Notes
to Consolidated Financial Statements
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. At inception, the Company had operated
an online portal that offered multi-user virtual environments to users. These operations were effectively ceased in
early 2014.
The
Company has entered into several transactions to develop its business, and more recently to carry out its strategic decision to
transition from a professional management and advisory company that provides cannabis licensing, operational consulting, and real
estate services, to a direct owner of cannabis licenses and operator of seed-to-sale operations. These transactions are summarized
below and disclosed in further detail in Note 3 –
Acquisitions
.
In
May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC, a company operating in the
cannabis industry. This transaction 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.
In
July 2018, the Company contracted to acquire AgriMed Industries of PA LLC (“AgriMed”), an entity that holds
a license for the cultivation of cannabis into medical marijuana products in the state of Pennsylvania. In February 2019, the
Company filed a complaint against this entity for specific performance of their obligations under the purchase agreement.
In
October 2018, the Company entered into a purchase agreement to acquire its two cannabis-licensed clients, KPG of Anna LLC and
KPG of Harrisburg LLC, currently operating medical marijuana dispensaries in the state of Illinois. As of December 31, 2018, the
Company had not yet received legislative approval – required for all ownership changes of cannabis licensees – and
therefore these entities were not consolidated in the Company’s financial statements as of such date. The Company anticipates
approval will be obtained, and the transaction consummated, in 2019
In
October 2018, the Company’s cannabis-licensed client with cultivation and dispensary operations 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, with the Company as the sole shareholder of the for-profit corporation. On November 30, 2018,
the conversion plan was approved by the secretary of state, and effective December 1, 2018, ARL was consolidated into the Company
as a wholly-owned subsidiary.
In
November 2018, the Company issued a letter of intent to acquire The Harvest Foundation LLC, its cannabis-licensed client with
cultivation operations in the state of Nevada. The acquisition is conditioned upon legislative approval of the transaction which
is expected to occur in May 2019.
In
December 2018, the Company entered into a memorandum of understanding to merge with Kind Therapeutics USA LLC, its cannabis-licensed
client in the state of Maryland. The parties expect the merger agreement to be finalized, and the transaction approved by the
state legislature in 2019
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”).
Certain
reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications
had no effect on consolidated income (losses) or cash flows.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements at December 31, 2018 and 2017 and for the years then ended include
the accounts of MariMed Inc. and the following majority-owned subsidiaries.
Subsidiary:
|
|
Percentage
Owned
|
|
MariMed
Advisors Inc.
|
|
|
100.0
|
%
|
Mia
Development LLC
|
|
|
89.5
|
%
|
Mari
Holdings IL LLC
|
|
|
60.0
|
%
|
Mari
Holdings MD LLC
|
|
|
97.4
|
%
|
Mari
Holdings NV LLC
|
|
|
100.0
|
%
|
Hartwell
Realty Holdings LLC
|
|
|
100.0
|
%
|
iRollie
LLC
|
|
|
100.0
|
%
|
ARL
Healthcare Inc.
|
|
|
100.0
|
%
|
Intercompany
transactions have been eliminated upon consolidation.
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.
The
Company’s cash and cash equivalents are maintained with recognized financial institutions located in the United States.
In the normal course of business, the Company may carry balances with certain financial institutions that exceed federally insured
limits. The Company has not experienced losses on balances in excess of such limits and management believes the Company is not
exposed to significant risks in that regard.
Accounts
Receivable
Accounts
receivable consist of trade receivables and are carried at their estimated collectible amounts.
The
Company provides credit to its clients in the form of payment terms. The Company limits its credit risk by performing credit evaluations
of its clients and maintaining a reserve, if deemed necessary, for potential credit losses. Such evaluations include the review
of a client’s outstanding balances with consideration towards such client’s historical collection experience, as well
as prevailing economic and market conditions and other factors. Based on such evaluations, the Company recorded a reserve of $150,000
at December 31, 2018.
The
accounts receivable balances of two clients constituted 84% of total accounts receivable at December 31, 2018. The balances of
these two clients represented 79% of total accounts receivable at December 31, 2017.
Investments
The
Company classifies its investments as available-for-sale-investments. Investments are comprised of equity holding of private companies
These investments are recorded at fair value on the Company’s consolidated balance sheet, with changes to fair value, if
any, included in comprehensive income. Investments are evaluated for other-than-temporary impairment and are written down if such
impairments are deemed to have occurred.
Revenue
Recognition
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 recognition of revenue is
determined by performing the following consecutive steps:
|
●
|
Identify
the contract(s) with a customer;
|
|
●
|
Identify
the performance obligations in the contract(s);
|
|
●
|
Determine
the transaction price;
|
|
●
|
Allocate
the transaction price to the performance obligations in the contract(s); and
|
|
●
|
Recognize
revenue as the performance obligation is satisfied.
|
Additionally,
when another party is involved in providing goods or services to the Company’s clients, a determination is made as to who—the
Company or the other party—is acting in the capacity as the principal in the sale transaction, and who is merely the agent
arranging for goods or services to be provided by the other party.
The
Company is typically considered the principal if it controls the specified good or service before such good or service is transferred
to its client. The Company may also be deemed to be the principal even if it engages another party (an agent) to satisfy some
of the performance obligations on its behalf, provided the Company (i) takes on certain responsibilities, obligations and risks,
(ii) possesses certain abilities and discretion, or (iii) other relevant indicators of the sale. If deemed an agent, the Company
would not recognize revenue for the performance obligations it does not satisfy.
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.
The
Company’s main sources of revenue are comprised of the following:
|
●
|
Real
Estate – the Company generates rental income and additional rental fees from leasing
its regulatory-compliant legal cannabis facilities to its clients, which are cannabis-licensed
operating companies. Rental income is generally a fixed amount per month that escalates
over the respective lease terms, while additional rental fees are based on a percentage
of tenant revenues that exceed a specified amount.
|
|
|
|
|
●
|
Management
– the Company receives fees for providing its clients with corporate services and
operational oversight of their cannabis cultivation, production, and dispensary operations.
These fees are based on a percentage of such clients’ revenue, and are recognized
after services have been performed.
|
|
|
|
|
●
|
Supply
Procurement – the Company maintains volume discounts with top national vendors
of cultivation and production resources, supplies, and equipment, which the Company acquires
and resells to its clients or third parties within the cannabis industry. The Company
recognizes this revenue after the acceptance of goods by the purchaser.
|
|
|
|
|
●
|
Licensing
– the Company’s derives revenue from the sale of precision-dosed, cannabis-infused
products, such as Kalm Fusion™ and Betty’s Eddies™, to legal dispensaries
throughout the United States. The recognition of this revenue occurs when the products
are delivered.
|
|
|
|
|
●
|
Consulting
– the Company assists third-parties parties in securing cannabis licenses, and
provides advisory services in the areas of facility design and development, and cultivation
and dispensing best practices. The revenues associated with these services are recognized
as the services are performed.
|
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 years ended December 31, 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 using the Black-Scholes pricing model and employing several
inputs such as the expected life of instrument, the exercise price, the expected risk-free interest rate,
the expected dividend yield, the value of the Company’s common stock on issuance date, and the expected volatility of
such common stock. The following table summarizes the range of inputs used by the Company during the prior two fiscal years:
|
|
2018
|
|
|
2017
|
|
Life
of instrument
|
|
|
0.5
to 5.0 years
|
|
|
|
3.0
to 5.0 years
|
|
Volatility
factors
|
|
|
1.019
to 2.086
|
|
|
|
0.963
to 1.095
|
|
Risk-free
interest rates
|
|
|
1.65%
to 3.07%
|
|
|
|
1.79%
to 2.08%
|
|
Dividend
yield
|
|
|
0%
|
|
|
|
0%
|
|
The
expected life of an instrument is calculated using the simplified method pursuant to Staff Accounting Bulletin Topic 14,
Share-Based
Payment
, which allows for using the mid-point between the vesting date and expiration date. The volatility factors are based
on the historical two-year movement of the Company’s common stock prior to an instrument’s issuance date. The risk-free
interest rate is based on U.S. Treasury rates with maturity periods similar to the expected instruments life on the issuance date.
The
Company amortizes the fair value of option and warrant issuances on a straight-line basis over the requisite service period of
each instrument.
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 years ended December 31, 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 December 31, 2018 and 2017, there were 18,916,211 and 9,045,311, respectively, of potentially dilutive securities in the form
of options and warrants. Also as of such dates, there were (i) zero and 500,000 shares, respectively, of subscriptions
on convertible preferred stock, (ii) $3,350,000 and $1,350,000, respectively, of convertible promissory notes, and (iii) approximately
$8.6 million and zero, respectively, of convertible debentures payable, that were potentially dilutive, and 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 years
ended December 31, 2018 and 2017, 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 identical calculations
of basic and fully diluted net income per share. 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 evaluates the perceived merits
of such proceedings or claims, and 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 the 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.
Beneficial
Conversion Features on Convertible Debt
Convertible
instruments that are not bifurcated as a derivative pursuant to ASC 815,
Derivatives and Hedging
, and not accounted for
as a separate equity component under the cash conversion guidance are evaluated to determine whether their conversion prices create
an embedded beneficial conversion feature at inception, or may become beneficial in the future due to potential adjustments.
A
beneficial conversion feature is a nondetachable conversion feature that is “in-the-money” at the commitment date.
The in-the-money portion, also known as the intrinsic value of the option, is recorded in equity, with an offsetting discount
to the carrying amount of convertible debt to which it is attached. The discount is amortized to interest expense over the life
of the debt with adjustments to amortization upon full or partial conversions of the debt.
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; 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 right-of-use lease
assets and lease liabilities for operating leases and disclosing key information about leasing arrangements. The Company is currently
implementing the requirements of Topic 842, which is effective for the Company starting on January 1, 2019. Most of the Company’s
operating leases are subject to this new standard whose impact will be reflected by an increase in the Company’s total assets
and total liabilities relative to such amount prior to adoption.
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. Topic 230 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 Topic 350 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
Sigal
Consulting LLC
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 $5.9 million, 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.
Betty’s
Eddies™
In
October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, know-how, and other
certain assets of Betty’s Eddies™, a brand of cannabis-infused fruit chews, from Icky Enterprises LLC, a company partially
owned by an officer of the Company (“Icky”). The purchase price was $140,000 plus 1,000,000 shares of the Company’s
common stock valued at $370,000 based on the price of the common stock on the issuance date. These shares of common stock were
issued in June 2018, and accordingly, the shares were classified as
Common Stock Subscribed But Not Issued
on the December
31, 2017 balance sheet.
The
acquisition was accounted for in accordance with ASC 10,
Business Combinations
. The following table summarizes the allocation
of the purchase price to the fair value of the assets acquired on the acquisition date:
Inventory
|
|
$
|
46,544
|
|
Machinery
and equipment
|
|
|
130,255
|
|
Goodwill
|
|
|
333,201
|
|
Total
fair value of consideration
|
|
$
|
510,000
|
|
The
goodwill balance of approximately $333,000 was written down in 2018.
As
part of the agreement between the parties, Icky 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 years ended December 31, 2018 and 2017, such royalties approximated $16,000 and $10,000, respectively.
iRollie
LLC
Effective
April 2018, the Company entered into a purchase agreement whereby 264,317 shares of the Company’s common stock were exchanged
for 100% of the ownership interests of iRollie LLC, a manufacturer of branded cannabis products and accessories for consumers,
and custom product and packaging for companies in the cannabis industry. The Company acquired, among other assets, iRollie’s
entire product line, service offerings, clients, and intellectual property, and hired its two co-founders.
The
acquisition was accounted for in accordance with ASC 10. The shares of Company common stock valued at $280,176 were issued to
iRollie’s former owners in December 2018, at which time the Company adjusted the total goodwill generated on the transaction.
The following table summarizes the allocation of the purchase price to the fair value of the assets acquired:
Cash
and cash equivalents
|
|
$
|
13,494
|
|
Goodwill
|
|
|
266,682
|
|
Total
fair value of consideration
|
|
$
|
280,176
|
|
Prior
to the acquisition, iRollie had not been generating positive cash flow as a stand-alone entity, and in conformity with relevant
accounting guidance, the goodwill was written down.
ARL
Healthcare Inc.
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, with the Company as
the sole shareholder of the for-profit corporation. ARL holds three cannabis licenses from the state of Massachusetts for the
cultivation, production and dispensing of cannabis.
On
November 30, 2018, the conversion plan was approved by the secretary of state, and effective December 1, 2018, ARL was consolidated
into the Company as a wholly-owned subsidiary. Additionally, the Company’s chief operating officer was appointed as ARL’s
sole board member.
The
acquisition was accounted for in accordance with ASC 10,
Business Combinations
. The following table summarizes the allocation
of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date:
Equipment
|
|
$
|
21,000
|
|
Cannabis
licenses
|
|
|
180,000
|
|
Accounts
payable
|
|
|
(120,689
|
)
|
Due
to related parties
|
|
|
(92,765
|
)
|
Total
identifiable net assets
|
|
|
(7,454
|
)
|
Goodwill
|
|
|
731,902
|
|
Total
fair value of consideration
|
|
$
|
724,448
|
|
The
total consideration paid by the Company was equal to the forgiveness of amounts owed by the Company to ARL. Accordingly, the transaction
gave rise to goodwill of approximately $732,000, which the Company wrote down.
AgriMed
Industries of PA LLC
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. In February 2019, the Company filed a complaint against
AgriMed for specific performance of their obligations under the purchase agreement. The consummation of this transaction is contingent
upon the resolution of this complaint.
KPG
of Anna LLC and KPG of Harrisburg LLC
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. Such approval is expected to be received by mid-2019. After the transaction is effectuated, the KPGs
and Mari-IL will be wholly-owned subsidiaries of the Company.
As
of December 31, 2018, the Company had not yet received the legislative approval – required for all ownership changes of
cannabis licensees – and therefore the operations of the KPGs were not consolidated in the Company’s financial statements
as of such date. The Company anticipates approval will be obtained, and the transaction consummated, in 2019. When that occurs,
the Company expects to consolidate the acquired entities in accordance with ASC 10.
The
Harvest Foundation LLC
In
November 2018, the Company issued a letter of intent to acquire 100% of the ownership interests of The Harvest Foundation LLC,
the Company’s cannabis-licensed client in the state of Nevada. The parties are in the process of negotiating a definitive
agreement governing the acquisition following the satisfactory completion of due diligence. The acquisition is conditioned upon
the appropriate legislative approval of the transaction, which is expected to occur in May 2019. Accordingly, the operations of
The Harvest Foundation LLC have not been consolidated for the year ended December 31, 2018.
Kind
Therapeutics LLC
In
December 2018, the Company entered into a memorandum of understanding to merge with its cannabis-licensed client in Maryland,
Kind Therapeutics LLC. A merger agreement is currently being drafted for this transaction, which is intended to qualify as a tax-deferred
reorganization under the Internal Revenue Code. The parties expect the merger agreement to be finalized, and the transaction approved
by the state legislature in 2019.
NOTE
4 – INVESTMENTS
Sprout
During
2018, the Company invested $300,000, of a total contracted cash investment of $500,000, and issued 378,259 shares of common stock,
valued at approximately $915,000, in exchange for 23% ownership in CVP Worldwide LLC (“CVP”). CVP has developed a
customer relationship management and marketing platform, branded under the name Sprout, which is specifically designed for companies
in the cannabis industry.
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 Sprout’s revenues generated from sales (i) to the Company’s
clients, and (ii) by the Company to third parties. As of December 31, 2018, no revenue share was earned by the Company.
The
investment has been accounted under the equity method. For the year ended December 31, 2018 , the Company recorded a charge to
net income of approximately $43,000 based on its equity in CVP’s net loss during the period of the Company’s ownership.
Such amount reduced the carrying value of the investment to approximately $1,172,000 at December 31, 2018.
Vitiprints
In
August 2018, the Company entered into a licensing agreement for the exclusive worldwide license to use, develop, sublicense, promote,
sell or otherwise commercialize in any way a patented technology to produce and distribute cannabis products with exceedingly
precise dosing at increased production economies (“the Vitiprints License”). The licensing agreement has an initial
term of five years, with an option to renew the agreement for successive five-year periods, provided that notice of renewal is
delivered prior to the expiration of the initial term or a renewal term.
Pursuant
to the agreement, the Company made a non-refundable payment of $250,000. This payment was expensed and is included in
Cost
of Revenues
on the financial statements. In addition, the Company shall pay a royalty to Vitiprints equal to 10% of net revenue,
as defined, received by the Company from commercialization of the Vitiprints License, with a minimum royalty payment of $250,000.
In order to maintain the exclusivity of the license, the Company shall make minimum royalty payments of (i) $500,000 for the year
following the first sale date, as defined, (ii) $750,000 for the following year, and (iii) $1,000,000 for all remaining years
during the initial or renewal terms.
DabTabs™
In
December 2018, the Company purchased 2,500,000 shares of common stock of Iconic Ventures Inc. (“Iconic”) for an aggregate
price of $500,000. Iconic, a private company, has developed DabTabs™, a unique solution for cannabinoid vaporization via
a convenient portable tablet that provides precisely measured dosing and acts as a storage system for full spectrum extracts,
concentrates and distillates.
The
Company’s investment equates to an ownership percentage in Iconic of less than 15%. The Company was not given a board seat
and does not have ability to exert operational or financial control over the entity. In accordance with ASC 321,
Investments
– Equity Securities
, the Company elected the measurement alternative to value this equity investment without a readily
determinable fair value. Under this alternative measurement election, the investment is recorded at its cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
in Iconic. Following the Company’s purchase, there has been no impairment to this investment, nor any observable price changes
to investments in Iconic. Accordingly, this investment was measured at $500,000 at December 31, 2018.
The
Company will continue to apply the alternative measurement guidance until this investment does not qualify to be so measured.
The Company may subsequently elect to measure this investment at fair value, and if so, shall measure all identical or similar
investments in Iconic at fair value. Any subsequent changes in fair value shall be recognized in net income.
NOTE
5 – DEFERRED RENTS RECEIVABLE
The
Company leases its regulatory-compliant legal cannabis facilities to its cannabis-licensed clients generally under 20-year non-cancelable
lease agreements which contain rent holidays, escalating rents over time, options to renew, and the requirement to pay property
taxes, insurance and/or maintenance costs. These leases also contain contingent rental payments that are based on a percentage
of monthly tenant revenues.
The
Company recognizes fixed rental receipts from such lease agreements on a straight-line basis over the expected lease term. Differences
between amounts received and amounts recognized are recorded under
Deferred Rents Receivable
on the balance sheet. Contingent
rentals are recognized only after tenants’ revenues are finalized and if such revenues exceed certain minimum levels.
The
Company leases the following owned properties:
|
●
|
Delaware
– a 45,000 square foot facility purchased in September 2016 and built into a cannabis cultivation, processing, and dispensary
facility which is leased to a cannabis-licensed client occupying 100% of the space under a 20-year triple net lease expiring
in 2035.
|
|
|
|
|
●
|
Illinois
– two 3,400 square foot free-standing retail dispensaries in the cities of Anna and Harrisburg and leased to two licensed
cannabis dispensary clients each under a 20-year lease expiring in 2036.
|
|
|
|
|
●
|
Maryland
– a 180,000 square foot former manufacturing facility purchased January 2017 and rehabilitated by the Company into a
cultivation and processing facility which is leased to a licensed cannabis client under a 20-year triple net lease that started
in January 2018.
|
The
Company subleases the following properties:
|
●
|
Delaware
– 4,000 square feet of retail space in a multi-use building space which the Company developed into a cannabis dispensary
which is subleased to its cannabis-licensed client under a under a five-year triple net lease with a five-year option to extend.
|
|
|
|
|
●
|
Nevada
– 10,000 square feet of an industrial building that the Company built-out into a cannabis cultivation facility and is
subleased to the Company’s cannabis-licensed client under a sublease for 10 years expiring in 2024.
|
As
of December 31, 2018 and 2017, cumulative fixed rental receipts under such leases approximated $5.4 million and $2.8 million,
respectively, compared to revenue recognized on a straight-line basis of approximately $7.5 million and $3.4 million. Accordingly,
the deferred rents receivable balances at December 31, 2018 and 2017 approximated $2.1 million and $611,000, respectively.
Future
minimum rental receipts for non-cancelable leases and subleases as of December 31, 2018 were:
2019
|
|
$
|
1,261,181
|
|
2020
|
|
|
1,287,257
|
|
2021
|
|
|
1,315,686
|
|
2022
|
|
|
1,193,990
|
|
2023
|
|
|
1,179,641
|
|
Thereafter
|
|
|
14,571,268
|
|
Total
|
|
$
|
20,809,023
|
|
NOTE
6 – DUE FROM THIRD PARTIES
At
December 31, 2018 and 2017, the balances due from third parties were comprised the following amounts advanced to the Company’s
cannabis-licensed clients for working capital purposes:
|
|
2018
|
|
|
2017
|
|
Kind
Therapeutics USA Inc. (Maryland licensee)
|
|
$
|
2,679,496
|
|
|
$
|
77,558
|
|
KPG
of Anna LLC (Illinois licensee)
|
|
|
482,700
|
|
|
|
418,305
|
|
KPG
of Harrisburg LLC (Illinois licensee)
|
|
|
449,385
|
|
|
|
382,260
|
|
Harvest
Foundation LLC (Nevada licensee)
|
|
|
248,796
|
|
|
|
40,693
|
|
ARL
Healthcare Inc. (Massachusetts licensee)
|
|
|
-
|
|
|
|
176,823
|
|
Other
|
|
|
-
|
|
|
|
101,279
|
|
Total
due from third parties
|
|
$
|
3,860,377
|
|
|
$
|
1,196,918
|
|
Such
amounts are advanced by the Company to its clients in order to furnish these companies with additional means by which they can
establish their cannabis businesses and grow their operations. The Company has employed this strategy in the past, and is continuing
with these companies, whereby all advanced amounts are reimbursed as the companies begin to generate positive cash flow.
NOTE
7 – DEBENTURES RECEIVABLE
During
2018, in a series of transactions, the Company purchased $30 million 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. 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. 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.
Among
other provisions of the subscription agreement governing this series of transactions, the Company was given the right to appoint
a director to GenCanna’s board, and agree to fund a $10 million employee bonus pool should GenCanna meet certain 2019 operating
targets.
Concurrent
with the completion of the GC Debenture purchases, the parties executed a security and pledge agreement whereby 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.
For the year ended December 31, 2018, the
Company earned and received interest income of approximately $502,000 on the GC Debentures. In February 2019, the Company converted
the GC Debentures plus accrued interest through the conversion date into a 33.5% ownership interest in GenCanna on a fully diluted
basis, as disclosed in Note 20 –
Subsequent Events
.
NOTE
8 – NOTES RECEIVABLE
At
December 31, 2018 and 2017, notes receivable were comprised of the following:
|
|
2018
|
|
|
2017
|
|
First
State Compassion Center -12.5% per annum, maturing in 2026
|
|
$
|
578,723
|
|
|
$
|
624,275
|
|
The
Healer - 8% per annum, maturing in 2021
|
|
|
307,429
|
|
|
|
-
|
|
Chooze
Corp. - 8% per annum, maturing in 2021
|
|
|
257,687
|
|
|
|
-
|
|
Total
notes receivable
|
|
|
1,143,839
|
|
|
|
624,167
|
|
Current
portion of First State Compassion Center note receivable
|
|
|
51,462
|
|
|
|
45,444
|
|
Notes
receivable, long-term portion
|
|
$
|
1,092,377
|
|
|
$
|
578,831
|
|
The
Company loaned approximately $700,000 to First State Compassion Center, 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 December 31, 2018 and 2017, the current portion of this note comprised the
Note Receivable,
Current Portion
amounts on the balance sheets, and the long-term portion of approximately $527,000 and $579,000, respectively,
was included in the caption
Notes Receivable, Less Current Portion
.
During
2018, the Company loaned an aggregate of $550,000 to Chooze Corp. and The Healer, two unrelated third-party companies in the cannabis
industry. The loans bear interest at 8% per annum and mature in 2021. At December 31, 2018, the aggregate loan balances plus accrued
interest approximated $565,000. In January 2019, the note receivable from Chooze Corp. was converted into a 2.7% ownership interest
in that entity.
NOTE
9 – PROPERTY AND EQUIPMENT
At
December 31, 2018 and 2017, property and equipment consisted of the following:
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
3,392,710
|
|
|
$
|
3,392,710
|
|
Buildings
and building improvements
|
|
|
13,566,144
|
|
|
|
3,918,359
|
|
Tenant
improvements
|
|
|
5,348,882
|
|
|
|
2,260,512
|
|
Furniture
and fixtures
|
|
|
114,160
|
|
|
|
95,815
|
|
Machinery
and equipment
|
|
|
1,632,351
|
|
|
|
506,464
|
|
Construction
in progress
|
|
|
12,205,447
|
|
|
|
17,279,949
|
|
|
|
|
36,259,694
|
|
|
|
27,453,809
|
|
Less:
accumulated depreciation
|
|
|
(2,159,830
|
)
|
|
|
(1,498,878
|
)
|
Property
and equipment, net
|
|
$
|
34,099,864
|
|
|
$
|
25,954,931
|
|
During
the years ended December 31, 2018 and 2017, additions to property and equipment were approximately $8.9 million and $21.0
million, respectively.
The
2017 additions were primarily comprised of (i) the purchase of properties in Hagerstown, MD, and Middleborough, MA, (ii) the
purchase of land and property in New Bedford, MA, (iii) the start of construction at these three locations, and (iv) continuing
improvements at the Lewes, DE, Anna, IL, and Harrisburg, IL locations. The 2018 additions consisted primarily of the continued
buildout of both locations in MA and the location in MD.
The
2017 construction in progress balance of approximately $17.3 million consisted of the following:
|
·
|
$11.2
million – Hagerstown, MD building, machinery, improvements, and fixtures;
|
|
·
|
$5.0 million – New Bedford, MA building and improvements; and
|
|
·
|
$1.1 million – Middleborough, MA building
|
During
2018, the $11.2 million of Hagerstown, MD construction in progress was placed into service, and the 2018 construction in progress
balance of approximately $12.2 million was primarily comprised of:
|
·
|
$9.8
million – New Bedford, MA building, improvements and machinery; and
|
|
·
|
$2.4
million – Middleborough, MA building, improvements and fixtures.
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was approximately $658,000 and $363,000,
respectively.
NOTE
10 – DEBT
Mortgages
In
November 2017, the Company entered into a 10-year mortgage agreement with Bank of New England for the purchase of a 138,000 square
foot industrial property in New Bedford, Massachusetts, within which the Company has built a 70,000 square foot cannabis cultivation
and processing facility that is leased to ARL. From the start of the mortgage through May 2019, the Company is required to make
monthly payments of interest-only at a rate equal to the monthly prime rate plus 2%, with a floor of 6.25%. From May 2019 to May
2024, the Company shall make principal and interest payments at a rate equal to the prime rate on May 2, 2019 plus 2%, with a
floor of 6.25%. Principal and interest payments shall continue from May 2024 through the end of the lease at a rate equal to the
prime rate on May 2, 2024 plus 2%, with a floor of 6.25%. At December 2018 and 2017, the principal balance on this mortgage was
approximately $4.9 million and $2.9 million, respectively.
The
Company maintains another mortgage with Bank of New England for the 2016 purchase of a 45,070 square foot building in Wilmington,
Delaware which was developed into a cannabis seed-to-sale facility and is currently leased to the Company’s cannabis-licensed
client in the state. The mortgage matures in 2031 with monthly principal and interest payments at a rate of 5.25% through September
2021, and thereafter the rate adjusting every five years to the then prime rate plus 1.5% with a floor of 5.25%. At December 31,
2018 and 2017, the principal balance on this mortgage was approximately $1.8 million and $1.9 million, respectively.
In
2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of two properties
that it developed into two 3,400 square foot free-standing retail dispensaries that are currently leased to the KPGs. On May 5
th
of each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined at the discretion
of DSB’s executive committee. At December 31, 2018 and 2017, the principal balance on this mortgage was approximately $850,000
and $869,000, respectively.
Promissory
Notes
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.
The
Company issued three-year warrants, which were attached to this promissory note, to the lender’s designees to purchase 750,000
shares of the Company’s common stock at an exercise price of $1.80 per share. The Company recorded a discount on the note
of approximately $1.5 million from the allocation of note proceeds to the warrants based on the fair value of such warrants on
the issuance date. During 2018, approximately $882,000 of the warrant discount was amortized to interest expense. At December
31, 2018, the carrying value of this note, net of remaining warrant discount of approximately $630,000, was approximately $2.37
million.
During
the year ended 2017, the Company raised $9,475,000 from the issuance of promissory notes with interest rates ranging from 4.5%
to 12%, all with maturity dates of 12 months or less from the date of issue.
During
2018, holders of previously issued promissory notes with principal balances of $1,075,000 converted such promissory notes into
1,568,375 shares of common stock at conversion prices ranging from $0.65 to $0.90 per share. The conversions resulted in the recording
of non-cash losses of approximately $829,000 in the aggregate, based on the market value of the common stock on the conversion
dates.
In
August 2017, $2.05 million in principal and approximately $262,000 of accrued interest on promissory notes were converted into
4,385,823 shares of common stock at a conversion price of $0.53 per share. Based on the market value of the common stock on the
conversion date, the Company recorded a non-cash loss on conversion of approximately $451,000.
During
2018, the Company issued 2,596,313 shares of common stock and subscriptions on 79,136 shares of common stock to retire promissory
notes with principal balances of $7,495,000 and approximately $95,000 of accrued interest. The Company recorded non-cash losses
of approximately $2.5 million based on the fair value of the common stock on the retirement dates.
During
2017, the Company issued 5,385,823 share of commons stock to retire promissory notes with principal balances of $2,300,000 and
approximately $312,000 of accrued interest. The Company recorded a non-cash loss of approximately $841,000 based on the fair
value of the common stock on the retirement dates.
During
2018 the Company repaid $700,000 of promissory notes. No repayments debt occurred during the same period in 2017.
The aggregate scheduled maturities of the
Company’s total debt outstanding, inclusive of the promissory notes and mortgages described within this Note 10 –
Debt
, and the convertible debentures described in the following Note 11 –
Debentures Payable
, as of December
31, 2018 were:
2019
|
|
$
|
5,154,404
|
|
2020
|
|
|
9,070,954
|
|
2021
|
|
|
235,827
|
|
2022
|
|
|
251,543
|
|
2023
|
|
|
268,338
|
|
Thereafter
|
|
|
5,544,226
|
|
Total
|
|
|
20,525,292
|
|
Less discounts
|
|
|
(5,553,339
|
)
|
|
|
$
|
14,971,953
|
|
NOTE
11 – DEBENTURES PAYABLE
In
October and November 2018, pursuant to 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”) has 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.
Subsequent
to the consummation of the SPA and related agreements, the Company and the Holder executed an addendum to the SPA whereby the
Holder agreed to that it would not undertake a conversion of all or a portion of the $10M Debentures that would require the Company
to issue more shares than the amount of available authorized shares at the time of conversion, which amount of authorized shares
shall not be less than the current authorized number of 500 million shares of common stock. Such addendum eliminated the requirement
to bifurcate and account for the conversion feature of the $10M Debentures as a derivative.
Based
on the conversion prices of the $10M Debentures in relation to the market value of the Company’s common stock, the $10M
Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the
commitment date. The intrinsic value of the beneficial conversion feature of approximately $5.6 million was recorded as a discount
to the carrying amount of the $10M Debentures, with an offset to additional paid-in-capital.
In
addition to the discount related to the beneficial conversion feature, an additional discount of approximately $1.057 million
was recorded based on the allocation of proceeds to the fair value of the Warrants attached to the debt.
In
November and December 2018, the Holder converted $1,400,000 of principal and approximately $36,000 of accrued interest into 524,360
shares of common stock at conversion prices of $2.23 and $3.04 per share.
During
the year ended December 31, 2018, amortization of the beneficial conversion feature, after adjustment for the partial conversions,
approximated $1.5 million; amortization of the Warrants discount approximated $91,000; and the amortization of original issue
discount approximated $9,000. This amortization was charged to interest expense. Additionally, accrued interest expense on the
notes for such period approximated $98,000 of which approximately $36,000 was paid prior to the end of the year.
At
December 31, 2018, the unamortized balances of the beneficial conversion feature, Warrants discount, and original issue discount
were approximately $4.1 million, $966,000, and $91,000, respectively. Also on such date, the outstanding principal balance on
the $10M Debentures was $8.6 million, with accrued and unpaid interest of approximately $62,000. Accordingly, at December 31,
2018, the carrying value of the $10M Debentures was approximately $3.6 million.
NOTE
12 – 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
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 2018.
The
Series A convertible preferred stock accrues an annual dividend of 6% until conversion. The preferred stock 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 has 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 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 year ended December 31, 2018 the Company sold 19,188,981 shares of common stock at prices ranging from $0.50 to $3.00 per
share, resulting in total proceeds of $31.8 million. During the year ended December 31, 2017, the Company sold 26,672,228 shares
of common stock, at prices ranging from $0.18 to $0.50 per share, resulting in total proceeds of $6,578,000.
During
the years ended December 31, 2018 and 2017, the Company issued 3,420,526 and 1,007,597 shares, respectively,
in exchange for services rendered by third-parties or to otherwise settle outstanding obligations. Based on the market value
of the common stock on the dates of issuance, the Company recorded non-cash losses on these settlements of
approximately $1,024,000 and $31,000, respectively.
As previously disclosed in Note 3 –
Acquisitions
, the Company issued common stock in 2018 for the acquisition of iRollie (264,317 shares), and in 2017 to acquire
of the remaining 49% interest of MariMed Advisors Inc. (75 million shares) and to purchase certain assets of Betty’s Eddies™
(1 million shares).
As previously disclosed in Note 4 –
Investments
, the Company issued 378,259 shares of common stock as part of the purchase price of the investment in Sprout.
As previously disclosed in Note 10 –
Debt
, during 2018, holders of promissory notes with principal balances of $1,075,000 converted such promissory notes into
1,568,375 shares of common stock, and holders of promissory notes with principal balances of approximately $7.5 million and $95,000
of accrued interest received 2,596,313 shares of common stock and subscriptions on 79,136 share of common stock to retire such
notes. During 2017, holders of promissory notes with principal balances of $2.05 million and approximately $262,000 of accrued
interest converted such promissory notes into 4,385,823 shares of common stock, and holders of promissory notes with principal
balances of $2.3 million and approximately 312,000 of accrued interest received 5,385,823 shares of common stock to retire such
notes.
As previously disclosed in Note 11 –
Debentures Payable
, the Holder of the $10M Debentures converted $1,400,000 of principal and approximately $36,000 of accrued
interest into 524,360 shares of common stock.
As further disclosed in Note 13 –
Stock Options
, during the years ended December 31, 2018 and 2017, options to purchase 760,000 and 4,800,000 shares of common
stock, respectively, were exercised. Of these exercised options, during 2018 and 2017, 460,000 and 4,500,000 options, respectively,
were cashless exercises.
As further disclosed in Note 14 –
Warrants
, during 2018, warrants to purchase 2,300,237 shares
of common stock were exercised, of which 1,000,000 warrants were exercised on a cashless basis.
Common
Stock Subscribed But Not Issued
At
December 31, 2018, there were outstanding subscriptions on 79,136 shares of common stock related to the settlement of a previously
issued promissory note with a principal balance of $50,000 and accrued interest of $1,454. These subscriptions had a value of
approximately $95,000 based on the market value of the common stock on the settlement date. Also outstanding on such date were
subscriptions on 18,000 shares of common stock, equivalent to an aggregate amount of $74,160, for the payment of rent for the
months of September 2018 through January 2019 for a leased property in Massachusetts. The shares of common stock associated with
all outstanding subscriptions at December 31, 2018 were issued in March 2019.
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 further
disclosed in Note 3 –
Acquisitions
. These subscriptions were valued at $370,000 based on the market value of the
common stock on the transaction date. The shares of common stock associated with these subscriptions were issued in June 2018.
Membership
Interests
In
August 2018, an individual member of Mari Holdings MD LLC, a majority owned subsidiary of the Company (“Mari-MD”),
exchanged his 0.5% membership interest in such subsidiary for 222,222 shares of the Company’s common stock.
In
December 2018, a subscriptions receivable balance of $25,000 related to a member’s interest in a majority-owned subsidiary
was written off, with a corresponding reduction of such member’s capital contribution account.
During
2017, the Company issued 12,778 Class A membership units of Mari-MD for $1,150,000, representing 3.05% ownership of this subsidiary
at December 31, 2017.
NOTE
13 – STOCK OPTIONS
During 2018, the Company granted options
to purchase 4.72 million shares of common stock at exercise prices ranging from $0.14 to $3.73 and expiring between December 2020
and November 2024. Of the total 4.72 million options issued, 3.15 million were vested upon issuance and 1.57 million have vesting
periods that span six to thirty months. The fair value of these options, measured on grant date, of approximately $5.9 million
is being amortized over the respective vesting periods, of which approximately $3.9 million was amortized during the year ended
December 31, 2018.
During
2017, the Company granted options to purchase 550,000 shares of common stock at exercise prices ranging from $0.26 to $0.55, vesting
from the grant date through March 2019, and expiring between September 2020 and October 2021. The fair value of these options,
measured on grant date, was approximately $159,000, of which approximately $74,000 was amortized in 2017,
$58,000 was amortized in 2018, and $27,000 was forfeited prior to vesting.
During
the years ended December 31, 2018 and 2017, options to purchase 760,000 and 4,800,000 shares of common stock, respectively, were
exercised at exercise prices ranging from $0.08 to $0.63 per share, and $0.01 to $0.03 per share, respectively. Of these exercised
options, during 2018 and 2017, 460,000 and 4,500,000 options, respectively, were cashless exercises, with the exercise price paid
via the surrender of 105,398 and 90,000 shares of common stock.
The
following table summarizes the Company’s stock option transactions during the 2018 and 2017 fiscal years:
|
|
Number
of
Stock Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
9,250,000
|
|
|
$
|
0.100
|
|
Granted
|
|
|
550,000
|
|
|
|
0.458
|
|
Exercised
|
|
|
(4,800,000
|
)
|
|
|
0.011
|
|
Forfeited/Expired
|
|
|
(200,000
|
)
|
|
|
0.025
|
|
Outstanding
at December 31, 2017
|
|
|
4,800,000
|
|
|
|
0.234
|
|
Granted
|
|
|
4,720,000
|
|
|
|
1.805
|
|
Exercised
|
|
|
(760,000
|
)
|
|
|
0.216
|
|
Forfeited/Expired
|
|
|
(450,000
|
)
|
|
|
0.433
|
|
Outstanding
at December 31, 2018
|
|
|
8,310,000
|
|
|
$
|
1.117
|
|
Stock
options outstanding and exercisable as of December 31, 2018 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.08
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
0.08
|
|
$
|
0.08
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
0.97
|
|
$
|
0.13
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
1.50
|
|
$
|
0.14
|
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
2.00
|
|
$
|
0.15
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.74
|
|
$
|
0.25
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.74
|
|
$
|
0.26
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.25
|
|
$
|
0.33
|
|
|
|
50,000
|
|
|
|
25,000
|
|
|
|
2.19
|
|
$
|
0.35
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.74
|
|
$
|
0.45
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
2.76
|
|
$
|
0.55
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
1.74
|
|
$
|
0.55
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
1.74
|
|
$
|
0.55
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2.02
|
|
$
|
0.63
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
3.00
|
|
$
|
0.77
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
4.00
|
|
$
|
0.90
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
4.37
|
|
$
|
0.95
|
|
|
|
50,000
|
|
|
|
10,000
|
|
|
|
4.00
|
|
$
|
2.32
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
4.70
|
|
$
|
2.45
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
5.85
|
|
$
|
2.50
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
4.66
|
|
$
|
2.65
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
4.73
|
|
$
|
2.85
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
3.95
|
|
$
|
2.85
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
4.95
|
|
$
|
3.00
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
4.96
|
|
$
|
3.73
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
4.94
|
|
|
|
|
|
|
8,310,000
|
|
|
|
7,425,000
|
|
|
|
|
|
NOTE
14 – WARRANTS
During
the years ended December 31, 2018 and 2017, the Company issued warrants to purchase 8,661,137 and 3,120,311 shares of common stock,
respectively, at exercise prices ranging from $0.20 to $5.50 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 of approximately
$15.7 million in 2018 ($1.8 million as compensation expense, $2.8 million as debt discounts, and $11.1 million as equity discounts)
and approximately $1.0 million in 2017 (all as compensation expense).
During
the year ended December 31, 2018, warrants to purchase 2,300,237 shares of common stock were exercised, at exercise prices ranging
from $0.10 to $1.75 per share. Of these exercised warrants, 1,000,000 warrants were cashless exercises, with the exercise price
paid via the surrender of 157,527 shares of common stock. No warrants were exercised during 2017.
The
following table summarizes the Company’s warrant transactions during the 2018 and 2017 fiscal years:
|
|
Number
of
Stock Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
1,125,000
|
|
|
$
|
0.136
|
|
Granted
|
|
|
3,120,311
|
|
|
|
0.468
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
4,245,311
|
|
|
|
0.380
|
|
Granted
|
|
|
8,661,137
|
|
|
|
2.548
|
|
Exercised
|
|
|
(2,300,237
|
)
|
|
|
0.385
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2018
|
|
|
10,606,211
|
|
|
$
|
2.149
|
|
At
December 31, 2018, warrants to purchase 10,606,211 shares of common stock were outstanding at exercise prices ranging from $0.12
to $5.50 per share.
NOTE
15 – REVENUES
For
the years ended December 31, 2018 and 2017, the Company’s revenues were comprised of the following major categories:
|
|
2018
|
|
|
2017
|
|
Real
estate
|
|
$
|
5,798,996
|
|
|
$
|
2,517,225
|
|
Management
|
|
|
1,581,548
|
|
|
|
1,193,854
|
|
Supply
procurement
|
|
|
3,657,909
|
|
|
|
1,936,686
|
|
Licensing
|
|
|
700,173
|
|
|
|
269,256
|
|
Consulting
|
|
|
50,000
|
|
|
|
150,604
|
|
Other
|
|
|
63,289
|
|
|
|
228
|
|
Total
revenues
|
|
$
|
11,851,915
|
|
|
$
|
6,067,853
|
|
Revenue
from two clients represented 73% and 81% of total revenues for the years ended December 31, 2018 and 2017, respectively.
NOTE
16 – NON-OPERATING INCOME
In
2017, the Company wrote off approximately $227,000 of deferred revenue that represented the conversion of a promissory note issued
to a third party by the Company’s former parent, and assumed by the Company in 201l, for future products and services related
to the Company’s previous online portal business.
No
products or services were provided by the Company, and the third party released the Company from all of its obligations to the
third party and any actions or demands related thereto.
NOTE
17 – INCOME TAXES
For
the years ended December 31, 2018 and 2017, the Company’s cumulative net operating losses were approximately $11.6 million
and $2.8 million, respectively, and accordingly a tax provision was not required for the years then ended.
The
reconciliations between the Company's effective tax rates and the statutory tax rate for the years ended December 31, 2018 and
2017 were as follows:
|
|
2018
|
|
|
2017
|
|
U.S
Federal taxes at the statutory rate
|
|
|
21
|
%
|
|
|
34
|
%
|
State
taxes net of federal benefit
|
|
|
6
|
%
|
|
|
5
|
%
|
Valuation
allowance
|
|
|
(27
|
)%
|
|
|
(39
|
)%
|
Total
|
|
|
0
|
%
|
|
|
0
|
%
|
The
approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2018 and 2017 is as
follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,121,086
|
|
|
$
|
2,826,698
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(952,875
|
)
|
|
|
(10,918
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
2,168,210
|
|
|
|
2,815,780
|
|
Valuation allowance
|
|
|
(2,168,210
|
)
|
|
|
(2,815,780
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company uses the asset and liability method to account for income taxes in accordance with ASC 740,
Income Taxes
. Under
this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial
accounting bases of assets and liabilities at each reporting period. Deferred income taxes are based on enacted tax laws and statutory
tax rates applicable to the period in which these differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The
Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. Among other things, the TCJA reduces the U.S.
federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.
The
one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) for which
the Company has previously deferred from U.S. income taxes. As of December 31, 2017, the Company recorded a provisional amount
for the one-time transition tax liability of $36 for its foreign subsidiaries, resulting in an increase of income tax provision
of $36. As of December 31, 2018, the Company has completed its calculation of the total post-1986 foreign E&P for these foreign
subsidiaries. The Company has recognized an additional $16 in its income tax expense for its one-time transition tax liability.
The
Company has provided a valuation allowance against its net deferred tax assets at December 31, 2018 and 2017. Based upon the level
of historical U.S. earnings and future projections over the period in which the net deferred tax assets are deductible, at this
time, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences.
The
federal net operating losses carryforward indefinitely, subject to an annual limitation of 80% of taxable income. The state net
operating losses expire at various dates beginning in 2031. These tax attributes are subject to an annual limitation from equity
shifts, which constitute and change of ownership as defined under IRC Section 382, which will limit their utilization. The Company
has not completed a study through December 31, 2018 to assess whether an ownership change under Section of 382 of the Code has
occurred during 2018, due to the costs and complexities associated with such a study. The Company may have experienced various
ownership changes, as defined by the code, as a result of financing transactions. Accordingly, the Company’s ability to
utilize the aforementioned carryforwards may be limited.
Management
assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use
the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred
through the period ended December 31, 2018. Such objective evidence limits the ability to consider the subjective evidence, such
as our projections for future growth. On the basis of this evaluation, as of December 31, 2018, a valuation allowance has been
recorded against all net deferred tax assets as these assets are more likely than not to be unrealized. The amount of the deferred
tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period
are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional
weight may be given to the subjective evidence such as our projections for growth.
The
Company previously adopted the provision for uncertain tax positions under ASC 740. The adoption did not have an impact on the
Company’s retained earnings balance. At December 31, 2018 and 2017, the Company had no recorded liabilities for uncertain
tax positions and had no accrued interest or penalties related to uncertain tax positions.
The
Company files income tax returns in the U.S. federal tax jurisdiction and various state jurisdictions. The Company is currently
open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years
ended 2015 through 2018. Since the Company is in a U.S. loss carryforward position, carryforward tax attributes generated in prior
years may still be adjusted upon future examination if they have or will be used in a future period.
NOTE
18 – RELATED PARTY TRANSACTIONS
As disclosed in Note 3 –
Acquisitions
,
the current CEO and CFO of the Company were part of the ownership group from whom Sigal Consulting LLC was acquired in May 2014.
The 49% ownership in the Company’s subsidiary, MariMed Advisors Inc., which this ownership group acquired as part of the
purchase price, was acquired by the Company from this ownership group in June 2017 in exchange for 75 million shares of the Company’s
common stock.
In
September 2017, the former CEO of the Company, who is a currently a board member, exercised options to purchase 4.5 million
shares of common stock at an exercise price of $0.01 per share. This individual’s aggregate exercise price of $45,000
was paid via the surrender of 90,000 shares of common stock.
In October 2017, the Company acquired certain
assets of the Betty’s Eddies™ brand of cannabis-infused products, as disclosed in Note 3 –
Acquisitions
,
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. The fair value of these options
on grant date of approximately $458,000 was amortized over the six-month vesting period.
The
Company’s current corporate offices are leased from a company owned by a related party under a 10-year lease that commenced
August 2018 and contains a five-year extension option. Previous to this lease, the Company’s former corporate offices were
also leased from a company owned by a related party
. For
the years ended December 31, 2018 and 2017, expenses incurred under these leases approximated $78,000 and $24,000, respectively.
The
outstanding
Due To Related Parties
balances at December 31, 2018 and 2017 of approximately $276,000 and $401,000, respectively,
were comprised of amounts owed of approximately (i) $81,000 and $33,000, respectively, to the Company’s CEO and CFO, (ii)
$135,000 and $153,000, respectively, to two companies partially owned by these officers, and (iii) $60,000 and $215,000, respectively,
to two shareholders of the Company. Such amounts owed are not subject to repayment schedules and are expected to be repaid during
2019.
The
outstanding
Due From Related Parties
balance at December 31, 2017 of approximately $135,000 (current and long-term balances
in the aggregate) was comprised of an advance of approximately $120,000 to a company partially owned by the Company’s CEO
and CFO, and an advance to a shareholder. During 2018, the amount owed by the shareholder was repaid, and the $120,000 amount
owed by the related company remained outstanding at December 31, 2018.
NOTE
19 – COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitments
The
Company leases facilities under several operating leases that contain rent holidays and customary escalations of lease payments
for the type of facilities being leased. The Company recognizes rent expense on a straight-line basis over the expected lease
term, including cancelable option periods which the Company fully expected to exercise. The differences between amounts paid and
amounts expensed are recorded under
Deferred Rents Payable
on the balance sheet. Certain leases require the payment of
property taxes, insurance and/or maintenance costs in addition to the rent payments.
The
location of the Company’s leased facilities and descriptions of the lease agreements are as follows:
|
●
|
Delaware
– 4,000 square feet of retail space in a multi-use building under a five-year lease that commenced in October 2016 and
contains a five-year option to extend the term. The Company developed the space into a cannabis dispensary which is subleased
to its cannabis-licensed client. Also in Delaware, in March 2019, the Company entered into a lease of a 100,000 square foot
warehouse that it intends to construct into a cultivation and processing facility to be subleased to the same Delaware
client. The lease term is 10 years, with an option to extend the term for three additional five-year periods.
|
|
|
|
|
●
|
Nevada
– 10,000 square feet of an industrial building that the Company built-out into
a cannabis cultivation facility and is subleased to the Company’s cannabis-licensed
client under a sub-lease which is coterminous with the Company’s lease for 10 years
expiring in 2024.
|
|
●
|
Massachusetts
– 10,000 square feet of office space which the Company utilizes as its corporate
offices under a 10-year lease with a related party expiring in 2028 which contain a 5-year
extension option.
|
|
●
|
Maryland
– a 2,700 square foot 2-unit apartment under a lease that expires in July 2020
with an option to renew for a two-year term.
|
For
the years ended December 31, 2018 and 2017, rent expense approximated $436,000 and $183,000, respectively.
Future
minimum lease payments as of December 31, 2018 under all non-cancelable operating leases having an initial or remaining term of
more than one year were:
2019
|
|
$
|
398,731
|
|
2020
|
|
|
797,120
|
|
2021
|
|
|
894,450
|
|
2022
|
|
|
882,068
|
|
2023
|
|
|
858,136
|
|
Thereafter
|
|
|
4,547,028
|
|
Total
|
|
$
|
8,377,533
|
|
Terminated
Employment Agreement
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 maintained an accrual of approximately $1,043,000 at December 31, 2018 and 2017 for any amounts that may be
owed under this agreement, although the Company contends that such agreement is not valid.
NOTE
20 – SUBSEQUENT EVENTS
GenCanna
Debentures Conversion
In
February 2019, the Company converted the entire $30 million investment in subordinated secured convertible debentures of GenCanna
plus accrued interest through the conversion date into common stock of GenCanna equal to a 33.5% ownership interest on a fully
diluted basis. As a result of the conversion, the Company will account for this investment in accordance with the equity method.
Also
during this month, the Company’s CEO was appointed to GenCanna’s board.
Acquisitions
In
February 2019, the Company contracted to purchase a 70% interest in Meditaurus LLC, a company established by Dr. Jokubas Ziburkas
who holds a PhD in neuroscience and is a leading authority on hemp-based CBD and the endocannabinoid system. Meditaurus currently
operates in the United States and Europe and has developed proprietary CBD formulations sold under its
Florance
brand.
Real
Estate
In
March 2019, the Company entered into a lease with an option to purchase a 100,000 square foot warehouse located in Milford, Delaware.
The lease term is 10 years, with an option to extend the term for three additional five-year periods. Build-out of the first 60,000
square feet into a cultivation and processing facility has commenced, and is expected to be completed by October 2019.
Investment
In
January 2019, the Company entered into an agreement with Maryland Health & Wellness Center Inc. (“MHWC”, an entity
that has been pre-approved for a cannabis dispensing license, to provide MHWC with a construction loan of $300,000 in connection
with the buildout of MHWC’s proposed dispensary location. MHWC issued a promissory note to the Company for the amount of
the loan at a rate of 8% per annum that matures in January 2023, provided however, upon the two year anniversary of the date of
final state approval of MHWC’s dispensing license, the Company shall have the right, subject to state approval, to convert
the note into shares of MHWC’s common stock which shall be equivalent to 20% ownership of MWHC.
Consulting
Agreement
At
the same time as the aforementioned investment in MHWC, the Company entered into a consulting services agreement with MHWC whereby
the Company will provide advisory and oversight services to MHWC over a three-year period relating to the development, administration,
operation, and management of MHWC's proposed dispensary in Maryland. The Company’s fee for such services shall be equal
to 20% of MHWC’s net income of the business, as defined in the agreement.
Promissory
Note Issuance
In
March 2019, the Company raised $6 million from the issuance a of promissory note bearing interest at the rate of 10% per annum.
This note is due and payable in January 2020.
Conversion
of Note Receivable
In
January, the Company’s note receivable balance of approximately $258,000 from Chooze Corp. was converted into a 2.7%
ownership interest in Chooze. As of the conversion date, the Company will account for this investment in accordance with the provisions
of ASC 321,
Investments – Equity Securities
.
Equity
Transactions
|
●
|
The
Company sold 799,995 shares of common stock at a price of $3.25 per share resulting in
aggregate proceeds of $2.6 million.
|
|
|
|
|
●
|
Warrants
to purchased 22,000 shares of common stock were exercised at exercise prices of $0.50 to $0.40. The
Company received exercise proceeds of $15,800 from these exercises.
|
|
|
|
|
●
|
Options
to purchase 50,000 shares of common stock were exercised at an exercise price of $0.26 per share. The Company
received exercise proceeds of $13,000 from this exercise.
|
|
|
|
|
●
|
Options
to purchase 350,000 shares of common stock were exercised on a cashless basis with the exercise prices paid via the surrender
of 139,985 shares of common stock.
|
|
|
|
|
●
|
The
holder of the $10M Debentures converted $600,000 of principal and approximately $97,000
of accrued interest into 233,194 shares of common stock at conversion prices ranging
from $2.90 and $3.06 per share.
|
|
|
|
|
●
|
The
Company issued 97,136 shares of common stock associated with the same number common stock
subscriptions outstanding on December 31, 2018.
|