Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc. (the “Company”), a Delaware corporation, is a multi-state organization in the emerging legal cannabis
and hemp industries. During 2018, the Company made a strategic decision to transition from a management and 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. Further, in recognition of the growing demand for hemp-derived cannabidiol (“CBD”),
the Company made a strategic investment in GenCanna Global Inc., one of the largest industrial hemp growers in the United States.
To
date, the Company’s cannabis business has secured, on behalf of itself and its clients, 12 cannabis
licenses across six states—two in Delaware, two in Illinois, one in Nevada, one in Rhode Island, three in
Maryland and three in Massachusetts. The Company has developed in excess of 300,000 square feet of state-of-the-art, regulatory-compliant
facilities for the cultivation, production, and dispensing of legal cannabis and cannabis-infused products, located in all of
the aforementioned states, except Rhode Island. Along with operational oversight of these facilities, the Company
provides its clients with license procurement, business development, human resources, accounting, and other corporate and
administrative services.
The
Company’s plan is to seek to acquire the ownership of all of its cannabis clients who currently lease the majority of the
Company’s facilities, and ultimately consolidate these entities under the MariMed banner. The Company has started the consolidation
process which is at various stages of completion. For example, in Massachusetts, the Company successfully converted its cannabis-licensed
client from a non-profit entity to a for-profit corporation with the Company as the sole shareholder, as described in further
detail below. In every state, the Company’s acquisition efforts will be subject to that particular state’s laws governing
cannabis license ownership, and accordingly, there is no assurance that the Company will be successful in fully implementing its
plan.
Additionally,
the Company licenses its own brands of precision-dosed, cannabis- and hemp-infused products to treat specific medical conditions
or to achieve a certain effect. These products are licensed under the brand names Kalm Fusion™, Nature’s Heritage™,
Betty’s Eddies™, and Florance™. The Company also has exclusive sublicensing rights in certain states
to distribute Lucid Mood™ vaporizer pens, 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’s stock is quoted on the OTCQB market under the ticker symbol MRMD.
The
Company was incorporated 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.
Summary
Transaction Timeline
The
following is a chronological summary of the major transactions undertaken by the Company.
These
transactions are
disclosed in further detail in
Note 3
–
Acquisitions,
in
Note 4
–
Investments,
and
Note 8 – Notes Receivable
.
May
2014 – The Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC, a company operating
in the medical cannabis industry. This transaction was accounted for as a purchase acquisition where the Company was both the
legal and accounting acquirer.
October
2017 – The Company acquired the intellectual property, formulations, recipes, proprietary equipment, knowhow, and
other certain assets of Betty’s Eddies™, a brand of cannabis-infused fruit chews.
April
2018 – The Company acquired iRollie LLC, a manufacturer of branded cannabis products and accessories for consumers,
and custom product and packaging for companies in the cannabis industry.
August
2018 – The Company exchanged cash and stock to acquire a 23% ownership interest in an entity that developed Sprout,
a customer relationship management and marketing platform for companies in the cannabis industry.
August
to October 2018 – The Company loaned $300,000 to Healer LLC, 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 $500,000.
October
2018 – The Company entered into a purchase agreement to acquire its two cannabis-licensed clients, KPG of Anna LLC
and KPG of Harrisburg LLC, currently operating medical marijuana dispensaries in the state of Illinois. The Company has not yet
received legislative approval – required for all ownership changes of cannabis licensees – and therefore these entities
were not consolidated into the Company’s financial statements as of June 30, 2019. The Company anticipates approval
will be obtained, and the transaction consummated, by the end of 2019.
October
2018 – The Company’s cannabis-licensed client with cultivation and dispensary operations in Massachusetts,
ARL Healthcare Inc. (“ARL”), filed a plan of entity conversion with the state to convert from a non-profit entity
to a for-profit corporation, with the Company as the sole shareholder of the for-profit corporation. On November 30, 2018, the
conversion plan was approved by the Massachusetts Secretary of State, and effective December 1, 2018, ARL was consolidated
into the Company as a wholly-owned subsidiary.
November
2018 – The Company issued a letter of intent to acquire The Harvest Foundation LLC, its cannabis-licensed client with
cultivation operations in the state of Nevada. The parties entered into a purchase agreement governing the transaction in
August 2019. The Company has not yet received state approval for the acquisition, and therefore this entity was not
consolidated into the Company’s financial statements as of June 30, 2019. The Company anticipates approval will be
obtained, and the transaction consummated, by the end of 2019.
December
2018 – The Company entered into a memorandum of understanding to acquire Kind Therapeutics USA LLC, its cannabis-licensed
client in the state of Maryland. The parties expect the merger agreement to be finalized, and the transaction approved by the
state in the early part of 2020.
January
2019 – The Company entered into an agreement with Maryland Health & Wellness Center Inc. (“MHWC”),
an entity that has been pre-approved for a cannabis dispensing license, to provide MHWC with a construction loan in connection
with the buildout of MHWC’s proposed dispensary. Upon the two-year anniversary of final state approval of MHWC’s dispensing
license, the Company shall have the right, subject to state approval, to convert the promissory note underlying the construction
loan into a 20% ownership interest of MHWC.
January
2019 – The Company converted a note receivable from Chooze Corp., an entity that develops environmentally conscious
CBD- and THC-infused products, into a 2.7% ownership interest in the entity.
January
2019 – The Company established MariMed Hemp Inc., a wholly-owned subsidiary to develop, market, and distribute hemp-based
CBD brands and products, and to provide hemp producers with bulk quantities of hemp genetics and biomass (“MariMed Hemp”).
February
2019 – The Company converted its $30 million purchase of subordinated secured convertible debentures of GenCanna
Global Inc., a producer and distributor of industrial hemp, CBD formulations, hemp genetics, and hemp products (“GenCanna”),
into a 33.5% ownership interest in GenCanna.
May
2019 – The Company extended loans totaling $750,000 to Atalo Holdings Inc., an agriculture and biotechnology firm specializing
in research, development, and production of industrial hemp and hemp-based CBD products.
May
2019 – The Company issued 500,000 shares of its common stock to purchase an 8.95% interest in Terrace Inc., a Canadian entity
that develops and acquires international cannabis assets.
June
2019 – the Company entered into a purchase agreement to acquire MediTaurus LLC, a company established by Dr. Jokubas Ziburkas,
a PhD in neuroscience and a leading authority on hemp-based CBD and the endocannabinoid system. Meditaurus operates in the United
States and Europe and has developed proprietary CBD formulations sold under its Florance™ brand.
July
2019 – The Company entered into a licensing agreement for the exclusive manufacturing and distribution in seven
eastern 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.
Significant
Transactions in the Current Period
During
the quarter ended June 30, 2019, the Company 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 Farm Bill.
The Company purchased approximately $3.3 million of hemp seed inventory in the quarter ended March 31, 2019,
and an additional $16.7 million in the quarter ended June 30, 2019, which the Company sold and delivered to GenCanna for approximately
$25.2 million. The seeds are to be harvested in the fall of 2019, and accordingly the Company provided GenCanna with extended payment
terms, with full payments to be made by December 2019 after the crop is harvested. The payments by GenCanna are not contingent
upon the harvest.
As required by the relevant accounting guidance, the Company has classified the $25.2 million due from GenCanna
as a receivable from a related party, with $22,0 million recognized as revenue from a related party for the six months ended June
30, 2019, and $3.2 million recorded under
Unearned Revenue From Related Party
on the balance sheet. When GenCanna makes
its payments to the Company in December 2019, the amount in
Unearned Revenue From Related Party
will be recognized as revenue.
This deferral of revenue represents the Company’s ownership portion of the profit on these transactions of 33.5% (the percentage
of GenCanna that the Company currently owns).
To
fund the seed purchases, the Company borrowed $17.0M, which is included in
Notes Payable
on the balance sheet as of June
30, 2019 and further discussed in
Note 11 – Debt
.
Towards the end of the second quarter
of 2019, and in early third quarter of 2019, the Company purchased approximately $5.0 million of additional hemp seed
inventory which it sold and delivered to GenCanna for approximately $8 million in the third quarter of 2019. The Company
continues to explore opportunities to continue such seed sale transactions in the future.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
In
accordance with GAAP, these interim statements do not contain all of the disclosures normally required in annual statements. In
addition, the results of operations of interim periods are not necessarily indicative of the results of operations to be expected
for the full year. Accordingly, these interim financial statements should be read in conjunction with the Company’s most
recent audited annual financial statements and accompanying notes for the year ended December 31, 2018.
Certain
reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications
had no effect on reported income (losses) or cash flows.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of MariMed Inc. and the following majority-owned
subsidiaries:
Subsidiary:
|
|
Percentage
Owned
|
|
MariMed Advisors Inc.
|
|
|
100.0
|
%
|
Mia Development LLC
|
|
|
89.5
|
%
|
Mari Holdings IL LLC
|
|
|
60.0
|
%
|
Mari Holdings MD LLC
|
|
|
97.4
|
%
|
Mari Holdings NV LLC
|
|
|
100.0
|
%
|
Hartwell Realty Holdings LLC
|
|
|
100.0
|
%
|
iRollie LLC
|
|
|
100.0
|
%
|
ARL Healthcare Inc.
|
|
|
100.0
|
%
|
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 recorded a reserve of $250,000
and $150,000 at June 30, 2019 and December 31, 2018, respectively.
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 periodically reviews physical inventory and will record a reserve for excess and/or obsolete inventory if necessary.
As of the date of this report, no reserve was deemed necessary.
Investments
The
Company classifies its investments as available-for-sale-investments. Investments are comprised of equity holding of private companies.
These investments are recorded at fair value on the Company’s consolidated balance sheet, with changes to fair value, if
any, included in comprehensive income. Investments are evaluated for other-than-temporary impairment and are written down if such
impairments are deemed to have occurred.
Revenue
Recognition
On
January 1, 2018, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”)
606,
Revenue from Contract with Customers,
as amended by subsequently issued Accounting Standards Updates. This revenue
standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration that it expects to be entitled to in exchange for those goods or services. The recognition of revenue is determined
by performing the following consecutive steps:
|
●
|
Identify
the contract(s) with a customer;
|
|
●
|
Identify
the performance obligations in the contract(s);
|
|
●
|
Determine
the transaction price;
|
|
●
|
Allocate
the transaction price to the performance obligations in the contract(s); and
|
|
●
|
Recognize
revenue as the performance obligation is satisfied.
|
Additionally,
when another party is involved in providing goods or services to the Company’s clients, a determination is made as to who—the
Company or the other party—is acting in the capacity as the principal in the sale transaction, and who is merely the agent
arranging for goods or services to be provided by the other party.
The
Company is typically considered the principal if it controls the specified good or service before such good or service is transferred
to its client. The Company may also be deemed to be the principal even if it engages another party (an agent) to satisfy some
of the performance obligations on its behalf, provided the Company (i) takes on certain responsibilities, obligations and risks,
(ii) possesses certain abilities and discretion, or (iii) other relevant indicators of the sale. If deemed an agent, the Company
would not recognize revenue for the performance obligations it does not satisfy.
The
adoption of this standard did not have a significant impact on the Company’s consolidated operating results, and accordingly
no restatement has been made to prior period reported amounts.
The
Company’s main sources of revenue are comprised of the following:
|
●
|
Real
Estate – rental income and additional rental fees from leasing of the Company’s regulatory-compliant legal
cannabis facilities to its clients, which are cannabis-licensed operating companies. Rental income is generally a fixed amount
per month that escalates over the respective lease terms, while additional rental fees are based on a percentage of tenant
revenues that exceed a specified amount.
|
|
|
|
|
●
|
Management
– 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 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 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 the quarter ended June 30,2019,
the Company commenced the direct sale of acquired hemp seed inventory. As the Company continues to explore opportunities to continue such sales, significant product sales are expected to be generated from (i) the distribution of the Company’s
acquired and developing hemp-derived CBD product lines, and (ii) the dispensary and wholesale operations of ARL
in Massachusetts and of the Company’s planned cannabis-licensee acquisitions in Illinois, Maryland, and Nevada. This
revenue will be 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. An impairment exists when the carrying amount of an asset exceeds
the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is
measured based on the excess of the asset’s carrying amount over its estimated fair value.
Impairment
analyses are based on management’s current plans, intended holding periods and available market information at the time
the analyses are prepared. If these criteria change, the Company’s evaluation of impairment losses may be different and
could have a material impact to the consolidated financial statements.
For
the six months ended June 30, 2019 and 2018, based on its impairment analyses, the Company did not have any 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 for the rights and obligations created by operating
leases in which the Company is the lessee that extend more than twelve months on the balance sheet. 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 six months ended June 30, 2019 and 2018:
|
|
Six Months Ended June
30,
|
|
|
|
2019
|
|
|
2018
|
|
Life of instrument
|
|
|
3.0
years
|
|
|
|
2.8
to
5.0 years
|
|
Volatility factors
|
|
|
1.059
to 1.106
|
|
|
|
1.020
to
2.086
|
|
Risk-free interest rates
|
|
|
1.76%
to 2.28%
|
|
|
|
1.92%
to 2.94%
|
|
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 six months ended June 30, 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 June 30, 2019 and 2018, there were 18,655,107 and 12,508,932, respectively, of potentially dilutive securities
in the form of options and warrants. Also as of such dates, there were $350,000 and $250,000, respectively, of convertible
promissory notes, and $13.75 million and zero, respectively, of convertible debentures payable, 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. Utilizing the June 30, 2019 closing stock price of the Company’s common stock, all such dilutive securities were
convertible into 19,509,815 shares of common stock. Such share amount was included in the number of weighted average common shares
outstanding on a diluted basis, and in the calculation of diluted net income per share for the three and six months ended June
30, 2019, as shown in the statement of operations.
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
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which enhances and
clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. This ASU was
adopted effective January 1, 2019 with no impact to the Company’s financial statements and related disclosures.
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based
Payment Accounting,
which is part of the FASB’s simplification initiative to maintain or improve the usefulness of the
information provided to the users of financial statements while reducing cost and complexity in financial reporting. This update,
which provides consistency in the accounting for share-based payments to nonemployees with that of employees, was adopted effective
January 1, 2019 with no material impact to the Company’s financial statements and related disclosures.
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
Sigal
Consulting LLC
In
May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC from its ownership group which
included the current CEO and CFO of the Company (the “Sigal Ownership Group”). The purchase price received by the
Sigal Ownership Group was comprised of (i) 31,954,236 shares of common stock valued at approximately $5,913.000, representing
50% of the Company’s outstanding shares on the closing date, (ii) options to purchase three million shares of the Company’s
common stock, expiring in September 2019 with exercise prices ranging from $0.15 to $0.35, and valued at approximately
$570,000, and (iii) a 49% ownership interest in MariMed Advisors Inc. The excess of purchase price over the book value of the
acquired entity was recorded as goodwill, which was subsequently impaired in full and written down to zero.
In
June 2017, the remaining 49% interest of MariMed Advisors Inc. was acquired by the Company in exchange for an aggregate
75 million shares of common stock issued to the Sigal Ownership Group.
Betty’s
Eddies™
In
October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, know-how, and other
certain assets of the Betty’s Eddies™ brand of cannabis-infused fruit chews, from Icky Enterprises LLC, a company
partially owned by an officer of the company (“Icky”). The purchase price was $140,000 plus 1,000,000 shares of the
Company’s common stock valued at $370,000 based on the price of the common stock on the date of the agreement.
The
acquisition was accounted for in accordance with ASC 10,
Business Combinations
. The following table summarizes the allocation
of the purchase price to the fair value of the assets acquired on the acquisition date:
Inventory
|
|
$
|
46,544
|
|
Machinery
and equipment
|
|
|
130,255
|
|
Goodwill
|
|
|
333,201
|
|
Total
fair value of consideration
|
|
$
|
510,000
|
|
The
goodwill balance of approximately $333,000 was written off in 2018.
As
part of the agreement between the parties, Icky is entitled to receive royalties based on a percentage of the Company’s
sales of the Betty’s Eddies™ product line, commencing at 25% and decreasing to 2.5% as certain sales thresholds are
met. For the six months ended June 30, 2019 and 2018, such royalties approximated $85,000 and $14,000, respectively.
iRollie
LLC
Effective
April 2018, the Company entered into a purchase agreement whereby 264,317 shares of the Company’s common stock were exchanged
for 100% of the ownership interests of iRollie LLC, a manufacturer of branded cannabis products and accessories for consumers,
and custom product and packaging for companies in the cannabis industry. The Company acquired, among other assets, iRollie’s
entire product line, service offerings, 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.
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 10,
Business Combinations
. The following table summarizes the allocation
of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date:
Equipment
|
|
$
|
21,000
|
|
Cannabis
licenses
|
|
|
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. The cannabis licenses acquired was included
in the balance of
Intangibles
within the asset section of the Company’s balance sheet at December 31, 2018. This
intangible asset is being amortized over its estimated useful life, and at June 30, 2019, the carrying value less amortization
was approximately $77,000.
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 will also acquire the Sellers’ ownership interests of Mari Holdings IL LLC, the
Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located (“Mari-IL”).
The
purchase price of 1,000,000 shares of the Company’s common stock shall be issued to the Sellers upon the closing of the
transaction, which is dependent upon, among other closing conditions, the approval by the Illinois Department of Financial and
Professional Regulation. Such approval is expected to be received by the end of 2019. After the transaction is effectuated,
the KPGs and Mari-IL will be wholly-owned subsidiaries of the Company.
As
of June 30, 2019, the Company had not yet received the state approval for the transaction, and therefore the operations
of the KPGs were not consolidated into the Company’s financial statements at such date. The Company anticipates
that approval will be obtained, and the transaction consummated, by the end of 2019. When that occurs, the Company
will consolidate the acquired entities in accordance with ASC 10.
The
Harvest Foundation LLC
In
November 2018, the Company issued a letter of intent to acquire 100% of the ownership interests of The Harvest Foundation LLC,
the Company’s cannabis-licensed client in the state of Nevada (“Harvest”). In August 2019, the parties entered
into a purchase agreement governing the transaction. The acquisition is conditioned upon the appropriate legislative approval
of the transaction, which is expected to occur by the end of 2019. Accordingly, the operations of Harvest have not been
consolidated for the six months ended June 30, 2019.
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, as a good faith deposit 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 state 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 state approval of the transaction, In June 2019, the Company issued
the aggregate 1,000,000 shares of common stock to the two owners of Harvest as a good faith deposit. These shares are
restricted and will be returned to the Company in the event the transaction does not close by a certain date. 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 June 30, 2019.
Kind
Therapeutics USA LLC
In
December 2018, the Company entered into a memorandum of understanding to merge with its cannabis-licensed client in Maryland,
Kind Therapeutics USA LLC. A merger agreement is currently being drafted for this transaction, which is intended to qualify
as a tax-deferred reorganization under the Internal Revenue Code. The parties expect the merger agreement to be finalized, and
the transaction approved by the state legislature in 2020.
MediTaurus
LLC
In
May 2019, the Company entered into a purchase agreement to acquire Meditaurus LLC, a company established by Dr.
Jokubas Ziburkas, a PhD in neuroscience and a 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 752,260 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 existing 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 of the purchase price to
the fair value of the assets acquired and liabilities assumed on the acquisition date:
Cash and cash equivalents
|
|
$
|
128,997
|
|
Accounts receivable
|
|
|
5,362
|
|
Inventory
|
|
|
519,750
|
|
Tradename and customer lists
|
|
|
3,346,668
|
|
Accounts
payable
|
|
|
(777
|
)
|
Total value
of MediTaurus
|
|
|
4,000,000
|
|
Noncontrolling
interests in MediTaurus
|
|
|
(1,200,000
|
)
|
Total fair
value of consideration
|
|
$
|
2,800,000
|
|
The
tradename and customer lists acquired were included the balance of
Intangibles
within the asset section of the
Company’s balance sheet at June 30, 2019. A valuation of
MediTaurus is currently pending; the useful lives of the intangible assets will be disclosed after the valuation is
completed
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.
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 writeoffs
of assets and supplies, was recorded in
Other Non-Operating Income
in the Company’s consolidated statement of operations
for the six months ended June 30, 2019.
NOTE
4 – INVESTMENTS
At
June 30, 2019 and December 31, 2018, the Company’s investments were comprised of the following:
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
GenCanna Global Inc.
|
|
$
|
32,234,403
|
|
|
$
|
-
|
|
Terrace Inc.
|
|
|
1,590,000
|
|
|
|
-
|
|
CVP Worldwide LLC
|
|
|
1,080,016
|
|
|
|
1,172,163
|
|
Iconic Ventures Inc.
|
|
|
500,000
|
|
|
|
500,000
|
|
Chooze Corp.
|
|
|
257,687
|
|
|
|
-
|
|
Total investments
|
|
$
|
35,662,106
|
|
|
$
|
1,672,163
|
|
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.
The
investment has been accounted for under the equity method. Accordingly, the Company recorded equity in earnings of approximately
$2.0 million based on its percentage equity interest in GenCanna’s net income from the date of conversion
through June 30, 2019.
Among
other provisions of the subscription agreement governing the GC Debentures, the Company agreed to fund a $10 million employee
bonus pool should GenCanna meet certain 2019 operating targets, and the Company’s CEO was appointed to GenCanna’s
board. Additionally, pursuant to a rights agreement, the Company was granted certain rights including the rights of inspection,
financial information, and participation in future security offerings of GenCanna.
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., a Canadian entity that develops and acquires international cannabis assets. The Company was
not given a board seat, nor does it have the ability to exert operational or financial control over the entity. In accordance
with ASC 321,
Investments – Equity Securities
, the Company elected the measurement alternative to value this equity
investment without a readily determinable fair value. Under this alternative measurement election, the investment is recorded
at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for
the identical or a similar investment in Terrace. Following the Company’s purchase, there has been no impairment to this
investment, nor any observable price declines to investments in Terrace. Accordingly, this investment was carried at its cost
of $1.59 million at June 30, 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 Terrace at fair value. Any subsequent changes in fair value shall be recognized in net income.
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 June 30, 2019, no revenue was earned by the Company.
The
investment has been 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. For the six months ended June 30, 2019, the Company
recorded a charge of approximately $92,000 representing the Company’s equity in CVP’s net loss during this
period, further reducing the carrying value of the investment to approximately $1,080,000 at June 30, 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
price 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 percentage in Iconic of approximately 10%. The Company
was not given a board seat, 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. Following the Company’s purchase, there has been no impairment to this investment, nor any observable
price changes to investments in Iconic. Accordingly, this investment was carried at $500,000 at June 30, 2019 and December 31,
2018.
The
Company will continue to apply the alternative measurement guidance until this investment does not qualify to be so measured.
The Company may subsequently elect to measure this investment at fair value, and if so, shall measure all identical or similar
investments in Iconic at fair value. Any subsequent changes in fair value shall be recognized in net income.
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 June 30, 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 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 shall 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 such gross revenue was generated as of June 30, 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. No royalties were
payable from the Vitiprints license agreement as of June 30, 2019.
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 to 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 built into a cannabis cultivation, processing, and dispensary
facility which is leased to a cannabis-licensed client occupying 100% of the space under a 20-year triple net lease expiring
in 2035.
|
|
|
|
|
●
|
Illinois
– two 3,400 square foot free-standing retail dispensaries in the cities of Anna and Harrisburg and leased to two licensed
cannabis dispensary clients each under a 20-year lease expiring in 2036.
|
|
|
|
|
●
|
Maryland
– a 180,000 square foot former manufacturing facility purchased January 2017 and rehabilitated by the Company into a
cultivation and processing facility which is leased to a licensed cannabis client under a 20-year triple net lease that started
in January 2018.
|
|
|
|
|
●
|
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 five-year lease.
|
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 five-year triple net lease with a five-year option to extend.
|
As
of June 30, 2019 and December 31, 2018, cumulative fixed rental receipts under such leases approximated $7.5 million and
$5.4 million, respectively, compared to revenue recognized on a straight-line basis of approximately $9.5 million and $7.5
million. Accordingly, the deferred rents receivable balances at June 30, 2019 and December 31, 2018 approximated $2.0 million
and $2.1 million, respectively.
Future
minimum rental receipts for non-cancelable leases and subleases as of June 30, 2019 were:
2019
|
|
$
|
2,071,161
|
|
2020
|
|
|
4,222,040
|
|
2021
|
|
|
4,368,640
|
|
2022
|
|
|
4,293,999
|
|
2023
|
|
|
3,997,651
|
|
Thereafter
|
|
|
48,942,935
|
|
Total
|
|
$
|
67,896,427
|
|
NOTE
6 – DUE FROM THIRD PARTIES
At
June 30, 2019 and December 31, 2018, the following amounts were advanced by the Company to its cannabis-licensed clients primarily
for working capital purposes:
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
Kind
Therapeutics USA Inc. (Maryland licensee)
|
|
$
|
1,590,016
|
|
|
$
|
2,679,496
|
|
KPG
of Anna LLC (Illinois licensee)
|
|
|
81,066
|
|
|
|
482,700
|
|
KPG
of Harrisburg LLC (Illinois licensee)
|
|
|
46,516
|
|
|
|
449,385
|
|
Harvest
Foundation LLC (Nevada licensee)
|
|
|
1,145,083
|
|
|
|
248,796
|
|
Total
due from third parties
|
|
$
|
2,862,681
|
|
|
$
|
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 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
.
NOTE
7 – NOTES RECEIVABLE
At
June 30, 2019 and December 31, 2018, notes receivable were comprised of the following:
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
First
State Compassion Center
|
|
$
|
553,791
|
|
|
$
|
578,723
|
|
Healer LLC
|
|
|
822,015
|
|
|
|
307,429
|
|
Atalo Holdings
Inc.
|
|
|
755,113
|
|
|
|
-
|
|
KPG of Anna LLC
|
|
|
447,712
|
|
|
|
-
|
|
KPG of Harrisburg
LLC
|
|
|
402,878
|
|
|
|
-
|
|
Maryland Health
& Wellness Center Inc.
|
|
|
310,882
|
|
|
|
-
|
|
Chooze
Corp.
|
|
|
-
|
|
|
|
257,687
|
|
Total notes receivable
|
|
|
3,292,391
|
|
|
|
1,143,839
|
|
Notes
receivable, current portion
|
|
|
821,524
|
|
|
|
51,462
|
|
Notes
receivable, less current portion
|
|
$
|
2,470,867
|
|
|
$
|
1,092,377
|
|
The
Company loaned approximately $700,000 to First State Compassion Center, its Delaware cannabis-licensee client, during the period
of October 2015 to April 2016. In May 2016, this client issued a 10-year promissory note, as amended, to the Company bearing interest
at a compounded rate of 12.5% per annum. The monthly payments of approximately $10,100 will continue through April 2026, at which
time the note will be fully paid down. At June 30, 2019 and December 31, 2018, the current portion of this note was approximately
$55,000 and $51,000, respectively, and included in
Note Receivable, Current Portion
on the balance sheets.
In
May 2019, the Company loaned $750,000 to Atalo Holdings Inc., an agriculture and biotechnology firm specializing in research,
development, and production of industrial hemp and hemp-based CBD products (“Atalo”). 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 July 2019, the Company loaned an additional $230,000 to Atalo
under the same terms as the initial loans.
During
the period August to October 2018, the Company loaned $300,000 to Healer LLC, 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 $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 loan date.
In
January 2019, KPG of Anna LLC and KPG of Harrisburg LLC each issued a promissory note to the Company in the amount of approximately
$451,000 and $405,000, respectively, representing the advances made by the Company to these entities through December 31, 2018.
The notes bear interest at 12% per annum, with monthly principal and interest payments due through December 2038. At June 30,
2019, the current portion of these notes approximated $12,000 in the aggregate.
In
January 2019, the Company entered into an agreement with Maryland Health & Wellness Center Inc. (“MHWC”), an entity
that has been pre-approved for a cannabis dispensing license, to provide MHWC with a construction loan 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 January 2020, provided however, upon the two-year anniversary of final state approval of MHWC’s dispensing license,
the Company shall have the right, 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 be terminated if the consulting services agreement
is terminated.
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.
NOTE
8 – INVENTORY/UNEARNED REVENUE FROM RELATED PARTY
During
the six months ended June 30, 2019, MariMed Hemp purchased $20 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 Farm Bill. As previously disclosed in
Note 1 – Organization and Description of Business
, As of June
30, 2019, MariMed Hemp sold approximately $15.7 million of seeds to GenCanna, a related party, at market value which generated
approximately $25.2 million of receipts. The seeds are to be harvested by October 2019, and accordingly the Company provided GenCanna
with extended payment terms, allowing full payments to be made by December 2019.
As required by the relevant accounting guidance, the Company classified the $25.2 million of billings to GenCanna
as a receivable from a related party, with $22,0 million recognized as revenue from a related party for the six months ended June
30, 2019, and $3.2 million recorded under
Unearned Revenue From Related Party
on the balance sheet. When GenCanna makes
its payments to the Company in December 2019, the amount in
Unearned Revenue From Related Party
will be recognized as revenue.
At June 30, 2019, inventory was comprised of approximately $4.3 million of hemp seeds,
and approximately $520,000 of hemp oil extract and products acquired in the MediTaurus transaction disclosed in
Note 3 –
Acquisitions
. 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 compounded rate of 9% per annum and had
an original maturity 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
June 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
Land
|
|
$
|
3,392,710
|
|
|
$
|
3,392,710
|
|
Buildings
and building improvements
|
|
|
14,513,538
|
|
|
|
13,566,144
|
|
Tenant
improvements
|
|
|
5,625,882
|
|
|
|
5,348,882
|
|
Furniture
and fixtures
|
|
|
143,237
|
|
|
|
114,160
|
|
Machinery
and equipment
|
|
|
2,057,059
|
|
|
|
1,632,351
|
|
Construction
in progress
|
|
|
14,473,474
|
|
|
|
12,205,447
|
|
|
|
|
40,205,900
|
|
|
|
36,259,694
|
|
Less:
accumulated depreciation
|
|
|
(2,602,019
|
)
|
|
|
(2,159,830
|
)
|
Property
and equipment, net
|
|
$
|
37,603,881
|
|
|
$
|
34,099,864
|
|
During
the six months ended June 30, 2019 and 2018, additions to property and equipment were approximately $3.9 million and $5.7
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 Lewes, DE facility. The 2019 additions consisted primarily of (i) the commencement
of construction in Milford, DE, (ii) the continued buildout of properties in Hagerstown, MD, New Bedford, MA, and Middleborough,
MA, and (iii) improvements to the Wilmington, DE and Las Vegas, NV properties.
The
December 31, 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. The additions to construction in progress during the six months ended June 30, 2019 of approximately
$2.3 million consisted of continuing buildout and machinery for the New Bedford, MA and Middleborough, MA properties,
and the commencement of construction in Milford, DE.
Depreciation
expense for the six months ended June 30, 2019 and 2018 was approximately $471,000 and $254,000, respectively.
NOTE
11 – DEBT
Mortgages
Payable
At
June 30, 2019 and December 31, 2018, mortgage balances, including accrued but unpaid interest, were comprised of the following:
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
Bank of New England
– Massachusetts property
|
|
$
|
4,877,624
|
|
|
$
|
4,895,000
|
|
Bank of New England – Delaware
property
|
|
|
1,742,619
|
|
|
|
1,791,736
|
|
DuQuoin
State Bank – Illinois properties
|
|
|
837,556
|
|
|
|
850,076
|
|
Total mortgages payable
|
|
|
7,457,799
|
|
|
|
7,536,812
|
|
Mortgages
payable, current portion
|
|
|
(238,386
|
)
|
|
|
(188,231
|
)
|
Mortgages
payable, less current portion
|
|
$
|
7,219,413
|
|
|
$
|
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 that is leased to ARL. This mortgage was personally guaranteed by the Company’s CEO and CFO.
From the start of the mortgage 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 shall
make principal and interest payments at a rate equal to the prime rate on May 2, 2019 plus 2%, with a floor of 6.25% 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 $4,877,000 and $4,895,000 on June 30, 2019 and December 31, 2018, respectively, of which approximately
$110,000 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 the 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 June 30, 2019
and December 31, 2018, the outstanding principal balance on this mortgage was approximately $1,743,000 and $1,792,000,
respectively, of which approximately $105,000 and $102,000, respectively, was current.
In
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 that are currently leased to the
KPGs. On May 5
th
of each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined
at the discretion of DSB’s executive committee. The mortgage was renewed in May 2019 at a rate of 8.5% per annum.
At June 30, 2019 and December 31, 2018, the outstanding principal balance on this mortgage was approximately $838,000
and $850,000, respectively, of which approximately $23,000 was current in both periods.
Notes
Payable
In
June 2019, MariMed Hemp issued a $10 million secured promissory note to an unaffiliated party (the “$10M
Note”). On the maturity date in January 2020, or earlier at MariMed Hemp’s discretion, the principal balance
shall be repaid plus a payment of $1.5 million. At June 30, 2019, the pro-rata portion, based on the term of the note, of such
payment approximated $162,000 and was charged to interest expense. The $10M Note is secured by the Company’s right,
title, and interest in certain property relative to the seed sale transactions with GenCanna, previously disclosed in
Note
1 – Organization and Description of Business.
The $10M Note imposes certain covenants, all of which were complied
with as of June 30, 2019.
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 $65,000 of the warrant discount was amortized to interest
expense in June 2018. Accordingly, the carrying value of the $10M Note approximated $9.46 million at June 30, 2019.
In
April 2019, MariMed Hemp issued a $1 million secured promissory note to an unaffiliated party maturing in December 2019. The note
is secured by the collateral assignment of certain receivables from GenCanna (the “Secured Receivables”) and certain
obligations of GenCanna to MariMed Hemp arising from the seed sale transactions previously disclosed in
Note 1 – Organization
and Description of Business
. The principal balance plus a payment of $180,000 shall be due in full on the earlier of the maturity
date or three business days after MariMed Hemp’s receipt of payment by GenCanna of the Secured Receivables. Such payment
date can be extended by the noteholder for an additional three months with proper notice; and if extended, the noteholder shall
receive an additional payment of $30,000. At June 30, 2019, the pro-rata portion, based on the term of the note, of the $180,000
payment approximated $52,000 and was charged to interest expense. 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 shall be deemed earned by and due to the noteholder.
In
March 2019, the Company raised $6 million from the issuance of a secured promissory note maturing in December 2019 and bearing
interest at the rate of 13% per annum, with interest payable monthly. Such note is secured by the collateral assignment of
certain receivables from and obligations of GenCanna to MariMed Hemp arising from the seed sale transactions previously disclosed
in
Note 1 – Organization and Description of Business
The Company may elect to prepay the note in whole or part
without penalty upon three business days’ notice and with payment of all interest through the maturity date. The Company
may extend the maturity date by up to three months upon thirty days’ notice prior to the maturity date with an extension
fee payment to the note holder of $300,000. At June 30, 2019, the carrying value of this note was $6 million.
In
September 2018, the Company raised $3 million from the issuance of a secured promissory note bearing interest at the rate of 10%
per annum, with interest payable monthly. The note is due and payable in September 2019, however the Company may elect to prepay
the note in whole or part at any time after December 17, 2018 without premium or penalty. The Company issued three-year warrants,
which were attached to this promissory note, to the lender’s designees to purchase 750,000 shares of the Company’s
common stock at an exercise price of $1.80 per share. The Company recorded a discount on the note of approximately $1,511,000
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. The carrying value of this note was $3 million at June 30, 2019 and approximately $2.37 million, net of remaining warrant
discount of $629,000, at December 31, 2018.
During
2018, holders of previously issued promissory notes with principal balances of $1,075,000 converted such promissory notes into
1,568,375 shares of common stock at conversion prices ranging from $0.65 to $0.90 per share. The conversions resulted in the recording
of non-cash losses of approximately $829,000 in the aggregate, based on the market value of the common stock on the conversion
dates. No conversions occurred during the six months ended June 30, 2019
During
2018, the Company issued 2,596,313 shares of its common stock and subscriptions on 79,136 shares of its common stock
to retire promissory notes with principal balances of $7,495,000 and approximately $95,000 of accrued interest. The Company recorded
non-cash losses of approximately $2.5 million based on the fair value of the common stock on the retirement dates. No retirements
were made during the six months ended June 30, 2019.
During
2018 the Company repaid $700,000 of promissory notes. No repayments of promissory notes occurred during the six months
ended June 30, 2019.
The
aggregate scheduled maturities of the Company’s total debt outstanding, inclusive of the promissory notes and mortgages
described within this
Note 12
–
Debt
, and the convertible debentures described in the following
Note
12
–
Debentures Payable
, as of June 30, 2019 were:
2019
|
|
$
|
10,496,536
|
|
2020
|
|
|
16,495,007
|
|
2021
|
|
|
7,762,293
|
|
2022
|
|
|
280,348
|
|
2023
|
|
|
299,689
|
|
Thereafter
|
|
|
6,262,463
|
|
Total
|
|
|
41,596,336
|
|
Less
discounts
|
|
|
(6,557,932
|
)
|
|
|
$
|
35,038,404
|
|
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 bearing interest at the rate of 6% per annum that mature two years from issuance, with
a 1% issue discount to an accredited investor, resulting in net proceeds to the Company of $9,900,000 (the “$10M
Debentures”).
The
holder of the $10M Debentures (the “Holder”) has the right at any time to convert all or a portion of the $10M Debenture,
along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of a calculated
average, as determined in the $10M Debentures, of the daily volume-weighted price during the ten consecutive trading days preceding
the date of conversion. Notwithstanding this conversion right, the Holder shall limit conversions in any given month to certain
agreed-upon values based on the conversion price, and the Holder shall also be limited from beneficially owning more than 4.99%
of the Company’s outstanding common stock (potentially further limiting the Holder’s conversion right).
The
Company shall have the right to redeem all or a portion of the $10M Debentures, along with accrued and unpaid interest, at a 10%
premium, provided however that the Company first provide advance written notice to the Holder of its intention to make a redemption,
with the Holder allowed to affect 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 principal amount of the $10M Debentures plus all accrued and unpaid interest
thereon. So long as the $10M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”),
as defined in the SPA, the Holder may cause the Company to revise the terms of the $10M Debentures to match the terms of the convertible
security of such VRT.
As
part of issuance of the $10M Debentures, the Company issued three-year warrants to the Holder to purchase 324,675 shares
of its common stock at exercise prices of $3.50 and $5.50 per share (the “Initial Warrants”). The
fair value of the Initial Warrants of approximately $1,057,000 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 customary registration rights with respect to any potential shares issued pursuant
to the terms of the SPA, the $10M Debentures, and the Warrants.
Subsequent
to the consummation of the SPA and related agreements, the Company and the Holder executed an addendum to the SPA whereby the
Holder agreed to that it would not undertake a conversion of all or a portion of the $10M Debentures that would require the Company
to issue more shares than the amount of available authorized shares at the time of conversion, which amount of authorized shares
shall not be less than the current authorized number of 500 million shares of common stock. Such addendum eliminated the requirement
to bifurcate and account for the conversion feature of the $10M Debentures as a derivative.
Based
on the conversion prices of the $10M Debentures in relation to the market value of the Company’s common stock, the $10M
Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the
commitment date. The intrinsic value of the beneficial conversion feature of approximately $5,570,000 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 an additional $5,000,000 of convertible debentures bearing interest at the rate of 6% per annum that
mature two years from issuance, with a 1% issue discount, resulting in net proceeds to the Company of $4,950,000, and (the “$5M
Debentures”). In June 2019, the Company sold an additional $2,500,000 of convertible debentures that mature two years from
issuance, with a 7% issue discount, resulting in net proceeds to the Company of $2,350,000 (the “$2.5M Debentures,”
and together with the $5M Debentures, the “$7.5M Debentures”).
The
$7.5M Debentures were sold to the Holder of the $10M Debentures. The terms of the $7.5M Debentures are consistent with the terms
of the $10M Debentures, except that (i) no interest shall accrue on the $2.5M Debentures, (ii) the issue discount on the $2.5M
Debentures is 7%, compared to 1% on the $10M Debentures and $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 $7.5M Debentures.
As
part of issuance of the $7.5M Debentures, the Company issued three-year warrants to the Holder to purchase 550,000 shares of common
stock an exercise price of $5.00 per share (the “Additional Warrants”). The fair value of the Additional Warrants
of approximately $929,000 was recorded as a discount to the carrying amount of the $7.5M Debentures.
Based
on the conversion prices of the $7.5M Debentures in relation to the market value of the Company’s common stock, the $7.5M
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 $3,385,000 was recorded as a discount
to the carrying amount of the $7.5M 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.
During
the six months ended June 30, 2019, amortization of the beneficial conversion features, after adjustment for the conversions,
approximated $2,282,000; amortization of the discounts from the Initial Warrants and Additional Warrants (together,
the “Total Warrants”) approximated $320,000; and the amortization of original issue discounts approximated
$29,000. This amortization was charged to interest expense. Additionally, accrued interest expense for such period approximated
$280,000.
At
June 30, 2019, the aggregate outstanding principal balance on the $10M Debentures and the $7.5M Debentures (together,
the “$17.5M Debentures”) was $13,750,000. Also on such date, the unamortized balances of the beneficial
conversion feature, the Total Warrants discount, and original issue discounts were approximately $5,152,000,
$1,575,000, and $287,000, respectively. Accordingly, at June 30, 2019, the carrying value of the $17.5M
Debentures was approximately $6,736,000.
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 $3.6 million.
NOTE
13 – EQUITY
Preferred
Stock
In
January 2018, all 500,000 shares of subscribed Series A convertible preferred stock 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.
The
Series A convertible preferred stock accrues an annual dividend of 6% until conversion. The preferred stock is convertible, along
with any accrued dividends, into common stock at a twenty-five percent discount to the selling price of the common stock in a
qualified offering, as defined in the subscription agreement. In addition, the Company has the ability to force the conversion
of preferred stock at such time the Company has a market capitalization in excess of $50 million for ten consecutive trading days.
In such event, the conversion price shall be a 25% discount to the average closing price of the Company’s common stock over
the ten trading days prior to the Company’s notice of its intent to convert.
Common
Stock
During
the six months ended June 30, 2019, the Company sold 799,995 shares of common stock at a price of $3.25 per share, resulting in
total proceeds of $2.6 million. During the same period in 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
the six months ended June 30, 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
the six months ended June 30, 2018, the Company issued 1,313,901 common shares 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 $959,000. Also during such period, the Company issued 1,679,486
common shares to retire $1,175,000 of promissory notes. Based on the market value of the stock on the retirement dates, the Company
recorded non-cash losses of approximately $918,000. No common shares were issued during the same period in 2019 to settle obligations
or retire promissory notes.
As
previously disclosed in
Note 3 – Acquisitions
, the Company issued 1,000,000 shares of common stock to the owners
of Harvest.
As
previously disclosed in
Note 4 – Investments
, the Company issued 500,000 shares of common stock to purchase a minority
interest in Terrace.
As
previously disclosed in
Note 12
–
Debentures Payable
, during the six months ended June 30, 2019,
the holder of the $17.5M Debentures converted $2,350,000 of principal and approximately $278,000 of
accrued interest into 1,156,379 shares of common stock.
As
further disclosed in
Note 14 – Stock Options
, during the six months ended June 30, 2019 and 2018, 358,446
and 300,000 shares of common stock, respectively, were issued in connection with the exercise of stock options.
As
further disclosed in
Note 15 – Warrants
, during the six months ended June 30, 2019 and 2018, warrants to purchase
666,104 and 1,235,768 shares of common stock were exercised.
Common
Stock Issuance Obligations
At
June 30, 2019, the Company was obligated to issue 752,260 shares of common stock, valued at $2,080,000, as part of the purchase
price for MediTaurus, as previously disclosed in
Note 3 – Acquisitions
. These shares will be subsequently issued
in the third quarter of 2019.
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.
At
June 30, 2018, the Company was obligated to issue: (a) 264,317 shares of common stock to in connection with the acquisition of
iRollie LLC, as disclosed in
Note 3 – Acquisitions
; (b) 32,083 shares of common stock in connection with the exercise
of a warrant, (c) 2,001,641 shares of common stock to settle $1,951,600 of vendor invoices; and (d) 9,281 shares of common stock,
valued at approximately $20,000, for the payment of rent on a leased property in Massachusetts for the months of May and June
2018. All such shares were issued subsequent to the June 30, 2018 quarter end.
NOTE
14 – STOCK OPTIONS
In
January
2018, the Company granted options to purchase 1.45
million shares of common stock to the Company’s board members at exercise prices ranging from $0.14 to $0.77, vesting over
a six-month period, and expiring between December 2020 and December 2022. The fair value of these options on grant date of approximately
$458,000 was fully amortized by June 30, 2018. No stock options were granted to board members during the six
months ended June 30, 2019.
In
May 2018, the Company granted five-year options to purchase 200,000 shares of common stock to an employee with an exercise price
of $0.90 per share.
As of June 30, 2018, the Company amortized approximately $28,000 of the total
adjusted fair value of this grant of approximately $208,000. In December 2018, 150,000 of these options were forfeited prior
to their vesting dates. Approximately $50,000 of the fair value had been amortized through the forfeiture date, and as a result,
approximately $158,000 will not be amortized. No options were granted to employees during the six months ended June 30, 2019.
During
the six months ended June 30, 2019 and 2018, options to purchase 520,000 and 700,000 shares of common stock,
respectively, were exercised at exercise prices ranging from $0.08 to $0.77 per share in 2019, and $0.08 to $0.63 per share
in 2018. Of the options exercised in 2019, 350,000 were exercised on a cashless basis by two board members with the exercise
prices paid via the surrender of 139,985 shares of common stock. Of the options exercised in 2018, 400,000 were exercised
by a board member on a cashless basis with the exercise price paid via the surrender of 98,000 shares of common stock.
During
the six months ended June 30, 2018, options to purchase 300,000 were forfeited, of which 200,000 had been owned by two board
members. There were no forfeitures in 2019
Stock
options outstanding and exercisable as of June 30, 2019 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.080
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
0.47
|
|
$
|
0.130
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
1.00
|
|
$
|
0.140
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
0.50
|
|
$
|
0.140
|
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
1.51
|
|
$
|
0.150
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.25
|
|
$
|
0.250
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.25
|
|
$
|
0.330
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.69
|
|
$
|
0.350
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0.25
|
|
$
|
0.450
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
2.26
|
|
$
|
0.630
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
2.51
|
|
$
|
0.770
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
3.51
|
|
$
|
0.900
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
3.87
|
|
$
|
0.950
|
|
|
|
50,000
|
|
|
|
10,000
|
|
|
|
3.51
|
|
$
|
2.320
|
|
|
|
300,000
|
|
|
|
60,000
|
|
|
|
4.20
|
|
$
|
2.450
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
3.48
|
|
$
|
2.500
|
|
|
|
100,000
|
|
|
|
25,000
|
|
|
|
4.16
|
|
$
|
2.650
|
|
|
|
200,000
|
|
|
|
100,000
|
|
|
|
4.24
|
|
$
|
2.850
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
3.45
|
|
$
|
2.850
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
4.45
|
|
$
|
3.000
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
4.47
|
|
$
|
3.725
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
4.45
|
|
|
|
|
|
|
7,790,000
|
|
|
|
6,935,000
|
|
|
|
|
|
NOTE
15 – WARRANTS
During
the six months ended June 30, 2019, in conjunction with the $7.5M Debentures previously disclosed in
Note 12 – Debentures
Payable
, the Company issued three-year warrants to purchase 550,000 shares of common stock at an exercise price of $5.00 per
share. The fair value of these warrants at issuance approximated $929,000, with approximately $57,000 of this amount amortized
to interest expense during the period and the remainder to be amortized over the two-year term of the $7.5M Debentures. Also during
this period, the Company issued three-year warrants to purchase 375,000 shares of common stock at an exercise price of $4.50 per
share as part of the $10M Note transaction previously disclosed in
Note 11 – Debt
. The fair value of these warrants
at issuance approximated $601,000, with approximately $65,000 of this amount amortized to interest expense during the period and
the remainder to be amortized by the January 2020 maturity date of the $10M Note.
During
the six months ended June 30, 2018, the Company issued warrants to purchase 4,239,000 shares of common stock at exercise prices
ranging from $0.30 to $2.25 per share. Of these warrants, (i) 470,000 warrants were issued in exchange for services previously
rendered to the Company, with expiration dates of three and five years from issuance, at a fair value of approximately $433,000
which was charged to compensation expense during the period, (ii) 237,500 warrants issued in conjunction with a promissory note,
expiring in April 2021, at a fair value of approximately $198,200 which was charged to interest expense during the period, and
(iii) 3,531,500 three-year warrants issued as part of the sale of common stock, at a fair value of at issuance of approximately
$4.5 million that was charged to additional paid-in capital.
During
the six months ended June 30, 2019 and 2018, warrants to purchase 666,104 and 1,425,379 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
$0.50 per share in 2018.
At
June 30, 2019 and 2018, warrants to purchase 10,865,107 and 7,058,932 shares of common stock, respectively, were
outstanding at exercise prices ranging from $0.15 to $5.50 per share in 2019 and $0.10 to $2.25 per share in 2018.
NOTE
16 – REVENUES
For
the six months ended June 30, 2019 and 2018, the Company’s revenues were comprised of the following major categories:
|
|
Six
months ended June 30,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Real
estate
|
|
$
|
3,442,024
|
|
|
$
|
2,731,364
|
|
Management
|
|
|
1,194,791
|
|
|
|
754,038
|
|
Supply
procurement
|
|
|
1,906,399
|
|
|
|
1,241,834
|
|
Licensing
|
|
|
568,127
|
|
|
|
281,557
|
|
Product sales
|
|
|
1,880
|
|
|
|
-
|
|
Product sales from related party
|
|
|
22,014,879
|
|
|
|
-
|
|
Other
|
|
|
60,392
|
|
|
|
11,482
|
|
Total
revenues
|
|
$
|
29,188,492
|
|
|
$
|
5,020,275
|
|
For the six months ended June 30, 2019,
revenue from three clients represented 95% 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 amount under
Product Sales From Related Party
shown in the table above represents the total revenues from these transactions
with GenCanna through June 30, 2019.
For the six months ended June 30, 2018, revenue from two clients comprised 75% of
total revenues.
NOTE
17 – RELATED PARTY TRANSACTIONS
During
the quarter ended June 30, 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 with proven genetics at volume
discounts that it sold to GenCanna at market rates. As previously disclosed in
Note 1 – Organization and Description
of Business
, the Company classified the $25.2 million due from GenCanna as a receivable from a related party, with $22,0
million recognized as revenue from a related party for the six months ended June 30, 2019, and $3.2M recorded under
Unearned
Revenue From Related Party
on the balance sheet. When GenCanna makes its payments to the Company in December 2019, the
amount in
Unearned Revenue From Related Party
will be recognized as revenue.
As
disclosed in
Note 3
–
Acquisitions
, the current CEO and CFO of the Company were part of the ownership group
from whom Sigal Consulting LLC was acquired in May 2014. The 49% ownership in the Company’s subsidiary, MariMed Advisors
Inc., which this ownership group acquired as part of the purchase price, was acquired by the Company from this ownership group
in June 2017 in exchange for 75 million shares of the Company’s common stock.
In
October 2017, the Company acquired certain assets of the Betty’s Eddies™ brand of cannabis-infused products, as disclosed
in
Note 3
–
Acquisitions
, from a company that was minority-owned by the Company’s chief operating
officer.
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
January 2018, the Company granted options to purchase 1.45 million shares of common stock to the Company’s board members
at exercise prices ranging from $0.14 to $0.77 and expiring between December 2020 and December 2022. Also during this month,
options to purchase 200,000 were forfeited by board members. During the six months ended June 30, 2019 and 2018, options to purchase
350,000 and 400,000 shares of common stock, respectively, were exercised by board members on a cashless basis with the exercise
prices paid via the surrender of 139,985 shares of common stock in 2019 and 98,000 shares of common stock in 2018. All of the
option transactions referred to in this paragraph have been previously disclosed in
Note 14 – Stock Options
.
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 six months ended June 30, 2019 and 2018, expenses incurred under
these leases approximated $34,000 and $6,000, respectively.
The
outstanding
Due To Related Parties
balances at June 30, 2019 and December 31, 2018 of approximately $77,000 and
$276,000, respectively, were comprised of amounts owed of approximately (i) zero and $81,000 in respectively to
the Company’s CEO and CFO, (ii) $17,000 and $135,000, respectively, to two companies partially owned by these officers,
and (iii) $60,000 in both periods to two shareholders of the Company. Such amounts owed are not subject to repayment schedules
and are expected to be repaid during 2019.
The
outstanding
Due From Related Parties
balance at December 31, 2018 of approximately $120,000 was comprised of an advance
to a company partially owned by the Company’s CEO and CFO. This amount was entirely offset by advances from such related
parties. At June 30, 2019, there were no amounts due from related parties.
NOTE
18 –
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company is the lessee under five operating leases and three 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 intends to construct into a cultivation and
processing facility to be subleased to the same Delaware client. The lease term is 10 years, with an option to extend the
term for three additional five-year periods.
|
|
|
|
|
●
|
Nevada
– 10,000 square feet of an industrial building that the Company 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 which contain a 5-year extension option.
|
|
|
|
|
●
|
Maryland
– a 2,700 square foot 2-unit apartment under a lease that expires in July 2020 with an option to renew for a two-year
term.
|
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 six months ended June 30, 2019 were as follows:
Operating lease cost
|
|
$
|
339,478
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
6,744
|
|
Interest on lease
liabilities
|
|
|
1,824
|
|
Total finance lease cost
|
|
$
|
8,568
|
|
The
weighted average remaining lease term for operating leases is 9.7 years, and for the finance lease is 3.9 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 June 30, 2019 under all non-cancelable operating leases having an initial or remaining term of more
than one year were:
|
|
Operating
Leases
|
|
|
Finance
Lease
|
|
2019
|
|
$
|
230,744
|
|
|
$
|
11,556
|
|
2020
|
|
|
917,444
|
|
|
|
23,112
|
|
2021
|
|
|
1,008,227
|
|
|
|
23,112
|
|
2022
|
|
|
949,535
|
|
|
|
11,823
|
|
2023
|
|
|
910,166
|
|
|
|
10,451
|
|
Thereafter
|
|
|
5,139,851
|
|
|
|
3,229
|
|
Total lease payments
|
|
|
9,155,967
|
|
|
$
|
83,282
|
|
Less: imputed
interest
|
|
|
(2,845,742
|
)
|
|
|
(11,296
|
)
|
|
|
$
|
6,310,224
|
|
|
$
|
71,986
|
|
Terminated
Employment Agreement
An
employment agreement 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. The
Company maintained an accrual of approximately $1,043,000 at June 30, 2019 and December 31, 2018 for any amounts that may be owed
under this agreement, although the Company contends that such agreement is not valid.
In July 2019, Mr. Kidrin,
also a former director of the Company, filed a complaint in the Massachusetts Superior Court, alleging that the Company breached
the employment agreement and failed to pay all wages owed to him, and requesting compensatory damages, attorney fees, costs, and
interest. To date, Mr. Kidrin has not served the complaint upon the Company. The Company believes that the allegations are without
merit and will vigorously defend this matter when Mr. Kidrin makes service upon it.
NOTE
19 – SUBSEQUENT EVENTS
Seed
Transactions
In
July 2019, the Company delivered and billed GenCanna an additional $8.0 million for hemp seeds that were purchased by the Company
for approximately $5.0 million. The seeds are to be harvested in the fall of 2019, and accordingly, the Company provided GenCanna
with extended payment terms, with the full payment to be made in December 2019 after the crop is harvested. The accounting treatment
of these sales were consistent with that of the original seed sale transactions as previously disclosed in
Note – 1 Organization
and Description of Business
.
Licensing
Agreement
In
July 2019, as previously disclosed in
Note 4 – Investments
, the Company entered into a licensing agreement for
the exclusive manufacturing and distribution in seven eastern 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.
Debentures
Payable
In
July 2019, the Holder of the $17.5M Debentures 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.
Note
Receivable
In
July 2019, the Company loaned an additional $230,000 to Atalo, pursuant a promissory note to the Company that bears 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.
Equity
In
July 2019, the Company issued three-year warrants to purchase 125,000 shares of common stock at an exercise price of $1.71 per
share. Also during this month, the Company issued options to purchase 100,000 shares of common stock to an employee at an exercise
price of $1.34 per share, expiring five years from issuance date.
In July and August, the Company issued an aggregate
of 18,820 shares of common stock to two employees.