UNITED STATESU.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number000-55450
MEDICINE MAN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada | 46-5289499 | |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
4880 Havana Street
Suite 201
Denver, Colorado 80239
(Address of principal executive offices)
(303) 371-0387
(Issuer’s telephone number, including area code)Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrantissuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | 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. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 8, 2019,August 10, 2020, the Registrant had 39,952,62841,937,146 shares of Common Stock issued and outstanding.
CAUTIONARY STATEMENT ONNOTE ABOUT FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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 forward-looking statements. Forward-looking statements are based upon our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. 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,” or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.
Factors that may cause or contribute actual results to differ from these forward-looking statements include, but are not limited to, for example:
· | regulatory limitations on our products and services; |
· | our ability to complete and integrate announced acquisitions; |
· | general industry and economic conditions; |
· | our ability to access adequate capital upon terms and conditions that are acceptable to us; |
· | volatility in credit and market conditions; |
· | other risks and uncertainties related to the cannabis market and our business strategy. |
We 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 extent to which any factor, or combination of factors, may cause actual results to differ 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 Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
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 report are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved.
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 this Quarterly Report on Form 10-Q. 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.
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.
MEDICINE MAN TECHNOLOGIES, INC.
Expressed in U.S. Dollars
June 30, 2020 | December 31, 2019 | |||||||||||||||
September 30, 2019 | December 31, 2018 | (Unaudited) | (Audited) | |||||||||||||
Assets | Assets | Assets | ||||||||||||||
Current assets: | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 15,204,587 | $ | 321,788 | $ | 5,418,317 | $ | 11,853,627 | ||||||||
Accounts receivable | 1,901,019 | 1,180,757 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts | 1,291,082 | 313,317 | ||||||||||||||
Accounts receivable – related party | 490,485 | 125,112 | 124,856 | 72,658 | ||||||||||||
Inventory | 407,708 | 489,239 | 1,977,572 | 684,940 | ||||||||||||
Other assets | 774,856 | 50,824 | ||||||||||||||
Notes receivable – related party | 767,695 | 767,695 | ||||||||||||||
Prepaid expenses and other current assets | 422,000 | 529,416 | ||||||||||||||
Prepaid acquisition costs (Note 11) | – | 1,347,462 | ||||||||||||||
Total current assets | 18,778,655 | 2,167,720 | 10,001,522 | 15,569,115 | ||||||||||||
Noncurrent assets: | ||||||||||||||||
Fixed assets, net accumulated depreciation of $189,896 and $149,015 | 61,072 | 94,640 | ||||||||||||||
Non-current assets | ||||||||||||||||
Fixed assets, net accumulated depreciation of $670,535 and $159,354, respectively | 2,562,612 | 239,078 | ||||||||||||||
Goodwill | 12,304,306 | 12,304,306 | 17,445,843 | 12,304,306 | ||||||||||||
Intangible assets, net accumulated amortization of $19,058 and $13,903 | 76,309 | 81,197 | ||||||||||||||
Intangible assets, net accumulated amortization of $23,106 and $19,811, respectively | 71,994 | 75,289 | ||||||||||||||
Investment | 741,307 | 2,199,344 | 517,514 | 406,774 | ||||||||||||
Accounts receivable – litigation | 3,063,968 | 1,281,511 | 3,063,968 | 3,063,968 | ||||||||||||
Note receivable – noncurrent, net | 237,246 | 92,888 | ||||||||||||||
Note receivable – related party | 487,695 | – | ||||||||||||||
Deferred tax assets, net | 268,423 | 268,423 | ||||||||||||||
Notes receivable – noncurrent, net | 292,101 | 241,711 | ||||||||||||||
Operating lease right of use assets | 168,344 | – | 1,747,109 | 59,943 | ||||||||||||
Total noncurrent assets | 17,140,247 | 16,053,886 | ||||||||||||||
Other assets | 41,879 | – | ||||||||||||||
Total non-current assets | 26,011,443 | 16,659,492 | ||||||||||||||
Total assets | $ | 35,918,902 | $ | 18,221,606 | $ | 36,012,965 | $ | 32,228,607 | ||||||||
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | |||||||||||||||
Current liabilities: | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 915,651 | $ | 202,515 | $ | 2,808,718 | $ | 699,961 | ||||||||
Accounts payable – related party | 20,703 | 71,312 | 606,196 | 15,372 | ||||||||||||
Accrued expenses | 485,292 | 291,084 | 1,848,933 | 1,091,204 | ||||||||||||
Derivative liabilities | 5,852,649 | – | 1,467,318 | 3,773,382 | ||||||||||||
Income taxes payable | 582,931 | 582,931 | – | 1,940 | ||||||||||||
Total current liabilities | 7,857,226 | 1,147,842 | 6,731,165 | 5,581,859 | ||||||||||||
Noncurrent liabilities: | ||||||||||||||||
Noncurrent liabilities | ||||||||||||||||
Lease liabilities | 121,835 | – | 1,770,742 | 66,803 | ||||||||||||
Total noncurrent liabilities | 121,835 | – | 1,770,742 | 66,803 | ||||||||||||
Total liabilities | 7,979,061 | 1,147,842 | 8,501,907 | 5,648,662 | ||||||||||||
Commitments and contingencies, note 13 | – | – | ||||||||||||||
Commitments and contingencies (Note 11) | – | – | ||||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock $0.001 par value. 90,000,000 authorized, 39,369,511 and 27,753,310 were issued and outstanding September 30, 2019 and December 31, 2018, respectively. | 39,490 | 27,875 | ||||||||||||||
Common stock $0.001 par value, 90,000,000 authorized, 42,194,878 shares issued and 41,937,146 shares outstanding at June 30, 2020, and 39,952,628 shares issued and outstanding at December 31, 2019. | 42,195 | 39,953 | ||||||||||||||
Additional paid-in capital | 44,656,071 | 20,239,163 | 59,260,357 | 50,356,469 | ||||||||||||
Additional paid-in capital – warrants | 2,647,461 | 2,647,461 | ||||||||||||||
Retained earnings | (19,403,181 | ) | (5,840,735 | ) | ||||||||||||
Accumulated deficit | (30,791,494 | ) | (22,816,477 | ) | ||||||||||||
Common stock held in treasury, at cost, 257,732 shares held at June 30, 2020 and December 31, 2019. | (1,000,000 | ) | (1,000,000 | ) | ||||||||||||
Total shareholders' equity | 27,939,841 | 17,073,764 | 27,511,058 | 26,579,945 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 35,918,902 | $ | 18,221,606 | $ | 36,012,965 | $ | 32,228,607 |
See accompanying notes to the financial statements
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED STATEMENT OF COMPREHENSIVE (LOSS) AND INCOME
For the Three and NineSix Months Ended SeptemberJune 30, 20192020 and 20182019
Expressed in U.S. Dollars
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||||||||||
Product sales, net | $ | 2,147,182 | $ | 239,085 | $ | 4,743,391 | $ | 797,381 | $ | 4,779,243 | $ | 1,212,499 | $ | 7,197,478 | $ | 2,596,209 | ||||||||||||||||
Product sales – related party, net | 613,014 | 143,761 | 893,084 | 425,499 | 59,411 | 119,480 | 170,107 | 280,070 | ||||||||||||||||||||||||
Consulting, licensing and Cultivation Max fees | 781,021 | 3,244,285 | 1,657,286 | 4,972,573 | ||||||||||||||||||||||||||||
Litigation revenue | 1,782,457 | 1,015,154 | 1,782,457 | 1,015,154 | ||||||||||||||||||||||||||||
Consulting and licensing services | 585,675 | 422,596 | 1,246,932 | 876,265 | ||||||||||||||||||||||||||||
Other operating revenues | 15,195 | 30,234 | 23,946 | 90,636 | – | 3,244 | 12,946 | 8,751 | ||||||||||||||||||||||||
Total revenue | 5,338,869 | 4,672,519 | 9,100,164 | 7,301,243 | 5,424,329 | 1,757,819 | 8,627,463 | 3,761,295 | ||||||||||||||||||||||||
Cost of goods and services: | ||||||||||||||||||||||||||||||||
Cost of goods and services | 2,786,244 | 459,280 | 5,471,369 | 1,213,194 | 3,106,686 | 1,086,413 | 5,255,221 | 2,685,125 | ||||||||||||||||||||||||
Total cost of goods and services | 2,786,244 | 459,280 | 5,471,369 | 1,213,194 | 3,106,686 | 1,086,413 | 5,255,221 | 2,685,125 | ||||||||||||||||||||||||
Gross profit | 2,552,625 | 4,213,239 | 3,628,795 | 6,088,049 | 2,317,643 | 671,406 | 3,372,242 | 1,076,170 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 718,990 | 259,900 | 1,092,702 | 710,647 | 1,088,479 | 454,389 | 1,755,398 | 823,195 | ||||||||||||||||||||||||
Professional services | 837,940 | 177,103 | 3,602,772 | 657,694 | 2,371,743 | 863,068 | 3,620,731 | 1,633,849 | ||||||||||||||||||||||||
Salaries, benefits and related expenses | 980,432 | 568,451 | 1,862,990 | 1,340,724 | 2,098,291 | 446,837 | 4,095,327 | 809,058 | ||||||||||||||||||||||||
Stock based compensation | 940,870 | 837,500 | 3,166,276 | 837,500 | 3,109,091 | 2,225,406 | 4,361,822 | 2,980,406 | ||||||||||||||||||||||||
Derivative expense – contingent compensation | – | – | 5,400,559 | – | – | 5,024,576 | – | 5,400,559 | ||||||||||||||||||||||||
Total operating expenses | 3,478,232 | 1,842,954 | 15,125,299 | 3,546,565 | 8,667,604 | 9,014,276 | 13,833,278 | 11,647,067 | ||||||||||||||||||||||||
Income from operations | (925,607 | ) | 2,370,285 | (11,496,504 | ) | 2,541,484 | (6,349,961 | ) | (8,342,870 | ) | (10,461,036 | ) | (10,570,897 | ) | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Gain on forfeiture of contingent consideration | – | – | 1,462,636 | – | ||||||||||||||||||||||||||||
Interest income (expense), net | 36,462 | (17,794 | ) | (155,815 | ) | 22,439 | (11,447 | ) | (192,277 | ) | 36,595 | (192,277 | ) | |||||||||||||||||||
Other income (expense) | – | – | – | (4,316 | ) | 32,621 | – | 32,621 | – | |||||||||||||||||||||||
Unrealized gain (loss) on derivative liabilities | (197,526 | ) | – | (452,090 | ) | – | (348,535 | ) | 80,472 | 843,428 | (254,564 | ) | ||||||||||||||||||||
Unrealized gain (loss) on investments | (741,307 | ) | 2,598,110 | (1,458,037 | ) | 2,598,110 | 81,615 | (367,975 | ) | 110,739 | (716,730 | ) | ||||||||||||||||||||
Total other income (expense) | (902,371 | ) | 2,580,316 | (2,065,942 | ) | 2,616,233 | (245,746 | ) | (479,780 | ) | 2,486,019 | (1,163,571 | ) | |||||||||||||||||||
Net income (loss) | $ | (1,827,978 | ) | $ | 4,950,601 | $ | (13,562,446 | ) | $ | 5,157,717 | $ | (6,595,707 | ) | $ | (8,822,650 | ) | $ | (7,975,017 | ) | $ | (11,734,468 | ) | ||||||||||
Earnings (loss) per share attributable to common shareholders: | ||||||||||||||||||||||||||||||||
Basic and diluted earnings (loss) per share | $ | (0.05 | ) | $ | 0.18 | $ | (0.44 | ) | $ | 0.19 | $ | (0.16 | ) | $ | (0.30 | ) | $ | (0.20 | ) | $ | (0.40 | ) | ||||||||||
Weighted average number of shares outstanding - basic and diluted | 35,115,889 | 27,578,310 | 31,136,392 | 27,578,310 | 41,568,147 | 29,857,473 | 40,742,462 | 29,113,665 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||||||||||||||||||
Total other comprehensive income (loss), net of tax | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Comprehensive income (loss) | $ | (1,827,978 | ) | $ | 4,950,601 | $ | (13,562,446 | ) | $ | 5,157,717 | $ | (6,595,707 | ) | $ | (8,822,650 | ) | $ | (7,975,017 | ) | $ | (11,734,468 | ) |
See accompanying notes to the financial statements
MEDICINE MAN TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY(UNAUDITED)
For the NineSix months Ended SeptemberJune 30, 20192020 and 20182019
Expressed in U.S. Dollars
Common Stock | Additional Paid-in | Retained | Total Stockholders' | |||||||||||||||||
Shares | Value | Capital | Earnings | Equity | ||||||||||||||||
Balance, December 31, 2017 | 22,991,137 | $ | 23,113 | $ | 17,505,697 | $ | (6,789,650 | ) | $ | 10,739,160 | ||||||||||
Net income (loss) | – | – | – | 5,157,717 | 5,157,717 | |||||||||||||||
Issuance of common stock in connection with sales made under private or public offerings | 937,647 | 938 | 992,062 | – | 1,000,000 | |||||||||||||||
Issuance of common stock in connection with the exercise of common stock purchase warrants | 1,091,197 | 1,091 | (1,091 | ) | – | – | ||||||||||||||
Issuance of common stock as compensation to employees, officers and/or directors | 625,000 | 625 | 836,875 | – | 837,500 | |||||||||||||||
Issuance of common stock in connection with the acquisition of a business | 1,933,329 | 1,933 | 2,998,067 | – | 3,000,000 | |||||||||||||||
Balance, September 30, 2018 | 27,578,310 | $ | 27,700 | $ | 22,338,610 | $ | (1,691,933 | ) | $ | 20,734,377 |
Common Stock | Additional Paid-in | Accumulated | Treasury Stock | Total Stockholders' | ||||||||||||||||||||||||
Shares | Value | Capital | Deficit | Shares | Cost | Equity | ||||||||||||||||||||||
Balance at, December 31, 2018 | 27,753,310 | $ | 27,875 | $ | 22,886,624 | $ | (5,840,735 | ) | – | $ | – | $ | 17,073,764 | |||||||||||||||
Net income (loss) | – | – | – | (11,734,468 | ) | – | – | (11,734,468 | ) | |||||||||||||||||||
Issuance of common stock in connection with sales made under private of public offerings | 2,200,000 | 2,200 | 4,397,800 | – | – | – | 4,400,000 | |||||||||||||||||||||
Issuance of common stock in connection with the exercise of common stock purchase warrants | 452,426 | 451 | 601,273 | – | – | – | 601,724 | |||||||||||||||||||||
Issuance of common stock as compensation to employees, officers and/or directors | 1,190,000 | 1,190 | 2,723,710 | – | – | – | 2,724,900 | |||||||||||||||||||||
Issuance of common stock in exchange for consulting, professional, and other services | 173,775 | 174 | 305,348 | – | – | – | 305,522 | |||||||||||||||||||||
Stock based compensation expense related to common stock options | – | – | 255,506 | – | – | �� | 255,506 | |||||||||||||||||||||
Balance, June 30, 2019 | 31,769,511 | $ | 31,890 | 31,170,261 | $ | (17,575,203 | ) | – | $ | – | $ | 13,626,948 |
Common Stock | Additional Paid-in | Retained | Total Stockholders' | |||||||||||||||||
Shares | Value | Capital | Earnings | Equity | ||||||||||||||||
Balance, December 31, 2018 | 27,753,310 | $ | 27,875 | $ | 22,886,624 | $ | (5,840,735 | ) | $ | 17,073,764 | ||||||||||
Net income (loss) | – | – | – | (13,562,446 | ) | (13,562,446 | ) | |||||||||||||
Issuance of common stock in connection with sales made under private or public offerings | 9,800,000 | 9,800 | 19,590,200 | – | 19,600,000 | |||||||||||||||
Issuance of common stock in connection with the exercise of common stock purchase warrants | 452,426 | 452 | 601,274 | – | 601,726 | |||||||||||||||
Issuance of common stock as compensation to employees, officers and/or directors | 1,190,000 | 1,190 | 2,723,710 | – | 2,724,900 | |||||||||||||||
Issuance of common stock in exchange for consulting, professional and other services | 173,775 | 173 | 305,348 | – | 305,521 | |||||||||||||||
Stock based compensation expense related to common stock options | – | – | 1,196,376 | – | 1,196,376 | |||||||||||||||
Balance, September 30, 2019 | 39,369,511 | $ | 39,490 | $ | 47,303,532 | $ | (19,403,181 | ) | $ | 27,939,841 |
Common Stock | Additional Paid-in | Accumulated | Treasury Stock | Total Stockholders' | ||||||||||||||||||||||||
Shares | Value | Capital | Deficit | Shares | Cost | Equity | ||||||||||||||||||||||
Balance at, December 31, 2019 | 39,952,628 | $ | 39,953 | $ | 50,356,469 | $ | (22,816,477 | ) | 257,732 | $ | (1,000,000 | ) | $ | 26,579,945 | ||||||||||||||
Net income (loss) | – | – | – | (7,975,017 | ) | – | – | (7,975,017 | ) | |||||||||||||||||||
Issuance of common stock as payment for Mesa | 2,554,750 | 2,555 | 4,167,253 | – | – | – | 4,169,808 | |||||||||||||||||||||
Return of common stock as compensation to employees, officers and/or directors | (500,000 | ) | (500 | ) | – | – | – | – | (500 | ) | ||||||||||||||||||
Issuance of common stock in connection with sales made under private or public offerings | 187,500 | 187 | 374,813 | – | – | – | 375,000 | |||||||||||||||||||||
Stock based compensation expense related to common stock options | – | – | 4,361,822 | – | – | – | 4,361,822 | |||||||||||||||||||||
Balance, June 30, 2020 | 42,194,878 | $ | 42,195 | 59,260,357 | $ | (30,791,494 | ) | 257,732 | $ | (1,000,000 | ) | $ | 27,511,058 |
The
4 |
MEDICINE MAN TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
For the Three months Ended June 30, 2020 and 2019
Expressed in U.S. Dollars
Common Stock | Additional Paid-in | Accumulated | Treasury Stock | Total Stockholders' | ||||||||||||||||||||||||
Shares | Value | Capital | Deficit | Shares | Cost | Equity | ||||||||||||||||||||||
Balance at, March 31, 2019 | 28,585,098 | $ | 28,705 | $ | 24,071,971 | $ | (8,752,553 | ) | – | $ | – | $ | 15,348,123 | |||||||||||||||
Net income (loss) | – | – | – | (8,822,650 | ) | – | – | (8,822,650 | ) | |||||||||||||||||||
Issuance of common stock in connection with sales made under private of public offerings | 2,200,000 | 2,200 | 4,397,800 | – | – | – | 4,400,000 | |||||||||||||||||||||
Issuance of common stock in connection with the exercise of common stock purchase warrants | 334,413 | 335 | 444,434 | – | – | – | 444,769 | |||||||||||||||||||||
Issuance of common stock as compensation to employees, officers and/or directors | 476,225 | 476 | 1,695,202 | – | – | – | 1,695,678 | |||||||||||||||||||||
Issuance of common stock in exchange for consulting, professional, and other services | 173,775 | 174 | 305,348 | – | – | – | 305,522 | |||||||||||||||||||||
Stock based compensation expense related to common stock options | – | – | 255,506 | – | – | – | 255,506 | |||||||||||||||||||||
Balance, June 30, 2019 | 31,769,511 | $ | 31,890 | 31,170,261 | $ | (17,575,203 | ) | – | $ | – | $ | 13,626,948 |
Common Stock | Additional Paid-in | Accumulated | Treasury Stock | Total Stockholders' | ||||||||||||||||||||||||
Shares | Value | Capital | Deficit | Shares | Cost | Equity | ||||||||||||||||||||||
Balance at, March 31, 2020 | 39,952,628 | $ | 39,953 | $ | 51,609,200 | $ | (24,195,787 | ) | 257,732 | $ | (1,000,000 | ) | $ | 26,453,366 | ||||||||||||||
Net income (loss) | – | – | – | (6,595,707 | ) | – | – | (6,595,707 | ) | |||||||||||||||||||
Issuance of common stock as payment for Mesa | 2,554,750 | 2,555 | 4,167,253 | – | – | – | 4,169,808 | |||||||||||||||||||||
Return of common stock as compensation to employees, officers and/or directors | (500,000 | ) | (500 | ) | – | – | – | – | (500 | ) | ||||||||||||||||||
Issuance of common stock in connection with sales made under private or public offerings | 187,500 | 187 | 374,813 | – | – | – | 375,000 | |||||||||||||||||||||
Stock based compensation expense related to common stock options | – | – | 3,109,091 | – | – | – | 3,109,091 | |||||||||||||||||||||
Balance, June 30, 2020 | 42,194,878 | $ | 42,195 | 59,260,357 | $ | (30,791,494 | ) | 257,732 | $ | (1,000,000 | ) | $ | 27,511,058 |
See accompanying notes are an integral part ofto the consolidated financial statements.statements
MEDICINE MAN TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS(UNAUDITED)
For the NineSix months Ended SeptemberJune 30, 20192020 and 20182019
Expressed in U.S. Dollars
2019 | 2018 | |||||||||||||||
2020 | 2019 | |||||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income for the period | $ | (13,562,446 | ) | $ | 5,157,717 | $ | (7,975,017 | ) | $ | (11,734,468 | ) | |||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||||||
Depreciation and amortization | 45,768 | 54,253 | 94,269 | 29,042 | ||||||||||||
Bad debt expense | – | – | ||||||||||||||
Common stock issued in exchange for fees and services | 210,521 | – | – | 210,521 | ||||||||||||
Derivative expense | 5,400,559 | – | – | 5,400,559 | ||||||||||||
Loss on change in derivative liabilities | 452,091 | – | (2,306,064 | ) | 254,563 | |||||||||||
Loss on investment, net | 1,458,037 | – | (110,739 | ) | 716,730 | |||||||||||
Stock based compensation | 3,921,276 | 837,500 | 4,361,822 | 2,980,406 | ||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Note receivable | – | 2,561 | ||||||||||||||
Accounts receivable | (2,868,093 | ) | (1,566,811 | ) | 780,772 | 775,962 | ||||||||||
Inventory | 81,530 | (335,869 | ) | 445,345 | (43,844 | ) | ||||||||||
Prepaid expenses and other current assets | (629,032 | ) | (3,580 | ) | ||||||||||||
Prepaid expenses and other assets | 65,538 | (54,279 | ) | |||||||||||||
Operating lease right of use assets and liabilities | (67,839 | ) | – | 16,773 | (45,226 | ) | ||||||||||
Accounts payable and other liabilities | 878,066 | (61,879 | ) | 575,153 | 776,684 | |||||||||||
Net cash used from operating activities | (4,679,562 | ) | 4,083,892 | |||||||||||||
Income taxes payables | (1,940 | ) | – | |||||||||||||
Net cash (used in) operating activities | (4,054,088 | ) | (733,348 | ) | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchase of fixed assets | (7,312 | ) | – | |||||||||||||
Sale of assets | – | 16,187 | ||||||||||||||
Short term debt | – | (58,280 | ) | |||||||||||||
Purchase of fixed assets, net of sales | (593,785 | ) | (7,312 | ) | ||||||||||||
Purchase of intangible assets | – | (6,000 | ) | |||||||||||||
Consideration for acquisition of business | (2,609,500 | ) | – | |||||||||||||
Issuance of notes receivable | (632,053 | ) | – | (50,390 | ) | (229,358 | ) | |||||||||
Investment proceeds | – | (5,260,840 | ) | |||||||||||||
Net cash used in investing activities | (639,365 | ) | (5,302,933 | ) | ||||||||||||
Net cash (used in) investing activities | (3,253,675 | ) | (242,670 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from issuance of common stock, net of issuance costs | 19,600,000 | 1,000,000 | ||||||||||||||
Proceeds from issuance of common stock, net of issuance costs and return of common stock | 374,500 | 4,400,000 | ||||||||||||||
Proceeds from exercise of common stock purchase warrants, net of issuance costs | 601,726 | – | – | 601,725 | ||||||||||||
Net cash earned for financing activities | 20,201,726 | 1,000,000 | ||||||||||||||
Net cash provided by financing activities | 374,500 | 5,001,725 | ||||||||||||||
Net decrease in cash and cash equivalents | 14,882,799 | (219,041 | ) | (6,933,263 | ) | 4,025,707 | ||||||||||
Cash and cash equivalents - beginning of period | 321,788 | 748,715 | 12,351,580 | 321,788 | ||||||||||||
Cash and cash equivalents - end of period | $ | 15,204,587 | $ | 529,674 | $ | 5,418,317 | $ | 4,347,495 |
See accompanying notes to the financial statements
MEDICINE MAN TECHNOLOGIES, INC.
NOTES TO THEUNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
Organization and Nature of Operations
Business Description –Business Activity
Medicine Man Technologies Inc. (the "Company"“Company”) incorporated in Nevada on March 20, 2014, in the State of Nevada.2014. On May 1, 2014, the Company entered into an exclusive Technology License Agreementtechnology license agreement with Medicine Man Denver, Inc., f/k/a Medicine Man Production Corporation, a Colorado corporation (��(“Medicine Man Denver”) whereby Medicine Man Denver granted it a license to use all of their proprietary processes they have developed, implemented and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including trade secrets, skills and experience (present and future) (the “Medicine Man Denver License Agreement”).
The Company commenced its business on May 1, 2014 and currently generategenerated revenues derived from licensing agreements withconsulting activities for prospective clients interested in entering the cannabis related entities,industry as well as sponsoring seminars offered to the cannabis industry and other business endeavors related to ourits core competencies.
In 2019, due to the changes in Colorado law permitting outside investment, the Company made a strategic decision to move toward direct plant-touching operations. Following that decision by executive leadership, the Company issued binding term sheets to several Colorado acquisition targets across the value chain. It believes that these targets are high quality, and the Company’s successful acquisition of these potential targets would allow it to become one of the largest vertically integrated seed-to-sale operators in the United States cannabis industry. These term sheets were announced in several Current Reports on Form 8-K during 2019. If successfully completed, the Company, post-transactions, will be able to offer retail, cultivation and extraction services. Management believes that the current company combined with the acquisition targets in its Colorado “roll-up” strategy will have the potential to create a vertically integrated company, which would further enjoy a competitive advantage operating in the Colorado market against incumbent operators. In addition to the contemplated business-integration benefits, management believes the sharing of best practices amongst the Company and the acquisition targets will allow for improved operations, revenue enhancements and increased profitability. Scale may also afford the ability to create an integrated back office system, providing a differentiated technology backbone to support the Company’s operations and enhance its overall management and operating capabilities. There can be no assurance that any of the proposed acquisitions will be consummated.
On April 20, 2020, the Company rebranded and conducts its business under the trade name, Schwazze. The corporate name of the Company continues to be Medicine Man Technologies, Inc. Effective April 21, 2020, the Company commenced trading under the OTC ticker symbol SHWZ.
On April 20, 2020 the Company completed its first acquisition of a Colorado plant touching entity, acquiring Mesa Organics, Ltd (“Mesa”) and its subsidiaries. These four entities include a Manufacturing Infusing Products (MIP) facility and four dispensaries. All are located in Southeastern Colorado. These acquisitions are included in our Products segment reporting.
1. | Liquidity and Capital Resources |
During the quarters ending SeptemberJune 30, 20192020 and 2018,2019, the Company primarily used revenues from its operation supplemented by cash to fund its operations.
Cash and cash equivalents are carried at cost and represent cash on hand, deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date. The Company had $15,204,587$5,418,317 and $321,788$11,853,627 classified as cash and cash equivalents as of SeptemberJune 30, 2019,2020, and December 31, 2018,2019, respectively. The Company anticipates it will need additional funds for the Star Buds acquisition and working capital and are exploring capital raising transactions in the form of equity and debt.
The Company maintains its cash balances with a high-credit-quality financial institution.institutions. At times, such cash may be more than the insured limit of $250,000. As of June 30, 2020 and December 31, 2019 respectively, the cash balance was $5,168,317 and $486,101 over the insured limit. The Company has not experienced any losses in such accounts, and management believes the Company is not exposed to any significant credit risk on its cash and cash equivalents.
In an effort to mitigate credit risk, the Company may purchase highly liquid investments with an original maturity of three months or less. At September 30, 2019, the Company had two United States Treasury Bills with a maturity date of October 15, 2019 and bearing interest at a rate of approximately 1.69%.
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The following table depicts the composition of the Company’s cash and cash equivalents as of SeptemberJune 30, 2019,2020, and December 31, 2018:2019:
September 30, 2019 | December 31, 2018 | |||||||
Deposits placed with banks | $ | 2,974,122 | $ | 321,788 | ||||
United States Treasury Bills | 12,230,465 | – | ||||||
Total cash and cash equivalents | $ | 15,204,587 | $ | 321,788 |
The Company has recently elected to accelerate its organic growth path through additional marketing, team development, synergistic acquisitions, and other corporate activities wherein it expects to generate negative cash flow and an additional demand for capital to fuel such growth.
The Company has commenced legal action against a client for breach of contract, adding a significant value to its receivables for fees that had been booked due to forbearance grants by the Company that were subsequently violated, causing the Company to increase its receivables accordingly (see Part II, Item 1, Legal Proceedings for more information).
June 30, 2020 | December 31, 2019 | |||||||
Deposits placed with banks | $ | 5,418,317 | $ | 736,101 | ||||
United States Treasury Bills | – | 11,117,526 | ||||||
Total cash and cash equivalents | $ | 5,418,317 | $ | 11,853,627 |
2. | Critical Accounting Policies and Estimates |
Management’s Representation of Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements at December 31, 2019 and 2018, as presented in the Company’s Annual Report on Form 10-K filed on March 30, 2020 with the SEC.
Basis of Presentation
These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s net earnings and financial position.
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Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments include cash, accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us. The Company’s derivative liability was adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
The following is the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis at SeptemberJune 30, 20192020 and December 31, 2018,2019, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
September 30, 2019 | December 31, 2018 | |||||||
Level 3 – Non-marketable securities – non-recurring | $ | 741,307 | $ | 2,199,344 |
June 30, 2020 | December 31, 2019 | |||||||
Level 1 – Marketable Securities Available-for-Sale – Recurring | 517,514 | 406,774 |
Non-MarketableMarketable Securities at Fair Value on a NonrecurringRecurring Basis
Certain assets are measured at fair value on a nonrecurringrecurring basis. The level 3 position consist of investments accounted for under the cost method. The Level 31 position consists of investmentsan investment in equity securities held in private companies.Canada House Wellness Group, Inc. (CHV), a publicly-traded company whose securities are actively quoted on the Toronto Stock Exchange. At both June 30, 2020 and December 31, 2019, the Company owned 17,650,540 shares of CHV common stock. The closing share price of CHV’s common stock on June 30, 2020 was CAD$0.040 per share.
Fair Value of Financial Instruments
The carrying amounts of cash and current assets and liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Available for saleAvailable-for-sale securities are recorded at current market value as of the date of this report.
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Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary course of business. Accounts receivable related to licensing and consulting revenues are recorded at the time the milestone resultsresult in the funds being due being achieved, services are delivered, and payment is reasonably assured. Licensing and consulting revenues are generally collected from 30 to 60 days after the invoice is sent.
The following table depicts the composition of our accounts receivable as of SeptemberJune 30, 2019,2020, and December 31, 2018:2019:
September 30, 2019 | December 31, 2018 | |||||||
Accounts receivable – trade | $ | 1,901,019 | $ | 1,180,757 | ||||
Accounts receivable – related party | 490,485 | 125,112 | ||||||
Accounts receivable – litigation, non-current | 3,063,968 | 1,281,511 | ||||||
Total accounts receivable | $ | 5,455,472 | $ | 2,587,380 |
June 30, 2020 | December 31, 2019 | |||||||
Accounts receivable – trade | $ | 1,332,878 | $ | 384,202 | ||||
Accounts receivable – related party | 124,856 | 72,658 | ||||||
Accounts receivable – litigation | 3,063,968 | 3,063,968 | ||||||
Allowance for doubtful accounts | (41,796 | ) | (70,885 | ) | ||||
Total accounts receivable | $ | 4,479,906 | $ | 3,449,943 |
The Company commenced legal action againstestablishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a customer for breach of contract, adding a significant value to its receivables for fees that had been booked, due to forbearance grants by the Company that were subsequently violated, causing the Company to increase its receivables accordingly.specific allowance will be required. At SeptemberJune 30, 20192020 and December 31, 2018, the accounts receivable for this matter totaled $2,773,321 and $990,864, and the related revenue recorded totaled $1,782,457 and $1,015,154 for the nine months ended September 30, 2019 and 2018, respectively.
On June 7, 2019 the company filed a complaint against a second customer in Clark County, Nevada, for, amongst other causes of action, breach of contract. On July 17, 2019, the parties stipulated to stay the case in favor of arbitration. Since that time, the parties have been in the process of mutually agreeing upon an arbitrator, which has now completed. The parties are now in the process of scheduling the arbitration. As of September 30, 2019, and December 31, 2018 the accounts receivable for this matter totaled $290,647.
The Company provided services to this customer for a period of thirteen months, agreeing conditionally to three modifications in December of 2017, March of 2018, and May of 2018 to forego certain revenue sharing payments in accordance with the agreement with the customer, which were subsequently breached by the customer. In July 2018, the Company engaged legal counsel and filed a complaint in Clark County, Nevada, which alleged breach of contract and sought general, special, and punitive damages in the amount of $3,876,850. On August 2, 2019, a jury in the District Court of Clark County, Nevada found in favor of the Company and awarded the Company damages totaling $2,773,321 (See Part II, Item 1, Legal Proceedings for more information). The Company has classified the awarded amount receivable as a non-current asset since the customer has subsequently filed an appeal.
On March 22, 2019, the Company entered intorecorded an Agreementallowance for doubtful accounts of Sale of Future Receipts (“Factoring Agreement”) with Libertas Funding, LLC (“Purchaser”). Under$41,796 and $70,885, respectively. During the terms of the Factoring Agreement, the Purchaser acquired $810,000 of certain future receivables from the Company for $582,000 in net proceeds. The Company is required to repay Purchaser $24,107 weekly for an estimated term of eight months. On July 2,six months ended June 30, 2020 and June 30, 2019, the Company repaid $436,607 which represented all remaining amounts owed under the Factoring Agreement. The Company recorded $192,277 in interesta bad debt expense related to the Factoring Agreement during the nine months ended September 30, 2019.
Due to the low volume of write offs, the Company uses the direct write off method versus having an allowance for uncollectible debts. The Company recorded wrote off $6,423 of its accounts receivable during the three$29,089 and nine months ended September 30, 2019. The Company did not write off any of its accounts receivable in either of the nine-month periods ending September 30, 2018.
The Company analyzed the contract, associated revenue and litigation process under ASC 606,Revenue from Contracts with Customers. As detailed above, the Company had a contract with the customer that identified distinct performance obligations to be satisfied over time. Additionally, it determined that the litigation process, and subsequent award, represented a contract modification.
Paragraph 606-10-25 states that an entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following criteria is met:
Paragraph 606-10-25 further states that the process for determining the proper treatment for a contract modification includes three steps:
ASC 606 defines a contract modification as a change in scope and/or price to an original contract, or any change to the enforceable rights and obligations of the parties to the original contract. Enforceable rights and obligations are those that are approved by both parties and legally required. A contract modification does not need to be written; enforceable changes can be the result of oral agreements or implied through customary business practices.
The effect that the modification has on the transaction price, and on the entity’s measure of progress towards satisfaction of the performance obligation, is recognized as an adjustment to revenue either as an increase in or a reduction of revenue at the date of the modification. The adjustment to revenue is made on a cumulative catch-up basis.
As management determined that the litigation process constituted a contract modification, and that the contract was upheld judicially, the Company recognized and recorded $1,782,457 on a cumulative catch-up basis as of August 2, 2019.$0, respectively.
Notes Receivable
On July 17, 2018, the Company entered into an intellectual property license agreement with Abba Medix Corp. (AMC), a wholly owned subsidiary of publicly traded Canada House Wellness Group, Inc. (CHV). The Company agreed to provide a lending facility to AMC in CAD$125,000 increments of up to CAD$500,000. The lending facility is for a term of 2436 months and bears interest at a rate at 5.50% (representing United States Prime)of 2%. As of SeptemberJune 30, 2019,2020 and December 31, 2018,2019, the Company loaned tooutstanding balance, including accrued interest, on the notes receivable with AMC a total of $237,246totaled $292,101 and $92,888,$241,711, respectively. The Company classified these loans as long-termnoncurrent notes receivable on its consolidated balance sheets as of SeptemberJune 30, 2019,2020 and December 31, 2018,2019, respectively.
Other Assets (Current and Non-Current)
Other assets at SeptemberJune 30, 2019,2020 and December 31, 20182019 were $774,856$463,879 and $50,824, respectively and as$529,416, respectively. As of SeptemberJune 30, 20192020, this balance included $573,191$422,000 in prepaid expenses $7,150and $41,879 in security deposits. At December 31, 2019, other assets included $480,881 in prepaid expenses, $21,085 in interest receivable and $19,450$27,450 in two security deposits. Prepaid expenses were primarily comprised of insurance premiums, membership dues, conferences and seminars, and other general and administrative costs.
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Goodwill and Intangible Assets
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets consist of licensing agreements, product licenses and registrations, and intellectual property or trade secrets. Their estimated useful lives range from 10 to 15 years.
Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value assessment at December 31, 2018,2019, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that no impairment exists. No additional factors or circumstances existed at June 30, 2020 that would indicate impairment.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value of the assets, the assets are written down to the estimated fair value.
The Company evaluated the recoverability of its long-lived assets on December 31, 20182019 on its subsidiaries with material amounts on their respective balance sheets and determined that no impairment exists. No additional factors or circumstances existed at June 30, 2020 that would indicate impairment.
Accounts Payable
Accounts payable at SeptemberJune 30, 2019,2020 and December 31, 20182019 were $915,651$2,808,718 and $202,515,$699,961, respectively and were comprised of trade payables for various purchases and services rendered during the ordinary course of business.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at SeptemberJune 30, 2019,2020 and December 31, 20182019 were $485,292$1,848,933 and $291,084,$1,091,204, respectively. At SeptemberJune 30, 2019,2020, this was comprised of customer deposits of $188,568,$81,441, accrued payroll of $203,788,$961,891, and operating expenses of $92,936.
$805,601. At December 31, 2018, this2019, accrued expenses and other liabilities was comprised of $163,568 in customer deposits $21,330 in deferred rent expenseof $148,109, accrued payroll of $714,220, and $106,185 in accrued payroll.operating expenses of $228,875.
Revenue Recognition and Related Allowances
OurThe Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. The Company recognizes revenues, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied – at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied.
The Company’s revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until is the criteria are met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenueRevenue contracts are identified when accepted from customers and represent a single performance obligation to sell ourthe Company’s products to a customer.
The Company has three main revenue streams: product sales; licensing and consulting cultivation max;fees; and other operating revenues from seminars, reimbursements and other miscellaneous sources.
Revenue from cultivation max, licensing and consulting services is recognized when the obligations to the client are fulfilled which is determined when milestones in the contract are achieved.
Product sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we considerthe Company considers several indicators, including significant risks and rewards of products, ourits right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
Revenue from licensing and consulting services is recognized when the obligations to the client are fulfilled which is determined when milestones in the contract are achieved and target harvest yields are exceeded. At June 30, 2020, all milestones for contracts were satisfactorily reached and no further performance obligations were outstanding on contracts through the period.
Revenue from seminar fees is related to one-day seminars and is recognized as earned upon the completion of the seminar. The Company also recognizes expense reimbursement from clients as revenue for expenses incurred during certain jobs.
Costs of Goods and Services Sold
Costs of goods and services sold are comprised of related expenses incurred while supporting the implementation and sales of the Company’s products and services.
General and Administrative Expenses
General and administrative expense are comprised of all expenses not linked to the production or advertising of the Company’s services.
12 |
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and totaled $212,506$336,529 and $340,995$465,796 for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, as compared to $32,110$73,088 and $109,650,$128,489, respectively, for the three and ninesix months ended SeptemberJune 30, 2018.2019.
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 EITFEmerging Issues Task Force (“EITF”) 96-18 when stock or options are awarded for previous or current service without further recourse.
Share basedShare-based expense paid to through direct stock grants is expensed as occurred. Since the Company’s common stock ishas 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
On June 20, 2018, the FASB issued ASU 2018-07 which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the Company’s common stock being tradedASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Previously, share-based payment arrangements to nonemployees were accounted for under ASC 718, while nonemployee share-based payments issued for goods and services were accounted for under ASC 505-50. Before the amendment, the major difference for the Company used(but not limited to) was the most recent valuation. determination of measurement date, which generally is the date on which the measurement of equity classified share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified nonemployee share-based payment awards are no longer measured at the earlier of the date which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. They are now measured at the grant date of the award, which is the same as share-based payments for employees. The Company adopted the requirements of the new rule as of January 1, 2019, the effective date of the new guidance.
The Company recognized $940,870$3,109,091 and $3,166,276$4,361,822 in expense for stock-based compensation from common stock options issued to employees during the three and six months ended June 30, 2020, and $2,225,406 and 2,980,406 in expenses for stock-based compensation from the issuance of common stock to employees, and consultants forofficers, directors and/or contractors during the three and ninesix months ended SeptemberJune 30, 2019, respectively, as compared to $837,500 for both the three and nine months ended September 30, 2018.2019.
Income Taxes
The Company has adopted SFAS No. 109 – “Accounting forASC 740, Income Taxes”. ASC Topic 740Taxes 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.
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Right of Use Assets and Lease Liabilities
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires lessees to recognize almost all leases on the balance sheet as a Right-of-Use (“ROU”) asset and a lease liability and requires leases to be classified as either an operating or a finance type lease. The standard excludes leases of intangible assets or inventory. The standard became effective for the Company beginning January 1, 2019. The Company adopted ASC 842 using the modified retrospective approach, by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under ASC 840. The Company elected the package of practical expedients permitted under the standard, which also allowed the Company to carry forward historical lease classifications. The Company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all equipment leases as well as electing a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the ROU assets and lease liabilities.
Under ASC 842, the Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
Operating leases are included in operating lease Right-of-Use assets and operating lease liabilities, current and non-current, on the Company's consolidated balance sheets.
Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. These potential dilutive shares include 3,474,500 shares from vested stock options and 9,987,500 stock purchase warrants. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
3. | Recent Accounting Pronouncements |
FASB ASU 2016-02 “Leases (Topic 842)” – In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance will classify leases as either finance or operating (similar to current standard’s “capital” or “operating” classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has adopted this pronouncementimplemented all new accounting pronouncements that are in effect and has reflected the value of all leases within the Balance Sheet of the Company.
FASB ASU 2016-15 “Statement of Cash Flows (Topic 230)” –In August 2016, the FASB issued 2016-15. Stakeholders indicatedthat may impact its financial statements and does not believe that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU did notany other new pronouncements that have been issued that might have a significantmaterial impact on our statementits financial position or results of cash flows.operations except as noted below:
FASB ASU 2017-01, “ClarifyingClarifying the Definition of a Business (Topic 805)” – In January 2017, the FASB issued 2017-1.2017-01. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU did not have a significant impact on ourthe Company’s consolidated results of operations, cash flows and financial position.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this amendment on its consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its consolidated financial statements.
4. | Property and Equipment |
Property and equipment are recorded at cost, net of accumulated depreciation and are comprised of the following:
September 30, 2019 | December 31, 2018 | |||||||
Furniture and fixtures | $ | 103,747 | $ | 98,395 | ||||
Marketing display | 36,900 | 36,900 | ||||||
Vehicles | 34,000 | 34,000 | ||||||
Office equipment | 76,321 | 74,361 | ||||||
Subtotal | $ | 250,968 | $ | 243,655 | ||||
Less: accumulated depreciation | (189,896 | ) | (149,015 | ) | ||||
Total property and equipment, net of depreciation | $ | 61,072 | $ | 94,640 |
June 30, 2020 | December 31, 2019 | |||||||
Furniture and fixtures | $ | 129,927 | $ | 98,903 | ||||
Leasehold improvements | 84,679 | 40,953 | ||||||
Machinery and tools | 1,947,949 | 34,000 | ||||||
Office equipment | 75,848 | 33,833 | ||||||
Software | 110,677 | – | ||||||
Work in process | 884,067 | 190,743 | ||||||
$ | 3,233,147 | $ | 398,432 | |||||
Less: Accumulated depreciation | (670,535 | ) | (159,354 | ) | ||||
Total property and equipment, net of depreciation | $ | 2,562,612 | $ | 239,078 |
Depreciation on equipment is provided on a straight-line basis over its expected useful lives at the following annual rates.
Furniture and fixtures | 3 years | |||
Leasehold improvements | Lesser of the lease term or estimated useful life | |||
Machinery and tools | 3 years | |||
Office equipment | 3 years | |||
Software | 3-5 years |
Depreciation expense for the three and ninesix months ended SeptemberJune 30, 20192020 was $15,265$86,510 and $40,881,$90,974, respectively, compared to $17,991$14,966 and $56,275,$25,617, respectively, for the three and ninesix months ended SeptemberJune 30, 2018.2019.
5. | Intangible Asset |
Intangible assets at SeptemberJune 30, 20192020 and December 31, 20182019 were comprised of the following:
September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
License agreement | $ | 5,300 | $ | 5,300 | $ | 5,300 | $ | 5,300 | ||||||||
Product license and registration | 57,300 | 57,300 | 57,300 | 57,300 | ||||||||||||
Trade secret – intellectual property | 32,500 | 32,500 | 32,500 | 32,500 | ||||||||||||
Subtotal | $ | 95,100 | $ | 95,100 | $ | 95,100 | $ | 95,100 | ||||||||
Less: accumulated amortization | (18,791 | ) | (13,903 | ) | (23,106 | ) | (19,811 | ) | ||||||||
Total intangible assets, net of amortization | $ | 76,309 | $ | 81,197 | $ | 71,994 | $ | 75,289 |
Amortization expense for the three and ninesix months ended SeptemberJune 30, 20192020 was $1,463$1,647 and $4,888,$3,295, respectively, compared to $1,629$1,729 and $4,886,$3,425, respectively, for the three and ninesix months ended SeptemberJune 30, 2018.2019.
6. | Derivative Liability |
During the nine months ended September 30,In 2019, the Company entered into certain employment agreements with certain key officers that contained contingent consideration provisions based upon the achievement of certain market condition milestones. The Company determined that each of these vesting conditions represented derivative instruments.
On January 8, 2019, the Company granted the right to receive 500,000 shares of restricted common stock to an officer and director, which will vest at such time that that the Company’s stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
On April 23, 2019, the Company granted the right to receive 1,000,000 shares of restricted common stock to an officer and director, which will vest at such time that that the Company’s stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds. Similarly,On February 25, 2020, the director resigned from his remaining positions with the Company and forfeited his right to the contingent consideration. As a result, the Company recorded a gain of $1,462,636 as a component of other income (expense), net on its financial statements.
On June 11, 2019, the Company granted the right to receive 1,000,000 shares of restricted common stock to an officer, which will vest at such time that that the Company’s stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
The Company accounts for derivative instruments in accordance with the US GAAP accounting guidance under ASC 815, “DerivativesDerivatives and Hedging Activities”Activities. The Company estimated the fair value of these derivatives at the respective balance sheet dates using the Black-Scholes option pricing model based upon the following inputs: (i) stock price on the date of grant ranging between $1.32 - $3.75, (ii) the contractual term of the derivative instrument ranging between 2.25 - 3 years, (iii) a risk-free interest rate ranging between 1.56% - 2.57% and (iv) an expected volatility of the price of the underlying common stock ranging between 136% - 158%.
As of SeptemberJune 30, 2019,2020, the fair value of these derivative liabilities is $5,852,649.$1,467,318. The change in the fair value of derivative liabilities for the three and nine months ended SeptemberJune 30, 20192020 was $197,526 and $452,090, respectively,$(348,535), resulting in an aggregate unrealized loss on derivative liabilities. The change in the fair value of the derivative liabilities for the six months ended June 30, 2020 was 843,428, resulting in an aggregated unrealized gain on derivative liabilities.
7. | Related Party Transactions |
During the year ended December 31, 2019, the Company’s Chief Cultivation Officer, Joshua Haupt, who currently owns 20% of both Super Farm and De Best, was an Officer of the Company and therefore a related party. Effective December 4, 2019, he was no longer an Officer and therefore no longer a related party. As such, he is not included as a related party with respect to sales and accounts receivable to Super Farm or De Best during the period ended June 30, 2020.
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company had sales from Super Farm LLC totaling $450,310 and $143,830 sales from De Best Inc. The Company gives a larger discount on nutrient sales to related parties than non-related parties. During the nine months ended September 30, 2019, the Company had sales discounts associated with Super Farm LLC totaling $227,650 and $71,915 from De Best Inc. As of September 30, 2019, the Company had an accounts receivable balance from Super Farm totaling $52,173 and an accounts receivable balance from De Best totaling $11,910.
The Company Chief Cultivation Officer, Joshua Haupt, currently owns 20% of both De Best and Super Farm.
During the nine months ended September 30, 2019, the Company recorded sales from Future Vision dba Medicine Man Denver totaling $293,075 and$170,106. There were no sales discounts totaling $108,793.during the six months ended June 30, 2020. As of SeptemberJune 30, 2019,2020, the Company had an accounts receivable balance with Future Vision totaling $34,094.
During the nine months ended September 30, 2019, the Company incurred expenses from Future Vision dba Medicine Man Denver totaling $92,874 for contract labor and other related administrative costs.
$83,679. The Company’s former Chief Executive Officer, Andy Williams, currently owns 38% of Future Vision dbamaintains an ownership interest in Medicine Man Denver.
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company recordeddid not record any sales from MedPharm Holdings totaling $48,710 and sales discounts totaling $7,498.LLC (“MedPharm Holdings”). As of SeptemberJune 30, 2019,2020, the Company had ana net accounts receivable balance with MedPharm Holdings totaling $5,557.
During$3,326. Also, during the nine monthsyear ended September 30,December 31, 2019, the Company issued various notes receivable to MedPharm Holdings totaling $487,695$767,695 with original maturity dates ranging from September 21, 2019 through January 19, 2020 and all bearing interest at 8%between 8-10% per annum. TheAll notes may be extended or renewed at maturityto July 2020 by mutual agreement between the Company and noteholder, and with no evidence of default.
noteholder. The Company’s former Chief Executive Officer, Andy Williams, currently owns 29% ofmaintains an ownership interest in MedPharm Holdings.
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company recordeddid not record any sales from Baseball 18, LLC totaling $3,836. As of September(“Baseball”), Farm Boy, LLC (“Farm Boy”), Emerald Fields LLC (“Emerald Fields”), or Los Sueños Farms (Los Sueños). During the six months ended June 30, 2019,2020, the Company had ana net accounts receivablepayable balance of $156,318 with Baseball, 18 LLC totaling $3,985.
During the nine months ended September 30, 2019, the Company recorded sales from Farm Boy LLC totaling $369,178. As of September 30, 2019, the Company had an accounts receivable balance$245,953 with Farm Boy, LLC totaling $382,766.
$114,838 with Emerald Fields, and $51,237 with Los Sueños. One of the Company’s Directors,former directors, Robert DeGabrielle, also owns twothe Colorado retail marijuana cultivation licenses for Farm Boy, LLCEmerald Fields and Baseball, 18 LLC, bothall doing business as Los Sueños Farms.
On May 20, 2020, the Company entered into a second amendment (the “Amendment”) to that certain securities purchase agreement (the “Agreement”) dated as of June 5, 2019 by and between the Company and Dye Capital Cann Holdings, LLC, a Delaware limited liability company (the “Investor” and together with the Company the “Parties”) as described in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on June 6, 2019, as amended by the first amendment to the Agreement dated as of July 15, 2019 (the “First Amendment”) and as described in a Current Report on Form 8-K filed with the SEC on July 17, 2019. The Agreement, as amended by the First Amendment, contemplated, among other things, the sale by the Company to the Investor in three separate tranches of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), together with warrants to purchase the number of shares of Common Stock purchased in each tranche closing (the “Warrants”). At the time of the closing of the initial transactions contemplated in the Agreement, Justin Dye, principal of the Purchaser, became a Director and Chief Executive Officer of the Company; the Purchaser is currently the Company’s largest shareholder and Mr. Dye has voting and dispositive power over the securities held by the Purchaser. The Amendment provides, pursuant to the terms and subject to the conditions set forth therein, that in addition to the shares of Common Stock and Warrants previously purchased by the Investor in connection with the Agreement as amended by the First Amendment, the Investor shall purchase in a private placement 187,500 shares of Common Stock at a price of $2.00 per share together with 187,500 Warrants at an exercise price of $3.50 per share (the “Transaction”). The Transaction closed on May 21, 2020.
8. | Inventory |
As of June 30, 2020, and December 31, 2019, respectively, the Company had $1,977,572 and $684,940 of inventory. At December 31, 2019 all inventory was finished goods inventory. At June 30, 2020, $849,153 was finished goods inventory and $1,128,419 was raw materials. The Company uses the FIFO inventory valuation method. As of June 30, 2020 and December 31, 2019, the Company did not recognize any impairment for obsolescence within its inventory.
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9. | Goodwill |
On September 17, 2018, weApril 20, 2020, the Company closed the acquisition of Two JS LLC, dba The Big Tomato, a Colorado limited liability company.Mesa Organics, Ltd (“Big T” or “Big Tomato”Mesa”). The Company issued an aggregate purchase price after working capital adjustments was $2,609,500 of 1,933,329cash and 2,554,750 shares of itsthe Company’s common stock, for 100% ownership of Big Tomato.par value $0.001 per share. The Company accounted for the transaction utilizing purchase price accounting stating that netthe book value approximates the fair market value of the assets acquired. The purchase price accounting resulted in the Company valuing the investment as $3,000,000$5,141,537 of Goodwill. At September 17, 2018,goodwill. The purchase price allocation is preliminary. The purchase price allocation will continue to be preliminary until a third-party valuation is finalized and the Company’s per sharefair value of common stock was $1.55. There is no requirement for Big Tomato to have independent audited financial statement for the prior two fiscal years and any interim periods because the aggregate valueuseful life of the acquisitionassets acquired is less than 20% ofdetermined. The amounts from the Company’s current assets.final valuation may significantly differ from the preliminary allocation.
Big Tomato Balance Sheet
Book/Fair Value | Book/Fair Value | |||||||||
Assets | Liabilities | |||||||||
Inventory | $ | 291,000 | Accounts payable | $ | 272,266 | |||||
Other assets | 4,950 | Customer Deposits | 23,684 | |||||||
$ | 295,950 | $ | 295,950 |
Purchase Price (1,933,329*1.5517) | ||||
$ | 3,000,000 | |||
Less: BV of Assets | (295,950 | ) | ||
Add: BV of Liabilities | 295,950 | |||
Goodwill | $ | 3,000,000 |
The following table sets forth the changes in the carrying amountvalue of the Company’s goodwill at SeptemberJune 30, 2019,2020 and December 31, 2018:2019:
Balance, December 31, 2017 | $ | 9,304,306 | ||
Acquisition of Big Tomato | 3,000,000 | |||
Balance, December 31, 2018 | 12,304,306 | |||
Activity for the period ended September 30, 2019 | – | |||
Balance September 30, 2019 | $ | 12,304,306 |
In accordance with ASC Topic 280 – “Earnings per Share”, the basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company's earnings (loss) per share on a basic and diluted basis were $(0.05) and $0.18 for the three months ended September 30, 2019 and 2018, respectively, and $(0.44) and $0.19 for the nine months ended September 30, 2019 and 2018, respectively.
Balance, December 31, 2019 | $ | 12,304,306 | |||
Acquisition of Mesa | 5,141,537 | ||||
Balance, June 30, 2020 | $ | 17,445,843 |
10. |
As of September 30, 2019, and December 31, 2018, respectively, the Company had $407,708 and $489,239 of finished goods inventory. The Company only has finished goods within inventory because it does not produce any of its products. All inventory is produced by a third party. The Company uses the FIFO inventory valuation method. As of September 30, 2019, and December 31, 2018, the Company did not have any obsolescence within its inventory.
The Company had a note payable to the Company’s Chief Cultivation Officer, Joshua Haupt. The balance of the note as of December 31, 2017 totaled $58,280 and was repaid in full during the quarter ended March 31, 2018.
Leases |
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”ROU”) operating lease asset and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line basis. RoUROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
The Company's leases consist of real estate leases for office, commercial retail, and storage spaces. The Company elected to combine the lease and related non-lease components for its operating leases.
The Company’s operating leases include options to extend or terminate the lease, which are not included in the determination of the RoUROU asset or lease liability unless reasonably certain to be exercised. The Company's operating leases have remaining lease terms of less than twothree to five years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the Company's leases do not provide an implicit rate, we used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The discount rate used in the computations wascomputation is 6%.
Balance Sheet Classification of Operating Lease Assets and Liabilities
Balance Sheet Line | September 30, 2019 | |||||||||||
Balance Sheet Line | June 30, 2020 | |||||||||||
Asset | ||||||||||||
Operating lease asset | Non-Current Assets | $ | 168,344 | |||||||||
Operating lease right of use assets | Noncurrent assets | $ | 1,747,109 | |||||||||
Liabilities | ||||||||||||
Operating lease liability | Non-Current Liabilities | $ | 121,835 | |||||||||
Lease liabilities | Noncurrent liabilities | $ | 1,770,742 |
Lease Costs
The table below summarizes the components of lease costs for the ninesix months ended SeptemberJune 30, 2019.2020.
Nine Months Ended September 30, 2019 | ||||
Operating lease costs | $ | 118,767 |
Six Months Ended June 30, 2020 | ||||
Operating lease costs | $ | 101,568 |
Maturities of Lease Liabilities
Maturities of lease liabilities as of SeptemberJune 30, 20192020 are as follows:
2019 fiscal year | $ | 62,952 | ||||||
2020 fiscal year | 67,904 | $ | 1,793,866 | |||||
Total lease payments | 130,856 | |||||||
Less: Interest | (9,021 | ) | (23,124 | ) | ||||
Present value of lease liabilities | $ | 121,835 | $ | 1,770,742 |
The following table presents the Company’s future minimum lease obligation under ASC 840 as of December 31, 2018:June 30, 2020:
2019 fiscal year | $ | 248,808 | ||||||
2020 fiscal year | $ | 67,904 | $ | 225,732 | ||||
2021 fiscal year | 451,464 | |||||||
2022 fiscal year | 451,464 | |||||||
2023 fiscal year | 410,232 | |||||||
2024 fiscal year | 369,000 | |||||||
2025 fiscal year | 123,000 | |||||||
Total | $ | 2,030,892 |
Commitments and Contingencies |
Binding Term Sheets to Acquire Certain Businesses
Over the past three years, the Company has supported legislation in Colorado to allow licensed cannabis companies in Colorado to trade their securities, provided they are reporting companies under the Securities Exchange Act, of 1934, as amended. HB19-1090 titled, “Publicly Licensed Marijuana Companies” was signed into Colorado legislaturelaw on May 29, 2019 and will gowent into effect on November 1, 2019. The bill repeals the provision that prohibits publicly traded corporations from holding a marijuana license in Colorado.
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Effective January 10, 2019, the Company entered into binding term sheets to acquire three cannabis and cannabis related companies, including the following:
· | FutureVision 2020, LLC and |
· | MedPharm Holdings, |
· | MX LLC, the holder of the license that allow it to be a manufacturer of marijuana infused products in the Denver metro area. It also has a research license that has been issued by the state of Colorado and the local jurisdiction approval is in process. |
The term sheets provide for the issuance of shares of common stock to the targets at an initial price per share of $1.32, with the final price to be determined based on the fair market valuation, which is subject to an independent valuation assessment. OurThe Company’s former Chief Executive Officer, Andrew Williams, serves as an officer/manager and has an ownership interest in each of the targets above.
On May 24, 2019, the Company entered into a binding term sheet with Farm Boy, LLC (“Farm Boy”) and Baseball 18, LLC (“Baseball”) setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Farm Boy and Baseball, respectively. As consideration, the Company shall pay a total purchase price of $5,937,500, subject to adjustment, consisting of $1,187,500 cash and 1,578,073 shares of its common stock, par value $0.001 per share. The 1,578,073 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to the execution date, which equated to $3.01 per share.
On May 24, 2019, the Company entered into a binding term sheet with Los Suenos, LLC (“Los Suenos”) and Emerald Fields Grow, LLC (“Emerald”) setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Los Suenos and Emerald, respectively. As consideration, the Company shall pay a total purchase price of $5,937,500, subject to adjustment, consisting of $1,187,500 cash and 1,578,073 shares of its common stock, par value $0.001 per share. The 1,578,073 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to the execution date, which equated to $3.01 per share.
On May 31, 2019, the Company entered into a binding term sheet with Mesa Organics Ltd., Mesa Organics II Ltd. and Mesa Organics III Ltd. (collectively referred to herein as “MesaPur”) setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of MesaPur. As consideration, the Company shall pay a total purchase price of $12,012,758, subject to adjustment, consisting of $2,402,552 cash and 2,801,809 shares of its common stock, par value $0.001 per share. The 2,801,809 shares were determined by averaging the closing price of Company’s common stock for the ten (10) days prior to the execution date, which equated to $3.43 per share.
On June 6, 2019, the Company entered into a binding term sheet with the stockholders of Green Equity S.A.S. (“Green Equity”), a Republic of Colombia simplified stock corporation, setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Green Equity. Green Equity, a company based in Bogota, Colombia, holds all four licenses in Colombia allowing it to grow, process, retail and export. As consideration, the Company shall pay a total purchase price of $5,400,000 consisting of $450,000 cash and 1,292,428 shares of its common stock, par value $0.001 per share. The 1,292,428 shares were determined by using the closing price of Company’s common stock on the day prior to the execution date, which equated to $3.83 per share.
On August 6, 2019, the Company entered into a binding term sheet with Cold Baked, LLC and Golden Works, LLC (d/b/a “Dabble”) setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Dabble. As consideration, the Company shall pay a total purchase price of $3,750,000 consisting of $750,000 cash and 996,678 shares of its common stock, par value $0.001 per share. The 996,678 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to the execution date, which equated to $3.01 per share.
On August 15, 2019, the Company entered into a binding term sheet with Medically Correct, LLC (“Medically Correct”), an edible, extract and extracttopical company, setting forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Medically Correct. As consideration, the Company shall pay a total purchase price of $17,250,000 consisting of $3,450,000 cash and 4,677,967 shares of its common stock, par value $0.001 per share. The 4,677,967 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 8, 2019, which equated to $2.95 per share.2019.
On August 28, 2019, the Company entered into a binding term sheet with Starbuds Pueblo LLC, Starbuds Louisville LLC, Starbuds Niwot LLC, Starbuds Longmont LLC and Starbuds Commerce City, LLC (“Starbuds”) pursuant to which the Company will purchase the membership interests of Starbuds. As consideration, the Company shall pay a total purchase price of $31,005,089 consisting of $23,253,816 in cash and 2,601,098 shares of its common stock, par value $0.001 per share. The 2,601,098 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 28, 2019, which equated to $2.98 per share.
On August 29, 2019, the Company entered into a binding term sheet with High Country Supply d/b/a Colorado Harvest Company (“CHC”) pursuant to which the Company will purchase 100% of the capital stock or assets of CHC. As consideration, the Company shall pay a total purchase price of $12,500,000 consisting of $4,000,000 in cash and 2,881,356 shares of its common stock, par value $0.001 per share. The 2,881,356 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to July 8, 2019, which equated to $2.95 per share.
On August 30, 2019, the Company entered into a binding term sheet with Colorado Health Consultants, LLC, CitiMed, LLC, Lucky Ticket LLC and KEW LLC (collectively, the “Targets”) pursuant to which the Company will purchase the membership interests of the Targets. As consideration, the Company shall pay a total purchase price of $36,898,499 consisting of $27,673,874.25 in cash and 3,095,512 shares of its common stock, par value $0.001 per share. The 3,095,512 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 30, 2019, which equated to $2.98 per share.
On August 31, 2019, the Company entered into a binding term sheet with SB Aurora LLC, SB Arapahoe LLC, SB Alameda LLC, and SB 44th LLC (“SB”) pursuant to which the Company will purchase the membership interests of SB. As consideration, the Company shall pay a total purchase price of $50,096,413 consisting of $37,590,310 in cash and 4,202,720 shares of its common stock, par value $0.001 per share. The 4,202,720 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 31, 2019, which equated to $2.98 per share.
On September 5, 2019, the Company entered into a binding term sheet dated September 2, 2019 with RSFCG, LLC, RFSCA LLC, RFSCB, LLC, RFSCEV, LLC, RFSCED LLC, RFSCLV, LLC, RFSCG-1 LLC, and RFSCLVG LLC, which entities operate under the name RootsRXRoots RX (“RootsRX”Roots RX”) pursuant to which the Company will purchase the membership interests of RootsRX.Roots RX. As consideration, the Company shall pay a total purchase price of $15,000,000 consisting of $9,750,000 in cash and 1,779,661 shares of its common stock, par value $0.001 per share. The 1,779,661 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 29, 2019, which equated to $2.95 per share.
On September 6, 2019, the Company entered into a binding term sheet with Ahab, LLC, Garden Greens, LLC, Syls LLC, Heartland Industries, LLC and Tri City Partners LLC, which entities operate under the name “Strawberry Fields” (“Strawberry Fields”) pursuant to which the Company will purchase 100% of the capital stock or assets of Strawberry Fields, except for certain assets as outlined in the term sheet. As consideration, the Company shall pay a total purchase price of $31,000,000 consisting of $14,000,000 in cash and 5,704,698 shares of its common stock, par value $0.001 per share. The 5,704,698 shares were determined by averaging the closing price of Company’s common stock for the five (5) days prior to August 22, 2019, which equated to $2.98 per share.2019.
On September 9, 2019, the Company entered into a binding term sheet with Canyon, LLC (“Canyon”) and It Brand Enterprises, LLC (“It Brand”) pursuant to which the Company will purchase 100% of the capital stock or assets of Canyon and certain assets of It Brand. As consideration, the Company shall pay a total purchase price of $5,130,000 consisting of (i) a cash component which in no case will be greater than $2,565,000, and (ii) an equity component, which will consist of shares of the Company’s common stock, par value $0.001 per share, for the balance of the purchase price. The number of shares that make up the equity component will be determined by dividing the balance of the Purchase Price by the average closing price of Company’s common stock for the five (5) days prior to September 7, 2019.
Definitive Agreement to Acquire the Colorado-Based Star Buds Branded Dispensaries
On June 5, 2020, the Company and SBUD, LLC, a Colorado limited liability company and wholly owned subsidiary of the Company (the “Purchaser”) entered into thirteen separate purchase agreements (each individually the “CHC Agreement” the “Citi Agreement” the “Lucky Agreement” the “Kew Agreement” the “Aurora Agreement” the “Arapahoe Agreement” the “Alameda Agreement” the “44th Agreement” the “Pueblo Agreement” the “Louisville Agreement” the “Niwot Agreement” the “Longmont Agreement” and the “Commerce City Agreement,” and collectively the “Agreements”) together with each of Colorado Health Consultants, LLC, CitiMed, LLC, Lucky Ticket LLC, Kew LLC, SB Aurora LLC, SB Arapahoe LLC, SB Alameda LLC, SB 44th LLC, Star Buds Pueblo LLC, Star Buds Louisville LLC, Star Buds Niwot LLC, Star Buds Longmont LLC, and Star Buds Commerce City LLC (any one a “Star Buds Company” and collectively the “Star Buds Group”) whereby the Purchaser agreed to purchase substantially all of the assets of the Star Buds Group from each individual Star Buds Company pursuant to the Agreements (the “Purchase”). As previously disclosed in a Current Report on Form 8-K filed September 3, 2019, which equatedthe Company and the Star Buds Group entered into a binding term sheet whereby the Company agreed to $3.07 per share.purchase the membership interests of each member of each Star Buds Company (the “Proposed Transaction”); the Agreements were entered into in lieu of the Proposed Transaction.
The aggregate purchase price for the assets of the Star Buds Group is approximately $118 million, subject to adjustment upon the closing of the Purchase based on, among other things, the target inventory as opposed to actual inventory and target working capital as opposed to net working capital of each member of the Star Buds Group, and shall be payable to the Star Buds Group and the members a mix of cash and shares of the Company’s common stock, par value $0.001 per share (the “Purchase Price”). The Purchaser will not assume any liabilities of the Star Buds Group other than accounts payable by Star Buds Group, liabilities in respect of any contractual arrangements assigned to the Purchaser by the Star Buds Group, and liabilities in connection with administrative fees associated with obtaining necessary governmental approvals or waivers of such approvals. The Purchaser has also agreed to pay certain transfer taxes in connection with the Purchase. The closing of the Purchase is subject to customary closing terms and conditions, and the closing of the purchase of the assets by the Purchaser of any Star Buds Company is subject to additional closing conditions as set forth in the Agreements.
Prepaid acquisition costs
The Company has entered into a number of sales transactions with companies above for which it has executed binding term sheets to acquire. The Company expects to settle each of these outstanding balances with the respective entity at the time of, or shortly following, their acquisition.
The contemplated acquisitions detailed above are conditioned upon the satisfaction or mutual waiver of certain closing conditions, including, but not limited to:
· | regulatory approval relating to all applicable filings and expiration or early termination of any applicable waiting periods; | |
· | regulatory approval of the Marijuana Enforcement Division and applicable local licensing authority approval; | |
· | receipt of all material necessary, third party, consents and approvals; | |
· | each party's compliance in all material respects with the respective obligations under the term sheet; | |
· | a tax structure that is satisfactory to both the Company and the targets; | |
· | the execution of leases and employment agreements that are mutually acceptable to each party; and | |
· | the execution of definitive agreements between the respective parties. |
There can be no assurance that wethe Company will be able to consummate any of the proposed acquisitions.
Departure of Officers
On February 25, 2020, Andy Williams resigned from the positions of President and member of the Board of Directors of the Company. Mr. Williams’s resignation was not the result of any disagreement with the Company on any matter relating to the company’s operations, policies or practices. Simultaneously, the Company entered into a Severance Agreement and Release (the “Severance Agreement”) with Mr. Williams.
The Severance Agreement provides that as severance and in consideration of a customary release against the Company and other customary covenants, Mr. Williams will receive (i) continued salary in the amount of $300,000, half of which to be paid within ten days of the execution of the Severance Agreement, and the remaining half is to be paid in 26 equal disbursements in accordance with the Company’s regular payroll periods, (ii) bonus payment in the amount of $25,000, (iii) one year family health care coverage, (iv) stock options to purchase 350,000 shares of the Company’s common stock, which may be exercised on a cashless basis and which vest immediately on the date of termination at a price of $1.80 per share and valued at $582,228, and (v) stock options to purchase 15,000 shares of the Company’s common stock, which may be exercised on a cashless basis at a price of $1.80 per share, valued at $27,000, at the one year anniversary of the termination date if Mr. Williams is compliant with the terms of the Severance Agreement.
On June 19, 2020, the Company received the resignation of Robert DeGabrielle from the positions of Chief Operating Officer and member of the Board of Directors of the Company. Mr. DeGabrielle’s resignation was not the result of any disagreement with the Company on any matters relating to the Company’s operations, policies, or practices.
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12. | Stockholders’ Equity |
On December 10, 2019, the shareholders approved an amendment to the Company’s articles of incorporation increasing the number of authorized shares of common stock from 90,000,000 shares to 250,000,000 shares.
The Company is authorized to issue two classes of shares, designated preferred stock and common stock.
Preferred Stock
The number of shares of preferred stock authorized is 10,000,000, par value $0.001 per share. The preferred stock may be divided into such number of series as the Company’s Board of Directors may determine. The Board is authorized to determine and alter the rights, preferences, privileges and restrictions granted and imposed upon any wholly unissued series of preferred stock, and to fix the number and designation of shares of any series of preferred stock. The Board, within limits and restrictions stated in any resolution of the Board, originally fixing the number of shares constituting any series may increase or decrease, but not below the number of such series then outstanding, the shares of any subsequent series.
Common Stock
The Company is authorized to issue 90,000,000250,000,000 shares of common stock at a par value of $0.001 and had 39,369,51142,194,878 shares of common stock issued and 27,753,31041,937,146 shares of common stock outstanding as of June 30, 2020, and 39,952,628 shares of common stock issued and outstanding as of September 30, 2019, and December 31, 2018, respectively.
Common Stock Issued in Private Placements
During the nine months ended September 30, 2018, the Company sold 937,647 shares of common stock to an accredited investor in a private placement.
On June 5, 2019, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Investor”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Investor and the Investor agreed to purchase, in a private placement, up to 7,000,000 shares of the Company’s common stock, at a price of $2.00 per share and warrants to purchase 100% of the number of shares of common stock sold. The warrants are for a term of three years and are exercisable at a price of $3.50.
At the initial closing on June 5, 2019, the Company issued and sold 1,500,000 shares of common stock and warrants to purchase 1,500,000 shares of common stock, for gross proceeds of $3,000,000.
The Purchase Agreement contemplates the sale of additional shares of common stock, subject to certain closing conditions set forth in the Purchase Agreement, as follows: (i) 3,500,000 shares of common stock and warrants to purchase 3,500,000 shares of common stock at a second closing to be held on or before July 15, 2019; (ii) 1,000,000 shares of common stock and warrants to purchase 1,000,000 shares of common stock at a third closing; and (ii) 1,000,000 shares of common stock and warrants to purchase 1,000,000 shares of common stock at a fourth closing.
On July 15, 2019, the Company entered into an amendment (the “Amendment”) to the Purchase Agreement. Pursuant to the Amendment, among other things, the Purchase Agreement was amended to provide for the sale, at the third closing, of a minimum of 3,000,000 shares of the Company’s common stock, with the Investor having the option to acquire up to an additional 2,500,000 shares of common stock for an aggregate of up to 5,500,000 shares of common stock and warrants to purchase 100% of the number of shares of common stock sold at the third closing.
The Amendment also removed as a closing condition to the second closing, the requirement that the Company shall have entered into definitive agreements for the acquisitions of each of (a) MedPharm LLC, (b) Futurevision 2020, LLC, Futurevision Ltd, and Medicine Man Longmont, LLC, collectively, (c) MX, LLC, (d) Los Sueños Farms, LLC, and Emerald Fields Grow, LLC, (e) Farm Boy LLC and Baseball 18, LLC.
In addition, the Amendment removed all references to a fourth closing and the conditions for such closing, which were outlined in the Purchase Agreement.
On July 16, 2019, the Company issued and sold 3,500,000 shares of common stock and warrants to purchase 3,500,000 shares of common stock pursuant to the terms of the Purchase Agreement, as amended, for gross proceeds of $7,000,000.
On September 17, 2019, the Company issued and sold 3,000,000 shares of common stock and warrants to purchase 3,000,000 shares of common stock pursuant to the terms of the Purchase Agreement, as amended, for gross proceeds of $6,000,000.
On September 30, 2019, the Company issued and sold 1,100,000 shares of common stock and warrants to purchase 1,100,000 shares of common stock pursuant to the terms of the Purchase Agreement, as amended, for gross proceeds of $2,200,000.
During the nine months ended September 30, 2019, the Company issued an additional 700,000 shares of common stock and warrants to purchase 700,000 shares of common stock, for gross proceeds of $1,400,000.2019.
Common Stock Issued in Connection with the Exercise of Warrants
During the ninesix months ended SeptemberJune 30, 2019, the Company issued 452,426 shares of common stock for proceeds of $601,726$601,725 under a series of stock warrant exercises with an exercise price of $1.33 per share.
During the six months ended June 30, 2020, the Company issued 187,500 shares of common stock for proceeds of $375,000 under a series of stock warrant exercises with an exercise price of $2.00 per share.
Common Stock Issued as Compensation to Employees, Officers, Directors and DirectorsContractors
On January 8, 2019, the Company granted to an officer of the Company, Paul Dickman, 500,000 shares of common stock, valued at $660,000.
On March 14, 2019, the Company granted 50,000 shares of common stock to James Toreson upon his resignation as a member of its board of directors for his service. These shares were valued at $95,000.
During the nine months ended September 30, 2019, the Company issued an additional 640,000 shares of common stock valued at $1,969,900 to employees, officers and directors as compensation.
Common Stock Issued in Exchange for Consulting, Professional and Other Services
Concurrent with his resignation, as described above, the Company issued 50,000 shares of its common stock to Mr. Toreson in connection with a consulting agreement having a service period extending through May 31, 2020. These shares were valued at $95,000.
DuringOn April 3, 2020, the nine monthsCompany cancelled 500,000 shares of common stock, with vesting conditions represented as derivative instruments. These shares were incorrectly issued as restricted shares instead of restricted stock units to an officer of the Company, Paul Dickman, on January 8, 2019. The return of these shares had no impact on EPS for the quarter ended SeptemberJune 30, 2019,2020.
Common Stock Issued as Payment for Acquisition
On April 20, 2020, the Company issued an additional 123,7752,554,750 shares of common stock valued at $210,521 to contractors and professionals in exchange$4,167,253 for services provided.the acquisition of Mesa Organics, Ltd.
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Warrants
The Company accounts for common stock purchase warrants in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.Equity. The Company estimates the fair value of warrants at date of grant using the Black-Scholes option pricing model. There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants, and the assumptions used in the Black Scholes option-pricing model are moderately judgmental.
During the year ended December 31, 2017, the Company issued 1,500,566 common stock purchase warrants with an exercise price of $1.33 per share, expiring on March 17, 2019. During the nine months ended September 30, 2019, an aggregate of 452,426 of these warrants were exercised while the remaining warrants were forfeited.
During the period ended December 31, 2017, the Company issued 2,000,000 common stock purchase warrants to three employees of the Company with an exercise price of $1.445 per share, expiring on December 31, 2019. As of September 30, 2018, all of these warrants were exercised.
During the year ended December 31, 2018, the Company issued 250,000 common stock purchase warrants to one employee of the Company with an exercise price of $1.49 per share for a period of time expiring on December 31, 2021. The Company estimated the fair value of these warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $1.49, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate of 2.48% and (iv) an expected volatility of the price of the underlying common stock of 126%.
During the nine months ended September 30, 2019, the Company issued 9,800,000 common stock purchase warrants to various accredited investors with an exercise price of $3.50 per share with an expiration date of three years from the date of issuance. On May 20, 2020, the Company issued an additional 187,500 common stock purchase warrants with an exercise price of $3.50 per share with an expiration date of three years from the date of issuance. The Company estimated the fair value of these warrants at date of grant using the Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $3.50, (ii) the contractual term of the warrant of 3 years, (iii) a risk-free interest rate ranging between 1.56%0.21% - 1.84% and (iv) an expected volatility of the price of the underlying common stock ranging between 158% - 162%173%.
The following table reflects the change in common stock purchase warrants for the six months ended June 30, 2020. All stock warrants are exercisable for a period of three years from the date of issuance.
Number of shares | ||||
Balance as of January 1, | ||||
Warrants exercised | ||||
Warrants forfeited | ||||
Warrants issued | ||||
Balance as of |
Segment Information |
The Company has twothree identifiable segments as of SeptemberJune 30, 2019;2020; (i) products, (ii) consulting and licensing and consulting,(iii) corporate, infrastructure and (ii) products.other. The products segment sells merchandise directly to customers via e-commerce portals, through ourthe Company’s proprietary websites and retail location. The licensing and consulting segment sales derives its revenue from licensing and consulting agreements with cannabis related entities.entities, in addition to fees from seminars and expense reimbursements included in other revenue on the Company’s financial statements. The corporate, infrastructure and other segment represents new resources added in anticipation of various acquisition transactions and other corporate related costs.
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The following information represents segment activity for the nine-monththree-month periods ended SeptemberJune 30, 20192020 and 2018:June 30, 2019:
For the Nine Months Ended September 30, | For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 30-June-2020 | 30-June-2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Products | Licensing and Consulting | Total | Products | Licensing and Consulting | Total | Products | Consulting and Licensing | Corporate, Infrastructure and Other | Total | Products | Consulting and Licensing | Corporate, Infrastructure and Other | Total | |||||||||||||||||||||||||||||||||||||||||||
Revenues | $ | 7,441,031 | $ | 1,659,132 | $ | 9,100,163 | $ | 1,222,880 | $ | 6,078,363 | $ | 7,301,243 | $ | 4,838,654 | $ | 585,675 | $ | – | $ | 5,424,329 | $ | 1,301,735 | $ | 456,084 | $ | – | $ | 1,757,819 | ||||||||||||||||||||||||||||
Cost of goods and services | $ | (2,833,244 | ) | $ | (273,442 | ) | $ | – | $ | (3,106,686 | ) | $ | (319,229 | ) | $ | (767,184 | ) | $ | – | $ | (1,086,412 | ) | ||||||||||||||||||||||||||||||||||
Gross profit | $ | 2,005,410 | $ | 312,233 | $ | – | $ | 2,317,643 | $ | 982,506 | $ | (311,100 | ) | $ | – | $ | 671,406 | |||||||||||||||||||||||||||||||||||||||
Intangible assets amortization | $ | 4,757 | $ | 398 | $ | 5,154 | $ | 4,490 | $ | 396 | $ | 4,886 | $ | 1,514 | $ | 133 | $ | – | $ | 1,647 | $ | 1,597 | $ | 132 | $ | – | $ | 1,729 | ||||||||||||||||||||||||||||
Depreciation | $ | 5,100 | $ | 35,781 | $ | 40,881 | $ | 4,148 | $ | 52,127 | $ | 56,275 | $ | 79,809 | $ | 6,701 | $ | – | $ | 86,510 | $ | 1,700 | $ | 13,266 | $ | – | $ | 14,966 | ||||||||||||||||||||||||||||
Income (loss) from operations | $ | 2,074,799 | $ | (13,571,303 | ) | $ | (11,496,504 | ) | $ | 1,179,028 | $ | 1,362,456 | $ | 2,541,484 | $ | 925,258 | $ | 313,028 | $ | (7,833,993 | ) | $ | (6,595,707 | ) | $ | 237,239 | $ | (197,465 | ) | $ | (8,862,424 | ) | $ | (8,822,650 | ) | |||||||||||||||||||||
Segment assets | $ | 8,803,431 | $ | 27,115,471 | $ | 35,918,902 | $ | 4,577,175 | $ | 16,430,245 | $ | 21,007,420 | $ | 9,578,911 | $ | (6,240,425 | ) | $ | 2,645,188 | $ | 5,983,674 | $ | 222,826 | $ | (9,269,203 | ) | $ | 12,646,902 | $ | 3,600,525 |
The following information represents segment activity for the six-month periods ended June 30, 2020 and June 30, 2019:
For the Six Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
30-June-20 | 30-June-19 | |||||||||||||||||||||||||||||||
Products | License/Cons. | Corporate Infrastructure and Other | Total | Products | License/Cons. | Corporate Infrastructure and Other | Total | |||||||||||||||||||||||||
Revenues | 7,367,585 | 1,259,878 | – | 8,627,463 | 2,880,042 | 881,253 | – | 3,761,295 | ||||||||||||||||||||||||
COGS | (4,729,470 | ) | (525,751 | ) | – | (5,255,221 | ) | (1,729,670 | ) | (955,455 | ) | – | (2,685,125 | ) | ||||||||||||||||||
Gross profit | 2,638,115 | 734,127 | 3,372,242 | 1,150,372 | (74,202 | ) | – | 1,076,170 | ||||||||||||||||||||||||
Intangible assets amortization | 3,027 | 268 | – | 3,295 | 3,160 | 265 | – | 3,425 | ||||||||||||||||||||||||
Depreciation | 81,041 | 9,933 | – | 90,974 | 3,400 | 22,217 | – | 25,617 | ||||||||||||||||||||||||
Income (loss) from operations | 1,371,757 | 467,455 | (9,814,229 | ) | (7,975,017 | ) | 179,552 | (394,681 | ) | (11,519,339) | (11,734,468 | ) | ||||||||||||||||||||
Segment assets | 22,513,985 | 247,170 | 13,251,810 | 36,012,965 | 5,435,508 | 287,359 | 15,642,009 | 21,364,876 |
Tax Provision |
The company utilizes FASB ASC 740, “Income Taxes”Income Taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company generated a deferredrecorded no tax credit throughprovision as of June 30, 2020. As of June 30, 2020, the Company had federal, state and local net operating loss carry forwards.carryforwards of approximately $10.2 million that are available to offset future liabilities for income taxes. The Company had no tax provisions as of September 30, 2019has generally established a valuation allowance against these carryforwards based on an assessment that it is more likely than not that these benefits will not be realized in future years. The federal and December 31, 2018. The company had astate net operating loss during the quarter ended September 30, 2019, increased the net loss carryforward.carryforwards expire in 2039.
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Subsequent |
In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to SeptemberJune 30, 20192020 to the date these consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements, except as follows:
Termination of Proposed Acquisitions
On October 11, 2019,July 1, 2020, the Company terminated the binding term sheet between(the “Dabble Term Sheet”) with Cold Baked, LLC and Golden Works, LLC (d/b/a “Dabble”), each a Colorado limited liability company, which term sheet had set forth the stockholdersterms of Green Equity S.A.S. andthe acquisition by the Company expired.of 100% of the capital stock and assets of Dabble. The Company declined to exercise its option to extendDabble Term Sheet was previously described in the agreement. See Note 13 – CommitmentsCompany’s Current Report on Form 8-K filed on August 12, 2019, and Contingencies for more information.incorporated herein by reference.
On October 11, 2019,July 1, 2020, the Company issuedterminated the binding term sheet (the “Los Suenos Term Sheet”) with Los Suenos, LLC (“Los Suenos”) and Emerald Fields Grow, LLC (“Emerald”), each a promissory noteColorado limited liability company, which term sheet had set forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Los Suenos and Emerald, respectively. The Los Suenos Term Sheet was previously described in the Company’s Current Report on Form 8-K filed on June 6, 2019, and incorporated herein by reference.
On July 1, 2020, the Company terminated the binding term sheet (the “Farm Boy Term Sheet”) with Farm Boy, LLC (“Farm Boy”) and Baseball 18, LLC (“Baseball”), each a Colorado limited liability company, which term sheet had set forth the terms of the acquisition by the Company of 100% of the capital stock and assets of Farm Boy and Baseball, respectively. The Farm Boy Term Sheet was previously described in the Company’s Current Report on Form 8-K filed on June 6, 2019, and incorporated herein by reference.
On July 27, 2020, the Company received notice of termination from Medically Correct, LLC (“MC”) terminating the term sheet to acquire MC. The term sheet was previously described in the Company’s Current Report on Form 8-K filed on August 20, 2019, and incorporated herein by reference.
On August 14, 2020 the Company terminated the term sheet with FutureVision 2020, LLC and FutureVision Ltd., Inc. dba Medicine Man Denver (in the aggregate, “Medicine Man Denver”), owners of several licensed dispensaries and a cultivation facility in the Denver, Colorado metro area. But for $90,000 tothe termination on August 14, 2020, the Medicine Man Denver term sheet would have expired on August 31, 2020.
Note Receivable
On August 1, 2020, the Company entered into a Settlement Agreement and Mutual Release (“Settlement Agreement”) with MedPharm Holdings, LLC, a related party.Inc. The promissory note bearsParties agreed that the amount of the settlement is $767,695 in principal and $47,161 in accrued interest, at 8.0% and has a maturity date of Maythru July 31, 2020. The note mayCompany received a $100,000 payment from MedPharm, which was to be extended or renewedpaid by August 1, 2020. In addition to the immediate $100,000 principal payment, Andrew Williams, a member of the MedPharm Board of Directors, will deliver and transfer to Schwazze 175,000 shares of Schwazze common stock as equity consideration by August 15, 2020 at maturitya price of $1.90 per share. The remaining outstanding receivable will be paid out in bi-weekly installments of product by mutual agreement between the Company and noteholder, and with no evidence of default.scheduled deliveries through March 31, 2021.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in Management’s Discussion and Analysis or MD&A, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “could,” “would,” “should,“will be,” “expect,“will continue,” “intend,“will likely result,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking.and similar expressions. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in “Risk Factors” in our filings withAnnual Report on Form 10-K for the SEC. Except to the extent required by law, weYear Ended December 31, 2019. We undertake no obligation to publicly update or revise any forward-looking statements, whether becauseincluding any changes that might result from any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of new information, future events, a change in events, conditions, circumstancesactivity, performance or assumptions underlying such statements, or otherwise.achievements.
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 itstheir proprietary processes it hadthey 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. In addition, we operate a division that sells grower supplies and a plant nutrient product line.
Recent Developments
DuringIn 2019, due to the nine months ended September 30, 2019,changes in Colorado law permitting outside investment, we startedmade a strategic decision to move toward direct plant-touching operations. Following that decision by our transition from being primarily aexecutive leadership, we issued binding term sheets to several Colorado acquisition targets across the value chain. We believe that these targets are high quality, and our successful acquisition of these potential targets would allow us to become one of the largest vertically integrated seed-to-sale operators in the United States cannabis consultingindustry. These term sheets were announced in several Current Reports on Form 8-K during 2019. If successfully completed, the Company, post-transactions, will be able to offer retail, cultivation and productsextraction services. We believe that the current company to becoming a company that operates plant touching production, processing, research and retail operations. This transition into operations was facilitatedcombined with the passage ofacquisition targets in our Colorado House Bill 1090 signed by Governor Jared Polis on May 30, 2019. Over“roll-up” strategy will have the first two quarters of 2019, we investedpotential to create a significant amount of time, effort and resources into preparing for this transition.
Throughvertically integrated company, which would further enjoy a competitive advantage operating in the date of this filing, we have entered into binding terms sheetsColorado market against incumbent operators. In addition to acquire the cannabis research, production, processing and distributions of various entities thatcontemplated business-integration benefits, we believe once consummated,the sharing of best practices amongst the Company and the acquisition targets will generate material future revenuesallow for improved operations, revenue enhancements and increased profitability. Scale may also afford the Company.
The target entities combined have the capacityability to grow product over 1,275,680 square feet of cultivation including, 42,000 square feet of indoor cultivation; 14,000 square feet of greenhouse cultivation;create an integrated back office system, providing a differentiated technology backbone to support our operations and 1,219,680 square feet of outdoor cultivation. The target entities own retail branded products that are currently distributed in over 400 retail locations throughout the state of Colorado, including Alivar; Become; Batch; Purplebees;enhance our overall management and Dabble.
The acquisitions are subject to certain closing conditions including, but not limited to, compliance with all required regulatory requirements necessary to complete our acquisition of the target entities. We will continue to evaluate and negotiate additional acquisition opportunities in line with our growth strategy. operating capabilities. There can be no assurance that weany of the proposed acquisitions will be able to consummateconsummated.
On April 20, 2020 the announced proposedcompany completed its first acquisition of a Colorado plant touching entity, acquiring Mesa Organics LTD and its subsidiaries. These four entities include a Manufacturing Infusing Products. (MIP) facility and four dispensaries. All are located in Southeastern Colorado. These acquisitions or any future acquisitions that we target.are included in our Products segment reporting.
Results of Operations
Comparison of Results of Operations for the three months ended SeptemberJune 30, 20192020 and 20182019
During the three months ended SeptemberJune 30, 2019, we2020, the Company generated revenues of $5,338,869$5,424,329 including (i) product sales of $2,760,195,$4,838,654, (ii) consulting licensing and Cultivation Maxlicensing fees of $2,563,478, of which includes $1,782,457 in revenue awarded in litigation,$585,675, and (iii) other operating revenues of $15,195$0 as compared with the three months ended SeptemberJune 30, 2018,2019, where wethe Company generated revenues of $4,672,519$1,757,819 including (i) product sales of $382,846,$1,331,979, (ii) consulting licensing and Cultivation Maxlicensing fees of $4,259,439, of which includes $1,015,154 in revenue subsequently awarded in litigation,$422,596, and (iii) other operating revenues of $30,234.$3,244. Revenue for the three months ended SeptemberJune 30, 20192020 increased by $666,349,$3,666,510, or approximately 14.3%208.6%, over the three months ended SeptemberJune 30, 2018.2019. The three-month ended increase in revenue was primarily driven by the product sales acquired from Mesa and Mesa Organics DBA Purplebee’s (“Purplebee’s”) manufactured infused product facility (“MIP”).
Cost of goods and services, consisting of expenses related to delivery of services and product procurement, was $2,786,244$3,106,686 during the three months ended SeptemberJune 30, 2019,2020, compared to $459,280$1,086,413 during the comparable period in 2018.2019. This increase was due to increased sales of productproducts from historical business and increased salariesthe addition of the newly acquired dispensaries and related employment costs.MIP.
Operating expenses during the three months ended SeptemberJune 30, 2019,2020, were $3,478,232,$8,667,604, compared to operating expenses of $1,842,954$9,014,276 incurred during the three months ended SeptemberJune 30, 2018, an increase2019, a decrease of $1,635,278. This increase$346,672. The decrease during the three-month period ended June 30, 2020 was dueprimarily attributable to increased general and administrative expenses, professional fees, salaries and related employmentcorporate infrastructure costs and non-cash, stock-based compensation.compensation offset by the absence of derivative expense.
As a result, we generated a net loss of $1,827,978$6,595,707 during the three months ended SeptemberJune 30, 20192020 (or a loss of approximately $0.05$0.16 per share), compared to net incomeloss of $4,950,601$8,822,650 (or incomea loss of approximately $0.18$0.30 per share) during the three months ended SeptemberJune 30, 2018.2019.
Comparison of Results of Operations for the ninesix months ended SeptemberJune 30, 20192020 and 20182019
During the ninesix months ended SeptemberJune 30, 2019,2020, we generated revenues of $9,100,164$8,627,463 including (i) product sales of $5,636,475,$7,367,585, (ii) consulting licensing and Cultivation Maxlicensing fees of $3,439,743, of which includes $1,782,457 in revenue awarded in litigation,$1,246,932, and (iii) other operating revenues of $23,946$12,946 as compared with the ninesix months ended SeptemberJune 30, 2018,2019, where we generated revenues of $7,301,243$3,761,295 including (i) product sales of $1,222,880,$2,876,279, (ii) consulting licensing and Cultivation Maxlicensing fees of $5,987,727, of which includes $1,015,154 in revenue subsequently awarded in litigation,$876,265, and (iii) other operating revenues of $90,636.$8,751. Revenue for the ninesix months ended SeptemberJune 30, 20192020 increased by $1,798,921,$4,866,168, or approximately 24.6%129.4%, over the ninesix months ended SeptemberJune 30, 2018.2019. The six-month ended increase in revenue was primarily driven by the product sales acquired from Mesa and Purplebee’s MIP.
Cost of goods and services, consisting of expenses related to delivery of services and product procurement, was $5,471,369$5,255,221 during the ninesix months ended SeptemberJune 30, 2019,2020, compared to $1,213,194$2,685,125 during the comparable period in 2018.2019. This increase was due to increased sales of productproducts from historical business and increased salariesthe addition of the newly acquired dispensaries and related employment costs.MIP.
Operating expenses during the ninesix months ended SeptemberJune 30, 2019,2020, were $15,125,299,$13,833,278, compared to operating expenses of $3,546,565$11,647,067 incurred during the ninesix months ended SeptemberJune 30, 2018,2019, an increase of $11,578,734. This$2,186,211. The increase during the six-month period ended June 30, 2020 was dueprimarily attributable to increased general and administrative expenses, professional fees, salaries and related employmentcorporate infrastructure costs and non-cash, stock-based compensation.compensation offset by the absence of derivative expense.
As a result, we generated a net loss of $13,562,446$7,975,017 during the ninesix months ended SeptemberJune 30, 20192020 (or a loss of approximately $0.44$0.20 per share), compared to net incomeloss of $5,157,717$11,734,468 (or incomea loss of approximately $0.19$0.40 per share) during the ninesix months ended SeptemberJune 30, 2018.2019.
Liquidity and Capital Resources
At SeptemberComparison of the liquidity and capital resources at June 30, 2020 and June 30, 2019
The Company had $5,418,317 and $4,347,495 in cash on hand at June 30, 2020 and June 30, 2019, we had $15,204,587respectively. The $1,070,822 change in cash andon hand was due to the following cash equivalents on hand.flow activities.
Net cash used in operating activities was $4,679,562$4,054,088 during the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to net cash provided byused from operating activities of $4,083,893$733,348 for the similar period in 2018, a decrease2019, an increase of $8,763,454.$3,320,740.
Cash flows used for investing activities was $3,253,675 during the six-month period ended June 30, 2020, compared to cash used of $242,670 for the similar period in 2019. $2,609,500 of the cash was used in the acquisition of Mesa.
Cash flows from financing activities was $374,500 during the six-month period ended June 30, 2020, compared to $5,001,725 for the similar period in 2019. The Company received proceeds of $4,400,000 from the private sale of our common stock during the six months ended June 30, 2019. The Company received $375,000 in proceeds in connection with the exercise of common stock purchase warrants and stock and returned $500 in connection with cancellation of common stock during the six-month period ended June 30, 2020.
Comparison of the liquidity and capital resources at June 30, 2020 and December 31, 2019
The Company had $5,418,317 and $11,853,627 in cash on hand at June 30, 2020 and December 31, 2019, respectively. The $6,435,310 change in cash on hand was due to the following cash flow activities.
Net cash used in operating activities was $4,054,088 during the six-month period ended June 30, 2020, compared to cash used from operating activities of $7,553,965 during the year ended December 31, 2019, a decrease of $3,499,876.
Cash flows used for investing activities was $639,365$3,253,675 during the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to net cash used of $1,116,756 during the year ended December 31, 2019, an increase of $2,136,919. $2,609,500 of the cash was used in investing activitiesthe acquisition of $5,302,933 for the similar period in 2018.Mesa.
Net cash provided byCash flows from financing activities was $20,201,726$374,500 during the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to net cash provided by financing activities of $1,000,000$20,202,560 for the nine-monthyear ended December 31, 2019. The Company received $375,000 in proceeds in connection with the exercise of common stock purchase warrants and stock and returned $500 in connection with cancellation of common stock during the six-month period ended SeptemberJune 30, 2018. During the nine months ended September 30, 2019, the2020. The Company received proceeds of $19,600,000 from the private sale of our common stock as compared to $1,000,000 in proceeds from the private sale of our common stock during the nine monthsyear ended September 30, 2018. Additionally, the Company received $601,726 in proceeds in connection with the exercise of common stock purchase warrants during the nine-month period ended September 30,December 31, 2019.
The Company anticipates it will need additional funds for the Star Buds acquisition and working capital and are exploring capital raising transactions in the form of equity and debt. We do not expect to be cash flow positive duringbelieve we will close the fiscal year 2019 and extending intoStar Buds acquisitions in the last half of 2020. While no assurances can be provided,However, upon successfully completion of the Star Buds acquisitions, we believe we will generate positive cash flow from our operations, upon successfully consummating certain acquisitions and merging those operations into our own. If we are successful in achieving this objective, we do not believeexpect that we will not need to raise any additional capital as we anticipate thatto execute the ongoing business operations. This is because the revenue generated from the fully integrated acquisitions will be sufficient to allow us to implement ourthe current business plan. However, there can be no assurance that we will be able to successfully complete any of the contemplated acquisitions. Also, there can be no assurance that we will have sufficient funds to consummate the acquisitions.operations.
However, if we do not generate positive cash flow, or we do not experienceidentify an acquisition which we believe will significantly impact our business operations in a positive impact on our operations from acquisitions we may consummate,manner, or unforeseen developments occur, we may need to raise additional capital, in the form of either debt, equity or both. At this time, we are unable to state how much capital we maywill need. As of the date of this Report we have no commitment from any investor or investment-banking firm to provide us with any funding. Further, no assurancefunding and there can be given that any future financingno assurances we will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations,such funding in the casefuture. We have, and will continue to, explore sources of debt financing or cause substantial dilution forto fund our stockholders, in case of equity financing.business operations and acquisition strategy. Failure to obtain this additional financing may have a material negative impact on our ability to generate profits on a regular basis in the future.
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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 three-month period ended SeptemberJune 30, 2019.2020.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of SeptemberJune 30, 20192020 and December 31, 2018.2019.
Contractual Obligations
There were no substantial contractual obligations as of June 30, 2020 and December 31, 2019.
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 discussed in our Annual Report on Form 10-K for the year ended December 31, 20182019 in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Not applicable
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officerChief Executive Officer and interim chief financial officerChief Financial Officer concluded that our disclosure controls and procedures are 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 Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, or person performing similar functions, as 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 report that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Item 1.Legal ProceedingsProceedings.
On June 7, 2019, Medicine Man Technologies, Inc.we filed a complaint against ACC Industries Inc,Inc. and Building Management Company B, L.L.C., in Clark County, Nevada, for, amongst other causes of action, breach of contract. On July 17, 2019, the parties stipulated to stay the case in favor of arbitration. SinceOn February 25, 2020 ACC filed a counterclaim alleging breach of contract, which the Company believes is without merit. Arbitration has been set for November 2, 2020. Medicine Man Technologies discovered new facts that time,lead it to believe that a related entity not previously named as a party to the parties havearbitration should be brought in as a party to the arbitration. Based upon the new facts, MMT filed a motion to amend the complaint to add new claims and the related entity as a party. The hearing on the motion to amend is set for the week of August 10th after which MMT will file a motion to compel arbitration. The state court has been inmoving slowly such that the process of mutually agreeing upon an arbitrator, which has now completed. The parties are now in the process of scheduling the arbitration.arbitration may get pushed back a few months.
On July 6, 2018, we filed a complaint in the Eight Judicial Court, Clark County, Nevada against Vegas Valley Growers ("VVG"(“VVG”). Within the complaint, the Company alleges the breach by VVG of that certainthe Technologies License Agreement dated April 27, 2017 as entered into between the parties and seeks general, special and punitive damages in the amount of $3,876,850.
On August 28, 2018, VVG filed an Answer and Counterclaim against the Company.
On August 2, 2019, a jury found in favor of the Company and awarded the Company damages totaling $2,773,321. In March 2020, VVG filed its opening appeal brief. The Company’s response brief is due on May 15, 2020. After VVG filed its opening brief in March 2020, MMT filed a Motion to Strike portions of the brief and record. Because a successful ruling on the motion may strike portions of the brief or require VVG to refile it, MMT asked for an extension on the filing its answering brief until the court renders its decision, which VVG did not oppose. MMT will have 30 days to file its answering brief once the court enters an order on the Motion to Strike or 30 days from when VVG files an amended opening brief and record.
On March 6, 2020, the Company’s former Chief Operating Officer, Joe Puglise, issued an arbitration demand against the Company claiming breach of contract. While the Company believes it has meritorious defenses against the claim, the ultimate resolution of the matter, which is expected to occur within one year, could result in a loss of up to $3.5 million. The parties agreed to two of the three arbitrators. The third arbitrator, to be the decided on by the agreed upon arbitrators, has not yet been identified.
In addition to the risk factors identified below, also refer to the risk factors applicable to us identified in the Annual Report on Form 10-K for the period ended December 31, 2019 filed with the Securities and Exchange Commission on March 30, 2020.
Risks Related to Our Industry
Businesses involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.
Investments in the U.S. cannabis industry are subject to a variety of laws and regulations that involve money laundering, financial recordkeeping and proceeds of crime, including the BSA, as amended by the Patriot Act, other anti-money laundering laws, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States. In February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the Treasury Department issued a memorandum (the “FinCEN Memo”) providing guidance to banks seeking to provide services to cannabis-related businesses. The FinCEN Memo outlines circumstances under which banks may provide services to cannabis-related businesses without risking prosecution for violation of U.S. federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors relating to the prosecution of U.S. money laundering offenses predicated on cannabis-related violations of the federal Controlled Substances Act and outlines extensive due diligence and reporting requirements, which most banks have viewed as onerous. The FinCEN Memo currently remains in place, but it is unclear at this time whether the current administration will continue to follow the guidelines of the FinCEN Memo. Such requirements could negatively affect our ability and the ability of our clients to establish and maintain banking connections.
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We may be unable to protect our intellectual property rights.
Because the manufacture (growth), sale, possession and use of cannabis is illegal under federal law, cannabis-related businesses may have restricted intellectual property rights particularly with respect to obtaining trademarks and enforcing patents. If we are unable to register, or maintain, our trademarks or file for or enforce patents on any of our inventions, such an inability could materially affect our ability to protect our name and proprietary technologies. In addition, cannabis businesses may face court action by third parties under the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Our intellectual property rights could be impaired as a result of our cannabis-related business, and we could be named as a defendant in an action asserting a RICO violation.
We may be unable to seek the protection of the bankruptcy courts.
There is an argument that the federal bankruptcy courts cannot provide relief for parties who engage in cannabis or cannabis-related businesses. Recent bankruptcy rulings have denied bankruptcies for cannabis dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the federal Controlled Substances Act. Therefore, due to our cannabis-related business, we may not be able to seek the protection of the bankruptcy courts and this could materially affect our financial performance and/or our ability to obtain or maintain credit.
We are unable to deduct all of our business expenses.
Section 280E of the Internal Revenue Code prohibits cannabis businesses from deducting their ordinary and necessary business expenses, forcing us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a cannabis business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our cannabis business may be less profitable than it could otherwise be.
Risks Related to our Common Stock
The market price for our Common Stock will be particularly volatile given our status as a relatively unknown company, with a limited operating history and lack of profits which could lead to wide fluctuations in our share price. You may be unable to sell your Common Stock at or above your purchase price, which may result in substantial losses to you.
While there is a market for our Common Stock, our price volatility in the future will be particularly volatile when compared to the shares of larger, more established companies that trade on a national securities exchange and have large public floats. The volatility in our share price will be attributable to a number of factors. First, our Common Stock will be, compared to the shares of such larger, more established companies, sporadically and thinly traded. As a smaller reporting company,consequence of this limited liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could decline precipitously in the event that a large number of shares of our Common Stock are sold on the market without commensurate demand. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that trades on a national securities exchange and has a large public float. Many of these factors are beyond our control and may decrease the market price of our Common Stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our Common Stock will be at any time.
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Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock, which could depress the price of our Common Stock.
FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not requiredbe suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to providerecommend that their customers buy our Common Stock, which may limit your ability to buy and sell our shares of Common Stock, have an adverse effect on the information required by this Item.market for our shares of Common Stock, and thereby depress the price per share of Common Stock.
Our future results may vary significantly which may adversely affect the price of our Common Stock.
It is possible that our quarterly revenues and operating results may vary significantly in the future and that period-to-period comparisons of our revenues and operating results are not necessarily meaningful indicators of the future. You should not rely on the results of one quarter as an indication of our future performance. It is also possible that in some future quarters, our revenues and operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our Common Stock may decline significantly.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2019, we sold 7,600,000 shares of our Common Stock with warrants to purchase 7,600,000 shares of common stock at an exercise price of $3.50 to accredited investors in a private placement for proceeds of $15,200,000.
The Company relied upon an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated under the Securities Act of 1934, as amended, in connection with the foregoing issuances.None.
Item 3.Defaults upon Senior Securities
None.
Not applicable.
On October 11, 2019,August 14, 2020 the bindingCompany terminated the term sheet betweenwith FutureVision 2020, LLC and FutureVision Ltd., Inc. dba Medicine Man Denver (in the stockholdersaggregate, “Medicine Man Denver”), owners of Green Equity S.A.S.several licensed dispensaries and a cultivation facility in the Company, by its terms, expired. The Company declined to exercise its option to extendDenver, Colorado metro area. But for the termination on August 14, 2020, the Medicine Man Denver term sheet.sheet would have expired on August 31, 2020.
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31.1 * | Rule 13a-14(a)/15d-14(a) Certification of | ||
31.2 * | Rule 13a-14(a)/15d-14(a) Certification of | ||
101.INS | XBRL Instance | ||
101.SCH | XBRL Schema | ||
101.CAL | XBRL Calculation Linkbase | ||
101.DEF | XBRL Definition Linkbase | ||
101.LAB | XBRL Label Linkbase | ||
101.PRE | XBRL Presentation Linkbase | ||
Document |
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* | Filed herewith. |
** | Furnished herewith. |
* 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.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunder duly authorized.
Dated: | MEDICINE MAN TECHNOLOGIES, INC. |
By: /s/ | |
(Principal Executive Officer) | |
By: /s/ | |
(Principal Financial and Accounting Officer) |
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