Tony
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 |
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| 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 November 1st, 2023, the Registrant had
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 37 | |
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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, the following:
● | 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.
3
Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements in this 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 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
Expressed in U.S. Dollars
September 30, | December 31, | |||||
2023 | 2022 | |||||
| (Unaudited) |
| (Audited) | |||
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 $ |
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Investments | | | ||||
Goodwill |
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Intangible assets, net accumulated amortization of $ |
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Note receivable – noncurrent, net |
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Deferred tax assets, net | | — | ||||
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' EQUITY |
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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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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 | | | ||||
Deferred income taxes, net |
| — |
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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 |
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Common stock held in treasury, at cost, |
| ( |
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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, 2023 and 2022
For the Three Months Ended | For the Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||
| (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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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 from operations |
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Other income (expense) |
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Interest expense, net |
| ( |
| ( |
| ( |
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Unrealized gain on derivative liabilities |
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Other loss |
| — |
| — |
| — |
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Unrealized gain (loss) on investments |
| — |
| ( |
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Total other income (expense) |
| ( |
| ( |
| ( |
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Pre-tax net income | | | | | |||||||||
Provision for income taxes |
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Net income (loss) | $ | ( | $ | | $ | ( | $ | | |||||
Less: Accumulated preferred stock dividends for the period |
| ( |
| ( |
| ( |
| ( | |||||
Net income (loss) attributable to common stockholders | $ | ( | $ | | $ | ( | $ | | |||||
Earnings (loss) per share attributable to common shareholders |
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Basic (loss) earnings per share | $ | ( | $ | — | $ | ( | $ | | |||||
Diluted (loss) earnings per share | $ | ( | $ | — | $ | ( | $ | | |||||
Weighted average number of shares outstanding – basic |
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Weighted average number of shares outstanding – diluted |
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Comprehensive (loss) income | $ | ( | $ | | $ | ( | $ | |
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, 2023 and 2022
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, December 31, 2021 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| — |
| — |
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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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Return of common stock as compensation to employees, officers and/or directors | — | — | — | — | — | — | | ( |
| ( | ||||||||||||||
Stock based compensation expense related to common stock options |
| — |
| — |
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| — |
| — |
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Balance, September 30, 2022 |
| | $ | |
| | $ | | $ | | $ | ( |
| | $ | ( | $ | |
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value | Capital |
| Deficit |
| Shares |
| Cost |
| Equity | ||||||||
Balance, December 31, 2022 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
| ||||||||||||||||||||||||
Net income (loss) |
| — |
| — | — |
| — |
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| ( |
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| ( | ||||||||
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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| — |
| — |
| — |
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Conversion of preferred stock to common stock |
| ( |
| ( | |
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| ( |
| — |
| — |
| — |
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Stock based compensation expense related to common stock options |
| — |
| — | — |
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| — |
| — |
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Balance, September 30, 2023 |
| | $ | | | $ | | $ | | $ | ( |
| | $ | ( | $ | |
See accompanying notes to the condensed consolidated financial statements
7
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended September 30, 2023 and 2022
Expressed in U.S. Dollars
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, June 30, 2022 | | $ | |
| | $ | | $ | | $ | ( |
| | $ | ( | $ | | |||||||
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Net income (loss) |
| — |
| — | — |
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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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Stock based compensation expense related to common stock options |
| — |
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Balance, September 30, 2022 |
| | $ | | | $ | | $ | | $ | ( |
| | $ | ( | $ | |
Additional | Total | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Treasury Stock | Stockholders’ | |||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Deficit |
| Shares |
| Cost |
| Equity | |||||||
Balance, June 30, 2023 | | $ | | | $ | | $ | | $ | ( | | $ | ( | $ | | |||||||||
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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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| — |
| — |
| — |
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Conversion of preferred stock to common stock |
| ( |
| ( | |
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| ( |
| — |
| — |
| — |
| — | |||||||
Stock based compensation expense related to common stock options |
| — |
| — | — |
| — |
| ( |
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| — |
| — |
| ( | ||||||||
Balance, September 30, 2023 |
| | $ | | | $ | | $ | | $ | ( |
| | $ | ( | $ | |
See accompanying notes to the condensed consolidated financial statements
8
MEDICINE MAN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Periods Ended September 30, 2023 and 2022
For the Nine Months Ended | ||||||
September 30, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities |
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Net income (loss) for the period | ( | | ||||
Adjustments to reconcile net income (loss) to cash for operating activities |
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Depreciation and amortization | |
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Non-cash interest expense | | | ||||
Non-cash lease expense | |
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Deferred taxes | ( |
| — | |||
Change in derivative liabilities | ( |
| ( | |||
Amortization of debt issuance costs | | | ||||
Amortization of debt discount | | | ||||
(Gain) loss on investment, net | ( |
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Stock based compensation | |
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Changes in operating assets and liabilities (net of acquired amounts): |
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Accounts receivable | |
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Inventory | ( |
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Prepaid expenses and other current assets | ( |
| ( | |||
Other assets | |
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Change in operating lease liabilities | ( |
| ( | |||
Accounts payable and other liabilities | ( |
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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, net of cash acquired | ( |
| ( | |||
Purchase of fixed assets | ( |
| ( | |||
Purchase of intangible assets | ( | ( | ||||
Net cash provided by (used in) investing activities |
| ( |
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Cash flows from financing activities: |
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Payment on notes payable |
| ( |
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Proceeds from issuance of common stock, net of issuance costs |
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Net cash provided by (used in) financing activities |
| ( |
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Net (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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Supplemental disclosure of non-cash investing and financing activities: |
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Lease liability arising from right of use asset | | | ||||
Issuance of stock as payment for acquisitions | | | ||||
Issuance of debt for acquisition | | | ||||
Acquisitions: | ||||||
Tangible and intangible assets acquired, net of cash | | | ||||
Liabilities assumed | | | ||||
Goodwill |
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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, the Company entered into an exclusive Technology License Agreement with Futurevision, Inc. f/k/a Medicine Man Production Corp. d/b/a Medicine Man Denver (“Medicine Man Denver”) whereby Medicine Man Denver granted us a license to use all of the proprietary processes they have developed, implemented and practiced at their cannabis facilities relating to the commercial growth, cultivation, marketing, and distribution of medical marijuana and recreational marijuana pursuant to relevant state laws and the right to use and to license such information, including trade secrets, skills and experience (present and future). The Company’s operations are organized into
On April 20, 2020, the Company rebranded, and now conducts its business under the trade name, Schwazze. The corporate name of the Company continues to be Medicine Man Technologies, Inc. The Company’s common stock is listed for trading in the United States on the OTCQX Best Market under the symbol “SHWZ” and also listed for trading in Canada on the NEO Exchange under the symbol “SHWZ.”
The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These unaudited interim consolidated financial statements include all the adjustments, which in the opinion of management, are necessary to present a fair presentation of the Company’s 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, 2022, and 2021, as presented in the Company’s Annual Report on Form 10-K filed on March 29, 2023 with the SEC. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s net earnings and financial position.
2.Accounting Policies and Estimates
There have been no changes in the Company’s accounting policies as described in Note 2, “Accounting Policies and Estimates,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
3.Recently Adopted Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. Pronouncements that are not applicable to the Company or where it has been determined to not have a significant impact on the financial statements have been excluded herein.
In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No (ASU). 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments have been effective for the Company since December 15, 2022. As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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On August 5, 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
4.Notes Receivable
On March 12, 2021, the Company sold equipment to Colorado Cannabis Company LLC (“Colorado Cannabis”). Colorado Cannabis is obligated to pay $
5.Inventory
The Company’s inventory consists of the following as of September 30, 2023 and December 31, 2022:
September 30, |
| December 31, | |||
Raw materials | $ | | $ | | |
Work in process | | | |||
Finished goods | | | |||
Total inventories | $ | | $ | |
As of September 30, 2023 and December 31, 2022, the Company did not recognize any adjustment to net realizable value within its inventory.
6.Property and Equipment
Property and equipment are recorded at cost, net of accumulated depreciation and are comprised of the following:
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Land | $ | | $ | | ||
Building |
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Leasehold improvements |
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Furniture and fixtures | | | ||||
Vehicles, machinery, and tools |
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Software, servers and equipment |
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Construction in progress |
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Total asset cost | $ | | $ | | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Total property and equipment, net of depreciation | $ | | $ | |
Construction in progress is related to both cultivation and manufacturing facilities and includes costs related to finished goods not yet completed or otherwise not ready for use.
Depreciation expense for the three and nine months ended September 30, 2023 was $
11
7.Business Combinations and Asset Acquisitions
Business Combinations
On January 26, 2022, the Company acquired
On February 8, 2022, the Company acquired its New Mexico business pursuant to a purchase agreement with Nuevo Holding, LLC, a wholly-owned subsidiary of the Company (“Nuevo Purchaser”), Nuevo Elemental Holding, LLC (“Elemental Purchaser” and together with Nuevo Purchaser, the “Nuevo Purchasers”), Reynold Greenleaf & Associates LLC (“RGA”), Elemental Kitchen and Laboratories, LLC, a wholly-owned subsidiary of RGA (“Elemental”), the equity holders of RGA and Elemental, and William N. Ford, in his capacity as Representative, as amended on February 9, 2022 (the “Nuevo Purchase Agreement”). The 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 were held by
On February 9, 2022, the Company acquired MCG, LLC (“MCG”), which operates
12
On February 15, 2022, the Company acquired substantially all of the operating assets of Brow 2, LLC (“Brow”) related to its indoor cannabis cultivation operations located in Denver, Colorado (other than assets expressly excluded) and assumed certain liabilities for contracts acquired pursuant to the terms of the Asset Purchase Agreement, dated August 20, 2021, among Double Brow, Brow, and Brian Welsh, as the owner of Brow (the “Brow Purchase Agreement”). The acquired assets included a
On May 31, 2022, the Company acquired substantially all of the operating assets of Urban Dispensary, which operates a dispensary and indoor cultivation in Colorado, pursuant to the terms of an Asset and Personal Goodwill Purchase Agreement, dated March 11, 2022, with Double Brow, Urban Health & Wellness, Inc. d/b/a Urban Dispensary (“Urban Dispensary”), Productive Investments, LLC, and Patrick Johnson (the “Urban Purchase Agreement”). Urban Dispensary operated an indoor cannabis cultivation facility and a single retail dispensary, each located in Denver, Colorado. The aggregate consideration for the Urban Dispensary acquisition was $
On December 15, 2022, the Company acquired substantially all of the operating assets associated with
On May 11, 2023, the Company acquired certain of the operating assets of Cannabis Care Wellness Centers, LLC (d/b/a Smokey’s) and Green Medicals Wellness Center #5, LLC (d/b/a Smokey’s) (together referenced herein as “Smokey’s”), and assumed specific obligations of Smokey’s, pursuant to the terms of the Asset Purchase Agreement, dated January 25, 2023, among Smoke Holdco, LLC, a wholly-owned subsidiary of the Company (“Smokey’s Buyer”), Smokey’s, Jeremy Lewchuk, Thomas Wilczynski, T&B Holdings, LLC, and Thomas Wilczynski, as Representative (the “Smokey’s Purchase Agreement”). Pursuant to the Smokey’s Purchase Agreement, Smokey’s Buyer acquired substantially all of Smokey’s’ assets related to its retail and medical cannabis stores located in Garden City, Colorado and Fort Collins, Colorado. After purchase price adjustments for transaction and related expenses, the aggregate consideration for the Smokey’s acquisition was approximately $
On June 1, 2023, the Company acquired
13
owned subsidiary of the Company (“Everest Purchaser”), Sucellus, LLC (“Everest Seller”), James Griffin, Brook Laskey, William Baldwin, Andrew Dolan, and Greg Templeton, and Brook Laskey, as Representative, as amended on June 1, 2023 (the “Everest Purchase Agreement”). Everest Purchaser acquired substantially all of the operating assets of Everest Seller and assumed specified liabilities of Everest Seller, subject to the terms and conditions set forth in the Everest Purchase Agreement (the “Everest Acquisition”). Pursuant to existing laws and regulations in New Mexico, the cannabis licenses for the facilities managed by Everest Seller are held by a NFP, Everest Apothecary, Inc., (“Everest”). At the closing, Everest Purchaser gained control over Everest by replacing the officers and directors of Everest with officers of the Company. On the same date, Everest Purchaser entered into a separate Call Option Agreement that gives Everest Purchaser the right to acquire
On June 15, 2023, the Company acquired substantially all of the operating assets of Standing Akimbo, LLC (“Standing Akimbo”) related to its medical cannabis store located in Denver, Colorado pursuant to the terms of the Asset Purchase Agreement, dated April 13, 2023 (the “Akimbo Purchase Agreement”), between Double Brow, Standing Akimbo, Spencer Kirson, and John Murphy (together with Spencer Kirson and John Murphy, the “Akimbo Equityholders”). The aggregate consideration for the acquisition was approximately $
The Company estimates intangible assets for current acquisitions based on prior valuations of acquisitions of similar size. The Company’s policy is to record amortization on the intangible assets beginning on the purchase date. Upon the completion of valuation, the Company revises the intangible assets and related amortization as necessary.
These transactions were accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”) in the period acquired. Refer to the Company’s business combination note as described in Note 7, “Business Combinations,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
14
In consideration of the foregoing business combinations entered into during the nine month period ending September 30, 2023, the Company paid as follows:
| Evergreen Holdco, LLC |
| Standing Akimbo, LLC |
| Smoke Holdco, LLC | ||||
Cash |
| $ | | $ | | $ | | ||
Akimbo Deferred Purchase Price | — | | — | ||||||
Everest Deferred Purchase Price | | — | — | ||||||
Seller notes |
| |
| — |
| — | |||
Common stock |
| |
| |
| | |||
Expected earn-out | | — | — | ||||||
Total purchase price | $ | | $ | | $ | |
As of September 30, 2023, the Company’s allocation of the purchase price is as follows:
Description |
| Evergreen Holdco, LLC |
| Standing Akimbo, LLC |
| Smoke Holdco, LLC | |||
Assets acquired: |
|
| |||||||
Cash | $ | | $ | | $ | | |||
Accounts receivable | | — | | ||||||
Inventory |
| |
| |
| — | |||
Fixed assets |
| |
| — |
| — | |||
Intangible assets |
| |
| |
| | |||
Goodwill |
| |
| |
| | |||
Operating lease right of use assets | | — | — | ||||||
Total assets acquired | $ | | $ | | $ | | |||
Liabilities and Equity assumed: |
|
|
|
|
| ||||
Accounts payable and accrued expenses | $ | | $ | — | $ | — | |||
Lease liability | | — | — | ||||||
Total liabilities assumed |
| |
| — |
| — | |||
Estimated fair value of net assets acquired | $ | | $ | | $ | |
The goodwill, which is not expected to be deductible for income tax purposes, consists largely of synergies, assembled workforce, and economies of scale expected from combining the operations of the acquired entities with the Company.
The following unaudited pro forma financial information set forth below gives effect to the Evergreen Holdco, LLC acquisition as if it had occurred on January 1, 2022. Pro forma financial information is not presented for Standing Akimbo, LLC and Smoke Holdco, LLC as such results are immaterial, individually and in aggregate, to both the current and prior periods. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative
15
of the result of operations that would have been achieved had the transaction been consummated as of that time, nor does it purport to be indicative of future financial operation results.
For The Three Months Ended | |||||||
September 30, 2023 | |||||||
Medicine Man Technologies | Evergreen Holdco, LLC | Total | |||||
(unaudited) | (unaudited) | (unaudited) | |||||
Pro forma revenue | $ | | - | $ | | ||
Pro forma net income: | |||||||
Pre- acquisition net income | - | ||||||
Pro forma adjustments: | |||||||
(a) Transaction costs | - | (a) | |||||
(b) Interest expense on Everest Note | - | (b) | |||||
(c) Depreciation and intangible amortization | - | (c) | |||||
(d) Income tax expense | - | (d) | |||||
Total pro forma adjustments | - | ||||||
Total pro forma net income | $ | ( | - | $ | ( |
a) Includes removal of transaction costs associated with the acquisition as they will be reflected as of the beginning of the earliest period presented (January 1, 2022). These costs were included as selling, general and administrative expenses in the statement of comprehensive (loss) income.
b) To record interest on Everest Note of
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
d) To record provision for income tax based on the estimated effective tax rate of
For The Nine Months Ended | |||||||
September 30, 2023 | |||||||
Medicine Man Technologies | Evergreen Holdco, LLC | Total | |||||
(unaudited) | (unaudited) | (unaudited) | |||||
Pro forma revenue | $ | | | $ | | ||
Pro forma net income: | |||||||
Pre- acquisition net income | | ||||||
Pro forma adjustments: | |||||||
(a) Transaction costs | | (a) | |||||
(b) Interest expense on Everest Note | ( | (b) | |||||
(c) Depreciation and intangible amortization | ( | (c) | |||||
(d) Income tax expense | ( | (d) | |||||
Total pro forma adjustments | ( | ||||||
Total pro forma net income | $ | ( | | $ | ( |
a) Includes removal of transaction costs associated with the acquisition as they will be reflected as of the beginning of the earliest period presented (January 1, 2022). These costs were included as selling, general and administrative expenses in the statement of comprehensive (loss) income.
b) To record interest on Everest Note of
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
d) To record provision for income tax based on the estimated effective tax rate of
16
For The Three Months Ended | |||||||
September 30, 2022 | |||||||
Medicine Man Technologies | Evergreen Holdco, LLC | Total | |||||
(unaudited) | (unaudited) | ||||||
Pro forma revenue | $ | | | $ | | ||
Pro forma net income: | |||||||
Pre- acquisition net income | | ||||||
Pro forma adjustments: | |||||||
(a) Transaction costs | ( | (a) | |||||
(b) Interest expense on Everest Note | ( | (b) | |||||
(c) Depreciation and intangible amortization | ( | (c) | |||||
Total pro forma adjustments | ( | ||||||
Total pro forma net income | $ | | | |
a) Includes transaction costs related to the acquisition (reflected as of January 1, 2022).
b) To record interest on Everest Note of
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
For The Nine Months Ended | |||||||
September 30, 2022 | |||||||
Medicine Man Technologies | Evergreen Holdco, LLC | Total | |||||
(unaudited) | (unaudited) | ||||||
Pro forma revenue | $ | | | $ | | ||
Pro forma net income: | |||||||
Pre- acquisition net income | | ||||||
Pro forma adjustments: | |||||||
(a) Transaction costs | ( | (a) | |||||
(b) Interest expense on Everest Note | ( | (b) | |||||
(c) Depreciation and intangible amortization | ( | (c) | |||||
Total pro forma adjustments | ( | ||||||
Total pro forma net income | $ | | | |
a) Includes transaction costs related to the acquisition (reflected as of January 1, 2022).
b) To record interest on Everest Note of
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
17
For The Year Ended | |||||||
December 31, 2022 | |||||||
Medicine Man Technologies | Evergreen Holdco, LLC | Total | |||||
(unaudited) | (unaudited) | ||||||
Pro forma revenue | $ | | | $ | | ||
Pro forma net income: | |||||||
Pre- acquisition net income | | ||||||
Pro forma adjustments: | |||||||
(a) Transaction costs | ( | (a) | |||||
(b) Interest expense on Everest Note | ( | (b) | |||||
(c) Depreciation and intangible amortization | ( | (c) | |||||
Total pro forma adjustments | ( | ||||||
Total pro forma net income | $ | ( | | ( |
a) Includes transaction costs related to the acquisition (reflected as of January 1, 2022).
b) To record interest on Everest Note of
c) To record depreciation of fixed assets and amortization of intangible assets related to fixed assets and intangible assets acquired in the transaction.
Asset Acquisitions
In two separate closings on June 16, 2023 and September 13, 2023, the Company acquired a retail marijuana license and a medical marijuana license, respectively, from Vertical Investment Group LLC d/b/a Stellar Cannabis Co. (“Stellar”). Pursuant to the terms of the License Transfer Agreement, as amended and restated on April 17, 2023, the aggregate consideration for the Stellar medical and retail licenses was $
8.Goodwill Accounting
The Company accounts for acquisitions in which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase.
| Retail |
| Wholesale |
| Other |
| Total | |||||
Balance as of January 1, 2023 | $ | | $ | | $ | | $ | | ||||
Goodwill acquired during the period | | — | — | | ||||||||
Measurement-period adjustment to prior year acquisition | ( | — | ( | ( | ||||||||
Balance as of September 30, 2023 | $ | | | $ | | $ | |
The Company performed its annual fair value assessment as of December 31, 2022 on its subsidiaries with material goodwill on their respective balance sheets and recognized a goodwill impairment charge of $
18
such impairment existed as of September 30, 2023. Impairment is recorded when the carrying values of the reporting units exceed the estimated fair value.
| Retail |
| Wholesale |
| Other |
| Total | |||||
Balance as of January 1, 2022 | $ | | | $ | | $ | | |||||
Goodwill acquired during the period | | | | | ||||||||
Measurement-period adjustment to prior year acquisition | | — | — | | ||||||||
Goodwill Impairment during 2022 | — | ( | ( | ( | ||||||||
Balance as of December 31, 2022 | $ | | | $ | | $ | |
9.Intangible Asset
Intangible assets as of September 30, 2023 and December 31, 2022 were comprised of the following:
September 30, 2023 | December 31, 2022 | |||||||||||
Gross | Gross | |||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||
| Amount |
| Amortization |
| Amount |
| Amortization | |||||
License agreements |
| $ | | $ | ( | $ | | $ | ( | |||
Tradename | |
| ( |
| |
| ( | |||||
Customer relationships | |
| ( |
| |
| ( | |||||
Non-compete | |
| ( |
| |
| ( | |||||
Product license and registration | |
| ( | |
| ( | ||||||
Trade secret | |
| ( |
| |
| ( | |||||
Total Intangible Assets | $ | | $ | ( | $ | | $ | ( |
Amortization expense was $
The following table presents the Company's future projected annual amortization expense as of September 30, 2023:
Remainder of 2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter | | ||
Total future projected annual amortization expense | $ | |
10.Derivative Liability
Investor Notes
On December 3, 2021, the Company and its subsidiaries, as guarantors (the “Subsidiary Guarantors”) entered into a Securities Purchase Agreement with
19
approximately $
A reconciliation of the beginning and ending balances of the derivative liabilities for the periods ended September 30, 2023 and December 31, 2022 were as follows:
Balance as of January 1, 2022 | $ | | |
Loss on derivative liability |
| ( | |
Balance as of December 31, 2022 | $ | | |
Loss on derivative liability |
| ( | |
Balance as of March 31, 2023 | $ | | |
Loss on derivative liability |
| ( | |
Balance as of June 30, 2023 | $ | | |
Loss on derivative liability |
| ( | |
Balance as of September 30, 2023 | $ | |
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 to determine the appropriate fair value. The derivative liability will ultimately be converted into the Company’s equity when the Investor Notes are converted or will be extinguished on the repayment of the Investor Notes. The derivative liability will not result in the outlay of any additional cash by the Company. Upon initial recognition, the Company recorded a derivative liability and debt discount of $
11.Debt
Term Loan — On February 26, 2021, the Company entered into a Loan Agreement with SHWZ Altmore, LLC (“Altmore”), as lender, and GGG Partners LLC, as collateral agent (the “Loan Agreement”). Upon execution of the Loan Agreement, the Company received $
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
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 $
20
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 Note Investors will have the right, at their option, to require the Company to repurchase some or all their Notes for cash in an amount equal to the principal amount of the Investor Notes being repurchased plus accrued and unpaid interest up to the date of repurchase.
On or after the second anniversary of the issuance date, the Company may, at its option, convert up to
The Investor Notes have a contingent redemption feature that involves a substantial premium, requiring the same to be bifurcated as a derivative liability.
The Investor Notes bear interest at
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
21
or other service agreement (the “Restricted Payments”) but the Company may declare and pay dividends if payable solely in its own equity, or, in the case of the Subsidiary Guarantors, amounts payable to such subsidiaries with respect to its applicable equity ownership. Provided the Company is not in default under the terms of the Indenture, the Company may make Restricted Payments not otherwise permitted thereunder (a) in an amount not to exceed $
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
Nuevo Note – On February 8, 2022, in connection with the Nuevo Purchase Agreement, Nuevo Purchaser issued the Nuevo Note to RGA, requiring the Company to make payments on an aggregate amount of $
Everest Note – On June 1, 2023, in connection with the Everest Purchase Agreement, Everest Purchaser issued the Everest Note to Everest Seller, requiring the Company to make payments on an aggregate amount of $
Akimbo Deferred Purchase Price– On June 15, 2023, in connection with the Akimbo Purchase Agreement, the Company entered into an agreement to pay $
22
The following tables sets forth our indebtedness as of September 30, 2023 and December 31, 2022, respectively, and future obligations:
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Term loan dated February 26, 2021, in the original amount of $ |
| $ | | $ | | |
Seller notes dated December 17, 2020, in the original amount of $ |
| |
| | ||
Investor note dated December 3, 2021, in the original amount of $ |
| |
| | ||
Nuevo note dated February 7, 2022, in the original amount of $ | | | ||||
Everest note dated June 1, 2023, in the original amount of $ | | — | ||||
Akimbo Deferred Purchase Price effective June 15, 2023, 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 | Net Long | |||||||||
| Payments |
| Costs |
| Debt Discount |
| Term Debt | |||||
2023 |
| |
| |
| |
| ( | ||||
2024 |
| |
| |
| |
| ( | ||||
2025 |
| |
| |
| |
| | ||||
2026 |
| |
| |
| |
| | ||||
2027 |
| |
| — |
| — |
| | ||||
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
23
over the lease term on a straight-line basis. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
The Company’s leases consist of real estate leases for office, retail, cultivation, and manufacturing facilities. The Company elected to combine the lease and related non-lease components for its operating leases.
The Company’s operating leases include options to extend or terminate the lease, which are not included in the determination of the ROU asset or lease liability unless reasonably certain to be exercised. The Company’s operating leases have remaining lease terms of less than
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, 2023 | ||
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, 2023 are as follows:
2023 |
| $ | |
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, 2023:
2023 |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter | | ||
Total | $ | |
13.Stockholders’ Equity
The Company is authorized to issue
Preferred Stock
The number of shares of Series A Cumulative Preferred Stock, par value $
24
constituting any series may increase or decrease, but not below the number of such series then outstanding, the shares of any subsequent series.
The Company had
Common Stock
The Company is authorized to issue
Equity Incentive Plan
The Company previously adopted the Medicine Man Technologies, Inc. 2017 Equity Incentive Plan, as amended (the “Equity Plan”), which permits the Company to grant stock awards, incentive stock option awards (“ISO Awards”), non-statutory stock options, restricted stock, restricted stock units (“RSUs”), and performance stock units (“PSUs”) to certain qualifying employees and individuals. ISO Awards granted under the Equity Plan are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, and the ISO Awards generally vest in
The Company recognized ($
The Company recognized $
25
The following table summarizes the ISO Awards activity granted under the Equity Plan as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
Options | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||
Outstanding at January 1, 2023 | | $ | | $ | | ||||||
Granted | | | — | ||||||||
Forfeited | ( | | — | — | |||||||
Vested | ( | | — | — | |||||||
Balance at September 30, 2023 | | $ | | $ | — | ||||||
Exercised | — | — | — | — | |||||||
Exercisable at September 30,2023 | | $ | | — |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2023 and December 31, 2022, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on September 30, 2023 and December 31, 2022. This amount will change in future periods based on the fair market value of the Company’s shares and the number of options outstanding.
The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted during the nine months ended September 30, 2023 and the year ended December 31, 2022, using the following ranges of assumptions:
September 30, 2023 | December 31, 2022 | ||||
Risk free rate | |||||
Expected dividend yield | |||||
Expected volatility | |||||
Expected option life |
The following table summarizes the number of unvested RSU awards under the LTIP as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
Options | Shares | Weighted-Average Grant Date Fair Value | |||
Unvested shares at January 1, 2023 | — | $ | — | ||
Granted | | | |||
Exercised | — | — | |||
Forfeited or expired | — | — | |||
Vested | ( | | |||
Unvested at September 30, 2023 | | $ | |
The following table summarizes the number of unvested PSU awards under the LTIP as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
Performance Share Units | Units | Weighted-Average Grant Date Fair Value | |||
Unvested shares at January 1, 2023 | - | $ | - | ||
Granted | | | |||
Exercised | - | - | |||
Forfeited or expired | ( | | |||
Vested | - | - | |||
Unvested at September 30, 2023 | | $ | |
26
The following table summarizes the ISO Awards activity granted under the LTIP as of September 30, 2023 and December 31, 2022, and the changes during the nine months ended September 30, 2023:
Options | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||
Outstanding at January 1, 2023 | — | $ | — | — | $ | — | |||||
Granted | | | — | ||||||||
Forfeited | ( | | — | — | |||||||
Vested | — | — | — | — | |||||||
Balance at September 30, 2023 | | $ | | $ | — | ||||||
Exercised | — | — | — | — | |||||||
Exercisable at September 30,2023 | | $ | | — |
As permitted under ASC 718, the Company has an accounting policy to account for forfeitures when they occur.
Common Stock Issued as Compensation to Employees, Officers, and Directors
For the year ended December 31, 2022, the Company issued
For the nine months ended September 30, 2023, the Company issued
Beginning on December 31, 2023, the company will issue Common Stock to Directors as compensation for its services on the Board on a quarterly basis in arrears.
Common and Preferred Stock Issued as Payment for Acquisitions
The Company issued an aggregate of
On February 9, 2022, the Company issued
On May 31, 2022, the Company issued
On May 11, 2023, the Company issued
On June 1, 2023, the Company issued
On June 15, 2023, 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.
27
There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants, and the assumptions used in the Black Scholes option-pricing model are moderately judgmental.
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, 2023:
| Equity Classified Warrants |
| Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||
Balance as of December 31, 2022 | | $ | | ||||
Warrants exercised |
| — | — | — | |||
Warrants forfeited/expired |
| ( | — | — | |||
Warrants issued |
| — | — | — | |||
Balance as of September 30, 2023 |
| | $ | |
14.Earnings per share (Basic and Dilutive)
The Company computes net income (loss) per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted Earnings Per Share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to Common Stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
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The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations for the three and nine months ended September 30, 2023 and 2022.
| For the Three Months Ended |
| For the Nine Months Ended |
| |||||||||
September 30, | September 30, | ||||||||||||
2023 |
| 2022 | 2023 |
| 2022 |
| |||||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) | $ | ( | $ | | $ | ( | $ | | |||||
Less: Accumulated preferred stock dividends for the period |
| ( |
| ( |
| ( |
| ( | |||||
Net income (loss) attributable to common stockholders | $ | ( | $ | | $ | ( | $ | | |||||
Denominator: |
|
|
|
|
|
|
|
| |||||
Weighted-average shares of common stock |
| |
| |
| |
| | |||||
Basic earnings (loss) per share | $ | ( | $ | | $ | ( | $ | | |||||
Numerator: |
|
|
|
|
|
|
|
| |||||
Net income (loss) attributable to common stockholders – Basic | ( | | ( | | |||||||||
Add: Investor note accrued interest | | — | | — | |||||||||
Add: Investor note amortized debt discount | | — | | — | |||||||||
Less: Loss on derivative liability related to investor note | ( | — | ( | — | |||||||||
Net income (loss) attributable to common stockholders – dilutive | $ | ( | $ | | $ | ( | $ | | |||||
Denominator: |
|
|
|
|
|
|
|
| |||||
Weighted-average shares of common stock |
| |
| |
| |
| | |||||
Dilutive effect of investor notes |
| |
| — |
| |
| — | |||||
Dilutive effect of warrants |
| — |
| |
| — |
| | |||||
Dilutive effect of options |
| — |
| |
| — |
| | |||||
Dilutive effect of preferred stock |
| — |
| |
| — |
| | |||||
Diluted weighted-average shares of common stock |
| |
| |
| |
| | |||||
Diluted earnings (loss) 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 earnings (loss) per share calculation, shares of preferred stock, warrants, options, and restricted stock units are excluded from the calculation for the three and nine months ended September 30, 2023 and 2022, as the inclusion of the common share equivalents would be anti-dilutive.
29
15.Tax Provision
The following table summarizes the Company’s income tax expense and effective tax rates for three and nine months ended September 30, 2023 and September 30, 2022:
Three Months Ended September 30, | ||||||
| 2023 |
| 2022 | |||
Income before income taxes | $ | | $ | | ||
Income tax expense |
| |
| | ||
Effective tax rate |
Nine Months Ended September 30, | ||||||
| 2023 |
| 2022 | |||
Income 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, 2023 varies from the three months and nine months ended September 30, 2022 primarily due to the change in nondeductible expenses as a proportion of total expenses in the current year. The Company incurs expenses that are not deductible due to IRC Section 280E limitations which results in significant income tax expense.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The Company’s valuation allowance represents the amount of tax benefits that are likely to not be realized. Management assesses the need for a valuation allowance each period and continues to have a full valuation allowance on its deferred tax assets as of September 30, 2023.
With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state, or local tax authorities for years before 2017.
16.Related Party Transactions
Transactions with Jonathan Berger
On May 4, 2022, and June 14, 2022, the Company issued
On April 5, 2023, the Company issued
30
Mr. Berger as compensation for services as the Chair of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee of the Board.
On September 29, 2023, the Company issued
Transactions with Jeffrey Cozad and Entities Affiliated with Jeffrey Cozad
On February 26, 2021, the Company entered into a Securities Purchase Agreement (the “CRW SPA”) with CRW pursuant to which the Company issued and sold
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
On April 5, 2023, the Company issued
On September 29, 2023, the Company issued
Transactions with Justin Dye and Entities Affiliated with Justin Dye
The Company has participated in several transactions involving Dye Capital, Dye Capital Cann Holdings, LLC (“Dye Cann I”), Dye Capital Cann Holdings II, LLC (“Dye Cann II”), and Dye Capital LLLP (“Dye LLLP”). Justin Dye, the Company’s former Chief Executive Officer, current Chairman of the Board, and one of the largest beneficial owners of Common Stock and Preferred Stock, controls Dye LLLP and Dye Capital, and Dye Capital controls Dye Cann I and Dye Cann II. Dye Cann I is the largest holder of the Company’s outstanding Common Stock. Dye Cann II is a significant holder
31
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 two individuals for election or appointment to the Company’s board of directors (the “Board”) and Board observer rights. Further, under the Dye Cann I SPA, until June 5, 2022, if the Company desires to pursue debt or equity financing, the Company must first give Dye Cann I an opportunity to provide a proposal to the Company with the terms upon which Dye Cann I would be willing to provide or secure such financing. If the Company does not accept Dye Cann I’s proposal, the Company may pursue such debt or equity financing from other sources but Dye Cann I has a right to participate in such financing to the extent required to enable Dye Cann I to maintain the percentage of Common Stock (on a fully-diluted basis) that it then owns, in the case of equity securities, or, in the case of debt, a pro rata portion of such debt based on the percentage of Common Stock (on a fully-diluted basis) that it then owns. The warrants granted to Dye Cann I pursuant to the Dye Cann I SPA expired on June 5, 2022.
The Company entered into a Securities Purchase Agreement (as amended, the “Dye Cann II SPA”) with Dye Cann II on November 16, 2020, pursuant to which the Company agreed to sell to Dye Cann II shares of Preferred Stock in one or more tranches at a price of $
The Company granted Dye Cann II certain demand and piggyback registration rights with respect to the shares of Common Stock issuable upon conversion of the Preferred Stock under the Dye Cann II SPA. Further, the Company granted Dye Can II the right to designate one or more individuals for election or appointment to the Board and Board observer rights.
On December 16, 2020, the Company entered into a Secured Convertible Note Purchase Agreement with Dye Capital and issued and sold to Dye Capital a Convertible Note and Security Agreement in the principal amount of $
On May 27, 2023, the Company entered into an agreement with Mr. Dye to provide for the compensation of Mr. Dye as the Chairman of the Board (the “Chair Agreement”). The Chair Agreement provides that Mr. Dye will be entitled to annual compensation in the amount of $
32
payment is scheduled to occur on or around December 31, 2023. The Chair Agreement also contains a termination fee of $
On June 13, 2023, Dye Capital LLLP, an entity owned by Mr. Dye, indirectly provided a loan in the amount of approximately $
The Company also acquires certain advertising and marketing services from Tella Digital, an on-premises digital experience solution, of which Mr. Dye is a partial owner and Chairman of the board of directors. For the three and nine months ended September 30, 2023, the Company recorded expenses of $
On September 29, 2023, 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 April 5, 2023, the Company issued
On September 29, 2023, the Company issued
Transactions with Entities Affiliated with Nirup Krishnamurthy
The Company also acquires certain advertising and marketing services from Tella Digital, an on-premises digital experience solution, of which Mr. Krishnamurthy is a partial owner and serves as director on Tella Digital’s board. For the three and nine months ended September 30, 2023, the Company recorded expenses of $
On May 24, 2023, the Company entered into an Amended and Restated Employment Agreement with Mr. Krishnamurthy following his appointment as Chief Executive Officer (the “CEO Agreement”). Pursuant to the CEO Agreement, the Company granted Mr. Krishnamurthy an additional
33
Transactions with Paul Montalbano
On April 5, 2023, the Company issued
On September 29, 2023, 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 $
On April 5, 2023, the Company issued
On September 29, 2023, the Company issued
Transactions with Marc Rubin and Entities Affiliated with Marc Rubin
On February 26, 2021, the Company entered into the CRW SPA with CRW, of which Marc Rubin is a beneficial owner. Pursuant to the CRW SPA, the Company issued and sold
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 $
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an increase to the principal amount of the Note. Mr. Rubin is the majority owner of the Rubin Revocable Trust and a member of the Board. In October 2022, the Board appointed Mr. Rubin as a director to fill a vacancy on the Board.
On April 5, 2023, the Company issued
On September 29, 2023, the Company issued
Transactions with Bradley Stewart
On April 5, 2023 and May 3, 2023, the Company issued
On September 29, 2023, the Company issued
Transactions with Star Buds Parties
The Company has participated in several transactions involving entities owned or affiliated with one or more of its former directors that are affiliated with Star Buds and/or the Star Buds Acquisitions. These individuals include: (i) Brian Ruden, a former director of the Company as of October 2022, and (ii) Salim Wahdan, a former director of the Company as of March 2023 (hereinafter referred to as the “Star Buds Affiliates”). Both Brian Ruden and Salim Wahdan had an ownership stake in the Star Buds companies acquired by the Company between December 2020 and March 2021.
Between December 17, 2020 and March 2, 2021, the Company’s wholly-owned subsidiary SBUD LLC acquired the Star Buds assets. The aggregate purchase price for the Star Buds assets was $
As of September 30, 2023 December 31, 2022, the Company owed an aggregate principal amount of $
In connection with acquiring the Star Buds assets the Company also assumed and acquired a number of leases for which one or more of the Star Buds Affiliates serve as landlord or maintain an ownership interest in the landlord entity. The Company has entered into a lease with each of 428 S. McCulloch LLC, Colorado Real Estate Holdings LLC, 5844 Ventures LLC, 5238 W 44th LLC, 4690 Brighton Blvd LLC, 14655 Arapahoe LLC and Montview Real Estate LLC, on substantially the same terms. Each of the leases is for an initial
35
Montview Real Estate LLC (“Aurora Lease”) are for the Company’s Arapahoe and Aurora locations, respectively, and were effective on March 2, 2021. The Pueblo West Lease, Lakeside Lease, and Commerce City Lease each provide for a monthly rent payment of $
On December 17, 2020, SBUD LLC entered into a Trademark License Agreement with Star Brands LLC (“Star Brands”) under which Star Brands licenses certain trademarks to SBUD LLC effective as of the closing of the acquisitions of all of the Star Buds assets. SBUD LLC has no payment obligation under this agreement. On June 15, 2023, the Company entered into a Licensing Agreement with Star Brands pursuant to which Star Brands licenses additional trademarks to the Company for the exclusive right to sell such licensed products in New Mexico (the “Star Brands Agreement”). Pursuant to the Star Brands Agreement, the Company is required to make quarterly payments to Star Brands for use of such exclusive license. The Company has not made any payments pursuant to the Star Brands Agreement as of June 30, 2023. Mr. Ruden is a partial owner of Star Brands.
In connection with the Star Buds Acquisitions, the Company granted Mr. Ruden and Naser Joudeh, another recipient of Preferred Stock from the Star Buds Acquisitions, the right to jointly designate two or three individuals for election or appointment to the Board, depending on the size of the Board and subject to ownership limitations.
17.Commitments and Contingencies
Pursuant to the Everest Purchase Agreement, the Company may be required to make a potential “earn-out” payment of up to an additional $
18.Segment Information
The Company has
The following information represents segment activity for the three months ended September 30, 2023:
For The Three Months Ended | ||||||||||||
September 30, 2023 | ||||||||||||
| Retail |
| Wholesale |
| Other |
| Total | |||||
External revenues | $ | | $ | | $ | | $ | | ||||
Depreciation and intangible assets amortization | | | | | ||||||||
Segment profit |
| |
| |
| ( |
| | ||||
Segment assets |
| |
| |
| |
| |
36
The following information represents segment activity for the nine months ended September 30, 2023:
For The Nine Months Ended | ||||||||||||
September 30, 2023 | ||||||||||||
| Retail | Wholesale |
| Other |
| Total | ||||||
External revenues | $ | | $ | | $ | | $ | | ||||
Depreciation and intangible assets amortization | | | | | ||||||||
Segment profit |
| |
| ( |
| ( |
| | ||||
Segment assets |
| |
| |
| |
| |
The following information represents segment activity for the three and nine months ended September 30, 2022:
For The Three Months Ended | ||||||||||||
September 30, 2022 | ||||||||||||
Retail | Wholesale |
| Other |
| Total | |||||||
External revenues | $ | | $ | | $ | | $ | | ||||
Depreciation and intangible assets amortization | | | | | ||||||||
Segment profit | | | ( | | ||||||||
Segment assets | | | | |
For The Nine Months Ended | ||||||||||||
September 30, 2022 | ||||||||||||
| Retail |
| Wholesale |
| Other |
| Total | |||||
External revenues | $ | | $ | | $ | | $ | | ||||
Depreciation and intangible assets amortization | | | | | ||||||||
Segment profit | | | ( | | ||||||||
Segment assets | | | | |
19.Subsequent Events
In accordance with FASB ASC 855-10, Subsequent Events, the Company has analyzed its operations subsequent to September 30, 2023 to the date these condensed consolidated financial statements were issued and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC. In addition to our historical unaudited condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.” See also, “CAUTIONARY NOTE ABOUT FORWARD-LOOKING INFORMATION.”
OVERVIEW OF THE COMPANY
Established in 2014 and headquartered in Denver, Colorado, Medicine Man Technologies, Inc., is a vertically integrated cannabis company with experienced retail leadership and operations in Colorado and New Mexico. The Company is focused on building a premier, vertically integrated cannabis company by taking its retail operating playbook to other states where it can develop a differentiated leadership position focused on assortment, value, and service. The Company is actively building a house of brands that includes retail banners, proprietary products, and licensed brands, while also preserving the ability to control and maintain the quality of its brands through vertical integration. The Company fosters a
37
high-performance culture that combines customer-centric thinking and data science to test, measure, and drive effective business decisions and outcomes.
Q3 Highlights and Recent Developments
During the third quarter of 2023, the Company continued to focus its efforts on strengthening operations, improving the customer experience, and increasing supply chain efficiencies while integrating its three new acquisitions in Colorado and New Mexico.
In May 2023, the Company acquired two new retail dispensaries located in Fort Collins, Colorado, and Garden City, Colorado, from Smokey’s. In June 2023, the Company acquired the Standing Akimbo branded medical dispensary located in Denver, Colorado. Also in June 2023, the Company expanded its New Mexico operations with the acquisition of Everest Apothecary, which added 14 retail dispensaries, one cultivation facility and one manufacturing facility. Additionally, during the third quarter the Company acquired a medical marijuana license from Stellar in addition to the retail marijuana license it acquired from Stellar in June 2023. Since then, the Company has focused on integration synergies, assortment, strategic pricing and the customer experience.
During the third quarter of 2023, the Company also opened an additional Standing Akimbo branded medical dispensary located in Colorado Springs, Colorado and another retail dispensary operating under the Star Buds banner located in Lakewood, Colorado. In New Mexico, the Company opened a store located in Hobbs, New Mexico, under its R. Greenleaf banner. This brings the Company’s total retail footprint to 63 stores with 30 stores in Colorado and 33 stores in New Mexico.
During the fourth quarter of 2023 to date, the Company announced its store within a store concept in Fort Collins, whereby the Company has combined a Star Buds neighborhood dispensary with a Standing Akimbo medical dispensary operating out of the same location, bringing two recognized brands in the recreational and medical retail space together. Additionally, the Company continues to develop its brand strategy and expand its wholesale presence in Colorado and New Mexico, driving penetration in both states, and realizing 10% quarter over quarter growth to date.
On August 2, 2023, the Board appointed Bradley Stewart as a member and Chair of the Board’s Compensation Committee, and it removed Marc Rubin from the Board’s Compensation Committee. Additionally, the Board appointed Jeffrey Cozad as the Chair of the Board’s Nominating and Corporate Governance Committee, and it removed Jonathan Berger as the Chair of the Board’s Nominating and Corporate Governance Committee. Mr. Berger remains as the Chair of the Board’s Audit Committee and as well as our Lead Independent Director.
On October 5, 2023, the Company relocated its corporate headquarters to 865 N. Albion Street, Denver, Colorado.
RESULTS OF OPERATIONS – CONSOLIDATED
The following table sets forth the Company’s selected consolidated financial results for the periods, and as of the dates, indicated. The (i) consolidated statements of operations for the three and nine months ended September 30, 2023 and September 30, 2022 and (ii) consolidated balance sheet as of September 30, 2023 and December 31, 2022 have been derived from and should be read in conjunction with the consolidated financial statements and accompanying notes presented in this report.
The Company’s consolidated financial statements have been prepared in accordance with GAAP and on a going-concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.
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Quarter Ended September 30, 2023 Compared to the Quarter Ended September 30, 2022
For the Three Months Ended |
| |||||||||||
September 30, | 2023 vs 2022 | |||||||||||
| 2023 |
| 2022 |
| $ |
| % |
| ||||
Total revenue | $ | 46,746,935 | $ | 43,190,986 | $ | 3,555,949 | 8 | % | ||||
Total cost of goods and services |
| 25,308,972 |
| 20,715,192 |
| 4,593,780 | 22 | % | ||||
Gross profit |
| 21,437,963 |
| 22,475,794 |
| (1,037,831) | (5) | % | ||||
Total operating expenses |
| 12,514,456 |
| 11,360,936 |
| 1,153,520 | 10 | % | ||||
Income (loss) from operations |
| 8,923,507 |
| 11,114,858 |
| (2,191,351) | (20) | % | ||||
Total other income (expense) |
| (3,804,160) |
| (3,712,108) |
| (92,052) | 2 | % | ||||
Provision for income taxes (benefit) |
| 5,441,809 |
| 5,593,513 |
| (151,704) | (3) | % | ||||
Net income (loss) | $ | (322,462) | $ | 1,809,237 | $ | (2,131,699) | (118) | % | ||||
Earnings (loss) per share attributable to common shareholders – basic | $ | (0.02) | $ | — | $ | (0.02) | (108) | % | ||||
Earnings (loss) per share attributable to common shareholders – diluted | $ | (0.03) | $ | — | $ | (0.03) | (122) | % | ||||
Weighted average number of shares outstanding – basic |
| 87,202,537 |
| 51,232,943 | — | — | ||||||
Weighted average number of shares outstanding – diluted |
| 87,202,537 |
| 137,954,532 | — | — |
Revenue
Revenues for the three months ended September 30, 2023 totaled $46,746,935, including (i) Retail sales of $41,951,969 (ii) Wholesale sales of $4,701,268 and (iii) Other operating revenues of $93,698, compared to revenues of $43,190,986, including (i) Retail sales of $39,759,734, (ii) Wholesale sales of $3,335,252, and (iii) Other operating revenues of $96,000 during the three months ended September 30, 2022, representing an increase of $3,555,949 or 8%. The increase in revenue as compared to the prior periods is primarily driven by additional retail locations and a 10% increase in Wholesale revenue compared to the same period last year. While the Company is beginning to see signs of wholesale pricing stabilization in Colorado, New Mexico license count has increased 76% compared to the same period last year versus a 17% market revenue increase compared to the same period last year. In response to these events, the Company is increasing its efforts on strategic pricing, promotional effectiveness, and targeted loyalty programming for customer acquisition and retention.
Cost of Goods and Services
Cost of goods and services for the three months ended September 30, 2023 totaled $25,308,972 compared to cost of goods and services of $20,715,192 during the three months ended September 30, 2022, representing an increase of $4,593,780 or 22%. Overall cost of goods and services increased over prior period due to the higher initial, one-time cost of acquired inventory associated with the Everest acquisition. During the third quarter of 2023, the Company consolidated manufacturing operations within the Everest Coronado facility for greater operating efficiencies and cost optimization.
Operating Expenses
Operating expenses for the three months ended September 30, 2023 totaled $12,514,456, compared to operating expenses of $11,360,936 during the three months ended September 30, 2022, representing an increase of $1,153,520 or 10%. This is primarily due to the increase in rent, wages, and other operating cost increases associated with the acquired and opened store base during the period. Compared to the same period last year, the Company increased store count from 35 to 63, accounting for the overall SG&A increase.
Other Income (Expense), Net
Other expense, net for the three months ended September 30, 2023 totaled $3,804,160 compared to other expense, net of $3,712,108 during the three months ended September 30, 2022, representing an increase of $92,052 or 2%.
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Net Income (Loss)
As a result of the factors discussed above, the Company generated net loss for the three months ended September 30, 2023 of $322,462, as compared to net income of $1,809,237 for the three months ended September 30, 2022.
Year to Date Ended September 30, 2023 Compared to Year to Date Ended September 30, 2022
For the Nine Months Ended |
| |||||||||||
September 30, | 2023 vs 2022 | |||||||||||
| 2023 |
| 2022 |
| $ |
| % |
| ||||
Total revenue | $ | 129,122,971 | $ | 119,231,932 | $ | 9,891,039 | 8 | % | ||||
Total cost of goods and services |
| 60,133,091 |
| 60,661,933 |
| (528,842) | (1) | % | ||||
Gross profit |
| 68,989,880 |
| 58,569,999 |
| 10,419,881 | 18 | % | ||||
Total operating expenses |
| 49,459,128 |
| 43,210,031 |
| 6,249,097 | 14 | % | ||||
Income (loss) from operations |
| 19,530,752 |
| 15,359,968 |
| 4,170,784 | 27 | % | ||||
Total other income (expense) |
| (9,468,870) |
| 4,770,919 |
| (14,239,789) | (298) | % | ||||
Provision for income taxes (benefit) |
| 15,246,546 |
| 11,259,369 |
| 3,987,177 | 35 | % | ||||
Net income (loss) | $ | (5,184,664) | $ | 8,871,518 | $ | (14,056,182) | (158) | % | ||||
Earnings (loss) per share attributable to common shareholders – basic | $ | (0.14) | $ | 0.07 | $ | (0.21) | (302) | % | ||||
Earnings (loss) per share attributable to common shareholders – diluted | $ | (0.14) | $ | 0.03 | $ | (0.17) | (572) | % | ||||
Weighted average number of shares outstanding – basic |
| 78,635,841 |
| 50,615,437 | — | — | ||||||
Weighted average number of shares outstanding – diluted |
| 78,635,841 |
| 137,337,027 | — | — |
Revenue
Revenues for the nine months ended September 30, 2023 totaled $129,122,971, including (i) Retail sales of $115,871,037 (ii) Wholesale sales of $13,034,676 and (iii) Other operating revenues of $217,258, compared to revenues of $119,231,932, including (i) Retail sales of $104,386,464, (ii) Wholesale of $14,661,268, and (iii) Other operating revenues of $184,200 during the nine months ended September 30, 2022, representing an increase of $9,891,039 or 8%. This increase in revenue is primarily driven by completion of additional acquisition transactions and adult-use legalization taking effect in New Mexico in April 2022.
Since the third quarter of 2022, the Company acquired or opened 28 additional retail stores across its platform bringing the Company’s total store count to 63 as of September 30, 2023, as compared to 35 retail stores as of September 30, 2022. This represents a substantial increase in the Company’s revenue-generating asset base.
Adult-use cannabis sales became legal in New Mexico in April 2022, shortly after the Company entered the New Mexico market with the acquisition of R. Greenleaf. The Company, and the New Mexico market generally, experienced an increase in sales volume in New Mexico due to this legalization event, and the Company’s revenue for the three and nine months ended September 30, 2022, includes higher revenues than the same periods of 2023 due to this anomalous event. Since adult-use legalization took effect in April 2022, the state has seen an increase of 421 open stores as of September 30, 2023, representing a 182% increase in open store count. This dilution has offset increases in revenue from adult-use sales due to market saturation and increased competition.
Cost of Goods and Services
Cost of goods and services for the nine months ended September 30, 2023 totaled $60,133,091 compared to cost of goods and services of $60,661,933 during the nine months ended September 30, 2022, representing a decrease of $528,842 or 1%. Cost of goods and services for the nine months ended September 30, 2023 decreased compared to prior period due to
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vertical integration in the Company’s existing New Mexico operations, and overall improvements to the Company’s operational assets and processes.
Operating Expenses
Operating expenses for the nine months ended September 30, 2023 totaled $49,459,128, compared to operating expenses of $43,210,031 during the nine months ended September 30, 2022, representing an increase of $6,249,097 or 14%. The increase is largely due to higher SG&A expenses associated with the increase in retail stores in Colorado and New Mexico. The Company had 63 open locations as of September 30, 2023, an increase of 28 stores, as compared to 35 open locations as of September 30, 2022, which generated an increase in the Company’s overall operating and overhead expenses.
Other Income (Expense), Net
Other expense, net for the nine months ended September 30, 2023, totaled $9,468,870 compared to other income, net of $4,770,919 during the nine months ended September 30, 2022, representing a decrease in other income, net of $14,239,789 or 298%. The decrease in other income, net is primarily driven by revaluation of derivative liability related to the Investor Notes that was recognized as income of $14,486,005 for the nine months ended September 30, 2023, as compared to income of $28,104,960 recognized from the same derivative liability for the nine months ended September 30, 2022.
Net Income (Loss)
As a result of the factors discussed above, the Company generated net loss for the nine months ended September 30, 2023 of $5,184,664, compared to net income of $8,871,518 for the nine months ended September 30, 2022.
REVENUE BY SEGMENT
The Company has consolidated financial statements across its operating businesses with operating segments of Retail, Wholesale and Other as set forth below.
| For the Three Months Ended September 30, | 2023 vs 2022 | ||||||||||
| 2023 |
| 2022 |
| $ |
| % | |||||
Retail | $ | 41,951,969 | $ | 39,759,734 | $ | 2,192,235 | 6 | % | ||||
Wholesale |
| 4,701,268 |
| 3,335,252 | 1,366,016 | 41 | % | |||||
Other |
| 93,698 |
| 96,000 | (2,302) | (2) | % | |||||
Total revenue | $ | 46,746,935 | $ | 43,190,986 | $ | 3,555,949 | 8 | % |
| For the Nine Months Ended September 30, | 2023 vs 2022 | ||||||||||
| 2023 |
| 2022 |
| $ |
| % | |||||
Retail | $ | 115,871,037 | $ | 104,386,464 | $ | 11,484,573 | 11 | % | ||||
Wholesale |
| 13,034,676 |
| 14,661,268 | (1,626,592) | (11) | % | |||||
Other |
| 217,258 |
| 184,200 | 33,058 | 18 | % | |||||
Total revenue | $ | 129,122,971 | $ | 119,231,932 | $ | 9,891,039 | 8 | % |
Retail revenues increased by approximately 6% during the first three months ended September 30, 2023, as compared to the same period last year due to newly acquired and new store base operating for the full quarter. Retail revenue increased by approximately 11% during the first nine months of 2023 compared to the same period in 2022. This increase in retail revenue is largely driven by the increase in the Company’s revenue-generating asset base by acquisitions and new store openings.
Revenues for Wholesale increased by approximately 41% for the three months ended September 30, 2023, as compared to the same period in 2022 due to increased penetration, expansion into New Mexico and stabilizing prices in the Colorado wholesale market. However, revenues for Wholesale decreased by approximately 11% for the nine months ended September 30, 2023, as compared to the same period in 2022 due to overall lower prices in the Colorado wholesale market
41
year over year. Wholesale prices in Colorado were down approximately 26% for the first nine months of 2023 as compared to the prior period, although early indicators from recent periods suggest downward wholesale pricing pressure may be stabilizing.
The fluctuations in other revenue are due to changes in the amount of promotional engagement and activity in the Company’s retail stores.
DRIVERS OF RESULTS OF OPERATIONS & KEY PERFORMANCE INDICATORS
Revenue
The Company derives its revenue from three revenue streams: (i) Retail, which sells finished goods sourced internally and externally to the end consumer in retail stores; (ii) Wholesale, which is the cultivation of flower and biomass sold internally and externally and the manufacturing of biomass into distillate for integration into externally developed products, such as edibles and internally developed products such as vapes and cartridges under the Purplebee’s brand; and (iii) Other, which includes other income and expenses from sales of vendor promotional programs within the Company’s owned retail assets.
Gross Profit
Gross profit is revenue less cost of goods sold. Cost of goods sold includes costs directly attributable to product sales and includes amounts paid for finished goods such as flower, edibles, and concentrates, as well as manufacturing and cultivation labor, packaging, supplies and overhead such as rent, utilities and other related costs. Cannabis costs are affected by market supply. Gross margin measures our gross profit as a percentage of revenue.
Operating Income
Operating income consists of gross profit less operating expenses. Such operating expenses include selling, general, and administrative expenses (SG&A), professional services, salary, and stock-based compensation expenses. Operating income measures the profitability of the Company’s operating assets.
Operating Working Capital
Operating Working Capital is derived from current assets, which is adjusted to exclude cash and cash equivalents, less current liabilities, which is adjusted to exclude derivative liabilities and the current portion of long term debt. Operating Working Capital is a non-GAAP financial measure, please see the section entitled "Non-GAAP Measures" below.
Adjusted EBITDA
Adjusted EBITDA is derived from operating income, which is adjusted for one-time expenses including merger and acquisition and capital-raising costs, non-cash related compensation costs, goodwill impairment, costs related to discontinued operations, depreciation and amortization, and other one-time expenses. Adjusted EBITDA is a non-GAAP financial measure, please see the section entitled “Non-GAAP Measures” below.
NON-GAAP MEASURES AND RECONCILIATION
Earnings before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA, and Operating Working Capital are non-GAAP measures and do not have standardized definitions under GAAP. The following information provides reconciliations for the supplemental non-GAAP financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures are presented because the Company believes it better explains the results of its core business. Management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-GAAP financial measures presented provide additional perspective and insight when analyzing the
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core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with the GAAP financial measures presented.
| Three Months Ended |
| Nine Months Ended | |||||||||
September 30, |
| September 30, | ||||||||||
| 2023 |
| 2022 | 2023 |
| 2022 | ||||||
Net income (loss) | $ | (322,462) |
| $ | 1,809,237 | $ | (5,184,664) |
| $ | 8,871,518 | ||
Interest expense, net |
| 8,320,397 |
|
| 8,500,235 |
| 23,956,691 |
|
| 23,312,088 | ||
Provision for income taxes |
| 5,441,809 |
|
| 5,593,513 |
| 15,246,546 |
|
| 11,259,369 | ||
Other (income) expense, net of interest expense |
| (4,516,237) |
|
| (4,788,127) |
| (14,487,821) |
|
| (28,083,007) | ||
Depreciation and intangible amortization |
| 5,330,529 |
|
| 3,322,150 |
| 15,808,535 |
|
| 8,823,549 | ||
Earnings before interest, taxes, depreciation and amortization (EBITDA) (non-GAAP) | $ | 14,254,036 |
| $ | 14,437,008 | $ | 35,339,287 |
| $ | 24,183,517 | ||
Non-cash stock compensation |
| (2,438,073) |
|
| 99,898 |
| 622,162 |
|
| 1,788,823 | ||
Deal related expenses |
| 1,401,795 |
|
| 993,828 |
| 3,331,315 |
|
| 4,907,291 | ||
Capital raise related expenses |
| 1,712 |
|
| 185,597 |
| 36,780 |
|
| 791,229 | ||
Inventory adjustment to fair market value for purchase accounting |
| - |
|
| 34,604 |
| - |
|
| 6,541,651 | ||
Severance |
| 121,715 |
|
| 22,434 |
| 425,832 |
|
| 71,536 | ||
Retention program expenses |
| 110,023 |
|
| - |
| 505,655 |
|
| - | ||
Employee relocation expenses |
| 12,867 |
|
| — |
| 65,042 |
|
| 19,110 | ||
Other non-recurring items | 655,244 | 87,097 | 2,132,272 | 422,532 | ||||||||
Adjusted EBITDA (non-GAAP) | $ | 14,119,319 |
| $ | 15,860,466 | $ | 42,458,345 |
| $ | 38,725,689 | ||
Revenue |
| 46,746,935 | 43,190,986 |
| 129,122,971 | 119,231,932 | ||||||
Adjusted EBITDA Percent |
| 30.2% | 36.7% |
| 32.9% | 32.5% | ||||||
| ||||||
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Current assets | $ | 64,384,320 |
| $ | 71,735,033 | |
Less: Cash and cash equivalents |
| (19,624,615) |
|
| (38,949,253) | |
Adjusted current assets (non-GAAP) | 44,759,705 |
| 32,785,780 | |||
Current liabilities | $ | 50,396,192 |
| $ | 47,381,308 | |
Less: Derivative liabilities | (2,022,248) | (16,508,253) | ||||
Less: Current portion of long term debt |
| (4,250,000) |
|
| (2,250,000) | |
Adjusted current liabilities (non-GAAP) | 44,123,944 |
| 28,623,055 | |||
Operating Working Capital (non-GAAP) | $ | 635,761 |
| $ | 4,162,725 |
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of September 30, 2023 and December 31, 2022, the Company had total current liabilities of $50,396,192 and $47,381,308, respectively. As of September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents of $19,624,615 and $38,949,253, respectively to meet its current obligations. The Company’s Operating Working Capital decreased by $3,526,964 for the nine months ended September 30, 2023, as compared to December 31, 2022.
The Company is a growth company, generating cash from operational revenue and capital raises. Cash is being reserved primarily for capital expenditures, facility improvements, acquisitions, and strategic investment opportunities. The
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Company predominantly relies on internal capital that is generated through revenue and any other internal sources of liquidity to meet its short-term capital demands. Management believes the Company’s current projected growth, revenue from consummated acquisitions, and revenue from operations will be sufficient to meet its current obligations as they become due. The Company relies on a combination of internal and external capital to meet its long-term obligations, with internal liquidity sourced from revenue from operations and external financing acquired from various sources, including commercial loan arrangements, capital raises and private placement transactions, and cash from the Investor Notes. Management believes this combination of internal revenue and external liquidity will be sufficient to meet the Company’s long-term obligations; however, it is possible the Company will seek additional external financing to meet strategic investment needs in the future.
Trends Impacting Liquidity
While management believes that the Company has sufficient liquidity to support its capital needs, certain factors may positively or negatively impact the Company’s liquidity and financing opportunities.
Due to our participation in the cannabis industry and the regulatory framework governing cannabis in the United States, our debt and loan arrangements are sometimes subject to higher interest rates than are market for other industries, which has an unfavorable impact on our liquidity and capital resources. The Company also tends to incur higher banking fees and rates than businesses in other industries. Liquidity may also be negatively impacted if the primary banking and credit institutions meaningfully curtail the use of debit card transactions in the cannabis industry. During the third quarter of 2023, Mastercard sent cease-and-desist letters to various banks and payment processors that facilitated cannabis purchases through unpermitted channels and processes, demanding such banks and processors terminate the activity and transactions. Management does not believe recent developments in the payment processing environment are likely to materially impact our liquidity; however, if we experience a transition back to all-cash transactions as a result of increased payment restrictions and limitations, the Company’s liquidity could be negatively impacted due to decreased sales and/or increased cost of compliance. While participation in the cannabis industry tends to negatively impact certain aspects of capital resources more than other industries, this could change in the future with changes to federal law. If the federal government enacts laws permitting the banking and financial industries to engage with the cannabis industry, such as passage of the SAFER Banking Act, (which is an update of the SAFE Banking Act introduced in the U.S. Senate in 2023) or rescheduling marijuana from Schedule I to Schedule III of the Controlled Substance Act, the Company anticipates that this could have a positive impact on the Company’s liquidity because it will open up financing and refinancing opportunities not otherwise widely available to cannabis companies at this time due to the current regulatory landscape.
One of our strategic goals is to grow our business through acquisitions, which also tends to negatively impact liquidity during periods when we consummate an identified acquisition. We expect to continue executing this strategy in future periods, meeting such capital requirements in connection therewith from both internal capital and external financing, which will decrease liquidity. Additionally, the cash requirements to service our debt obligations increase with the passage of time due to interest accrual, which increases constraints on our capital resources and tends to reduce liquidity in the amount of such accruals.
The wholesale cannabis market has experienced downward pricing pressure from over-supply of certain cannabis products in the market, which has affected retail margins in certain periods and will likely impact the relationship between cost and revenue if and/or when supply is constrained. However, we maintain the ability to shift between external sales and internal use or transfer of our wholesale products due to vertical integration based on market conditions, which may mitigate some of the negative impacts of wholesale market downturns. Wholesale pricing can affect margins positively or negatively depending on market conditions, but profit as a percentage of revenue tends to have an inverse relationship with market pricing conditions. Wholesale pricing increases could reduce retail margins and also generate positive profitability in the wholesale segment, and vice versa. The Company anticipates that the wholesale market will likely remain depressed relative to previous periods, which can negatively impact the Company’s overall liquidity.
We have also seen a negative relationship between license applications and liquidity in the markets where we operate, and this may negatively impact our liquidity and financial performance in upcoming periods. Since adult-use cannabis sales became legal in New Mexico in April 2022, 421 active retail stores have opened in the New Mexico Market as of September 30, 2023, representing a 182% increase in active store count. This increase in state-wide license count
44
represents a substantial increase in competitors in that market, which has diluted the Company’s overall market share in New Mexico. As more licenses are issued in states where we operate, our liquidity is likely to be negatively impacted due to increased competition.
Increasing inflation may also negatively impact the liquidity, as the cost of goods and services may increase without corresponding increases to revenue. Inflation increases could also impact the incremental borrowing rate and ability to obtain external financing on similar terms as previous financing arrangements. Increasing inflation and general economic downturn in the United States could also negatively impact revenue to the extent such factors affect consumer behavior. Additional factors or trends that have impacted or could potentially impact liquidity in future periods include general economic conditions such as market saturation, inflation, labor shortages and employee turnover, consumer behavior, and general economic downturn.
Cash Flows
Net cash provided by (used in) operating, investing and financing activities for the periods ended September 30, 2023 and 2022 were as follows:
For the Periods Ended September 30, | |||||||
| 2023 |
| 2022 |
| |||
Net cash provided by (used in) operating activities | $ | 8,749,202 | $ | 434,448 | |||
Net cash provided by (used in) investing activities |
| (25,269,156) |
| (69,390,137) | |||
Net cash provided by (used in) financing activities |
| (2,804,684) |
| 1,280,660 |
Operating Activities
The change in cash related to operating activities for the period ended September 30, 2023, was predominantly driven by expansion and the related increase in sales and operating efficiencies combined with changes to the Company’s operating assets and liabilities.
Investing Activities
The Company’s use of cash from investing activities is driven by acquisition of businesses, cannabis licenses, and property, plant, and equipment for existing entities such as store remodels. The decrease in cash used in investing activities is largely attributable to less cash paid for acquisitions than paid in connection with acquisitions in previous periods.
Financing Activities
Historically, our cash provided by financing activities has mainly consisted of proceeds from our Loan Agreement with Altmore, the Investor Notes and the issuance of shares of Common Stock. The change in cash flow from financing activities is primarily related to payment of cash holdbacks pursuant to acquisition agreements that became due and payable during the third quarter of 2023. In accordance with ASC 230 Statement of Cash Flows, certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s net earnings and financial position.
Description of Indebtedness
Loan Agreement
On February 26, 2021, the Company entered into the Loan Agreement with Altmore. Upon execution of the Loan Agreement, the Company received $10,000,000 of loan proceeds. In connection with the Company’s acquisition of Southern Colorado Growers (“SCG”), the Company received an additional $5,000,000 of loan proceeds under the Loan Agreement. The term loan incurs 15% interest per annum, payable quarterly on March 1, June 1, September 1, and December 1 of each year. The Company has begun making principal payments on June 1, 2023, in the amount of $750,000, payable quarterly with the remainder of the principal due upon maturity on February 26, 2025. The Company’s obligations
45
under the Loan Agreement are secured by a first priority security interest in the assets of PBS Holdco LLC (“PBS”), a wholly-owned subsidiary of the Company and the Company’s Colorado manufacturing operation, and the 36 acres of land in Huerfano County, Colorado owned by the Company and designed for indoor and outdoor cultivation (the “Altmore Collateral”).
Under the terms of the loan, the Company must comply with certain restrictions and covenants. These include customary events of default and various financial covenants including, maintaining (i) a consolidated fixed charge coverage ratio of at least 1.3 at the end of each fiscal quarter beginning in the first quarter of 2022, and (ii) a minimum of $3,000,000 in a deposit account in which the lender has a security interest. As of September 30, 2023, the Company was in compliance with the requirements described above.
Seller Notes
As part of the Star Buds Acquisitions, the Company entered into a deferred payment arrangement with the sellers in an aggregate amount of $44,250,000, also referred to in this report as “seller note(s)”. The seller notes incur 12% interest per annum, payable on the first of every month through November 2025. Principal payments are due in accordance with the following schedule: $13,901,759 on December 17, 2025, $3,474,519 on February 3, 2026, and $26,873,722 on March 2, 2026. The seller notes are secured by a first priority security interest in substantially all of the assets owned by SBUD LLC, a wholly-owned subsidiary of the Company that acquired the Star Buds assets (the “Star Buds Collateral”).
Investor Notes
On December 3, 2021, the Company and the Subsidiary Guarantors entered into the Note Purchase Agreement with 31 accredited investors pursuant to which the Company agreed to issue and sell to the investors 13% senior secured convertible notes due December 7, 2026 in an aggregate principal amount of $95,000,000 for an aggregate purchase price of $93,100,000 (reflecting an original issue discount of $1,900,000, or 2%) in the private placement. On December 7, 2021, the Company consummated the private placement and issued and sold the Investor Notes. The Company received net proceeds of approximately $92,000,000 at the closing, after deducting a commission to the placement agent and estimated offering expenses associated with the private placement payable by the Company.
The Investor Notes were issued pursuant to an Indenture, dated December 7, 2021, among the Company, the Subsidiary Guarantors, Ankura Trust Company, LLC as trustee and Chicago Atlantic Admin, LLC as collateral agent for the Investor Note holders. The Investor Notes will mature five years after issuance unless earlier repurchased, redeemed, or converted. The Investor Notes bear interest at 13% per year paid quarterly commencing March 31, 2022 in cash for an amount equal to the amount payable on such date as if the Investor Notes were subject to an annual interest rate of 9%, with the remainder of the accrued interest payable as an increase to the principal amount of the Investor Notes. The proceeds from the Investor Notes are required to be used to fund previously identified acquisitions and other growth initiatives. The principal is due December 7, 2026. The Company’s obligations under the Indenture and the Investor Notes are secured by (i) a junior security interest in the Altmore Collateral and the Star Buds Collateral, and (ii) a first priority security interest in all assets owned by the Company and the Subsidiary Guarantors on or after December 7, 2021.
Under the Indenture, the Company must comply with certain restrictions and covenants. These include customary events of default and various financial covenants, including maintaining (i) a consolidated fixed charge coverage ratio of no less than 1.30 to 1.00 at the end of each fiscal quarter, and (ii) a minimum of $10,000,000 (in aggregate) in deposit accounts in which the Indenture Collateral Agent has a security interest. As of September 30, 2023, the Company was in compliance with the requirements described above.
The Indenture includes customary affirmative and negative covenants, including limitations on liens, additional indebtedness, repurchases and redemptions of any equity interest in the Company, certain investments, and dividends and other restricted payments, and customary events of default. See Note 11, “Debt,” to the consolidated financial statements for additional details on such restrictions included in the Indenture. These restrictions have not impacted the Company’s ability to meet its cash obligations, although such restrictions and limitations may make additional external financing more difficult to obtain and/or subject to less favorable terms.
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Nuevo Note
As part of the acquisition under the Nuevo Purchase Agreement, Nuevo Holding, LLC, a wholly-owned subsidiary of the Company, issued the Nuevo Note to RGA requiring the Company to make payments on an aggregate amount of $17,000,000. The deferred Nuevo Note incurs 5% interest per year, payable on the first of each month. The principal is due February 7, 2025. The Nuevo Note is unsecured.
Everest Note
In connection with the Everest Purchase Agreement, Everest Purchaser issued the Everest Note to Everest Seller, requiring the Company to make payments on an aggregate amount of $17,500,000. The Everest Note incurs 5% interest per year, payable quarterly starting June 30, 2023. The Company is required to make installment payments of principal and interest starting June 30, 2025, and the total outstanding principal will be due on May 31, 2027. The Everest Note is unsecured.
Contractual Cash Obligations and Other Commitments and Contingencies
Material contractual obligations arising in the normal course of business primarily consist of debt and interest related payments, lease obligations, and purchase price obligations for acquisitions. Management believes that cash flows from operations will be sufficient to satisfy our capital expenditures, debt services, working capital needs, and other contractual obligations for the next twelve months. We may need to obtain additional external financing to meet our material long-term obligations, and management believes the Company will need additional financing to continue execution of its growth strategy in future periods.
The following table quantifies the Company’s future contractual obligation as of September 30, 2023:
| Total |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter | ||||||||
Notes Payable (a) | $ | 193,121,777 | $ | 2,000,000 | $ | 3,000,000 | $ | 27,624,655 | $ | 147,594,213 | $ | 12,902,909 | $ | — | |||||||
Interest Due on Notes Payable (b) |
| 50,808,833 |
| 4,577,254 |
| 18,252,178 |
| 16,379,690 |
| 11,331,798 |
| 267,913 |
| — | |||||||
Right of Use Assets (c) |
| 42,499,184 |
| 2,123,963 |
| 7,399,326 |
| 6,127,958 |
| 5,516,090 |
| 4,325,564 |
| 17,006,284 | |||||||
Deferred Payment for Acquisitions (d) |
| 2,069,173 |
| — |
| 547,011 |
| 601,725 |
| 920,436 |
| — |
| — | |||||||
Total | $ | 288,498,967 | $ | 8,701,217 | $ | 29,198,515 | $ | 50,734,028 | $ | 165,362,537 | $ | 17,496,386 | $ | 17,006,284 |
(a) | Represents principal amounts owed pursuant to the Loan Agreement, the Investor Notes, the Nuevo Note, the seller notes, and the Everest Note, excluding $34,723,592 of unamortized debt discount and $5,339,158 of unamortized debt issuance costs. See Note 11 “Debt” to our consolidated financial statements. |
(b) | Represents cash interest accruals owed pursuant to the Loan Agreement, the Investor Notes, the Nuevo Note, the seller notes, and the Everest Note. The Investor Notes are convertible into Common Stock freely at the option of the holder and subject to certain restrictions at the option of the Company such that conversion events could impact the interest and accrual obligations related to the Investor Notes in future periods. See Note 11 “Debt” to our consolidated financial statements. |
(c) | Reflects our contractual obligations to make future payments under all of the Company’s leases in effect as of September 30, 2023. See Note 12 “Leases” to our consolidated financial statements. |
(d) | Represents the Akimbo Deferred Purchase Price obligation. See Note 7 “Business Combinations” to our consolidated financial statements. |
Critical Accounting 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
47
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
We have three main revenue streams: (i) Retail sales, (ii) Wholesale sales, and (iii) Other revenues from revenues from marketing and promotional activities and other miscellaneous sources not otherwise directly related to our retail and wholesale operations. During 2022, we ceased providing licensing and consulting services, strategically discontinued that portion of our business operations, and are no longer providing these services.
The Company’s retail and wholesale sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, our sales are generally recognized when products are delivered to customers.
The Company’s other revenue, typically from marketing and promotional services, is recognized when our obligations to our client are fulfilled, which is determined when milestones in the contract are achieved.
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until the criteria are met. A contract liability is recorded when consideration is received in advance of the delivery of goods or services. We identify revenue contracts upon acceptance from the customer when such a contract represents a single performance obligation to sell our products.
Stock Based Compensation
We account for share-based payments pursuant to Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation and, accordingly, we record compensation expense for share-based awards based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option pricing model.
Our stock compensation expense for stock options is recognized over the vesting period of the award or expensed immediately under ASC 718 when stock or options are awarded for previous or current service without further recourse.
Income Taxes
ASC 740, Income Taxes requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC 740, the Company’s deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Our deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Goodwill and Intangible Assets
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from our acquisitions is attributable to the value of the potential expanded market opportunity with new customers. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. Our amortizable intangible assets consist of licensing agreements, product licenses and registrations, and intellectual property or trade secrets. Their estimated useful lives range from 3 to 15 years.
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Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. We perform an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, we determine fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, we rely on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, our risk relative to the overall market, our size and industry and other risks specific to us. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then the second step must be taken to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause us to perform an impairment test prior to scheduled annual impairment tests.
We performed our annual fair value assessment as of December 31, 2022 on our subsidiaries with material goodwill on our respective balance sheets and recognized a goodwill impairment charge of $11,719,306, of which $3,708,226 is included in loss from disposal of assets in the accompanying consolidated statements of comprehensive income as it is related to ceased operations during 2022. No additional factors or circumstances existed as of September 30, 2023, that would indicate impairment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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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 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. 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 sale is now completed. On July 26, 2022, the court approved a creditors’ claim process. The Company complied with the claim process and its claim was approved by the receiver. The Company believes that it will, or the receiver will, file a motion to begin winding up the receivership and request that the receiver make a preliminary distribution of the proceeds obtained from the asset sale to approved creditors. The Company believes it is the largest creditor and that the asset sale proceeds will be distributed pro rata to creditors with approved claims.
On August 11, 2023, Justin Fowler, a budtender in the Company’s Cottonwood R. Greenleaf location in New Mexico, filed a wage and hour case as a collective action pursuant to the Fair Labor Standards Act (FLSA) and as a class action under the New Mexico Minimum Wage Act (NMMWA) against the Company, Schwazze New Mexico, LLC and R. Greenleaf Organics (collectively “the Company”) on behalf of himself and similarly situated budtenders employed by the Company. The complaint alleges that the Company’s pooling and allocation of tips violated federal and state law. The Company denies all of Plaintiff’s allegations. To date, Plaintiff has joined 13 Opt-in Plaintiffs, of which two are former employees at one of the Company’s Colorado locations. The parties are presently engaged in early discovery with a mediation tentatively set for February 1, 2024. If mediation fails, the Company intends to vigorously defend the allegations. It is not possible at this time reasonably to assess the final outcome of this litigation or reasonably to estimate the possible loss or range of loss with respect to this litigation. If the Company was not to prevail in final, non-appealable determinations of this litigation, the impact is not anticipated to be material.
On September 6, 2023, John T. Frost (the “Plaintiff”), a budtender at the Company’s Star Buds Louisville, Colorado location, filed a complaint against the Company, Justin Dye, Daniel R. Pabon, Daniel Bonach, Cetan Wanbli Williams, Brian Ruden, Salim Husan Wahdan, Bassel Husan Wahdan, Kyle Kreuger, Forrest Hoffmaster, Nirup Krishnamurthy, Schwazze Colorado, LLC, SBUD, LLC, Two J’s d/b/a/ The Big Tomato, and Star Buds Louisville, LLC (collectively, “Defendants”) in the 20th Judicial District Court for the County of Boulder, Colorado. In the complaint, Plaintiff, Pro Se, alleges, among other claims: (i) violation of the FLSA, the Colorado Wage Claim Act, and Colorado Overtime and Minimum Pay Standards Order #38 stemming from alleged theft of tips, (ii) harassment, (iii) discriminatory and/or unfair employment practices, (iv) unjust enrichment, (v) menacing, (vi) criminal extortion, and (vii) intimidation of a witness. On October 6, 2023, Defendants removed the case from the 20th Judicial District Court for the County of Boulder, Colorado to the United States District Court for the District of Colorado. On October 11, 2023, Plaintiff filed a motion to amend his complaint to include an eighth claim asserting violations of the federal Controlled Substances Act. The District Court subsequently granted a motion by Defendants to extend the time for Defendants to submit an Answer until after resolution of Plaintiff’s motion to amend the complaint. At this time, it is not possible to reasonably assess the final outcome of this
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litigation or to reasonably estimate the possible loss or range of loss with respect to this litigation. If Defendants were not to prevail in final, non-appealable determinations of this litigation, the impact is not anticipated to be material.
Item 1A. Risk Factors
There have been no material changes in the risk factors applicable to us from those identified in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the period ended December 31, 2022 filed with the Securities and Exchange Commission on March 29, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company is subject to restrictions on the payment of dividends and other working capital requirements in its loan and debt agreements. See Note 10 to the Financial Statements included in Part I to this Quarterly Report on Form 10-Q for additional information on the Company’s indebtedness and related restrictions therein.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None. Without limiting the generality of the foregoing, during the three months ended September 30, 2023, no director or officer of the Company adopted or terminated any “Rule 10b5-1 trading arrangement,” or any “non-Rule 10b-5 trading arrangement,” as such terms are defined in Item 408(a) of Regulation S-K.
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Item 6. Exhibits
2.1 + | ||
2.2 ++ | ||
2.3 | ||
2.4 | ||
2.5 + | ||
4.1 | ||
10.1 ˄ | ||
10.2 ˄ | ||
10.3 ˄, ** | Description of Medicine Man Technologies, Inc. 2023 Long-Term Incentive Plan | |
10.4 ˄, ** | Form of Restricted Stock Option and Performance Share Unit Award Agreement | |
31.1 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32 * | ||
99.1 | ||
99.2 | ||
101.INS | Inline XBRL Instance 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. |
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++ Certain information has been redacted pursuant to Item 601(a)(6) of Regulation S-K. The Company hereby undertakes to supplementally furnish any redacted information to the SEC upon request.
* | Furnished herewith. |
** | Filed herewith. |
˄ | Indicates management contract or compensatory plan or arrangement. |
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SIGNATURES
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 14, 2023 | MEDICINE MAN TECHNOLOGIES, INC. | |
By: | /s/ Nirup Krishnamurthy | |
Nirup Krishnamurthy, Chief Executive Officer | ||
By: | /s/ Forrest Hoffmaster | |
Forrest Hoffmaster, Chief Financial Officer | ||
(Principal Financial Officer and Chief Accounting Officer) |
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