UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ________________ to ________________.
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
None |
| None |
| None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer ☐ | Accelerated Filer ☐ |
| Smaller reporting company | |
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 31, 2022, the Registrant had
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 | |
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2
CAUTIONARY NOTE ABOUT FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” “become,” “develop,” “build,” or the negative of these terms or other words of similar meaning in connection with a discussion of future events or future operating or financial performance, although the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are based upon our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual events or our actual results, performance or achievements to be materially different from the future events, results, performance or achievements expressed or implied by any forward-looking statements. There can be no assurance that future events, results, performance or achievements will be in accordance with our expectations or that the effect of future events, results, performance or achievements will be those anticipated by us.
Factors and risks that may cause or contribute to actual events, results, performance or achievements differing from these forward-looking statements include, but are not limited to, for example:
● | regulatory limitations on our products and services; |
● | our ability to identify, consummate, and integrate anticipated acquisitions; |
● | general industry and economic conditions; |
● | our ability to access adequate capital upon terms and conditions that are acceptable to us; |
● | our ability to pay interest and principal on outstanding debt when due; |
● | volatility in credit and market conditions; and |
● | other risks and uncertainties related to the cannabis market and our business strategy. |
We operate in very competitive and rapidly changing markets. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this Quarterly Report on Form 10-Q are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved.
These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Considering these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place
3
undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether because of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
4
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | ||||||
2022 | 2021 | ||||||
| (Unaudited) |
| (Audited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, net of allowance for doubtful accounts |
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Inventory |
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Note receivable - current, net |
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| — | |||
Marketable securities, net of unrealized loss of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Non-current assets |
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Fixed assets, net accumulated depreciation of $ |
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Goodwill |
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Intangible assets, net accumulated amortization of $ |
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Note receivable – noncurrent, net |
| — |
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Accounts receivable – litigation |
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Other noncurrent assets |
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Operating lease right of use assets |
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Total non-current assets |
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Total assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS' DEFICIT |
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Current liabilities |
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Accounts payable | $ | | $ | | |||
Accounts payable - related party |
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Accrued expenses |
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Derivative liabilities |
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Notes payable - related party |
| — |
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Lease liabilities - current |
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| — | |||
Current portion of long term debt | | — | |||||
Income taxes payable |
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Total current liabilities |
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Long term debt, net of debt discount and issuance costs |
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Lease liabilities |
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Total long-term liabilities |
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Total liabilities | | | |||||
Stockholders' equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
| ( | |||
Common stock held in treasury, at cost, |
| ( |
| ( | |||
Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | | $ | |
See accompanying notes to the condensed consolidated financial statements
5
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) AND INCOME
For the Periods Ended September 30, 2022 and 2021
For the Three Months Ended | For the Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
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Operating revenues |
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Retail | $ | | $ | | $ | | $ | | |||||
Wholesale |
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Other |
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Total revenue |
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Cost of goods and services | |||||||||||||
Total cost of goods and services |
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Gross profit |
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Operating expenses |
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Selling, general and administrative expenses |
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Professional services |
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Salaries |
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Stock based compensation |
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Total operating expenses |
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Income (loss) from operations |
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Other income (expense) |
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Interest expense, net |
| ( |
| ( |
| ( |
| ( | |||||
Unrealized gain on derivative liabilities |
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Other income |
| — |
| — |
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| — | |||||
Gain (loss) on sale of assets |
| — |
| ( |
| — |
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Unrealized gain (loss) on investments |
| ( |
| ( |
| ( |
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Total other income (expense) |
| ( |
| ( |
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| ( | |||||
Provision for income taxes |
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Net income | $ | | $ | | $ | | $ | | |||||
Less: Accumulated preferred stock dividends for the period |
| ( |
| — |
| ( |
| — | |||||
Net income attributable to common stockholders | $ | | $ | | $ | | $ | | |||||
Earnings (loss) per share attributable to common shareholders |
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Basic earnings (loss) per share | $ | | $ | | $ | | $ | | |||||
Diluted earnings (loss) per share | $ | | $ | | $ | | $ | | |||||
Weighted average number of shares outstanding - basic |
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Weighted average number of shares outstanding - diluted |
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| |
See accompanying notes to the condensed consolidated financial statements
6
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2022 and 2021
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, December 31, 2020 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| — |
| — |
| | ||||||
Issuance of stock as payment for acquisitions |
| |
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| — |
| — |
| — |
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Issuance of common stock as compensation to employees, officers and/or directors |
| — |
| — |
| |
| |
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| — |
| — |
| — |
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Issuance of preferred stock in connection with sales made under private or public offerings |
| |
| |
| — |
| — |
| |
| — |
| — |
| — |
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Dividends declared |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Return of common stock |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| ( |
| ( | ||||||
Stock based compensation expense related to common stock options |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| — |
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Balance, September 30, 2021 |
| | $ | |
| | $ | | $ | | $ | ( |
| | $ | ( | $ | |
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, December 31, 2021 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
| ||||||||||||||||||||||||
Net income (loss) |
| — |
| — | — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Issuance of stock as payment for acquisitions |
| — |
| — | |
| |
| |
| — |
| — |
| — |
| | |||||||
Return of common stock as compensation to employees, officers and/or directors |
| — |
| — | |
| |
| |
| — |
| — |
| — |
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Issuance of common stock as compensation to employees, officers and/or directors |
| — |
| — | |
| |
| |
| — |
| — |
| — |
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Return of common stock |
| — |
| — | — |
| — |
| — |
| — |
| |
| ( |
| ( | |||||||
Stock based compensation expense related to common stock options |
| — |
| — | — |
| — |
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| — |
| — |
| — |
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Balance, September 30, 2022 |
| | $ | | | $ | | | $ | ( |
| | $ | ( | $ | |
See accompanying notes to the condensed consolidated financial statements
7
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended September 30, 2022 and 2021
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, June 30, 2021 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
| ||||||||||||||||||||||||
Net income (loss) |
| — |
| — | — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Issuance of stock as payment for acquisitions |
| — |
| — | |
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| — |
| — |
| — |
| | |||||||
Issuance of common stock as compensation to employees, officers and/or directors |
| — |
| — | — |
| |
| — |
| — |
| — |
| — |
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Dividends declared |
| — |
| — | — |
| — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Stock based compensation expense related to common stock options |
| — |
| — | — |
| — |
| |
| — |
| — |
| — |
| | |||||||
Balance, September 30, 2021 |
| | $ | | | $ | | $ | | $ | ( |
| | $ | ( | $ | |
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, June 30, 2022 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
| ||||||||||||||||||||||||
Net income (loss) |
| — |
| — | — |
| — |
| — |
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| — |
| — |
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Return of common stock as compensation to employees, officers and/or directors |
| — |
| — | ( |
| ( |
| — |
| — |
| — |
| — |
| ( | |||||||
Issuance of common stock as compensation to employees, officers and/or directors |
| — |
| — | |
| |
| |
| — |
| — |
| — |
| | |||||||
Balance, September 30, 2022 |
| | $ | | | $ | | $ | | $ | ( |
| | $ | ( | $ | |
See accompanying notes to the condensed consolidated financial statements
8
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Periods Ended September 30, 2022 and 2021
For the Nine Months Ended | |||||||
September 30, | |||||||
| 2022 |
| 2021 |
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Cash flows from operating activities |
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Net income (loss) for the period | | | |||||
Adjustments to reconcile net income to cash provided by (used in) operating activities |
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Depreciation and amortization |
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Non-cash lease expense |
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| — | |||
Gain on change in derivative liabilities |
| ( |
| ( | |||
Loss (gain) on investment, net |
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| ( | |||
Gain loss on sale of asset |
| — |
| ( | |||
Stock based compensation |
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Changes in operating assets and liabilities (net of acquired amounts): |
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Accounts receivable |
| ( |
| ( | |||
Inventory |
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| ( | |||
Prepaid expenses and other current assets |
| ( |
| ( | |||
Other assets |
| ( |
| ( | |||
Operating leases right of use assets and liabilities |
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Accounts payable and other liabilities |
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| ( | |||
Deferred Revenue |
| — |
| ( | |||
Income taxes payable |
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Net cash provided by (used in) operating activities |
| ( |
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Cash flows from investing activities: |
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Collection of notes receivable |
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Cash consideration for acquisition of business |
| ( |
| ( | |||
Purchase of fixed assets |
| ( |
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Purchase of intangible assets |
| — |
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Net cash used in investing activities |
| ( |
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Cash flows from financing activities: |
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Proceeds from issuance of debt |
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Debt issuance and discount costs | | ||||||
Repayment of notes payable |
| — |
| ( | |||
Proceeds from issuance of common stock, net of issuance costs |
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Net cash provided by financing activities |
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Net increase (decrease) in cash and cash equivalents |
| ( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental disclosure of cash flow information: |
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Cash paid for interest | $ | | $ | | |||
Cash paid for income taxes |
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| — | |||
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Supplemental disclosure of non-cash investing and financing activities: |
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Issuance of common stock | | — | |||||
Return of common stock | | — | |||||
Issuance of stock as payment for acquisitions |
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| — | |||
Issuance of preferred stock in connection with private offerings |
| — |
| — |
See accompanying notes to the condensed consolidated financial statements
9
MEDICINE MAN TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
1.Organization and Nature of Operations
Medicine Man Technologies, Inc. (“we,” “us,” “our” or the “Company”) was incorporated in Nevada on March 20, 2014. On May 1, 2014, we entered into a non-exclusive Technology License Agreement with Futurevision, Inc., f/k/a Medicine Man Production Corp., dba Medicine Man Denver (“Medicine Man Denver”) pursuant to which Medicine Man Denver granted us a license to use all of the proprietary processes that it had developed, implemented and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including trade secrets, skills and experience (present and future) for 10 years.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of the Company’s financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2021 and 2020, as presented in the Company’s Annual Report on Form 10-K filed on March 31, 2022 with the SEC.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the current interim period are not necessarily indicative of the results of operations to be expected for the full year.
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s net earnings and financial position.
On January 25, 2022, the Company acquired the assets BG3 Investments, LLC, dba Drift (“Drift”), and Black Box Licensing, LLC under the applicable asset purchase agreement.
On February 8, 2022, the Company acquired its New Mexico business under the terms of a Purchase Agreement, dated November 29, 2021, with Nuevo Holding, LLC and Nuevo Elemental Holding, LLC, both of which are indirect wholly-owned subsidiaries of the Company (collectively, the “Nuevo Purchasers”), Reynold Greenleaf & Associates, LLC (“RGA”), Elemental Kitchen and Laboratories, LLC (“Elemental”), the equity holders of RGA and Elemental, and William N. Ford, in his capacity as Representative, as amended on February 8, 2022 (the “Nuevo Purchase Agreement”). The Nuevo Purchasers acquired substantially all of the operating assets of RGA and all of the equity of Elemental and assumed specified liabilities of RGA and Elemental. Pursuant to existing laws and regulations in New Mexico, the cannabis licenses for certain facilities managed by RGA are held by two not-for-profit entities: Medzen Services, Inc. (“Medzen”) and R. Greenleaf Organics, Inc. (“R. Greenleaf” and together with Medzen, the “NFPs”). At the closing, Nuevo Holding, LLC gained control over the NFPs by becoming the sole member of each of the NFPs and replacing the directors of the two NFPs with Justin Dye, the Company’s Chief Executive Officer and one of its directors, Nancy Huber, the Company’s Chief Financial Officer, and Dan Pabon, the Company’s General Counsel, Chief Government Affairs Officer and Corporate Secretary. The business acquired from RGA consists of serving as a branding, marketing and consulting company, licensing certain intellectual property related to the business of THC-based products to Elemental and the NFPs, providing consulting services to Elemental and the NFPs, and supporting Elemental and the NFPs to promote, support, and develop sales and distribution of products. Elemental is engaged in the business of creating and distributing cannabis-derived products to licensed cannabis producers. Elemental and the NFPs are in the business of cultivating, processing and dispensing marijuana in New Mexico, with
10
Grants and Las Vegas, New Mexico. The cultivation and manufacturing facilities are located in Albuquerque, New Mexico and consists of approximately
On February 9, 2022, the Company acquired MCG, LLC and its four wholly-owned subsidiaries (collectively, “MCG”) pursuant to the terms of an Agreement and Plan of Merger, dated November 15, 2021, with Emerald Fields Merger Sub, LLC, a wholly-owned subsidiary of the Company, MCG, MCG’s owners, and Donald Douglas Burkhalter and James Gulbrandsen in their capacity as the Member Representatives, as amended on February 9, 2022.
On February 15, 2022, Double Brow, LLC, a wholly owned subsidiary of the Company (“Double Brow”) acquired substantially all of the operating assets of Brow 2, LLC (“Brow”) related to its indoor cannabis cultivation operations located in Denver, Colorado (other than assets expressly excluded) and assumed certain liabilities for contracts acquired pursuant to the terms of the Asset Purchase Agreement, dated August 20, 2021, among Double Brow, Brow, and Brian Welsh, as the owner of Brow.
On March 17, 2022, the Company announced that its Common Stock was approved for listing on the NEO, a tier one Canadian Stock exchange based in Toronto, Ontario. The Common Stock began trading on the NEO on March 23, 2022.
On May 31, 2022, the Company acquired substantially all of the operating assets of Urban Health & Wellness, Inc d/b/a Urban Dispensary (“Urban Dispensary”) pursuant to the terms of an Asset and Personal Goodwill Purchase Agreement, dated March 11, 2022, with Double Brow, Urban Dispensary, Productive Investments, LLC, and Patrick Johnson. Urban Dispensary operates an indoor cannabis cultivation facility and a single retail dispensary, each located in Denver, Colorado.
On July 13, 2022, the Company entered into a strategic relationship with Mission Holdings US, Inc. (“Mission Holdings”), an entity affiliated with MCG, by purchasing a non-controlling equity interest in Mission Holdings. Mission Holdings offers various products and brands, including proprietary cannabis infused gummies and premium flower for medical and recreational sale in Colorado and California. The Company has the right to acquire
2.Critical Accounting Policies and Estimates
Inventory
Inventory of purchased finished goods and packing materials are initially valued at cost and subsequently at the lower of cost and net realizable value. Costs incurred during the growing and production process are capitalized as incurred to the extent that cost is less than net realizable value. These costs include materials, labor and manufacturing overhead used in the growing and production processes.
Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
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Cost is determined using the average lot cost. Products for resale and supplies and consumables are valued at lower of cost and net realizable value. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventories are written down to net realizable value. There were
3.Notes Receivable
On March 12, 2021, the Company sold equipment to Colorado Cannabis Company LLC (“Colorado Cannabis”). Colorado Cannabis is obligated to pay $
4.Property and Equipment
Property and equipment are recorded at cost, net of accumulated depreciation and are comprised of the following:
September 30, | December 31, | |||||
| 2022 |
| 2021 | |||
Furniture and fixtures | $ | | $ | | ||
Leasehold improvements |
| |
| | ||
Vehicles, machinery, and tools |
| |
| | ||
Land |
| |
| | ||
Software, servers and equipment |
| |
| | ||
Building |
| |
| | ||
Construction in process |
| |
| | ||
Total Asset Cost | $ | | $ | | ||
Less: Accumulated depreciation |
| ( |
| ( | ||
Total property and equipment, net of depreciation | $ | | $ | |
Depreciation on equipment is provided on a straight-line basis over its expected useful lives at the following annual rates.
Furniture and fixtures |
| |
Leasehold improvements |
| |
Vehicles, machinery and tools |
| |
Land |
| |
Software, servers and equipment |
| |
Building |
|
Depreciation expense for the three and nine months ended September 30, 2022 was $
Construction in process represents build out of the Company’s cultivation operations based in Colorado and New Mexico. The amount represents the “invoiced to date” construction costs and includes general contractor fees, construction materials, construction labor and other items.
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5.Intangible Asset
Intangible assets as of September 30, 2022 and December 31, 2021 were comprised of the following:
September 30, 2022 | December 31, 2021 | |||||||||||
Gross | Gross | |||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||
| Amount |
| Amortization |
| Amount |
| Amortization | |||||
License Agreements |
| $ | | $ | ( | $ | | $ | ( | |||
Tradename | |
| ( |
| |
| ( | |||||
Customer Relationships | |
| ( |
| |
| ( | |||||
Non-compete | |
| ( |
| |
| ( | |||||
Product License and Registration | |
| ( | |
| ( | ||||||
Trade Secret | |
| ( |
| |
| ( | |||||
Total | $ | | $ | ( | $ | | $ | ( |
Amortization expense for the three and nine months ended September 30, 2022 was $
Amortization | |||
| Expense | ||
Aggregate for year ended 12/31/2022 |
| $ | |
Estimated for year ended 12/31/2023 |
| | |
Estimated for year ended 12/31/2024 |
| | |
Estimated for year ended 12/31/2025 |
| | |
Estimated for year ended 12/31/2026 |
| | |
Estimated for year ended 12/31/2027 |
| | |
Thereafter | | ||
Total | $ | |
6.Derivative Liability
Investor Note
On December 3, 2021, the Company and its subsidiaries, as guarantors (the “Subsidiary Guarantors”) entered into a Securities Purchase Agreement with
13
as if the Investor Notes were subject to an annual interest rate of
A reconciliation of the beginning and ending balances of the derivative liabilities for the periods ended September 30, 2022 and December 31, 2021 were as follows:
Balance as of January 1, 2021 |
| $ | |
Fair value of derivative liabilities on issuance date |
| | |
Gain on derivative liability |
| ( | |
Balance as of December 31, 2021 | $ | | |
Loss on derivative liability |
| | |
Balance as of March 31, 2022 | $ | | |
Gain on derivative liability |
| ( | |
Balance as of June 30, 2022 | $ | | |
Gain on derivative liability |
| ( | |
Balance as of September 30, 2022 | $ | |
The Company accounts for derivative instruments in accordance with the GAAP accounting guidance under ASC 815 Derivatives and Hedging Activities. In accordance with GAAP, a contract to issue a variable number of equity shares fails to meet the definition of equity and must instead be classified as a derivative liability and measured at fair value with changes in fair value recognized in the consolidated statements of operations at each period-end. The Company utilizes a Monte Carlo simulation in determining the appropriate fair value. The derivative liability will ultimately be converted into the Company’s equity when the Investor Notes are converted or will be extinguished on the repayment of the Investor Notes. The derivative liability will not result in the outlay of any additional cash by the Company. Upon initial recognition, the Company recorded a derivative liability and debt discount of $
7.Related Party Transactions
Transactions Involving Former Directors, Executive Officers or Their Affiliated Entities
During the year ended December 31, 2019, the Company made loans to MedPharm Holdings LLC (“MedPharm”) totaling $
14
Transactions with Entities Affiliated with Justin Dye
The Company has participated in several transaction involving Dye Capital, Dye Capital Cann Holdings, LLC (“Dye Cann I”) and Dye Capital Cann Holdings II, LLC (“Dye Cann II”). Justin Dye, the Company’s Chief Executive Officer, one of its directors, and the largest beneficial owner of Common Stock and Preferred Stock, controls Dye Capital and Dye Capital controls Dye Cann I and Dye Cann II. Dye Cann I is the largest holder of the Company’s outstanding Common Stock. Dye Cann II is a significant holder of our Preferred Stock. Mr. Dye has sole voting and dispositive power over the securities held by Dye Capital, Dye Cann I, and Dye Cann II.
The Company entered into a Securities Purchase Agreement with Dye Cann I on June 5, 2019, (as amended, the “Dye Cann I SPA”) pursuant to which the Company agreed to sell to Dye Cann I up to between
The Company granted Dye Cann I certain demand and piggyback registration rights with respect to the shares of Common Stock sold under the Dye Cann I SPA and issuable upon exercise of the warrants sold under the Dye Cann I SPA. The Company also granted Dye Cann I the right to designate one or more individuals for election or appointment to the Company’s board of directors (the “Board”) and Board observer rights. Further, under the Dye Cann I SPA, until June 5, 2022, if the Company desires to pursue debt or equity financing, the Company must first give Dye Cann I an opportunity to provide a proposal to the Company with the terms upon which Dye Cann I would be willing to provide or secure such financing. If the Company does not accept Dye Cann I’s proposal, the Company may pursue such debt or equity financing from other sources but Dye Cann I has a right to participate in such financing to the extent required to enable Dye Cann I to maintain the percentage of Common Stock (on a fully-diluted basis) that it then owns, in the case of equity securities, or, in the case of debt, a pro rata portion of such debt based on the percentage of Common Stock (on a fully-diluted basis) that it then owns. The warrants granted to Dye Cann I pursuant to the Dye Cann I SPA expired on June 5, 2022.
The Company entered into a Securities Purchase Agreement (as amended, the “Dye Cann II SPA”) with Dye Cann II on November 16, 2020 pursuant to which the Company agreed to sell to Dye Cann II shares of Preferred Stock in one or more tranches at a price of $
The Company granted Dye Cann II certain demand and piggyback registration rights with respect to the shares of Common Stock issuable upon conversion of the Preferred Stock under the Dye Cann II SPA. Further, the Company granted Dye Can II the right to designate one or more individuals for election or appointment to the Board and Board observer rights.
15
On December 16, 2020, the Company entered into a Secured Convertible Note Purchase Agreement with Dye Capital and issued and sold to Dye Capital a Convertible Note and Security Agreement in the principal amount of $
The Company previously reported the terms of the Preferred Stock in the Company’s Current Report on Form 8-K filed on December 23, 2020.
During the year ended December 31, 2021 the Company recorded expenses of $
Transactions with Entities Affiliated with Jeffrey Cozad
On February 26, 2021, the Company entered into a Securities Purchase Agreement (the “CRW SPA”) with CRW Cann Holdings, LLC (“CRW”) pursuant to which the Company issued and sold
On December 7, 2021, the Company entered into a Securities Purchase Agreement with Cozad Investments, L.P. pursuant to which the Company issued an Investor Note in the aggregate principal amount of $
On May 4, 2022, and June 14, 2022, the Company issued
16
Transactions with Entities Affiliated with Marc Rubin
On February 26, 2021, the Company entered into the CRW SPA with CRW, of which Marc Rubin is a beneficial owner. Pursuant to the CRW SPA, the Company issued and sold
On December 7, 2021, the Company entered into a Securities Purchase Agreement with The Rubin Revocable Trust U/A/D 05/09/2011 (the “Rubin Revocable Trust”) pursuant to which the Company issued an Investor Note in the aggregate principal amount of $
Transactions with Entities Affiliated with Brian Ruden
The Company has participated in several transactions involving entities owned or affiliated with Brian Ruden, one of its former directors as of October 2022, a beneficial owner of more than
Between December 17, 2020 and March 2, 2021, the Company’s wholly-owned subsidiary SBUD LLC consummated the Star Buds Acquisition. The Company previously reported the terms of the applicable purchase agreements and related amendments in the Company’s Current Reports on Form 8-K filed June 8, 2020, September 21, 2020, December 22, 2020, and March 8, 2021.
The aggregate purchase price for the Star Buds Acquisition was $
Mr. Ruden’s interest in the aggregate purchase price for the Star Buds Acquisition is as follows: (i) $
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Mr. Ruden was a part-owner of a majority of the Star Buds companies that sold assets to SBUD LLC. Mr. Ruden owned
In connection with acquiring the Star Buds assets for our Pueblo West, Niwot, Commerce City, Lakeside, Arapahoe and Aurora locations, SBUD LLC entered into a lease with each of 428 S. McCulloch LLC, Colorado Real Estate Holdings LLC, 5844 Ventures LLC, 5238 W 44th LLC, 14655 Arapahoe LLC and Montview Real Estate LLC, on substantially the same terms. Each of the leases is for an initial
On December 17, 2020, SBUD LLC entered into a Trademark License Agreement with Star Brands LLC under which Star Brands LLC licenses certain trademarks to SBUD LLC effective as of the closing of the entire Star Buds Acquisition. SBUD LLC has no payment obligation under this agreement. Mr. Ruden is a part-owner of Star Brands LLC.
In connection with the Star Buds Acquisition, the Company granted Mr. Ruden and Naser Joudeh the right designate individuals for election or appointment to the Board.
On May 4, 2022, and June 14, 2022, the Company issued
Transactions with Jeffrey Garwood
On December 7, 2021, the Company entered into a Securities Purchase Agreement with Jeff Garwood pursuant to which the Company issued an Investor Note in the aggregate principal amount of $
On May 4, 2022, and June 14, 2022, the Company issued
Transactions with Pratap Mukharji
On December 7, 2021, the Company entered into a Securities Purchase Agreement with Pratap Mukharji pursuant to which the Company issued an Investor Note in the aggregate principal amount of $
18
The Investor Note bears interest at
On May 4, 2022, and June 14, 2022, the Company issued
Transactions with Paul Montalbano
On May 4, 2022, and June 14, 2022, the Company issued
Transactions with Jonathan Berger
On May 4, 2022, and June 14, 2022, the Company issued
Transactions with Salim Wahdan
The Company has participated in several transactions involving entities owned or affiliated with Salim Wahdan, one of its directors, related to the acquisition of the Star Buds assets.
Between December 17, 2020 and March 2, 2021, SBUD LLC acquired the Star Buds assets. The Company previously reported the terms of the applicable purchase agreements and related amendments in the Company’s Current Reports on Form 8-K filed June 8, 2020, September 21, 2020, December 22, 2020, and March 8, 2021.
The aggregate purchase price for the Star Buds Acquisition was $
Mr. Wahdan’s interest in the aggregate purchase price for the Star Buds assets is as follows: (i) $
Mr. Wahdan was a partial owner of certain of the Star Buds companies that sold assets to SBUD, LLC. Mr. Wahdan owned
In connection with acquiring the Star Buds assets for our Lakeside location, SBUD LLC entered into a lease with each of 5238 W 44th LLC. The lease is for an initial
19
for a monthly rent payment of $
On June 14, 2022 and June 24, 2022, the Company issued
8.Goodwill Accounting
The Company accounts for acquisitions in which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase.
Retail | Wholesale | Other | Total | ||||||||||
Balance as of January 1, 2022 | $ | | $ | | $ | | $ | | |||||
Goodwill acquired during 2022 | | | | | |||||||||
Measurement-period adjustment to prior year acquisition | | — | — | | |||||||||
Balance as of September 30, 2022 | $ | | $ | | $ | | $ | |
Goodwill related to the Other segment is driven by the New Mexico acquisition. At this time, ASC 805 valuation has not been finalized, therefore goodwill estimated for the acquisition is classified in Other until valuation can be completed.
The Company performed its annual fair value assessment as of December 31, 2021, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that no impairment exists. No additional factors or circumstances existed as of September 30, 2022, that would indicate impairment.
9.Business Combination
On January 26, 2022, the Company acquired the assets of Drift, and Black Box Licensing, LLC, which operates dispensaries in Colorado, under the applicable asset purchase agreement. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting resulted in $
On February 8, 2022, the Company acquired its New Mexico business under the Nuevo Purchase Agreement with the Nuevo Purchasers, RGA, Elemental, the equity holders of RGA and Elemental and William N. Ford, in his capacity as Representative, as amended on February 9, 2022. The Nuevo Purchasers acquired substantially all the operating assets of RGA and all of the equity of Elemental and assumed specified liabilities of RGA and Elemental. Pursuant to existing laws and regulations in New Mexico, the cannabis licenses for certain facilities managed by RGA are held by the NFPs. At the
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closing, Nuevo Holding, LLC gained control over the NFPs by becoming the sole member of each of the NFPs and replacing the directors of the
On February 9, 2022, the Company acquired MCG, which operates dispensaries located in Colorado pursuant to the terms of an Agreement and Plan of Merger, dated November 15, 2021, with Emerald Fields Merger Sub, LLC, a wholly-owned subsidiary of the Company, MCG, MCG’s owners and Donald Douglas Burkhalter and James Gulbrandsen in their capacity as the Member Representatives, as amended on February 9, 2022. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting resulted in $
On February 15, 2022, the Company acquired substantially all of the operating assets of Brow related to its indoor cannabis cultivation operations located in Denver, Colorado (other than assets expressly excluded) and assumed certain liabilities for contracts acquired pursuant to the terms of the Asset Purchase Agreement, dated August 20, 2021, among Double Brow, Brow, and Brian Welsh, as the owner of Brow. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting resulted in $
On May 31, 2022, the Company acquired substantially all of the operating assets of Urban Dispensary, which operates a dispensary and indoor cultivation in Colorado, pursuant to the terms of an Asset and Personal Goodwill Purchase Agreement, dated March 11, 2022, with Double Brow, Urban Dispensary, Productive Investments, LLC, and Patrick Johnson. Urban Dispensary operates an indoor cannabis cultivation facility and a single retail dispensary, each located in Denver, Colorado. The Company utilized purchase price accounting to value assets acquired, which values such assets at approximately fair market value. The purchase price accounting resulted in $
As of three and nine months ended September 30, 2022, the Company acquired cannabis brands and other assets of Drift, RGA, MCG, Brow, Urban Dispensary, and
21
These transactions were accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). In consideration of the sale and transfer of the acquired assets the Company paid as follows:
| Nuevo Holding LLC |
| Emerald Fields Merger Sub, LLC |
| Other Acquisitions | ||||
Cash |
| $ | | $ | | $ | | ||
Seller notes |
| |
| |
| | |||
Common stock |
| |
| |
| | |||
Total purchase price | $ | | $ | | $ | |
As of September 30, 2022, the Company’s allocation of purchase price is as follows:
Description |
| Nuevo Holding LLC |
| Emerald Fields Merger Sub, LLC |
| Other Acquisitions | |||
Assets acquired: |
|
| |||||||
Cash | $ | | $ | | $ | | |||
Accounts receivable | | | | ||||||
Other assets | | | | ||||||
Inventory |
| |
| |
| | |||
Fixed assets |
| |
| |
| | |||
Other long term assets | | | | ||||||
Intangible assets |
| — |
| |
| | |||
Goodwill |
| |
| |
| | |||
Total Assets acquired | $ | | $ | | $ | | |||
Liabilities and Equity assumed: |
|
|
|
|
|
| |||
Accounts payable | $ | | $ | | $ | | |||
Accrued liabilities |
| |
| |
| | |||
Total Liabilities and Equity assumed |
| |
| |
| | |||
Estimated fair value of net assets acquired | $ | | $ | | $ | |
The goodwill, which is not expected to be deductible for income tax purposes, consists largely of the synergies, assembled workforce and economies of scale expected from combining the operations of the acquired entities with the Company.
10.Inventory
As of September 30, 2022, and December 31, 2021, respectively, the Company had $
11.Debt
Term Loan — On February 26, 2021, the Company entered into a Loan Agreement with SHWZ Altmore, LLC (“Altmore”), as lender, and GGG Partners LLC, as collateral agent. Upon execution of the Loan Agreement, the Company received $
Under the terms of the loan, the Company must comply with certain restrictions. These include customary events of default and various financial covenants including, maintaining (i) a consolidated fixed charge coverage ratio of at least
22
Seller Notes — As part of the Star Buds Acquisition, the Company entered into a deferred payment arrangement with the sellers in an aggregate amount of $
As part of the acquisition under the Nuevo Purchase Agreement, the company entered into a deferred payment arrangement with the sellers in an aggregate amount of $
Investor Notes – On December 3, 2021, the Company and the Subsidiary Guarantors entered into a Securities Purchase Agreement with the Note Investors pursuant to which the Company agreed to issue and sell to the Note Investors Investor Notes in a private placement. On December 7, 2021, the Company consummated the private placement and issued and sold the Investor Notes pursuant to the Indenture. The Company received net proceeds of approximately $
The Company may, at its option, elect to redeem all, but not less than all, of the Investor Notes for cash, subject to certain conditions, at a repurchase price equal to the principal amount of the Notes plus accrued and unpaid interest thereon on such date as more fully discussed in the agreement.
On the fourth anniversary of the issuance date, the investors will have the right, at their option, to require the Company to repurchase some or all their Notes for cash in an amount equal to the principal amount of the Investor Notes being repurchased plus accrued and unpaid interest up to the date of repurchase.
On or after the second anniversary of the issuance date, the Company may, at its option, convert up to
The notes have a contingent redemption feature that involves a substantial premium, requiring the same to be bifurcated as a derivative liability.
The Investor Notes bear interest at
23
The Indenture includes customary affirmative and negative covenants, including limitations on liens, additional indebtedness, repurchases and redemptions of any equity interest in the Company or any Subsidiary Guarantor (as defined in the Indenture), certain investments, and dividends and other restricted payments, and customary events of default. Starting on December 7, 2022, the Company must maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) of no less than
The Indenture contains restrictions and limitations on the Company’s ability to incur additional debt and grant liens on its assets. The Company and its Subsidiary Guarantors are not permitted to incur additional debt or issue Disqualified Equity Interests (as defined in the Indenture) unless the Company’s Consolidated Leverage Ratio is between
24
The following tables sets forth our indebtedness as of September 30, 2022 and December 31, 2021, respectively, and future obligations:
September 30, | December 31, | |||||
| 2022 |
| 2021 | |||
Term loan dated February 26, 2021, in the original amount of $ |
| $ | | $ | | |
Seller notes dated December 17, 2020 in the original amount of $ |
| |
| | ||
Investor note dated December 3, 2021, in the original amount of $ |
| |
| | ||
Seller note dated February 7, 2022 in the original amount of $ | | | ||||
Less: unamortized debt issuance costs |
| ( |
| ( | ||
Less: unamortized debt discount |
| ( |
| ( | ||
Total long term debt |
| |
| | ||
Less: current portion of long term debt | ( | — | ||||
Long term debt and unamortized debt issuance costs | $ | | $ | |
Unamortized | ||||||||||||
Principal | Debt Issuance | Unamortized | Total Long | |||||||||
| Payments |
| Costs |
| Debt Discount |
| Term Debt | |||||
2022 |
| — | $ | | $ | | $ | ( | ||||
2023 |
| |
| |
| |
| ( | ||||
2024 |
| |
| |
| |
| ( | ||||
2025 |
| |
| |
| |
| | ||||
2026 |
| |
| |
| |
| | ||||
Thereafter |
| — |
| — |
| — |
| — | ||||
Total | $ | | $ | | $ | | $ | |
12.Leases
Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with a term greater than one year are recognized on the balance sheet at the time of lease commencement or modification of a Right of Use (“ROU”) operating lease asset and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line basis. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
The Company’s leases consist of real estate leases for office, retail, cultivation, and manufacturing facilities. The Company elected to combine the lease and related non-lease components for its operating leases.
The Company’s operating leases include options to extend or terminate the lease, which are not included in the determination of the ROU asset or lease liability unless reasonably certain to be exercised. The Company’s operating
25
leases have remaining lease terms of less than
. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.As the Company’s leases do not provide an implicit rate, we used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The discount rate used in the computations ranged between
Balance Sheet Classification of Operating Lease Assets and Liabilities
| Balance Sheet Line |
| September 30, 2022 | ||
Asset |
|
|
|
| |
Operating lease right of use assets |
| Noncurrent assets | $ | | |
Liabilities |
|
|
|
| |
Lease liabilities | Current Liabilities | $ | | ||
Lease liabilities |
| Noncurrent liabilities | |
Maturities of Lease Liabilities
Maturities of lease liabilities as of September 30, 2022 are as follows:
2022 fiscal year |
| $ | |
Less: Interest |
| | |
Present value of lease liabilities | $ | |
The following table presents the Company’s future minimum lease obligation under ASC 842 as of September 30, 2022:
2022 fiscal year |
| $ | |
2023 fiscal year |
| | |
2024 fiscal year |
| | |
2025 fiscal year |
| | |
2026 fiscal year |
| | |
Thereafter | | ||
Total | $ | |
13.Commitments and Contingencies
Definitive Agreement to Acquire
On September 9, 2022, the Company entered into
26
limitation, obtaining licensing approval from the Colorado Marijuana Enforcement Division and local regulatory authorities.
14.Stockholders’ Equity
The Company is authorized to issue
Preferred Stock
The number of shares of preferred stock authorized is
The Company had
Common Stock
The Company is authorized to issue
Employee Stock Option Plan
The Company’s stock option plan permits the grant of share options to its employees. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on
Common Stock Issued as Compensation to Employees, Officers, and Directors
For the year ended December 31, 2021, the Company issued
For the nine months ended September 30, 2022, the Company issued
Common and Preferred Stock Issued as Payment for Acquisitions
On April 20, 2020, the Company issued
27
The Company issued shares of Preferred Stock in connection with the Star Buds Acquisition to each relevant selling party as follows: (i) on December 17, 2020 the Company issued
On July 21, 2021, the Company issued
On December 21, 2021, the Company issued
On January 26, 2022, the Company agreed to issue an aggregate of
On February 9, 2022, the Company issued
On May 31, 2022, the Company issued
Warrants
The Company accounts for Common Stock purchase warrants in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity. The Company estimates the fair value of warrants at date of grant using the Black-Scholes option pricing model. There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants, and the assumptions used in the Black Scholes option-pricing model are moderately judgmental.
For the year ended December 31, 2021, the Company issued warrants to purchase an aggregate of
The following table reflects the change in Common Stock purchase warrants for the period ended September 30, 2022:
| Number of shares | |
Balance as of December 31, 2021 | | |
Warrants exercised |
| — |
Warrants forfeited/expired |
| ( |
Warrants issued |
| — |
Balance as of September 30, 2022 |
| |
28
Conversion of Preferred Stock to Common Stock
On December 20, 2021, a holder of Preferred Stock converted
15.Segment Information
The Company has
The following information represents segment activity for the three months ended September 30, 2022:
| Retail |
| Wholesale |
| Other |
| Total | |||||
External revenues | | | | | ||||||||
Cost of goods and services |
| ( |
| ( |
| ( |
| ( | ||||
Gross profit |
| |
| ( |
| ( |
| | ||||
Intangible assets amortization |
| |
| |
| |
| | ||||
Depreciation |
| ( |
| |
| |
| | ||||
Segment profit |
| |
| ( |
| ( |
| | ||||
Segment assets |
| |
| |
| |
| |
The following information represents segment activity for the nine months ended September 30, 2022:
| Retail |
| Wholesale |
| Other |
| Total | |||||
External revenues | | | | | ||||||||
Cost of goods and services |
| ( |
| ( |
| ( |
| ( | ||||
Gross profit |
| |
| |
| ( |
| | ||||
Intangible assets amortization |
| |
| |
| |
| | ||||
Depreciation |
| |
| |
| |
| | ||||
Segment profit |
| |
| ( |
| ( |
| | ||||
Segment assets |
| |
| |
| |
| |
Segment assets from Other are mainly related to goodwill from the Nuevo acquisition. Upon completion of the ASC 805 valuation, these will be split between the
29
16.Tax Provision
The following table summarizes the Company’s income tax expense and effective tax rates for three and nine months ended September 30, 2022 and September 30, 2021:
Three Months Ended September 30, | ||||||
| 2022 |
| 2021 | |||
Income (loss) before income taxes | $ | | $ | | ||
Income tax expense |
| |
| | ||
Effective tax rate |
Nine Months Ended September 30, | ||||||
| 2022 |
| 2021 | |||
Income (loss) before income taxes | $ | | $ | | ||
Income tax expense |
| |
| | ||
Effective tax rate |
The Company has computed its provision for income taxes under the discrete method which treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis. The discrete method is applied when application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. We believe that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as the estimated annual effective tax rate method is not reliable due to the high degree of uncertainty in estimating annual pre-tax income due to the early growth stage of the business.
Due to its cannabis operations, the Company is subject to the limitations of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.
The effective tax rate for the three months and nine months ended September 30, 2022 varies from the three months and nine months ended September 30, 2021 primarily due to the change in nondeductible expenses as a proportion of total expenses in the current year. The Company incurs expenses that are not deductible dur to IRC Section 280E limitations which results in significant income tax expense.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The Company’s valuation allowance represents the amount of tax benefits that are likely to not be realized. Management assesses the need for a valuation allowance each period and continues to have a full valuation allowance on its deferred tax assets as of September 30, 2022.
The Federal statute of limitation remains open for the 2017 tax year to present. The state statute of limitation remains open for the 2016 tax year to present.
17.Earnings per share (Basic and Dilutive)
The Company computes net income (loss) per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted Earnings Per Share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to Common Stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. These potential dilutive shares include
30
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations for the three and nine months ended September 30, 2022 and 2021.
| For the Three Months Ended |
| For the Nine Months Ended |
| |||||||||
September 30, | September 30, | ||||||||||||
2022 |
| 2021 | 2022 |
| 2021 | ||||||||
Numerator: |
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| ||||
Net income (loss) | $ | | $ | | $ | | $ | | |||||
Less: Accumulated preferred stock dividends for the period |
| ( |
| — |
| ( |
| — | |||||
Net income (loss) attributable to common stockholders | $ | | $ | | $ | | $ | | |||||
Denominator: |
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Weighted-average shares of common stock |
| |
| |
| |
| | |||||
Basic earnings per share | $ | | $ | | $ | | $ | | |||||
Numerator: |
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| |||||
Net income (loss) attributable to common stockholders – dilutive | $ | | $ | | $ | | $ | | |||||
Denominator: |
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| |||||
Weighted-average shares of common stock |
| |
| |
| |
| | |||||
Dilutive effect of warrants |
| |
| — |
| |
| | |||||
Dilutive effect of options |
| |
| — |
| |
| | |||||
Dilutive effect of preferred stock |
| |
| — |
| |
| — | |||||
Diluted weighted-average shares of common stock |
| |
| |
| |
| | |||||
Diluted earnings per share | $ | | $ | | $ | | $ | |
Basic net loss per share attributable to common stockholders is computed by dividing reported net loss attributable to common stockholders by the weighted average number of common shares outstanding for the reported period. Note that for purposes of basic loss per share calculation, shares of Preferred Stock are excluded from the calculation as of December 31, 2021, as the inclusion of the common share equivalents would be anti-dilutive. As the Company incurred a loss from operations in 2020, shares of Common Stock issuable pursuant to the equity awards were excluded from the computation of diluted net loss per share in the accompanying consolidated statement of operations, as their effect is anti-dilutive.
18.Subsequent Events
In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to September 30, 2022 to the date these consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC. In addition to our historical unaudited condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.” See also, “CAUTIONARY NOTE ABOUT FORWARD-LOOKING INFORMATION.”
OVERVIEW OF THE COMPANY
Established in 2014 and headquartered in Denver, Colorado, Medicine Man Technologies, Inc., is a cannabis consumer packaged goods company and retailer. The Company’s focus is on building the premier, vertically integrated cannabis company by taking operating systems to other states where it can develop a differentiated leadership position. The Company is anchored by a high-performance culture that combines customer-centric thinking and data science to test, measure, and drive decisions and outcomes. The Company currently operates in Colorado and New Mexico.
Results of Operations – Consolidated
The following table sets forth the Company’s selected consolidated financial results for the periods, and as of the dates, indicated. The (i) consolidated statements of operations for the three and nine months ended September 30, 2022 and September 30, 2021 and (ii) consolidated balance sheet as of September 30, 2022 and December 31, 2021 have been derived from and should be read in conjunction with the consolidated financial statements and accompanying notes presented in this report.
The Company’s consolidated financial statements have been prepared in accordance with GAAP and on a going-concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in ordinary course of business.
Revenue segments
The Company has consolidated financial statements across its operating businesses with operating segments of retail, wholesale and other. The Company also accounts for revenue by state within the operating segments of retail, wholesale, and other for the State of Colorado and the State of New Mexico, each of which are reported below.
REVENUE OF OPERATION BY SEGMENT
| For the Three Months Ended September 30, | 2022 vs 2021 |
| ||||||||||
| 2022 |
| 2021 |
| $ |
| % |
| |||||
Retail | $ | 39,759,734 | $ | 20,741,864 | $ | 19,017,870 | 92 | % | |||||
Wholesale |
| 3,335,252 |
| 11,022,519 | $ | (7,687,267) | (70) | % | |||||
Other |
| 96,000 |
| 70,922 | $ | 25,078 | 35 | % | |||||
Total revenue | $ | 43,190,986 | $ | 31,835,305 | $ | 11,355,681 | 36 | % |
| For the Nine Months Ended September 30, | 2022 vs 2021 | ||||||||||
| 2022 |
| 2021 |
| $ |
| % | |||||
Retail | $ | 104,386,464 | $ | 54,083,880 | $ | 50,302,584 | 93 | % | ||||
Wholesale |
| 14,661,268 |
| 27,654,965 | $ | (12,993,697) | (47) | % | ||||
Other |
| 184,200 |
| 165,416 | $ | 18,784 | 11 | % | ||||
Total revenue | $ | 119,231,932 | $ | 81,904,261 | $ | 37,327,671 | 46 | % |
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REVENUE OF OPERATION BY STATE
| For the Three Months Ended September 30, | 2022 vs 2021 | ||||||||||
| 2022 |
| 2021 |
| $ |
| % | |||||
Colorado | $ | 30,953,225 | $ | 31,835,305 | $ | (882,080) | (3) | % | ||||
New Mexico |
| 12,237,761 |
| — | $ | 12,237,761 | *** | |||||
Total revenue | $ | 43,190,986 | $ | 31,835,305 | $ | 11,355,681 | 36 | % |
| For the Nine Months Ended September 30, | 2022 vs 2021 | ||||||||||
| 2022 |
| 2021 |
| $ |
| % | |||||
Colorado | $ | 90,986,990 | $ | 81,904,261 | $ | 9,082,729 | 11 | % | ||||
New Mexico |
| 28,244,942 |
| — | $ | 28,244,942 | *** | |||||
Total revenue | $ | 119,231,932 | $ | 81,904,261 | $ | 37,327,671 | 46 | % |
Revenues for Colorado and New Mexico for the three months ended September 30, 2022, totaled $30,953,225 and $12,237,761, respectively. Revenue for Colorado for the three months ended September 30, 2022 decreased by $882,080, or 3% compared to the prior period. Revenues for New Mexico for the three months ended September 30, 2022 increased $12,237,761 compared to the prior period, as the Company purchased the New Mexico business in the first quarter of 2022. For the three months ended September 30, 2022, Colorado and New Mexico represented 72% and 28%, respectively, of the Company’s total revenue.
Revenues for Colorado and New Mexico for the nine months ended September 30, 2022, totaled $90,986,990 and $28,244,942, respectively. Revenue for Colorado for the nine months ended September 30, 2022 increased by $9,082,729, or 11% compared to the prior period. Revenues for New Mexico for the nine months ended September 30, 2022 increased $28,244,942 compared to the prior period, as the Company purchased the New Mexico business in the first quarter of 2022. For the nine months ended September 30, 2022, Colorado and New Mexico represented 76% and 24%, respectively, of the Company’s total revenue.
For the Three Months Ended |
| |||||||||||
September 30, | 2022 vs 2021 | |||||||||||
| 2022 |
| 2021 |
| $ |
| % |
| ||||
Total revenue | $ | 43,190,986 | $ | 31,835,305 | $ | 11,355,681 | 36 | % | ||||
Total cost of goods and services |
| 17,226,451 |
| 16,779,313 |
| 447,138 | 3 | % | ||||
Gross profit |
| 25,964,535 |
| 15,055,992 |
| 10,908,543 | 72 | % | ||||
Total operating expenses |
| 14,849,677 |
| 11,218,992 |
| 3,630,685 | 32 | % | ||||
Income (loss) from operations |
| 11,114,858 |
| 3,837,000 |
| 7,277,858 | 190 | % | ||||
Total other income (expense) |
| (3,712,108) |
| (1,555,427) |
| (2,156,681) | 139 | % | ||||
Provision for income taxes (benefit) |
| 5,593,513 |
| 1,312,817 |
| 4,280,696 | 326 | % | ||||
Net income (loss) | $ | 1,809,237 | $ | 968,756 | $ | 840,481 | 87 | % | ||||
Earnings (loss) per share attributable to common shareholders - basic | $ | 0.00 | $ | 0.02 | $ | (0.02) | (98) | % | ||||
Earnings (loss) per share attributable to common shareholders - diluted | $ | 0.00 | $ | 0.02 | $ | (0.02) | (99) | % | ||||
Weighted average number of shares outstanding - basic |
| 51,232,943 |
| 44,145,709 | ||||||||
Weighted average number of shares outstanding - diluted |
| 137,954,532 |
| 44,145,709 |
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Quarter Ended September 30, 2022 Compared to the Quarter Ended September 30, 2021
Revenue
Revenues for the three months ended September 30, 2022 totaled $43,190,986, including (i) retail sales of $39,759,734 (ii) wholesale sales of $3,335,252 and (iii) other operating revenues of $96,000, compared to revenues of $31,835,305, including (i) retail sales of $20,741,864, (ii) wholesale sales of $11,022,519, and (iii) other operating revenues of $70,922 during the three months ended September 30, 2021, representing an increase of $11,355,681 or 36%. The most influential factor driving revenue increases in the third quarter of 2022 as compared to the same period in 2021 is acquisition activity. Revenue for the quarter ended September 30, 2022 included revenue from four consummated acquisitions in Colorado and revenue from the Company’s initial entrance into the New Mexico market with the acquisition of R. Greenleaf, which were not in revenue for the same period in 2021. Revenue from wholesale sales decreased, due in large part to continued pricing pressure in the Colorado wholesale market as a result of supply saturation in flower and bulk distillate products.
Cost of Goods and Services
Cost of goods and services for the three months ended September 30, 2022 totaled $17,226,451 compared to cost of goods and services of $16,779,313 during the three months ended September 30, 2021, representing an increase of $447,138 or 3%. Overall cost of goods and services increased due to the same acquisition activities that generated substantial increases in revenue, but the rate at which cost of goods and services increases from acquisition activity occurs at a lower rate than increases in revenue from acquisition activity due to lower wholesale flower pricing in Colorado and substantial vertical integration in New Mexico generating favorable cost savings.
Operating Expenses
Operating expenses for the three months ended September 30, 2022 totaled $14,849,677, compared to operating expenses of $11,218,992 during the three months ended September 30, 2021, representing an increase of $3,630,685 or 32%. This increase is due to increased selling, general and administrative expenses, professional service fees, salaries, benefits and related employment costs, all largely driven by growth from acquisitions.
Other Income (Expense), Net
Other expense, net for the three months ended September 30, 2022 totaled $3,712,108 compared to $1,555,427 during the three months ended September 30, 2021, representing an increase in other expense of $2,156,681 or 139%. The increase in other expenses is due to higher interest payments due on the Company’s debt obligations as a result of compounding interest with the passage of time and higher debt balances, which was partially offset this quarter by the revaluation of the derivative liability related to the Investor Notes issued in December 2021 that was recognized as income in the three months ended September 30, 2022.
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Net Income (Loss)
As a result of the factors discussed above, we generated net loss for the three months ended September 30, 2022 of $1,809,237, compared to net income of $968,756 for the three months ended September 30, 2021.
For the Nine Months Ended |
| ||||||||||||
September 30, | 2022 vs 2021 | ||||||||||||
| 2022 |
| 2021 |
| $ |
| % |
|
| ||||
Total revenue | $ | 119,231,932 | $ | 81,904,261 | $ | 37,327,671 | 46 | % | |||||
Total cost of goods and services |
| 57,173,192 |
| 44,692,765 |
| 12,480,427 | 28 | % | |||||
Gross profit |
| 62,058,740 |
| 37,211,496 |
| 24,847,244 | 67 | % | |||||
Total operating expenses |
| 46,698,772 |
| 30,418,486 |
| 16,280,286 | 54 | % | |||||
Income (loss) from operations |
| 15,359,968 |
| 6,793,010 |
| 8,566,958 | 126 | % | |||||
Total other income (expense) |
| 4,770,919 |
| (3,105,816) |
| 7,876,735 | (254) | % | |||||
Provision for income taxes (benefit) |
| 11,259,369 |
| 1,997,905 |
| 9,261,464 | 464 | % | |||||
Net income (loss) | $ | 8,871,518 | $ | 1,689,289 | $ | 7,182,229 | 425 | % | |||||
Earnings (loss) per share attributable to common shareholders - basic | $ | 0.07 | $ | 0.04 | $ | 0.03 | 80 | % | |||||
Earnings (loss) per share attributable to common shareholders - diluted | $ | 0.03 | $ | 0.03 | $ | (0.00) | (13) | % | |||||
Weighted average number of shares outstanding - basic |
| 50,615,437 |
| 42,903,008 | |||||||||
Weighted average number of shares outstanding - diluted |
| 137,337,027 |
| 56,688,640 |
Year to Date September 30, 2022 Compared to the Year to Date September 30, 2021
Revenue
Revenues for the nine months ended September 30, 2022 totaled $119,231,932, including (i) retail sales of $104,386,464 (ii) wholesale sales of $14,661,268 and (iii) other operating revenues of $184,200, compared to revenues of $81,904,261, including (i) retail sales of $54,083,880, (ii) wholesale of $27,654,965, and (iii) other operating revenues of $165,416 during the nine months ended September 30, 2021, representing an increase of $37,327,671 or 46%. The most influential factor driving revenue increases in the first nine months of 2022 as compared to the same period in 2021 is acquisition activity. Revenue for the nine months ended September 30, 2022 included revenue from four new acquisitions in Colorado, which included five new retail dispensaries, and revenue from the Company’s initial entrance into the New Mexico market with the acquisition of R. Greenleaf that created an immediate initial portfolio of ten retail dispensaries across the state of New Mexico, none of which were in revenue for the same period in 2021.
Cost of Goods and Services
Cost of goods and services for the nine months ended September 30, 2022 totaled $57,173,192 compared to cost of goods and services of $44,692,765 during the nine months ended September 30, 2021, representing an increase of $12,480,427 or 28%. Year to date cost of goods and services in 2022 increased as compared to 2021 due to the same acquisition activities that generated substantial increases in revenue, but the rate at which cost of goods and services increases from acquisition activity occurs at a lower rate than increases in revenue from acquisition activity due to lower wholesale flower pricing in Colorado and substantial vertical integration in New Mexico generating favorable cost savings.
Operating Expenses
Operating expenses for the nine months ended September 30, 2022 totaled $46,698,772, compared to operating expenses of $30,418,486 during the nine months ended September 30, 2021, representing an increase of $16,280,286 or 54%. This increase is due to increased selling, general and administrative expenses, professional service fees, salaries, benefits and related employment costs, all largely driven by growth from acquisitions.
35
Other Income (Expense), Net
Other income, net for the nine months ended September 30, 2022 totaled $4,770,919 compared to other expenses, net, of ($3,105,816) during the nine months ended September 30, 2021, representing an increase in income of $7,876,735 or (254)%. The increase in other income, net is primarily due to significant gains recognized in connection with revaluation of the derivative liability related to the Investor Notes for the nine months ended September 30, 2022, partially offset by higher interest payments due on the Company’s debt obligations as a result of compounding interest with the passage of time and higher debt balances.
Net Income (Loss)
As a result of the factors discussed above, we generated net income for the nine months ended September 30, 2022 of $8,871,518, compared to net income of $1,689,289 for the nine months ended September 30, 2021.
DRIVERS OF RESULTS OF OPERATIONS & KEY PERFORMANCE INDICATORS
Revenue
The Company derives its revenue from three revenue streams: (i) Retail, which sells finished goods sourced internally and externally to the end consumer in retail stores; (ii) Wholesale, which is the cultivation of flower and biomass sold internally and externally and the manufacturing of biomass into distillate for integration into externally developed products, such as edibles and internally developed products such as vapes and cartridges under the Purplebee’s brand; and (iii) Other, which includes other income and expenses, such as, licensing and consulting services, facility design services, facility management services, the Company’s Three A Light™ publication, and corporate operations.
Gross Profit
Gross profit is revenue less cost of goods sold. Cost of goods sold includes costs directly attributable to product sales and includes amounts paid for finished goods such as flower, edibles, and concentrates, as well as manufacturing and cultivation labor, packaging, supplies and overhead such as rent, utilities and other related costs. Cannabis costs are affected by market supply. Gross margin measures our gross profit as a percentage of revenue.
Total Operating Expenses
Total operating expenses other than the costs of goods sold consists of selling costs to support customer relations, marketing and branding activities. It also includes an investment in the corporate infrastructure required to support the Company’s ongoing business.
Adjusted EBITDA
Adjusted EBITDA is derived from Operating Income, which is adjusted for one-time expenses, merger and acquisition and capital raising costs, non-cash related compensation costs, and depreciation and amortization.
Average Basket Size
Average Basket Size is calculated based on the average dollar value of all total items purchased by a single customer during a single visit to one of the Company’s retail dispensary stores. Management monitors and utilizes Average Basket Size to assess consumer preferences and behavior, effectiveness of consistent reward and discount offerings, and product performance. Management believes this metric can be useful to investors for a better understanding of average customer spend and revenue across all Company retail dispensaries.
36
Recorded Customer Visits
The Recorded Customer Visits metric reports the number of customers that have visited any of the Company’s retail dispensary stores and made a purchase. Customer visits are recorded at the time of purchase. If a customer makes multiple purchases in a day, each purchase is counted as an individual visit. Management uses Recorded Customer Visits to monitor and assess Company performance in the markets where it operates, consumer acceptance of the Company’s brand and products, customer retention, and store traffic. Recorded Customer Visits is a useful non-financial metric for investors to contextualize the Company’s assessment of overall market performance and consumer appetite for cannabis products.
Same Store Sales and Stacked IDs
The Company utilizes Same Store Sales and Stacked Identical Store Sales (“Stacked IDs”) to evaluate and monitor organic growth from existing dispensaries. Management believes these metrics are useful for investors to assess management of our retail stores and to distinguish revenue and growth from operations from revenue and growth from acquisitions. Same Store Sales and Stacked IDs are both expressed as a percentage that indicates the relative increase or decrease to revenue for certain retail stores from the relevant previous reporting period, which are reported separately for retail operations in Colorado and New Mexico. Same Store Sales is calculated by comparing revenue from sales for all dispensaries in existence for more than one year against the revenue from the sales for the same dispensaries for a specified previous period. Stacked IDs, which is derived from Same Store Sales, reflects Same Store Sales as adjusted for dating discrepancies to report comparable sales for the identical period of days for a specified previous period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2022 and December 31, 2021, the Company had total current liabilities of $30,041,901 and $45,263,179, respectively. The decrease is driven by the revaluation of the derivative liability associated with the Investor Notes. As of September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $38,725,187 and $106,400,216, respectively to meet its current obligations. The Company had working capital of $41,548,525 as of September 30, 2022, a decrease of $37,594,104 as compared to December 31, 2021. The reduction in cash, and in turn working capital, is primarily driven by expenditure of cash to fund acquisitions and operations.
The Company is an early-stage growth company, generating cash from operational revenue and capital raises. Cash is being reserved primarily for capital expenditures, facility improvements, acquisitions, and strategic investment opportunities. The Company predominantly relies on internal capital that is generated through revenue and any other internal sources of liquidity to meet its short-term and certain long-term capital demands. Management believes the Company’s current projected growth, revenue from consummated acquisitions, and revenue from operations will be sufficient to meet its current obligations as they become due. The Company relies on a combination of internal and external capital to meet its long-term obligations, with internal liquidity sourced from revenue from operations and external financing acquired from various sources, including commercial loan arrangements, capital raises and private placement transactions, and cash from the Investor Notes. Management believes this combination of internal revenue and external liquidity will be sufficient to meet the Company’s long-term obligations; however, it is possible the Company will seek additional external financing to meet capital needs in the future. The Company maintains the unused portion of the funds received from the Investor Notes for future acquisitions and execution of strategic growth initiatives.
Due to our participation in the cannabis industry and the regulatory framework governing cannabis in the United States, our debt and loan arrangements are sometimes subject to higher interest rates than are market for other industries, which has an unfavorable impact on our liquidity and capital resources. Additionally, the cash requirements to service our debt obligations increase with the passage of time due to interest accrual, which increases constraints on our capital resources and tends to reduce liquidity in the amount of such accruals. We currently anticipate meeting these cash requirements from operating revenue and cash on hand. One of our strategic goals is to stimulate growth through acquisitions, which also tends to negatively impact liquidity during periods when we consummate an identified acquisition. We expect to continue executing this strategy in future periods, meeting such capital requirements in connection therewith from both internal capital and external financing (including unused funds from the Investor Notes), which will decrease liquidity. Additional factors or trends that have impacted or could potentially impact liquidity in future periods include general economic conditions such as market saturation, inflation, and general economic downturn. The Colorado cannabis market has
37
experienced downward pricing pressure from over-supply of certain cannabis products in the market, which has improved retail margins in current periods but will likely impact the relationship between cost and revenue if and/or when supply is decreased in the Colorado market. Increasing inflation may also negatively impact our liquidity, as our cost of goods and services may increase without corresponding increases to revenue. Increasing inflation and general economic downturn in the United States could also negatively impact revenue to the extent such factors affect consumer behavior.
Cash Flows
Cash Provided by (Used in) Operating, Investing and Financing Activities
Net cash provided by (used in) operating, investing and financing activities for the periods ended September 30, 2022 and 2021 were as follows:
For the Periods Ended September 30, | |||||||
| 2022 |
| 2021 |
| |||
Net cash provided by (used in) operating activities | $ | (3,957,263) | $ | 4,814,104 | |||
Net cash used in investing activities |
| (105,117,739) |
| (75,644,398) | |||
Net cash provided by financing activities |
| 41,399,973 |
| 90,761,874 |
The Company’s cash used in operating activities for 2022 is predominantly driven by the gain on derivative liabilities from the Investor Note. The Company’s use of cash from investing activities is driven by acquisition of businesses, cannabis licenses, and property, plant and equipment for existing entities such as store remodels. Our cash provided by financing activities is mainly from proceeds from our credit facility, the Investor Notes and the issuance of shares of Common Stock.
CONTRACTUAL CASH OBLIGATIONS AND OTHER COMMITMENTS AND CONTINGENCIES
The following table quantifies the Company’s future contractual obligation as of September 30, 2022:
| Total |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter | ||||||||
Notes Payable (a) | $ | 174,387,022 | $ | — | $ | 2,250,000 | $ | 3,000,000 | $ | 40,651,759 | $ | 128,485,263 | $ | — | |||||||
Interest Due on Notes Payable |
| 64,882,707 |
| 4,325,445 |
| 17,395,558 |
| 17,325,242 |
| 15,443,743 |
| 10,392,719 |
| — | |||||||
Right of Use Assets |
| 34,246,054 |
| 1,242,307 |
| 4,646,609 |
| 5,244,672 |
| 4,653,106 |
| 4,211,405 |
| 14,247,955 | |||||||
Total | $ | 273,515,783 | $ | 5,567,752 | $ | 24,292,167 | $ | 25,569,914 | $ | 60,748,608 | $ | 143,089,387 | $ | 14,247,955 |
(a) - This amount excludes $42,972,369 of unamortized debt discount and $7,025,206 of unamortized debt issuance costs. See Note 10 - Debt
The Company anticipates using funds from operating activities, and, if needed, additional external financing to support its contractual cash obligations.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2022 and September 30, 2021, we were not party to any off-balance sheet arrangement that had or was reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
38
Critical Accounting Estimates and Recent Accounting Pronouncements
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that of its significant accounting policies (see Note 2 to Financial Statements), the ones that may involve a higher degree of uncertainty, judgment and complexity are revenue recognition, stock based compensation, derivative instruments, income taxes, goodwill and commitments and contingencies are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition and Related Allowances
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until the criteria are met. A contract liability is recorded when consideration is received in advance of the delivery of goods or services. We identify revenue contracts upon acceptance from the customer when such contract represents a single performance obligation to sell our products.
We have three main revenue streams: (i) retail sales, (ii) wholesale sales, and (iii) other revenues from revenues from consulting, licensing, and other miscellaneous sources.
The Company’s retail and wholesale sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, our sales are generally recognized when products are delivered to customers.
The Company’s other revenue, typically from licensing and consulting services, is recognized when our obligations to our client are fulfilled which is determined when milestones in the contract are achieved. The Company’s revenue from seminar fees is related to one-day seminars and is recognized as earned upon the completion of the seminar. We also recognize expense reimbursement from clients as revenue for expenses incurred during certain jobs.
Stock Based Compensation
We account for share-based payments pursuant to Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation and, accordingly, we record compensation expense for share-based awards based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option pricing model.
Our stock compensation expense for stock options is recognized over the vesting period of the award or expensed immediately under ASC 718 when stock or options are awarded for previous or current service without further recourse.
Income Taxes
ASC 740, Income Taxes requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC 740, the Company’s deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Our deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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Goodwill and Intangible Assets
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from our acquisitions is attributable to the value of the potential expanded market opportunity with new customers. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. Amortizable intangible assets consist of licensing agreements, product licenses and registrations, and intellectual property or trade secrets. Their estimated useful lives range from 3 to 15 years.
Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. We perform an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to the carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, we determine fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, we rely on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, our risk relative to the overall market, our size and industry and other risks specific to us. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater than the 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 our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause us to perform an impairment test prior to scheduled annual impairment tests.
We performed our annual fair value assessment on our subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets at December 31, 2021, and determined that no impairment exists. No additional factors or circumstances existed as of September 30, 2022, that would indicate impairment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the
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Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
On June 7, 2019, the Company filed a complaint against ACC Industries Inc. and Building Management Company B, L.L.C., in state district court located in Clark County, Nevada, alleging, amongst other causes of action, breach of contract, conversion, and unjust enrichment and seeking general, special and punitive damages. On July 17, 2019, the parties stipulated to stay the case in favor of arbitration. On February 25, 2020, ACC Industries Inc. filed a counterclaim against the Company alleging breach of contract. The Company discovered new facts that lead it to believe that a related entity not previously named as a party to the arbitration, ACC Enterprises, LLC (“ACC”), should be brought in as a party to the arbitration. Based upon the new facts, the Company filed a motion to amend the complaint to add new claims and ACC as a party. On September 1, 2020, the arbitrator granted the Company’s motion and permitted the Company to amend the complaint to add ACC as a party. On September 1, 2020, the Company filed an amended complaint and added intentional misrepresentation, fraudulent inducement, civil conspiracy, aiding and abetting, successor liability and fraudulent concealment claims. The Company began arbitration proceedings on November 2, 2020. The Company completed arbitration in February 2021. On May 14, 2021, the Arbitrator entered an award in favor of the Company in the aggregate amount of $1,935,273, subject to an offset equal to $150,000, for a total net award of $1,785,273. After the arbitration award was entered, a receiver was appointed over ACC and its affiliates due to the death of the only owner who had a valid cannabis establishment registration agent card. An automatic litigation stay was entered upon the appointment of the receiver. During the receivership, ACC’s owners have had internal ownership disputes and ACC has had financial difficulties. The receiver has taken the position that ACC should be liquidated and sold. On April 28, 2022, the receiver received approval from the court to liquidate ACC’s assets. On May 24, 2022, upon the completion of a bidding procedure for certain ACC assets, the court approved the sale of certain ACC assets to the only and prevailing bidder. The finality of that sale is in progress and near completion. On July 26, 2022, the court approved a creditors’ claim process. The Company has compiled with the claim process and is awaiting formal approval from the receiver. The Company believes its claim will be approved and will continue to participate in the receivership.
On July 6, 2018, the Company filed a complaint in the Eight Judicial Court, Clark County, Nevada against Vegas Valley Growers (“VVG”). In the complaint, the Company alleges breach by VVG of the Technologies License Agreement dated April 27, 2017 entered into between the parties and seeks general, special and punitive damages in the amount of $3,876,850. On August 28, 2018, VVG filed an Answer and Counterclaim against the Company. On August 2, 2019, a jury found in favor of the Company and awarded the Company damages totaling $2,773,321 plus pre- and post-judgment interest and attorneys’ fees. In March 2020, VVG filed its opening appeal brief with the Nevada Supreme Court. The Company’s response brief was due on May 15, 2020. After VVG filed its opening brief in March 2020, the Company filed a Motion to Strike portions of the brief and record. On August 27, 2020, the court ordered VVG to supplement its brief and the record. On October 27, 2020, the Company, in a joint request with VVG, filed a motion to extend its time to file its answering brief. The Company filed its answering brief in January 2021. VVG’s reply brief was filed in March 2021. On July 23, 2021, the Nevada Supreme Court affirmed the trial court’s damage award but remanded the case to the trial court to properly calculate post-judgment interest. After the affirmance, VVG filed a petition for rehearing with the Nevada Supreme Court arguing it overlooked or misapprehended material facts in the record. The Company answered the rehearing petition arguing that it did not. On December 22, 2021, the Company received $3,577,200 for most of the outstanding receivable plus interest and legal fees. Requests for costs and fees related to the appeal are currently pending before the district court. The costs were recently awarded by the Court in full. VVG has paid the cost award. The Company believes it has reached a resolution on the outstanding attorney’s fees owed to the Company. At that point, a dismissal will be filed on the case.
Item 1A. Risk Factors
There have been no material changes in the risk factors applicable to us from those identified in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the period ended December 31, 2021 filed with the Securities and Exchange Commission on March 31, 2022.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company is subject to restrictions on the payment of dividends and other working capital requirements in its loan and debt agreements. See Note 11 to the Financial Statements included in Part I to this Quarterly Report on Form 10-Q for additional information on the Company’s indebtedness and related restrictions therein.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
2.1 * | ||
2.2 * | ||
10.1 ** | ||
10.2 * ** | ||
10.3 * + | ||
10.4 * + | ||
10.5 * + | ||
10.6 * | ||
10.7 * + | ||
10.8 * + | ||
10.9 * + | ||
10.10 * + | ||
10.11 * ** | ||
31.1 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32 * | ||
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
+ | Certain exhibits and schedules to the agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to supplementally furnish copies of any omitted schedules to the Securities and Exchange Commission upon request. |
* | Furnished herewith. |
** | Indicates management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 9, 2022 | MEDICINE MAN TECHNOLOGIES, INC. | |
By: | /s/ Justin Dye | |
Justin Dye, Chief Executive Officer | ||
By: | /s/ Nancy Huber | |
Nancy Huber, Chief Financial Officer | ||
(Principal Financial Officer and Chief Accounting Officer) |
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