NOTES TO THE FINANCIAL STATEMENTS
Organization and Nature of Operations
Business Description –
Business Activity
Medicine Man Technologies Inc. (the “Company”)
incorporated in Nevada on March 20, 2014. On May 1, 2014, the Company 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 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 generates revenues from consulting activities for prospective clients interested in entering the cannabis
industry as well as sponsoring seminars offered to the cannabis industry and other business endeavors related to our core competencies.
1.
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Liquidity and Capital Resources
|
During the fiscal year ended December 31,
2019 and 2018, the Company primarily used revenues from its operation supplemented by cash to fund its operations.
Cash and cash equivalents are carried at
cost or amortized 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 $11,853,627 and $321,788
classified as cash and cash equivalents as of December 31, 2019, and December 31, 2018, respectively.
The
Company maintains its cash balances with a high-credit-quality financial institution. At times, such cash may be more than the
insured limit of $250,000. The Company has not experienced any losses in such accounts, and management believes the Company is
not exposed to any significant credit risk on its cash and cash equivalents.
To mitigate credit risk, the Company may
purchase highly liquid investments with an original maturity of three months or less. At December 31, 2019, the Company had one
United States Treasury Bill with a maturity date of January 14, 2020 and bearing interest at a rate of approximately 1.4%.
The following table depicts the composition
of the Company’s cash and cash equivalents as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Deposits placed with banks
|
|
$
|
736,101
|
|
|
$
|
321,788
|
|
United States Treasury Bill
|
|
|
11,117,526
|
|
|
|
–
|
|
Total cash and cash equivalents
|
|
$
|
11,853,627
|
|
|
$
|
321,788
|
|
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 (“U.S. GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual 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 year amounts have been reclassified
to conform to the current year presentation. These reclassifications had no impact on the Company’s net (loss) 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 the year, using Level 3 inputs.
The following is the Company’s assets
and liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 2019 and 2018, using quoted prices
in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs
(Level 3):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Level 1 – Marketable Securities Available-for-Sale –
Recurring
|
|
$
|
406,774
|
|
|
$
|
2,199,344
|
|
Marketable Securities at Fair Value
on a Recurring Basis
Certain assets are measured at fair value
on a recurring basis. The Level 1 position consists of an investment in equity securities held in Canada House Wellness Group,
Inc. (CHV), a publicly-traded company whose securities are actively quoted on the Toronto Stock Exchange.
Fair Value of Financial Instruments
The carrying amounts of cash and current
assets and liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect these estimates. Available-for-sale securities are recorded at current market
value as of the date of this report.
Accounts Receivable
The Company extends unsecured credit to
its customers in the ordinary course of business. Accounts receivable related to consulting revenues are recorded when a milestone
is reached at point in time resulting in funds being due for delivered services, and where payment is reasonably assured. Accounts
receivable related to Cultivation Max revenues are recorded based on cultivation yields over time on harvested cannabis. Consulting
and Cultivation Max 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 December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts receivable – trade
|
|
$
|
384,202
|
|
|
$
|
1,180,757
|
|
Accounts receivable – related party
|
|
|
72,658
|
|
|
|
125,112
|
|
Accounts receivable – litigation, non-current
|
|
|
3,063,968
|
|
|
|
1,281,511
|
|
Allowance for doubtful accounts
|
|
|
(70,885
|
)
|
|
|
–
|
|
Total accounts receivable
|
|
$
|
3,449,943
|
|
|
$
|
2,587,380
|
|
The Company establishes an allowance for
doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment
is required in assessing the amount of the allowance. The Company makes judgments about the creditworthiness of each customer based
on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future.
If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance
will be required. At December 31, 2019 and 2018, the Company recorded an allowance for doubtful accounts of $70,885 and $0, respectively.
Recovery of bad debt amounts previously
written off is recorded as a reduction of bad debt expense in the period the payment is collected. If the Company’s actual
collection experience changes, revisions to its allowance may be required. After all attempts to collect a receivable have failed,
the receivable is written off against the allowance. The Company wrote-off $80,284 of its accounts receivable during the
year ended December 31, 2019. The Company did not write-off any of its accounts receivable in year ended December 31, 2018.
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 the Purchaser $24,107 weekly for
an estimated term of eight months. On July 2, 2019, the Company repaid $436,607, which represented all remaining amounts owed
under the Factoring Agreement. The Company recorded $192,107 in interest expense related to the Factoring Agreement during
the year ended December 31, 2019.
In July 2018, the Company commenced legal
action against a customer in Clark County, Nevada 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. The Company provided services to this customer for a period of thirteen months, agreeing conditionally
to three modifications in December 2017, March 2018 and May 2018 to forego certain revenue sharing payments in accordance with
the agreement with the customer, which were subsequently breached by the customer. As a result, 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. Considering this customer’s appeal, the Company sought to compel the customer
to obtain and produce a bond securing the award. On December 13, 2019, proof of the bond was posted through United States Fire
Insurance Company, naming the Company as the obligee.
At December 31, 2019 and 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 years ended December 31, 2019 and 2018, respectively.
The Company analyzed the contract, associated
revenue and litigation process under Accounting Standards Codification (“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:
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·
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The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
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The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
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·
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The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
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Paragraph 606-10-25 further states that
the process for determining the proper treatment for a contract modification includes three steps:
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·
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Determine whether a change to a contract qualifies as a contract modification.
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·
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Determine whether the modification should be treated as a separate, standalone contract or as a modification of the original contract. If the contract is a separate contract, the entity follows the five-step model to determine how to recognize revenue. If the modification is not treated as a separate contract, the entity continues to Step 3.
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·
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Determine appropriate accounting treatment for contract modification not accounted for as a separate contract.
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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.
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 December
31, 2019 and 2018, the accounts receivable for this matter totaled $290,647.
Notes Receivable
In July 2016, the Company executed a non-binding
Term Sheet to acquire Capital G Ltd, an Ohio limited liability company and its three wholly owned subsidiary companies, Funk Sac
LLC, Commodogy LLC, and OdorNo LLC. The agreement was subject to the Company’s due diligence as well as execution of definitive
agreements. In January 2017, the parties agreed not to proceed with this transaction. As part of the term sheet, the Company agreed
to loan Capital G the principal balance of $250,000 pursuant to the terms of a convertible note which accrues interest at the rate
of 12% per annum and which became due November 1, 2017. As of September 30, 2018, this note has not been repaid when it became
due. As of December 31, 2018, the Company has written off 100%, or $250,000, of this balance plus accrued interest of $49,018.
Due to this bad debt expense not being a part of the Company’s normal business this expense is categorized in other income
and expense on the income statement.
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 36 months and bears interest at a rate of 2%. As of December 31, 2019 and 2018, the Company
had loaned to AMC a total of $241,711 and $92,888, respectively. The Company classified these loans as long-term notes receivable
on its consolidated balance sheets as of December 31, 2019 and 2018.
Other Assets (Current and Non-Current)
Other assets at December 31, 2019 and 2018
were $529,416 and $50,824, respectively.
At December 31, 2019, other assets included
$480,881 in prepaid expenses, $21,085 in interest receivable and $27,450 in security deposits. Prepaid expenses were primarily
comprised of insurance premiums, membership dues, conferences and seminars and other general and administrative costs.
At December 31, 2018, other assets included
$29,005 in prepaid expenses and $21,819 in security deposits.
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 at the end of each calendar 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, 2019 on its reporting units and subsidiary with material goodwill and intangible asset amounts
on their respective balance sheets and determined that no impairment exists.
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. Long-lived
asset are 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 at December 31, 2019 on its reporting units and subsidiary with material amounts on their respective balance
sheets and determined that no impairment exists.
Accounts Payable
Accounts payable at December 31, 2019 and
2018 were $699,961 and $202,515, 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 December 31, 2019 and 2018 were $1,091,204 and $291,084, respectively.
At December 31, 2019, accrued expenses
and other liabilities was comprised of customer deposits of $148,109, accrued payroll of $714,220, and operating expenses of $228,875.
At December 31, 2018, accrued expenses
and other liabilities was comprised of $163,568 in customer deposits, $21,330 in deferred rent expense and $106,185 in accrued
payroll.
Revenue Recognition and Related Allowances
The Company’s revenue recognition
policy is significant because the amount and timing of revenue is a key component of its results of operations. Certain criteria
are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until
the criteria are met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded.
Revenue contracts are identified when accepted from customers and represent a single performance obligation to sell the Company’s
products to a customer.
The Company has three main revenue streams:
(i) product sales; (ii) licensing, consulting and Cultivation Max fees; and (iii) other operating revenues from seminars, reimbursements
and other miscellaneous sources.
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,
the Company considers several indicators, including significant risks and rewards of products, its right to payment, and the legal
title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered
to customers.
Revenue from licensing, consulting and
Cultivation Max fees are 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.
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.
Intellectual Property Licensing
Agreement with ABBA Medix Corp.
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
CHV.
The license agreement granted AMC the right
to use products and processes related to high-efficiency cultivation of cannabis, as well as various inventions, ideas, discoveries,
algorithms, designs, hardware, prototypes, copyrights, processes, mask works, trade secrets, know-how, calculations, testing results,
technical data, documentation, potential customer contracts, marketing ideas and other technology in the cannabis cultivation industry,
in addition to all related trademarks, from the Company. The license was granted as of the effective date of the agreement for
an 18-month period and shall automatically renew for successive 18-month periods until the agreement is otherwise terminated.
As consideration for granting the license
to AMC, the Company received the following:
|
·
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$3,500,000 in shares of CHV common stock; and
|
|
·
|
Ongoing licensing fees calculated as a percentage of AMC’s sales revenue directly related to the Company’s intellectual property.
|
ASC 606 provides guidance in determining
the proper accounting treatment for the license of the intellectual property requiring the Company had to complete a sequence of
analyses. These analyses include the following: (i) sale versus licensing transactions; (ii) distinct performance obligations;
(iii) the nature of the license; and (iv) the timing of recognition based on the nature of the license. Based on an analysis of
ASC 606, the Company determined the following:
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·
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The license agreement establishes AMC’s right to use the intellectual property; it does not transfer any of the Company’s ownership in the assets. Therefore, the agreement is clearly identified as a licensing transaction.
|
|
·
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The license agreement grants AMC the right to use the intellectual property immediately and does provide for the transfer of any other goods or services to AMC. The property is capable of being distinct, and the promise to transfer the property is distinct within the context of the contract. The Company recognized its license as distinct and a separate performance obligation.
|
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·
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The intellectual property is functional intellectual property as it has significant standalone functionality. The license agreement with AMC grants them with the exclusive right to use the Company’s intellectual property immediately upon the date of the agreement. This date clearly represents a transfer of control to the customer. Further, upon its effectiveness, the Company established the right to payment and the customer accepted the asset. As control has been transferred to the customer, the Company has satisfied its performance obligation and, as such, is entitled to immediately recognize the $4,650,000 in revenue associated with the granting of the licensing rights.
|
Additionally, under the terms of the agreement,
the Company agreed to provide a loan facility to AMC under the following terms:
The Licensor (the Company) shall provide
a lending facility to the Licensee (AMC) in $125,000 increments of up to $500,000; noting that any increment over the initial
$250,000 advanced shall only be funded upon the Licensee’s funding of the second $575,000 amount to the Licensor. Such lending
facilities shall bear a nominal interest rate and carry terms as agreed to by both parties. Both parties agree that each of the
Licensor’s advances shall be first money in and first money to be repaid in accordance with the terms mutually agreed to.
The purpose of this lending facility was
to provide financing support to AMC, the licensee of the Company’s intellectual property, for investing in capital expenses
that would allow them to generate revenue that would result in a royalty being paid to Medicine Man Technologies, Inc. The Company
is entitled to receive 4% of the gross revenues associated with the sale of Success Nutrients by AMC over the term of the agreement.
The Company considered the guidance under ASC 606 in determining whether the facility had any impact on the Company’s ability
to recognize revenue from the licensing agreement. Based upon the Company’s analysis, the Company determined the business
purpose of the financing facility that it provided to AMCwas a separate agreement with distinct responsibilities from the Company’s
performance obligations under the intellectual property license agreement. The Company considered the scope exceptions highlighted
in 606-10-15-2(c) and determined that ASC 825, Financial Instruments more appropriately applied. The amount of revenue of
$4,650,000 that the Company recognized was not reduced by the amount of the $500,000 facility, which the Company determined is
a standalone contract with commercial substance and collectability. As of December 31, 2018, the Company recorded a trade accounts
receivable on its balance sheet due from AMC of $250,000.
On July 31, 2018, the license agreement
was amended solely to eliminate the equal $1,000,000 million-dollar stock swap element. Based upon the Company’s analysis
of ASC 606-10-25-13, the Company determined the modification represented the elimination of a stock swap between the Company and
its customer’s parent company, CHV. While the consideration had a defined value, the result of the modification does not
beneficially or negatively impact either the Company or its customer. The Company determined that the remaining goods or services
as of the time of the modification are not distinct and, form part of a single performance obligation that was partially, if not
fully, satisfied. As the consideration represented an exchange of equal value between the two parties, the Company did not record
any revenue adjustments (either as an increase or a reduction) due to the elimination of the stock swap.
Cultivation Max fees
On August 6, 2018, the Company entered
into an agreement with a client that was comprised of two basic elements:
Element One: The Company was hired
to act as project management due to the Company’s industry knowledge to help a client prepare to cultivate their crop. The
Company completed all of its work to get them growing by December 31, 2018. This element of the Company’s contract called
for simply charging an agreed upon fee for services performed. All fees were considered fully earned and were billed and collected
in 2018.
Element Two: The second part of
the agreement called for the Company to receive a bonus equal to “25% of the value of the product grown over 2 pounds
per light” for the next 5 years. “2 pounds per light” is a marijuana industry standard meaning that if the
crop yield was above that standard, it would indicate that due to the Company’s expertise that the client crop was “above
standard”. Under that clause, the Company would be sharing in the extra profit if it was achieved, because the expert advice
provided by the Company would enable the client to generate a significant level of profit above industry standard. On December
14, 2018, the Company entered into an amendment to amend the terms of the August 6, 2018 license agreement:
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·
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The term for receiving 25% of the value grown over 2 pounds per light, was reduced from five years to three years
|
|
·
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The 25% level was reduced to 5%
|
|
·
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In return, the Company received a $1,000,000 fee which it billed in 2018 and collected in full in January 2019. Specifically, the wording in the addendum stated, “The aforementioned fee of $1,000,000 shall be deemed earned by the Licensor (Medicine Man) upon the execution of this Addendum and shall be payable before January 15, 2019”. The Company met all contractual terms prior to December 31, 2018 and has no ongoing contractual responsibility to provide consulting services in order to earn this fee. The client limited their exposure for potentially higher future payments by agreeing to a one-time payment of $1,000,000.
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The amendment also provided that the client
will reimburse the Company up to $11,000 a month for the cost of its employees if they are needed at the client’s locations.
The Company considered this a pass-thru item where no profit was recognized. Under the guidelines of ASC 606-10-25-27, 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:
|
a.
|
The customer simultaneously receives and consumes the benefits provided by the entity’s performance
as the entity performs (see paragraphs 606-10-55-5 through 55-6).
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|
b.
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The entity’s performance creates or enhances an asset (for example, work in process) that
the customer controls as the asset is created or enhanced (see paragraph 606-10-55-7).
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c.
|
The entity’s performance does not create an asset with an alternative use to the entity (see
paragraph 606-10-25-28), and the entity has an enforceable right to payment for performance completed to date (see paragraph 606-10-25-29).
|
As a result of the contractual consulting
services the Company provided for Element One, control of the services has been transferred to the customer. These services enhanced
the client’s crop output capabilities and clearly meet criteria (a) and (b) above, and, therefore were recorded as revenue
in 2018.
With respect to Element Two in terms of
considering the revenue method of recognition under ASC 606, the following characteristics of the transaction were considered:
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·
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The Company had no further performance obligations
|
|
·
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The customer contractually deemed this fee as earned
|
|
·
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The future potential value of the reduction from 25% over five years, to 5% over three years, is an asset that legally passed to the client.
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|
·
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The customer paid the fee
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Based on the analysis performed, the Company
determined “control” at a point in time, transferred immediately to the client upon the signing of the amendment. As
a result, the Company recorded a trade receivable of $1,000,000 on its balance sheet as of December 31, 2018 and $1,000,000 of
revenue in its statement of operations for the year ended December 31, 2018. This $1,000,000 receivable was fully received in January
of 2019.
The Company notes no change in the pattern
of revenue recognition due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers. The Company believes that the revenue recognition related
to our licensing, consulting and product sales are consistent with our current practice.
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 Company’s products and services.
General and Administrative Expenses
General and administrative expense are
comprised of all expenses not linked to the production or advertising of the Company’s products or services.
Advertising and Marketing Costs
Advertising and marketing costs are expensed
as incurred and totaled $455,047 and $291,711 for years ended December 31, 2019 and 2018, respectively.
Stock-Based Compensation
The Company accounts for share-based payments
pursuant to ASC 718, Stock Compensation and, accordingly, the Company records compensation expense for share-based awards
based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option pricing
model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and Emerging Issues Task Force (“EITF”)
96-18 when stock or options are awarded for previous or current service without further recourse.
Share-based expense paid to through direct
stock grants is expensed as occurred. Since the Company’s stock is publicly traded, the value is determined based on the
number of shares issued and the over-the-counter quoted value of the stock on the date of the transaction.
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 ASU, most of
the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.
Previously, share-based payment arrangements to nonemployees were accounted for under ASC 718, while nonemployee share-based payments
issued for goods and services were accounted for under ASC 505-50. Before the amendment, the major difference for the Company (but
not limited to) was the determination of measurement date, which generally is the date on which the measurement of equity classified
share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified
nonemployee share-based payment awards are no longer measured at the earlier of the date which a commitment for performance by
the counterparty is reached or the date at which the counterparty’s performance is complete. They are now measured at the
grant date of the award, which is the same as share-based payments for employees. The Company adopted the requirements of the new
rule as of January 1, 2019, the effective date of the new guidance.
The Company recognized $7,279,363 and $1,457,250
in expense for stock-based compensation to directors, employees and consultants during the years ended December 31, 2019 and 2018,
respectively.
Income Taxes
ASC 740, Income Taxes requires the
use of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC 740, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets 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.
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’ 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.
3.
|
Recent Accounting Pronouncements
|
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations except
as noted below:
FASB ASU 2017-01, Clarifying the Definition
of a Business (Topic 805) – In January 2017, the FASB issued 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 the Company’s consolidated
results of operations, cash flows and financial position.
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.
Fixed assets are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Furniture and fixtures
|
|
$
|
98,903
|
|
|
$
|
98,395
|
|
Leasehold improvements
|
|
|
40,953
|
|
|
|
36,900
|
|
Vehicles
|
|
|
34,000
|
|
|
|
34,000
|
|
Office equipment
|
|
|
33,833
|
|
|
|
74,360
|
|
Work in process
|
|
|
190,743
|
|
|
|
–
|
|
|
|
|
398,432
|
|
|
|
243,655
|
|
Less: accumulated depreciation
|
|
|
(159,354
|
)
|
|
|
(149,015
|
)
|
Total property and equipment, net of depreciation
|
|
$
|
239,078
|
|
|
$
|
94,640
|
|
Depreciation on fixed assets is recorded
on a straight-line basis over the following expected useful:
Furniture and fixtures
|
|
|
3 years
|
|
Marketing display
|
|
|
3 years
|
|
Vehicles
|
|
|
3 years
|
|
Office equipment
|
|
|
3 years
|
|
Depreciation expense for the years ended
December 31, 2019 and 2018 was $55,800 and $75,446, respectively.
Intangible assets
at December 31, 2019 and 2018 were comprised of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
License agreement
|
|
$
|
5,300
|
|
|
$
|
5,300
|
|
Product license and registration
|
|
|
57,300
|
|
|
|
57,300
|
|
Trade secret – intellectual property
|
|
|
32,500
|
|
|
|
32,500
|
|
|
|
|
95,100
|
|
|
|
95,100
|
|
Less: accumulated amortization
|
|
|
(19,811
|
)
|
|
|
(13,903
|
)
|
Total intangible assets, net of amortization
|
|
$
|
75,289
|
|
|
$
|
81,197
|
|
Amortization expense for years ended December
31, 2019 and 2018 was $5,908 and $6,515, respectively.
6.
|
Derivative Liabilities
|
During the year ended December 31, 2019,
the Company entered into employment agreements with certain key officers that contained contingent consideration provisions based
upon the achievement of certain market condition milestones. The Company determined that each of these vesting conditions represented
derivative instruments.
On January 8, 2019, the Company granted
the right to receive 500,000 shares of restricted common stock to an officer, which will vest at such time that that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
On April 23, 2019, the Company granted
the right to receive 1,000,000 shares of restricted common stock to an officer, which will vest at such time that that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds. Similarly, on June 11,
2019, the Company granted the right to receive 1,000,000 shares of restricted common stock to an officer, which will vest at such
time that that the Company’s stock price appreciates to $8.00 per share with defined minimum average daily trading volume
thresholds.
The Company accounts for derivative instruments
in accordance with the U.S. GAAP accounting guidance under ASC 815 Derivatives and Hedging Activities. The Company estimated
the fair value of these derivatives at the respective balance sheet dates using the Black-Scholes option pricing model based upon
the following inputs: (i) stock price on the date of grant ranging between $1.32 - $3.75, (ii) the contractual term of the derivative
instrument ranging between 2.25 - 3 years, (iii) a risk-free interest rate ranging between 1.56% - 2.57% and (iv) an expected
volatility of the price of the underlying common stock ranging between 136% - 158%.
As of December 31, 2019, the fair value
of these derivative liabilities is $3,773,382. The change in the fair value of derivative liabilities for the year ended December
31, 2019 was $1,627,177, resulting in an aggregate unrealized gain on derivative liabilities.
7.
|
Related Party Transactions
|
For the year ended December 31, 2019
During the year ended December 31, 2019,
the Company had sales from Super Farm LLC (“Super Farm”) totaling $578,655 and sales from De Best Inc. (“De Best”)
totaling $191,915. The Company gives a larger discount on nutrient sales to related parties than non-related parties. During the
year ended December 31, 2019, the Company had sales discounts associated with Super Farm totaling $291,823 and sales discounts
associated with De Best totaling $95,957. As of December 31, 2019, the Company had an accounts receivable balance from Super Farm
totaling $33,127 and an accounts receivable balance from De Best totaling $2,180. The Company’s Chief Cultivation Officer,
Joshua Haupt, currently owns 20% of both Super Farm and De Best.
During the year ended December 31, 2019,
the Company recorded sales from Medicine Man Denver totaling $402,839 and sales discounts totaling $143,473. As of December 31,
2019, the Company had an accounts receivable balance with Medicine Man Denver totaling $34,748. Also, during the year ended December
31, 2019, the Company incurred expenses from Medicine Man Denver totaling $125,897 for contract labor and other related administrative
costs. The Company’s former Chief Executive Officer, Andy Williams, currently owns 38% of Medicine Man Denver.
During the year ended December 31, 2019,
the Company recorded sales from MedPharm Holdings LLC (“MedPharm Holdings”) totaling $64,378 and sales discounts totaling
$7,498. As of December 31, 2019, the Company had an accounts receivable balance with MedPharm Holdings totaling $2,604. Also, during
the year ended December 31, 2019, the Company issued various notes receivable to MedPharm Holdings totaling $767,695 with original
maturity dates ranging from September 21, 2019 through January 19, 2020 and all bearing interest at 8% per annum. Certain notes
extended to 2020 by mutual agreement between the Company and noteholder. The Company’s former Chief Executive Officer, Andy
Williams, currently owns 29% of MedPharm Holdings.
During the year ended December 31, 2019,
the Company recorded sales from Baseball 18, LLC (“Baseball”) totaling $165,617. The revenue is included under product
sales - related party, net, in the Company’s consolidated financial statements. As of December 31, 2019, the Company had
an accounts receivable balance with Baseball totaling $169,960. During the year ended December 31, 2019, the Company recorded sales
from Farm Boy, LLC (“Farm Boy”) totaling $321,307. The revenue is included under product sales - related party, net,
in the Company’s consolidated financial statements. As of December 31, 2019, the Company had an accounts receivable balance
with Farm Boy totaling $330,911.
For the year ended December 31, 2018
As of December 31, 2018, the Company had
six related parties, Brett Roper, Medicine Man Denver, MedPharm Holdings, MedPharm Iowa, Super Farm LLC and De Best Inc. The Company’s
Chief Cultivation Officer, Joshua Haupt, currently owns 20% of both Super Farm and De Best. Additionally, the Company’s former
Chief Executive Officer, Andy Williams, currently owns 38% of Medicine Man Denver. Andy Williams also owns 10% of MedPharm Holdings
and 3% of MedPharm Iowa. Brett Roper was the Chief Executive Officer of the Company before Andy Williams.
During the year ended December 31, 2018,
the Company had net sales from Super Farm totaling $264,103 and $88,063 in net sales from De Best. The Company gives a larger discount
on nutrient sales to related parties than non-related parties. As of December 31, 2018, the Company had accounts receivable balance
with Super Farm totaling $61,110 and $20,503 accounts receivable from De Best. As of December 31, 2018, the company had an accounts
payable balance to Brett Roper in the amount of $69,714.
As of and for the year ended December 31,
2018, the Company had sales from Medicine Man Denver totaling $158,805 and an accounts receivable balance of $28,893. As of December
31, 2018, the Company had an accounts receivable balance owed from Medicine Man Denver totaling $2,986. During the year ended December
31, 2018, the Company had sales from MedPharm Iowa totaling $10,026 and $34,438 in sales from MedPharm Holdings. As of December
31, 2018, the Company had an accounts receivable balance owed from MedPharm Iowa totaling $1,195 and $10,425 owed from MedPharm
Holdings.
8.
|
Goodwill and Acquisition Accounting
|
On September 17, 2018, of the Company
acquired Two JS LLC, d/b/a The Big Tomato, a Colorado limited liability company (“Big T” or “The Big Tomato”).
The Company issued an aggregate of 1,933,329 shares of its common stock in exchange for a 100% ownership of Big T. The Company
utilized purchase price accounting stating that net 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 of Goodwill. At September 17, 2018, the
Company’s per share value of Common Stock was $1.55. There was no requirement for The Big Tomato to have independent audited
financial statement for the prior two fiscal years and any interim periods because the aggregate value of the acquisition is less
than 20% of the Company’s current assets.
The 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
|
|
|
|
|
|
As of December 31, 2019, the Company’s
Goodwill has a balance of $12,304,306. This amount consisted of $3,003,226 from the DCG (Denver Consulting Group) acquisition,
$6,301,080 from the Success Nutrients and Pono Productions acquisitions and $3,000,000 from the acquisition of The Big Tomato.
As of December 31, 2019, the Company had an independent third-party valuation group perform an impairment analysis on our consolidated
goodwill balance. It was noted that as of December 31, 2019, no impairment was needed.
As of December 31, 2019 and December 31,
2018, the Company had $684,940 and $489,239 of finished goods inventory, respectively. The Company only has finished goods within
inventory because it does not produce any of its products. All inventory is produced by a third party. The inventory valuation
method that the Company uses is the FIFO method. During the years ended December 31, 2019 and 2018, the Company did not recognize
any impairment for obsolescence within its inventory.
The Company had a note payable to its
Chief Cultivation Officer, Joshua Haupt. The note was repaid in full during the quarter ended March 31, 2018.
Leases with an initial term of one year
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
by recording an ROU operating lease asset and a lease liability, initially measured at the present value of the lease payments.
Lease costs are recognized in the income statement over the lease term on a straight-line basis. ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease.
The Company's leases consist of real estate
leases for office, retail and warehouse spaces. The Company elected to combine the lease and related non-lease components for
its operating leases.
The Company’s operating leases may
include options to extend or terminate the leases, which are not included in the determination of the ROU asset or lease liability
unless it is reasonably certain to be exercised. The Company's operating leases have remaining lease terms of less than one year.
The Company’s lease agreements do not contain any material residual value guarantees or materially restrictive covenants.
As the Company's leases do not provide
an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement
date in determining the present value of lease payments. The discount rate used in the computations was 6%.
Balance Sheet Classification of Operating Lease Assets
and Liabilities
|
|
Balance Sheet Line
|
|
December 31, 2019
|
|
Asset
|
|
|
|
|
|
|
Operating lease asset
|
|
Non-Current Assets
|
|
$
|
59,943
|
|
Liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Non-Current Liabilities
|
|
$
|
66,803
|
|
Lease Costs
The table below summarizes the components of lease costs for
the year ended December 31, 2019.
|
|
Year Ended
December 31, 2019
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
227,115
|
|
Maturities of Lease Liabilities
Maturities of lease liabilities as of December
31, 2019 are as follows:
2020 fiscal year
|
|
$
|
67,904
|
|
Total lease payments
|
|
|
67,904
|
|
Less: Interest
|
|
|
(1,101
|
)
|
Present value of lease liabilities
|
|
$
|
66,803
|
|
The following table presents the Company’s future minimum
lease obligation under ASC 840 as of December 31, 2019:
2020 fiscal year
|
|
$
|
67,904
|
|
12.
|
Commitments and Contingencies
|
Over the past three years, the
Company has supported legislation in Colorado to allow licensed cannabis companies in Colorado to trade their securities, provided
they are reporting companies under the Exchange Act, as amended. HB19-1090 titled, “Publicly Licensed Marijuana Companies”
was signed into Colorado legislature on May 29, 2019 and went into effect on November 1, 2019. The bill repeals the provision
that prohibits publicly traded corporations from holding a marijuana license in Colorado.
Effective January 10, 2019, the Company
entered into binding term sheets to acquire three cannabis and cannabis related companies, including the following:
|
·
|
FutureVision 2020, LLC and FutureVision Ltd., Inc. dba Medicine
Man Denver (in the aggregate, “Medicine Man Denver”), owners of several licensed dispensaries and a cultivation facility
in the Denver, Colorado metro area. It is also a leading cultivator, retailer and one of the best-known brands in the cannabis sector,
winning over a dozen industry awards. Medicine Man Denver operates out of a 35,000 square foot cultivation operation and has four
popular retail locations across the Denver metropolitan area;
|
|
·
|
MedPharm Holdings, a company that develops and manages intellectual property related to the manufacture and formulation of products containing cannabinoid extracts. Management believes that this acquisition will bring world-class processing and pharmaceutical-grade products to the company; and
|
|
·
|
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. The 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 and 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.
Also, on May 24, 2019, the Company entered
into a binding term sheet with Los Suenos, LLC (“Los Suenos”) and 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.
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.
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.
On August 15, 2019, the Company entered
into a binding term sheet with Medically Correct, LLC (“Medically Correct”), an edible, extract and topical 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.
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.
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.
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.
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.
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 Roots RX (“Roots RX”) pursuant to which the Company
will purchase the membership interests of 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.
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.
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.
Prepaid acquisition costs
During the year ended December 31, 2019,
the Company 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 we will
be able to consummate any of the proposed acquisitions.
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 number of shares of common stock authorized
is 250,000,000, par value $0.001 per share. At December 31, 2019 and 2018, the Company had 39,952,628 and 27,753,310 shares of
common stock, respectively, issued and outstanding.
Common Stock Issued in Private Placements
During the year ended December 31, 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 Holdings, (b) Futurevision 2020, LLC, Futurevision Ltd, and Medicine Man
Longmont, LLC, collectively, (c) MX, LLC, (d) Los Sueños Farms, LLC, and Emerald, and (e) Farm Boy and Baseball.
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 year ended December 31, 2019,
the Company issued an additional 700,000 shares of common stock and warrants to purchase 700,000 shares of common stock, for gross
proceeds of $1,400,000.
Common Stock Issued in Connection
with the Exercise of Warrants
During the year ended December 31, 2019,
the Company issued 485,543 shares of common stock for proceeds of $602,560 under a series of stock warrant exercises with an exercise
price of $1.33 per share.
Common Stock Issued as Compensation
to Employees, Officers and Directors
During the year ended December 31, 2018,
the Company granted 800,000 shares of common stock to certain employees, officers and/or directors, valued at $1,457,250.
On January 8, 2019, the Company granted
to an officer of the Company, Paul Dickman, 1,000,000 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 year ended December 31, 2019,
the Company issued an additional 690,000 shares of common stock valued at $2,161,880 to employees, officers and directors as compensation.
Common Stock Issued in Exchange for
Consulting, Professional and Other Services
Concurrent with his resignation as described
above, the Company issued 50,000 shares of its common stock to Mr. Toreson in connection with a consulting agreement having a service
period extending through May 31, 2020. These shares were valued at $95,000.
During the year ended December 31, 2019,
the Company issued an additional 123,775 shares of common stock valued at $210,521 to contractors and professionals in exchange
for services provided.
Warrants
The Company accounts for common stock purchase
warrants in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock, Distinguishing Liabilities from Equity. The Company estimates the fair value of warrants at date of
grant using the Black-Scholes option pricing model. There is a moderate degree of subjectivity involved when using option pricing
models to estimate the warrants, and the assumptions used in the Black Scholes option-pricing model are moderately judgmental.
During the year ended December 31, 2017,
the Company issued 1,500,566 common stock purchase warrants with an exercise price of $1.33 per share, expiring on March 17, 2019.
During the year ended December 31, 2019, an aggregate of 485,543 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 year ended December 31, 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. 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% - 1.84% and
(iv) an expected volatility of the price of the underlying common stock ranging between 158% - 162%.
|
|
Number of shares
|
|
|
|
|
|
Balance as of January 1, 2019
|
|
|
2,647,461
|
|
Warrants exercised
|
|
|
(485,543
|
)
|
Warrants forfeited
|
|
|
(2,161,918
|
)
|
Warrants issued
|
|
|
9,800,000
|
|
Balance as of December 31, 2019
|
|
|
9,800,000
|
|
The Company utilizes ASC 740, Income
Taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based
on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established if it is more likely than not that some portion or all of the deferred tax asset will not
be realized. The Company generated a deferred tax credit through net operating loss carry forwards.
The following table sets forth the components
of income tax (benefit) expense for the years ended December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(477,625
|
)
|
|
$
|
477,625
|
|
State and local
|
|
|
(105,305
|
)
|
|
|
105,305
|
|
Total
|
|
$
|
(582,931
|
)
|
|
$
|
582,931
|
|
The following table sets forth a reconciliation
of income tax expense (benefit) at the federal statutory rate to recorded income tax expense (benefit) for the years ended December
31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Federal taxes at U.S. statutory rate
|
|
|
21.0%
|
|
|
|
21.0%
|
|
State income taxes
|
|
|
4.6%
|
|
|
|
4.6%
|
|
Permanent and temporary differences
|
|
|
(15.5%
|
)
|
|
|
27.5%
|
|
Change in valuation allowance
|
|
|
(6.8%
|
)
|
|
|
(15.1%
|
)
|
Effective tax rate
|
|
|
3.3%
|
|
|
|
38.1%
|
|
The following tables set forth the components
of income taxes payable as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Federal
|
|
$
|
–
|
|
|
$
|
477,625
|
|
State and local
|
|
|
–
|
|
|
|
105,305
|
|
Total
|
|
$
|
–
|
|
|
$
|
582,931
|
|
The following tables set forth the components
of deferred income taxes as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
$
|
18,168
|
|
|
|
–
|
|
Accrued expenses
|
|
|
38,413
|
|
|
|
–
|
|
Share based compensation accruals
|
|
|
3,528,726
|
|
|
|
373,493
|
|
Net operating loss carryforwards
|
|
|
1,703,425
|
|
|
|
–
|
|
Unrealized losses
|
|
|
578,201
|
|
|
|
118,766
|
|
Total deferred tax assets
|
|
|
5,866,934
|
|
|
|
492,259
|
|
Less: valuation allowance
|
|
|
(5,598,511
|
)
|
|
|
(492,259
|
)
|
Net deferred tax assets
|
|
$
|
268,423
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
121,777
|
|
|
|
7,434
|
|
Fixed assets
|
|
|
12,388
|
|
|
|
24,256
|
|
Goodwill and intangible assets
|
|
|
636,188
|
|
|
|
174,173
|
|
Unrealized gains
|
|
|
417,046
|
|
|
|
–
|
|
Total deferred tax liabilities
|
|
|
1,187,399
|
|
|
|
205,863
|
|
Less: valuation allowance
|
|
|
(1,187,399
|
)
|
|
|
(205,863
|
)
|
Net deferred tax liabilities
|
|
$
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
$
|
268,423
|
|
|
|
–
|
|
On
December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“TCJA”), which instituted fundamental changes
to the taxation of corporations, including a reduction the U.S. corporate income tax rate to 21% beginning in 2018.
As of December 31, 2019, the Company had
federal, state and local net operating loss carryforwards of approximately $6.6 million that are available to offset future liabilities
for income taxes. The Company has 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 state net operating loss
carryforwards expire in 2039.
The Company remains subject to examination
in federal and state jurisdictions in which the Company conducts its operations and files tax returns. These tax years range from
2015 through 2019. The Company believes that the results of current or any prospective audits will not have a material effect
on its financial position or results of operations as adequate reserves have been provided to cover any potential exposures related
to these ongoing audits.
The Company has made its assessment of
the level of tax authority for each tax position (including the potential application of interest and penalties) based on the technical
merits and determined that no unrecognized tax benefits associated with the tax positions exist.
15.
|
Major Customers and Accounts Receivable
|
The Company had certain customers whose
revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually
represented 10% or more of the Company’s total accounts receivable.
For the year ended December 31, 2019, one
customer accounted for 14% of revenue. As of December 31, 2019, two customers accounted for 68% of accounts receivable, one with
57% and another with 11%.
For the year ended December 31, 2018,
two customers accounted for 48% of revenue, one with 37% and another with 11%. As of December 31, 2018, three customers accounted
for 88% of accounts receivable, one with 11%, one with 38% and another with 39%. The Company is currently pursuing litigation
against two of these customers to receive contractual amounts owed. See “Part II, Item 1, Legal Proceedings” for further
explanation.
The Company has three identifiable segments
as of December 31, 2019; (i) products, (ii) licensing and consulting and (iii) corporate, infrastructure and other. The products
segment sells merchandise directly to customers via e-commerce portals, through the 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. The corporate, infrastructure and other segment represents new resources added in anticipation of various acquisition
transactions and other corporate related costs.
The following information represents segment
activity for the years ended December 31, 2019 and 2018:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Products
|
|
|
Licensing and Consulting
|
|
|
|
Corporate, Infrastructure and Other
|
|
|
Total
|
|
|
Products
|
|
|
Licensing and Consulting
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,820,518
|
|
|
$
|
4,580,436
|
|
|
$
|
–
|
|
|
$
|
12,400,955
|
|
|
$
|
2,031,603
|
|
|
$
|
7,410,952
|
|
|
$
|
9,442,555
|
|
Intangible assets amortization
|
|
$
|
5,465
|
|
|
$
|
443
|
|
|
$
|
–
|
|
|
$
|
5,908
|
|
|
$
|
5,987
|
|
|
$
|
528
|
|
|
$
|
6,515
|
|
Depreciation
|
|
$
|
7,186
|
|
|
$
|
48,614
|
|
|
$
|
–
|
|
|
$
|
55,800
|
|
|
$
|
5,848
|
|
|
$
|
69,598
|
|
|
$
|
75,446
|
|
Net income (loss)
|
|
$
|
794,747
|
|
|
$
|
1,688,147
|
|
|
$
|
(19,458,635
|
)
|
|
$
|
(16,975,742
|
)
|
|
$
|
878,067
|
|
|
$
|
70,848
|
|
|
$
|
948,915
|
|
Segment assets
|
|
$
|
12,406,230
|
|
|
$
|
6,081,485
|
|
|
$
|
13,740,892
|
|
|
$
|
32,228,607
|
|
|
$
|
5,631,127
|
|
|
$
|
12,590,478
|
|
|
$
|
18,221,605
|
|
17.
|
Earnings per share (Basic and Dilutive)
|
The Company computes net (loss) income
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 2,215,500 vested stock options and 9,800,000
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.
The following is a reconciliation of the
numerator and denominator used in the basic and diluted EPS calculations for the years ended December 31, 2019 and 2018.
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(16,975,742
|
)
|
|
$
|
948,915
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock
|
|
|
33,740,557
|
|
|
|
25,121,896
|
|
Dilutive effect of warrants
|
|
|
–
|
|
|
|
2,647,461
|
|
Diluted weighted-average shares of common stock
|
|
|
33,740,557
|
|
|
|
27,769,357
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.50
|
)
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
(0.50
|
)
|
|
$
|
0.03
|
|
Dilutive-potential common share equivalents
are excluded from the computation of net loss per share in loss periods, as their effect would be antidilutive. As the Company
has incurred a loss from operations in 2019, shares issuable pursuant to equity awards were excluded from the computation of diluted
net loss per share in the accompanying consolidated statements of operations, as their effect is anti-dilutive.
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to December 31, 2019 to the date these consolidated financial statements
were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial
statements, except as follows:
On February 25, 2020, Andy Williams resigned from the positions
of President and member of the Board of Directors of Medicine Man Technologies, Inc. Mr. Williams’s resignation is 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 Agreements 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 is 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 (v) stock options to purchase 15,000
shares of the Company’s common stock, which may be exercised on a cashless basis.
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.