Notes
to Consolidated Financial Statements
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc. (the “Company”) is a leader in the emerging cannabis industry. The Company is an expert in the development, operation,
management and optimization of facilities for the cultivation, production and dispensing of medicinal and recreational cannabis
and cannabis-infused products. To date, the Company has developed in excess of 300,000 square feet of state-of-the-art, regulatory-compliant
facilities in five states – Delaware, Illinois, Maryland, Massachusetts, and Nevada.
At
the outset of the Company’s entrance into the cannabis industry, the Company provided advisory services and assistance to
its clients in the procurement of state-issued cannabis licenses, leased its aforementioned cannabis facilities to these newly-licensed
clients, and provided industry-leading expertise and oversight in all aspects of their cannabis operations, as well as ongoing
regulatory, accounting, human resources, and administrative services. During this time, the Company successfully secured, on behalf
of its clients, 13 cannabis licenses across six states – two in Delaware, three in Illinois, one in Nevada, one in Rhode
Island, three in Maryland, and three in Massachusetts.
Since
entering the cannabis industry, the Company has demonstrated an excellent track record developing and operating licensed cannabis
facilities, implementing its proprietary operating procedures, and industry best practices. In 2018, the Company commenced a strategic
plan to transition from an advisory firm that provides cannabis licensing, operational consulting and real estate services, to
a direct owner of cannabis licenses and operator of seed-to-sale operations, dedicated to the improvement of health and wellness
through the use of cannabinoids and cannabis products.
The
Company’s strategic plan consists of the acquisition of its cannabis-licensed clients who currently lease the Company’s
facilities, and the consolidation of these entities under the MariMed banner. The Company has played a key role in the successes
of these entities, from the securing of their cannabis licenses, to the development of facilities that are models of excellence,
to providing operational and corporate guidance. Accordingly, the Company believes it is well suited to own these facilities and
manage the continuing growth of their operations.
A
goal in completing this transition is to present a simpler, more transparent financial picture to the investor community. Once
the consolidation is complete, the Company’s financial statements will provide a clearer representation of the revenues,
earnings, and other financial metrics that the Company is generating, rather than a fee-for-service revenue model that reports
only consulting and management fees, and does not reflect the full breadth of the Company’s overall business.
To
date, acquisitions of the licensed businesses in Massachusetts and Illinois have been state-approved and completed, with the remaining
entities located in Maryland, Nevada, and Rhode Island at various stages of completion and state approvals as further discussed
below. When implemented, all of the Company’s cannabis-licensed clients will be fully consolidated into the Company, establishing
it as a fully integrated seed-to-sale multistate operator of licensed cannabis businesses.
Each
of the remaining potential acquisitions is subject to the respective state’s approval under its laws governing the ownership
and transfer of cannabis licenses. The completion of the entire plan requires a modification of current cannabis license ownership
laws in in Delaware and Rhode Island, and therefore there is no assurance that the Company will be successful in fully implementing
its plan. However, the Company continues to develop additional revenue and business in the states in which it operates and plans
to leverage its success in these markets to expand into other states where cannabis is and becomes legal.
The
Company has also created its own brands of precision-dosed, cannabis-infused products designed to treat specific health conditions,
alleviate medical symptoms, or achieve a certain effect. These products are developed by the Company in cooperation with state-licensed
facilities and operators who meet the Company’s strict standards, including all natural—not artificial or synthetic—ingredients.
The Company licenses its product formulations only to knowledgeable manufacturing professionals who agree to adhere to the Company’s
precise scientific formulations using its trademarked product recipes.
The
Company’s branded products are licensed under brand names including Kalm Fusion™, Nature’s Heritage™,
and Betty’s Eddies™, and are distributed in the form of dissolvable strips, tablets, powders, microwaveable popcorn,
fruit chews, and with more varieties in development. The Company also has exclusive sublicensing rights in certain states to distribute
DabTabs™ vaporization tablets infused with cannabis concentrates, the Binske® line of cannabis products made from premium
artisan ingredients, and the clinically tested medicinal cannabis strains developed in Israel by Tikun Olam™. The Company
intends to continue licensing and distributing its brands as well as other top brands in the Company’s current markets and
in partnerships in other states markets across the country where product sale is legal.
In
anticipation of the growing demand for hemp-derived cannabidiol (“CBD”), in 2018, the Company invested $30.0 million
in GenCanna Global Inc. (“GenCanna”), a Kentucky-based cultivator, producer, and distributor of hemp and GMP-quality
CBD oils and isolates. Concurrent with this investment, the Company acquired MediTaurus LLC (“MediTaurus”), a company
operating in the United States and Europe that has developed proprietary CBD formulations under its Florance™ brand.
The
transactions with GenCanna and MediTaurus, along with the Company’s cannabis platform and product experience, enabled the
Company to expand into the emerging global CBD market just as the U.S Farm Bill was adopted in late 2018 which descheduled industrial
hemp and hemp-derived CBD as controlled substances and classified them as agricultural commodities. This new law enabled
a new emerging industry of CBD oils, isolates, and infused products within the United States. In early 2019, the Company established
a wholly owned subsidiary, MariMed Hemp Inc. (“MariMed Hemp”) to market and distribute hemp-derived CBD products across
several vertical markets.
The
Company’s stock is quoted on the OTCQX market under the ticker symbol MRMD.
The
Company was incorporated in Delaware in January 2011 under the name Worlds Online Inc. Initially, the Company developed
and managed online virtual worlds. By early 2014, this line of business effectively ceased operating and the Company pivoted into
the legal cannabis industry.
Significant
Transactions in the Current Period
During
2019, the Company, through its MariMed Hemp subsidiary, entered into several hemp seed sale transactions with GenCanna
whereby the Company acquired large quantities of top-grade feminized hemp seeds with proven genetics at volume discounts that
it sold to GenCanna at market rates. The seeds met the U.S. government’s definition of federally legal industrial hemp,
which was descheduled as a controlled substance and classified as an agricultural commodity upon the signing of the 2018 U.S.
Farm Bill.
The
Company purchased $20.75 million of hemp seed inventory which it sold and delivered to GenCanna for $33.2 million. The
Company provided GenCanna with extended payment terms through December 2019, to coincide with the completion of the seeds’
harvest, although the payment by GenCanna was not contingent upon the success of such harvest or its yield. To partially
fund the seed purchases, the Company raised $17.0 million in debt financings which is reflected in Notes Payable on the
balance sheet and further discussed in Note 11 – Debt.
By
the end of 2019, GenCanna had not paid the amount it owed the Company for its seed purchases due to several challenges it faced
late in the year, including a fire at its main processing and lab facility, the domestic decline of CBD selling prices, and the
contraction of the cannabis capital markets. In February 2020, GenCanna filed for voluntary reorganization under Chapter 11 with
the U.S. Bankruptcy Court in the Eastern District of Kentucky. The filing is intended to permit GenCanna to operate its business
while working through a reorganization plan that could include refinancing of its existing indebtedness, or an alternative restructuring
transaction such as a sale.
As
required by the relevant accounting guidance, the Company initially recorded the $33.2 million due from GenCanna as a related
party receivable, with approximately $29.0 million recognized as related party revenue, and approximately $4.2 million classified
as unearned revenue (such amount representing the Company’s 33.5% ownership portion of the profit on these transactions,
which was to have been recognized as revenue upon payment by GenCanna). As a result of GenCanna’s Chapter 11 filing, the
Company wrote off the receivable balance of approximately $29.0 million and the entire unearned revenue balance of approximately
$4.2 million. Additionally, the Company recorded a charge to net income of approximately $30.2 million, which reduced to zero
the carrying value of the Company’s investment in GenCanna.
In
addition to the foregoing adjustments, the Company recorded bad debt reserves in 2019 against the receivable and working capital
balances due from (i) Kind of approximately $11.2 million in the aggregate, in light of the ongoing litigation between the Company
and Kind, and (ii) Harvest of approximately $2.2 million in the aggregate, due to the anticipated effect on Harvest’s operations
from a weakened local economy due to the coronavirus pandemic. These charges are further described in Note 6 – Due From
Third Parties and Note 17 – Bad Debts.
The
Company expects the coronavirus pandemic to likewise have a negative impact on the operations of certain entities in which the
Company has invested and to whom the Company has extended loans. For that reason, the Company also wrote off (i) three notes receivable
balances of approximately $1.6 million in the aggregate, (ii) goodwill of approximately 2.7 million associated with the Company’s
acquisition of MediTaurus, and (iii) the carrying value of a $500,000 investment. These items are further described in Note 3
– Acquisitions, Note 4 – Investments, and Note 7 – Notes Receivable.
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”).
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.
Going
Concern
In
connection with the preparation of its financial statements for the year ended December 31, 2019, the Company’s management
evaluated the Company’s ability to continue as a going concern in accordance with the ASU 2014-15, Presentation of Financial
Statements–Going Concern (Subtopic 205-40), which requires an assessment of relevant conditions or events, considered
in the aggregate, that are known or reasonably knowable by management on the issuance dates of the financial statements which
indicated the probable likelihood that the Company will be unable to meet its obligations as they become due within one year after
the issuance date of the financial statements.
As
part of its evaluation, management assessed known events, trends, commitments, and uncertainties, which at the time included the
status of its consolidation plan, the GenCanna bankruptcy, the amount of capital raised by the Company during the past two calendar
years, the recent level of cannabis industry investment activity, the stock price movement of public cannabis companies, the actions
and/or results of certain bellwether cannabis companies, the measure of cannabis investor confidence, and the changes to state
laws with respect to adult-use recreational and medical cannabis use.
At
December 31, 2019, the Company had negative working capital of approximately $31.0 million, and for the year then ended, incurred
negative cash flow from operations of approximately $24.8 million. For further discussion on these metrics and the Company’s
liquidity and capital resources, please refer to Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations of the Company’s Form 10-K for the fiscal year ended December 31, 2019.
In
early 2020, the Company raised approximately $4.4 million as part of an exchange agreement with two institutional stockholders,
and $935,000 from the issuance of convertible debentures. Additionally, the Company has extended the maturity dates of approximately
$19.4 million of promissory notes, and is in the process of finalizing the documentation to extend another $3.0 million of promissory
notes. These transactions are further disclosed in Note 21 – Subsequent Events.
Moreover,
as of the filing date of this report, the Company has obtained a commitment from an accredited investor for a $12.0 million loan,
secured by the Company’s real estate, at a rate of 10% per annum with a one-year term, and an option to extend for an additional
year. This transactions is expected to close upon the lender’s completion of its due diligence, which is in its final stages,
although there is no assurance that it will close in the foreseeable future or at all. Also as of the filing date of this report,
the Company is in discussions with financial institutions to consider generating liquidity from the Company’s unencumbered
real property through mortgage-backed financings, the refinancing of certain outstanding mortgage loans, the sales-leaseback of
certain properties, and/or a combination thereof. Based on preliminary discussions, such financings could potentially generate
upwards of $17.0 million from such transactions, however the Company has not signed any commitments it has received to date and
there are no assurances that it will.
In
addition to the aforementioned financing transactions that have been consummated and that are in progress, the operations of the
Company’s recently acquired entities in Illinois and Massachusetts are expected to generate considerable liquidity and working
capital for the Company. The state of Illinois legalized adult-use cannabis in January 2020, which was added to the Company’s
two existing cannabis licenses, thereby increasing the Company’s operations in this state to service both medical and recreational
cannabis consumers. In Massachusetts, the cultivation and production facility acquired by the Company will soon complete its first
harvest and commence full scale selling operations in this state’s robust cannabis market.
The
Company believes that it will close incremental debt financings in the foreseeable future, and it projects that its operating
profit will organically support its day-to-day operations by the latter part of 2020. However, since there are no assurances that
another financing transaction will be consummated, or that the Company will meet or exceed its projections in light of the unknown
current state of the global economy, there are similarly no assurances that the Company will be able to meet all of its obligations
as they become due within one year after the issuance date of these financial statements
Principles
of Consolidation
The
accompanying condensed consolidated financial statements 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
|
|
|
100.0
|
%
|
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
|
%
|
KPG
of Anna LLC
|
|
|
100.0
|
%
|
KPG
of Harrisburg LLC
|
|
|
100.0
|
%
|
MariMed
Hemp Inc.
|
|
|
100.0
|
%
|
MediTaurus
LLC
|
|
|
70.0
|
%
|
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.
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 maintained a reserve
of approximately $10.7 million and $150,000 at December 31, 2019 and 2018, respectively. The 2019 reserve primarily
consisted of reserves against the accounts receivable balances of Kind of approximately $9.7 million and Harvest of approximately
$239,000, as further disclosed in Note 17 – Bad Debts.
Inventory
Inventory
is carried at the lower of cost or net realizable value, with the cost being determined on a first-in, first-out (FIFO) basis.
The Company allocates a certain percentage of overhead cost to its manufactured inventory; such allocation is based on square
footage and other industry-standard criteria. The Company reviews physical inventory for obsolescence and/or excess
and will record a reserve if necessary. As of the date of this report, no reserve was deemed necessary.
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 included in income. Investments are evaluated for permanent 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 – rental income and additional rental fees from leasing of the Company’s regulatory-compliant 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
– fees for providing the Company’s cannabis 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 delivery and acceptance of goods by the purchaser.
|
|
|
|
|
●
|
Licensing
– 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
– fees from third-parties where the Company provides assistance in securing cannabis licenses, and advisory services
in the areas of facility design and development, and cultivation and dispensing best practices. These fees are recognized
as the services are performed.
|
|
|
|
|
●
|
Product
Sales – direct sales of cannabis, hemp, and products derived from these plants. During 2019, such revenue was generated
from (i) the post-acquisition dispensary operations of both ARL in Massachusetts and the KPGs in Illinois, and (ii) the sales
of hemp and CBD products by MariMed Hemp and MediTaurus. This revenue is recognized when products are delivered
or at retail points-of-sale.
|
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 from the undiscounted future cash flows of such asset over the anticipated
holding period. An impairment loss is measured by the excess of the asset’s carrying amount over its estimated fair value.
Impairment
analyses are based on management’s current plans, asset holding periods, and currently available market information. 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, 2019 and 2018, based on the results of management’s impairment analyses, there were
no impairment losses.
Leases
The
consolidated financial statements reflect the Company’s adoption of ASC 842, Leases, as amended by subsequent accounting
standards updates, utilizing the modified retrospective transition approach which calls for applying the new standard to all of
the Company’s leases effective January 1, 2019, which is the effective date of adoption.
ASC
842 is intended to improve financial reporting of leasing transactions. The most prominent change from previous accounting guidance
is the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheet representing the rights
and obligations created by operating leases that extend more than twelve months in which the Company is the lessee. The Company
elected the package of practical expedients permitted under ASC 842. Accordingly, the Company accounted for its existing operating
leases that commenced before the effective date as operating leases under the new guidance without reassessing (i) whether the
contracts contain a lease, (ii) the classification of the leases (iii) the accounting for indirect costs as defined in ASC 842.
The
Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Non-lease components within lease agreements are accounted for separately. Right-of-use assets and obligations
are recognized at the commencement date based on the present value of lease payments over the lease term, utilizing the Company’s
incremental borrowing rate. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over
the lease term.
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:
|
|
2019
|
|
|
2018
|
|
Life of instrument
|
|
|
1.5
to 4.0 years
|
|
|
|
0.5
to 5.0 years
|
|
Volatility
factors
|
|
|
1.039
to 1.106
|
|
|
|
1.019
to 2.086
|
|
Risk-free
interest rates
|
|
|
1.42%
to 2.28%
|
|
|
|
1.65%
to 3.07%
|
|
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, 2019 and 2018.
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, 2019 and 2018, there were 18,051,357 and 18,916,211, respectively, of potentially dilutive
securities in the form of outstanding options and warrants. Also as of such dates, there were (i) $10.0 million
and $8.6 million, respectively, of outstanding convertible debentures payable, and (ii) $350,000 of outstanding
convertible promissory notes in both years, 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 years ended December 31, 2019 and 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 calculations, resulting in identical
basic and fully diluted net income per share for these periods. The potentially dilutive 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; 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
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
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
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 Massachusetts Secretary of State, and effective December 1, 2018, ARL
was consolidated into the Company as a wholly-owned subsidiary.
The
acquisition was accounted for in accordance with ASC 805, 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
|
|
|
185,000
|
|
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 to the Company by ARL. Accordingly, the transaction
gave rise to goodwill of approximately $732,000, which the Company wrote off in 2018. The balance of acquired cannabis
licenses was included in Intangibles within the asset section of the Company’s balance sheet at December 31, 2018.
This intangible asset was fully amortized by December 2019.
In
2019, the Company paid for the annual renewal ARL’s cannabis license. At December 31, 2019, the carrying value less amortization
was approximately $138,000.
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 also acquired 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”).
In
October 2019, the transaction was approved by the Illinois Department of Financial & Professional Regulation, and 1,000,000
shares of the Company’s common stock, representing the entire purchase price, were issued to the Sellers. Effective October
1, 2019, the KPGs and Mari-IL became wholly-owned subsidiaries of the Company with 100% of the operations of these entities
consolidated into the Company’s financial statements as of that date. The KPGs contributed revenues of approximately
$1.3 million and pretax income of approximately $79,000 since the date of acquisition.
The
acquisition was accounted for in accordance with ASC 805. 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:
Cash
and cash equivalents
|
|
$
|
443,980
|
|
Inventory
|
|
|
113,825
|
|
Intangibles
|
|
|
2,067,727
|
|
Minority interests
|
|
|
138,356
|
|
Accounts payable
|
|
|
(642,033
|
)
|
Accrued expenses
|
|
|
(186,005
|
)
|
Due
to third parties
|
|
|
(1,020,850
|
)
|
Total
fair value of consideration
|
|
$
|
915,000
|
|
Consolidated
unaudited pro forma results of operations for the Company are presented below assuming this 2019 acquisition had occurred at January
1, 2018, the beginning of the reporting period of these financial statements.
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenues
|
|
$
|
48,444,052
|
|
|
$
|
14,417,923
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(81,705,403
|
)
|
|
$
|
(13,514,832
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per share
|
|
$
|
(0.39
|
)
|
|
$
|
(0.07
|
)
|
Pro
forma financial information is not necessarily indicative of the Company’s actual results if the transaction had been completed
during the periods reflected above, nor is it necessarily an indication of future operating results. Amounts do not include any
operating efficiencies or costs savings that the Company would have been able to achieve.
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
(“Harvest”), the Company’s cannabis-licensed client in the state of Nevada. In August 2019, the parties
entered into a purchase agreement governing the transaction. The acquisition is conditioned upon legislative approval of the transaction,
which is expected to occur by the end of 2020. Upon consummation, the operations of Harvest will be consolidated into the
Company’s financial statements.
The
purchase price is comprised of the issuance of (i) 1,000,000 shares of the Company’s common stock, in the aggregate, to
two owners of Harvest, which as a good faith deposit, were issued upon execution of the purchase agreement, (ii)
$1.2 million of the Company’s common stock at closing, based on the closing price of the common stock on the day prior to
legislative approval of the transaction, and (iii) warrants to purchase 400,000 shares of the Company’s common stock at
an exercise price equal to the closing price of the Company’s common stock on the day prior to legislative approval of the
transaction. These shares are restricted and will be returned to the Company in the event the transaction does not close by a
date certain. As the transaction has not been consummated, the issued shares were recorded at par value within the Stockholders’
Equity section of the balance sheet at December 31, 2019.
Kind
Therapeutics USA Inc.
In
December 2018, the Company entered into a memorandum of understanding (“MOU”) to acquire Kind Therapeutics USA Inc.
(“Kind”), its client in Maryland that holds licenses for the cultivation, production, and dispensing of medical cannabis.
The MOU provides for a total purchase price of $6.3 million in cash, 2,500,000 shares of the Company’s common stock, and
other consideration. The acquisition is subject to the approval by the Maryland Medical Cannabis Commission, which approval is
not expected prior to October 2020.
Also
in December 2018, MariMed Advisors Inc, the Company’s wholly owned subsidiary, and Kind entered into a management agreement
pursuant to which the Company provides comprehensive management services in connection with the business and operations of Kind,
and Mari Holdings MD LLC, the Company’s majority-owned subsidiary, entered into a 20-year lease with Kind for its utilization
of the Company’s 180,000 square foot cultivation and production facility in Hagerstown, MD. Additionally, in October 2019,
Mari Holdings MD LLC purchased a 9,000 square foot building in Anne Arundel County, MD for the development of a dispensary
which would be leased to Kind.
Recently,
the sellers of Kind have attempted to renegotiate the terms of the MOU. Even though the MOU contains all the definitive material
terms with respect to the acquisition transaction and confirms the management and lease agreements, the selling parties now allege
that the MOU is not an enforceable agreement. The Company engaged with the sellers in good faith in an attempt to reach updated
terms acceptable to both parties, however the sellers failed to reciprocate in good faith, resulting in an impasse, resulting
in both parties commencing legal proceedings. For further information, see Part II, Item 1. Legal Proceedings in this
report.
MediTaurus
LLC
In
May 2019, the Company entered into a purchase agreement to acquire MediTaurus LLC (“MediTaurus”), a company formed
and owned by Jokubas Ziburkas PhD, a neuroscientist and leading authority on CBD and its interactions with the brain and endocannabinoid
system. MediTaurus currently operates in the United States and Europe and has developed proprietary CBD formulations sold under
its Florance™ brand.
Pursuant
to the purchase agreement, the Company acquired 70% of MediTaurus on June 1, 2019, and will acquire the remaining 30% of MediTaurus
on June 1, 2020. The purchase price for the initial 70% was $2.8 million, comprised of cash payments totaling $720,000 and 520,000
shares of the Company’s common stock valued at $2,080,000. The purchase price of the remaining 30%, payable in cash
or stock at the Company’s option, shall be equal to a defined percentage of the Company’s receipts from the licensing
of certain MediTaurus technology and products that existed on June 1, 2019 (all such technology and products, the “MT
Property”). For a period of ten years following June 1, 2020, certain former members of MediTaurus shall be paid a royalty
on the Company’s receipts from the licensing of MT Property, with the royalty percentage commencing at 10% and decreasing
to 2% over time.
The
acquisition was accounted for in accordance with ASC 10. The following table summarizes the allocation, adjusted in September
2019, of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date:
Cash
and cash equivalents
|
|
$
|
64,196
|
|
Accounts
receivable
|
|
|
5,362
|
|
Inventory
|
|
|
519,750
|
|
Goodwill
|
|
|
2,662,669
|
|
Accounts
payable
|
|
|
(777
|
)
|
Total
value of MediTaurus
|
|
|
3,251,200
|
|
Noncontrolling
interests in MediTaurus
|
|
|
(975,360
|
)
|
Total
fair value of consideration
|
|
$
|
2,275,840
|
|
Based
on a valuation of MediTaurus in late 2019, the goodwill on the transaction was adjusted to approximately $2.7 million, which was
written off in expectation of the impact of the coronavirus pandemic on MediTaurus’ business.
As
part of the transaction, the Company hired Dr. Ziburkas as the Company’s Chief Innovation Officer, as well as other members
of the MediTaurus executive team.
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 (“iRollie”), 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, client list, 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 approximately $280,000,
were issued to iRollie’s former owners in December 2018, at which time the Company adjusted the total goodwill generated
by 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 off.
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 (“AgriMed”), an entity that holds a license from the state of Pennsylvania for the cultivation of cannabis. The
purchase price was comprised of $8 million, payable in stock and cash, and the assumption of certain liabilities of AgriMed. In
February 2019, the Company commenced legal proceedings against AgriMed seeking specific performance of the purchase agreement.
In
May 2019, the dispute between the parties was resolved through the cash payment to the Company of $3.1 million and other good
and valuable consideration, in exchange for the Company relinquishing its rights under the purchase agreement and releasing its
claims against AgriMed. The net amount of approximately $2,949,000, representing the cash payment less legal fees and write-offs
of assets and supplies, was recorded in Other Non-Operating Income in the Company’s consolidated statement of
operations for the year ended December 31, 2019.
NOTE
4 – INVESTMENTS
At
December 31, 2019 and 2018, the Company’s investments were comprised of the following:
|
|
2019
|
|
|
2018
|
|
Current
investments:
|
|
|
|
|
|
|
|
|
Terrace
Inc.
|
|
$
|
1,449,144
|
|
|
$
|
-
|
|
Total
current investments
|
|
$
|
1,449,144
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-current
investments:
|
|
|
|
|
|
|
|
|
GenCanna
Global Inc.
|
|
|
-
|
|
|
|
-
|
|
CVP
Worldwide LLC
|
|
|
1,066,975
|
|
|
|
1,172,163
|
|
Iconic
Ventures Inc.
|
|
|
-
|
|
|
|
500,000
|
|
Chooze
Corp.
|
|
|
257,686
|
|
|
|
-
|
|
Total
non-current investments
|
|
|
1,324,661
|
|
|
|
1,672,163
|
|
Total
investments
|
|
$
|
2,773,805
|
|
|
$
|
1,672,163
|
|
Terrace
Inc.
In
May 2019, the Company issued 500,000 shares of its common stock, valued at $1.59 million on the date of issuance, to purchase
an 8.95% interest in Terrace Inc. (“Terrace”), a Canadian entity that develops and acquires international cannabis
assets. The Company has no board representation, nor does it have the ability to exert operational or financial control over the
entity.
In
November 2019, the common stock of Terrace commenced public trading on the Toronto Stock Venture Exchange. In accordance with
ASC 321, Investments – Equity Securities, this investment is carried at fair value, with changes to fair value recognized
in net income. Prior to Terrace becoming publicly traded, the Company had elected the measurement alternative to value this equity
investment without a readily determinable fair value.
At
December 31, 2019, the carrying amount of this investment declined to approximately $1.45 million, based on its fair value on
such date, and the Company recorded a charge to net income of approximately $141,000.
GenCanna
Global Inc.
During
2018, in a series of transactions, the Company purchased $30 million of subordinated secured convertible debentures (the “GC
Debentures”) of GenCanna. In February 2019, the Company converted the GC Debentures, plus unpaid accrued interest of approximately
$229,000 through the conversion date, into common stock of GenCanna equal to a 33.5% ownership interest in GenCanna on a fully
diluted basis. Concurrent with the conversion, Company’s CEO was appointed to GenCanna’s board and the Company
was granted certain rights, including the rights of inspection, financial information, and participation in future security offerings
of GenCanna.
Since
the conversion date, this investment had been accounted for under the equity method. However, as previously discussed in Note
1 – Organization and Description of Business, GenCanna filed for voluntary reorganization under Chapter 11 in February
2020 with the U.S. Bankruptcy Court in the Eastern District of Kentucky. As a result, the Company recorded a charge to net income
of approximately $30.23 million, classified under Loss on Equity Investments on the statement of operations for the year
ended December 31, 2019, which reduced the carrying value of this investment to zero.
CVP
Worldwide LLC
In
August 2018, the Company invested $300,000, of a total contracted cash investment of $500,000, and issued 378,259 shares of its
common stock, valued at approximately $915,000, in exchange for a 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, 2019, no revenue was earned by the Company.
The
investment is accounted under the equity method. In 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. In 2019, the Company recorded a charge
of approximately $105,000 representing the Company’s equity in CVP’s net loss during year, further reducing
the carrying value of the investment to approximately $1,067,000 at December 31, 2019.
Iconic
Ventures Inc.
In
December 2018, the Company purchased 2,500,000 shares of common stock of Iconic Ventures Inc. (“Iconic”) for an aggregate
cash payment of $500,000. Iconic 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 a current ownership interest in Iconic of approximately 10%. The Company has no board
representation, nor does it have the ability to exert operational or financial control over the entity. In accordance with
ASC 321, 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.
In
2019, the Company wrote off the investment after an impairment review that considered the viability of the entity in light of
the current economic climate. Accordingly, this investment
was carried at zero and $500,000 on December 31, 2019 and 2018, respectively.
Chooze
Corp.
In
January 2019, the entire principal and accrued interest balance of a note receivable from Chooze Corp. of approximately $258,000
was converted into a 2.7% equity interest in Chooze. In accordance with ASC 321, the Company elected the measurement alternative
to value this equity investment without a readily determinable fair value. Following the Company’s purchase, there has been
no impairment to this investment, nor any observable price changes to investments in the entity. Accordingly, this investment
was carried at approximately $258,000 at December 31, 2019.
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 Chooze at fair value. Any subsequent changes in fair value shall be recognized in net income.
Binske®
In
July 2019, the Company entered into a licensing agreement for the exclusive manufacturing and distribution in seven eastern U.S.
states of the Binske® portfolio of products, a brand known for utilizing best-in-class proprietary strains and
craft ingredients in its edibles, concentrates, vaporizers, and topicals. In consideration for the license and other rights, the
Company agreed to pay a royalty of 10.0% to 12.5% of gross revenue, as defined, derived from the sale of Binske® products,
subject to an annual minimum royalty. No gross revenue was generated as of December 31, 2019.
Vitiprints
In
August 2019, the Company terminated the license agreement it had entered into in August 2018 for the use of a patented technology
to produce and distribute cannabis products with precise dosing and at increased economies (“Vitiprints”). The licensing
agreement had an initial term of five years, and required the Company to make a non-refundable payment of $250,000 which the Company
charged to Cost of Revenues in August 2018.
NOTE
5 – DEFERRED RENTS RECEIVABLE
The
Company is the lessor under several operating leases which contain rent holidays, escalating rents over time, options to renew,
requirements to pay property taxes, insurance and/or maintenance costs, and contingent rental payments based on a percentage of
monthly tenant revenues. The Company is not the lessor under any finance leases.
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 developed into a cannabis cultivation, processing, and
dispensary facility which is leased to a cannabis-licensed client occupying 100% of the space under a triple net lease that
commenced in 2017 and expires in 2035.
|
|
|
|
|
●
|
Maryland
– a 180,000 square foot former manufacturing facility purchased in January 2017 and developed by the Company into a
cultivation and processing facility which is leased to a licensed cannabis client under a triple net lease that commenced
2018 and expires in 2037.
|
|
|
|
|
●
|
Massachusetts
– a 138,000 square foot industrial property of which approximately half of the available square footage is leased to
a non-cannabis manufacturing company under a lease that commenced in 2017 and expires in 2022.
|
|
|
|
|
●
|
Illinois
– two 3,400 square foot free-standing retail dispensaries in the cities of Anna and Harrisburg and leased to the KPGs,
each under a 20-year lease that commenced in 2018. With the acquisition of the KPGs as disclosed in Note 3 – Acquisitions,
this lease was eliminated upon the consolidation of the KPGs in October 2019. Accordingly, the rental receipts on such leases
have been removed from the table of future minimum rental receipts below.
|
The
Company subleases the following property:
|
●
|
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 triple net lease expiring in 2021 with a five-year option
to extend.
|
As
of December 31, 2019 and 2018, cumulative fixed rental receipts under such leases approximated $9.5 million and
$5.4 million, respectively, compared to revenue recognized on a straight-line basis of approximately $11.3 million and
$7.5 million. Accordingly, the deferred rents receivable balances at December 31, 2019 and 2018 approximated $1.8
million and $2.1 million, respectively.
Future
minimum rental receipts for non-cancelable leases and subleases as of December 31, 2019 were:
2020
|
|
$
|
3,896,550
|
|
2021
|
|
|
4,036,550
|
|
2022
|
|
|
3,959,709
|
|
2023
|
|
|
3,661,821
|
|
2024
|
|
|
3,717,080
|
|
Thereafter
|
|
|
40,404,470
|
|
Total
|
|
$
|
59,676,179
|
|
NOTE
6 – DUE FROM THIRD PARTIES
At
December 31, 2019 and 2018, the following table reflects amounts that were advanced by the Company to its cannabis-licensed
clients primarily for working capital purposes, and the carrying amount of such advances after write-offs:
|
|
2019
|
|
|
2018
|
|
Kind
Therapeutics USA Inc. (Maryland licensee)
|
|
$
|
1,475,675
|
|
|
$
|
2,679,496
|
|
Harvest
Foundation LLC (Nevada licensee)
|
|
|
1,938,787
|
|
|
|
248,796
|
|
KPG
of Anna LLC (Illinois licensee acquired Oct. 2019)
|
|
|
-
|
|
|
|
482,700
|
|
KPG
of Harrisburg LLC (Illinois licensee acquired Oct. 2019)
|
|
|
-
|
|
|
|
449,385
|
|
Total
working capital advances to third parties
|
|
|
3,414,462
|
|
|
|
3,860,377
|
|
Reserves
against working capital advances
|
|
|
(3,414,462
|
)
|
|
|
-
|
|
Due
from third parties, net
|
|
$
|
-
|
|
|
$
|
3,860,377
|
|
When
a client is able to organically fund its ongoing operations, such client will issue a promissory note to the Company for the cumulative
advances made up to that point, which will then be paid down monthly over a specified period of time. The Company has successfully
employed this strategy in the past, and accordingly, in January 2019, KPG of Anna LLC and KPG of Harrisburg LLC issued promissory
notes to the Company as further described in Note 7 – Notes Receivable.
In
December 2019, the Company recorded bad debt reserves against the working capital advance balances due from (i) Kind of approximately
$1.5 million in light of the ongoing litigation between the Company and Kind, and (ii) Harvest of approximately $1.9 million because
of the anticipated effect on Harvest’s operations from a weakened local economy due to the coronavirus pandemic.
NOTE
7 – NOTES RECEIVABLE
At
December 31, 2019 and 2018, notes receivable were comprised of the following:
|
|
2019
|
|
|
2018
|
|
First
State Compassion Center
|
|
$
|
527,261
|
|
|
$
|
578,722
|
|
Healer
LLC
|
|
|
846,985
|
|
|
|
307,429
|
|
Atalo
Holdings Inc.
|
|
|
-
|
|
|
|
-
|
|
Maryland
Health & Wellness Center Inc.
|
|
|
323,526
|
|
|
|
-
|
|
High
Fidelity Inc.
|
|
|
252,873
|
|
|
|
-
|
|
Chooze
Corp.
|
|
|
-
|
|
|
|
257,687
|
|
Total
notes receivable
|
|
|
1,950,645
|
|
|
|
1,143,838
|
|
Notes
receivable, current portion
|
|
|
311,149
|
|
|
|
51,462
|
|
Notes
receivable, less current portion
|
|
$
|
1,639,496
|
|
|
$
|
1,092,376
|
|
The
Company loaned approximately $700,000 to First State Compassion Center, its Delaware cannabis-licensee client, during the period
from October 2015 to April 2016. In May 2016, this client issued a 10-year promissory note, as subsequently amended, to the Company
bearing interest at a rate of 12.5% per annum. The monthly payments of approximately $10,100 will continue through April 2026,
at which time the note will become due. At December 31, 2019 and 2018, the current portion of this note was approximately
$58,000 and $51,000, respectively, and is included in Notes Receivable, Current Portion on the respective balance
sheets.
In
2018, the Company loaned an aggregate of $300,000 to
Healer LLC (“Healer”), an entity that provides cannabis education, dosage programs, and products developed by Dr.
Dustin Sulak, an integrative medicine physician and nationally renowned cannabis practitioner. In 2019, the Company loaned Healer
an additional aggregate amount of $500,000. The loans bear interest at 6% per annum, with principal and interest payable
on the maturity dates which are three years from the respective loan dates.
In
2019, the Company extended loans aggregating $980,000 to Atalo Holdings Inc. (“Atalo”), an agriculture and
biotechnology firm specializing in research, development, and production of industrial hemp and hemp-based CBD products. The loans
bear interest at 6% per annum, with principal and interest payable on the earlier of April 3, 2020 or the date on which the Company
acquires at least 25% of Atalo’s outstanding capital stock, in which case the principal and interest due shall be credited
toward Company’s purchase price for such capital stock. In December 2019, the Company wrote off the entire carrying value
of the Atalo note receivable balance based on the expectation that the operations of Atalo would be negatively impacted by the
coronavirus pandemic.
In
January 2019, the Company entered into an agreement with Maryland Health & Wellness Center Inc. (“MHWC”), an entity
that has been pre-approved by the state of Maryland for a cannabis dispensing license, to provide MHWC with a $300,000 construction
loan in connection with the buildout of MHWC’s proposed dispensary. The Company also entered into a consulting services
agreement to provide MHWC with advisory and oversight services over a three-year period relating to the development, administration,
operation, and management of MHWC’s proposed dispensary in Maryland. The construction loan bears interest at 8% per annum,
with principal and interest payable in May 2022, the two-year anniversary of final state approval of MHWC’s dispensing
license, provided however, that the Company shall have the right, that extends through such two-year anniversary and
which is subject to state approval, to convert the promissory note underlying the construction loan into a 20% ownership interest
of MHWC. This conversion right of the Company shall terminate if the consulting services agreement is terminated.
In
August 2019, the Company loaned $250,000 to High Fidelity Inc., a company that owns and operates two seed-to sale medical
marijuana facilities in the state of Vermont and produces its own line of CBD products. The loan bears interest at a rate of 10%
per annum, with interest-only monthly payments through its extended maturity in August 2020.
During
the period from May to October 2018, the Company loaned $250,000 to Chooze Corp. bearing interest at 8% per annum and maturing
in 2021. In January 2019, the entire principal and accrued interest balance of approximately $258,000 was converted into a 2.7%
ownership interest in Chooze, as previously discussed in Note 4 – Investments.
In
January 2019, KPG of Anna LLC and KPG of Harrisburg LLC each issued a promissory note to the Company in the approximate amount
of $451,000 and $405,000, respectively, representing the advances made by the Company to these entities through December 31, 2018.
The notes bore interest at 12% per annum, with monthly principal and interest payments due through December 2038. With the acquisition
of the KPGs as disclosed in Note 3 – Acquisitions, these notes were eliminated upon the consolidation of the KPGs
in October 2019.
NOTE
8 – INVENTORY
In
2019, the Company purchased $21.6 million of hemp seeds
for its wholesale hemp distribution business and to develop hemp-derived CBD products. The seeds meet the U.S. government’s
definition of federally legal industrial hemp, which was descheduled as a controlled substance and classified as an agricultural
commodity upon the signing of the 2018 U.S. Farm Bill. As previously disclosed in Note 1 – Organization and Description
of Business, the Company sold a majority of these seeds to GenCanna, generating a related party receivable of
$33.2 million which was written off as of December 31, 2019.
At
December 31, 2019, inventory was comprised of approximately $226,000 of CBD isolate and hemp extract; approximately
$476,000 of work-in-process; and approximately $518,000 of finished cannabis and CBD products. At December 31, 2018, inventory
was comprised of product packaging and other collateral.
NOTE
9 – DEBENTURES RECEIVABLE
As
detailed in Note 4 – Investments, the Company converted the GC Debentures into a 33.5% ownership interest in GenCanna
in February 2019. Prior to conversion, the GC Debentures bore interest at a rate of 9% per annum and had an original maturity
date of three years from issuance. For the year ended December 31, 2018, the Company earned and received interest income of approximately
$502,000 on the GC Debentures.
NOTE
10 – PROPERTY AND EQUIPMENT
At
December 31, 2019 and 2018, property and equipment consisted of the following:
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
3,887,710
|
|
|
$
|
3,392,710
|
|
Buildings
and building improvements
|
|
|
27,063,235
|
|
|
|
13,566,144
|
|
Tenant
improvements
|
|
|
7,762,991
|
|
|
|
5,348,882
|
|
Furniture
and fixtures
|
|
|
299,645
|
|
|
|
114,160
|
|
Machinery
and equipment
|
|
|
4,086,691
|
|
|
|
1,632,351
|
|
Construction
in progress
|
|
|
2,827,940
|
|
|
|
12,205,447
|
|
|
|
|
45,928,212
|
|
|
|
36,259,694
|
|
Less:
accumulated depreciation
|
|
|
(3,135,843
|
)
|
|
|
(2,159,830
|
)
|
Property
and equipment, net
|
|
$
|
42,792,369
|
|
|
$
|
34,099,864
|
|
During
the years ended December 31, 2019 and 2018, additions to property and equipment were approximately $9.7 million
and $8.9 million, respectively.
The
2018 additions were primarily comprised of (i) the buildout of properties in Hagerstown, MD, New Bedford, MA, and Middleborough,
MA, and (ii) improvements to the Wilmington, DE facility.
The
2019 additions consisted primarily of (i) the commencement of construction in Milford, DE and Annapolis, MD, (ii) the continued
buildout of properties in Hagerstown, MD, New Bedford, MA, and Middleborough, MA, and (ii) improvements to the Wilmington, DE
and Las Vegas, NV properties.
The
2018 construction in progress balance of approximately $12.2 million was primarily comprised of (i) New Bedford, MA building,
improvements and machinery of approximately $9.8 million and (ii) Middleborough, MA building, improvements and fixtures of approximately
$2.4 million. All of this construction in progress was placed into service in 2019.
The
2019 construction in progress balance of approximately $2.8 million consisted of the commencement of construction
of properties in Milford, DE and Annapolis, MD.
Depreciation
expense for the year ended December 31, 2019 and 2018 was approximately $999,000 and $658,000, respectively.
NOTE
11 – DEBT
Mortgages
Payable
At
December 31, 2019 and 2018, mortgage balances, including accrued but unpaid interest, were comprised of the following:
|
|
2019
|
|
|
2018
|
|
Bank
of New England – Massachusetts property
|
|
$
|
4,825,226
|
|
|
$
|
4,895,000
|
|
Bank
of New England – Delaware property
|
|
|
1,682,275
|
|
|
|
1,791,736
|
|
DuQuoin
State Bank – Illinois properties
|
|
|
829,229
|
|
|
|
850,076
|
|
Total
mortgages payable
|
|
|
7,336,730
|
|
|
|
7,536,812
|
|
Mortgages
payable, current portion
|
|
|
(223,889
|
)
|
|
|
(188,231
|
)
|
Mortgages
payable, less current portion
|
|
$
|
7,112,842
|
|
|
$
|
7,348,581
|
|
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. This mortgage was personally guaranteed by the Company’s CEO and CFO. From the mortgage date through
May 2019, the Company was required to make monthly payments of interest-only at a rate equal to the prime rate plus 2%, with a
floor of 6.25% per annum. From May 2019 to May 2024, the Company is required to 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% per annum. 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% per
annum. The outstanding principal balance on this mortgage was approximately $4,825,000 and $4,895,000 on December 31, 2019
and 2018, respectively, of which approximately $94,000 and $63,000, respectively, was current.
The
Company maintains a second mortgage with Bank of New England, also personally guaranteed by the Company’s CEO and CFO, 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 that state. The mortgage matures in 2031 with monthly
principal and interest payments at a rate of 5.25% per annum 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% per annum. At December 31, 2019 and 2018, the outstanding
principal balance on this mortgage was approximately $1,682,000 and $1,792,000, respectively, of which approximately $105,000
and $102,000, respectively, was current.
In
May 2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of two properties
which the Company developed into two 3,400 square foot free-standing retail dispensaries in Illinois. On May 5th
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. The mortgage was renewed in May 2019 at a rate of 8.5% per annum. At December 31, 2019
and 2018, the outstanding principal balance on this mortgage was approximately $829,000 and $850,000, respectively,
of which approximately $24,000 and $23,000, respectively, was current.
Notes
Payable
In
June 2019, the Company and MariMed Hemp, its wholly-owned subsidiary, issued a secured promissory note in the
principal amount of $10 million to an unaffiliated party (the “$10M Note”). The proceeds from the $10M Note
were used to finance a portion of the purchases of hemp seed inventory previously discussed in Note 1 – Organization
and Description of Business. The $10M Note provided for the repayment of principal plus a payment of $1.5 million on January
31, 2020. At December 31, 2019, the pro-rata portion of such payment, based on the term of the $10M Note, approximated $1,307,000
and was charged to interest expense. The $10M Note imposes certain covenants on the borrowers, all of which were complied with
as of December 31, 2019.
In
February 2020, the Company entered into an amendment agreement with the holder of the $10M Note, whereby the Company and MariMed
Hemp issued an amended and restated promissory note in the principal amount of $11,500,000 (the “$11.5M Note”), bearing
interest at a rate of 15% per annum, due on June 15, 2020, and with monthly interest payments and minimum amortization payments
of $3,000,000 in the aggregate due on or before April 30, 2020, of which the Company has already paid $2,300,000. The $11.5M Note
is secured by a first priority security interest in the assets of certain of the Company’s subsidiaries and brands, and
a pledge of the Company’s ownership interest in certain of its subsidiaries. The $11.5M Note imposes certain covenants on
the borrowers effective on the date of the amendment agreement.
As
part of the $10M Note transaction, the Company issued three-year warrants to purchase 375,000 shares of common stock at an exercise
price of $4.50 per share to the holder of the $10M Note. The fair value of these warrants on the issuance date of approximately
$601,000 was recorded as a discount to the $10M Note. Approximately $523,000 of the warrant discount was amortized to interest
expense in 2019. Accordingly, the carrying value of the $10M Note approximated $9.92 million at December 31,
2019.
In
April 2019, MariMed Hemp issued a secured promissory note in the principal amount of $1,000,000 to an unaffiliated party.
The proceeds of the note were used to finance a portion of the purchases of hemp seed inventory previously discussed in Note
1 – Organization and Description of Business. The note is secured by the collateral assignment of certain receivables
from GenCanna (the “Secured Receivables”) and certain obligations of GenCanna to MariMed Hemp. The principal balance
plus a payment of $180,000, initially due on December 31, 2019, was extended to March 31, 2020 in accordance with the
terms of the note, requiring an additional payment of $30,000 payable on the extended due date. MariMed Hemp can elect to
repay the note in whole or in part without penalty, provided the noteholder is given proper notice and MariMed Hemp is not in
default of the note agreement. Upon such election, the entire payment of $180,000 and additional payment of $30,000 shall
be deemed earned by and due to the noteholder.
In
March 2019, the Company raised $6 million through the issuance of a secured promissory note to an unaffiliated party bearing interest
at a rate of 13% per annum and a service fee of $900,000 (the “$6M Note”). The proceeds of the note were used to finance
a portion of the purchases of hemp seed inventory previously discussed in Note 1 – Organization and Description of Business.
The note is secured by the collateral assignment of certain receivables from and obligations of GenCanna to MariMed Hemp. The
note’s initial maturity date of December 31, 2019 was extended to April 30, 2020 in accordance with the terms of
the note, with the Company paying an extension fee in December 2019 of $300,000 which was charged to interest expense. At December
31, 2019, accrued interest payable on the note approximated $635,000.
In
September 2018, the Company raised $3 million from the issuance of a secured promissory note to the same unaffiliated party of
the $6M Note, bearing interest at a rate of 10% per annum, with interest payable monthly through an initial maturity date
of March 31, 2020 (the “$3M Note”). The Company may elect to prepay the $3M Note in whole or part at any time after
December 17, 2018 without premium or penalty provided the noteholder is given proper notice and the Company is not in default
of the note agreement. The $3M Note was extended for an additional six months in accordance with its terms, with
the interest rate increasing to 12% per annum during the extension period. The $3M Note is secured by the Company’s property
in Maryland.
As
part of $3M Note transaction, the Company issued three-year
warrants 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 $3M Note of approximately $1,511,000 from the allocation of note
proceeds to the warrants based on the fair value of such warrants on the issuance date. Approximately $882,000 of the warrant
discount was amortized to interest expense during 2018, and the remaining $629,000 was amortized during 2019. At December 31,
2019 and 2018, the carrying value of the $3M Note was $3 million and approximately $2.37 million (principal less
the remaining warrant discount of $629,000), respectively.
In
addition to the above transactions, the Company raised $2,760,000 in 2019 from the issuance of promissory notes to individuals
and accredited investors bearing interest at rates of 10% to 18% per annum, and maturing in 2020 and 2021. No additional promissory
notes were issued in 2018 than those previously described above.
Note
Settlements
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 fair value of the common stock on the dates
of conversion. No conversions of promissory notes occurred during 2019.
During
2019 and 2018, the Company issued 2,435,116 shares and 3,827,373 shares of its common stock, respectively,
and subscriptions on zero and 79,136 shares of its common stock, respectively to retire promissory notes (principal
and accrued interest) of approximately $1,047,000 and $7,590,000, respectively. The Company recorded non-cash losses
of approximately $2.5 million in 2018 based on the fair value of the common stock on the retirement dates. No such losses
were incurred in 2019.
During
2018, the Company repaid $700,000 of promissory notes. No repayments of promissory notes occurred during 2019.
Debt
Maturities
As
of December 31, 2019, the aggregate scheduled maturities of
the Company’s total debt outstanding, inclusive of the promissory notes and mortgages described within this Note 11 –
Debt, and the convertible debentures described in the following Note 12 – Debentures Payable, were:
2020
|
|
$
|
21,433,484
|
|
2021
|
|
|
11,262,710
|
|
2022
|
|
|
280,830
|
|
2023
|
|
|
300,248
|
|
2024
|
|
|
320,702
|
|
Thereafter
|
|
|
5,822,397
|
|
Total
|
|
|
39,420,370
|
|
Less
discounts
|
|
|
(3,135,686
|
)
|
|
|
$
|
36,284,684
|
|
NOTE
12 – DEBENTURES PAYABLE
In
October and November 2018, pursuant to a securities purchase agreement (the “SPA”), the Company sold an aggregate
of $10,000,000 of convertible debentures to an accredited investor bearing interest at the rate of 6% per annum that mature
two years from issuance, with a 1% issuance 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 accordance with the terms of 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 amounts 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 that the Company first deliver advance written notice to the Holder of its intention to make a redemption,
with the Holder allowed to effect certain 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 outstanding 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 issued in such VRT.
In
conjunction with the issuance of the $10M Debentures, the Company issued two warrants to the Holder to purchase 142,857 and 181,818
shares of the Company’s common stock at exercise prices of $3.50 and $5.50 per share, respectively, and expiring three years
from issuance (the “Initial Warrants”). The fair value of the Initial Warrants of approximately $1,058,000
was recorded as a discount to the carrying amount of the $10M Debentures.
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 certain registration rights with respect to any potential shares issued pursuant
to the terms of the SPA, the $10M Debentures, and the Initial Warrants.
Subsequent
to entering into 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 $5,570,000 was recorded as a discount
to the carrying amount of the $10M Debentures, with an offset to additional paid-in-capital.
In
May 2019, the Company sold to the Holder an additional $5,000,000 convertible debenture bearing interest at the rate of 6% per
annum that matures two years from issuance, with a 1% issuance discount, resulting in net proceeds to the Company
of $4,950,000 (the “$5M Debentures”). In each of June and August 2019, the Company sold to the Holder an additional
$2,500,000 of convertible debentures, totaling $5,000,000, that mature two years from issuance, with a 7% issuance discount,
resulting in aggregate net proceeds to the Company of $4,650,000 (the “Two $2.5M Debentures,” and together with the
$5M Debentures, the “Additional $10M Debentures”).
The
terms of the Additional $10M Debentures are consistent with the terms of the $10M Debentures, except that (i) no interest shall
accrue on the Two $2.5M Debentures, (ii) the issuance discount on the Two $2.5M Debentures is 7%, compared to 1% on the
$10M Debentures and the $5M Debentures, and (iii) other small variations, most notably a cap on the conversion price. The SPA,
registration rights agreement, and addendum to the SPA were all amended and restated to incorporate the Additional $10M Debentures.
As
part of issuance of the Additional $10M Debentures, the Company issued three-year warrants to the Holder to purchase 550,000 and
300,000 shares of common stock at exercise prices of $3.00 and $5.00 per share, respectively (the “Additional Warrants”).
The fair value of the Additional Warrants of approximately $1,148,000 was recorded as a discount to the carrying amount of the
Additional $10M Debentures.
Based
on the conversion prices of the Additional $10M Debentures in relation to the market value of the Company’s common stock,
the Additional $10M Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was
in-the-money on the commitment date. The aggregate intrinsic value of the beneficial conversion feature of approximately $4,235,000
was recorded as a discount to the carrying amount of the Additional $10M Debentures, with an offset to additional paid-in-capital.
In
November and December 2018, the Holder converted, in two separate transactions, an aggregate of $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.
In
January 2019, the Holder converted, in three separate transactions, an aggregate of $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 to $3.06 per share. In April and
June 2019, the Holder converted, in four separate transactions, an aggregate of $1,750,000 of principal and approximately $181,000
of accrued interest into 923,185 shares of common stock at conversion prices ranging from $1.74 to $2.74 per share. In July, the
Holder converted, in two separate transactions, an aggregate of $2,750,000 of principal and approximately $17,000 of accrued interest
into 2,435,144 shares of common stock at conversion prices of $1.08 and $1.70 per share. In September 2019, the Holder converted
$2,400,000 of principal and approximately $64,000 of accrued interest into 3,206,816 shares of common stock at a conversion price
of $0.77 per share. In December 2019, the Holder converted $1,100,000 of principal and approximately $17,000 of accrued interest
into subscriptions on 3,004,131 shares of common stock at a conversion price of $0.37 per share.
All
of the aforementioned conversions were performed in accordance with the terms of their respective convertible debenture agreements,
and therefore the Company was not required to record a gain or loss on such conversions.
During
2019 and 2018, amortization of the beneficial conversion features, after adjustment for the conversions, approximated $5,242,000
and $1,522,000, respectively; amortization of the discounts from the Initial Warrants and Additional Warrants (together, the
“Total Warrants”) approximated $1,298,000 and $91,000 respectively; and the amortization of original issue
discounts approximated $107,000 and $9,000, respectively. This amortization was charged to interest expense. Additionally,
accrued interest expense for such periods approximated $513,000 in 2019 and $98,000 in 2018.
At
December 31, 2019, the aggregate outstanding principal balance on the $10M Debentures and the Additional $10M Debentures
(together, the “$20M Debentures”) was $10,000,000. Also on such date, the unamortized balances of the beneficial
conversion feature, the Total Warrants discount, and original issue discounts were approximately $3,041,000, $817,000, and
$307,000, respectively. Accordingly, at December 31, 2019, the carrying value of the $20M Debentures was approximately
$5,835,000.
At
December 31, 2018, the outstanding principal balance on the $10M Debentures was $8,600,000. Also on such date, the unamortized
balances of the beneficial conversion feature, Initial Warrants discount, and original issue discounts were approximately $4,048,000,
$966,000, and $91,000, respectively, and accrued and unpaid interest was approximately $62,000. Accordingly, at December 31, 2018,
the carrying value of the $10M Debentures was approximately $3,557,000.
NOTE
13 – EQUITY
Preferred
Stock
In
January 2018, all 500,000 shares of subscribed Series A convertible preferred stock then outstanding were converted into 970,988
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. At December 31, 2019 and 2018, no shares of Series
A convertible preferred stock were issued or outstanding.
In
February 2020, the Company filed a certificate of elimination to return all shares of the Series A convertible preferred stock
to the status of authorized and unissued shares of undesignated preferred stock. Concurrent with this filing, the Company also
filed a certificate of designation to designate the rights and preferences of newly authorized Series B convertible preferred
stock, shares of which were issued in February 2020 as further discussed in Note 21 – Subsequent Events.
Common
Stock
During
2019, the Company sold 1,014,995 shares of common stock at prices of $0.70 and $3.25 per share, resulting
in total proceeds of $2,750,000. During 2018, the Company sold 10,111,578 shares of common stock, at prices ranging from
$0.50 to $1.30 per share, resulting in total proceeds of approximately $8.5 million.
During
2019 and 2018, the Company issued 97,136 and 1,000,000 common shares, respectively, associated with previously issued subscriptions
on common stock with a value of approximately $169,000 and $370,000, respectively.
During
2019 and 2018, the Company issued 172,663 and 3,420,526 common 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 $5,000 in 2019 and $1,024,000 in 2018.
In
2019, the Company granted 141,546 shares of common stock to employees at an aggregate value of approximately $223,000.
Of these granted shares, 32,726 were not issued as of December 31, 2019 and were reflected in Common Stock Subscribed But Not
Issued on the balance sheet. No common stock was granted in 2018.
As
previously disclosed in Note 3 – Acquisitions, the Company issued (i) 264,317 shares of common stock in connection
with the acquisition of iRollie in 2018, (ii) 1,000,000 shares of common stock in connection with the acquisition of the
KPGs and Mari-IL in 2019, (iii) 1,000,000 shares of stock as a good faith deposit in 2019 on the Harvest acquisition, and
(iv) 520,000 shares of commons stock in connection with the acquisition of MediTaurus in 2019.
As
previously disclosed in Note 4 – Investments, the Company issued 500,000 shares of common stock in 2019 to
purchase a minority interest in Terrace in 2019, and 378,259 shares of its common stock in 2018 to purchase a minority interest
in CVP.
As
previously disclosed in Note 11 – Debt, the Company issued (i) 1,568,375 shares of common stock in 2018 to former
noteholders who converted promissory notes with principal balances of $1,075,000, and (ii) 2,435,116 shares in 2019 and 3,827,373
shares in 2018 of common stock to retire promissory notes (principal and accrued interest) of approximately $1,047,000 in 2019
and $7,590,000 in 2018.
As
previously disclosed in Note 12 – Debentures Payable, the holder of the $20M Debentures converted (i) in 2018,
approximately $1,436,000 of principal and interest into 524,360 shares of common stock, and (ii) in
2019, approximately $8,976,000 of principal and interest into 6,798,339 shares of common stock and subscriptions on 3,004,131
shares of common stock.
As
further disclosed in Note 14 – Stock Options, during 2019 and 2018, 3,261,808 and 760,000 shares of
common stock, respectively, were issued in connection with the exercise of stock options.
As
further disclosed in Note 15 – Warrants, during 2019 and 2018, warrants to purchase 686,104 and 2,300,237
shares of common stock, respectively, were exercised.
Common
Stock Issuance Obligations
At
December 31, 2019, the Company was obligated to issue (i) 32,726 shares of common stock, valued at approximately
$29,000, in connection with the stock grants disclosed earlier in this Note 13 – Equity, (ii) 3,004,131
shares of common stock, valued at approximately $1,117,000, with respect to the December 2019 conversion of
a portion of the $20M Debentures as previously disclosed in Note 12 – Debentures Payable, and (iii) 200,000
shares of common stock associated with exercise of stock options by the Company’s CEO as further disclosed in Note 19 –
Related Party Transactions. These shares were issued in the first quarter of 2020.
At
December 31, 2018, the Company was obligated to issue: (a) 79,136 shares of common stock, valued at approximately $95,000, related
to the settlement of a previously issued promissory note with a principal balance of $50,000 and accrued interest of $1,454; and
(b) 18,000 shares of common stock, valued at approximately $74,000, for the payment of rent for a leased property in Massachusetts
for the months of September 2018 through January 2019. Such shares were subsequently issued in the first quarter of 2019.
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.
Amended
and Restated 2018 Stock Award and Incentive Plan
In
August 2019, the Company’s board of directors approved the Amended and Restated 2018 Stock Award and Incentive Plan (the
“Incentive Plan”), based on the board’s belief that awards authorized under the Incentive Plan provide incentives
for the achievement of important performance objectives and promote the long-term success of the Company. In September 2019, the
Incentive Plan was approved by the stockholders at the Company’s annual stock-holders meeting.
The
Incentive Plan is an omnibus plan, authorizing a variety of equity award types as well as cash and long-term incentive
awards. The Incentive Plan amends and restates the Company’s 2018 Stock Award and Incentive Plan (the “Previous
Plan”), which was approved by the board of directors in July 2018 but never presented to stockholders for approval.
Any grants made under the Previous Plan prior to the approval date of the Incentive Plan shall continue to be governed
by the terms of the Previous Plan.
The
Incentive Plan authorizes a broad range of awards, including stock options, stock appreciation rights, restricted stock, deferred
stock, dividend equivalents, performance shares, cash-based performance awards, and other stock-based awards. Such awards can
be granted to employees, non-employee directors and other persons who provide substantial services to the Company and its affiliates.
Nothing in the Incentive Plan precludes the payment of other compensation to officers and employees, including bonuses based upon
performance, outside of the Incentive Plan.
An
aggregate of 40,000,000 shares are reserved for delivery to participants, and may be used for any type of award under the Incentive
Plan. Shares actually delivered in connection with an award will be counted against such number of reserved shares. Shares will
remain available for new awards if an award under the Incentive Plan expires, is forfeited, canceled, or otherwise terminated
without delivery of shares or is settled in cash. Each award under the Incentive Plan is subject to the Company’s claw back
policy in effect at the time of grant of the award.
The
board of directors may amend, suspend, discontinue, or terminate the Incentive Plan or the authority to grant awards thereunder
without stockholder approval, except as required by law or regulation or under rules of the stock exchange, if any, on which the
Company’s stock may then be listed. Unless earlier terminated, grants under the Incentive Plan will terminate ten years
after stockholder approval of the Incentive Plan, and the Incentive Plan will terminate when no shares remain available and the
Company has no further obligation with respect to any outstanding award.
NOTE
14 – STOCK OPTIONS
During
2019, the Company granted options to purchase 2,565,000 shares of common stock, expiring four and five years from their
grant dates, at exercise prices ranging from $0.42 to $1.95 per share. The fair value of these option grants
of approximately $1,502,000 is being amortized over their respective vesting periods, of which approximately $544,000 was amortized
in 2019.
During
2018, the Company granted options to purchase 4,720,000 shares of common stock, expiring four and five years from their
grant dates, at exercise prices ranging from $0.14 to $3.72 per share. The fair value of these option grants of
approximately $5,897,000 is being amortized over their respective vesting periods, of which approximately $3,339,000 and $1,534,000
was amortized in 2019 and 2018, respectively.
During
2019, options to purchase 3,667,499 shares of common stock were exercised at prices ranging from $0.08 to $0.77 per share.
Of these exercised options, 2,167,499 were exercised on a cashless basis with the exercise prices paid via the surrender
of 405,691 shares of common stock.
During
2018, options to purchase 760,000 shares of common stock were exercised at prices ranging from $0.08 to $0.63 per share.
Of these exercised options exercised in 2018, 460,000 were exercised on a cashless basis with the exercise price
paid via the surrender of 105,398 shares of common stock.
During
2019, options to purchase 117,501 shares of common stock expired, and options to purchase 818,750 shares of common stock were
forfeited, resulting in an aggregate reduction of amortization expense of approximately $432,000 in 2019. During 2018, options
to purchase 200,000 shares of common stock expired, and options to purchase 250,000 shares of common stock were forfeited,
resulting in an aggregate reduction of amortization expense of approximately $71,000 in 2018.
Stock
options outstanding and exercisable as of December 31, 2019 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.130
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
0.50
|
|
$
|
0.140
|
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
1.00
|
|
$
|
0.330
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.19
|
|
$
|
0.417
|
|
|
|
900,000
|
|
|
|
-
|
|
|
|
4.99
|
|
$
|
0.450
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
1.76
|
|
$
|
0.590
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
4.94
|
|
$
|
0.630
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
2.00
|
|
$
|
0.770
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
3.00
|
|
$
|
0.900
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
3.37
|
|
$
|
0.910
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.81
|
|
$
|
0.950
|
|
|
|
50,000
|
|
|
|
30,000
|
|
|
|
3.00
|
|
$
|
0.992
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
4.74
|
|
$
|
1.000
|
|
|
|
200,000
|
|
|
|
15,000
|
|
|
|
4.84
|
|
$
|
1.350
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
3.58
|
|
$
|
1.950
|
|
|
|
500,000
|
|
|
|
125,000
|
|
|
|
3.50
|
|
$
|
2.320
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
3.70
|
|
$
|
2.450
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2.98
|
|
$
|
2.500
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
3.66
|
|
$
|
2.650
|
|
|
|
200,000
|
|
|
|
150,000
|
|
|
|
3.73
|
|
$
|
2.850
|
|
|
|
56,250
|
|
|
|
37,500
|
|
|
|
2.95
|
|
$
|
2.850
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
3.95
|
|
$
|
3.000
|
|
|
|
25,000
|
|
|
|
12,500
|
|
|
|
3.96
|
|
$
|
3.725
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
3.94
|
|
|
|
|
|
|
6,271,250
|
|
|
|
4,207,500
|
|
|
|
|
|
NOTE
15 – WARRANTS
In
conjunction with the issuance of the $20M Debentures
previously disclosed in Note 12 – Debentures Payable, in 2019 and 2018, the Company issued three-year warrants
to purchase 850,000 and 324,675 shares of its common stock, respectively, at exercise prices of $3.00 to
$5.00 per share and $3.50 to $5.50 per share, respectively. The fair value of these warrants at issuance approximated
$1,148,000 in 2019 and $1,058,000 in 2018, with approximately $1,298,000 amortized to interest expense in 2019,
approximately $91,000 in 2018, and the balance to be amortized over the remaining durations of the $20M
Debentures.
As
part of the $10M Note transaction previously disclosed in Note 11 – Debt, in 2019,
the Company issued three-year warrants to purchase 375,000 shares of common stock at an exercise price of $4.50 per share. The
fair value of these warrants at issuance approximated $601,000, with approximately $523,000 of this amount amortized to
interest expense during the year, and the balance to be amortized by the initial January 2020 maturity date
of the $10M Note.
In
connection with $3M Note transaction previously disclosed in Note 11 – Debt, in 2018, the Company issued three-year
warrants to purchase 750,000 shares of the Company’s common stock at an exercise price of $1.80 per share. The fair value
of these warrants at issuance approximated $1,511,000, with approximately $882,000 amortized to interest expense during 2018,
and the remaining $629,000 amortized during 2019.
In
addition to the above warrants issued with the $20M Debentures, $10M Note, and $3M Note, in connection with promissory notes issued
to individuals in 2019 and 2018, the Company issued warrants to purchase 10,000 and 237,500 shares of common stock, respectively,
at an exercise price of $0.75 and $0.55 per share, respectively, expiring four years and three years, respectively, from issuance.
The fair value of these warrants at issuance of approximately $5,000 in 2019 and $198,000 in 2018 were fully amortized to interest
expense in the year of issuance.
In
2018, alongside the sale of common stock, the Company issued three-year and five-year warrants to purchase 6,098,962 shares of
common stock at exercise prices ranging from $1.75 to 4.30 per share. The fair value of these warrants at issuance of approximately
$11,146,000 was treated as a reduction to the value of the common stock and charged to Additional Paid-In Capital on the
balance sheet. No warrants were issued alongside sales of common stock in 2019.
In
2019 and 2018, the Company issued stand-alone warrants to purchase 1,250,000 and 625,000 shares of common stock, respectively,
at exercise prices of $0.80 to 1.71 per share in 2019, and $0.20 to $2.45 per share in 2018. The 2019 warrants expire three years
from issuance and the 2018 options expire three and five years from issuance. The fair value of the warrant issuances of approximately
$392,000 in 2019 and $1,815,000 in 2018 were charged to expense in the year of issuance.
During
2019 and 2018, warrants to purchase 686,104 and 2,300,237 shares of common stock, respectively, were exercised at exercise
prices ranging from $0.12 to $1.75 per share in 2019 and $0.10 to $0.75 per share in 2018.
At
December 31, 2019 and 2018, warrants to purchase 11,780,107 and 10,606,211 shares of common stock, respectively,
were outstanding with exercise prices ranging from $0.15 to $5.50 per share in 2019 and $0.12 to $5.50 per share
in 2018.
NOTE
16 – REVENUES
For
the years ended December 31, 2019 and 2018, the Company’s revenues were comprised of the following major categories:
|
|
2019
|
|
|
2018
|
|
Real
estate
|
|
$
|
6,836,316
|
|
|
$
|
6,441,160
|
|
Management
|
|
|
2,798,738
|
|
|
|
1,581,548
|
|
Supply
procurement
|
|
|
3,555,555
|
|
|
|
3,015,745
|
|
Licensing
|
|
|
1,794,161
|
|
|
|
700,173
|
|
Product
sales
|
|
|
1,542,037
|
|
|
|
-
|
|
Product
sales to related party
|
|
|
29,029,249
|
|
|
|
-
|
|
Other
|
|
|
48,589
|
|
|
|
113,289
|
|
Total
revenues
|
|
$
|
45,604,644
|
|
|
$
|
11,851,915
|
|
For
the year ended December 31, 2019, revenue from three clients represented 92% of total revenues. One of these clients
was GenCanna, a related party, with whom the Company conducted the seed sale transactions previously disclosed in Note 1 –
Organization and Description of Business. The total revenue from these transactions with GenCanna are reflected under
Product Sales To Related Party in the table above.
Excluding
the revenues from GenCanna, two clients represented 78% and 73% of revenues for the years ended December 31, 2019 and
2018, respectively.
NOTE
17 – BAD DEBTS
For
the years ended December 31, 2019 and 2018, the Company recorded bad debt expense of approximately $44.5 million and $150,000,
respectively.
The
amount recorded in 2019 included (i) the write off of the accounts receivable balance due from GenCanna
of approximately $29.0 million following GenCanna’s Chapter 11 filing, and (ii) the recording of bad debt reserves against
the accounts receivable and working capital balances due from Kind of approximately $9.7 million and approximately $1.5 million,
respectively, in light of the current litigation between the Company and Kind.
Additionally,
2019 bad debt expense included the following amounts that were based on the Company’s expectation of the negative impact
of the coronavirus pandemic on the operations of certain of the Company’s debtors, and therefore the collectibility thereof:
(i) the recording of bad debt reserves against the accounts receivable and working capital balances due from Harvest of approximately
$239,000 and $1.9 million, respectively, and (ii) the write off of notes receivable and accrued interest balances due from Atalo
of approximately $1.0 million and two other entities of approximately $650,000 in the aggregate.
NOTE
18 – INCOME TAXES
For
the years ended December 31, 2019 and 2018, the Company’s cumulative net operating losses were approximately $26.3 million
and $11.6 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, 2019
and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
U.S
Federal taxes at the statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State
taxes net of federal benefit
|
|
|
6.3
|
%
|
|
|
6.3
|
%
|
Valuation
allowance
|
|
|
(27.3
|
)%
|
|
|
(27.3
|
)%
|
Total
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2019 and 2018 is as
follows:
|
|
2019
|
|
|
2018
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
26,291,878
|
|
|
$
|
11,559,576
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
(5,421,341
|
)
|
|
|
(3,529,167
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
|
20,870,537
|
|
|
|
8,030,409
|
|
Valuation
allowance
|
|
|
(20,870,537
|
)
|
|
|
(8,030,409
|
)
|
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, 2018, the Company has completed its calculation
of the total post-1986 foreign E&P for these foreign subsidiaries. The Company has not recognized any adjustments 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, 2019 and 2018. 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, 2019 to assess whether an ownership change under Section of 382 of the Code has
occurred during 2019, 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, 2019. Such objective evidence limits the ability to consider the subjective evidence, such
as the Company’s projections for future growth. On the basis of this evaluation, as of December 31, 2019, 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 the Company’s 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, 2019 and 2018, 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 2016 through 2019. 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
19 – RELATED PARTY TRANSACTIONS
During
2019, the Company entered into several hemp seed sale transactions with GenCanna, a related party, whereby the Company acquired
large quantities of top-grade feminized hemp seeds at volume discounts that it sold to GenCanna at market rates as previously
disclosed in Note 1 – Organization and Description of Business.
As
disclosed in Note 11 – Debt, the Company’s two mortgages with Bank of New England are personally guaranteed
by the Company’s CEO and CFO.
In
2019, the Company granted five-year options to purchase 100,000 shares of common stock to each of the Company’s three independent
board members at an exercise price of $0.99. The aggregate fair value of these options of approximately $191,000 is being amortized
over the vesting period, of which approximately $189,000 was amortized at December 31, 2019. In 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 aggregate fair value of these options of
approximately $480,000 was fully amortized by June 30, 2018.
In
2019, options to purchase 200,000
and 132,499 shares of common stock were exercised by the Company’s CEO and an independent board member, respectively,
at weighted average exercise prices of $0.11 and $0.08 per share, respectively. The independent board member’s options were
exercised on a cashless basis with the exercise prices paid via the surrender of 3,108 shares of common stock.
At December 31, 2019, the shares of common stock associated with the exercise by the Company’s CEO were not issued and
reflected in Common Stock Subscribed But Not Issued on the balance sheet. In 2018, options to purchase 400,000 shares of
common stock were exercised by an independent board member at exercise prices of $0.08 to $0.63 per share on a cashless basis
with the exercise prices paid via the surrender of 98,000 shares of common stock.
In
2019 and 2018, options to purchase 117,501 and 200,000 shares of common stock, respectively, were forfeited
by board members.
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 year ended December 31, 2019 and 2018, expenses incurred under
these leases approximated $156,000 and $78,000, respectively.
The
balance of Due To Related Parties at December 31, 2019 and 2018 of approximately $1,455,000 and $276,000,
respectively, were comprised of amounts owed of approximately (i) $420,000 and $81,000, respectively, to the Company’s
CEO and CFO, (ii) $975,000 and $135,000, respectively, to two companies partially owned by these officers, and (iii) $60,000
in both periods to two stockholders of the Company. Such amounts owed are not subject to repayment schedules.
The
balance of Due From Related Parties at December 31, 2018 of approximately $120,000 was comprised of an advance to
an entity partially owned by the Company’s CEO and CFO. This amount was entirely offset by payments made to the
Company from the related entity. At December 31, 2019, there were no amounts due from related parties.
NOTE
20 – COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company is the lessee under five operating leases and four finance leases. These leases 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 expects to exercise. Certain leases require the
payment of property taxes, insurance and/or maintenance costs in addition to the rent payments.
The
details of the Company’s operating 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.
|
|
|
|
|
●
|
Delaware
– a 100,000 square foot warehouse leased in March 2019 that the Company is developing 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 has built-out into a cannabis cultivation facility and
plans to rent to its cannabis-licensed client under a sub-lease which will be coterminous with this lease 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, with an option to extend the term for an additional five-year period.
|
|
|
|
|
●
|
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.
|
The
Company leases machinery and office equipment under finance leases that expire in February 2022 through June 2024 with such terms
being a major part of the economic useful life of the leased property.
The
components of lease expense for the year ended December 31, 2019 were as follows:
Operating
lease cost
|
|
$
|
832,403
|
|
Finance
lease cost:
|
|
|
|
|
Amortization
of right-of-use assets
|
|
$
|
23,085
|
|
Interest
on lease liabilities
|
|
|
6,414
|
|
Total
finance lease cost
|
|
$
|
29,499
|
|
The
weighted average remaining lease term for operating leases is 9.3 years, and for the finance lease is 3.6 years. The weighted
average discount rate used to determine the right-of-use assets and lease liabilities was 7.5% for all leases.
Future
minimum lease payments as of December 31, 2019 under all non-cancelable leases having an initial or remaining term of more than
one year were:
|
|
Operating
Leases
|
|
|
Finance
Lease
|
|
2020
|
|
$
|
917,444
|
|
|
$
|
38,412
|
|
2021
|
|
|
1,008,227
|
|
|
|
38,412
|
|
2022
|
|
|
949,535
|
|
|
|
27,123
|
|
2023
|
|
|
910,166
|
|
|
|
23,201
|
|
2024
|
|
|
835,411
|
|
|
|
3,229
|
|
Thereafter
|
|
|
4,304,441
|
|
|
|
-
|
|
Total
lease payments
|
|
|
8,925,223
|
|
|
$
|
130,377
|
|
Less:
imputed interest
|
|
|
(2,608,366
|
)
|
|
|
(16,552
|
)
|
|
|
$
|
6,316,857
|
|
|
$
|
113,825
|
|
Terminated
Employment Agreement
An
employment agreement which commenced in 2012 with Thomas Kidrin, the former CEO of the Company, that provided Mr. Kidrin with
salary, car allowances, stock options, life insurance, and other employee benefits, was terminated by the Company in 2017. At
December 31, 2019 and 2018, the Company maintained an accrual of approximately $1,043,000 for any amounts that may be owed under
this agreement, although the Company contends that such agreement is not valid and no amount is due.
In
July 2019, Mr. Kidrin, also a former director of the Company, filed a complaint in the Massachusetts Superior Court, that alleges
the Company failed to pay all wages owed to him and breached the employment agreement, and requests multiple damages, attorney
fees, costs, and interest. The Company has moved to dismiss certain counts of the complaint and has asserted counterclaims against
Mr. Kidrin alleging breach of contract, breach of fiduciary duty, money had and received, and unjust enrichment. The Company believes
that the allegations in the complaint are without merit and intends to vigorously defend this matter and prosecute its counterclaims.
Maryland
Acquisition
As
previously disclosed in Note 3 – Acquisitions, the sellers of Kind have attempted to renegotiate the terms of the
MOU, alleging that the MOU is not an enforceable agreement, despite the MOU containing all the definitive material terms with
respect to the acquisition transaction and confirming the management and lease agreements. The Company engaged with the sellers
in a good faith attempt to reach updated terms acceptable to both parties, but the non-reciprocation of the sellers resulted in
an impasse and both parties commenced legal proceedings.
On
November 13, 2019, Kind commenced an action in the Circuit Court for Washington County, MD against the Company alleging, inter
alia, breach of contract, breach of fiduciary duty and unjust enrichment, and seeking a declaratory judgment, injunctive relief,
an accounting and damages in excess of $75,000. On November 15, 2019, the Company filed counterclaims against Kind and, as plaintiffs,
the Company commenced an action against the Kind sellers alleging breach of contract with respect to the MOU and the management
agreement, unjust enrichment, promissory estoppel/detrimental reliance, and fraud in the inducement. The Company seeks a declaratory
judgement that the MOU is an enforceable contract, specific performance of such contact, and the establishment of a constructive
trust for the Company’s benefit.
Both
parties brought motions for a temporary restraining order and a preliminary injunction. On November 21, 2019, the Court denied
both parties’ motion for a temporary restraining order. In its opinion, the Court specifically noted that, contrary to Kind’s
allegations, the management agreement and lease “appear to be independent, valid and enforceable contracts.” Currently,
each party’s preliminary injunction motion is pending before the Court. The Company believes that its claims for breach
of contract with respect to the MOU and the management agreement, unjust enrichment, promissory estoppel/detrimental reliance,
and fraud in the inducement are meritorious and that Kind’s claims against the Company are without merit. The Company intends
to aggressively prosecute and defend the action.
NOTE
21 – SUBSEQUENT EVENTS
GenCanna
Bankruptcy Filing
In
February 2020, GenCanna filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court
for the Eastern District of Kentucky. The filing is intended to permit GenCanna to operate its business while working through
a reorganization plan that could include refinancing of its existing indebtedness, or an alternative restructuring transaction
such as a sale.
Consequently,
as of December 31, 2019, the Company wrote off the outstanding receivable balance from GenCanna of approximately $29.0 million
and the related balance of unearned revenue of approximately $4.2 million as previously discussed in Note 1 – Organization
and Description of Business.
Additionally,
the Company recorded a charge to net income of approximately $30.2 million, classified under Loss on Equity Investments on
the statement of operations for the year ended December 31, 2019, which reduced to zero the carrying value of the Company’s
previous investment in GenCanna as previously discussed in Note 4 – Investments.
Exchange
Agreement
In
February 2020, the Company entered into an exchange agreement with two institutional shareholders (the “TIS”) whereby
the TIS loaned the Company an aggregate of $4,417,500. In return for the loans, and the Company (i) issued promissory notes to
the TIS for the aggregate amount, bearing interest at 16.5% per annum and maturing in August 2021, with a right to extend the
maturity date through February 2022 upon payment of an extension fee. and (ii) exchanged 4,903,333 shares of the Company’s
common stock previously acquired by the TIS, for an equal number of shares of newly designated Series B convertible preferred
stock.
In
connection with the exchange agreement, the Company filed (i) a certificate of designation to designate the rights and preferences
of the Series B convertible preferred stock, and (ii) a certificate of elimination to return all shares of the Series A convertible
preferred stock, of which no shares were issued or outstanding at the time of filing, to the status of authorized and unissued
shares of undesignated preferred stock.
Issuance
of Additional Debenture
In
February 2020, the Company sold to the Holder of the $20M Debentures an additional convertible debenture in the principal amount
of $1,000,000 bearing interest at a rate of 6.5% per annum that matures one year from issuance, with a 6.5% issuance discount,
resulting in net proceeds to the Company of $935,000 (the “$1M Debenture”).
The
terms of the $1M Debenture are consistent with the terms of the $20M Debentures. The SPA, registration rights agreement, and addendum
to the SPA were all amended and restated to incorporate the $1M Debenture. As part of issuance of the $1M Debenture, the Company
issued three-year warrants to the Holder to purchase 180,000 shares of common stock at an exercise prices of $0.75 per share.
Promissory
Note Extensions
As
previously discussed in Note 11 – Debt, the Company and MariMed Hemp issued the $11.5M Note in February 2020 which
amended and restated the previously issued $10M Note. The $11.5M Note bears interest at a rate of 15% per annum and matures on
June 15, 2020, with monthly interest payments and minimum amortization payments of $3,000,000 in the aggregate due on or before
April 30, 2020, of which the Company has already paid $2.3 million. The $11.5M Note is secured by a first priority security interest
in the assets of certain of the Company’s subsidiaries and brands, and a pledge of the Company’s ownership interest
in certain of its subsidiaries. The $11.5M Note imposes certain covenants on the borrowers effective on the date of the amendment
agreement.
The
Company also extended the maturity dates of another $9.4 million of promissory notes, and is in the process of finalizing the
paperwork to extend another $3.0 million of promissory notes, as a result of which the Company will not be in default on any of
its debt servicing payments.
Loan
Commitment
In
February, the Company received a commitment from an accredited investor for a $12.0 million loan, secured by the Company’s
real estate, at a rate of 10% per annum with a one-year term, and an option to extend for an additional year. The loan contains
an origination fee of four points and a prepayment penalty of two months interest. This transactions is expected to close upon
the lender’s completion of its due diligence, which is in its final stages, although there is no assurance that it will
close in the foreseeable future or at all.
Conversion
of Debentures Payable
In
January 2020, the holder of the $20M Debentures converted $1,000,000 of principal and approximately $205,000 of accrued interest
into 3,555,859 shares of common stock at a conversion price of $0.34 per share.
Promissory
Note Paydown
In
February, the Company paid cash to retire a promissory note in the principal amount of $100,000 which matured during that month.
Equity
Transactions
In
the first quarter of 2020, the Company issued 3,236,857 shares of common stock associated with the subscriptions
on common stock outstanding at December 31, 2019 and previously disclosed in Note 13 – Equity. These subscriptions
were comprised of (i) 32,726 shares in connection with common stock granted in 2019; (ii) 3,004,131 shares with respect to the
December 2019 conversion of a portion of the $20M Debentures, and (iii) 200,000 shares associated with exercise of stock options
by the Company’s CEO.