| Critical Accounting Policies and Estimates | 2. Critical Accounting Policies and Estimates Basis of Presentation These accompanying financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission for financial statements. Reclassifications Certain prior period amounts have been
reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial
position. Fair Value Measurements Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value
hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows: Level 1 – Quoted
prices in active markets for identical assets or liabilities. Level 2 – Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the
assets or liabilities. The Company’s financial instruments
include cash, accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial
instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates
fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to
us. The Company’s derivative liability was adjusted to fair market value at the end of each reporting period, using Level
3 inputs. The following is the Company’s assets
and liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2019 and December 31, 2018, using quoted
prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable
inputs (Level 3):
June 30, 2019 December 31, 2018
Level 3 – Non-Marketable Securities – Non-recurring $ 1,482,614 $ 2,199,344
Non-Marketable Securities at Fair
Value on a Nonrecurring Basis Certain assets are measured at fair value
on a nonrecurring basis. The level 3 position consist of investments accounted for under the cost method. The Level 3 position
consists of investments in equity securities held in private companies. Use of Estimates The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due
to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that
differ from these estimates. Accounts Receivable The Company extends unsecured credit to
its customers in the ordinary course of business. Accounts receivable related to licensing and consulting revenues are recorded
at the time the milestone result in the funds being due being achieved, services are delivered, and payment is reasonably assured.
Licensing and consulting revenues are generally collected from 30 to 60 days after the invoice is sent. The following table depicts the composition
of our accounts receivable as of June 30, 2019, and December 31, 2018:
June 30, 2019 December 31, 2018
Accounts receivable – trade $ 470,584 $ 1,180,757
Accounts receivable – related party 59,322 125,112
Accounts receivable – litigation 1,281,511 1,281,511
Total accounts receivable $ 1,811,417 $ 2,587,380 The Company commenced legal action against
a customer for breach of contract, adding a significant value into its receivables for fees that had been booked due to forbearance
grants by the Company that were subsequently violated, causing the Company to increase its receivables accordingly. At June 30,
2019 and December 31, 2018, the accounts receivable for this matter totaled $1,281,511, and the revenue earned, all during the
year ended December 31, 2018, was $1,518,099. Further, the Company provided services to this Client for a period of thirteen months,
agreeing conditionally to three modifications in December of 2017, March of 2018, and May of 2018 to forego certain revenue sharing
payments in accordance with the agreement with the Client, which the Client subsequently violated. In July 2018, the Company engaged
legal counsel in Clark County Nevada to pursue the default and collect the payments due the Company pursuant to the terms of the
agreement with the Client. (See Note 17 – Subsequent Events and Part II, Item 1, Legal Proceedings for more information). On March 22, 2019, the Company entered
into an Agreement of Sale of Future Receipts (“Factoring Agreement”) with Libertas Funding, LLC (“Purchaser”).
Under the terms of the Factoring Agreement, the Purchaser acquired $810,000 of certain future receivables from the Company for
$582,000 in net proceeds. The Company is required to repay Purchaser $24,107 weekly for an estimated term of eight months. The Company commenced legal action against
a customer for breach of contract, adding a significant value into its receivables for fees that had been booked due to forbearance
grants by the Company that were subsequently violated, causing the Company to increase its receivables accordingly. At June 30,
2019 and December 31, 2018, the accounts receivable for this matter totaled $1,281,511, and the revenue earned, all during the
year ended December 31, 2018, was $1,518,099. Further, the Company provided services to this Client for a period of thirteen months,
agreeing conditionally to three modifications in December of 2017, March of 2018, and May of 2018 to forego certain revenue sharing
payments in accordance with the agreement with the Client, which the Client subsequently violated. In July 2018, the Company engaged
legal counsel in Clark County Nevada to pursue the default and collect the payments due the Company pursuant to the terms of the
agreement with the Client. (See Note 17 – Subsequent Events and Part II, Item 1, Legal Proceedings for more information). On March 22, 2019, the Company entered
into an Agreement of Sale of Future Receipts (“Factoring Agreement”) with Libertas Funding, LLC (“Purchaser”).
Under the terms of the Factoring Agreement, the Purchaser acquired $810,000 of certain future receivables from the Company for
$582,000 in net proceeds. The Company is required to repay Purchaser $24,107 weekly for an estimated term of eight months. Due to the low volume of write offs, the
Company uses the direct write off method versus having an allowance for uncollectible debts. The Company did not write off any
of its accounts receivable in either of the six-month periods ending June 30, 2019 or 2018. Notes Receivable On July 17, 2018, the Company entered into
an intellectual property license agreement with Abba Medix Corp. (AMC), a wholly-owned subsidiary of publicly-traded Canada House
Wellness Group, Inc. (CHV). The Company agreed to provide a lending facility to AMC in CAD$125,000 increments of up to CAD$500,000.
The lending facilities shall bear an initial interest rate at 5.50% (representing United States Prime) and carry a term of 24 months,
unless otherwise amended by both parties. As of June 30, 2019 and December 31, 2018,
the Company loaned to AMC a total of $237,246 and $92,888, respectively. The Company classified these loans as long-term notes
receivable on its consolidated balance sheets as of June 30, 2019, and December 31, 2018, respectively. Other Assets (Current and Non-Current) Other assets at June 30, 2019, and December
31, 2018 were $200,103 and $50,824, respectively and as of June 30, 2019 this balance included $180,653 in prepaid expenses and
$19,450 in two security deposits. Accounts Payable In June 2019, the Company requested an
early payoff amount to repay all amounts outstanding under the Factoring Agreement (see Note 2 – Critical Accounting Policies
and Estimates, Accounts Receivable) prior to the conclusion of its term. As of June 30, 2019, a balance of $436,607 remained unpaid
and was included in the Company’s accounts payable. The Company recorded $192,277 in interest expense related to the Factoring
Agreement during the six months ended June 30, 2019. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities
at June 30, 2019, and December 31, 2018 were $563,582 and $291,084, respectively. At June 30, 2019, this was comprised of customer
deposits of $163,568, accrued payroll of $122,706, and operating expenses of $277,308. At December 31, 2018, this was comprised
of $163,568 in customer deposits, $21,330 in deferred rent expense and $106,185 in accrued payroll. Fair Value of Financial Instruments The carrying amounts of cash and current
assets and liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect these estimates. Available for sale securities are recorded at current market
value as of the date of this report. Revenue Recognition and Related Allowances Our revenue recognition policy is significant
because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met
in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration
is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified
when accepted from customers and represent a single performance obligation to sell our products to a customer. The Company has five main revenue streams,
product sales, licensing and consulting, cultivation max, reimbursements, investment and others. Revenue from cultivation max, licensing
and consulting services is recognized when the obligations to the client are fulfilled which is determined when milestones in the
contract are achieved. Product Sales are recorded at the time
that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers,
we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title
of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers. Revenue from seminar fees is related to
one-day seminars and is recognized as earned upon the completion of the seminar. The Company also recognizes expense reimbursement
from clients as revenue for expenses incurred during certain jobs. Product Sales are recorded at the time
that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers,
we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title
of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers. Costs of Goods and Services Sold Costs of goods and services sold are comprised
of related expenses incurred while supporting the implementation and sales of the Company’s products and services. General and Administrative Expenses General and administrative expense are
comprised of all expenses not linked to the production or advertising of the Company’s services. Advertising and Marketing Costs Advertising and marketing costs are expensed
as incurred and totaled $73,088 and $128,489 for the three and six months ended June 30, 2019, respectively, as compared to $28,396
and $77,540, respectively, for the three and six months ended June 30, 2018. Stock Based Compensation The Company accounts for share-based payments
pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company records compensation expense for share-based
awards based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option
pricing model. Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and EITF 96-18 when stock or options are
awarded for previous or current service without further recourse. The Company issued stock options to contractors and external
companies that had been providing services to the Company upon their termination of services. Under ASC 718 and EITF 96-18 these
options were recognized as expense in the period issued because they were given as a form of payment for services already rendered
with no recourse. Share based expense paid to through direct
stock grants is expensed as occurred. Since the Company’s stock has become publicly traded, the value is determined based
on the number of shares issued and the trading value of the stock on the date of the transaction. Prior to the Company’s
stock being traded the Company used the most recent valuation. The Company recognized $2,225,406 in expenses for stock-based compensation
to employees and consultants during both the three and six months ended June 30, 2019. The Company did not recognize any such expenses
during either the three or six months ended June 30, 2018. Income Taxes The Company has adopted SFAS No. 109 –
“Accounting for Income Taxes”. ASC Topic 740 requires the use of the asset and liability method of accounting for income
taxes. Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management Fee Contracts In February 2017, the Company entered
into a Merger Agreement with Pono Publications Ltd. (“Pono”), as well as a Share Exchange Agreement with Success Nutrients,
Inc. (“SN”), each a Colorado corporation, in order to facilitate the acquisition of both of these entities. The ratification
of the acquisition of these companies required the approval of the holders of a majority of the Company’s shareholders,
which was submitted for such approval at the Company’s annual shareholder meeting held on May 2017. The relevant agreements
provide that the effective date for accounting purposes would be April 1, 2017. Success Nutrients became a wholly owned subsidiary
of Medicine Man Technologies, Inc. and the business conducted by Pono was incorporated into a newly formed wholly owned subsidiary,
Medicine Man Consulting, Inc., which is also where the Company continues to conduct its consulting service business. |
