Medicine Man Technologies Files Pre-IPO Documents with SEC

Medicine Man

The Medicine Man name may sound familiar to followers of Colorado’s recreational experiment, which has been carried out on a national stage over the past 18 months.

Ownership in the Medicine Man Denver stores—there are two now, one near the airport in Denver and one in Aurora—is not actually what is being pitched to investors in the S-1 from Medicine Man Technologies. The business of Medicine Man Technologies is actually consulting, but its model and outlook are inexorably tied to the highly successful cultivator and retailer you may have seen on MSNBC’s “Pot Barons” TV series.

The consulting part is the company’s attempt to export the operational expertise that CEO Andy Williams has shown, along with his brother Pete Williams, in running their flagship Colorado operations. Medicine Man Denver may not be the biggest retailer of marijuana in the state of Colorado, but they certainly are getting the most press. In so doing, they are making major headroads to becoming the first cannabis retail brand. And that brand, that expertise is highly attractive among prospective cannabis entrepreneurs in other parts of the country.

Big industry hitters like Troy Dayton of the ArcView Group, and Tripp Keber, CEO of consumer products company Dixie Elixirs, have stood up and taken notice of how well the Williams brothers own and operate the Medicine Man Denver stores.

Medicine Man Tech consults prospective business owners on the particulars of running a high revenue, security conscious cultivation and/or retail outfit. To that end, the company provides education and training in areas relating to cultivation science, logistics, employee training, best practices, SOP documentation and state licensing.


What Makes Medicine Man So Successful

Branding: While the Williams family has apparently had widely different views on the pros and cons of putting themselves and their stores on television, it seems to have worked well so far. Medicine Man Tech wouldn’t exist as a viable stand-alone company without the success of its parent company, which is essentially looking to charge clients to tell them the secret sauce of cannabis sales.

Cash management/Security: The travesty of cannabis business owners having to work in almost all cash is well known by this point. Not only is it a physical risk to the owners and employees, it is a huge added operational expense to hire armored transports, beef up door security, and basically treat cash management like a casino operator—lots of eyeballs and lots of counting.

VCCH: This may be the crown jewel of Medicine Man Tech’s value proposition. Medicine Man Denver runs what they call a variable capacity, continuous harvest model. This essentially means creating smaller batches of product which can be harvested year-round while keeping inventory tight. It has proven successful in Medicine Man Denver’s retail stores, with CEO Andy Williams estimating net earnings of more than $4 million in 2014.


Offering Details

Per the company’s amended S-1 submitted to the SEC on Aug. 17, 2015, 1,619,000 shares would be offered to the public, amounting to 16.3% of the total outstanding shares of 9.94 million. Medicine Man Denver, a private enterprise, remains the parent of Medicine Man Tech, owning about 5.3 million shares and controlling the exclusive license agreement that is the centerpiece of Medicine Man Technologies’ business model.

Shares were put in with a placeholder value of $1 per, which could change prior to any listing. It should be noted that just because an S-1 has been filed, there is no specific timetable for a public listing. The S-1 is just a major prerequisite to having an IPO. When equity markets are going through a correction or period of high volatility, both of which are occurring right now, many company owners decide to “wait it out” until the equity issuance climate shows more health.


Risk Details

As a consulting company, intellectual property and the knowledge base of key personnel are the most valuable assets. These are inherently hard to protect against leaks, inadvertent borrowing and theft. Companies like this tend to have higher than average legal costs throughout their lifetimes.

Competition will also be an ongoing risk, as several quality consulting firms have popped up in the past few years. Firms like American Cannabis Company Inc. (OTCQB: AMMJ) and 4Front Advisors also offer services to help current and prospective business owners navigate the tricky waters of varied state laws and regulatory climates. And of course, there is the ever-looming threat of operating a cannabis-related business in multiple states while the plant is still illegal under federal law.


Financial Details

The company’s financial position is quite laudable in an industry where many companies are only offering a path to revenues, rather than actual revenues. In the first six months of 2015, Medicine Man Technologies generated more than $365,000 in revenue, and actually delivered a net profit over $82,000 during the period.

The majority of the company’s $188,000 in operating expenses during the first half of the year come from sales, general and administrative costs. As one might expect, these will be the largest costs for a company dealing in knowledge and intellectual property transfer. Things like legal and accounting costs, travel costs, and compensation expense will be the largest expense drivers. But a 22% net profit margin is not only impressive, it is likely to be scalable as the company grows its revenues in future years.


How Big Can it Grow?

For prospective investors, any faith in the company to grow will depend on one’s faith in how big the entire cannabis industry can get. Medicine Man Tech has done an impressive job of hitting the ground running—it has only been incorporated for about a year—but the company may find it difficult to export a model that works just right in Colorado to the kaleidoscopic map that we currently see in the United States.

Should the company list, it will also be a microcap company at current levels, worth less than $10 million. Given the company’s current run-rate of sales, it could generate about $750,000 in revenue for 2015. This would value the stock at a pretty high multiple of current sales, and the price/earnings multiple would be astronomical.

But that alone isn’t a disqualifier—most cannabis investors are putting dollars to work on a belief in the future, not an expectation of owning value stocks. If Medicine Man Denver can succeed in becoming a de facto cannabis retail brand, then Medicine Man Technologies could steal future business from larger and even more entrenched consulting competitors. Potential business owners will want to know they have the greatest chances of securing a state license, and going into the risky business of cultivation and retail with some added confidence that their business models work. So far at least, Medicine Man is setting a strong precedent.

Ryan has spent nearly 20 years analyzing financial markets and investment opportunities for institutional and high-net worth investors. He specializes in determining the size and scope of new markets, changing industry trends and the market potential of new companies, products and services. Ryan has also published hundreds of articles on investment topics, market commentary and macroeconomic analysis.

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