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MEDICINE MAN TECHNOLOGIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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04/17/2017 | 08:19pm CEST

The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.


Overview and History


We were incorporated on March 20, 2014, in the State of Nevada. On May 1, 2014, we entered into an exclusive Technology License Agreement with Medicine Man Denver, Inc., f/k/a Medicine Man Production Corporation, a Colorado corporation ("Medicine Man Denver") whereby Medicine Man Denver granted us a license to use all of their proprietary processes they have developed, implemented and practiced at its cannabis facilities relating to the commercial growth, cultivation, marketing and distribution of medical 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 "License Agreement") in consideration for the issuance of 5,331,000 shares of our Common Stock. See Notes 2 and 3 to our financial statements. Medicine Man Denver is owned by some of our affiliates. See "Part III, Item 13, Certain Relationships and Related Transactions."






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We commenced our business on May 1, 2014, and currently generate revenues derived from licensing agreements with cannabis related entities, as well as sponsoring seminars offered to the cannabis industry. See "Part I, Item I, Business." On February 27, 2017, we entered into a Merger Agreement with Pono Publications Ltd. ("Pono"), as well as a Share Exchange Agreement with Success Nutrients, Inc. ("Success Nutrients"), each a Colorado corporation, in order to facilitate our acquisition of both of these entities. Upon ratification of these two agreements by our shareholders, which is expected to occur at our annual shareholder meeting to be held in May 2017, and the filing of various documents in Nevada and Colorado these agreements will become effective. The agreements provide for an effective date of March 1, 2017 for accounting purposes. See "Part I, Item 1, Business - Acquisition of Pono Publications and Success Nutrients."Upon effectiveness of these acquisitions we expect to generate revenue from the sale of plant nutrients and book sales.

We have never been subject to any bankruptcy proceeding. Our executive offices are located at 4880 Havana Street, Suite 200, Denver, Colorado 80239, telephone (303) 371-0387. Our website address is www.medicinemantechnologies.com.


Results Of Operations


Comparison of Results of Operations for our fiscal years ended December 31, 2016 and 2015

During our fiscal year ended December 31, 2016, we generated revenues of $631,456, including licensing fees of $589,721 and seminar fees of $41,735, compared to revenues of $835,777 during 2015, including licensing fees of $766,957 and seminar fees of $68,820, a decrease of $204,321. Revenues decreased during 2016 as a result of fewer clients, which we believe is a result of fewer new states adopting cannabis as a legal commodity and the related initial consulting work required to be successful in securing clients in these emerging markets. At the end of 2016 we had 27 active clients compared to 29 clients in 2015. Seminar revenues decreased due to a decrease in the number of scheduled seminars from 11 in 2015 to four in 2016, as we shifted our focus to the development of new business lines in addition to adding individual consultations which we believe will potentially replace all but the larger seminar events. Though we do not view training seminars as a primary source of revenue, we have found them to be a productive method to obtain new licensing clients.

While there are no assurances, we expect to see a significant increase in revenue in 2017 as the billing cycle of several clients we have worked with in the past will hit completion allowing us to recognize the revenues for the work we have been engaged in for those clients in early 2017. In addition, the new service lines provided by our acquisition of Pono and Success Nutrients are expected to significantly increase revenues.

We recognize income for licensing revenues upon set milestones being achieved, such as license approval or receiving the required business license. This can cause certain billing periods to be lower if those milestones are not achieved until after milestone is achieved, regardless of how close we may be to reaching the milestone and completing billings.

During 2016 our cost of services was $462,182, compared to $209,745 during 2015, an increase of $252,437. The primary cause of this increase was that we added several additional employees as well as moved two employees from part time to full time. In addition, we hired a subcontractor to assist us with several clients during an application time period that was compressed related to servicing our clients in Hawaii. We expect that our cost of goods sold will continue to increase as our total revenues increase.

General and administrative expenses increased slightly from $372,869 in 2015, to $382,641 in 2016. A portion of this increased cost was related to higher office rents. We utilized a larger space for the entire year in 2016 whereas we had used only a portion of the office space in 2015.

Operating expense also increased in 2016 compared to 2015. In 2016, we incurred total operating expense of $1,321,363, compared to $535,879, an increase of $785,484. This increase was primarily as a result of stock compensation expense, which was $627,200 in 2016, compared to $79,725 in 2015, an increase of $547,475 (687%). Advertising expenses increased by 274% to $311,522 in 2016, from $83,285 in 2015, an increase of $228,237. We also invested heavily in marketing as well as industry related event participation in FY 2016, participating in 14 different events as compared with 7 events in FY 2015. Our investment in brand awareness in these events generated significant new business for us in late 2016 that we believe will add to our revenue growth moving into 2017. This increase was expected as we continue to execute ours plan of becoming a brand warehouse. We intend to continue to invest heavily to strengthen our brand awareness and value.






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Other expenses increased in 2016 to $312,184, from other income of $8,071 in 2015, due to several factors. We earned $14,016 in interest income from the Funk Sack note receivable in 2016 compared to interest income of $8,017 in 2015. However,, we recognized a net loss of $9,950 in 2016 upon the liquidation of an investment in a cannabis related stock. In 2016 we also recognized an aggregate of $123,179 in interest expense, with $102,907 of that expense as well as the entire $191,095 of loss on derivative liability being caused by the embedded derivative related to the $810,000 in convertible debt that was raised in 2016. Due to the provision in these notes that the price they will convert into stock at is based upon the trading price of the stock, we recognized these expenses though they have no cash impact. Excluding the noncash transactions related to the convertible note imbedded derivative and stock based compensation, our net loss would have been only $543,071.

As a result, we generated a net loss in 2016 of $1,464,273 (approximately $0.14 per share), compared to a net income of $85,749 ($0.01 per share) in 2015.

Liquidity and Capital Resources

As of December 31, 2016, we had cash and cash equivalents of $351,524.

Net cash used by operating activities was $741,477 during the year ended December 31, 2016, compared to $301,843 earned in 2015, a decrease of $1,043,320 from 2015. While no assurances can be provided, we anticipate we will transition back to generating positive cash flow from operations in 2017.

Cash flows provided by investing activities was $20,855 in 2016, compared to cash used of $104,207 in 2015.

Cash flows from financing activities was $810,000 in 2016, compared to $10,000 in 2015. In 2016 we undertook a private offering of convertible debt wherein we raised $810,000 by December 31, 2016. In 2015, we only sold shares of our Common Stock for gross proceeds of $10,000 ($1.00 per share) to 1 "accredited" investor, as that term is defined under the Securities Act of 1933.

This increase in debt was anticipated by management's forecast of operational needs in the summer of 2016 as the result of our additional growth in our staffing and marketing costs moving ahead to better position us as we completed our acquisitions of Pono Publications and Success Nutrients.

From October 2016 through February 2017, we engaged in a private offering of convertible notes to 11 accredited investors (as that term is defined under Rule 501, Regulation D of the Securities Act of 1933, as amended). These loans provide for a fixed or VW AP conversion option, bear an annual interest rate of 12% (simple), with interest paid quarterly and mature on December 31, 2018. We issued notes totaling $1,000,000. As of the date of this Report, Convertible Notes aggregating $254,777 were converted to 155,687 shares of our Common Stock. These conversions were computed at both the floor value of $1. 75 as well as at a VW AP value as allowable under the terms of the conversion rights. See "Notes to Financial Statements."

As we continue to grow we expect to continue to raise additional capital through the issuance of debt, equity or the combination of the two. As of the date of this report we have not identified any additional potential acquisition and as a result, do not know the amount of additional capital we will need, if any, to successfully consummate such an acquisition. We have no agreement with any third party to provide us any additional financing and there can be no assurances that we will be able to raise any capital, either debt or equity on commercially reasonable terms, or at all. If we require additional capital and are unable to raise the same, it could have a material negative impact on our continued development and expansion. Separate from these potential acquisitions, we currently expect to continue to grow revenues through the development of new clients as additional states successfully adopt laws and regulations legalizing medical and/or recreational marijuana.


Inflation


Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the year ended December 31, 2016.








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Critical Accounting Estimates

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 accounting principles generally accepted in the United States. 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 following represents a summary of our critical accounting policies, defined as those policies that we believe 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.

Leases- We follow the guidance in SFAS No. 13 "Accounting for Leases," as amended, which requires us to evaluate the lease agreements we enter into to determine whether they represent operating or capital leases at the inception of the lease.

Recently Adopted Accounting Standards - Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2016-15 "Statement of Cash Flows (Topic 230)" - In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.

FASB ASU 2016-12 "Revenue from Contracts with Customers (Topic 606)" - In May 2016, the FASB issued 2016-12. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our results of operations, cash flows and financial position.

FASB ASU 2016-11 "Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)" - In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our results of operations, cash flows and financial position.

FASB ASU 2016-10 "Revenue from Contracts with Customers (Topic 606)" - In April 2016, the FASB issued ASU 2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our results of operations, cash flows and financial position.

FASB ASU 2016-09 "Compensation - Stock Compensation (Topic 718)" - In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our financial statements and related disclosures.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

© Edgar Online, source Glimpses

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Brett Roper Chief Executive Officer & Secretary
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Paul D. Dickman Independent Director
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