UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
(Exact Name of Registrant as Specified in its Charter)
|
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
|
|
||
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including
area code (
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered | ||
| Not applicable | Not applicable | Not applicable |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
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.
Explanatory Note
On February 15, 2022, Medicine Man Technologies, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) to report, among other things, the completion of its previously announced merger between Emerald Fields Merger Sub, LLC, a wholly-owned subsidiary of the Company, and MCG, LLC (“MCG”).
The Company is filing this Amendment No. 1 to Current Report on Form 8-K/A (this “Amendment”) to amend the Original Form 8-K to include (i) unaudited financial statements of MCG as of, and for the nine months ended, September 30, 2021, (ii) audited financial statements of MCG as of, and for the year ended, December 31, 2020, and (iii) unaudited pro forma condensed combined financial information of the Company giving effect to the merger, required by Items 9.01(a) and 9.01(b) of Form 8-K. This Amendment does not modify, amend, or update in any way any of the financial or other information contained in the Original Filings, nor does it reflect events that may have occurred subsequent to the filing dates of the Original Filings.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
1. The unaudited financial statements of MCG and the notes thereto, for the nine months ended September 30, 2021 are included as Exhibit 99.2 hereto and are incorporated herein by reference.
2. The audited financial statements of MCG and the notes thereto, for the year ended December 31, 2020, are included as Exhibit 99.2 hereto and are incorporated herein by reference.
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined financial information of the Company, giving effect to the merger, is included in Exhibit 99.3 hereto and is incorporated herein by reference:
1. Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2021;
2. Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 2021; and
3. Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2020.
(d) Exhibits
| 2 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Medicine Man Technologies, Inc. | ||
| By: | /s/ Justin Dye | |
| Date: March 30, 2022 | Justin Dye, Chief Executive Officer | |
| (Principal Executive Officer) | ||
| By: | /s/ Nancy Huber | |
| Nancy Huber, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 3 |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-262059) and Form S-8 (Nos. 333-218662 and 333-225947), as amended, of Medicine Man Technologies, Inc. of our report dated March 29, 2022, relating to the consolidated financial statements of Reynold Greenleaf and Associates, LLC and Subsidiaries for the year ended December 31, 2020 appearing in Exhibit 99.2 to this Amendment No. 1 to Current Report on Form 8-K of Medicine Man Technologies, Inc.
/s/ BF Borgers CPA PC
Certified Public Accountants
Lakewood, CO
March 30, 2022
Exhibit 99.2
MCG, LLC
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2021 (UNAUDITED)
AND THE YEAR ENDED
DECEMBER 31, 2020
| Page | |
| INDEPENDENT AUDITOR’S REPORT | 1 |
| FINANCIAL STATEMENTS: | |
| Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 | 2 |
| Statements of Income for the nine months ended September 30, 2021 (unaudited) and the year ended December 31, 2020 | 3 |
| Statements of Changes in Members’ Equity for the nine months ended September 30, 2021 (unaudited) and the year ended December 31, 2020 | 4 |
| Statements of Cash Flows for the nine months ended September 30, 2021 (unaudited) and the year ended December 31, 2020 | 5 |
| Notes to the Financial Statements | 6 |
INDEPENDENT AUDITORS’ REPORT
To the Members of MCG, LLC
We have audited the accompanying financial statements of MCG, LLC (the “Company”), which comprise the balance sheet as of December 31, 2020 and the related statements of income, member’s equity, and cash flows for the year ended December 31, 2020, and the related notes to the financial statements (collectively referred to as “financial statements”).
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MCG, LLC as of December 31, 2020 and the results of its operations and its cash flows for the year ended December 31, 2020, in accordance with accounting principles generally accepted in the United States of America.
/S BF Borgers CPA PC
BF Borgers CPA PC
Lakewood, CO
March 29, 2022
| 1 |
MCG, LLC
Balance Sheets
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 2,688,628 | $ | 1,273,512 | ||||
| Inventories | 1,045,089 | 928,334 | ||||||
| Prepaid Expenses and Other Current Assets | 92,847 | 143,337 | ||||||
| Total Current Assets | 3,826,564 | 2,345,183 | ||||||
| Property and Equipment, Net | 1,062,549 | 1,438,623 | ||||||
| Deposits and Other Assets | 192,000 | 192,000 | ||||||
| TOTAL ASSETS | $ | 5,081,113 | $ | 3,975,806 | ||||
| LIABILITIES AND MEMBERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 252,064 | $ | 452,991 | ||||
| Accrued Liabilities | 94,321 | 81,958 | ||||||
| Accrued Sales Taxes | 599,465 | 487,429 | ||||||
| Deferred Rent | 19,190 | 21,768 | ||||||
| Total Current Liabilities | 965,040 | 1,044,146 | ||||||
| TOTAL LIABILITIES | 965,040 | 1,044,146 | ||||||
| MEMBERS' EQUITY | 4,116,073 | 2,931,660 | ||||||
| TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 5,081,113 | $ | 3,975,806 | ||||
See Accompanying Notes to the Financial Statements
| 2 |
MCG, LLC
Statements of Income
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Revenues, Net | $ | 19,938,322 | $ | 22,930,146 | ||||
| Cost of Goods Sold | 8,691,772 | 9,868,301 | ||||||
| Gross Profit | 11,246,550 | 13,061,845 | ||||||
| Operating Expenses: | ||||||||
| Selling, General, and Administrative | 5,033,157 | 6,184,758 | ||||||
| Depreciation | 455,339 | 602,961 | ||||||
| Total Operating Expenses | 5,488,496 | 6,787,719 | ||||||
| Income from Operations | 5,758,054 | 6,274,126 | ||||||
| Other Income | 292,959 | 60,332 | ||||||
| Net Income Before Provision for Income Taxes | 6,051,013 | 6,334,458 | ||||||
| Provision for Income Taxes | (2,878,600 | ) | (3,128,990 | ) | ||||
| Net Income | $ | 3,172,413 | $ | 3,205,468 | ||||
See Accompanying Notes to the Financial Statements
| 3 |
MCG, LLC
Statements of Changes in Members’ Equity
| Balance, January 1, 2020 | $ | 3,436,192 | ||
| Distributions to members | (3,710,000 | ) | ||
| Net Income | 3,205,468 | |||
| Balance, December 31, 2020 | $ | 2,931,660 | ||
| Balance, January 1, 2021 | $ | 2,931,660 | ||
| Distributions to members (unaudited) | (1,988,000 | ) | ||
| Net Income (unaudited) | 3,172,413 | |||
| Balance, September 30, 2021 (unaudited) | $ | 4,116,073 |
See Accompanying Notes to the Financial Statements
| 4 |
MCG, LLC
Statements of Cash Flows
Nine months ended September 30, 2021 | Year ended December 31, 2020 | |||||||
| (unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income | $ | 3,172,413 | $ | 3,205,468 | ||||
| Adjustments to Reconcile Net Income to Net Cash | ||||||||
| Used in Operating Activities | ||||||||
| Depreciation | 455,339 | 602,961 | ||||||
| Changes in Operating Asset and Liabilities | ||||||||
| Inventories | (116,755 | ) | (520,492 | ) | ||||
| Prepaid Expenses and Other Current Assets | 50,490 | 161,624 | ||||||
| Accounts Payable | (200,927 | ) | 20,623 | |||||
| Accrued Liabilities | 12,363 | (300,531 | ) | |||||
| Accrued Sales Taxes | 112,036 | 94,787 | ||||||
| Deferred Rent | (2,578 | ) | (284 | ) | ||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 3,482,381 | 3,264,156 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of Property and Equipment | (79,265 | ) | (276,592 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (79,265 | ) | (276,592 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Distribution to Members | (1,988,000 | ) | (3,710,000 | ) | ||||
| NET CASH USED IN FINANCING ACTIVITIES | (1,988,000 | ) | (3,710,000 | ) | ||||
| NET INCREASE (DECREASE) IN CASH | 1,415,116 | (722,436 | ) | |||||
| CASH - BEGINNING OF PERIOD | 1,273,512 | 1,995,948 | ||||||
| CASH - END OF PERIOD | $ | 2,688,628 | $ | 1,273,512 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for taxes | $ | 2,878,600 | $ | 3,188,462 | ||||
See Accompanying Notes to the Financial Statements
| 5 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
1. NATURE OF OPERATIONS
| (a) | Business Description and Nature of Operations |
MCG, LLC (the “Company”) was formed as a limited liability company in December of 2015 in the State of Colorado. Under the terms of the operating agreement, the Company will continue in existence until the members decide to dissolve the Company. The members’ liability is limited to the contributions made. Pursuant to the operating agreement, members are not required to make capital contributions or loan capital to the Company but are not prohibited from doing so.
The Company sells a variety of manufactured and cultivated cannabis products. The Company owns and operates two licensed retail dispensaries.
In February 2022, the Company entered into an asset purchase agreement with Medicine Man Technologies, Inc. for total consideration of approximately $29 million and will be paid as 60% cash and 40% common stock upon closing.
| (b) | The Regulatory Environment |
The manufacture, distribution or dispensing of cannabis remains prohibited under the Controlled Substances Act (“CSA”) of 1970. Under the CSA, cannabis is classified as a Schedule-I controlled substance. The United States Supreme Court has ruled that it is the United States federal government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus federal law criminalizing the use of cannabis preempts state laws that legalize its use. Many states impose and enforce similar prohibitions. Notwithstanding the CSA, thirty-three states and the District of Columbia have legalized certain cannabis-related activity.
The Company operates in a volatile and rapidly evolving industry whereby regulations may vary significantly from state to state.
2. SIGNIFICANT ACCOUNTING POLICIES
| (a) | Basis of Presentation |
The Company’s financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) as issued by the Financial Accounting Standards Board (“FASB”). The accompanying financial statements include unaudited interim information as of September 30, 2021 and for the nine months ended September 30, 2021. The interim information is not reflective of full year results. Company management believes the interim information includes all normal recurring adjustments.
| (b) | Cash |
Cash includes cash deposits in financial institutions and cash held at the stores.
| (c) | Inventories |
Inventories consist of cannabis and non-cannabis products that are valued at cost and subsequently at the lower of cost (first-in, first out basis) or net realizable value. The Company reviews its inventories for obsolete, redundant and slow-moving goods and any such inventories are written down to net realizable value. There were no reserves for obsolete inventories as of September 30, 2021 and December 31, 2020.
| 6 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (d) | Property and Equipment |
Purchase of property and equipment are recorded at cost, net of accumulated depreciation and impairment losses, if any. Improvements and replacements of property and equipment are capitalized. Maintenance and ordinary repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. Depreciation is calculated on a straight-line basis over the estimated economic useful lives of each class of assets using the following terms:
| Furniture and Fixtures | 5 – 7 Years |
| Leasehold Improvements | Lesser of the life of the lease or estimated useful life of the asset |
The assets’ residual values, useful lives, and methods of depreciation are reviewed at year-end and adjusted prospectively, if appropriate.
When assets are sold or retired, its cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the statement of operations. Construction in progress is transferred when available for use and depreciation of the assets commences at that point.
| (e) | Impairment of Long-Lived Assets |
The Company accounts for its long-lived assets such as property and equipment in accordance with FASB ASC Topic No. 360, "Accounting for the Impairment or Disposal of Long-lived Assets" ("ASC 360").
Management reviews long-lived assets for impairment whenever changes in events or circumstances indicate the assets may be impaired. Pursuant to ASC 360, an impairment loss is to be recorded when the net book value of an asset exceeds the undiscounted cash flows expected to be generated from the use of the asset. If an asset is determined to be impaired, the asset is written down to its fair value, and the loss is recognized in the statement of income in the period when the determination is made. No impairment charges for long-lived assets have been recorded for the nine months ended September 30, 2021 or the year ended December 31, 2020.
| (f) | Leased Assets |
A lease of property and equipment is classified as a capital lease if it transfers substantially all the risks and rewards incidental to ownership to the Company. A lease of property and equipment is classified as an operating lease whenever the terms of the lease do not transfer substantially all of the risks and rewards of ownership to the lessee. Lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits are consumed.
| (g) | Income Taxes |
The Company is taxed as a C corporation. Accordingly, the Company accounts for income taxes for the activity of this entity under ASC 740 Income Taxes.
| 7 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (g) | Income Taxes (Continued) |
Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
In accordance with FASB ASC Topic 740, Income Taxes, management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. 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. Interest and penalties are classified as expense as incurred.
Income tax benefits are recognized for income tax positions taken or expected to be taken in a tax return, only when it is determined that the income tax position will more-likely than-not be sustained upon examination by taxing authorities. The Company has analyzed tax positions taken for filings with the Internal Revenue Service and all tax jurisdictions where it operates. The Company believes that income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the Company’s financial condition, results of operations or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals for interest and penalties for uncertain income tax positions at September 30, 2021 or December 31, 2020.
Under Federal law, the Company is a taxable entity and is subject to Federal income tax. Pursuant to Section 280E of the Internal Revenue Code of 1986, as amended (“Section 280E”). The section disallows deductions and credits attributable to a trade or business of trafficking in controlled substances. Under U.S. law marijuana is a Schedule I controlled substance. The Company has taken the position that any costs included in the cost of goods sold should not be treated as amounts subject to Section 280E expense disallowance.
| 8 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (h) | Revenue Recognition |
Revenue is recognized by the Company in accordance with FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:
| • | Identify a customer along with a corresponding contract; | |
| • | Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer; | |
| • | Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer; | |
| • | Allocate the transaction price to the performance obligation(s) in the contract; | |
| • | Recognize revenue when or as the Company satisfies the performance obligation(s). |
Revenues consists of retail sales of cannabis, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy.
Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer.
Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its financial statements.
| (i) | Fair Value of Financial Instruments |
The carrying amounts of cash and accounts payable approximate fair value due to the short maturity of these instruments.
| (j) | Advertising |
Advertising costs are charged to operations when incurred. Advertising expenses, included in operating expenses, was approximately $395,000 and $615,000 for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively.
| 9 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (k) | Significant Accounting Judgements, Estimates, and Assumptions |
The preparation of the Company’s financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Significant estimates inherent in the preparation of the Company’s financial statements include the estimated useful lives for property and equipment.
The Company’s business is subject to a variety of state laws, regulations, and local ordinances. Certain states have legalized the possession, distribution, and cultivation of marijuana for medical and/or non-medical purposes; these activities remain illegal under federal law, which cause higher federal income taxation (IRC Section 280E) and difficulty in obtaining traditional banking relationships. If the federal government elects to enforce the laws as currently written or otherwise changes the laws in an adverse way with respect to marijuana it could have an adverse effect on the Company’s operations, including potential prosecution under the laws and liquidation of the Company.
| (l) | Concentrations of Credit Risk |
The Company’s financial instruments that at times are exposed to concentrations of credit risk consist primarily of cash. The Company maintains cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management does not believe the Company is exposed to significant credit risk related to cash because the Company maintains cash with high quality institutions.
| 10 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
| (m) | New Accounting Pronouncements |
| (i) | In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”), which will replace ASC 840, “Leases”. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. For private companies, the standard will be effective for annual periods beginning on or after December 15 2021, with earlier application permitted. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the effect of adopting this ASU on the Company’s financial statements. |
| (ii) | In June 2016, the FASB issued ASC 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgements used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. For private companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2022. The Company does not believe that the impact of the new standard on its financial statements will be material. |
| (iii) | In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. For private companies, ASU 2019-12 is effective for annual periods beginning and after December 15, 2021. The Company is currently evaluating the effect of adopting this ASU on the Company’s financial statements. |
| (n) | Coronavirus Pandemic |
In March 2020, the World Health Organization categorized coronavirus disease 2019 (“COVID-19”) as a pandemic. COVID-19 continues to spread throughout the U.S. and other countries across the world, and the duration and severity of its effects are currently unknown. The Company continues to implement and evaluate actions to strengthen its financial position and support the continuity of its business and operations.
As of the date hereof, the Company’s operations have not been significantly impacted as the cannabis industry has been deemed an essential service in many states since March 2020. Going forward, the extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on various developments, including the duration and magnitude of the outbreak, and the impact on customers, employees and vendors, all of which are uncertain and cannot be predicted.
| 11 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
3. PROPERTY AND EQUIPMENT
The Company’s property and equipment consists of the following as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Furniture and Fixtures | $ | 221,221 | $ | 179,652 | ||||
| Leasehold Improvements | 2,051,378 | 1,971,544 | ||||||
| Construction in Process | – | 42,138 | ||||||
| Total Property and Equipment | 2,272,599 | 2,193,334 | ||||||
| Less: Accumulated Depreciation | (1,210,050 | ) | (754,711 | ) | ||||
| Property and Equipment, Net | $ | 1,062,549 | $ | 1,438,623 | ||||
4. LEASE OBLIGATIONS
The Company has three operating leases Colorado that require minimum base rent. These leases expire at various dates throughout 2022 and contain escalation clauses. Rent expense is calculated on a straight-line basis over the term of the lease. The Company’s rent expense was $270,609 and $318,552 for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively.
Future minimum rental commitments on leases are:
| Year Ending December 31, | Amount | |||
| 2021 (3 months) | $ | 94,522 | ||
| 2022 | 260,658 | |||
| Total | $ | 355,180 | ||
5. INCOME TAXES
The income tax provision consists of the following for the nine months ended September 30, 2021 and the year ended December 31, 2020.
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Current: | ||||||||
| Federal | $ | 2,538,000 | $ | 2,816,535 | ||||
| State | 340,600 | 312,455 | ||||||
| Total current | $ | 2,878,600 | $ | 3,128,990 | ||||
| 12 |
MCG, LLC
Notes to Financial Statements
For the Nine Months Ended September 30, 2021 (unaudited)
and the Year Ended December 31, 2020
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits, investigations and other claims related to employment, commercial and other matters that arise out of operations in the normal course of business. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable, and the amount can be reliably estimated, such amount is recognized in other liabilities.
Contingent liabilities are measured at management’s best estimate of the expenditure required to settle the obligation at the end of the reporting period and are discounted to present value where the effect is material. The Company performs evaluations to identify onerous contracts and, where applicable, records contingent liabilities for such contracts.
| (a) | Contingencies |
The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of September 30, 2021, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.
| (b) | Claims and Litigation |
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of September 30, 2021, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s combined results of operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.
7. SUBSEQUENT EVENTS
The Company has evaluated subsequent events March 29, 2022 which is the date these financial statements were available to be issued.
On February 9, 2022, the Company was acquired by Medicine Man Technologies, Inc.
| 13 |
Exhibit 99.3
Medicine Man Technologies, Inc.
Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020 combine the financial statements of Medicine Man Technologies, Inc. (“Medicine Man”), MCG, LLC (“MCG”) giving effect to the transaction described in the Agreement, as if they had occurred on January 1, 2020 in respect of the unaudited pro forma condensed combined statements of operations and on September 30, 2021 in respect of the unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial information should be read in conjunction with:
| · | Medicine Man’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2020, as contained in the Form 10-K filed on March 31, 2021 with the United States Securities and Exchange Commission (the “SEC”). |
| · | Medicine Man’s unaudited condensed consolidated financial statements and accompanying notes as of and for the nine months ended September 30, 2021, as contained in its Quarterly Report on Form 10-Q filed on November 15, 2021 with the SEC. |
| · | MCG’s audited financial statements as of and for the year ended December 31, 2020, contained elsewhere herein. |
| · | MCG’s unaudited condensed financial statements as of September 30, 2021 and for the nine months ended September 30, 2021, contained elsewhere herein. |
| · | the other information contained in or incorporated by reference into this filing. |
The final purchase consideration and the allocation of the purchase consideration may materially differ from that reflected in the unaudited pro forma condensed combined financial information after final valuation procedures are performed and amounts are finalized following the completion of the acquisition.
The unaudited pro forma adjustments give effect to events that are directly attributable to the transaction and are based on available data and certain assumptions that management believes are factually supportable. In addition, with respect to the unaudited condensed combined statements of operations, the unaudited pro forma adjustments are expected to have a continuing impact on the combined results.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and to aid you in your analysis of the financial aspects of the acquisition. The unaudited pro forma condensed combined financial information described above has been derived from the historical financial statements of Medicine Man and MCG and the related notes included elsewhere in this Form 8-K. The unaudited pro forma condensed combined financial information is based on Medicine Man’s accounting policies. Further review may identify additional differences between the accounting policies of Medicine Man and MCG. The unaudited pro forma adjustments and the pro forma condensed combined financial information do not reflect the impact of synergies or post-transaction management actions and are not necessarily indicative of the financial position or results of operations that may have actually occurred had the transaction taken place on the dates noted, or of Medicine Man’s future financial position or operating results.
| 1 |
Medicine Man Technologies, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended September 30. 2021
| Transaction | ||||||||||||||||
| Accounting | Pro Forma | |||||||||||||||
| Medicine Man | MCG | Adjustments | Combined | |||||||||||||
| Operating revenues: | ||||||||||||||||
| Product sales, net | $ | 54,083,880 | $ | 19,938,322 | $ | 74,022,202 | ||||||||||
| Product sales – related party, net | 27,654,965 | – | – | 27,654,965 | ||||||||||||
| Consulting and licensing services | – | – | – | – | ||||||||||||
| Other operating revenues | 165,416 | – | – | 165,416 | ||||||||||||
| Total revenue | 81,904,261 | 19,938,322 | – | 101,842,583 | ||||||||||||
| Cost of goods and services: | ||||||||||||||||
| Cost of goods and services | 44,692,765 | 8,691,772 | – | 53,384,537 | ||||||||||||
| Gross profit | 37,211,496 | 11,246,550 | – | 48,458,046 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative expenses | 13,580,469 | 5,033,157 | – | 18,613,626 | ||||||||||||
| Professional services | 4,466,696 | – | – | 4,466,696 | ||||||||||||
| Salaries, benefits and related expenses | 8,505,733 | – | 8,505,733 | |||||||||||||
| Stock based compensation | 3,865,588 | – | – | 3,865,588 | ||||||||||||
| Transaction costs | 112,544 | 112,544 | ||||||||||||||
| Depreciation | – | 455,339 | – | 455,339 | ||||||||||||
| Total operating expenses | 30,418,486 | 5,488,496 | 112,544 | 36,019,526 | ||||||||||||
| Income from operations (loss) | 6,793,010 | 5,758,054 | (112,544 | ) | 12,438,520 | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (4,526,746 | ) | – | (3,087,500 | ) | (D) | (7,614,246 | ) | ||||||||
| Amortization of debt discount | – | – | (2,079,809 | ) | (E) | (2,079,809 | ) | |||||||||
| Gain (loss) on sale of assets | 242,494 | – | 242,494 | |||||||||||||
| Other income (expense) | – | 292,959 | – | 292,959 | ||||||||||||
| Unrealized gain (loss) on derivative liabilities | 967,751 | – | – | 967,751 | ||||||||||||
| Unrealized gain (loss) on investments | 210,685 | – | – | 210,685 | ||||||||||||
| Total other income (expense) | (3,105,816 | ) | 292,959 | (5,167,309 | ) | (7,980,166 | ) | |||||||||
| Income (loss) before income tax expense | 3,687,194 | 6,051,013 | (5,279,853 | ) | 4,458,354 | |||||||||||
| Income tax benefit (expense) | (1,997,905 | ) | (2,878,600 | ) | – | (4,876,505 | ) | |||||||||
| Net income (loss) | $ | 1,689,289 | $ | 3,172,413 | $ | (5,279,853 | ) | $ | (418,151 | ) | ||||||
| Earnings (loss) per share attributable to common stockholders: | ||||||||||||||||
| Basic earning (loss) per share | $ | 0.04 | – | – | $ | (0.01 | ) | |||||||||
| Diluted earning (loss) per share | $ | 0.03 | – | – | $ | (0.01 | ) | |||||||||
| Weighted average number of shares outstanding - basic | 42,903,008 | – | 6,547,239 | $ | 49,450,247 | |||||||||||
| Weighted average number of shares outstanding - diluted | 56,688,640 | – | 6,547,239 | $ | 63,235,879 | |||||||||||
| 2 |
Medicine Man Technologies, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2020
| Transaction | ||||||||||||||||
| Accounting | Pro Forma | |||||||||||||||
| Medicine Man | MCG | Adjustments | Combined | |||||||||||||
| Operating revenues: | ||||||||||||||||
| Product sales, net | $ | 21,371,408 | $ | 22,930,146 | $ | – | $ | 44,301,554 | ||||||||
| Product sales – related party, net | 1,170,398 | – | – | 1,170,398 | ||||||||||||
| Consulting and licensing services | 1,425,778 | – | – | 1,425,778 | ||||||||||||
| Other operating revenues | 33,268 | – | – | 33,268 | ||||||||||||
| Total revenue | 24,000,852 | 22,930,146 | – | 46,930,998 | ||||||||||||
| Cost of goods and services: | ||||||||||||||||
| Cost of goods and services | 17,226,486 | 9,868,301 | – | 27,094,787 | ||||||||||||
| Gross profit | 6,774,366 | 13,061,845 | – | 19,836,211 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative expenses | 3,054,091 | 6,184,758 | – | 9,238,849 | ||||||||||||
| Professional services | 5,390,186 | – | – | 5,390,186 | ||||||||||||
| Salaries, benefits and related expenses | 5,973,482 | – | 5,973,482 | |||||||||||||
| Stock based compensation | 5,815,808 | – | – | 5,815,808 | ||||||||||||
| Transaction costs | 112,544 | 112,544 | ||||||||||||||
| Depreciation | – | 602,961 | – | 602,961 | ||||||||||||
| Total operating expenses | 20,233,567 | 6,787,719 | 112,544 | 27,133,830 | ||||||||||||
| Income from operations (loss) | (13,459,201 | ) | 6,274,126 | (112,544 | ) | (7,297,619 | ) | |||||||||
| Other income (expense): | ||||||||||||||||
| Gain on forfeiture of contingent consideration | 1,462,636 | – | – | 1,462,636 | ||||||||||||
| Interest expense | (41,460 | ) | – | (2,099,500 | ) | (D) | (2,140,960 | ) | ||||||||
| Amortization of debt discount | – | – | (2,772,078 | ) | (E) | (2,772,078 | ) | |||||||||
| Other income (expense) | 32,621 | 60,332 | – | 92,953 | ||||||||||||
| Unrealized gain (loss) on derivative liabilities | 1,263,264 | – | – | 1,263,264 | ||||||||||||
| Unrealized gain (loss) on investments | (129,992 | ) | – | – | (129,992 | ) | ||||||||||
| Total other income (expense) | 2,587,069 | 60,332 | (4,871,578 | ) | (2,224,177 | ) | ||||||||||
| Income (loss) before income tax expense | (10,872,132 | ) | 6,334,458 | (4,984,122 | ) | (9,521,796 | ) | |||||||||
| Income tax benefit (expense) | 899,109 | (3,128,990 | ) | – | (2,229,881 | ) | ||||||||||
| Net income (loss) | $ | (9,973,023 | ) | $ | 3,205,468 | $ | (4,984,122 | ) | $ | (11,751,677 | ) | |||||
| Earnings (loss) per share attributable to common stockholders: | ||||||||||||||||
| Basic earning (loss) per share | $ | 0.04 | – | – | $ | (0.24 | ) | |||||||||
| Diluted earning (loss) per share | $ | 0.03 | – | – | $ | (0.19 | ) | |||||||||
| Weighted average number of shares outstanding - basic | 42,903,008 | – | 6,547,239 | $ | 49,450,247 | |||||||||||
| Weighted average number of shares outstanding - diluted | 56,688,640 | – | 6,547,239 | $ | 63,235,879 | |||||||||||
| 3 |
Medicine Man Technologies, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
September 30, 2021
| Transaction | ||||||||||||||||
| Accounting | Pro Forma | |||||||||||||||
| Medicine Man | MCG | Adjustments | Combined | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 21,168,816 | $ | 2,688,628 | $ | (2,688,628 | ) | (A) | $ | 21,168,816 | ||||||
| Accounts receivable, net of allowance for doubtful accounts | 3,530,520 | – | – | 3,530,520 | ||||||||||||
| Inventory | 10,678,381 | 1,045,089 | – | 11,723,470 | ||||||||||||
| Prepaid expenses and other current assets | 2,579,035 | 92,847 | (92,847 | ) | 2,579,035 | |||||||||||
| Total current assets | 37,956,752 | 3,826,564 | (2,781,475 | ) | 39,001,841 | |||||||||||
| Non-current assets: | ||||||||||||||||
| Fixed assets, net | 8,805,348 | 1,062,549 | – | 9,867,897 | ||||||||||||
| Goodwill | 42,090,944 | – | 26,699,969 | (C) | 68,790,913 | |||||||||||
| Intangible assets, Net | 98,072,970 | – | – | 98,072,970 | ||||||||||||
| Investment | 487,467 | – | – | 487,467 | ||||||||||||
| Note receivable - noncurrent, net | 179,167 | – | 179,167 | |||||||||||||
| Accounts receivable – litigation | 3,063,968 | – | – | 3,063,968 | ||||||||||||
| Operating lease right of use assets | 3,626,617 | – | – | 3,626,617 | ||||||||||||
| Other assets | 448,062 | 192,000 | – | 640,062 | ||||||||||||
| Total non-current assets | 156,774,543 | 1,254,549 | 26,699,969 | 184,729,061 | ||||||||||||
| Total assets | $ | 194,731,295 | $ | 5,081,113 | $ | 23,918,494 | $ | 223,730,902 | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| Accounts payable | $ | 953,467 | $ | 252,064 | $ | (252,064 | ) | (A) | $ | 953,467 | ||||||
| Accounts payable – related party | 87,143 | – | – | 87,143 | ||||||||||||
| Accrued expenses | 11,660,237 | 693,786 | (693,786 | ) | (A) | 11,660,237 | ||||||||||
| Note payable- related party | 134,498 | – | – | 134,498 | ||||||||||||
| Deferred rent | – | 19,190 | (19,190 | ) | (A) | – | ||||||||||
| Derivative liabilities | 79,730 | – | 8,319,235 | (B) | 8,398,965 | |||||||||||
| Income taxes payable | 1,029,482 | – | – | 1,029,482 | ||||||||||||
| Total current liabilities | 13,944,556 | 965,040 | 7,354,195 | 22,263,792 | ||||||||||||
| Noncurrent liabilities: | ||||||||||||||||
| Long term debt | 59,246,338 | – | 7,688,765 | (B) | 66,935,103 | |||||||||||
| Lease liabilities | 3,807,306 | – | – | 3,807,306 | ||||||||||||
| Total noncurrent liabilities | 63,053,644 | – | 7,688,765 | 70,742,409 | ||||||||||||
| Total liabilities | 76,998,200 | 965,040 | 15,042,960 | 93,006,200 | ||||||||||||
| Stockholders’ equity | ||||||||||||||||
| Common stock $0.001 par value, 250,000,000 authorized, 45,139,297 shares issued and 44,400,853 shares outstanding at September 30, 2021, and 42,601,773 shares issued and 42,169,041 outstanding at December 31, 2020, respectively. | 45,140 | – | – | 45,140 | ||||||||||||
| Preferred Stock $0.001 par value, 10,000,000 authorized, 82,838 shares issued and outstanding at September 30, 2021, and 10,000,000 shares authorized; 19,716 shares issued and outstanding at December 31, 2020. | 87 | – | 87 | |||||||||||||
| Additional paid-in capital | 165,393,733 | – | 10,671,999 | ( | (B) | 176,065,732 | ||||||||||
| Accumulated equity (deficit) | (46,188,829 | ) | 4,116,073 | (1,796,465 | ) | (A) | (43,869,221 | ) | ||||||||
| Common stock held in treasury, at cost, 517,044 shares held at September 30, 2021 and 432,732 shares held at December 31, 2020 | (1,517,036 | ) | – | – | (1,517,036 | ) | ||||||||||
| Total stockholders' equity | 117,733,095 | 4,116,073 | 8,875,534 | 130,724,702 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 194,731,295 | $ | 5,081,113 | $ | 23,918,494 | $ | 223,730,902 | ||||||||
| 4 |
Medicine Man Technologies, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1. Basis of Presentation
The unaudited pro forma condensed combined financial information set forth herein is based upon the consolidated financial statements of Medicine Man Technologies, Inc. and MCG, LLC. The unaudited pro forma condensed combined financial information is presented as if the transaction had been completed on January 1, 2020 with respect to the unaudited pro forma condensed combined statements of operations for each of the nine months ended September 30, 2021 and for the year ended December 31, 2020 and on September 30, 2021 in respect of the unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations had the transaction occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the combined company will experience after the completion of the transactions.
We have accounted for the acquisition in this unaudited pro forma condensed combined financial information using the acquisition method of accounting, in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805”). In accordance with ASC 805, we use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired.
Pro forma adjustments reflected in the unaudited pro forma condensed combined balance sheet are based on items that are factually supportable and directly attributable to the transaction. Pro forma adjustments reflected in the pro forma condensed combined statements of operations are based on items that are factually supportable, directly attributable to the transaction and expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information does not reflect the cost of any integration activities or benefits from the transaction, including potential synergies that may be generated in future periods.
Note 2. Description of the Transaction
On February 10, 2022, Medicine Man Technologies, Inc. operating its business under the trade name Schwazze (the “Company”) consummated the Agreement with MCG. The aggregate purchase price is $29,000,000, which comprised of cash and stock in Medicine Man, Inc.
| 5 |
Note 3. Purchase Price Allocation
The fair value of the consideration transferred was valued as of the date of the acquisition as follows. The source of the cash that funded the purchase was debt taken out by Medicine Man prior to the acquisition.
| MCG Purchase Consideration | ||||
| Cash | $ | 16,008,000 | ||
| Stockholders’ Equity | 12,992,000 | |||
| Total Purchase Consideration | $ | 29,000,000 | ||
The preliminary allocation for the consideration recorded for the acquisition is as follows if the acquisition had taken place as of September 30, 2021:
| Current Assets | $ | 1,045,482 | ||
| Property and Equipment | 1,062,549 | |||
| Goodwill | 26,699,969 | |||
| Other Assets | 192,000 | |||
| Total | $ | 29,000,000 |
The purchase price allocation is preliminary. The purchase price allocation will continue to be preliminary until a third-party valuation is finalized and the fair value and useful life of the assets acquired is determined. The amounts from the final valuation may significantly differ from the preliminary allocation.
Note 4. Pro Forma Adjustments
The following pro forma adjustments give effect to the transaction.
Unaudited Pro Forma Condensed Combined Balance Sheet – As of September 30, 2021
| Note A | To remove MCG assets, liabilities, and equity not purchased pursuant to the asset purchase agreements. |
| Note B | To record purchase consideration and transaction financing. The purchase consideration included cash and a common stock in Medicine Man. The transaction financing consisted of convertible notes (which the Company determined included an embedded derivative). The convertible notes were allocated pro-rata to the transaction based on the amount of cash used to fund the transaction. |
| Note C | To record assets acquired and liabilities assumed from MCG at preliminary estimated fair value. The Company has not completed its purchase price allocation and the amounts noted are preliminary. |
Unaudited Pro Forma Condensed Combined Statement of Operations – For The Nine Months Ended September 30, 2021
| Note D | To record interest on convertible notes. |
| Note E | To record amortization of debt discount related to the derivative associated with the convertible note. |
Unaudited Pro Forma Condensed Combined Statement of Operations – For The Year Ended December 31, 2020
| Note D | To record interest on convertible notes. |
| Note E | To record amortization of debt discount related to the derivative associated with the convertible note. |
| 6 |