Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc. (the “Company”), a Delaware corporation, develops and manages state-of-the-art, regulatory-compliant facilities
for the cultivation, production, and dispensing of legal cannabis and cannabis-infused products. Such facilities, located in multiple
states, are leased to the Company’s clients in the emerging cannabis industry. Along with operational oversight, the Company
provides its clients with legal, accounting, human resources, business development, and other corporate and administrative services.
The
Company also provides professional consultative services in all aspects of cannabis licensing procurement. To date, the Company
has secured, on behalf of its clients, 11 cannabis licenses across five states—two in Delaware, two in Illinois, one in
Nevada, three in Maryland and three in Massachusetts. Accordingly, the Company has developed over 300,000 square feet of
seed-to-sale cannabis facilities across these five states.
In
addition, the Company licenses precision-dosed, cannabis-infused products to treat specific medical conditions or to achieve a
certain result. These products are licensed under the brand names Kalm Fusion™ and Nature’s Heritage™, both
of which were developed by the Company, and Betty’s Eddies™, acquired in October 2017. The Company also has exclusive
sublicensing rights in certain states to distribute vaporizer pens developed by Lucid Mood™, as well as the clinically-tested
medicinal cannabis strains developed in Israel by Tikun Olam™.
The
Company’s stock is quoted on the OTCQB market under the ticker symbol MRMD.
The
Company was originally incorporated in January 2011 under the name Worlds Online Inc., using the ticker symbol WORX. In early
2017, the Company name and ticker were changed to its current name and ticker. Since inception, the Company had operated an online
portal that offers multi-user virtual environments to users. This segment of the business has had insignificant operations since
early 2014.
In
May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC, a company operating in the
cannabis industry. The purchase price consisted of Company common stock, options to purchase additional Company common stock,
and a minority interest in MariMed Advisors Inc. This transaction, further disclosed in Note 3, was accounted for as a purchase
acquisition where the Company was both the legal and accounting acquirer. In June 2017, the minority interest in MariMed Advisors
Inc. was merged into the Company.
In
May 2018, the Company acquired iRollie LLC, a manufacturer of branded cannabis products and accessories for consumers, and custom
product and packaging for companies in the cannabis industry. This acquisition is further disclosed in Note 3.
In
July 2018, the Company contracted to acquire an entity that holds a license for the cultivation of cannabis into medical marijuana
products in the state of Pennsylvania, as further disclosed in Note 3.
In
October 2018, the Company entered into a purchase agreement to acquire its two cannabis-licensed clients currently operating medical
marijuana dispensaries in the state of Illinois. The execution of this agreement occurred subsequent to the quarter end as further
disclosed in Note 14.
In
October 2018, the Company’s cannabis-licensed client with cultivating and dispensing operations in Massachusetts filed a
plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation. Upon approval of the
conversion plan by the state, the for-profit corporation shall be wholly-owned by the Company as further disclosed in Note 14.
In
October 2018, the Company acquired BSC Group LLC, a multidisciplinary advisory firm that provides operational, marketing, and
licensing management services to companies within the cannabis industry.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
In
accordance with GAAP, these interim statements do not contain all of the disclosures normally required in annual statements. In
addition, the results of operations of interim periods are not necessarily indicative of the results of operations to be expected
for the full year. Accordingly, these interim financial statements should be read in conjunction with the Company’s audited
annual financial statements and accompanying notes for the year ended December 31, 2017.
Certain
reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications
had no effect on reported income (losses) or cash flows.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of MariMed Inc. and its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts within the financial statements and disclosures thereof. Actual results could differ from these estimates
or assumptions.
Cash
Equivalents
The
Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. The fair
values of these investments approximate their carrying values.
Revenue
Recognition
The
Company’s main sources of revenue are comprised of: leasing of its developed cannabis cultivation, production, and dispensary
facilities to its cannabis-licensed clients; agreements to provide comprehensive oversight and corporate support to its clients’
operations; consulting services to companies operating in the medical and legal recreational cannabis industries; arrangements
for the procurement of cannabis materials and resources; and licensing of branded cannabis products.
On
January 1, 2018, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”)
606,
Revenue from Contract with Customers,
as amended by subsequently issued Accounting Standards Updates. This revenue
standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration that it expects to be entitled to in exchange for those goods or services. The adoption of this standard did
not have a significant impact on the Company’s consolidated operating results, and accordingly no restatement has been made
to prior period reported amounts.
Research
and Development Costs
Research
and development costs are charged to operations as incurred.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation, with depreciation recognized on a straight-line basis over the
shorter of the estimated useful life of the asset or the lease term, if applicable. When assets are retired or disposed, the cost
and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income. Repairs
and maintenance are charged to expense in the period incurred.
The
estimated useful lives of property and equipment are generally as follows: buildings and building improvements, seven to thirty-nine
years; tenant improvements, the remaining duration of the related lease; furniture and fixtures, seven years; machinery and equipment,
five to ten years. Land is not depreciated.
The
Company’s property and equipment are individually reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds
the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is
measured based on the excess of the asset’s carrying amount over its estimated fair value.
Impairment
analyses are based on management’s current plans, intended holding periods and available market information at the time
the analyses are prepared. If these criteria change, the Company’s evaluation of impairment losses may be different and
could have a material impact to the consolidated financial statements.
For
the nine months ended September 30, 2018 and 2017, based on its impairment analyses, the Company did not have any impairment losses.
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15,
Impairment or Disposal of Long-Lived Assets
.
Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected cash flows, in which
case the assets are written down to fair value, which is determined based on discounted future cash flows or appraised values.
Fair
Value of Financial Instruments
The
Company follows the provisions of ASC 820,
Fair Value Measurement
, to measure the fair value of its financial instruments,
and ASC 825,
Financial Instruments,
for disclosures on the fair value of its financial instruments. To increase consistency
and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. The three levels of fair value hierarchy defined by ASC 820 are:
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The
carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their
fair values due to the short maturity of these instruments. The fair value of option and warrant issuances are determined utilizing
the binomial options pricing model and employing the following inputs: life of instrument, exercise price, value of the underlying
security on issuance date, and 2-year volatility of underlying security.
Extinguishment
of Liabilities
The
Company accounts for extinguishment of liabilities in accordance with ASC 405-20,
Extinguishments of Liabilities.
When
the conditions for extinguishment are met, the liabilities are written down to zero and a gain or loss is recognized.
Stock-Based
Compensation
The
Company accounts for stock-based compensation using the fair value method as set forth in ASC 718,
Compensation—Stock
Compensation,
which requires a public entity to measure the cost of employee services received in exchange for an equity award
based on the fair value of the award on the grant date, with limited exceptions. Such value will be incurred as compensation expense
over the period an employee is required to provide service in exchange for the award, usually the vesting period. No compensation
cost is recognized for equity awards for which employees do not render the requisite service.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740,
Income Taxes
. Deferred income tax assets and liabilities
are determined based upon differences between the financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be
realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements
of operations in the period that includes the enactment date.
ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. The Company did not take any uncertain tax positions and
had no adjustments to unrecognized income tax liabilities or benefits for the nine months ended September 30, 2018 and 2017.
Related
Party Transactions
The
Company follows ASC 850,
Related Party Disclosures
, for the identification of related parties and disclosure of related
party transactions.
In
accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well
as transactions that are eliminated in the preparation of financial statements.
Comprehensive
Income
The
Company reports comprehensive income and its components following guidance set forth by ASC 220,
Comprehensive Income
,
which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial
statements. There were no items of comprehensive income applicable to the Company during the period covered in the financial statements.
Earnings
Per Share
Earnings
per common share is computed pursuant to ASC 260,
Earnings Per Share
. Basic earnings per share is computed by dividing
net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share
is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus the weighted
average number of potentially dilutive securities during the period.
As
of September 30, 2018 and 2017, there were 15,497,823 and 6,748,898, respectively, of potentially dilutive securities
in the form of options and warrants. Also as of September 30, 2018 and 2017, there were zero and 500,000 shares, respectively,
of subscriptions on convertible preferred stock, and $350,000 and $1,075,000, respectively, of convertible promissory
notes, that were potentially dilutive, whose conversion into common stock is based on a discount to the market value of common
stock on or about the future conversion date. For the nine months ended September 30, 2018, all potentially dilutive securities
had an anti-dilutive effect on earnings per share, and in accordance with ASC 260, were excluded from the diluted net income per
share calculation, resulting in calculations of basic and fully diluted net income per share that were identical for this period.
These securities may dilute earnings per share in the future.
Commitments
and Contingencies
The
Company follows ASC 450,
Contingencies
, which requires the Company to assess the likelihood that a loss will be incurred
from the occurrence or non-occurrence of one or more future events. Such assessment inherently involves an exercise of judgment.
In assessing possible loss contingencies from legal proceedings or unasserted claims, the Company would evaluate the perceived
merits of the proceedings or claims, and the perceived merits of the relief sought or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss will be incurred and the amount of the liability
can be estimated, then such estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which
case the guarantees would be disclosed.
While
not assured, management does not believe, based upon information available at this time, that a loss contingency will have material
adverse effect on the Company’s financial position, results of operations or cash flows.
Risk
and Uncertainties
The
Company is subject to risks common to companies operating within the legal and medical marijuana industries, including, but not
limited to, federal laws, government regulations and jurisdictional laws.
Noncontrolling
Interests
Noncontrolling
interests represent third-party minority ownership of the Company’s consolidated subsidiaries. Net income attributable to
noncontrolling interests is shown in the consolidated statements of operations; and the value of net assets owned by noncontrolling
interests are presented as a component of equity within the balance sheets.
Off
Balance Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
In February 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
, which modifies accounting for lessees by requiring the recording of lease assets and liabilities for
operating leases and disclosing key information about leasing arrangements. This ASU will be effective in 2019 and the
Company is currently evaluating the impact of adoption, which will be determined by the Company’s lease portfolio at the
time of implementation.
In November 2016, the FASB issued ASU No.
2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which enhances and clarifies the guidance on the classification
and presentation of restricted cash in the statement of cash flows. This ASU will be effective in 2019 and its impact is dependent
upon the level of restricted cash of the Company, which at this time is insignificant.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350)
which simplifies goodwill impairment
testing by requiring that such periodic testing be performed by comparing the fair value of a reporting unit with its carrying
amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures,
which is effective for fiscal years, including interim periods, beginning after December 15, 2019.
In June 2018, the FASB issued ASU
2018-07,
Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting,
which
is part of the FASB’s simplification initiative to maintain or improve the usefulness of the information provided to
the users of financial statements while reducing cost and complexity in financial reporting. This update provides consistency
in the accounting for share-based payments to nonemployees with that of employees. This update is effective
for interim and annual reporting periods beginning after December 15, 2018, and the Company is currently evaluating
its financial statement impact.
In
addition to the above, the Company has reviewed all other recently issued, but not yet effective, accounting pronouncements, and
does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the
results of its operations.
NOTE
3 – ACQUISITIONS
In
May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC from its ownership group which
included the current CEO and CFO of the Company (the “Sigal Ownership Group”). The purchase price received by the
Sigal Ownership Group was comprised of (i) 31,954,236 shares of common stock valued at approximately $5,913.000, representing
50% of the Company’s outstanding shares on the closing date, (ii) options to purchase three million shares of the Company’s
common stock, exercisable over five years with exercise prices ranging from $0.15 to $0.35, and valued at approximately $570,000,
and (iii) a 49% ownership interest in MariMed Advisors Inc. The excess of purchase price over the book value of the acquired entity
was recorded as goodwill, which was subsequently impaired in full and written down to zero.
In
June 2017, the remaining 49% interest of MariMed Advisors Inc. was merged into the Company in exchange for an aggregate 75 million
shares of common stock to the Sigal Ownership Group.
In
October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, know-how, and other
certain assets of the Betty’s Eddies™ brand of cannabis-infused fruit chews. The purchase price was $140,000 plus
subscriptions on 1,000,000 shares of the Company’s common stock. The shares of common stock associated with these subscriptions
were subsequently issued in June 2018. In addition, the selling company shall receive royalties based on a percentage of the
Company’s sales of the Betty’s Eddies™ product line, commencing at 25% and decreasing to 2.5% as certain sales
thresholds are met. For the nine months ended September 30, 2018, such royalties approximated $14,000, of which $5,000 were paid
and $9,000 accrued at September 30, 2018.
After
applying the total purchase price, which consisted of the cash paid plus the fair value of the subscribed common stock on the
date of the transaction, to the assessed fair values of the assets purchased, the transaction gave rise to goodwill of approximately
$333,000. At September 30, 2018 and December 31, 2017, the Company reviewed the goodwill for impairment and determined that, based
on the present value of future cash flows of the acquired assets, there was no impairment. The goodwill was included in
Other Assets
in the Company’s financial statements.
In
May 2018, the Company issued $600,000 of subscriptions on common stock in exchange for 100% of the ownership interests of iRollie
LLC. The Company acquired, among other assets and liabilities, iRollie’s entire product line, service offerings, clients,
and intellectual property, and hired its two co-founders. After applying the purchase price to the fair value of the assets acquired
and liabilities assumed, the Company recorded goodwill of approximately
$119,000
.
At September 30, 2018, the Company determined that the goodwill had not been impaired, which was included in
Other Assets
in the Company’s financial statements.
In
July 2018, the Company entered into a purchase agreement to acquire 100% of the ownership interests of AgriMed Industries of PA
LLC, an entity that holds a license from the state of Pennsylvania for the cultivation of cannabis (“AgriMed”). AgriMed
presently develops cannabis products that are wholesaled to medical marijuana dispensaries within the state. The purchase price
is comprised of $8,000,000, a portion of which may be in the form of the Company’s common stock at the seller’s option,
and the assumption of certain liabilities of AgriMed not to exceed $700,000. As required by state law, and in order to effectuate
the transaction, the parties have applied for legislative approval of the change in AgriMed’s ownership with respect to
the Company’s acquisition. The Company expects to receive written evidence thereof prior to the end of the 2018 fiscal year,
at which time the Company will consolidate the operations of AgriMed in accordance with GAAP.
NOTE
4 – INVESTMENTS
In August 2018, the Company invested $100,000,
of a total contracted cash investment of $500,000, and agreed to issue 378,259 shares of common stock in exchange for 23% ownership
in an entity that provides a customer relationship management and marketing platform specifically designed for companies in the
cannabis industry whose product is branded Sprout. The investment balance at September 30, 2018 of $100,000 is included in
Other
Assets
on the Company’s balance sheet. After the total cash and stock investment is made, which is expected to occur
prior to the end of the 2018 fiscal year, the investment shall be accounted for under the equity method.
The
Company shall assist in the ongoing development and design of Sprout, and in marketing Sprout to companies within the cannabis
industry. The Company shall earn a percentage share of the revenue from sales of Sprout (i) to its current clients, and (ii) made
by the Company to third parties. As of September 30, 2018, no such share of revenue was earned.
In
August 2018, the Company invested $250,000 to obtain the exclusive worldwide license to sublicense, use, develop, promote, sell
or otherwise commercialize in any way a technology to produce and distribute cannabis products with exceedingly precise dosing
at increased production economies (“the Vitiprints license”). The amount invested was expensed and is included in
Cost of Revenues, Including Depreciation
within the financial statements.
Under
this licensing agreement, the Company shall pay a royalty to Vitiprints equal to 10% of the net revenue, as defined, earned by
the Company from sales of the Vitiprints license, with a minimum royalty of $250,000 during the initial five-year term, and $250,000
for each five-year renewal term, if renewed. As of September 30, 2018, no such net revenue was earned.
NOTE
5 – NOTES RECEIVABLE
In
September 2018, the Company purchased $6.75M of subordinated secured convertible debentures (the “GC Debentures”)
of GenCanna Global, Inc., a producer and distributor of agricultural hemp, cannabidiol (CBD) formulations, hemp genetics, and
hemp products (“GenCanna”). The GC Debentures bear interest at a compounded rate of 9% per annum and mature three
years from issuance.
The
GC Debentures are convertible into the common stock of GenCanna, at the Company’s option, (i) upon the occurrence
of a Liquidity Event, as defined in the GC Debentures, or (ii) after December 31, 2018, upon ten days prior written notice
to GenCanna. The conversion price is equal to the lesser of a 20% discount to the price of the Liquidity Event, or
the price based on a defined post-money valuation of GenCanna. If a Liquidity Event does not occur on or before June 30, 2020,
the Company shall have the option to be redeemed in cash for the principal amount of the GC Debenture plus all accrued and unpaid
interest thereon.
Subsequent
to September 30, 2018, the Company entered into a subscription agreement with GenCanna to purchase an aggregate of $30 million
of GC Debentures, as disclosed in Note 14 below.
During
the nine months ended September 30, 2018, the Company loaned an aggregate of $300,000 to two third-party companies in the cannabis
industry. The loans plus accrued interest at the rate of 8% per annum are expected to be repaid by the end of fiscal year 2019.
The Company loaned
approximately $700,000 to its Delaware cannabis-licensee client during the period of October 2015 to April 2016. In May 2016,
this client issued a 10-year promissory note, as amended, to the Company bearing interest at a compounded rate of 12.5% per
annum. The monthly payments of approximately $10,100 will continue through April 2026, at which time the note will be fully
paid down. At September 30, 2018 and December 31, 2017, the current portion of this note comprised the
Note Receivable,
Current Portion
amounts on the balance sheet, and the long-term portion of approximately $541,000 and $579,000,
respectively, along with the aforementioned notes receivable in this Note 5, were reflected in the caption
Notes
Receivable, Less Current Portion
.
NOTE
6 – PROPERTY AND EQUIPMENT
Property
and equipment are shown net of accumulated depreciation and are primarily comprised of the following: land; buildings; building
and tenant improvements; furniture and fixtures; and machinery and equipment.
During
the nine months ended September 30, 2018 and 2017, additions to property and equipment were approximately $7.3 million
and $11.5 million, respectively.
Depreciation
expense for the nine months ended September 30, 2018 and 2017 was approximately $446,000 and $264,000, respectively.
At September 30, 2018 and December 31, 2017, accumulated depreciation approximated $1,944,000 and $1,499,000, respectively.
NOTE
7 – DEBT
During
the nine months ended September 30, 2018, the Company received additional capital of approximately $1,998,000 from the existing
mortgage on the cannabis cultivation and processing facility it is currently developing in the state of Massachusetts.
In
September 2018, the Company raised $3,000,000 from the issuance of a secured promissory note bearing interest at the rate of 10%
per annum, with interest payable monthly. The note is due and payable in September 2019, however the Company may elect
to prepay the note in whole or part at any time after December 17, 2018 without premium or penalty. In addition, the Company issued
three-year warrants to lender designees to purchase 750,000 shares of common stock at an exercise price of $1.80 per share.
During the nine months ended September 30, 2017, the Company raised $3,650,000 from the issuance of promissory
notes, each with an interest rate of 10% per annum and an initial term of 6 months with the ability to extend.
In
August 2018, the holder of previously issued promissory notes with principal balances of $3,250,000 converted such promissory
notes into subscriptions on 1,231,060 shares of common stock at a conversion price equal to the market value of the stock on the
conversion date of $2.64 per share.
During
the nine months ended September 30, 2018, holders of previously issued promissory notes with principal balances of $5,175,000
and accrued and unpaid interest of approximately $93,000 converted such promissory notes into 4,018,534 shares of common stock
at conversion prices ranging from $0.65 to $1.75 per share. The conversions resulted in the recording of non-cash losses of approximately
$3,210,000 in the aggregate, based on the market value of the common stock on the conversion dates.
During
the nine months ended September 30, 2017, the Company issued 4,385,823 shares of common stock to retire promissory notes with
principal balances of $2,050,000 plus approximately $262,000 of accrued and unpaid interest. The Company recorded a non-cash loss
of approximately $451,000 based on the fair value of the common stock on the transaction date. These former noteholders also received
warrants to purchase 863,898 shares of common stock. The fair value of these warrants recorded by the Company on the grant date
approximated $257,000.
During
the nine months ended September 30, 2018, the Company repaid $700,000 of promissory notes. No repayments debt occurred during
the same period in 2017.
NOTE
8 – EQUITY
Preferred
Stock
In
January 2017, the Company increased the number of authorized shares of preferred stock from 5 million to 50 million shares.
During
the nine months ended September 30, 2017, the Company issued subscriptions on 200,000 shares of Series A convertible preferred
stock at $1.00 per share. No subscriptions were issued during the same period in 2018.
Series
A convertible preferred stock accrues an annual dividend of six percent until conversion, and is convertible, along with any accrued
dividends, into common stock at a twenty-five percent discount to the selling price of the common stock in a qualified offering,
as defined in the subscription agreement. In addition, the Company shall have the ability to force the conversion of preferred
stock at such time the Company has a market capitalization in excess of $50 million for ten consecutive trading days. In such
event, the conversion price shall be a 25% discount to the average closing price of the Company’s common stock over the
ten trading days prior to the Company’s notice of its intent to convert.
In
January 2018, all 500,000 shares of subscribed Series A convertible preferred stock were converted into 970,989 shares of common
stock at a conversion price of $0.55 per share. The Company recorded a non-cash loss on conversion of approximately $34,000 based
on the market value of the common stock on the conversion date. No shares were converted during the same period in 2017.
Common
Stock
In
January 2017, the Company increased the number of authorized shares of common stock from 100 million to 500 million shares.
In
June 2017, the Company issued 75 million shares of common stock to acquire the remaining 49% interest in its subsidiary MariMed
Advisors Inc.
During
the nine months ended September 30, 2018, the Company sold 14,189,738 shares of common stock at prices ranging from $0.50
to $2.70 per share, resulting in total proceeds of $16,896,000. During the same period in 2017, the Company sold
22,178,888 shares of common stock at prices of $0.18 and $0.25 per share, resulting in total proceeds of $5,150,000.
During
the nine months ended September 30, 2018 and 2017, the Company issued 3,350,934 and 531,597 shares of common stock,
respectively for services rendered by third parties. The Company recorded non-cash losses of approximately $1,015,000 in
2018 and $31,000 in 2017, based on the market value of the common stock on the issuance dates.
Subscribed
Common Stock
In
September 2017, options to purchase 4.8 million shares of common stock were exercised at prices ranging from $0.010 to $0.025,
as discussed in Note 9 below. Of this amount, 4.5 million shares were exercised by the former CEO of the Company, who is currently
a board member, and 300,000 shares were exercised by the former CFO of the Company. The shares of common stock were issued to
these individuals in October 2017.
In
October 2017, the Company issued subscriptions on 1,000,000 shares of common stock as part of the purchase price of the Betty’s
Eddies™ acquired assets, as disclosed in Note 3. These subscriptions, valued at $370,000 based on the price of the common
stock on the issuance date, were classified under
Common Stock Subscribed But Not Issued
within the equity section of the
Company’s balance sheet at December 31, 2017.
The shares of common stock
associated with these subscriptions were issued in June 2018.
During
the nine months ended September 30, 2018, the Company issued (i) subscriptions on 264,317 shares of common stock to acquire
iRollie LLC, valued at $600,000 based on the price of the common stock on the issuance date, as disclosed in Note 3, (ii)
subscriptions on 2,894 shares of common stock, equivalent to an aggregate amount of $10,000, for the payment of rent for the
month of September 2018 for a leased property in Massachusetts, and (iii) subscriptions on 1,231,060 shares of common stock
to convert previously issued promissory notes with principal balances of $3,250,000 at a conversion price of $2.64 per share,
as disclosed in Note 7. These subscriptions on common stock were classified under
Common Stock Subscriptions
within the current liabilities section of the Company’s balance sheet.
Membership
Interests
During
the nine months ended September 30, 2018, an individual member of Mari Holdings MD LLC, a majority owned subsidiary of the
Company, exchanged his membership interest in such subsidiary for 222,222 shares of the Company’s common stock. During the
nine months ended September 30, 2017, the Company issued 1,667 Class A membership units of Mari-MD for $150,000, representing
0.33% ownership of this subsidiary on the transaction date.
In
September 2018, a receivable balance of $25,000, related to previously issued membership interests in a majority-owned subsidiary,
was settled by way of the membership interest holder providing consulting services to the Company at a value equivalent to the
outstanding balance.
NOTE
9 – STOCK OPTIONS
In
January
2018, the Company granted options to purchase 1.45
million shares of common stock to the Company’s board members at exercise prices ranging from $0.14 to $0.77 and expiring
between December 2020 and December 2022. The fair value of these options on grant date of approximately $458,000 was amortized
over the six-month vesting period during the nine months ended September 30, 2018.
During
the nine months ended September 30, 2018, the Company granted options to purchase 850,000 shares of common stock to newly-hired
employees at exercise prices ranging from $0.90 to $2.65 per share, expiring five years from the grant date. As of September 30,
2018, the Company recorded approximately $181,000 of the total fair value of these grants of approximately $2,083,000, which is
being amortized over the five-year vesting periods.
During
the nine months ended September 30, 2017, the Company granted options to purchase 300,000 shares of common stock to newly-hired
employees at exercise prices ranging from $0.26 to $0.55, and expiring in September 2020, March
2021, and April 2021. The fair value of these options on the grant date approximated $73,000, of which
approximately $46,000 is being amortized over the respective vesting periods, and approximately $27,000 was forfeited by
the option holder.
During
the nine months ended September 30, 2018, options to purchase 700,000 shares of common stock were exercised at exercise prices
ranging from $0.08 to $0.63 per share by a current board member (400,000 shares) and the former CFO of the Company (300,000
shares). During the same period ended September 30, 2017, options to purchase 4.8 million shares of common stock were exercised
at prices ranging from $0.010 to $0.025. As discussed in Note 8 above, of the total exercised shares during this period, 4.5 million
shares were exercised by the former CEO of the Company, who is currently a board member, and 300,000 shares were exercised by
the former CFO of the Company. The former CEO’s exercise price of $0.01 per share, or $45,000 in the aggregate, was paid
with the surrender of 90,000 shares of common stock. These surrendered shares were classified as treasury stock.
Options
to purchase 300,000 shares of common stock were forfeited during the nine-month period ended September 30, 2018. No options were
forfeited during the same period in 2017.
Stock
options outstanding and exercisable as of September 30, 2018 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.080
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
0.33
|
|
$
|
0.080
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
1.22
|
|
$
|
0.130
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
1.75
|
|
$
|
0.140
|
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
2.25
|
|
$
|
0.150
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.99
|
|
$
|
0.250
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.99
|
|
$
|
0.260
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.51
|
|
$
|
0.330
|
|
|
|
50,000
|
|
|
|
25,000
|
|
|
|
2.44
|
|
$
|
0.350
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.99
|
|
$
|
0.450
|
|
|
|
250,000
|
|
|
|
125,000
|
|
|
|
3.01
|
|
$
|
0.550
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
1.99
|
|
$
|
0.630
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
3.25
|
|
$
|
0.770
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
4.25
|
|
$
|
0.900
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
4.62
|
|
$
|
0.950
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
4.25
|
|
$
|
2.320
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
4.95
|
|
$
|
2.500
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
4.91
|
|
$
|
2.650
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
4.99
|
|
|
|
|
|
|
6,100,000
|
|
|
|
4,800,000
|
|
|
|
|
|
NOTE
10 – WARRANTS
During
the nine months ended September 30, 2018 and 2017, the Company issued warrants to purchase 7,209,974 and 1,189,280
shares of common stock, respectively, at exercise prices ranging from $0.30 to $4.30 per share in 2018 and $0.40 to
$0.62 per share in 2017. These warrants generally expire three or five years from issuance date. The Company recorded the
fair value of these warrants, based on the market value of the Company’s common stock on the issuance dates, of approximately
$14,237,000 in 2018 and $344,000 in 2017.
During
the nine months ended September 30, 2018, warrants to purchase 2,057,462 shares of common stock were exercised, at exercise
prices ranging from $0.10 to $0.50 per share. No warrants were exercised during the same period in 2017.
At
September 30, 2018, warrants to purchase 9,397,823 shares of common stock were outstanding at exercise prices ranging from
$0.12 to $4.30 per share.
NOTE
11 – RELATED PARTY TRANSACTIONS
As
disclosed in Note 3 above, the current CEO and CFO of the Company are part of the Sigal Ownership Group from whom Sigal
Consulting LLC was acquired in May 2014. The 49% ownership in the Company’s subsidiary, MariMed Advisors Inc., which the
Sigal Ownership Group acquired as part of the purchase price, was acquired by the Company from the Sigal Ownership Group in June
2017 in exchange for 75 million shares of the Company’s common stock.
In
October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, and know-how of the
Betty’s Eddies™ brand of cannabis-infused products, as disclosed in Note 3, from a company that is minority-owned
by the Company’s chief operating officer.
In
December 2017 and January 2018, options to purchase 400,000 shares of commons stock at an exercise price of $0.025 were forfeited
by the CEO and by an independent board member (200,000 shares forfeited by each individual).
In
January 2018, the Company granted options to purchase 1.45 million shares of common stock to the Company’s board members
at exercise prices ranging from $0.14 to $0.77 and expiring between December 2020 and December 2022, as disclose in Note 9. Also
during this month, the CEO and a board member each forfeited options to purchase 100,000 shares of common stock.
During
the nine months ended September 30, 2018, a current board member exercised options to purchase 400,000 shares of common stock,
and the former CFO of the Company exercised options to purchase 300,000 shares of common stock. These options were exercised at
exercise prices ranging from $0.08 to $0.63 per share. During the same period ended September 30, 2017, as disclosed in Notes
8 and 9, options to purchase 4.5 million shares of common stock were exercised by the former CEO of the Company, who is a currently
a board member, at an exercise price of $0.01 per share.
During
the nine months ended September 30, 2018 and 2017, the Company issued 170,000 and 202,541 shares, respectively, of common
stock for services rendered by the former CFO of the Company. Based on the market value of the common stock on the dates of the
two issuances, the Company recorded non-cash losses of approximately $112,000 in 2018 and $31,000 in 2017.
At
September 30, 2018 and December 31, 2017, the Company owed an aggregate of approximately $33,000 to the CEO and
CFO.
The
caption
Due from Related Parties
in the Company’s financial statements is primarily comprised of short-term
loans to non-consolidated entities under common ownership.
The
caption
Due to Related Parties
reflects short term loans from related parties and includes advances received from officers
of the Company.
NOTE
12 –
COMMITMENTS AND CONTINGENCIES
An
employment agreement with the former CEO of the Company that provided this individual with salary, car allowances, stock options,
life insurance, and other employee benefits was terminated in 2017.
The
Company recorded an accrual of approximately $1,043,000 at September 30, 2018 and December 31, 2017 for any amounts that may be
owed under this agreement. However, the Company is contesting the validity this agreement.
NOTE
13 – SEGMENT REPORTING
In
accordance with ASC 280, the following is information regarding the Company’s operating segments:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
—
|
|
|
$
|
289
|
|
Cannabis
related operations
|
|
|
8,411,858
|
|
|
|
4,487,184
|
|
Consolidated
revenues
|
|
$
|
8,411,858
|
|
|
$
|
4,487,473
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Cannabis
related operations
|
|
|
445,504
|
|
|
|
263,624
|
|
Depreciation
|
|
$
|
445,504
|
|
|
$
|
263,624
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
(207
|
)
|
|
$
|
(31,903
|
)
|
Cannabis
related operations
|
|
|
(18,221,440
|
)
|
|
|
331,864
|
|
Net
income (loss)
|
|
$
|
(18,221,647
|
)
|
|
$
|
300,161
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Cannabis
related operations
|
|
|
7,259,413
|
|
|
|
11,502,688
|
|
Combined
capital expenditures
|
|
$
|
7,259,413
|
|
|
$
|
11,502,688
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
1,191
|
|
|
$
|
1,476
|
|
Cannabis
related operations
|
|
|
57,132,308
|
|
|
|
21,370,942
|
|
Combined
assets
|
|
$
|
57,133,499
|
|
|
$
|
21,372,418
|
|
NOTE
14 – SUBSEQUENT EVENTS
Notes
Receivable
In October and November 2018, the Company
purchased an additional $23.25 million of GC Debentures, at which time the Company entered into a Subscription Agreement for Convertible
Debentures (the “SA”) with GenCanna governing the aggregate GC Debentures purchased of $30 million. The SA maintains
the provisions of the $6.75M of GC Debentures previously purchased as of September 30, 2018 and disclosed in Note 4. Additionally,
among other provisions, the Company shall have the right to appoint one director to GenCanna’s board, and shall fund a $10
million employee bonus pool should GenCanna meet certain 2019 operating targets.
Pursuant to a Security and Pledge Agreement
executed with GenCanna in November 2018, the Company was granted a senior security interest on certain assets of GenCanna equal
in value to 100% or more of the principal and accrued interest on the GC Debentures until such time the GC Debentures are paid
down, redeemed or converted. Additionally, the Company was granted certain other rights, pursuant to a Rights Agreement, including
rights of inspection, financial information, and participation in future security offerings of GenCanna.
Conversion
of the Company’s entire $30 million investment shall equate to at least a 33.3% ownership interest in GenCanna on a fully
diluted basis.
Debt
Issuance
In
October and November 2018, pursuant to the terms of a Securities Purchase Agreement (the “SPA”), the Company sold
an aggregate of $10,000,000 convertible debentures bearing interest at the rate of 6% per annum that mature three years from issuance,
with a 1% issue discount, resulting in net proceeds to the Company of $9,900,000 (the “$10M Debentures”).
The
holder of the $10M Debentures (the “Holder”) shall have the right at any time to convert all or a portion of the $10M
Debenture, along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of
a calculated average, as determined in the $10M Debentures, of the daily volume-weighted price during the ten consecutive trading
days preceding the date of conversion. Notwithstanding this conversion right, the Holder shall limit conversions in any given
month to certain agreed-upon values based on the conversion price, and the Holder shall also be limited from beneficially owning
more than 4.99% of the Company’s outstanding common stock (potentially further limiting the Holder’s conversion right).
The
Company shall have the right to redeem all or a portion of the $10M Debentures, along with accrued and unpaid interest, at a 10%
premium, provided however that the Company first provide advance written notice to the Holder of its intention to make a redemption,
with the Holder allowed to affect one or more conversions of the $10M Debentures during such notice period.
Upon
a change in control transaction, as defined in the $10M Debentures, the Holder may require the Company to redeem all or a portion
of the $10M Debentures at a price equal to 110% of the principal amount of the $10M Debentures plus all accrued and unpaid interest
thereon. So long as the $10M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”),
as defined in the SPA, the Holder may cause the Company to revise the terms of the $10M Debentures to match the terms of the convertible
security of such VRT. As part of issuance of the $10M Debenture, the Company issued three-year warrants to the Holder to purchase
324,675 shares of common stock at exercise prices of $3.50 and $5.50 per share (the “Warrants”).
Pursuant
to the terms of a Registration Rights Agreement with the Holder, entered into concurrently with the SPA and the $10M Debentures,
the Company agreed to provide the Holder with customary registration rights with respect to any potential shares issued pursuant
to the terms of the SPA, the $10M Debentures, and the Warrants.
Acquisitions
In
October 2018, the Company entered into a purchase agreement to acquire 100% of the ownership interests of KPG of Anna LLC and
KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state
of Illinois (both entities collectively, the “KPGs”), from the current ownership group of the KPGs (the “Sellers”).
As part of this transaction, the Company will also acquire the Sellers’ ownership interests of Mari Holdings IL LLC, the
Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located (“Mari-IL”).
The purchase price of 1,000,000 shares of the Company’s common stock shall be issued to the Sellers upon the closing of
the transaction, which is dependent upon, among other closing conditions, the approval by the Illinois Department of Financial
and Professional Regulation. After the transaction is effectuated, the KPGs and Mari-IL will be wholly-owned subsidiaries of the
Company.
In
October 2018, the Company’s cannabis-licensed client in Massachusetts, ARL Healthcare Inc. (“ARL”), filed a
plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation. ARL holds three cannabis
licenses from the state of Massachusetts for the cultivation, production and dispensing of cannabis. Upon approval of the conversion
plan by the state, the Company shall be the sole shareholder of ARL, and shall elect its current COO to serve as ARL’s sole
board member.
As
of September 30, 2018, the Company had not yet received the legislative approval that is required for all ownership changes of
cannabis licensees, and therefore the operations of the KPGs and ARL were not consolidated in the Company’s financial statements
as of such date. The Company anticipates that approval for these transactions will be obtained, and those deals consummated, prior
to the end of the current fiscal year, or in early 2019. When that occurs, the Company will consolidate the acquired entities
in accordance with GAAP.
In
October 2018, the Company acquired BSC Group LLC, a multidisciplinary advisory firm that provides operational, marketing, and
licensing management services to companies within the cannabis industry.
Equity
Transactions
In
October 2018, the Company (i) sold 4,999,242 shares of common stock at prices of $2.20 and $3.00 per share, resulting in total
proceeds of $14,925,000, and (ii) issued three-year warrants to purchase 1,201,163 shares of common stock at exercise prices ranging
from $3.50 to $5.50 per share.
In
October 2018, warrants to purchase 222,775 shares of common stock were exercised at exercise prices ranging from $0.40 to $1.75
per share, and options to purchase 60,000 shares of common stock were exercised at an exercise price of $0.45 per share in a cashless
transaction.