292,152 |
2027 | |
| 12,902,910 | |
| — | |
| — | |
| 12,902,910 |
Total | | $ | 195,190,950 | | $ | 5,339,158 | | $ | 34,723,592 | | $ | 155,128,200 |
12.Leases
Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with a term greater than one year are recognized on the balance sheet at the time of lease commencement or modification of a Right of Use (“ROU”) operating lease asset and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized in the income statement
23
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 ten years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the Company’s leases do not provide an implicit rate, we used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The discount rate used in the computations ranged between 6% and 12%.
Balance Sheet Classification of Operating Lease Assets and Liabilities
| | | | | |
|
| Balance Sheet Line |
| September 30, 2023 | |
Asset |
|
|
| |
|
Operating lease right of use assets |
| Noncurrent assets | | $ | 25,315,122 |
Liabilities |
|
| |
|
|
Lease liabilities | | Current liabilities | | $ | 4,721,713 |
Lease liabilities |
| Noncurrent liabilities | | | 23,525,633 |
Maturities of Lease Liabilities
Maturities of lease liabilities as of September 30, 2023 are as follows:
| | | |
2023 |
| $ | 42,499,184 |
Less: Interest | |
| 13,943,363 |
Present value of lease liabilities | | $ | 28,555,821 |
The following table presents the Company’s future minimum lease obligation under ASC 842 as of September 30, 2023:
| | | |
2023 |
| $ | 2,123,963 |
2024 | |
| 7,399,326 |
2025 | |
| 6,127,958 |
2026 | |
| 5,516,090 |
2027 | |
| 4,325,564 |
Thereafter | | | 17,006,284 |
Total | | $ | 42,499,184 |
13.Stockholders’ Equity
The Company is authorized to issue two classes of stock, Preferred Stock and Common Stock.
Preferred Stock
The number of shares of Series A Cumulative Preferred Stock, par value $0.001 per share (“Preferred Stock”) authorized is 10,000,000. 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
24
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 86,494 shares of Preferred Stock issued which includes 944 shares of Preferred Stock in escrow as of September 30, 2023 and December 31, 2022. 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 Stock dividends were $2,353,883 and $4,383,277 for the three and nine months ended September 30, 2023, and $1,766,575 and $5,294,132 for the three and nine months ended September 30, 2022, 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 72,607,621 shares of Common Stock issued, 72,591,605 shares of Common Stock outstanding, 920,150 shares of Common Stock in treasury, and 219,848 shares of Common Stock in escrow as of September 30, 2023, and 56,352,545 shares of Common Stock issued, 55,212,547 shares of Common Stock outstanding, 920,150 shares of Common Stock in treasury, and 219,848 shares of Common Stock in escrow as of December 31, 2022.
Equity Incentive Plan
The Company previously adopted the Medicine Man Technologies, Inc. 2017 Equity Incentive Plan, as amended (the “Equity Plan”), which permits the Company to grant stock awards, incentive stock option awards (“ISO Awards”), non-statutory stock options, restricted stock, restricted stock units (“RSUs”), and performance stock units (“PSUs”) to certain qualifying employees and individuals. ISO Awards granted under the Equity Plan are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, and the ISO Awards generally vest in four equal installments starting on the first anniversary of the grant date, subject to continuous service at the Company. ISO Awards under the Equity Plan generally have 10-year contractual terms and remain outstanding during the contractual life of the award unless forfeited prior to exercise, subject to the terms of the Equity Plan and the applicable award agreement. Effective May 3, 2023, the Company adopted and implemented the Medicine Man Technologies, Inc. 2023 Long-Term Incentive Plan (the “LTIP”), pursuant to which the Company awarded ISO Awards and PSUs to certain employees and management of the Company (the “LTIP Awards”). The LTIP Awards will vest over four years, with the ISO Awards vesting on each anniversary of the grant date and the PSU Awards to vest over four years on each anniversary of the grant date subject to satisfaction or completion of performance criteria set annually by the Board. The first installment of PSUs included in the LTIP Awards have assumed performance criteria has been met for the 2023 fiscal year, and 25% of the PSUs awarded in the LTIP Awards will vest on May 3, 2024.
The Company recognized ($2,438,073) and $662,162 in expense for stock-based compensation from Common Stock options and Common Stock issued to employees, officers, and directors during the three and nine months ended September 30, 2023, respectively.
The Company recognized $99,898 and $1,788,823 in expense for stock-based compensation from Common Stock options and Common Stock issued to employees, officers, and directors during the three and nine months ended September 30, 2022, respectively.
25
The following table summarizes the ISO Awards activity granted under the Equity Plan as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
| | | | | | | | | | | |
Options | | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value | |||
Outstanding at January 1, 2023 | | 10,356,500 | | $ | 2.13 | | | 7.08 | | $ | 772,996 |
Granted | | 4,275,000 | | | 1.19 | | | 9.42 | | | — |
Forfeited | | (630,250) | | | 1.47 | | | — | | | — |
Vested | | (1,762,500) | | | 2 | | | — | | | — |
Balance at September 30, 2023 | | 12,238,750 | | $ | 1.95 | | | 7.23 | | $ | — |
Exercised | | — | | | — | | | — | | | — |
Exercisable at September 30,2023 | | 12,238,750 | | $ | 1.95 | | | 7.23 | | | — |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2023 and December 31, 2022, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on September 30, 2023 and December 31, 2022. This amount will change in future periods based on the fair market value of the assets acquired. Company’s shares and the number of options outstanding.
The purchase price accounting resulted in $3,003,226 of Goodwill. The ASC at 350-20-35-3A directs that “An entity may assess qualitative factorsCompany uses the Black-Scholes option pricing model to determine whether it is more likely than not (that is, a likelihood of more than 50%) thatestimate the fair value of the options granted during the nine months ended September 30, 2023 and the year ended December 31, 2022, using the following ranges of assumptions:
| | | | | |
| | September 30, 2023 | | | December 31, 2022 |
Risk free rate | | 4.61% | | | 3.96% |
Expected dividend yield | | 0% | | | 0% |
Expected volatility | | 75.97% | | | 78.97% |
Expected option life | | 4.75 to 6.25 years | | | 4.75 to 6.25 years |
The following table summarizes the number of unvested RSU awards under the LTIP as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
| | | | | |
Options | | Shares | | Weighted-Average Grant Date Fair Value | |
Unvested shares at January 1, 2023 | | — | | $ | — |
Granted | | 1,600,000 | | | 1.03 |
Exercised | | — | | | — |
Forfeited or expired | | — | | | — |
Vested | | (400,000) | | | 1.03 |
Unvested at September 30, 2023 | | 1,200,000 | | $ | 1.03 |
The following table summarizes the number of unvested PSU awards under the LTIP as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
| | | | | |
Performance Share Units | | Units | | Weighted-Average Grant Date Fair Value | |
Unvested shares at January 1, 2023 | | - | | $ | - |
Granted | | 702,432 | | | 1.03 |
Exercised | | - | | | - |
Forfeited or expired | | (25,976) | | | 1.03 |
Vested | | - | | | - |
Unvested at September 30, 2023 | | 676,456 | | $ | 1.03 |
26
The following table summarizes the ISO Awards activity granted under the LTIP as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
| | | | | | | | | | | |
Options | | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value | |||
Outstanding at January 1, 2023 | | — | | $ | — | | | — | | $ | — |
Granted | | 702,432 | | | 1.03 | | | 9.60 | | | — |
Forfeited | | (25,976) | | | 1.03 | | | — | | | — |
Vested | | — | | | — | | | — | | | — |
Balance at September 30, 2023 | | 676,456 | | $ | 1.03 | | | 9.60 | | $ | — |
Exercised | | — | | | — | | | — | | | — |
Exercisable at September 30,2023 | | 676,456 | | $ | 1.03 | | | 9.60 | | | — |
As permitted under ASC 718, the Company has an accounting policy to account for forfeitures when they occur.
Common Stock Issued as Compensation to Employees, Officers, and Directors
For the year ended December 31, 2022, the Company issued 717,546 shares of Common Stock valued at $1,027,288 as compensation to its directors.
For the nine months ended September 30, 2023, the Company issued 748,210 shares of Common Stock valued at $682,946 as compensation to its directors.
Beginning on December 31, 2023, the company will issue Common Stock to Directors as compensation for its services on the Board on a reporting unit is less than its carrying amount, including goodwill”quarterly basis in arrears.
Common and Preferred Stock Issued as Payment for Acquisitions
The Company issued an aggregate of 1,146,099 shares of Common Stock valued at $1,948,620 in connection with the acquisition of the assets of Drift during 2022.
On February 9, 2022, the Company issued 7,116,564 shares of Common Stock valued at $11,600,000 for the acquisition of MCG. The Company also issued 29,160 shares of Common Stock valued at $47,531 following closing for a purchase price adjustment required by the MCG Merger Agreement.
On May 31, 2022, the Company issued 1,450,381 shares of Common Stock valued at $1,900,000, of which 219,847 shares valued at $288,000 were placed in escrow, for the acquisition of Urban Dispensary.
On May 11, 2023, the Company issued 2,884,615 shares of Common Stock valued at $3,150,000 for the acquisition of Smokey’s.
On June 1, 2023, the Company issued 7,619,047 shares of Common Stock valued at $8,000,000 for the acquisition of Everest.
On June 15, 2023, the Company issued 4,488,691 shares of Common Stock valued at $4,488,692 for the acquisition of Standing Akimbo.
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 obtained an independent valuation of the DCG on July 21, 2017. The fair market value on July 21, 2017 of DCG was $3,650,000, thus creating a fair market value greater than the carrying value of Goodwill. The ASC at 350-20-35-3D directs that “If an entity determines that it is not more likely thatestimates the fair value of a reporting unit is less than its carrying amount, then Goodwill impairment is unnecessary.”
| Denver Consulting Group Balance Sheet | ||||||||||||||||||
| Book Value | Fair Value | Book Value | Fair Value | |||||||||||||||
| Assets | Liabilities | |||||||||||||||||
| Cash | 43,797 | 43,797 | Customer deposits | 43,797 | 43,797 | |||||||||||||
| 43,797 | 43,797 | 43,797 | 43,797 | |||||||||||||||
| Purchase Price | ||||||||||||||||||
| (2,258,065 * 1.33) | 3,003,226 | |||||||||||||||||
| Less: BV of Assets | (43,797 | ) | ||||||||||||||||
| Add: BV of Liabilities | 43,797 | |||||||||||||||||
| Goodwill | 3,003,226 | |||||||||||||||||
As of September 30, 2017, the Company’s Goodwill has a balance of $9,304,306. This amount consisted of $3,003,226 from the DCG acquisition and $6,301,080 from the Pono and Success acquisition.
As of September 30, 2017, and December 31, 2016, respectively, the Company had $87,685 and $0 of finished goods inventory. The Company only has finished goods within inventory because it does not produce any of its products. All inventory is produced by a third party. The inventory valuation method that the Company uses is the FIFO method. During 2017 and 2016, the company had $0 obsolescence within their inventory.
As of September 30, 2017, and December 31, 2016, the Company had a note payable balance of $58,280 and $0, respectively. The note payable is a balance that is due to an officer of the Company, Joshua Haupt.
In accordance with ASC Topic 280 – “Earnings Per Share”, the basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company's quarterly earnings for the period ended September 30, 2017 and 2016 basic and diluted earnings/(loss) per share $(0.22) and $(0.02), respectively.
Office Lease – Denver, Colorado – The Company entered into a lease for office space at 4880 Havana Street, Suite 201, Denver, Colorado 80239. The lease period started March 1, 2017 and will terminate February 29, 2020, resulting in the following future commitments:
| 2017 fiscal year | $ | 95,947 | ||
| 2018 fiscal year | 154,174 | |||
| 2019 fiscal year | 171,000 | |||
| 2020 fiscal year | 29,000 |
Office and Warehouse Lease – Denver, Colorado – The Company entered into a lease for office and warehouse space at 6660 E. 47th Ave Drive, Denver, Colorado 80216. The lease commitment is split between both Success Nutrients and Pono Publications. The lease period started December 1, 2016 and will terminate November 30, 2020, resulting in the following future commitments:
| 2017 fiscal year | $ | 115,328 | ||
| 2018 fiscal year | 118,528 | |||
| 2019 fiscal year | 121,728 | |||
| 2020 fiscal year | 124,928 |
The Company notes that this lease is accelerated, and the deferred amount isn’t booked due to immateriality.
The Company had no tax provisions as of September 30, 2017 and December 31, 2016. The company had a net loss in the quarter ending September 30, 2017 and the deferred tax asset has a full valuation against it.
The Company issued one round of warrants related to various equity transactions that was approved by the Board on June 3, 2017 and issued on June 19, 2017. Since the terms weren’t established until June 19, 2017, these were valued on this date per the signed agreements and issuance on June 19, 2017. The Company accounts for its warrants issued in accordance with the US GAAP accounting guidance under ASC 480. We estimated the fair value of these warrants at the respective balance sheet datesdate of grant using the Black-Scholes option pricing model as described in the stock-based compensation section above, based on the estimated market valuemodel.
27
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.
| Number of shares | Exercise Price | |||||||
| Balance as of March 31, 2017 | – | – | ||||||
| Warrants issued | 2,000,000 | $ | 1.445 | |||||
| Settlements | – | – | ||||||
| Balance as of September 30, 2017 | 2,000,000 | |||||||
For the year ended December 31, 2021, the Company issued warrants to purchase an aggregate of 5,531,250 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 Altmore 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 new warrants were issued as of September 30, 2023.
DuringThe following table reflects the change in Common Stock purchase warrants for the period ended September 30, 2023:
| | | | | | | |
|
| Equity Classified Warrants |
| | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life |
Balance as of December 31, 2022 | | 7,218,750 | | $ | 1.76 | | 2.74 |
Warrants exercised |
| — | | | — | | — |
Warrants forfeited/expired |
| (187,500) | | | — | | — |
Warrants issued |
| — | | | — | | — |
Balance as of September 30, 2023 |
| 7,031,250 | | $ | 1.67 | | 2.37 |
14.Earnings per share (Basic and Dilutive)
The Company computes net income (loss) per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted Earnings Per Share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to Common Stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
28
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
| | September 30, | | September 30, | | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 |
| ||||
Numerator: |
| |
|
| |
|
| |
|
| |
|
|
Net income (loss) | | $ | (322,462) | | $ | 1,809,237 | | $ | (5,184,664) | | $ | 8,871,518 | |
Less: Accumulated preferred stock dividends for the period | |
| (1,547,369) | |
| (1,784,113) | |
| (5,930,646) | |
| (5,294,132) | |
Net income (loss) attributable to common stockholders | | $ | (1,869,831) | | $ | 25,124 | | $ | (11,115,310) | | $ | 3,577,386 | |
| | | | | | | | | | | | | |
Denominator: | |
|
| |
|
| |
|
| |
|
| |
Weighted-average shares of common stock | |
| 87,202,537 | |
| 51,232,943 | |
| 78,635,841 | |
| 50,615,437 | |
| | | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | (0.02) | | $ | 0.00 | | $ | (0.14) | | $ | 0.07 | |
| | | | | | | | | | | | | |
Numerator: | |
|
| |
|
| |
|
| |
|
| |
Net income (loss) attributable to common stockholders – Basic | | | (1,869,831) | | | 25,124 | | | (11,115,310) | | | 3,577,386 | |
Add: Investor note accrued interest | | | 421,511 | | | — | | | 1,264,537 | | | — | |
Add: Investor note amortized debt discount | | | 2,181,265 | | | — | | | 6,269,584 | | | — | |
Less: Loss on derivative liability related to investor note | | | (4,516,237) | | | — | | | (14,486,005) | | | — | |
Net income (loss) attributable to common stockholders – dilutive | | $ | (3,783,292) | | $ | 25,124 | | $ | (18,067,194) | | $ | 3,577,386 | |
| | | | | | | | | | | | | |
Denominator: | |
|
| |
|
| |
|
| |
|
| |
Weighted-average shares of common stock | |
| 87,202,537 | |
| 51,232,943 | |
| 78,635,841 | |
| 50,615,437 | |
Dilutive effect of investor notes | |
| 45,853,728 | |
| — | |
| 48,953,526 | |
| — | |
Dilutive effect of warrants | |
| — | |
| 2,229,011 | |
| — | |
| 2,229,011 | |
Dilutive effect of options | |
| — | |
| 1,187,124 | |
| — | |
| 1,187,124 | |
Dilutive effect of preferred stock | |
| — | |
| 83,305,454 | |
| — | |
| 83,305,454 | |
Diluted weighted-average shares of common stock | |
| 133,056,265 | |
| 137,954,531 | |
| 127,589,367 | |
| 137,337,027 | |
| | | | | | | | | | | | | |
Diluted earnings (loss) per share | | $ | (0.03) | | $ | 0.00 | | $ | (0.14) | | $ | 0.03 | |
Basic net loss per share attributable to common stockholders is computed by dividing reported net loss attributable to common stockholders by the weighted average number of common shares outstanding for the reported period. Note that for purposes of basic earnings (loss) per share calculation, shares of preferred stock, warrants, options, and restricted stock units are excluded from the calculation for the three and nine months ended September 30, 2023 and 2022, as the inclusion of the common share equivalents would be anti-dilutive.
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15.Tax Provision
The following table summarizes the Company’s income tax expense and effective tax rates for three and nine months ended September 30, 2023 and September 30, 2022:
| | | | | | |
| | Three Months Ended September 30, | ||||
|
| 2023 |
| 2022 | ||
Income before income taxes | | $ | 5,119,347 | | $ | 7,402,750 |
Income tax expense | |
| 5,441,809 | |
| 5,593,513 |
Effective tax rate | | | 106.30% | | | 75.56% |
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2023 |
| 2022 | ||
Income before income taxes | | $ | 10,061,882 | | $ | 20,130,887 |
Income tax expense | |
| 15,246,546 | |
| 11,259,369 |
Effective tax rate | | | (152)% | | | 55.93% |
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 and nine months ended September 30, 2023 varies from the three months and nine months ended September 30, 2022 primarily due to the change in nondeductible expenses as a proportion of total expenses in the current year. The Company incurs expenses that are not deductible due to IRC Section 280E limitations which results in significant income tax expense.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all 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 September 30, 2023.
With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state, or local tax authorities for years before 2017.
16.Related Party Transactions
Transactions with Jonathan Berger
On May 4, 2022, and June 14, 2022, the Company issued 40,463 shares of Common Stock valued at $70,001 and 22,728 shares of Common Stock valued at $35,001, respectively, to Mr. Berger as compensation for service on the Board. On June 24, 2022, the Company issued 19,085 shares of Common Stock valued at $25,001 to Mr. Berger as compensation for service as the Chair of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee of the Board. On September 22, 2022, the Company issued 102,355 shares of Common Stock valued at $100,000 to Mr. Berger as compensation for service as Lead Independent Director of the Board.
On April 5, 2023, the Company issued 50,971 shares of Common Stock valued at $52,500 to Mr. Berger as compensation for services on the Board. On May 3, 2023, the Company issued 12,136 shares of Common Stock valued at $12,500 to
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Mr. Berger as compensation for services as the Chair of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee of the Board.
On September 29, 2023, the Company issued 40,900 shares of Common Stock valued at $32,311 to Mr. Berger as compensation for services on the Board and Audit Committee, and, for the period from July 1, 2023 to August 2, 2023, for services as Chair of the Compensation Committee, and Nominating and Corporate Governance Committee of the Board.
Transactions with Jeffrey Cozad and Entities Affiliated with Jeffrey Cozad
On February 26, 2021, the Company entered into a Securities Purchase Agreement (the “CRW SPA”) with CRW pursuant to which the Company issued and sold 25,350 shares of Series A Preferred Stock to CRW at a price of $1,000 per share for aggregate gross proceeds of $25,350,000. The transaction made CRW a beneficial owner of more than 5% of the Company’s common stock. The Company granted CRW certain demand and piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Series A Preferred Stock under the CRW SPA. On the same date, the Company entered into a letter agreement with CRW, granting CRW the right to designate one individual for election or appointment to the Board and Board observer rights. Under the letter agreement, for as long as CRW has the right to designate a Board member, if the Company, directly or indirectly, plans to issue, sell or grant any securities or options to purchase any of its securities, CRW has a right to purchase its pro rata portion of such securities, based on the number of shares of Series A Preferred Stock beneficially held by CRW on the applicable date on an as-converted to common stock basis divided by the total number of shares of common stock outstanding on such date on an as-converted, fully-diluted basis (taking into account all outstanding securities of the Company regardless of whether the holders of such securities have the right to convert or exercise such securities for common stock at the time of determination). Further, under the letter agreement, the Company paid 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. The Company paid CRW the final monitoring fee of $25,000 during 2022 and $0 monitoring fees during 2023. On March 14, 2021, the Board appointed Jeffrey A. Cozad as a director to fill a vacancy on the Board. Mr. Cozad is a co-manager and owns 50% of CRW Capital, LLC, and he shares voting and disposition power over the shares of Series A Preferred Stock held by CRW with Mr. Rubin. Mr. Cozad and his family members indirectly own membership interests in CRW.
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 $250,000 to Cozad Investments, L.P. for $245,000 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 the majority owner of Cozad Investments, L.P, and a member of the Board.
On May 4, 2022, and June 14, 2022, the Company issued 40,463 shares of Common Stock valued at $70,001 and 22,728 shares of Common Stock valued at $35,001, respectively, to Mr. Cozad as compensation for service on the Board.
On April 5, 2023, the Company issued 50,971 shares of Common Stock valued at $52,500 to Mr. Cozad as compensation for service on the Board.
On September 29, 2023, the Company issued 34,253 shares of Common Stock valued at $27,060 to Mr. Cozad as compensation for service on the Board and, for the period from August 2, 2023 to September 30, 2023, for services as the Chair of the Nominating and Corporate Governance Committee of the Board.
Transactions with Justin Dye and Entities Affiliated with Justin Dye
The Company has participated in several transactions involving Dye Capital, Dye Capital Cann Holdings, LLC (“Dye Cann I”), Dye Capital Cann Holdings II, LLC (“Dye Cann II”), and Dye Capital LLLP (“Dye LLLP”). Justin Dye, the Company’s former Chief Executive Officer, current Chairman of the Board, and one of the largest beneficial owners of Common Stock and Preferred Stock, controls Dye LLLP and 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
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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 Company and Dye Cann I entered into a first amendment to the Dye Cann I SPA on July 15, 2019, a second amendment to the Dye Cann I SPA on May 20, 2020, and a Consent, Waiver and Amendment on December 16, 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 two 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 warrants granted to Dye Cann I pursuant to the Dye Cann I SPA expired on June 5, 2022.
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 Company and Dye Cann II entered into an amendment to the Dye Cann II SPA on December 16, 2020, a second amendment to the Dye Cann II SPA on February 3, 2021, and a third amendment to the Dye Cann II SPA on March 30, 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, 1,300 shares of Preferred Stock on February 25, 2021, 2,500 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. 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.
On May 27, 2023, the Company entered into an agreement with Mr. Dye to provide for the compensation of Mr. Dye as the Chairman of the Board (the “Chair Agreement”). The Chair Agreement provides that Mr. Dye will be entitled to annual compensation in the amount of $300,000, payable quarterly in accordance with the Company’s director compensation policy and schedule. Mr. Dye may, at his option, take payment in cash, common stock, or restricted stock units. The next
32
payment is scheduled to occur on or around December 31, 2023. The Chair Agreement also contains a termination fee of $350,000, payable in cash, for which the Company will be liable in the event Mr. Dye is terminated as Chair of the Board other than for Cause (as defined in the Chair Agreement) on or before May 27, 2024. Pursuant to the Chair Agreement, the Company also accelerated the last vesting period of Mr. Dye’s outstanding stock option award granted in December 2019, and Mr. Dye has 2,000,000 stock option awards vested and outstanding as of September 30, 2023.
On June 13, 2023, Dye Capital LLLP, an entity owned by Mr. Dye, indirectly provided a loan in the amount of approximately $2.3 million to Lakewood Wadsworth Partners, LLC (“Lakewood Landlord”) to acquire property in the Lakewood neighborhood of Denver, Colorado for the purpose of leasing such property to the Company. The Company is obligated to make monthly rental payments of $22,649 for the first five years of the lease term to Lakewood Landlord, and such rental payments will be used to pay down the loan. Rental payments pursuant to this lease commence in the third quarter of 2023.
The Company also acquires certain advertising and marketing services from Tella Digital, an on-premises digital experience solution, of which Mr. Dye is a partial owner and Chairman of the board of directors. For the three and nine months ended September 30, 2023, the Company recorded expenses of $104,417 and $394,913, respectively, with Tella Digital, as compared to $47,955 and $254,136 for the same periods in 2022.
On September 29, 2023, the Company issued 130,801 shares of Common Stock valued at $103,333 to Mr. Dye for services as Chairman of the Board for the periods of May 27, 2023 to June 30, 2023, and through December 31, 2023.
Transactions with Jeffrey 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 $300,000 to Mr. Garwood for $294,000 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.
On April 5, 2023, the Company issued 50,971 shares of Common Stock valued at $52,500 to Mr. Garwood as compensation for service on the Board. On May 4, 2022, and June 14, 2022, the Company issued 40,463 shares of Common Stock valued at $70,001 and 22,728 shares of Common Stock valued at $35,001, respectively, to Mr. Garwood, as compensation for service on the Board.
On September 29, 2023, the Company issued 22,152 shares of Common Stock valued at $17,500 to Mr. Garwood and $8,750 of cash as compensation for service on the Board.
Transactions with Entities Affiliated with Nirup Krishnamurthy
The Company also acquires certain advertising and marketing services from Tella Digital, an on-premises digital experience solution, of which Mr. Krishnamurthy is a partial owner and serves as director on Tella Digital’s board. For the three and nine months ended September 30, 2023, the Company recorded expenses of $104,417 and $394,913, respectively, with Tella Digital, as compared to $47,955 and $254,136 for the same periods in 2022.
On May 24, 2023, the Company entered into an Amended and Restated Employment Agreement with Mr. Krishnamurthy following his appointment as Chief Executive Officer (the “CEO Agreement”). Pursuant to the CEO Agreement, the Company granted Mr. Krishnamurthy an additional 800,000 stock options and 1,600,000 restricted stock units under the Equity Plan. The stock options vest in equal installments over four years starting on the first anniversary of the effective date of the CEO Agreement, and the restricted stock units vest in four equal installments, with the first tranche of 400,000 RSUs, valued at $412,000 vesting immediately upon execution of the CEO Agreement and the remainder to vest on each anniversary of the effective date of the CEO Agreement.
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Transactions with Paul Montalbano
On April 5, 2023, the Company issued 50,971 shares of Common Stock valued at $52,500 to Mr. Montalbano as compensation for service on the Board. On May 4, 2022, and June 14, 2022, the Company issued 40,463 shares of Common Stock valued at $70,001 and 22,728 shares of Common Stock valued at $35,001, respectively, to Mr. Montalbano, as compensation for service on the Board.
On September 29, 2023, the Company issued 33,228 shares of Common Stock valued at $26,250 to Mr. Montalbano as compensation for service on 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 $200,000 to Mr. Mukharji for $196,000 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.
On April 5, 2023, the Company issued 50,971 shares of Common Stock valued at $52,500 to Mr. Mukharji as compensation for service on the Board. On May 4, 2022, and June 14, 2022, the Company issued 40,463 shares of Common Stock valued at $70,001 and 22,728 shares of Common Stock valued at $35,001, respectively, to Mr. Mukharji, as compensation for service on the Board.
On September 29, 2023, the Company issued 33,228 shares of Common Stock valued at $26,250 to Mr. Mukharji as compensation for service on the Board.
Transactions with Marc Rubin and 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. Pursuant to the CRW SPA, the Company issued and sold 25,350 shares of Series A Preferred Stock to CRW at a price of $1,000 per share for aggregate gross proceeds of $25,350,000. The transaction made CRW a beneficial owner of more than 5% of the Company’s common stock. The Company granted CRW certain demand and piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Series A Preferred Stock under the CRW SPA. Effective February 4, 2022, the Company registered the resale of the shares of common stock issuable upon conversion of the Series A Preferred Stock on a Form S-3. Also on February 26, 2021, the Company entered into a letter agreement with CRW, granting CRW the right to designate one individual for election or appointment to the Board and Board observer rights. Under the letter agreement, for as long as CRW has the right to designate a Board member, if the Company, directly or indirectly, plans to issue, sell or grant any securities or options to purchase any of its securities, CRW has a right to purchase its pro rata portion of such securities, based on the number of shares of Series A Preferred Stock beneficially held by CRW on the applicable date on an as-converted-to-common-stock basis divided by the total number of shares of common stock outstanding on such date on an as-converted, fully-diluted basis (taking into account all outstanding securities of the Company regardless of whether the holders of such securities have the right to convert or exercise such securities for common stock at the time of determination). Further, under the letter agreement, the Company paid 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. The Company paid CRW the final monitoring fee of $25,000 during 2022 and $0 monitoring fees in 2023. Mr. Rubin is a co-manager and 50% owner of CRW Capital, LLC, and he shares voting and disposition power over the shares of Series A Preferred Stock held by CRW with Mr. Cozad.
On December 7, 2021, the Company entered into a Securities Purchase Agreement with The Rubin Revocable Trust U/A/D 05/09/2011 (the “Rubin Revocable Trust”) pursuant to which the Company issued an Investor Note in the aggregate principal amount of $100,000 to the Rubin Revocable Trust for $98,000 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
34
an increase to the principal amount of the Note. Mr. Rubin is the majority owner of the Rubin Revocable Trust and a member of the Board. In October 2022, the Board appointed Mr. Rubin as a director to fill a vacancy on the Board.
On April 5, 2023, the Company issued 69,125 shares of Common Stock valued at $71,200 to Mr. Rubin as compensation for service on the Board.
On September 29, 2023, the Company issued 33,228 shares of Common Stock valued at $26,250 to Mr. Rubin as compensation for service on the Board.
Transactions with Bradley Stewart
On April 5, 2023 and May 3, 2023, the Company issued 13,825 shares of Common Stock valued at $14,240 on each date to Mr. Stewart as compensation for service on the Board.
On September 29, 2023, the Company issued 34,870 shares of Common Stock valued at $27,547 to Mr. Stewart as compensation for service on the Board and, for the period from August 2, 2023 to September 30, 2023, for service as Chair of the Compensation Committee of the Board.
Transactions with Star Buds Parties
The Company has participated in several transactions involving entities owned or affiliated with one or more of its former directors that are affiliated with Star Buds and/or the Star Buds Acquisitions. These individuals include: (i) Brian Ruden, a former director of the Company as of October 2022, and (ii) Salim Wahdan, a former director of the Company as of March 2023 (hereinafter referred to as the “Star Buds Affiliates”). Both Brian Ruden and Salim Wahdan had an ownership stake in the Star Buds companies acquired by the Company between December 2020 and March 2021.
Between December 17, 2020 and March 2, 2021, the Company’s wholly-owned subsidiary SBUD LLC acquired the Star Buds assets. The aggregate purchase price for the Star Buds assets was $118,000,000, paid as follows: (i) $44,250,000 in cash at the applicable closings, (ii) $44,250,000 in deferred cash, also referred to in this report as “seller note(s),” (iii) 29,506 shares of Series A Preferred Stock, of which 25,078 shares were issued at the applicable closings and 4,428 shares were held back by the Company as collateral for potential indemnification obligations pursuant to the applicable purchase agreements. In addition, the Company issued warrants to purchase an aggregate of 5,531,250 shares of common stock to the sellers. Each party’s interests in the seller notes are as follows: (i) Brian Ruden: 31% and (ii) Salim Wahdan: 3.5%. The Company issued warrants to purchase an aggregate of (i) 1,715,936 shares of common stock to Mr. Ruden and (ii) 193,929 shares of commons stock to Mr. Wahdan.
As of September 30, 2023 December 31, 2022, the Company owed an aggregate principal amount of $44,250,000 under the seller notes and held 944 shares of Series A Preferred Stock in escrow as collateral for potential indemnification obligations pursuant to the applicable purchase agreements. The Company paid $1,327,500 and $2,655,000 in interest pursuant to the seller notes for the three and six months ended June 30, 2023, respectively, and $1,082,694 and $2,165,387 for the three and nine months ended September 30, 2022. The Company has not paid any principal as of September 30, 2023 and December 31, 2022.
In connection with acquiring the Star Buds assets the Company also assumed and acquired a number of leases for which one or more of the Star Buds Affiliates serve as landlord or maintain an ownership interest in the landlord entity. The Company has entered into a lease with each of 428 S. McCulloch LLC, Colorado Real Estate Holdings LLC, 5844 Ventures LLC, 5238 W 44th LLC, 4690 Brighton Blvd 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 (“Pueblo West Lease”). The leases with Colorado Real Estate Holdings LLC (“Niwot Lease”) and 5844 Ventures LLC (“Commerce City Lease”) are for the Company’s Niwot and Commerce City Star Buds location, respectively, and were 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 (“Lakeside Lease”). The lease with 4690 Brighton Blvd LLC is for the Company’s Brighton store in north Denver and was effective on February 3, 2021 (“Brighton Lease”). The leases with 14655 Arapahoe LLC (“Arapahoe Lease”) and
35
Montview Real Estate LLC (“Aurora Lease”) are for the Company’s Arapahoe and Aurora locations, respectively, and were effective on March 2, 2021. The Pueblo West Lease, Lakeside Lease, and Commerce City Lease each provide for a monthly rent payment of $5,000 with an aggregate of $180,000 during the initial term of the leases. The Niwot Lease provides for a monthly rent payment of $6,779 with an aggregate of $244,044 during the initial term of the lease. The Arapahoe Lease provides for a monthly rent payment of $12,367 with an aggregate of $445,212 during the initial term of the lease. The Aurora Lease provides for a monthly rent of $6,250 with an aggregate of $225,000 during the initial term of the lease. The Brighton Lease provides for a monthly rent payment of $7,250 with an aggregate of $261,000 during the initial term of the lease. SBUD LLC made aggregate rental payments pursuant to these leases of $142,938 and $285,876 for the three and six months ended September 30, 2023 and 2022. 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 (“Star Brands”) under which Star Brands licenses certain trademarks to SBUD LLC effective as of the closing of the acquisitions of all of the Star Buds assets. SBUD LLC has no payment obligation under this agreement. On June 15, 2023, the Company entered into a Licensing Agreement with Star Brands pursuant to which Star Brands licenses additional trademarks to the Company for the exclusive right to sell such licensed products in New Mexico (the “Star Brands Agreement”). Pursuant to the Star Brands Agreement, the Company is required to make quarterly payments to Star Brands for use of such exclusive license. The Company has not made any payments pursuant to the Star Brands Agreement as of June 30, 2023. Mr. Ruden is a partial owner of Star Brands.
In connection with the Star Buds Acquisitions, the Company granted Mr. Ruden and Naser Joudeh, another recipient of Preferred Stock from the Star Buds Acquisitions, the right to jointly designate two or three individuals for election or appointment to the Board, depending on the size of the Board and subject to ownership limitations.
17.Commitments and Contingencies
Pursuant to the Everest Purchase Agreement, the Company may be required to make a potential “earn-out” payment of up to an additional $8 million, payable in Company common stock, based on the revenue performance of certain retail stores of Everest for 12 months following such stores opening for business. Management currently estimates the expected earn-out payment to equal approximately $2.1 million based on current projections.
18.Segment Information
The Company has three identifiable segments as of September 30, 2023; (i) Retail, (ii) Wholesale and (iii) and Other. Retail represents our dispensaries which sell merchandise directly to customers via retail locations and e-commerce portals. Wholesale represents our manufacturing, cultivation, and wholesale business which sells merchandise to customers via e-commerce portals, a retail location, and a manufacturing facility. Other derives its revenue from in-store advertisements and vendor promotions offered in the Company’s retail dispensaries.
The following information represents segment activity for the three months ended September 30, 2023:
| | | | | | | | | | | | |
| | For The Three Months Ended | ||||||||||
| | September 30, 2023 | ||||||||||
|
| Retail |
| Wholesale |
| Other |
| Total | ||||
External revenues | | $ | 41,951,969 | | $ | 4,701,268 | | $ | 93,698 | | $ | 46,746,935 |
Depreciation and intangible assets amortization | | | 3,496,179 | | | 1,137,469 | | | 232,302 | | | 4,865,950 |
Segment profit | |
| 14,785,153 | |
| 243,097 | |
| (6,104,743) | |
| 8,923,507 |
Segment assets | |
| 211,279,966 | |
| 113,288,960 | |
| 46,021,760 | |
| 370,590,687 |
36
The following information represents segment activity for the nine months ended September 30, 2017,2023:
| | | | | | | | | | | | |
| | For The Nine Months Ended | ||||||||||
| | September 30, 2023 | ||||||||||
|
| Retail | | Wholesale |
| Other |
| Total | ||||
External revenues | | $ | 115,871,037 | | $ | 13,034,676 | | $ | 217,258 | | $ | 129,122,971 |
Depreciation and intangible assets amortization | | | 10,792,018 | | | 3,840,969 | | | 1,070,681 | | | 15,703,668 |
Segment profit | |
| 44,032,159 | |
| (1,720,029) | |
| (22,781,378) | |
| 19,530,752 |
Segment assets | |
| 211,279,966 | |
| 113,288,960 | |
| 45,968,203 | |
| 370,590,687 |
The following information represents segment activity for the Company issued 2,000,000 common stock purchase warrants to three employees of the Company with an exercise price of $1.445 per share for a period of time expiring on December 31, 2019. As of September 30, 2017, none of the warrants were exercised. Stock-based compensation expense recognized for warrants during the nine-month periodand nine months ended September 30, 2017 was $2,100,318.2022:
| | | | | | | | | | | | |
| | For The Three Months Ended | ||||||||||
| | September 30, 2022 | ||||||||||
| | Retail | | Wholesale |
| Other |
| Total | ||||
External revenues | | $ | 39,759,734 | | $ | 3,335,252 | | $ | 96,000 | | $ | 43,190,986 |
Depreciation and intangible assets amortization | | | 1,728,764 | | | 850,313 | | | 249,290 | | | 2,828,367 |
Segment profit | | | 30,713,920 | | | 1,837,973 | | | (21,437,036) | | | 11,114,858 |
Segment assets | | | 188,486,331 | | | 74,042,877 | | | 67,981,863 | | | 330,511,071 |
| | | | | | | | | | | | |
| | For The Nine Months Ended | ||||||||||
| | September 30, 2022 | ||||||||||
|
| Retail |
| Wholesale |
| Other |
| Total | ||||
External revenues | | $ | 104,386,464 | | $ | 14,661,268 | | $ | 184,200 | | $ | 119,231,932 |
Depreciation and intangible assets amortization | | | 6,029,035 | | | 1,598,931 | | | 701,801 | | | 8,329,767 |
Segment profit | | | 45,023,554 | | | 5,892,696 | | | (35,556,282) | | | 15,359,968 |
Segment assets | | | 188,486,331 | | | 74,042,877 | | | 67,981,863 | | | 330,511,071 |
The
19.Subsequent Events
In accordance with FASB ASC 855-10, Subsequent Events, the Company received notice from two holders of their request for conversion of debt as described herein relatedhas analyzed its operations subsequent to Convertible Notes valued at $45,000,September 30, 2023 to convert into an aggregate of 46,249 of Common Shares at a conversion price of $0.973 per share.the date these condensed consolidated financial statements were issued and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included herein. In connectionherein and with and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
Overview
We were incorporated on March 20, 2014, in the State of Nevada. On May 1, 2014, we entered into an exclusive Technology License Agreement with Medicine Man Denver, Inc., f/k/a Medicine Man Production Corporation, a Colorado corporation (“Medicine Man Denver”) whereby Medicine Man Denver granted us a license to use all of their proprietary processes they have developed, implemented and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including trade secrets, skills and experience (present and future) (the “Medicine Man Denver License Agreement”).
We commenced our business on May 1, 2014 and currently generate revenues derived from licensing agreements with cannabis related entities, as well as sponsoring seminars offered to the cannabis industry and other business endeavors related to our core competencies. As of the date of this report we have or have had 45 fee generating clients in 14 different states. Cultivation MAX update: The Company as previously announced began an engagement with two Nevada based cultivators, each having approximately 500 revenue generating lamps that should begin to produce revenues for the Company in its 4th quarter of FY 2017. The Company has several new Cultivation MAX clients in California and Colorado that should become operational during the 1st and 2nd quarters of FY 2018.
We are a cannabis consulting company providing services related to cost efficient cannabis cultivation technologies focusing on quality as well as safety, retail operations related to the delivery of cannabis related products, and other related business lines as described in our operating strategic vision.
We have never been subject to any bankruptcy proceeding. Our executive offices are located at 4880 Havana Street, Suite 201 South,Denver, Colorado 80239, telephone (303) 371-0387.Our website address is www.medicinemantechnologies.com.
Results of Operations
Comparison of Results of Operations for the three months ended September 30, 2017 and 2016
During the three months ended September 30, 2017, we generated revenues of $928,264, including consulting/licensing fees of $588,001 and product sales of $340,263 as compared with the three months ended September 30, 2016, where we generated revenues of $236,593, all of which were related to consulting/licensing services. This resulted in an increase in our consulting/licensing revenues of 149% or $351,408 noting the balance of this increase was related to Success Nutrient sales which were not present in the same quarter one year earlier. Overall revenue increased during this three-month period over that of the prior year by 292% of $691,671.
Cost of services, consisting of expense related to delivery of services and product procurement, was $297,185 during the three months ended September 30, 2017, compared to $83,209 during the comparable period in 2016. This increase was largely driven by the addition of product procurement expenses and increases in wages for the period.
Operating expenses during the three months ended September 30, 2017, were $950,825 consisting of acquisition costs of $42,600, officer bonuses of $90,823, professional fees of $144,796, salaries of 127,250, and general and administrative expense of $331,764, compared to general and administrative expenses of $99,891 incurred during the three months ended September 30, 2016, an increase of $231,873. Increased operating expenses during this three-month period were primarily attributable to acquisition expenses, which did not occur in 2016, professional fees relating to these acquisitions, officer’s bonuses, as well as the cost increase of additional staff needed to service our expanding client base as reflected in our operating expense category.
During the three-month period ended September 30, 2017, we issued 134,533 shares of our Common Stock to consultants in exchange for $164,000 of services rendered as shown in stock compensation expense on our condensedaudited consolidated statements of operations for the three-month period ended September 30, 2017.
During the three-month period ended September 30, 2017, the Company incurred $42,600 in acquisition costs, $164,000 in stock compensation expense and loss of $136,088 on conversion derivative. The cost of these three items total $342,688 and represented 71% of the losses as shown below.
As a result, we generated a net loss of $485,627 during the three months ended September 30, 2017 (approximately ($0.02) per share), compared to net income of $18,752 during the three months ended September 30, 2016.
Comparison of Results of Operations for the nine months ended September 30, 2017 and 2016
During the nine months ended September 30, 2017, we generated revenues of $2,351,752, including consulting/licensing fees of $1,653,902 and product sales of $691,611 with only a nominal amount of revenue arising from our participation in cannabis seminars. In the nine months ended September 30, 2016 revenue generated was $585,388 with $570,135 generated through consulting/licensing fees. During the nine months ended September 30, 2017 we increased revenue by 302% over the similar period in 2016. This increase was due to the acquisition of Pono and Success, growth in our service model and growth within our client base.
Cost of services, consisting of expenses related to delivery of services and product procurement, was $734,345 during the nine months ended September 30, 2017, compared to $264,826 during the comparable period in 2016, an increase of $469,519. This increase was largely driven by the addition of product procurement expenses and increases in wages for the period.
Operating expenses during the nine months ended September 30, 2017, were $6,352,539, including stock compensation expense of $4,644,318 compared to stock based compensations of $49,200 during the similar period in 2016, an increase of $4,595,118. General and administrative expense was $735,018 during the nine months ended September 30, 2017, compared to of $411,523 incurred during the nine months ended September 30, 2016, an increase of $323,495. Increased operating expenses included additional cost incurred related to professional fees of $384,278 incurred during the period, as well as $136,436 in advertising expense incurred during the nine months ended September 30, 2017, compared to advertising expenses of $61,541 during the corresponding period in 2016. During the nine months ended September 30, 2017, the Company incurred $141,301 in acquisition costs related to the Pono/Success acquisition and the Denver Consulting Group acquisition.
During the three-month period ended September 30, 2017, the Company incurred $141,301 in acquisition costs and $4,644,318 in stock compensation expense. The cost of these two items total $4,785,619 and represented 98% of the losses as shown below.
As a result, we generated net loss of $4,868,859 during the nine months ended September 30, 2017 (approximately ($0.22) per share, compared to net loss of $194,766 during the nine months ended September 30, 2016.
Liquidity and Capital Resources
At September 30, 2017, we had $927,884 in cash on hand.
Net cash used from operating activities was $657,052 during the nine-month period ended September 30, 2017, compared to cash used from operating activities of $320,198 for the similar period in 2016, an increase of $336,854.
Between November 2014 and March 2016, we undertook a private offering of our Common Stock wherein we sold 270,000 shares of our Common Stock for gross proceeds of $270,000 ($1.00 per share) to 4 non-accredited and 23 “accredited” investors, as that term is defined under the Securities Act of 1933.
From October 2016 through February 2017, we engaged in a private offering of convertible notes to 11 accredited investors (as that term is defined under Rule 501, Regulation D of the Securities Act of 1933, as amended). These loans provide for a fixed or VW AP conversion option, bear an annual interest rate of 12% (simple), with interest paid quarterly and mature on December 31, 2018. We issued notes totaling $989,777. As of the date of this Report, Convertible Notes aggregating $254,777 were converted to 145,587 shares of our Common Stock. These conversions were computed at both the floor value of $1.75 as well as at a VWAP value as allowable under the terms of the conversion rights. See "Notes to Financial Statements."
During the three months ended September 30, 2017, we undertook a unit offering wherein we sold 937,647 shares of our Common Stock for gross proceeds of $1,000,000 ($1.0665 per share) to 1 non-accredited investor, as that term is defined under the Securities Act of 1933. During the three months ended September 30, 2017, the Company sold 25,000 shares of Common Stock to Andy Williams, Director of the Board of the Company, at a value of $1.0665 per share on September 20, 2017. During the three months ended September 30, 2017, the Company sold 30,000 shares of Common Stock to Brett Roper, CEO of the Company, at a value of $1.0665 per share on September 20, 2017.
As we continue to focus on expanding our branding warehouse concept through acquisition, we believe we will require capital beyond our current ability to generate through our operations. Over time we expect that these investments will begin to require less capital and be spread out over an ever-increasing corporate structure integrating various acquisitions as wholly owned subsidiary operations, all supporting a common brand and marketing strategy. Additionally, we are attempting to evolve and lower costs as we eliminate duplication of all the various related costs and services incurred by these entities prior to our acquisition. There are no assurances this will occur.
We are currently in process of undertaking an effort to raise additional capital through the sale of our securities. It is expected, though not assured, that this additional cash infusion will provide meet our cash requirements until we will again start generating positive cash flow from operations. However, if we are unable to secure this financing or generate profits from our operations or elect to expand our operations or otherwise require additional capital, we have no agreement with any third party to provide us the same and there can be no assurances that we will be able to raise any capital, either debt or equity on commercially reasonable terms, or at all. If we require additional capital and are unable to raise the same, it could have a material negative impact on our results of operations.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the nine-month period ended September 30, 2017.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2017 and December 31, 2016.
Critical Accounting Estimates
Our financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussedincluded in our Annual Report on Form 10-K for the year ended December 31, 20162022, as filed with the SEC. In addition to our historical unaudited condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.” See also, “CAUTIONARY NOTE ABOUT FORWARD-LOOKING INFORMATION.”
OVERVIEW OF THE COMPANY
Established in 2014 and headquartered in Denver, Colorado, Medicine Man Technologies, Inc., is a vertically integrated cannabis company with experienced retail leadership and operations in Colorado and New Mexico. The Company is focused on building a premier, vertically integrated cannabis company by taking its retail operating playbook to other states where it can develop a differentiated leadership position focused on assortment, value, and service. The Company is actively building a house of brands that includes retail banners, proprietary products, and licensed brands, while also preserving the ability to control and maintain the quality of its brands through vertical integration. The Company fosters a
37
high-performance culture that combines customer-centric thinking and data science to test, measure, and drive effective business decisions and outcomes.
Q3 Highlights and Recent Developments
During the third quarter of 2023, the Company continued to focus its efforts on strengthening operations, improving the customer experience, and increasing supply chain efficiencies while integrating its three new acquisitions in Colorado and New Mexico.
In May 2023, the Company acquired two new retail dispensaries located in Fort Collins, Colorado, and Garden City, Colorado, from Smokey’s. In June 2023, the Company acquired the Standing Akimbo branded medical dispensary located in Denver, Colorado. Also in June 2023, the Company expanded its New Mexico operations with the acquisition of Everest Apothecary, which added 14 retail dispensaries, one cultivation facility and one manufacturing facility. Additionally, during the third quarter the Company acquired a medical marijuana license from Stellar in addition to the retail marijuana license it acquired from Stellar in June 2023. Since then, the Company has focused on integration synergies, assortment, strategic pricing and the customer experience.
During the third quarter of 2023, the Company also opened an additional Standing Akimbo branded medical dispensary located in Colorado Springs, Colorado and another retail dispensary operating under the Star Buds banner located in Lakewood, Colorado. In New Mexico, the Company opened a store located in Hobbs, New Mexico, under its R. Greenleaf banner. This brings the Company’s total retail footprint to 63 stores with 30 stores in Colorado and 33 stores in New Mexico.
During the fourth quarter of 2023 to date, the Company announced its store within a store concept in Fort Collins, whereby the Company has combined a Star Buds neighborhood dispensary with a Standing Akimbo medical dispensary operating out of the same location, bringing two recognized brands in the recreational and medical retail space together. Additionally, the Company continues to develop its brand strategy and expand its wholesale presence in Colorado and New Mexico, driving penetration in both states, and realizing 10% quarter over quarter growth to date.
On August 2, 2023, the Board appointed Bradley Stewart as a member and Chair of the Board’s Compensation Committee, and it removed Marc Rubin from the Board’s Compensation Committee. Additionally, the Board appointed Jeffrey Cozad as the Chair of the Board’s Nominating and Corporate Governance Committee, and it removed Jonathan Berger as the Chair of the Board’s Nominating and Corporate Governance Committee. Mr. Berger remains as the Chair of the Board’s Audit Committee and as well as our Lead Independent Director.
On October 5, 2023, the Company relocated its corporate headquarters to 865 N. Albion Street, Denver, Colorado.
RESULTS OF OPERATIONS – CONSOLIDATED
The following table sets forth the Company’s selected consolidated financial results for the periods, and as of the dates, indicated. The (i) consolidated statements of operations for the three and nine months ended September 30, 2023 and September 30, 2022 and (ii) consolidated balance sheet as of September 30, 2023 and December 31, 2022 have been derived from and should be read in conjunction with the consolidated financial statements and accompanying notes presented in this report.
The Company’s consolidated financial statements have been prepared in accordance with GAAP and on a going-concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.
38
Quarter Ended September 30, 2023 Compared to the Quarter Ended September 30, 2022
| | | | | | | | | | | | |
| | For the Three Months Ended | | | | | |
| ||||
| | September 30, | | 2023 vs 2022 | | |||||||
|
| 2023 |
| 2022 |
| | $ |
| % |
| ||
Total revenue | | $ | 46,746,935 | | $ | 43,190,986 | | $ | 3,555,949 | | 8 | % |
Total cost of goods and services | |
| 25,308,972 | |
| 20,715,192 | |
| 4,593,780 | | 22 | % |
Gross profit | |
| 21,437,963 | |
| 22,475,794 | |
| (1,037,831) | | (5) | % |
Total operating expenses | |
| 12,514,456 | |
| 11,360,936 | |
| 1,153,520 | | 10 | % |
Income (loss) from operations | |
| 8,923,507 | |
| 11,114,858 | |
| (2,191,351) | | (20) | % |
Total other income (expense) | |
| (3,804,160) | |
| (3,712,108) | |
| (92,052) | | 2 | % |
Provision for income taxes (benefit) | |
| 5,441,809 | |
| 5,593,513 | |
| (151,704) | | (3) | % |
Net income (loss) | | $ | (322,462) | | $ | 1,809,237 | | $ | (2,131,699) | | (118) | % |
Earnings (loss) per share attributable to common shareholders – basic | | $ | (0.02) | | $ | — | | $ | (0.02) | | (108) | % |
Earnings (loss) per share attributable to common shareholders – diluted | | $ | (0.03) | | $ | — | | $ | (0.03) | | (122) | % |
Weighted average number of shares outstanding – basic | |
| 87,202,537 | |
| 51,232,943 | | | — | | — | |
Weighted average number of shares outstanding – diluted | |
| 87,202,537 | |
| 137,954,532 | | | — | | — | |
Revenue
Revenues for the three months ended September 30, 2023 totaled $46,746,935, including (i) Retail sales of $41,951,969 (ii) Wholesale sales of $4,701,268 and (iii) Other operating revenues of $93,698, compared to revenues of $43,190,986, including (i) Retail sales of $39,759,734, (ii) Wholesale sales of $3,335,252, and (iii) Other operating revenues of $96,000 during the three months ended September 30, 2022, representing an increase of $3,555,949 or 8%. The increase in revenue as compared to the prior periods is primarily driven by additional retail locations and a 10% increase in Wholesale revenue compared to the same period last year. While the Company is beginning to see signs of wholesale pricing stabilization in Colorado, New Mexico license count has increased 76% compared to the same period last year versus a 17% market revenue increase compared to the same period last year. In response to these events, the Company is increasing its efforts on strategic pricing, promotional effectiveness, and targeted loyalty programming for customer acquisition and retention.
Cost of Goods and Services
Cost of goods and services for the three months ended September 30, 2023 totaled $25,308,972 compared to cost of goods and services of $20,715,192 during the three months ended September 30, 2022, representing an increase of $4,593,780 or 22%. Overall cost of goods and services increased over prior period due to the higher initial, one-time cost of acquired inventory associated with the Everest acquisition. During the third quarter of 2023, the Company consolidated manufacturing operations within the Everest Coronado facility for greater operating efficiencies and cost optimization.
Operating Expenses
Operating expenses for the three months ended September 30, 2023 totaled $12,514,456, compared to operating expenses of $11,360,936 during the three months ended September 30, 2022, representing an increase of $1,153,520 or 10%. This is primarily due to the increase in rent, wages, and other operating cost increases associated with the acquired and opened store base during the period. Compared to the same period last year, the Company increased store count from 35 to 63, accounting for the overall SG&A increase.
Other Income (Expense), Net
Other expense, net for the three months ended September 30, 2023 totaled $3,804,160 compared to other expense, net of $3,712,108 during the three months ended September 30, 2022, representing an increase of $92,052 or 2%.
39
Net Income (Loss)
As a result of the factors discussed above, the Company generated net loss for the three months ended September 30, 2023 of $322,462, as compared to net income of $1,809,237 for the three months ended September 30, 2022.
Year to Date Ended September 30, 2023 Compared to Year to Date Ended September 30, 2022
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | | | |
| ||||
| | September 30, | | 2023 vs 2022 | | |||||||
|
| 2023 |
| 2022 |
| | $ |
| % |
| ||
Total revenue | | $ | 129,122,971 | | $ | 119,231,932 | | $ | 9,891,039 | | 8 | % |
Total cost of goods and services | |
| 60,133,091 | |
| 60,661,933 | |
| (528,842) | | (1) | % |
Gross profit | |
| 68,989,880 | |
| 58,569,999 | |
| 10,419,881 | | 18 | % |
Total operating expenses | |
| 49,459,128 | |
| 43,210,031 | |
| 6,249,097 | | 14 | % |
Income (loss) from operations | |
| 19,530,752 | |
| 15,359,968 | |
| 4,170,784 | | 27 | % |
Total other income (expense) | |
| (9,468,870) | |
| 4,770,919 | |
| (14,239,789) | | (298) | % |
Provision for income taxes (benefit) | |
| 15,246,546 | |
| 11,259,369 | |
| 3,987,177 | | 35 | % |
Net income (loss) | | $ | (5,184,664) | | $ | 8,871,518 | | $ | (14,056,182) | | (158) | % |
Earnings (loss) per share attributable to common shareholders – basic | | $ | (0.14) | | $ | 0.07 | | $ | (0.21) | | (302) | % |
Earnings (loss) per share attributable to common shareholders – diluted | | $ | (0.14) | | $ | 0.03 | | $ | (0.17) | | (572) | % |
Weighted average number of shares outstanding – basic | |
| 78,635,841 | |
| 50,615,437 | | | — | | — | |
Weighted average number of shares outstanding – diluted | |
| 78,635,841 | |
| 137,337,027 | | | — | | — | |
Revenue
Revenues for the nine months ended September 30, 2023 totaled $129,122,971, including (i) Retail sales of $115,871,037 (ii) Wholesale sales of $13,034,676 and (iii) Other operating revenues of $217,258, compared to revenues of $119,231,932, including (i) Retail sales of $104,386,464, (ii) Wholesale of $14,661,268, and (iii) Other operating revenues of $184,200 during the nine months ended September 30, 2022, representing an increase of $9,891,039 or 8%. This increase in revenue is primarily driven by completion of additional acquisition transactions and adult-use legalization taking effect in New Mexico in April 2022.
Since the third quarter of 2022, the Company acquired or opened 28 additional retail stores across its platform bringing the Company’s total store count to 63 as of September 30, 2023, as compared to 35 retail stores as of September 30, 2022. This represents a substantial increase in the Company’s revenue-generating asset base.
Adult-use cannabis sales became legal in New Mexico in April 2022, shortly after the Company entered the New Mexico market with the acquisition of R. Greenleaf. The Company, and the New Mexico market generally, experienced an increase in sales volume in New Mexico due to this legalization event, and the Company’s revenue for the three and nine months ended September 30, 2022, includes higher revenues than the same periods of 2023 due to this anomalous event. Since adult-use legalization took effect in April 2022, the state has seen an increase of 421 open stores as of September 30, 2023, representing a 182% increase in open store count. This dilution has offset increases in revenue from adult-use sales due to market saturation and increased competition.
Cost of Goods and Services
Cost of goods and services for the nine months ended September 30, 2023 totaled $60,133,091 compared to cost of goods and services of $60,661,933 during the nine months ended September 30, 2022, representing a decrease of $528,842 or 1%. Cost of goods and services for the nine months ended September 30, 2023 decreased compared to prior period due to
40
vertical integration in the Company’s existing New Mexico operations, and overall improvements to the Company’s operational assets and processes.
Operating Expenses
Operating expenses for the nine months ended September 30, 2023 totaled $49,459,128, compared to operating expenses of $43,210,031 during the nine months ended September 30, 2022, representing an increase of $6,249,097 or 14%. The increase is largely due to higher SG&A expenses associated with the increase in retail stores in Colorado and New Mexico. The Company had 63 open locations as of September 30, 2023, an increase of 28 stores, as compared to 35 open locations as of September 30, 2022, which generated an increase in the Company’s overall operating and overhead expenses.
Other Income (Expense), Net
Other expense, net for the nine months ended September 30, 2023, totaled $9,468,870 compared to other income, net of $4,770,919 during the nine months ended September 30, 2022, representing a decrease in other income, net of $14,239,789 or 298%. The decrease in other income, net is primarily driven by revaluation of derivative liability related to the Investor Notes that was recognized as income of $14,486,005 for the nine months ended September 30, 2023, as compared to income of $28,104,960 recognized from the same derivative liability for the nine months ended September 30, 2022.
Net Income (Loss)
As a result of the factors discussed above, the Company generated net loss for the nine months ended September 30, 2023 of $5,184,664, compared to net income of $8,871,518 for the nine months ended September 30, 2022.
REVENUE BY SEGMENT
The Company has consolidated financial statements across its operating businesses with operating segments of Retail, Wholesale and Other as set forth below.
| | | | | | | | | | | | |
|
| For the Three Months Ended September 30, | | 2023 vs 2022 | | |||||||
|
| 2023 |
| 2022 |
| $ |
| % | | |||
Retail | | $ | 41,951,969 | | $ | 39,759,734 | | $ | 2,192,235 | | 6 | % |
Wholesale | |
| 4,701,268 | |
| 3,335,252 | | | 1,366,016 | | 41 | % |
Other | |
| 93,698 | |
| 96,000 | | | (2,302) | | (2) | % |
Total revenue | | $ | 46,746,935 | | $ | 43,190,986 | | $ | 3,555,949 | | 8 | % |
| | | | | | | | | | | | |
|
| For the Nine Months Ended September 30, | | 2023 vs 2022 | | |||||||
|
| 2023 |
| 2022 |
| $ |
| % | | |||
Retail | | $ | 115,871,037 | | $ | 104,386,464 | | $ | 11,484,573 | | 11 | % |
Wholesale | |
| 13,034,676 | |
| 14,661,268 | | | (1,626,592) | | (11) | % |
Other | |
| 217,258 | |
| 184,200 | | | 33,058 | | 18 | % |
Total revenue | | $ | 129,122,971 | | $ | 119,231,932 | | $ | 9,891,039 | | 8 | % |
Retail revenues increased by approximately 6% during the first three months ended September 30, 2023, as compared to the same period last year due to newly acquired and new store base operating for the full quarter. Retail revenue increased by approximately 11% during the first nine months of 2023 compared to the same period in 2022. This increase in retail revenue is largely driven by the increase in the Company’s revenue-generating asset base by acquisitions and new store openings.
Revenues for Wholesale increased by approximately 41% for the three months ended September 30, 2023, as compared to the same period in 2022 due to increased penetration, expansion into New Mexico and stabilizing prices in the Colorado wholesale market. However, revenues for Wholesale decreased by approximately 11% for the nine months ended September 30, 2023, as compared to the same period in 2022 due to overall lower prices in the Colorado wholesale market
41
year over year. Wholesale prices in Colorado were down approximately 26% for the first nine months of 2023 as compared to the prior period, although early indicators from recent periods suggest downward wholesale pricing pressure may be stabilizing.
The fluctuations in other revenue are due to changes in the amount of promotional engagement and activity in the Company’s retail stores.
DRIVERS OF RESULTS OF OPERATIONS & KEY PERFORMANCE INDICATORS
Revenue
The Company derives its revenue from three revenue streams: (i) Retail, which sells finished goods sourced internally and externally to the end consumer in retail stores; (ii) Wholesale, which is the cultivation of flower and biomass sold internally and externally and the manufacturing of biomass into distillate for integration into externally developed products, such as edibles and internally developed products such as vapes and cartridges under the Purplebee’s brand; and (iii) Other, which includes other income and expenses from sales of vendor promotional programs within the Company’s owned retail assets.
Gross Profit
Gross profit is revenue less cost of goods sold. Cost of goods sold includes costs directly attributable to product sales and includes amounts paid for finished goods such as flower, edibles, and concentrates, as well as manufacturing and cultivation labor, packaging, supplies and overhead such as rent, utilities and other related costs. Cannabis costs are affected by market supply. Gross margin measures our gross profit as a percentage of revenue.
Operating Income
Operating income consists of gross profit less operating expenses. Such operating expenses include selling, general, and administrative expenses (SG&A), professional services, salary, and stock-based compensation expenses. Operating income measures the profitability of the Company’s operating assets.
Operating Working Capital
Operating Working Capital is derived from current assets, which is adjusted to exclude cash and cash equivalents, less current liabilities, which is adjusted to exclude derivative liabilities and the current portion of long term debt. Operating Working Capital is a non-GAAP financial measure, please see the section entitled "Non-GAAP Measures" below.
Adjusted EBITDA
Adjusted EBITDA is derived from operating income, which is adjusted for one-time expenses including merger and acquisition and capital-raising costs, non-cash related compensation costs, goodwill impairment, costs related to discontinued operations, depreciation and amortization, and other one-time expenses. Adjusted EBITDA is a non-GAAP financial measure, please see the section entitled “Non-GAAP Measures” below.
NON-GAAP MEASURES AND RECONCILIATION
Earnings before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA, and Operating Working Capital are non-GAAP measures and do not have standardized definitions under GAAP. The following information provides reconciliations for the supplemental non-GAAP financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures are presented because the Company believes it better explains the results of its core business. Management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-GAAP financial measures presented provide additional perspective and insight when analyzing the
42
core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with the GAAP financial measures presented.
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Net income (loss) | | $ | (322,462) |
| $ | 1,809,237 | | $ | (5,184,664) |
| $ | 8,871,518 |
Interest expense, net | |
| 8,320,397 |
|
| 8,500,235 | |
| 23,956,691 |
|
| 23,312,088 |
Provision for income taxes | |
| 5,441,809 |
|
| 5,593,513 | |
| 15,246,546 |
|
| 11,259,369 |
Other (income) expense, net of interest expense | |
| (4,516,237) |
|
| (4,788,127) | |
| (14,487,821) |
|
| (28,083,007) |
Depreciation and intangible amortization | |
| 5,330,529 |
|
| 3,322,150 | |
| 15,808,535 |
|
| 8,823,549 |
Earnings before interest, taxes, depreciation and amortization (EBITDA) (non-GAAP) | | $ | 14,254,036 |
| $ | 14,437,008 | | $ | 35,339,287 |
| $ | 24,183,517 |
Non-cash stock compensation | |
| (2,438,073) |
|
| 99,898 | |
| 622,162 |
|
| 1,788,823 |
Deal related expenses | |
| 1,401,795 |
|
| 993,828 | |
| 3,331,315 |
|
| 4,907,291 |
Capital raise related expenses | |
| 1,712 |
|
| 185,597 | |
| 36,780 |
|
| 791,229 |
Inventory adjustment to fair market value for purchase accounting | |
| - |
|
| 34,604 | |
| - |
|
| 6,541,651 |
Severance | |
| 121,715 |
|
| 22,434 | |
| 425,832 |
|
| 71,536 |
Retention program expenses | |
| 110,023 |
|
| - | |
| 505,655 |
|
| - |
Employee relocation expenses | |
| 12,867 |
|
| — | |
| 65,042 |
|
| 19,110 |
Other non-recurring items | | | 655,244 | | | 87,097 | | | 2,132,272 | | | 422,532 |
Adjusted EBITDA (non-GAAP) | | $ | 14,119,319 |
| $ | 15,860,466 | | $ | 42,458,345 |
| $ | 38,725,689 |
| | | | | | | | | | | | |
Revenue | |
| 46,746,935 | | | 43,190,986 | |
| 129,122,971 | | | 119,231,932 |
Adjusted EBITDA Percent | |
| 30.2% | | | 36.7% | |
| 32.9% | | | 32.5% |
| | | | | | | | | | | | |
| | | | | | |
|
| | ||||
| | September 30, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Current assets | | $ | 64,384,320 |
| $ | 71,735,033 |
Less: Cash and cash equivalents | |
| (19,624,615) |
|
| (38,949,253) |
Adjusted current assets (non-GAAP) | | | 44,759,705 |
| | 32,785,780 |
| | | | | | |
Current liabilities | | $ | 50,396,192 |
| $ | 47,381,308 |
Less: Derivative liabilities | | | (2,022,248) | | | (16,508,253) |
Less: Current portion of long term debt | |
| (4,250,000) |
|
| (2,250,000) |
Adjusted current liabilities (non-GAAP) | | | 44,123,944 |
| | 28,623,055 |
| | | | | | |
Operating Working Capital (non-GAAP) | | $ | 635,761 |
| $ | 4,162,725 |
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of September 30, 2023 and December 31, 2022, the Company had total current liabilities of $50,396,192 and $47,381,308, respectively. As of September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents of $19,624,615 and $38,949,253, respectively to meet its current obligations. The Company’s Operating Working Capital decreased by $3,526,964 for the nine months ended September 30, 2023, as compared to December 31, 2022.
The Company is a growth company, generating cash from operational revenue and capital raises. Cash is being reserved primarily for capital expenditures, facility improvements, acquisitions, and strategic investment opportunities. The
43
Company predominantly relies on internal capital that is generated through revenue and any other internal sources of liquidity to meet its short-term capital demands. Management believes the Company’s current projected growth, revenue from consummated acquisitions, and revenue from operations will be sufficient to meet its current obligations as they become due. The Company relies on a combination of internal and external capital to meet its long-term obligations, with internal liquidity sourced from revenue from operations and external financing acquired from various sources, including commercial loan arrangements, capital raises and private placement transactions, and cash from the Investor Notes. Management believes this combination of internal revenue and external liquidity will be sufficient to meet the Company’s long-term obligations; however, it is possible the Company will seek additional external financing to meet strategic investment needs in the future.
Trends Impacting Liquidity
While management believes that the Company has sufficient liquidity to support its capital needs, certain factors may positively or negatively impact the Company’s liquidity and financing opportunities.
Due to our participation in the cannabis industry and the regulatory framework governing cannabis in the United States, our debt and loan arrangements are sometimes subject to higher interest rates than are market for other industries, which has an unfavorable impact on our liquidity and capital resources. The Company also tends to incur higher banking fees and rates than businesses in other industries. Liquidity may also be negatively impacted if the primary banking and credit institutions meaningfully curtail the use of debit card transactions in the cannabis industry. During the third quarter of 2023, Mastercard sent cease-and-desist letters to various banks and payment processors that facilitated cannabis purchases through unpermitted channels and processes, demanding such banks and processors terminate the activity and transactions. Management does not believe recent developments in the payment processing environment are likely to materially impact our liquidity; however, if we experience a transition back to all-cash transactions as a result of increased payment restrictions and limitations, the Company’s liquidity could be negatively impacted due to decreased sales and/or increased cost of compliance. While participation in the cannabis industry tends to negatively impact certain aspects of capital resources more than other industries, this could change in the future with changes to federal law. If the federal government enacts laws permitting the banking and financial industries to engage with the cannabis industry, such as passage of the SAFER Banking Act, (which is an update of the SAFE Banking Act introduced in the U.S. Senate in 2023) or rescheduling marijuana from Schedule I to Schedule III of the Controlled Substance Act, the Company anticipates that this could have a positive impact on the Company’s liquidity because it will open up financing and refinancing opportunities not otherwise widely available to cannabis companies at this time due to the current regulatory landscape.
One of our strategic goals is to grow our business through acquisitions, which also tends to negatively impact liquidity during periods when we consummate an identified acquisition. We expect to continue executing this strategy in future periods, meeting such capital requirements in connection therewith from both internal capital and external financing, which will decrease liquidity. Additionally, the cash requirements to service our debt obligations increase with the passage of time due to interest accrual, which increases constraints on our capital resources and tends to reduce liquidity in the amount of such accruals.
The wholesale cannabis market has experienced downward pricing pressure from over-supply of certain cannabis products in the market, which has affected retail margins in certain periods and will likely impact the relationship between cost and revenue if and/or when supply is constrained. However, we maintain the ability to shift between external sales and internal use or transfer of our wholesale products due to vertical integration based on market conditions, which may mitigate some of the negative impacts of wholesale market downturns. Wholesale pricing can affect margins positively or negatively depending on market conditions, but profit as a percentage of revenue tends to have an inverse relationship with market pricing conditions. Wholesale pricing increases could reduce retail margins and also generate positive profitability in the wholesale segment, and vice versa. The Company anticipates that the wholesale market will likely remain depressed relative to previous periods, which can negatively impact the Company’s overall liquidity.
We have also seen a negative relationship between license applications and liquidity in the markets where we operate, and this may negatively impact our liquidity and financial performance in upcoming periods. Since adult-use cannabis sales became legal in New Mexico in April 2022, 421 active retail stores have opened in the New Mexico Market as of September 30, 2023, representing a 182% increase in active store count. This increase in state-wide license count
44
represents a substantial increase in competitors in that market, which has diluted the Company’s overall market share in New Mexico. As more licenses are issued in states where we operate, our liquidity is likely to be negatively impacted due to increased competition.
Increasing inflation may also negatively impact the liquidity, as the cost of goods and services may increase without corresponding increases to revenue. Inflation increases could also impact the incremental borrowing rate and ability to obtain external financing on similar terms as previous financing arrangements. Increasing inflation and general economic downturn in the United States could also negatively impact revenue to the extent such factors affect consumer behavior. Additional factors or trends that have impacted or could potentially impact liquidity in future periods include general economic conditions such as market saturation, inflation, labor shortages and employee turnover, consumer behavior, and general economic downturn.
Cash Flows
Net cash provided by (used in) operating, investing and financing activities for the periods ended September 30, 2023 and 2022 were as follows:
| | | | | | | |
| | For the Periods Ended September 30, | | ||||
|
| 2023 |
| 2022 |
| ||
Net cash provided by (used in) operating activities | | $ | 8,749,202 | | $ | 434,448 | |
Net cash provided by (used in) investing activities | |
| (25,269,156) | |
| (69,390,137) | |
Net cash provided by (used in) financing activities | |
| (2,804,684) | |
| 1,280,660 | |
Operating Activities
The change in cash related to operating activities for the period ended September 30, 2023, was predominantly driven by expansion and the related increase in sales and operating efficiencies combined with changes to the Company’s operating assets and liabilities.
Investing Activities
The Company’s use of cash from investing activities is driven by acquisition of businesses, cannabis licenses, and property, plant, and equipment for existing entities such as store remodels. The decrease in cash used in investing activities is largely attributable to less cash paid for acquisitions than paid in connection with acquisitions in previous periods.
Financing Activities
Historically, our cash provided by financing activities has mainly consisted of proceeds from our Loan Agreement with Altmore, the Investor Notes and the issuance of shares of Common Stock. The change in cash flow from financing activities is primarily related to payment of cash holdbacks pursuant to acquisition agreements that became due and payable during the third quarter of 2023. In accordance with ASC 230 Statement of Cash Flows, 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.
Description of Indebtedness
Loan Agreement
On February 26, 2021, the Company entered into the Loan Agreement with Altmore. 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 (“SCG”), 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 has begun making principal payments 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. The Company’s obligations
45
under the Loan Agreement are secured by a first priority security interest in the assets of PBS Holdco LLC (“PBS”), a wholly-owned subsidiary of the Company and the Company’s Colorado manufacturing operation, and the 36 acres of land in Huerfano County, Colorado owned by the Company and designed for indoor and outdoor cultivation (the “Altmore Collateral”).
Under the terms of the loan, the Company must comply with certain restrictions and covenants. 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 September 30, 2023, the Company was in compliance with the requirements described above.
Seller Notes
As part of the Star Buds Acquisitions, the Company entered into a deferred payment arrangement with the sellers in an aggregate amount of $44,250,000, also referred to in this report as “seller note(s)”. The seller notes incur 12% interest per annum, payable on the first of every month through November 2025. Principal payments are due in accordance with the following schedule: $13,901,759 on December 17, 2025, $3,474,519 on February 3, 2026, and $26,873,722 on March 2, 2026. The seller notes are secured by a first priority security interest in substantially all of the assets owned by SBUD LLC, a wholly-owned subsidiary of the Company that acquired the Star Buds assets (the “Star Buds Collateral”).
Investor Notes
On December 3, 2021, the Company and the Subsidiary Guarantors entered into the Note Purchase Agreement with 31 accredited investors pursuant to which the Company agreed to issue and sell to the investors 13% senior secured convertible notes due December 7, 2026 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 the private placement. On December 7, 2021, the Company consummated the private placement and issued and sold the Investor Notes. 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 were issued pursuant to an Indenture, dated December 7, 2021, among the Company, the Subsidiary Guarantors, Ankura Trust Company, LLC as trustee and Chicago Atlantic Admin, LLC as collateral agent for the Investor Note holders. 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 Company’s obligations under the Indenture and the Investor Notes are secured by (i) a junior security interest in the Altmore Collateral and the Star Buds Collateral, and (ii) a first priority security interest in all assets owned by the Company and the Subsidiary Guarantors on or after December 7, 2021.
Under the Indenture, the Company must comply with certain restrictions and covenants. These include customary events of default and various financial covenants, including maintaining (i) a consolidated fixed charge coverage ratio of no less than 1.30 to 1.00 at the end of each fiscal quarter, and (ii) a minimum of $10,000,000 (in aggregate) in deposit accounts in which the Indenture Collateral Agent has a security interest. As of September 30, 2023, the Company was in compliance with the requirements described above.
The Indenture includes customary affirmative and negative covenants, including limitations on liens, additional indebtedness, repurchases and redemptions of any equity interest in the Company, certain investments, and dividends and other restricted payments, and customary events of default. See Note 11, “Debt,” to the consolidated financial statements for additional details on such restrictions included in the Indenture. These restrictions have not impacted the Company’s ability to meet its cash obligations, although such restrictions and limitations may make additional external financing more difficult to obtain and/or subject to less favorable terms.
46
Nuevo Note
As part of the acquisition under the Nuevo Purchase Agreement, Nuevo Holding, LLC, a wholly-owned subsidiary of the Company, issued the Nuevo Note to RGA requiring the Company to make payments on an aggregate amount of $17,000,000. The deferred Nuevo Note incurs 5% interest per year, payable on the first of each month. The principal is due February 7, 2025. The Nuevo Note is unsecured.
Everest Note
In connection with the Everest Purchase Agreement, Everest Purchaser issued the Everest Note to Everest Seller, requiring the Company to make payments on an aggregate amount of $17,500,000. The Everest Note incurs 5% interest per year, payable quarterly starting June 30, 2023. The Company is required to make installment payments of principal and interest starting June 30, 2025, and the total outstanding principal will be due on May 31, 2027. The Everest Note is unsecured.
Contractual Cash Obligations and Other Commitments and Contingencies
Material contractual obligations arising in the normal course of business primarily consist of debt and interest related payments, lease obligations, and purchase price obligations for acquisitions. Management believes that cash flows from operations will be sufficient to satisfy our capital expenditures, debt services, working capital needs, and other contractual obligations for the next twelve months. We may need to obtain additional external financing to meet our material long-term obligations, and management believes the Company will need additional financing to continue execution of its growth strategy in future periods.
The following table quantifies the Company’s future contractual obligation as of September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | |
|
| Total |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter | |||||||
Notes Payable (a) | | $ | 193,121,777 | | $ | 2,000,000 | | $ | 3,000,000 | | $ | 27,624,655 | | $ | 147,594,213 | | $ | 12,902,909 | | $ | — |
Interest Due on Notes Payable (b) | |
| 50,808,833 | |
| 4,577,254 | |
| 18,252,178 | |
| 16,379,690 | |
| 11,331,798 | |
| 267,913 | |
| — |
Right of Use Assets (c) | |
| 42,499,184 | |
| 2,123,963 | |
| 7,399,326 | |
| 6,127,958 | |
| 5,516,090 | |
| 4,325,564 | |
| 17,006,284 |
Deferred Payment for Acquisitions (d) | |
| 2,069,173 | |
| — | |
| 547,011 | |
| 601,725 | |
| 920,436 | |
| — | |
| — |
Total | | $ | 288,498,967 | | $ | 8,701,217 | | $ | 29,198,515 | | $ | 50,734,028 | | $ | 165,362,537 | | $ | 17,496,386 | | $ | 17,006,284 |
| (a) | Represents principal amounts owed pursuant to the Loan Agreement, the Investor Notes, the Nuevo Note, the seller notes, and the Everest Note, excluding $34,723,592 of unamortized debt discount and $5,339,158 of unamortized debt issuance costs. See Note 11 “Debt” to our consolidated financial statements. |
| (b) | Represents cash interest accruals owed pursuant to the Loan Agreement, the Investor Notes, the Nuevo Note, the seller notes, and the Everest Note.The Investor Notes are convertible into Common Stock freely at the option of the holder and subject to certain restrictions at the option of the Company such that conversion events could impact the interest and accrual obligations related to the Investor Notes in future periods. See Note 11 “Debt” to our consolidated financial statements. |
| (c) | Reflects our contractual obligations to make future payments under all of the Company’s leases in effect as of September 30, 2023. See Note 12 “Leases” to our consolidated financial statements. |
| (d) | Represents the Akimbo Deferred Purchase Price obligation. See Note 7 “Business Combinations” to our consolidated financial statements. |
Critical Accounting Policies sectionEstimates and Recent Accounting Pronouncements
The discussion and analysis of Management’s Discussionour financial condition and Analysisresults of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that of
47
its significant accounting policies (see Note 2 to Financial ConditionStatements), the ones that may involve a higher degree of uncertainty, judgment and Resultscomplexity are revenue recognition, stock based compensation, derivative instruments, income taxes, goodwill and commitments and contingencies are the most important to the portrayal of Operations.our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition and Related Allowances
We have three main revenue streams: (i) Retail sales, (ii) Wholesale sales, and (iii) Other revenues from revenues from marketing and promotional activities and other miscellaneous sources not otherwise directly related to our retail and wholesale operations. During 2022, we ceased providing licensing and consulting services, strategically discontinued that portion of our business operations, and are no longer providing these services.
The Company’s retail and wholesale sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, our sales are generally recognized when products are delivered to customers.
The Company’s other revenue, typically from marketing and promotional services, is recognized when our obligations to our client are fulfilled, which is determined when milestones in the contract are achieved.
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until the criteria are met. A contract liability is recorded when consideration is received in advance of the delivery of goods or services. We identify revenue contracts upon acceptance from the customer when such a contract represents a single performance obligation to sell our products.
Stock Based Compensation
We account for share-based payments pursuant to Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation and, accordingly, we record compensation expense for share-based awards based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option pricing model.
Our stock compensation expense for stock options is recognized over the vesting period of the award or expensed immediately under ASC 718 when stock or options are awarded for previous or current service without further recourse.
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, the Company’s 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. Our deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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 our 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. Our 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.
48
Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. We perform 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, we determine 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, we rely 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, our risk relative to the overall market, our size and industry and other risks specific to us. 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 taken 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 our 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 us to perform an impairment test prior to scheduled annual impairment tests.
We performed our annual fair value assessment as of December 31, 2022 on our subsidiaries with material goodwill on our respective balance sheets and recognized a goodwill impairment charge of $11,719,306, of which $3,708,226 is included in loss from disposal of assets in the accompanying consolidated statements of comprehensive income as it is related to ceased operations during 2022. No additional factors or circumstances existed as of September 30, 2023, that would indicate impairment.
Item 3.Quantitative and Qualitative Disclosures aboutAbout Market Risk
Not applicableapplicable.
49
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As requiredof the end of the period covered by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),this Quarterly Report on Form 10-Q, we have carried outconducted an evaluation, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer.Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based onupon this evaluation, our CEOChief Executive Officer and CFO haveChief Financial Officer concluded that our disclosure controls and procedures wereare effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or person performing similar functions, as of September 30, 2017.
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the last quarterly period covered by this reportQuarterly Report on Form 10-Q that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1.Legal Proceedings.Proceedings
We may becomeOn June 7, 2019, the Company filed a complaint against ACC Industries Inc. and Building Management Company B, L.L.C., in state district court located in Clark County, Nevada, alleging, amongst other causes of action, breach of contract, conversion, and unjust enrichment and seeking general, special and punitive damages. On July 17, 2019, the parties stipulated to stay the case in favor of arbitration. On February 25, 2020, ACC Industries Inc. filed a counterclaim against the Company alleging breach of contract. The Company discovered new facts that lead it to believe that a related entity not previously named as a party to the arbitration, ACC Enterprises, LLC (“ACC”), should be brought in as a party to the arbitration. Based upon the new facts, the Company filed a motion to amend the complaint to add new claims and ACC as a party. On September 1, 2020, the arbitrator granted the Company’s motion and permitted the Company to amend the complaint to add ACC as a party. On September 1, 2020, the Company filed an amended complaint and added intentional misrepresentation, fraudulent inducement, civil conspiracy, aiding and abetting, successor liability and fraudulent concealment claims. The Company began arbitration proceedings on November 2, 2020. The Company completed arbitration in February 2021. On May 14, 2021, the Arbitrator entered an award in favor of the Company in the aggregate amount of $1,935,273, subject to legal proceedingsan offset equal to $150,000, for a total net award of $1,785,273. After the arbitration award was entered, a receiver was appointed over ACC and claims which arise inits affiliates due to the ordinary course of our business. Although occasional adverse decisions or settlements may occur, we believe that the final disposition of such matters should not have a material adverse effect on our financial position, results of operations or liquidity. Asdeath of the date of this report, we have one pending legal claim related to our useonly owner who had a valid cannabis establishment registration agent card. An automatic litigation stay was entered upon the appointment of the word ‘FIRE’ in one of our nutrient products as being in conflict with a trademarked word use within another nutrient line. While no assurances canreceiver. During the receivership, ACC’s owners have had internal ownership disputes and ACC has had financial difficulties. The receiver has taken the position that ACC should be provided, we expect this claimliquidated. On April 28, 2022, the receiver received approval from the court to be resolved to the satisfaction of both parties prior toliquidate ACC’s assets. On May 24, 2022, upon the completion of a bidding procedure for certain ACC assets, the court approved the sale of certain ACC assets to the only and prevailing bidder. The sale is now completed. On July 26, 2022, the court approved a creditors’ claim process. The Company complied with the claim process and its claim was approved by the receiver. The Company believes that it will, or the receiver will, file a motion to begin winding up the receivership and request that the receiver make a preliminary distribution of the proceeds obtained from the asset sale to approved creditors. The Company believes it is the largest creditor and that the asset sale proceeds will be distributed pro rata to creditors with approved claims.
On August 11, 2023, Justin Fowler, a budtender in the Company’s Cottonwood R. Greenleaf location in New Mexico, filed a wage and hour case as a collective action pursuant to the Fair Labor Standards Act (FLSA) and as a class action under the New Mexico Minimum Wage Act (NMMWA) against the Company, Schwazze New Mexico, LLC and R. Greenleaf Organics (collectively “the Company”) on behalf of himself and similarly situated budtenders employed by the Company. The complaint alleges that the Company’s pooling and allocation of tips violated federal and state law. The Company denies all of Plaintiff’s allegations. To date, Plaintiff has joined 13 Opt-in Plaintiffs, of which two are former employees at one of the Company’s Colorado locations. The parties are presently engaged in early discovery with a mediation tentatively set for February 1, 2024. If mediation fails, the Company intends to vigorously defend the allegations. It is not possible at this fiscal year.time reasonably to assess the final outcome of this litigation or reasonably to estimate the possible loss or range of loss with respect to this litigation. If the Company was not to prevail in final, non-appealable determinations of this litigation, the impact is not anticipated to be material.
On September 6, 2023, John T. Frost (the “Plaintiff”), a budtender at the Company’s Star Buds Louisville, Colorado location, filed a complaint against the Company, Justin Dye, Daniel R. Pabon, Daniel Bonach, Cetan Wanbli Williams, Brian Ruden, Salim Husan Wahdan, Bassel Husan Wahdan, Kyle Kreuger, Forrest Hoffmaster, Nirup Krishnamurthy, Schwazze Colorado, LLC, SBUD, LLC, Two J’s d/b/a/ The Big Tomato, and Star Buds Louisville, LLC (collectively, “Defendants”) in the 20th Judicial District Court for the County of Boulder, Colorado. In the complaint, Plaintiff, Pro Se, alleges, among other claims: (i) violation of the FLSA, the Colorado Wage Claim Act, and Colorado Overtime and Minimum Pay Standards Order #38 stemming from alleged theft of tips, (ii) harassment, (iii) discriminatory and/or unfair employment practices, (iv) unjust enrichment, (v) menacing, (vi) criminal extortion, and (vii) intimidation of a witness. On October 6, 2023, Defendants removed the case from the 20th Judicial District Court for the County of Boulder, Colorado to the United States District Court for the District of Colorado. On October 11, 2023, Plaintiff filed a motion to amend his complaint to include an eighth claim asserting violations of the federal Controlled Substances Act. The District Court subsequently granted a motion by Defendants to extend the time for Defendants to submit an Answer until after resolution of Plaintiff’s motion to amend the complaint. At this time, it is not possible to reasonably assess the final outcome of this
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litigation or to reasonably estimate the possible loss or range of loss with respect to this litigation. If Defendants were not to prevail in final, non-appealable determinations of this litigation, the impact is not anticipated to be material.
Item 1A.Risk Factors
There have been no material changes in the risk factors applicable to us from those identified in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the period ended December 31, 2022 filed with the Securities and Exchange Commission on March 29, 2023.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company is subject to restrictions on the payment of dividends and other working capital requirements in its loan and debt agreements. See Note 10 to the Financial Statements included in Part I to this Quarterly Report on Form 10-Q for additional information on the Company’s indebtedness and related restrictions therein.
During
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Without limiting the ninegenerality of the foregoing, during the three months ended September 30, 2017, we collectively issued 1,127,180 shares for cash and services. The Company issued 100,000 shares of Common Stock in exchange for services at a value of $1.16 per share, 34,533 shares of Common Stock in exchange for services, at a value of $1.39, we undertook a unit offering wherein we sold 937,647 shares of our Common Stock for gross proceeds of $1,000,000 ($1.0665 per share) to 1 non-accredited investor, as that term is defined under the Securities Act of 1933, we sold 25,000 shares of Common Stock to Andy Williams, Director of the Board2023, no director or officer of the Company at a valueadopted or terminated any “Rule 10b5-1 trading arrangement,” or any “non-Rule 10b-5 trading arrangement,” as such terms are defined in Item 408(a) of $1.0665 per share and we sold 30,000 sharesRegulation S-K.
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None.
Item 4.Mine Safety Disclosures
Not applicable.
None.
2.1 + | | |
2.2 ++ | | |
2.3 | | |
2.4 | | |
2.5 + | | |
4.1 | | |
10.1 ˄ | | |
10.2 ˄ | | |
10.3 ˄, ** | | Description of Medicine Man Technologies, Inc. 2023 Long-Term Incentive Plan |
10.4 ˄, ** | | Form of Restricted Stock Option and Performance Share Unit Award Agreement |
31.1 * | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 * | | |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | ||
32 * | | |
99.1 | | |
99.2 | | |
101.INS | | Inline XBRL Instance |
101.SCH | | Inline XBRL Taxonomy Extension Schema |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
______________________
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are not deemed filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act or Section 18 of the Securities Exchange Act and otherwise not subject to liability.
+ | Certain exhibits and schedules to the agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to supplementally furnish copies of any omitted schedules to the Securities and Exchange Commission upon request. |
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++ Certain information has been redacted pursuant to Item 601(a)(6) of Regulation S-K. The Company hereby undertakes to supplementally furnish any redacted information to the SEC upon request.
* | Furnished herewith. |
** | Filed herewith. |
˄ | Indicates management contract or compensatory plan or arrangement. |
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this reportQuarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
Dated: November 14, 2023 | MEDICINE MAN TECHNOLOGIES, INC. | ||
| | ||
| By: | /s/ Nirup Krishnamurthy | |
| |||
Nirup Krishnamurthy, Chief Executive Officer | |||
| |||
| |||
| | ||
| By: | /s/ Forrest Hoffmaster | |
| Forrest Hoffmaster, Chief Financial Officer | ||
| (Principal Financial Officer and Chief Accounting Officer) | ||
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